In addition to “Wangding Is Not Prosperous,” Salsa's “Sunset Afterglow” came under pressure from purchasing and preparing goods

Sasha released data for fiscal year 19Q3 (corresponding to Q4 '18). Revenue fell 2.2% year on year to HK$2.19 billion, mainly due to cold revenue in Hong Kong and Macau, dragged down 2.8% year on year. Same-store sales in Hong Kong and Macau fell 3.7% year on year. The number of transactions increased slightly by 0.4%, but the amount of a single transaction fell 2.6%. Among them, although the number of mainland tourist transactions increased by 5.8%, the amount of a single transaction fell 6.1%, reflecting the lower end of both customers and goods.

The company has previously mentioned that Hong Kong's sales have fallen short of expectations since October, but this time it indicated that the new mainland visitors to the Hong Kong-Zhuhai-Macao Bridge were mainly sightseeing, and that the “try it out” effect did not match consumption power. The number of visitors to Hong Kong from the mainland surged 25.8% year on year in November, but Hong Kong's total retail revenue and pharmaceutical and cosmetics revenue increased by only 1.4% and 10.1% respectively. Our emphasis on the new infrastructure passenger flow “Wangding is not prosperous” was confirmed by many sources. However, in addition to “poor wealth,” the increasingly lower-end consumer attributes are reflected in the decline in individual amounts. We mentioned earlier that after the opening of the bridge, daily necessities such as sanitary napkins and pain relievers were wiped out in the market in the Tung Chung region of Hong Kong, but the “sanitary napkin economy” is not the way to retail in Hong Kong.

The bigger problem with Shasha is that in this “low-end” consumer competition for daily necessities, as overseas prices become more transparent, mainland cross-border e-commerce platforms such as Tmall International, NetEase Koala, SF Haitao, Chimei, Yang Wharf, Xiaohongshu, etc. are standardized and large-scale and can reduce prices through large-scale procurement, making full use of the advantages of deepening mainland warehousing logistics and e-commerce networking to provide mainland consumers with multi-channel comparison and supply comparison. However, relying on the limited Hong Kong retail market, Sasha faced fierce competition from the beginning of purchasing and preparing goods, limiting the range of products and also causing costs to rise, reflecting the “sunset afterglow” of the entire Hong Kong retail market.

The “trying new” effect of new infrastructure may gradually subside, and the “sanitary napkin economy” will not save Hong Kong retail

Exchange rate pressure and a slump in the stock market put pressure on actual consumption. The consumption attributes of visitors to Hong Kong have changed from “buy buy” and “eat and eat eat” to “lower end” consumption of daily necessities and “differentiated” sightseeing of alternative attractions. However, it is difficult for the increase in lower end passenger traffic attracted by the new infrastructure to be converted into actual purchasing power. The “bridge effect” brought about by the opening of the Hong Kong-Zhuhai-Macao Bridge further spawned the “sanitary napkin economy”. The low cost and high capacity allowed travelers to continue to pour into Hong Kong's Tung Chung for a while, and there were “one-day bridge tours” for places on the west bank of the Pearl River estuary, including Zhuhai, Zhongshan, Foshan, Jiangmen, etc., and low-cost tours in Guangdong's surrounding provinces such as Guangxi and Sichuan on the “Zhuhai-Macau-Hong Kong” route. However, with the government's traffic dredging and tour group restrictions, the try-out effect will also weaken. We recently observed that passenger flow in Tung Chung has returned to the past. However, low-cost groups are moving to the old urban areas of Hong Kong, including Hung Hom, Tokwawan, and Kowloon City, which themselves have limited carrying capacity, and it is difficult to promote the improvement of the overall retail market by concentrating compulsory consumption at low-end rebate stores.

Also, according to our estimates, taking 200,000 trips per week on the Hong Kong-Zhuhai-Macao Bridge corresponding to about 10.4 million trips per year, the Guangzhou-Shenzhen-Hong Kong High Speed Rail's average of 50,000 passengers per day corresponds to about 18.25 million trips throughout the year, totaling about 28 million two-way passengers. Half of the inbound visitors correspond to 14 million visitors per year. However, considering that the actual visa bottleneck has not been broken and the diversion situation, etc., we think that the actual number of new visitors in the short term may still be in the median figure of one million (if we calculate a 10-20% increase of 44.45 million mainland visitors to Hong Kong in '17, corresponding to 4.5-9 million).

Maintaining the “sale” of salsa, the target price was lowered to HK$2.1

As early as May of last year, we began reminding Sasha to face “Korea's potential diversion plus high valuation+exchange rate pressure”, and suggested avoiding the Hong Kong stock retail sector in mid-September, and downgraded Sasha's rating from “holding” to “selling” in mid-October, stressing that after the infrastructure was opened, there was no way for Wang Ding's poor financial passenger flow to drive consumer performance. However, the central price of RMB against the US dollar remains relatively high at 6.8. We believe that the trend of “lower-end” shopping will still suppress the spending intentions of price-sensitive customers.

Sasha's performance in Q2 (18Q3) of fiscal year was already weak, and this season's (18Q4) performance deteriorated further. Hong Kong and Macau's revenue turned negative for the first time in nine quarters, and the first half of this year will face a high base of the first half of 2018. We think there is room for further decline in Sasha's performance. We lowered Sasha's FY19/20 revenue growth forecast from high single digits to middle single digits, and EPS was lowered from 0.17/0.19 to HK$0.13/0.14. Currently, 15x PE is half down from the 30x high in the middle of last year, close to the bottom of the historical valuation 13-14x, and the corresponding target price was lowered from 2.8 to HK$2.1 to maintain “selling”.

Risk warning: New passenger traffic exceeds expectations, Hong Kong's retail industry is picking up, company performance is improving, etc.