HK Retail Sector Monthly:July retail sales +4%,highest level since Nov 2014

July retail sales beat consensus Retail sales rose 4.0% YoY in July (vol +4.6% YoY),the highest level of growth since Nov 2014 and above consensus of +0.8% (excluding the14.9% growth in Feb 2015 as it is more meaningful to combine Jan & Feb sales forcomparison due to CNY). Growth improved from +0.1% in June driven by mainland visitorarrivals growth of 2% (vs a 3% drop in June), the wealth effect from the stock market andthe jump in jewelry sales due to the low gold price. The +0.1% YoY growth in retail salesin June represented a low base due to the shift of the Dragon Boat Festival to May andas there were more rainy weekends in the first half of June. Excluding jewelry sales, JulyHK retail sales growth was +2.4%, also the highest level since Nov 2014, suggestingconsumer sentiment has bottomed. HK retail sales growth has remained positive for fivesuccessive months.

    Jewelry performance most improved By category, comparing July with June, jewelrysaw a notable improvement in sales growth (from -1% in June to +13% in July), followedby department stores (from +1% to +6%), cosmetics (from -1% to +3%), and apparel (from-2% to +1%). We think the strong jewelry sales growth in July will be a one-off dueto low prices. According to Chow Sang Sang’s management, gold product SSS saw highdouble-digit growth in July but have turned negative in Aug month-to-date.

    Shares in the sector underperformed in Aug Shares across the sector fell 1% in Aug(vs the HSI’s 3% increase). I.T (999 HK, Buy) rose 5% thanks to good 1QFY18 operatingdata. Luk Fook (590 HK, Accumulate), which has the greatest exposure to the Macaumarket among jewelry retailers, fell 6% as its sales in Macau could be negatively affectedby typhoons.

    Recovery in HK retail sales to continue in 3Q17 Most HKRMA members expect steadysales growth in 3Q17, and the association also kept its 2017 HK retail sales forecast offlat to 1% growth, implying at least low single-digit growth in 2H17 to overcome the 0.6%decline in 1H17. Given the low base and the wealth effect from the stock and propertymarkets, we expect the recovery in HK retail sales to continue in 3Q17. However,declining purchasing power among mainland tourists will remain a challenge. We expectan earnings recovery for retailers that have good growth in China/overseas markets anda stabilizing HK business. We maintain our Buy rating on I.T, Accumulate rating for LukFook, and Hold ratings for Chow Tai Fook (1929 HK) and Chow Sang Sang (116 HK).