Core ideas:
The endogenous growth potential of the Hong Kong and Macao market has peaked, and the structural growth of the mainland market is expected.
Due to the small population base and stable endogenous demand in Hong Kong and Macao, the market penetration of cosmetic retail is close to saturation, and the potential for endogenous growth has peaked. Tourist shopping has become the main pillar of the retail industry in Hong Kong. Reviewing the development of the retail industry in Hong Kong in the past five years, we can find that the changes in the number of tourists are highly related to the performance of retail sales. Although the mainland market has said goodbye to the stage of rapid demand growth, it is expected to bring structural growth as consumption upgrading in first-and second-tier cities spreads to third-and fourth-tier cities.
Sasha: the leading cosmetics retailer in Hong Kong and Macao, the mainland market penetration still needs to be improved.
Sasha adopts the business model of parallel import, brand agency and exclusive brand that complement each other. After more than 40 years of development, Sasha has established the leading position in the market share of Hong Kong and Macao (according to our estimates, Sasha's market share is 15% in fiscal year 2018). The Hong Kong and Macao market has always been the focus of Sasha's business and the main source of income for the group. In fiscal year 18, about 82% of the income came from Hong Kong and Macao. As of the end of September 2018, Sasha had 273 retail stores, including 120 in Hong Kong and Macao, 54 in the mainland, 77 in Malaysia and 22 in Singapore. Sasha's penetration rate in the mainland market is not high and has not yet turned losses into profits. Mainland income accounted for 3.6% of the group's total revenue in fiscal year 18. Due to the restrictions of the mainland health regulations, Sasha cannot use the business model of parallel import, which restricts the development of business in the mainland to a certain extent.
The valuation has entered the bottom area, and it will take time for the performance to pick up. Sasha will be given a rating.
Due to the high concentration of income share and net profit contribution of Sasha in Hong Kong and Macao, the prosperity of the retail industry in Hong Kong and Macao has a significant impact on Sasha's performance, and the potential income and profit fluctuate more. Considering that the future Sino-US trade negotiations are expected to achieve phased progress, the pressure on the devaluation of the RMB has eased, and the retail sector valuation has been fully adjusted, we believe that the Sasha valuation has entered the bottom area. We expect the 2019 fiscal year EPS of HK $0.13, using the historical average value of 20x PE, to get a reasonable value of HK $2.60, with a hold rating.
Risk hint
The trade war escalated, the RMB depreciated more than expected, the growth rate of visitors to Hong Kong was lower than expected, and the mainland business lost more than expected.