OCBC Investment Research 2015-07-20: Consumer Sector - Expect similar drags in 2Q

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/