The Hong Kong stock market showed another boring day on Thursday. Previous worry troubling the stock market, ie. Europe ’s debt crisis, was fading away gradually. The U.S. dollar retreated slightly helped to push most Asian market slightly higher. Hang Seng index gained 154-point, or 0.67%, to close at 22901 but turnover remained thin at HK$55.7bn. I expect the range trade pattern will persist for a while longer.
One sector which I hold a long-term positive view in the Chinese economy is retail. China ’s April retail sales were up 17.1% YoY, slightly lower than March figure and market forecast. A detailed review will show the slowdown in growth was contributed by a slowing sales growth in auto, this would be an inevitable consequence after the substantial increase in auto sales in 2009 (52%) and 2010 (33%), they are bound to decelerate.
Growth in department store related merchandises continued the momentum in April, depending on the types of merchandises but the year-on-year growth rates were ranging between 22%-50%. In fact, many listed department stores release their operational data monthly and they tend to concur with the above view. 1Q11 same-store-sales growth was stronger than analysts’ expectation, ranging from 25% to 30% YoY growth. The stronger-than-expected growth could be attributable to (i) inflation, and (ii) increase in real wages. Implication is that analysts will likely upgrade target prices for department stores.
Personal income tax revenue, an indication of personal wages, surged 37% YoY in 1Q11, much higher than 21.3% YoY growth in 1Q10 and 25.8% YoY growth in 4Q10. Furthermore, I expect central government to launch reform of personal income tax assessment in 2H 2011 to lower income tax bracket more.
Of all the listed department stores, Golden Eagle (3308.HK) is perhaps the best managed with the best prospect but valuation is not cheap at 30X FY11 PE. Over a 6-month period, I favour Intime (1833) because: (i) young store portfolio (average store age was 3.8 years at the end of 2010), (ii) less risky expansion strategy by co-operating with local players and M&A to increase market share in Beijing, Hubei and Anhui markets, and (iii) highest EPS growth among peers, 36.3% CAGR in core EPS between 2010 and 2012.
For the branded sporting goods companies, it is extremely difficult to pick a winner. I certainly would advise to avoid top-tier company, such as Li Ning (2331.HK), because I do not see how they can compete with foreign brands such as Nike and Adidas, youngsters in large cities all prefer foreign brands. Second-tiers Chinese brands may stand a chance in gaining market share amongst lower-income groups due to their lower selling prices. I do not have any particular preference but may be worth to study Anta (2020.HK) and Xtep (1368.HK).
Benny Wong, head of research at a Chinese company in Hong Kong, continues his exclusive commentary for Equities this week.
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