Consumer Sector: Expect similar drags in 2Q
- Retail sales growth remain modest.
- Still have room for downside.
- Sticking to our preferred picks.
No clear signs of a pickup for Indonesia
- Bank Indonesia (BI) recently kept its policy rate unchanged, against a backdrop of rising inflation and global financial risks.
- Since the slowdown in 1Q, government spending has been disappointing and this impinged on consumer sentiments as well.
- Retail sales survey by BI suggests weakening consumer spending, and despite some optimism from BI for a better 2H15, a pick-up in 2Q seems unlikely and there is room for further disappointment according to OCBC Treasury Research.
- Thus, with Indonesia making up about 70% of Petra Foods’ [SELL, S$3.61] topline, we think the risk of earnings downside continues to loom for the group.
China and Hong Kong retail scene still uninspiring
- Hong Kong’s retail sales in May fell for the fifth month straight, albeit at a smaller decline of 0.1% YoY, with the luxury segment as the main drag.
- The retail sector in HK will likely see weak tourist spending in the near term amid tighter regulations and inherent economy slowdown in China.
- For China, retail sales growth in May was lower at 10.1% vs. an average growth rate of 12% for 2014.
- With the equity market rout, concerns may arise over the negative wealth effect on consumption but as equity investments typically comprise only 15-20% of household financial assets, the actual impact could be limited.
- Nonetheless, we had previously stated that structural changes in China and e-commerce growth have contributed to waning footfall in malls, resulting in underperforming sales for retail and F&B companies such as BreadTalk [SELL, S$1.14].
- OSIM’s [HOLD, S$1.87] share price seemed to already bore the brunt of a challenging environment in its key markets as it had fallen to a low of S$1.415. Its upcoming 2Q results this Thurs should reveal indicative signs on whether their new flagship chair is able to drive good growth for the year.
Looking towards a better 2H
- Performance from the consumer indices, FTSE Consumer Goods (FSTCG) and FTSE Consumer Services (FSTCS) remain muted with YTD returns of -1.2% and -3.9% respectively vs. the FSSTI of -0.5%.
- We are still NEUTRAL on the sector as we look to a better 2H with regional growth driven by government reforms, and opt to stick to our preferred picks Thai Beverage [BUY, S$0.83] for its market dominance and defensive Sheng Siong Group.
- More recently, data showed Singapore’s retail sales in May rose 1.8% MoM and 0.9% YoY, excluding motor vehicles. In particular, retail sales for supermarkets in May grew 1.0% MoM and 3.6% YoY, which bodes fairly well for Sheng Siong [BUY, S$0.92].
(Jodie Foo)
Source: http://www.ocbcresearch.com/
