HK Landlords and REITs:March retail sales-9.8%YoY

Event

    Retail sales growth of -9.8% in March. The Hong Kong Census andStatistics Department released March 2016 retail sales value growth data of-9.8% YoY, below the Bloomberg consensus forecast of -8.8% YoY and ourforecast of -3.7% YoY. Excluding retail sales for ‘jewellery, watches, clocks &other valuable gifts’, Hong Kong retail sales growth for March 2016 was -7.7%YoY, while retail sales growth for ‘jewellery, watches, clocks & other valuablegifts’ was -20.3% YoY in March. In 2015, Hong Kong retail sales were down -3.7% YoY. Looking ahead, we forecast retail sales growth of -3.6% in April2016 and -6.2% in CY16E. Separately, in March 2016, the growth rate fortotal visitor arrivals to Hong Kong was -4.3% YoY, and the growth rate forChina visitors was -6.9% YoY. Mainland visitors accounted for ~76.3% of totalvisitors on a 12-month rolling basis.

    A government spokesman indicated that “retail sales remained weak inMarch, with many types of retail outlet registering year-on-year declines insales. The slowdown in inbound tourism continued to pose a severe drag, andthe uncertain economic outlook and asset market consolidation had conceivablyalso hurt local consumption sentiment. Looking ahead, the near-term outlook forretail sales will continue to depend on the performance of inbound tourism, andon the extent to which the local consumption sentiment is affected by theheadwinds arising from the subpar economic conditions and externaluncertainties.”§ When will retail sales bottom? We believe retail sales will bottom whenluxury retail sales bottom at end-CY16. The 12-month rolling luxury retailsales as a percentage of overall Hong Kong retail sales was 15% during theglobal financial crisis and subsequently expanded to 24% in CY13. In March2016, the single-month ratio reached 14.8%, achieving new five-year lowagain, while the 12-month rolling figure fell to 17.6%. We expect it to furtherdeteriorate in CY16 and reach a sustainable level of 15% by 4Q16, whichsuggests a bottom-fishing opportunity for Hong Kong luxury retail landlords.

    Strong F&B and resilient supermarkets. Looking into the retail salesbreakdown, we noticed that F&B delivered +2.6% YoY growth, whilesupermarkets were flat YoY. This reflected strong local consumption andfavours mass-market focused names including Link REIT and Fortune REIT.

    We also noted that retail landlords are refining their tenant mix to house morerestaurants. Swire Properties in particular, will add more F&B tenants toPacific Place Mall to increase the current F&B area by half.

    Mainland tourists during May Golden Week’s first 2 days up. News reportedthat visitor arrivals to Hong Kong from mainland China during the first two days ofthe May Golden Week were up +10% YoY, with tourists under individual visitscheme rising +13% YoY while group tour visitors were down -5% YoY.

    Top pick: Hongkong Land and Link REIT. We continue to believe that HKGrade-A office market is in a favourable demand cycle and maintainHongkong Land as our HK landlord top pick. Also as noted in our recentnote, we switched our HK/China REIT top pick from Yuexiu REIT to LinkREIT as we have identified three areas of upside potential, including car parkrental catch-up, asset disposals and AEIs.