Tourist slump, a strong dollar and the lure of Japan paint gloomy picture for Hong Kong retail stocks

PUBLISHED : Tuesday, 31 May, 2016, 8:52pm
UPDATED : Wednesday, 01 June, 2016, 3:04pm

Hong Kong retail stocks are expected to be hit by a “triple whammy” this year, dragging down their share valuations.

The continuing decline of tourist arrivals to the city, the delay in Japan’s consumption tax hike and the strong Hong Kong dollar, will all add further pressure to Hong Kong retail stocks, said Hanna Li Wai-han, a strategist at UOB Kay Hian (Hong Kong).

“I do not see any good news for Hong Kong retail stocks so far,” she said. “Their revenue growth cannot get momentum when visitors continue to decline and their consumption ability further weakens.”

The number of visitors from all countries entering Hong Kong slipped 2.1 per cent in April year on year to 4.686 million, according to data released Tuesday by the Hong Kong Tourism Board. Visitors from the mainland fell 4 per cent to 3.459 million.

Li said she expected the downtrend would not be reversed in the short term because a proportion of people with high consumption ability have instead chosen to travel to South Korea, Japan, Taiwan and even Europe and the US due to Hong Kong’s lack of scenic spots.

Do not expect a big decline for rental costs, especially for the stores in shopping malls
Hanna Li Wai-han, UOB Kay Hian

UOB Kay Hian maintains a negative outlook on almost all Hong Kong retailers offering beauty products, snacks, fashion, jewellery and baby formula – products sought after by mainland visitors – at least for the rest of this year.

Shares of some of the largest Hong Kong-listed retailers fell on Tuesday despite the broader Hang Seng stock index closing at its highest level in more than four weeks at 20,815.09.

Milan Station Holdings slumped 3.8 per cent, while Aeon Stores (Hong Kong) dropped 2.35 per cent. New World Department Store China and Bonjour Holdings declined 1.94 per cent and 1.56 per cent respectively.

As well as declining visitor numbers, competition from Japan is putting further pressure on Hong Kong retailers. Japan expects to hold off raising its consumption tax by two-and-half years until October 2019.

“More visitors will go shopping in Japan if the country’s consumption-tax rise is delayed,” said Li. “Hong Kong retailers, especially those offering beauty products and snacks, will be hit hard.”

Sa Sa, the largest cosmetics store chain in Hong Kong, is expected to bear the brunt. Li said the rebound in its share price cannot be sustained despite its Tuesday rally of 6.5 per cent. Multi-brand fashion house I.T limited jumped 3.61 per cent to HK$2.58 on Tuesday, but Li said speculation was behind the rebound.

Further pressure for the city’s retailers comes from a stronger Hong Kong dollar following US dollar strengthening, given that the two currencies are linked. “It is not that cost-effective for mainlanders to shop in Hong Kong when the Chinese yuan continues to weaken and the Hong Kong dollar becomes stronger,” Li added.

Hong Kong’s retail sales fell for the 14th successive month in April, down 7.5 per cent from a year earlier to HK$35.2 billion measured by value. In volume terms, April sales dropped 7.6 per cent, government data showed on Tuesday.

One possibility to relieve pressure on Hong Kong retailers would be lower store rental costs, said Li. “But do not expect a big decline for rental costs, especially for the stores in shopping malls,” she said.

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