Depth of HK’s retail gloom revealed in its stocks
June 18 2016 11:16 PM
depth
Shares of Hong Kong’s biggest cosmetics seller Sa Sa are down 70% from a 2013 peak and seven of 12 analysts tracked by Bloomberg are advising investors to dump the stock.

Bloomberg/Hong Kong

For a measure of just how tough Hong Kong retailers have it, look at Sa Sa International Holdings.
Shares of the city’s biggest cosmetics seller are down 70% from a 2013 peak and seven of 12 analysts tracked by Bloomberg are advising investors to dump the stock. Sa Sa warned last month that profit fell by more than 50% in the year ending March.
It’s a far cry from the post-financial crisis boom years, when Sa Sa rallied more than 1,600% as Hong Kong and Macau shop-owners profited from an influx of Chinese tourists. Since then, those shoppers have curtailed spending or started going elsewhere, and retail sales in Hong Kong have declined for 17 straight months. A gauge of consumer goods stocks including Sa Sa is down 31% since the start of 2014, almost twice the broader market’s decline.
“The golden age for Hong Kong’s tourism and retailers is over,” said Arthur Kwong, Hong Kong-based head of Asia Pacific equities at BNP Paribas Investment Partners which oversees $582bn globally. “We are not a big fan of this sector. Investors were really overestimating when the industry was trading at high multiples.”
At its peak, Sa Sa was valued at 24 times estimated earnings, according to data compiled by Bloomberg. That’s dropped to a multiple of 17, compared with 21 on a gauge of global retailers.
Sa Sa declined to comment, citing the company’s black out period in the run up to its earnings announcement on June 23. The stock gained 1.1% in Hong Kong on Friday.
The retail industry, one of the key pillars propping up the Hong Kong economy, has been hit hard by China’s slowdown and a campaign against corruption since 2012 that wrecked businesses for shops selling luxury goods. Hong Kong’s economy unexpectedly contracted 0.4% in the first three months of the year compared to the prior quarter – the steepest drop since 2011, official data show.
Sa Sa’s same-store sales for Hong Kong and Macau fell 17.6% from a year ago in the three months through March. Other retailers fared little better in the quarter, which includes the peak shopping period for Chinese visitors over the Lunar New Year holidays: the city’s takings slid 12.5%. Arrivals from the mainland will fall 3.2% in 2016, according to the Hong Kong Tourism Board.
Another victim of the malaise is Chow Tai Fook Jewellery Group, the world’s largest publicly traded jewellery chain. The stock has tumbled 65% from its initial public offering price in 2011, while the company reported a 46% drop in full-year profit on June 8.
Reductions in rents may lend some support to struggling retailers. Emperor Watch & Jewellery Ltd’s rents fell as much as 41% over the last nine months including cuts in June, according to Bloomberg Intelligence. Chow Tai Fook, which said this month it may close as many as eight shops outside mainland China this year, is pursuing a 20%-30% rent reduction to offset its falling profit, it said.
While Sa Sa’s shares have rebounded 35% since falling to their lowest level since 2009 in January, further gains are limited as the outlook continues to deteriorate, said Dickie Wong, executive director of research at Kingston Securities in Hong Kong. Fast-growing Chinese e-commerce peers are a threat to conventional shop operators such as Sa Sa, which derives only 5.1% of revenues from Internet sales, he said.
“The shares may have neared a bottom but I don’t see much upside,” said Wong. “We’ve already seen the peak for revenues and share prices and the best era we’ve had will never come back.”
The yuan’s decline is reducing Chinese shoppers’ appetite to come to Hong Kong, where goods are priced in a greenback- pegged currency. Among large Hong Kong retailers, Sa Sa has the highest exposure to Chinese shoppers, who account for 71% of sales. The Hong Kong dollar has climbed 7.4% versus the yuan in the past three years, compared with a loss of more than 9% for the euro and declines of more than 17% for currencies in Australia, Malaysia and Indonesia.
“Hong Kong is expensive for not just Chinese tourists but visitors from Europe and elsewhere,” said BNP’s Kwong.



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