RHB: Hong Kong protests will ‘dull’ Dairy Farm’s outlook

Outlet of Guardian, which is owned by Dairy Farm, at Kinex mall in SingaporeOutlet of Guardian, which is owned by Dairy Farm, at Kinex mall in Singapore

The protests in Hong Kong will “dull” the outlook of grocery-, convenience- and drug store operator Dairy Farm, with retail sales in the protectorate taking a hit, RHB said in a note Monday.

“We estimate that around 70 percent of Dairy Farm’s FY18 operating profit was derived from Hong Kong therefore, ongoing protests there are likely to impact retailers, especially those located in Causeway Bay near the rallying point for protests,” RHB said.

It noted data from the Census and Statistic Department of Hong Kong showed June and July overall retail sales fell 7 percent and 11 percent, respectively.

In addition, the chief supervisor of the Cosmetic and Perfumery Association of Hong Kong estimated cosmetics sales dropped by around 40 percent in Hong Kong’s popular tourist shopping areas, the note said.

“Sales from the Health & Beauty segment are also exposed to tourism spending,” RHB said, adding it expected Health & Beauty’s contribution would be the main driver for Dairy Farm’s fiscal 2019-20 earnings.

“As a result, even as the protests taper down in size, we expect the downward pressure on Hong Kong medicine and cosmetics sales to persist in the fourth quarter of 2019 as tourist arrivals from Mainland China are likely to decline,” RHB said.

RHB cuts its earnings forecasts for Dairy Farm by 2 percent for fiscal 2019-20 as Hong Kong sales may decline, partially offset by improving sales for the Manning stores in China and the Guardian stores in Southeast Asia.

The brokerage lowered its target price on the stock to US$6.63 from US$7.36; it kept a Neutral call.

“We think there is currently a limited upside to the stock price given the weakened outlook,” RHB said.

The stock price was up 1.05 percent at US$6.72 at 11:50 A.M. SGT.

Dairy Farm’s brands include Wellcome in Hong Kong and Taiwan, Yonghui in mainland China, Cold Storage in Malaysia and Singapore, Giant in Indonesia, Malaysia and Singapore, Hero in Indonesia and Robinsons in the Philippines.

It also operates 7-Eleven convenience stores in Hong Kong, Macau, Singapore and Southern China.

In the health and beauty segment, Dairy Farm operates Mannings in Greater China, Rose Pharmacy in the Philippines and Guardian in Brunei, Cambodia, Indonesia, Malaysia, Singapore and Vietnam.

It also operates IKEA outlets in Hong Kong, Indonesia, Macau and Taiwan.

 

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