China Retail Weekly (Vol. 5) - "October Sales Preview for Major Retail

Pls see attached the full PDF research report, below is a highlight:
CICC Weekly View:
◆         Major retail listcos are expected to report sales growth of less than 20% in October, lower than in 3Q, as this year’s week-long National Day holiday started on September 29 rather than October 1, as is traditional. Excluding this distortion, changes should be relatively minor for better players, and we expect October sales growth to drop to 17~18% from 20% in 3Q, and organic growth to slow to 12~13% from 15%. However, some retail listcos are unlikely to post sales growth in October, bringing their earnings growth into sharp relief with that of better players.
◆         Overall, we believe: 1) supermarket operators could report stable sales growth in October, as the timing of the National Day holiday has a less significant impact; 2) retail listcos in northern China are expected to deliver better sales performance than those in southern China; 3) mid-end department store retailers could record more desirable sales than high-end ones.
1)           We believe the following retail listcos should report at least 15% sales growth in October: Hefei Department Store (over 15%), Parkson (16%), Hualian Hypermarket (20%), Jingkelong (20%), and Wuhan Zhongbai (23%).
2)           Listcos expected to post 10~15% growth include: Dongbai Group (12%) and Dashang Group (15%).
3)           Listcos likely to report <10% growth include: Lifestyle (little growth), Sa Sa (low single digit), Guangzhou Friendship (low single digit), GOME (7%), Lianhua Supermarket (high single digit), and New World Department Store (10%).
◆         We also expect mixed organic growth in October:
◆         Department store retailers: Organic growth is expected to be more than 10% for mid-end Parkson and Hefei Department Store (HDS), about 10% for Dashang, and little for mid/high-end New World Department Store (NWDS) and high-end Guangzhou Friendship. Meanwhile, Hong Kong domestic retailers are facing challenges from slowing consumption. Lifesytle’s Causeway Bay SOGO already reported negative SSS growth in October.
◆         Supermarket retailers: Overall, organic growth is estimated at 6~10%, and at around 10% for Hualian Hypermarket, Wuhan Zhongbai and Jingkelong, and just 6% for Lianhua Supermarket.
◆         Home appliance retailers: We expect a year-on-year decline due to the timing of National Day holiday this year.
◆         Investment recommendations:
◆         According to our understanding, most retailers believe that the sales environment following the National Day holiday is more challenging than in the last few years. It is even possible that some retailers will fail to report organic growth, putting a large pressure on 4Q sales growth. Investors should guard against this risk.
◆         A-share retail listcos: Overall, mid-end department stores and supermarket retailers are relatively defensive, as their sales growth and organic growth are higher than other retailers. We believe that retailers able to report decent sales growth and earnings growth in 4Q08 and 1Q09 could be favored by investors and show strong share performance. HDS, if it manages to record fast growth in 4Q despite the high base, could signal to the market that its earnings growth is sustainable, warranting our attention.
◆         H-share retail listcos:
◆         Retailers with expensive P/Es usually have better fundamentals, though naturally with some exceptions. Parkson deserves a valuation premium, as it is the best department store retailer among HK-listed peers in terms of operations and profitability. Meanwhile, mid/high-end positioning gives some uncertainty to NWDS’ future earnings growth. Investors are advised to take profit during a market recovery, or buy Parkson. Lianhua Supermarket continues to have an expensive valuation, but profitability and organic growth are less than rivals. Investors should be aware of this risk.
◆         Retailers with cheap P/Es usually have slightly disappointing fundamentals. Lifestyle and Sa Sa still face large downside risk to earnings growth, due to deteriorating consumption in Hong Kong. Investors may take profit during market recovery, or buy Jingkelong (good fundamentals).
◆         The 2009 New Year holiday will start on January 1 (whereas the 2008 holiday started on December 30 2007), meaning that 4Q08 will have four fewer days of holiday than 4Q07 (two days each for National Day and New Year). We estimate that each “lost” day will reduce quarterly organic growth of home appliance retailers by 2~3%, meaning that negative SSS growth is unavoidable in 4Q08. Investors should be aware of this risk, despite it being only short term.
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