Profit alerts highlight China retailing strains

Red chips top warning list as consumers curb spending amid economic slowdown on mainland

PUBLISHED : Thursday, 25 July, 2013, 12:00am
UPDATED : Thursday, 25 July, 2013, 4:24am

A growing number of mainland-based companies have posted profit warnings for the second quarter as consumers tighten their purse strings, crimping retailers' earnings.

Seventy-two Hong Kong-listed companies issued negative profit warnings last month, up from 51 in May and 35 in April, stock exchange data shows.

Red-chip companies dominate the list of firms issuing alerts, including footwear maker Daphne International, whose shares have plunged 48.1 per cent this year.

The market's benchmark Hang Seng Index is down 3 per cent so far.

Negative profit warnings are issued when a company advises its earnings will not meet analysts' expectations, softening the blow to investors and the market.

"[The increase in profit warnings] could signify that the economic slowdown has dragged on and continued to flow through to various downstream sectors," CLSA analyst Aaron Fischer said. "Consumers usually cut back on discretionary spending and big-ticket purchases, which include apparel, vehicles and travel."

The consumer discretionary sector drew the most alerts during the second quarter, prompting a host of analyst downgrades that sent stocks tumbling.

The technology and materials sectors were the next hardest hit.

Within the consumer discretionary sector, retailers of luxury accessories and the liquor segment felt the most pain, including branded handbags seller Milan Station and liquor distributor Silver Base. Their shares have plunged 23.6 per cent and 37.2 per cent, respectively, this year.

Both companies cited weaker consumer sentiment as the central government clamped down on gift-giving in the first quarter.

Although mass-market fashion retailers, such as Esprit, have also issued warnings, analysts did not significantly change their views on those companies.

"We have been negative on Esprit since September 2010 and reiterated that the transformation of the brand would lead to massive cash outflow and take years to execute," Fischer said.

Nomura analyst Tanuj Shori said it would take the company a long time to turn things around.

Esprit in May warned of a "larger than expected operating loss" and the need to close about 16 loss-making stores at a cost of up to HK$300 million.

Esprit's shares have risen 13.4 per cent this year.

Sportswear retailers were also among the clothing companies issuing alerts, including Win Hanverky, Eagle Nice (International) and Peak Sport Products, which blamed higher labour costs and the lack of international sporting events this year.

"Retail sales are still achieving 22 per cent year-on-year growth but companies aren't enjoying this kind of revenue growth, because more are jumping in to grab market share," said Spencer Leung, a consumer research analyst at UBS.

Half of the 32 million square metres of shopping centres under construction around the world are in China, according to CBRE.

"Overall, China retail space could double in three years, yet sales efficiency is unlikely to catch up at the same rate, which then leads to a drop in profits," Leung said.

More companies in branded apparel industry are looking to diversify sourcing in factories outside the mainland as labour costs climb.