20170706-广发证券_香港_-2H17_Consumer_Discretionary_Sector_Outlook__Select_names_with_re-rating_potential_driven_by_accelerating_earnings_growth_and_attractive_valuations_17页_1mb

2H17 Consumer Discretionary Sector Outlook Summary

Core Content

This document provides an outlook for the Consumer Discretionary sector in the second half of 2017, focusing on three sub-sectors: Jewelry, Sportswear, and Education. It includes valuation analysis, key themes, investment strategy, top picks, and risk factors.

Sector View

• Jewelry: Neutral outlook. SSSG (same-store sales growth) is expected to moderate in 4Q17 due to a high comparable base. However, the rental reversion trend in the HK market remains favorable as shop rentals have declined after peaking in 2015. Jewelry retailers are shifting to residential areas, reducing rental expenses.
• Sportswear: Long-term positive outlook. The domestic sports industry is growing, supported by government policies and increasing participation in sports. Order book growth peaked in 1Q-2Q16 and has since normalized.
• Education: Positive outlook. Private schools are expected to gain market share due to rising middle-class income and preference for well-rounded education. The sector saw re-rating in 1H17 as concerns about policy impacts were alleviated.

Key Themes

• Jewelry: Gold price, SSSG, sales mix of high-margin gem-set products.
• Sportswear: SSSG, trade fair results, retail discounts, sales mix of functional products.
• Education: Student enrollment, M&A activities.

Valuation Analysis

• Jewelry: The sector is trading at 16.7x one-year forward P/E, above the five-year historical average of 14.5x. Valuation re-rating is unlikely in 2H17 due to expected moderation in SSSG.
• Sportswear: The sector is trading at 14.4x one-year forward P/E, above the five-year historical average of 12.0x. The valuation is considered fair.
• Education:
  • Maple Leaf is trading at 17.5x FY18 P/E, above its historical average of 14.4x.
  • Wisdom Education is trading at 15.5x FY18 P/E, below the sector average of 16.5x FY18 P/E.

Investment Strategy

• A bottom-up approach is preferred, focusing on companies with re-rating potential driven by accelerating earnings growth and attractive valuations.

Top Picks

• Wisdom Education (6068 HK): Buy rating. The company's expansion plan is expected to significantly increase student capacity, surpassing peers. Its strong academic record and successful school replication are key drivers.
• I.T (999 HK): Buy rating. The company is expected to benefit from better visibility and accelerated earnings growth in FY18, supported by loss stabilization in the HK market and continued growth in China and Japan.

Risks

• Upside risks: Better-than-expected SSSG, trade fair results, M&A, gold price rally, mainland tourist arrivals growth, and improved student enrollment.
• Downside risks: Lower-than-expected SSSG, gold price slump, decline in mainland tourist arrivals, policy risks, teacher cost pressure, and fierce competition.

Sector Performance Review (1H17)

• Jewelry: Outperformed due to SSSG recovery in China and HK & Macau. Share prices of Chow Sang Sang, Chow Tai Fook, and Luk Fook rose by 27%, 39%, and 32%, respectively.
• Sportswear: Underperformed. Li Ning was the best performer with a 22% share price increase. Anta underperformed the market, while Xstep fell due to missed profit expectations.
• Education: Outperformed. The sector saw re-rating, with Wisdom Education, Yuhua Education, and Maple Leaf rising by 59%, 32%, and 24%, respectively.

Jewelry Sector Details

• SSSG Moderation: Expected to moderate in 4Q17, with mid-single-digit growth for FY18.
• Rental Reversion: Declining in HK due to falling shop rentals, with Chow Tai Fook likely to see a 12% drop in fixed rental expenses in FY18.
• Sales Mix: Gold products continue to dominate, with a higher sales mix in China compared to HK & Macau.

Sportswear Sector Details

• Industry Growth: The sports industry in China is expected to reach Rmb3trn by 2020, driven by supportive policies and increased participation.
• Running Footwear: The largest category, with a significant increase in marathon events and participants in 2016.
• Order Book Growth: Peaked in 1Q16 or 2Q16 and normalized, with the sector trading at a fair valuation.

Education Sector Details

• Private Schools: Expected to gain market share due to rising middle-class income and preference for quality, well-rounded education.
• Student Enrollment: Private primary and secondary education enrollment is projected to grow at a CAGR of 4.7% from 2015 to 2020.
• Expansion Plans: Wisdom Education has the strongest expansion plan, with a 59% capacity increase from FY17 to FY19, supported by successful M&A and new school openings.

Valuation Table

Key Highlights

• Wisdom Education is a top pick due to its expansion plan, strong academic performance, and expected student enrollment growth.
• I.T is highlighted for its re-rating potential based on improved visibility and earnings growth.
• Jewelry sector faces moderation in SSSG, but rental reversion in HK remains positive.
• Education sector is expected to continue gaining market share due to increasing demand for quality and well-rounded education.
• The overall valuation of the sector is considered fair, with some companies trading above or below the sector average.