XXXX-01-17_汇丰银行ChinaGroceryRetailers-Settingupfora

abcGlobalResearchGrowthandmarginscouldrecoverasearlyas2Q12Postthecorrectionfrom4Q11,thesectorissettingupforareboundRemainOW(V)onSunArt;upgradeWumarttoN(V)fromUW(V)Goingthrougharoughpatch.Groceryretailershavehadaroughsixmonthswithconsumerdemandgrowthweakeningonhighinflationin3Q11andremainingweakin4Q11asconsumersdelayedpurchasesinanticipationthatinflationwouldcontinuetoease.Thisweaknessislikelytocontinuethrough1Q12duetoashorterChineseNewYear(CNY)promotionalperiod(CNYstartsearlierthisyear,shorteningthepromotionalperiodtojust21daysfor2012versus31daysin2011).Atthesametime,labourcostsandrentalcostsgrowthpressurehaveremainedhigh.Butareboundisjustaroundthecorner.Realdisposableincomegrowthwillbeboostedbypolicymeasures,suchashigherminimumwagelevelsandtheincreaseintheincometaxthresholdlastyear.Togetherwithre-stockingbyconsumersafterCNY,weexpecttoseeavolumerecoveryin2Q12.Thecomparativebaseforcostsshouldnormalizeaboutthesametime,deliveringasecondoperationalboost.Recentcorrectionsetsthesectorupforoutperformance.Groceryretailerstockshaveseenasignificantcorrectionsince4Q11andnowtradeatanarrowerpremium/discountagainsttheMSCIChinaConsumerStapleIndex.Asfundamentalsimprovein2Q12,thisvaluationpremiumshouldreverttowardshistoricallevels,leadingtotheoutperformanceofthesector.Hypermarkets:theindustrygrowthdriver.ModernretailchannelsaretakingmarketsharefromtraditionalchannelsinChina,asseenbythecontinuedgrowthinhypermarkets,especiallyinlower-tiercities.SunArtisthemajorbeneficiary.ReiterateOW(V)onSunArt,ourtoppick.Wethinkgroceryretailerswiththinnermarginswillleadthesharepricerebound,especiallygiventhegovernment’sabolishmentofVATonfreshvegetablestakingeffectfromJanuary2012.Inthelongerterm,welikecompanies,suchasSunArt,withhighscalability,stablecosts,andpricingadvantage.WeupgradeWumartfromtoN(V)fromUW(V),andreiterateOW(V)onSunArt.Consumer&RetailChinaMultilineRetailChinaGroceryRetailersSettingupforareboundSummaryofratingsandtargetpricesTickerPrice(HKD)OldratingNewratingOldTPNewTPPot.ReturnSunArtRetail6808HK9.80OW(V)OW(V)11.511.821.5%Wumart1025HK16.02UW(V)N(V)16.916.12.4%Source:HSBCestimates.Pricesasof12January2012.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,plustheforecastdividendyield.17January2012LinaYan*AnalystTheH[e-mail]*Employedbyanon-USaffiliateofHSBCSecurities(USA)Inc,andisnotregistered/qualifiedpursuanttoFINRAregulationsIssuerofreport:TheHongkongandShanghaiBankingCorporationLimitedDisclaimer&DisclosuresThisreportmustbereadwiththedisclosuresandtheanalystcertificationsintheDisclosureappendix,andwiththeDisclaimer,whichformspartofit2Consumer&RetailChinaMultilineRetail17January2012abcInflation:double-edgedswordInflationhasrepresentedadouble-edgedswordforgroceryretailers.Withfoodtypicallyaccountingfor90%ofsupermarketsalesand50%ofhypermarketsales,groceryretailerswereviewedasinflationplays.AsCPIbegantorisein4Q10,groceryretailersbenefitedfromthehigherASP(astheyrealizedimprovedmarginsoncheapinventory)andfromstrongvolumegrowth(asconsumersstockedupinanticipationofhigherprices).Thiswasevidencedinthe1H11results.Butasinflationreachedchroniclevels,growthinconsumerdemandpeakedoutandbegantoslowin3Q11.Inadditiontoslowertop-linemomentum,groceryretailersalsosawgrowthinmarginsslowedonthebackofrisingcosts.Inflationhits3QdemandgrowthTheinflectionpointinsalesgrowthcamemid-yearin2011.Afterheadlineinflationroseabove6%inJune2011,samestoresales(SSS)growthtaperedoff.2011:AtaleoftwohalvesAslowdowninsalesin2H11tocontinueinto1Q12SunArtoutperformedingrowthduring2011,withstoregrowthdivergingmarkedlyfromitspeersAfterthe4Q11correction,badnewslookspricedin,withvaluationpremiumnarrowingagainsttheMSCIConsumerStaplesindexFigure1.Inflationvs.foodretailsalesgrowth(2011)4.95.45.35.56.46.56.265.34.235.4230.492533.8426.4431.5229.0528.2223.9432.2120222426283032343638Jan-FebMarAprMayJunJulAugSepOctNov012345678CPI(%)-rhsTop100chainretailerfoodsalesgrowthyoy(%)CPI5%Source:MinistryofCommerce,NationalBureauofStatistics3Consumer&RetailChinaMultilineRetail17January2012abcFigure1showsthatafterinflationroseabove6%,foodsalesgrowthratesofthetop100retailchainsdeclinedfor3consecutivemonthsonayear-on-yearbasisfromAugusttoOctober.InNovember,asCPIdroppedto4.2%,foodsalesgrowthreboundedto32%.WeseethesametrendintheSSSgrowthofthemajorsupermarketandhypermarketchainsinFigure2.Slowdowncontinuedin4Q11Figure3.FoodCPI3.7%6.2%5.2%5.9%6.1%5.7%6.8%7.5%8.0%11.7%9.6%10.3%11.0%11.7%11.5%11.7%14.4%14.8%13.4%13.5%11.9%8.8%10.1%0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%JanFebMarAprMayJunJulAugSepOctNovDec201020113.7%6.2%5.2%5.9%6.1%5.7%6.8%7.5%8.0%11.7%9.6%10.3%11.0%11.7%11.5%11.7%14.4%14.8%13.4%13.5%11.9%8.8%10.1%0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%JanFebMarAprMayJunJulAugSepOctNovDec20102011Source:CEIC,HSBCWheninflationbeginstorise,consumersreactbystockingup.Whenfoodinflationstartstosoften,consumerstendtopostponepurchases.Thisphenomenonpointstoslowersalesgrowthin4Q11onahighcomparativebasec