More legs to recovery in mass retailers/TV advertising

Deutsche Bank Markets Research Asia Hong Kong Consumer Industry HK Retailers/Media Date 2 September 2016 Industry Update More legs to recovery in mass retailers/TV advertising We have Buy ratings for Giordano, Lifestyle, CDC and TVB ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Top picks Giordano (0709.HK),HKD4.36 Buy Lifestyle International (1212.HK),HKD11.70 Buy Cafe de Coral (0341.HK),HKD27.20 Buy Television Broadcasts (0511.HK),HKD27.80 Buy Source: Deutsche Bank Macro trends, such as geopolitical tension, Yen appreciation and new CBEC regulations have resulted in reduced outbound travel/spending, and the return of mainland tourists to the HK retail scene. This is evidenced by some retailers seeing an improvement in SSS recently (although it's still negative in most cases), vs. negative sentiment across the board in Mar. The heavier rainfall in Aug, brought about by the La Niña effect, and currency volatility are near-term overhangs, but we remain constructive on the stabilizing SSS with better cost structure (rental reduction). We turn positive on mass players/TV advertising but remain cautious on high-end (especially jewelry)/ international companies. Macro trends turning more favorable for sales growth and cost structure We see several macro developments becoming more favorable to HK retail sales: 1) favorable currency trend (Yen) and uncertainties over geopolitical issues in Europe help domestic consumption and lure mainland tourists back to HK too; and 2) domestic consumer sentiment might improve in 2H with the property market stabilizing in 2Q. On the cost side, street store rentals have come down and shopping malls are likely to follow with high-end brands closing stores. Recovery starts with volume and is reflected in the return of tourist arrivals Tourist arrivals rose in July for the first time over the past 14 months, with 2.6% yoy growth. Cosmetics and other daily necessities benefit first. Cosmetic chains, casual wear brands, fast food/casual dining and department stores are seeking to open stores while the high-end is closing stores. With the recent macro trends, we expect the high-end to stabilize in 2H2016. Separately, advertising is highly related to retail sales and we expect a recovery in 2017. We turn more positive on mass brands /retailers and TV advertising For companies under coverage, we note the SSS improvement for mass players and daily necessities in the past 2-3 months vs. 2Q, although Aug data is likely affected by typhoons. The high-end is also seeing some stabilization although it is less obvious. We turn more positive on mass brands/retailers and TV advertising. We believe the high-end is stabilizing but requires the recovery trend to continue. Share prices have outperformed for both mass players and high-end players. HK retailers have outperformed indices by ~14-40% in the past four months. We believe this is due to: 1) short covering as shares dropped by 7-74% over the past two years, 2) investors looking for yield plays as HK retailers have a good track record, 3) SSS declining less in 2Q in the mass segment, and 4) rental reductions benefiting NP in 2H16. We believe there is still upside potential for mass players. Our sector top picks among HK retailers – Giordano, Lifestyle, CDC and TVB We have Buy ratings for Giordano, Lifestyle, CDC and TVB among HK brands/retailers/media plays. We use DCF and P/E-to-growth as tools to value the sector. DCF captures the future cash flow of consumer companies, while PE/G and relative P/E show a company’s value relative to its peers. Downside risks: SSSG failing to pick up; intense competition; product misses and currency volatility. Upside risks: a greater-than-expected rise in SSSG; higher operating leverage and the return of domestic spending. Distributed on: 09/02/2016 01:36:50GMT 2 September 2016 Consumer HK Retailers/Media Page 2 Deutsche Bank AG/Hong Kong Table Of Contents Outline ................................................................................. 3 Marco trends...that favor domestic and tourist spending .................................. 4 ...that favors mass market brands/retailers .......