Retail sales recovered slightly in March, but the environment is still challenging

HK retail sales value grew 17.3% in March 2012

HK retail sales value increased by 17.3% compared with the same period of last year, according to HK Census and Statistics Department. After stripping out the price effect, sales volume grew 13.4% YoY. Both figures beat the Bloomberg consensus estimates, which were 14% and 8.9% respectively.

Sales growth of luxury goods were not as good as 2011

Luxury goods’ sales showed sign of recovery in March. Sales of commodities in department stores registered a 14.5% growth, up from 11.7%, the average sales growth in Jan & Feb 2012. Sales of jewellery, watches & clocks, and valuable gifts up 19%, which was 260 bps higher than the average sales growth in Jan & Feb 2012. Nevertheless, these figures were still far below than that of 2011, owing to the increasing uncertainty of economic growth in China and tight monetary policy adopted by China government.

Mainland visitor arrivals remain resilient

Looking ahead, we believe the retail sales growth in the coming months will not surprise us, due to the high base in last year and subdued consumer sentiment. However, with the continuous influx of mainland tourists, HK retail sales should maintain a mid-teen growth in 2012, in our view. According to the HK tourism board, No. of mainland visitor arrivals reached 1.62mn in March, up 27.3% YoY. On the back of good reputation of HK retailers and the absence of consumption tax & VAT, we believe HK will attract more and more mainland consumer in the future.

Rising rental cost is our major concern

Despite the satisfactory retail sales growth, we believe the rising rental costs will hamper the earnings growth of HK retailers. HK private retail rental index is still on the rise albeit retail sales growth slowed since 4Q 2011. As more and more international brands regard HK as a stepping stone to enter the China market, plus the lack of new shopping area in HK, rents in prime shopping area will not drop unless retail sales growth decrease significantly. We believe retailers with higher rental to sales ratio will underperform in 2012.