2023.02.06 21,000 to be the support

China carried a total of 842m passengers in all transportations during 1/7-27. Although it was 47% lower than 2019 (pre Covid), it was up 53% YoY. During the Lunar new year holidays, there were 308mn domestic tourist visits, +23.1% YoY, recovering to 88.6% of the same period in 2019, and the domestic tourism revenue was CNY375.8bn, +30%YoY and reaching 73.1% of 2019’s level. Travel and consumption showed signs of recovery. China’s Jan PMI expanded to 50.1, better than the expected 49.8, non-manufacturing PMI rose to 54.4, higher than the expected 52. Although the market is optimistic about the recovery of the economy and corporate earnings, investors should be aware of whether the economic data can keep meeting expectations. Given equity market is “ buy on exceptions, sell on facts”, we believe further upside is limited.

The pressure for interest rates hike eased with cool down in US inflation, market expects interest rate to peak in 1H23 which has improved investment sentiments. However, during the FOMC meeting, Fed suggested that the rate needs to be increased further and remain elevated at least through 2023. We expect investors to have profit taking after Hang Seng Index has risen ~50% since 4Q22 and to consolidate without more catalysts. We believe investors should turn their focus on profit guidance and outlook of the companies during the results season in the near term. For sectors, we expect Hong Kong property sector to outperform with the sales recovering in Jan while developers are also planning to launch 8 new projects in the coming 2 months which gives indication of their confidence. Hang Seng Index dropped below 10 and 20 days SMA, we expect Hang Seng to trade between 21,000 -22,500 points.

Consumer sectors outperformed the market. Although the retail performance did not rebound sharply, and shares price may have priced in the positives, without other thematic catalysts, we believe consumer sectors to continue to outperform. 

Sa Sa International (178) is mainly engaged in retail and wholesale of cosmetic products. At the end of December 22, the company had a total of 189 stores, -20% YoY, of which 80 were in Hong Kong and Macau, 38 in China, and 71 in Malaysia. During 4Q22, the company’s revenue decreased 12% YoY to HK$ 865mn, of which Hong Kong and Macau fell 7% YoY to HK$576mn, China fell 42% YoY to HK$44.2mn, with Malaysia rising 28% YoY to HK$80.5mn.

Since October 22, the Hong Kong and Macau operations have returned to profitability. In addition, benefiting from the relaxation of Covid measures in China, sales in Macau recorded a double-digit YoY growth in Jan 23. Before Covid, around 60% of Hong Kong and Macau sales were contributed by mainland tourist. With border reopening and normalization of Chinese tourist, company’s sales is expected to further improve. In addition, more than 50% of the company’s stores had a 3-year fixed rental agreement, the rental to sales ratio can drop further with the increase in sales which is favorable for-profit margins. We recommend investors to buy at $2.0, target $2.26, and stop loss at $1.90. Risk: The recovery of tourist consumption was weaker than expected.

Chow Tai Fook (1929): During FY3Q22 (Oct -Dec), same store sales (SSS) in the Mainland and Macau recorded declines: China fell by 33.1% YoY, mainly due to Covid and Macau fell 40% due to the decrease in tourists from China, but for Hong Kong, SSS was up 6.4% YoY.

According to management, the sales performance in China has improved since January 23, Beijing and Tianjin have recorded double-digit SSS growth, management expects sales in China to have low single digit growth in FY4Q23 (Jan -Mar 23).  In terms of network expansion, as company has achieved the target of 7,000 stores in China, the company will only target to open 600-800 new stores in China in FY24E, which is less than net open of 1,400-1,500 in FY23E. However, the company will focus more on improving the margin, including reduce discounts, price hikes, and to have better product mix, hoping to increase profit margins from ~9.3% to 11%-12% in FY26E. As the results have bottomed, we recommend investors to buy at $16.2, target $18.2, and stop loss at $15.3. Risk: Gold price movements may affect the demand for gold products.