HK Retail Sector Monthly:Jun retail sales below expectation,mainland visitors declining

Jun retail sales remained soft HK retail sales dropped mildly in Jun (-0.4% YoY),behind consensus of +0.5%. This was slightly below the 0.1% decline in May, given the1.8% YoY decline in mainland visitor arrivals during Jun (vs +5% in May). We believethe decline was due to the Shenzhen permanent residents’ multiple-entry permit changeto one-visit-per-week (sameday visitor growth slowed from +9.2% in May to +1.7% inJun) and the sharp decline in the number of tour groups (-27.1% in Jun vs -3.4% inMay). By category, durable goods sales growth saw the strongest MoM improvement(from +17.1% in May to +22.2% in Jun), followed by jewelry (from -14.9% in May to -10.4%). On the other hand, department stores saw the biggest MoM decline (from+7.6% in May to -3.3% in Jun) due to a high base in May (promotional activities atSOGO and YATA), followed by cosmetics (from -1.8% in May to -4.2% in Jun) andapparel (from -2.7% in May to -4.6% in Jun).

    Sector underperformed in July Shares across the sector fell 13% MoM on average inJuly, weaker than the HSI’s 6% decline. All the stocks in the sector that we trackdropped in July. Stelux (84 HK, NR) led the decline, plunging 25% on weak 1QFY16operating data. Sa Sa (178 HK, NR) also slumped 17% as the company reported -7%SSS in 1QFY16 (vs 0.9% in 4QFY15).

    Outlook We expect July retail sales to have remained weak given the further drop inmainland visitor arrivals of 14% YoY during Jul 1-26. According to HKRMA, most of itsmembers indicated a single-digit to double-digit sales decline in July. Given the goldprice fell below US$1,100/ounce, we expect jewelry sales to rebound in July. Despite alow base in 4Q15 due to the protests, we believe the continuing decline in the number ofmainland visitors and their purchasing power will limit the pace of recovery for retailsales. We still see a challenging outlook for the HK retail sector in the medium to longterm given China’s potential cut in import tariffs and consumption tax to reduce the retailprice gap with overseas markets and the increase in the number of domestic duty-freeshopping destinations. The opening of the Shenzhen Qianhai Global Goods ShoppingCenter and Shanghai Disneyland in 2016 could be negative catalysts for the HK retailsector. We maintain our Underperform rating on Chow Tai Fook (1929 HK) and Holdratings on Luk Fook (590 HK) and Chow Sang Sang (116 HK).