Singapore Consumer Sector Stocks - RHB Invest 2018-06-22: Set For The Year

Consumer - RHB Invest 2018-06-22: Set For The Year Singapore Consumer Sector Stocks FOOD EMPIRE HOLDINGS LIMITED SGX:F03 SHENG SIONG GROUP LTD SGX:OV8 DELFI LIMITED SGX:P34 THAI BEVERAGE PUBLIC CO LTD SGX:Y92 DAIRY FARM INT'L HOLDINGS LTD SGX:D01 JAPAN FOODS HOLDING LTD. SGX:5OI KIMLY LIMITED SGX:1D0

Consumer Sector - Set For The Year

  • Maintain OVERWEIGHT. Top Picks are Sheng Siong and Food Empire.
  • We remain optimistic about Singapore’s consumer sector, as economic growth continues to bolster domestic spending, while tourism activities remain strong. Our channel checks show that retailers are revamping themselves to attract consumers to spend.
  • Beyond Singapore, sentiment in the region is also improving. This is positive for the sector since most stocks under our coverage have exposure in regional markets.



Stronger consumer confidence, stronger domestic spending


Healthy economic indicators prop up domestic spending.

  • Consumer spending is largely influenced by economic situation and purchasing power. Last year, the economy expanded at 3.6%, leading to retail sales picking up. This year, consensus is forecasting healthy growth in GDP, averaging about 3.2%, while Singapore’s Ministry of Trade and Industry is expecting GDP growth of 2.5-3.5%.
  • Job prospects are also looking brighter with the number of job vacancies exceeding the number of unemployed people. Unemployment rate moderated to 2% in 1Q18 (1Q17: 2.2%). As a result, we expect domestic spending to remain strong over the next two quarters in tandem with the stronger economy and improved job market outlook.

Pent-up demand to give extra boost.

  • We note that economic growth was lacklustre in 2015-2016, leading to muted consumer spending and a challenging retail environment, before picking up strongly in 2H17. We believe the pent-up demand will be unleashed this year, giving extra boost to retail sales.

Positive signs on consumer confidence.

  • YTD, Singapore’s retail sales index has been fairly positive. In particular, consumer durables have shown robust growth. Higher expenditures in this category suggest consumers are more confident in their outlook and more willing to spend for the future. We believe this would translate to overall positive growth in domestic spending over the near term.
  • Department stores and consumer discretionary items like footwear and apparel have had higher-than-average growth YTD. This suggests higher spending power and willingness to spend. This could also be partially attributed to higher tourist arrivals in Singapore, which tie in with our observation of more tourists in retail malls including Bugis Junction, Wisma Atria and Marina Bay Sands. 
  • We believe increased tourism certainly helped boost foot traffic in department stores and lend support to sales growth.


Key events to prompt consumers to spend


World Cup.

  • June marks the start of the FIFA World Cup, with games being played around the evenings and late nights in Singapore. Viewers are likely to watch in the games in the comfort of their homes, or in restaurants or pubs.
  • We expect sales of snacks, takeaway foods, as well as alcoholic and non-alcoholic beverages to rise, thereby giving a slight sales kick to supermarkets and convenience store operators like Sheng Siong and Dairy Farm. Do note however, that these are not high margin items for the grocery retailers.
  • Restaurants and fast food outlets that air football matches at their premises are likely to see a one-off surge in volumes. Takeaway foods and food delivery services could benefit as well. foodpanda Singapore for instance, advertises during the 15-minute half-time break. On the other hand, full-service restaurants that do not air matches could lose out during these two months.
  • In Thailand, we are optimistic on Thaibev, which could potentially see some recovery in alcohol consumption with the aid of World Cup.

GSS.

  • Apparel, footwear and department stores are the main categories that will benefit from the GSS. We expect retail sales to pick up amid the improved consumer sentiment. 
  • Coupled with increased tourism activities and pent-up demand domestically, we expect sales at both specialty stores and department stores to do well during these two months.


Resurrection of retailers


On the supply side, retailers are putting in more effort.

  • The past three years of intensifying competition from e-commerce and muted consumer spending have compelled retailers to be less complacent, and they are now revamping themselves to reel in consumers to spend.
  • Many retailers have not only embraced online platforms but also reinvested in physical stores to improve the overall brand experience. From our observation, the following are some of the new retail trends put in place to woo consumers:

i. Refreshing store image to attract millennial consumers.

  • Millennials are image-conscious and do not like to be seen stepping into an “uncool” shop. As such, brands must constantly refresh their image to attract the younger crowd. Sheng Siong’s outlets in new housing estates for instance, feature cleaner and more organised displays as opposed to older stores, which used to cater to lower-income consumers.
  • See Sheng Siong: Still Thriving (11 Apr 2018)
  • Dairy Farm now incorporates a wine and dine section within some of its Cold Storage supermarkets, giving consumers more time to spend within the store and hopefully, purchase more.
  • In the health & beauty industry, Watsons Singapore and Sephora Singapore are leading the game by incorporating interactive digital screens that allow consumers to try on make-up virtually. Such features are fuss-free, more hygienic and attract digital-savvy millennials to enter the stores to try on new products and have fun. This encourages customers to try more products, have fun, and hopefully buy more.
  • See Retail - Staples: Shopaholic Hits The Grocery Stores (21 May 2018).


ii. Flagships store on the rise.

