No respite likely for Hong Kong-based retailers

Hong Kong-based retailers will continue to face tough times as domestic and international issues impact the economy according to a leading analyst.

Anne Ling, an equity analyst at the investment bank and financial-services company Jefferies Group,  says every 10 percent decline in retail sales impacts the earnings-before-tax (EBIT) of Hong Kong retail companies by between 7 percent and 55 percent. Retail sales in October and November fell by about 24 percent and during the first 11 months of last year were down by 10.34 percent.

“For international brands like Prada, Samsonite and L’Occitane, we estimate the impact at the sales level is not that material [because] Hong Kong [represents] less than 2 percent to 5 percent of sales. However, at the EBIT level (circa 3 percent to 7 percent) Hong Kong has a higher contribution.”

Ling warns Hong Kong-based retailers are vulnerable to a risk of the further market slowdown from a higher unemployment rate and weaker consumer confidence in the city.

“In such times, the immediate lever to hand for brands and retailers is to increase cash flow by reducing inventory and staff and/or rental costs. However, over the medium term, we would expect most players to reset or readjust their Hong Kong store networks to avoid over-reliance on tourist spending.

“We see a need for the Hong Kong and international brands and retailers listed in Hong Kong, which have heavily de-rated in recent years, to review their business strategies and seek out new business drivers, [so] that they remain relevant to investors.”

Ling says she expects Sino-US tensions to continue while the mainland Chinese government focuses on stabilizing economic growth this year.

Given that backdrop, Jeffries would favor recommending investment in Hong Kong-based retailers and manufacturers of low-ticket items like staple goods, food retailers and the fast-food segment, as they are more resilient.