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SECTOR REVIEW
Chinese consumers at a standstill
■
Based on our recent visits to China and discussions with various
retailers, the last line of defence in China’s growth story is faltering.
Consumers are not in the mood to go shopping. Chinese consumers’
seemingly insatiable appetite for better and more goods seems to have
come to a sudden halt in October.
■
A number of retailers saw same-store sales drop from strong doubledigit
growth in 3Q08 and during the October golden week holiday, to
just single-digit growth for all of October. Coastal regions are the worst
hit now, but the negative sentiment is expected to spread inland.
■
The latest October PMI reading of 44.6 pointing to a much sharperthan-
expected contraction in economic activities is certainly not good
for consumer sentiment in the coming months. In addition, while high
CPI inflation does not necessarily benefit all retailers, deflation is
definitely negative for them.
■
Department store operators, food retailers and electronic retailers all
appear to be in for a rough ride ahead. Earnings and working capital
risks are probably highest for electronic retailers.
■
We have downgraded our FY09-10 earnings forecasts for Chinese
retailers by 5-24%, with our target prices cut across the board. We have
downgraded our ratings for Golden Eagle, Wumart and Suning to
UNDERPERFORM for all. We have also downgraded our rating for
Parkson from Outperform to NEUTRAL. We maintain our NEUTRAL
rating on CRE, Lianhua and GOME.
Chinese consumers at a standstill
The October crash
Chinese consumers’ seemingly insatiable appetite for better and more goods appears to
have come to a sudden halt in October. In fact, the sharp change in consumer sentiment is
no less dramatic than what we have seen in the global equity markets. Based on our
recent visits to China as well as our discussions with various retailers, the last line of
defence in China’s growth story appears to be faltering. Many retailers testified to seeing
same-store sales drop from strong double-digit growth in 3Q08, as well as during the
October golden week holidays, to just single-digit growth for the whole of October. At the
moment, the sharp decline in consumer demand is most noticeable in China’s coastal
regions, but the negative sentiment is likely to spread inland.
Deflationary headwinds
The latest October PMI reading of 44.6 pointing to a much sharper-than-expected
contraction in economic activities is certainly not good for consumer sentiment in the
coming months. Our economics team has recently cut our China GDP growth forecast to
8.7% from 9.3% for 2008, and to 7.2% from 8.8% for 2009. More importantly, our
economics team now believes that China is heading into a period of near deflation. We
have revised our CPI inflation forecast for China to 6.1% from 6.5% for 2008, and to 0.4%
from 4.3% for 2009, with a few months possibly dipping below zero inflation. While high
CPI inflation does not necessarily benefit all retailers, deflation is definitely negative for
them.
Challenges for retailers
Department stores. The sudden slowdown in consumer demand has taken many by
surprise, including department store operators as well as their concessionaires. Increasing
promotional activities to push sales is no longer an option for department store operators,
in our view. Effective commission rates are likely to fall with increased promotions.
Food retail. Chinese food retailers have significantly benefited from the sharp rise in CPI
inflation since 2H07. Same-store sales growth surged on the back of higher input prices
and consumers’ trade up demand. However, all that is changing rapidly with the sharp
U-turn in China’s CPI inflation and consumer confidence.
Electronic retail. Electronic retailers were one of the first to see the slowdown in sales,
(starting as early as 2Q08) with the continued property market correction. The sector
seemed to have seen a strong recovery in 3Q08. However, electronic retailers’ good
fortune in 3Q08 is likely to reverse in 4Q08.
Earnings revisions and downgrades
We have downgraded our FY09-10 earnings forecast for Chinese retailers by 5-24%, with
target prices cut across the board. In light of the sharp change in consumer sentiment over
the past month, we have downgraded our ratings on Golden Eagle (from Outperform),
Wumart and Suning (both from Neutral) to UNDERPERFORM for all, and our rating on
Parkson from Outperform to NEUTRAL. We are maintaining our NEUTRAL rating on CRE,
Lianhua and GOME.
As Chinese consumers grow more cautious in their spending, there will likely be very little
differentiation amongst the various consumption counters on the basis of fundamentals.
Some will fall faster, but others are sure to follow. In the near-term, share price
performance will likely remain in the doldrums. However, the next 6-9 months should
present good buying opportunities for longer-term investors looking to take meaningful
stakes in the stronger industry leaders.
Massive slowdown noted in
coastal regions
CPI inflation forecast cut to
0.4% from 4.3% for 2009
No safe haven
Falling knife
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