20170105-广发证券_香港_-2017_Consumer_Discretionary_Sector_Outlook_Select_earnings_and_margin_recovery_names_16页_1mb

2017 Consumer Discretionary Sector Outlook Summary

Sector Overview

The 2017 outlook for the Consumer Discretionary sector highlights a neutral stance overall, with varying degrees of optimism and caution across sub-sectors. The report focuses on Jewelry, Sportswear, and Ladies Footwear and outlines the investment strategy and top picks based on earnings recovery and margin improvements.

Core Content

1. Jewelry Sector

• Sector Growth Outlook:

  • Positive sales growth is expected in 1H17 for both China and Hong Kong due to a low comparable base and weaker gold prices.
  • The sector is currently trading at 14.9x one-year forward P/E, slightly above its five-year average of 14.6x.
  • SSSG (Same-Store Sales Growth) bottomed out in July and August 2016, and is expected to recover in 1H17.

• Key Factors:

  • Gold price trends.
  • SSSG performance.
  • Sales mix of high-margin gem-set products.

• Top Picks:

  • Chow Sang Sang (116 HK): Expected to see a re-rating due to earnings recovery and a lower P/E multiple than peers, despite a higher EPS growth rate.
  • I.T (999 HK): China has become its largest market, with significant expansion potential.
  • Li Ning (2331 HK): Expected to drive strong earnings growth from FY16 to FY18 due to margin recovery.

• Risks:

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

2. Sportswear Sector

• Sector Growth Outlook:

  • Long-term positive outlook due to favorable government policies and increasing sports participation.
  • Revenue growth softened in 2017 after three years of recovery.
  • The sector is trading at 11.1x one-year forward P/E, in line with its five-year average.

• Key Factors:

  • SSSG and trade fair results.
  • Retail discounts and sales mix of functional products.
  • M&A as a potential catalyst for future growth.

• Top Picks:

  • Anta (2020 HK): Expected to grow net profit by 21% in FY17, driven by growth in FILA, kids, and e-commerce segments.
  • Li Ning (2331 HK): Positive outlook due to margin recovery and strong performance in the China market.

• Risks:

  • Downside: Lower-than-expected SSSG and trade fair results, gold price slump, decline in tourist arrivals, policy risks, and competition.

3. Ladies Footwear Sector

• Sector Growth Outlook:

  • Structural challenges persist in 2017, including declining sales volume, shifting consumer preferences toward sporty styles, and online competition.
  • The sector is trading at 10.3x one-year forward P/E, below its five-year average of 13.1x.

• Key Factors:

  • SSSG decline in 2H16 continued.
  • Changing consumer preferences and online competition.

• Top Picks:

  • Belle (1880 HK): Listed as Underperform, with management indicating that the worst is still ahead for the sector.

• Risks:

  • Downside: Notable decline in SSSG, gold price slump, and decline in tourist arrivals.

Investment Strategy

• A bottom-up approach is recommended due to low sector visibility.
• Preference is given to companies expected to see earnings recovery, such as:
  • I.T (999 HK)
  • Chow Sang Sang (116 HK)
• Companies with strong earnings growth outlook due to margin recoveries, such as:
  • Li Ning (2331 HK)
  • Anta (2020 HK)

Key Figures and Analysis

1. Jewelry Sector Valuation

• Chow Sang Sang is the only name below its historical average P/E of 13x.
• Chow Tai Fook is priced above its historical average of 21x.
• Luk Fook is at its historical average +1sd.

2. Sportswear Sector Valuation

• Anta is close to its historical average +1sd.
• Li Ning and Xstep are expected to see strong growth in FY17 and beyond.

3. Ladies Footwear Sector Valuation

• Belle is at the low end of its historical P/E range.
• Daphne and Le Saunda show declining EPS growth, suggesting weak performance.

Summary of Key Companies

I.T (999 HK)

• Target Price: HK$3.60
• Market Share:
  • China: 44% of total sales
  • Hong Kong: 43%
• Growth:
  • China is the key growth driver with 13% SSSG in FY17.
  • Japan has seen strong revenue growth of 40% in FY17.
• Valuation:
  • Trading at 11.1x one-year forward P/E.
  • Core net profit increased by 26% in FY17.
• Prospects:
  • Strong expansion potential in China.
  • Improved bargaining power with malls due to better store locations and pure turnover-rent leases.

Risks Summary

Upside Risks:

• Better-than-expected SSSG and trade fair results.
• M&A activity.
• Gold price rally.
• Growth in mainland tourist arrivals.

Downside Risks:

• Lower-than-expected SSSG and trade fair results.
• Gold price slump.
• Decline in mainland tourist arrivals.
• Policy risks.
• Keen competition.

Conclusion

The report suggests a neutral outlook for the overall Consumer Discretionary sector in 2017. While Jewelry and Sportswear show potential for recovery and growth, the Ladies Footwear sector faces structural challenges. I.T (999 HK), Chow Sang Sang (116 HK), and Li Ning (2331 HK) are highlighted as top picks due to their strong earnings recovery and growth potential. Investors are advised to adopt a bottom-up approach and focus on companies with positive margin recoveries and strong SSSG performance.