Dairy Farm - RHB Invest 2017-12-19: Bellwether Retail Stock

DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Bellwether Retail Stock

Dairy Farm has exposure across the Asian markets in various categories ranging from supermarkets to health & beauty and home furnishings.
Moving towards 2018, we believe the group would see growth coming from its higher-margin segments – home & beauty and home furnishings.
Its associates – Maxim and Yonghui – should also continue to deliver respective stellar performances.

With the accelerated Chinese tourist arrivals to Hong Kong, we think the health & beauty segment would continue to benefit from this trend. From Jan-Oct 2017, Hong Kong’s medicines and cosmetics industry sales grew by 4.2%.
Moving into 2018, we expect the single digit sales growth to continue in this segment, with potential lower rentals to improve bottomline. Across the emerging countries like Indonesia, Vietnam, and the Philippines, health & beauty is also making strong headways.
We believe the push to develop more corporate brands would give the segment an edge in these emerging markets and further boost margins.

The group opened its fourth IKEA in Tsuen Wan, Hong Kong in October. Given that the pre- opening costs have been incurred in 2017, we think 2018 would see the store ramp up on its profitability.
A second distribution point in Surabaya, Indonesia has also been set up to support online sales since the roll out of its e-commerce site in 2016.
We expect to see a stronger performance for the segment following the roll-out of its e-commerce websites across Hong Kong, Taiwan and Indonesia as online sales generally draw higher margins.

The supermarket and hypermarket segment remains challenging in South-East Asia. We see this situation improving in Malaysia and Singapore as consumer spending picks up. However, we think the difficult operating environment in Indonesia is likely to persist with mini- marts increasing their penetration rate. This should however be offset by improved operational efficiencies with the opening of distribution centres in Singapore (May 2016), the Philippines (May 2017) and Malaysia (2H17).
Growth in the convenience stores should also help to offset the negatives as the group continues to expand its store count in Guangzhou, China.

Dairy Farm generates very strong cash flow, and we believe the stock would undergo a re-rating if the company is able to improve its South-East Asia supermarket and hypermarket operations.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19

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