  • Following the steps of major retail players like Uniqlo (Singapore), Victoria’s Secret, and Apple to reinvest in physical stores to improve overall brand experience, more companies are opening flagship stores. ( Uniqlo is managed by the JV establishing by Fast Retailing Co. Ltd. and Wing Tai Holdings Limited's wholly owned subsidiary Wing Tai Retail Pte. Ltd. )
  • Last year, we saw lifestyle brand, Muji opening its flagship store in Plaza Singapura, while technology and electronics retailer, Challenger opened a flagship store in Bugis Junction.

iii. Concatenation of concepts.

  • Like Muji’s flagship store, we are increasingly seeing mixed retail concepts in Singapore where food, play and shopping are combined. Bars like Hopheads and Level Up for instance, combine a “playing element” into the food and beverage (F&B) bar concept. These bars not only offer a great place to lounge in, with food and alcoholic options, they also have arcade machines, card games, foosball tables, and beer pong tables for patrons to enjoy.
  • In this digitalised era where food delivery apps are sprouting, we think that the “playing element” at these bars gives consumers a more compelling reason to visit the physical outlets. It also encourages spending on F&B items, as customers receive tokens to play the arcade machines upon ordering alcoholic beverages.
  • On the other hand, new arcades in Singapore like Cow Play Cow Moo and Fat Cat are combining retail and bringing it to a whole new level. These arcades feature over 200 machines and bring back the fun of winning tickets. They have a large redemption station with a wide selection of prizes. The prize selections include over 1,000 toys, collectibles and board games. The winning tickets can be regarded as “currency” to purchase prizes.


Beyond Singapore


Strong demand from North Asia.

  • China’s retail sales remain robust, chalking up 9.7% y-o-y growth during the first four months. Growth from retail sales of meals, cosmetics and commodities were higher than the overall average.
  • Retail sales in Hong Kong were even stronger (January-April: +13.9% y-o-y), backed by upbeat consumer sentiment and increased tourism. Sales of jewellery & watches, electronics and medicines & cosmetics skewed the high growth. We think this could be partly attributed to higher mainland Chinese tourist arrivals.
  • On this front, we are positive on Dairy Farm, which derives c.60% of its sales from North Asia. Its health & beauty segment is likely a key beneficiary of improved medicine & cosmetics sales in Hong Kong and China.

Malaysia.

  • Consumer companies with exposure in Malaysia could expect a rosier outlook. The recent zero-rated GST is likely to improve sentiment and boost consumer spending over the next 12 months.

Thailand

  • In Thailand, recent GDP data shows that growth is at its fastest in five years. Although private consumption has yet to see broad-based expansion, we note that the contraction in farm income has begun to slow. 
  • A recovery in agricultural prices would be positive in raising overall purchasing power and would benefit Thailand-concentrated company like Thaibev.

Indonesia

  • In Indonesia, consumer confidence has shown monthly consecutive improvement in May. This should benefit Delfi and Japfa, which have large exposure to the Indonesian market. 
  • Currently, we are expecting inflation to subside post-Lebaran, which should help boost demand. However, continuous IDR depreciation is a key risk, as consumers’ purchasing power would be negatively affected by cost pressures.


Conclusion


Positive on near term outlook.

  • We are optimistic about the consumer sector in Singapore this year, as we expect to see higher consumer spending. Strong economic growth and an improved job outlook would continue to back consumer sentiment.
  • In addition, efforts put in by retailers would help rejuvenate the retail scene and motivate consumers to head outside of the house to spend. This would also have a positive spillover effect on other brick-and-mortar players when shopping malls and districts see stronger foot traffic.

Amongst our coverage, our Top Pick is grocery retailer, Sheng Siong.

  • As a largely pure Singapore play, Sheng Siong is likely to benefit from the uplift in domestic spending and new store openings. The refreshed image at its outlets in new housing estates would also help attract new target consumers – the millennials. 
  • It would also enjoy margin expansion, as consumers purchase higher quality and higher value products such as fresh produce, which generate higher gross margins.

We also like Food Empire, an instant coffee mix player. 

  • We see Food Empire’s efforts in diversifying outside of core Commonwealth of Independent States’ (CIS) markets blossoming over the years. Growth should be driven by improved sales and profitability at the food ingredients business, as it ramps up utilisation at the second snack line. 
  • In Russia, declining income has led to increased opportunities in the mass-market product segment. With an approximately 50% market share in Russia’s instant coffee mix industry, we believe Food Empire will remain resilient in spite of the depreciating RUB. 
  • Restructuring of its distribution in Ukraine will likely see positive impact on this year’s earnings.








Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-22
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