In Aug, the value of HK retail sales climbed 4.5% YoY, a slightly improvement over Jul, which saw sales rise 3.9% YoY (revised figure). While these increases are substantially lower than the YoY increases earlier in the year, which ranged between 8.7% and 17.1% for Jan-Jun, rental rates and prices of retail spaces are still continuing a good upward march. Based on information from the Hong Kong Retail Management Association, we think that rental rates may have relatively more room to climb vis-à-vis the cost of other production factors, specifically wages and inventory costs. We lower our discount rate to reflect the prevailing interest rates, which are likely to stay low till at least mid-2015 given QE3. We raise our fair value from HK$5.33 to HK$6.49 and upgrade FRT from Hold to BUY.
Aug sales show slight improvement over Jul
In Aug, the value of HK retail sales climbed 4.5% YoY, a slightly improvement over Jul, which saw sales rise 3.9% YoY (revised figure). We note that these increases are substantially lower than the YoY increases earlier in the year, which ranged between 8.7% and 17.1% for Jan-Jun. However, despite the recent lackluster growth, we believe that landlords have reasonably good bargaining power.
What retailers are thinking…
According to a recent press release by the Hong Kong Retail Management Association, for full year 2012, most sub-sectors sectors expect single-digit to double-digit growth. Given the uncertain economy and high rental and labor costs, the majority of subsectors will consider more automated store operations to reduce manpower costs. Apart from closely monitoring stock control, should inflation continue, they may increase prices. They may also reduce the rate of store expansion and close shops if rental costs are too high. We interpret that rental rates may have more room to climb vis-à-vis the cost of other production factors, specifically wages and inventory costs.
Rental rates keep climbing
In Jul, the HK retail rental index climbed by 2.3% MoM and 14.3% YoY. The HK retail price index climbed by 2.7% MoM and 29.2% YoY. In comparison, for Jun 2012, the nominal wage index for those in the import/export, wholesale and retail trades increased by only 4.3% YoY. Given that FRT’s malls are geared more towards non-discretionary spending, they should have a stronger footing versus high-end malls.
Upgrade to BUY
We lower our discount rate on the premise that interest rates will stay low till at least mid-2015 given QE3. We raise our fair value from HK$5.33 to HK$6.49 and upgrade FRT from Hold to BUY. On a historical basis, the FY12F dividend yield of 5.4% is not low relative to the HK retail market yield of ~2.7% (YTD, based on government’s provisional figures). This suggests further yield compression could take place.
In Aug, the value of HK retail sales climbed 4.5% YoY, a slightly improvement over Jul, which saw sales rise 3.9% YoY (revised figure). We note that these increases are substantially lower than the YoY increases earlier in the year, which ranged between 8.7% and 17.1% for Jan-Jun. However, despite the recent lackluster growth, we believe that landlords have reasonably good bargaining power.
What retailers are thinking…
According to a recent press release by the Hong Kong Retail Management Association, for full year 2012, most sub-sectors sectors expect single-digit to double-digit growth. Given the uncertain economy and high rental and labor costs, the majority of subsectors will consider more automated store operations to reduce manpower costs. Apart from closely monitoring stock control, should inflation continue, they may increase prices. They may also reduce the rate of store expansion and close shops if rental costs are too high. We interpret that rental rates may have more room to climb vis-à-vis the cost of other production factors, specifically wages and inventory costs.
Rental rates keep climbing
In Jul, the HK retail rental index climbed by 2.3% MoM and 14.3% YoY. The HK retail price index climbed by 2.7% MoM and 29.2% YoY. In comparison, for Jun 2012, the nominal wage index for those in the import/export, wholesale and retail trades increased by only 4.3% YoY. Given that FRT’s malls are geared more towards non-discretionary spending, they should have a stronger footing versus high-end malls.
Upgrade to BUY
We lower our discount rate on the premise that interest rates will stay low till at least mid-2015 given QE3. We raise our fair value from HK$5.33 to HK$6.49 and upgrade FRT from Hold to BUY. On a historical basis, the FY12F dividend yield of 5.4% is not low relative to the HK retail market yield of ~2.7% (YTD, based on government’s provisional figures). This suggests further yield compression could take place.
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