Singapore Consumer Sector - RHB Invest 2017-11-29: Shop More, Pay More


Singapore Consumer Sector - RHB Invest 2017-11-29: Shop More, Pay More GST Rate Hike Singapore Consumer Stocks BREADTALK GROUP LIMITED 5DA.SI DAIRY FARM INT'L HOLDINGS LTD D01.SI SHENG SIONG GROUP LTD OV8.SI RAFFLES MEDICAL GROUP LTD BSL.SI NEO GROUP LIMITED 5UJ.SI

Singapore Consumer Sector - Shop More, Pay More

  • Shopping is going to become more expensive. A possible GST hike was the talk of the town last week after Prime Minister Lee Hsien Loong said Singapore will be raising taxes to support growing government spending. If implemented, we believe retailers in the consumer discretionary segment would be more affected than consumer staples players. 
  • A silver lining for companies with a brick-and-mortar presence is that online retailers are likely to be taxed, too. This should help to level the playing field between online and offline players.



“Raising taxes is not a matter of whether, but a matter of when.” 

  • Following Prime Minister Lee’s comment on tax hikes, at the recent People's Action Party (PAP) convention on 19 Nov, experts are expecting an increase in the Goods and Services Tax (GST). We believe this could come after the next general election, since the Government has highlighted the adequacy of revenue for the current term, which ends in 2021. 
  • At the moment, the GST rate is at 7%. It was last adjusted in Jul 2007. We also note that the Government has hinted several times about taxes on e-commerce spending. We think this could come sooner than the GST hike.


Impact of the GST hike on the retail sector. 

  • Singapore’s GDP growth is projected to moderate to 2-3% annually after 2020. Hence, the impact of the next GST hike would not be mitigated by strong economic growth. In a moderate growth environment, we believe consumer discretionary players would underperform compared to consumer staples and medical goods & toiletries producers, when that happens. 
  • The consumer discretionary segment, however, might potentially see a strong spike in sales prior to a GST hike as consumers rush to make big purchases before prices increase.


Silver lining for brick-and-mortar stores and GST-registered vendors. 

  • The Government is also looking to diversify its tax revenue receipts to include e- commerce players. Currently, imported goods with cost, insurance and freight value below SGD400 are not taxed. We believe this move could help level the playing field for brick-and-mortar players and local GST-registered vendors.
  • We think the GST hike would not happen in the near term but may come after the current government’s term of office ends. Names under our coverage that might be affected include the ones listed below.

Consumer staples. 

  • Dairy Farm and Sheng Siong should be less affected by a GST hike, given the nature of consumption of staples. Taxes on e-commerce spending may make shopping at these brick-and-mortar supermarkets even cheaper, compared to the vendors from online market places (such as Qoo10) which may not be GST-registered. However, we do think that consumers may cut down on festive expenditures, which are considered more discretionary.

Food retailers. 

  • BreadTalk, which runs bakeries, restaurants and high-end food courts, may see a slight retraction if consumers trade down to small neighbourhood bakeries and coffee shops that are not subjected to GST. 
  • Neo Group’s catering arm and food retail business may also be negatively affected. Still, we believe the overall impact would be mitigated as the group has been trying to move upstream into the food manufacturing and food trading business.

Medical goods and healthcare services. 

  • Raffles Medical is a private healthcare provider that offers general practitioner and hospital services. We think its general practitioner services arm would be rather resilient, as most of the patients are on corporate health insurance. However, its hospital services segment would be less price-competitive compared to regional players.


Learning from history 


Background on GST. 

  • GST is broad-based consumption tax levied on the import of goods, as well as nearly all supplies of goods and services in Singapore. GST was first implemented in 1 Apr 1994, at 3%. It was raised to 4% on 1 Jan 2003, 5% on 1 Jan 2004 and then to 7% on 1 Jul 2007. The retail and wholesale trade segment is the largest contributor to GST.

GST’s biggest impact was on retail sales when it was first implemented in 1994.

  • Retail sales shot up by 27.9% YoY in the month prior to the GST implementation as consumers rushed to stock up on goods ahead of the hike. In the month of GST implementation (April), retail sales declined 9.6% YoY. For the 12 months following the 3% GST implementation, retail sales were down 3.1% despite a strong GDP growth of 10% that year. Clearly, people felt the pinch and were unwilling to spend more.

2003 – GST was not even the main factor of consideration. 

  • 2003 was the year of a special situation. The GST was raised to 4%, from 3%. However, retail sales grew by 8.5%. If we exclude motor vehicle sales, retail sales fell by 2.8% for the full year. 
  • We think most of the decline in retail sales in 2003 was attributed to the outbreak of severe acute respiratory syndrome (SARS) rather than the GST hike. This was because the GST was increased on 1 Jan 2003. Despite this, retail sales excluding motor vehicles still registered a strong 8.7% YoY growth in January. 
  • Retail sales only began to tumble in February when SARS first reached Singapore.

Strong economic rebound offset the impact of the GST hike in 2004. 

  • In 2004, the GST was increased again, by 1ppt, to 5%. Nevertheless, Singapore’s strong economic growth of 9.5% YoY more than offset any pains felt as a result of the higher prices. Retail sales grew 13.6% YoY in 2004. Excluding motor vehicles sales, it grew 5.7% YoY. 
  • We think this was also partly due to the pent-up demand accumulated from the dot-com crisis in 2001 and the SARS outbreak in 2003.

The one-off pinch in 2007. 

  • The GST was raised by 2 ppts to 7% on 1 Jul 2007. Similar to 1994, consumers shopped ahead of time. June's retail sales index shot up 15.3% YoY, followed by a decline of 2% YoY in July. Spending behavior soon normalised in August. For the 12 months following the GST hike, retail sales were up by 3.6% YoY. 
  • We believe consumers were able to accept that level of price increase, as the country was still in its structural growth phase back then.

Sub-sector performance. 

  • Based on historical records, consumer discretionary – furniture & household equipment, recreational goods, watches & jewellery, apparel & footwear – and food retailers typically saw a slowdown in growth or declining sales in the 12 months following a GST hike.
  • Consumer staples – supermarkets, mini-marts & convenience stores and department Stores – were fairly resilient against GST hikes in the past. These sub-sectors still managed to showed positive growth in three out of the four years, when the GST was increased. Medical goods & toiletries as well as computer & telecommunications equipment, however, managed to show positive sales growth despite historical hikes in GST.


Looking ahead. 

  • We think a GST hike would not happen in the near term but may come after the current government’s term of office ends in 2021. While it is all speculation right now, a 10% rate seems to be the number being floated around.


Taxes on e-commerce, in the meantime, may come earlier. 

  • We believe this would have a negative impact on consumer spending, as Singapore is now a mature economy and its GDP is projected to only grow 2-3% annually beyond 2020. We are more positive on consumer companies with exposure to growth markets outside of Singapore. 
  • In the meantime, companies involved in consumer staples in Singapore should continue to be more resilient, compared to companies dealing with consumer discretionary products.






Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-29
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