Broken-hearted: Sad Chinese Valentine's Day story of Hong Kong's retail

Visits to stores shed some light.

A visit to ~20 stores of Chow Tai Fook, Chow Sang Sang and Luk Fook in Mong Kok, Tsim Sha Tsui and Causeway Bay over the past weekend amid the celebration of Chinese Valentine's Day has shed some light on the Hong Kong retail sector.

According to a research note from Nomura, although the sample is not big and may have some bias, it still gives some colour on the recent performance of the sector.

While Saturday (2 Aug) was the Chinese Valentine’s Day, the footfalls to jewellery stores still looked to be weak vs. early this year, based on Nomura's observation.

Gold products continued to attract more traffic, and non-gold accessories were promoted by offering discounts.

Many store staff said the recent best-selling diamond rings are 0.5-0.7 karat (vs. 1 karat early this year).

Nomura believes the falling ASPs may likely subdue the top-line and put pressure on SG&A, eventually leading to declines in earnings.

Here’s more from Nomura:

We reiterate our Reduce rating on CTF and CSS and Neutral on LF. The next potentially negative catalyst would be China’s retail sales in jewellery category in July, which is slated to be announced on 13 August.

We expect to see a low- to mid-single-digit decline y-y

Some investors tend to ignore last year’s numbers due to the high base, and expect to see a positive improvement in top-line growth this fiscal year vs. the year before last.

But we believe it is pertinent to note that the three jewellers’ store numbers have increased by 20-30% during the two-year period.

Therefore, a positive single-digit revenue growth for this fiscal year vs. the year before last should not be seen as a solid sign of improvement, in our view.

Although we agree that the gem-set jewellery business should have good potential in the mainland in the long run, we believe its scale is still too small to offset the decline in the gold products business in the short term for the three HK jewellery names.

More importantly, their gross margin improvement this year might not be substantial as it seems that it is the items with more price markdowns that attract more Chinese consumers’ eyeballs, in our view.

As most landlords of HK’s prime location stores are still asking for high increments in rent, the jewellers may consider relocating their stores.

We argue that such relocations may have critical short-term impact because each retail store in HK is, on average, about 10-fold more productive than one on the mainland in terms of revenues.

Further, the search for an alternative location and renovation may take at least 1-2 months.