Q1 Same store - 10.8% continued to decline, and “Wangding is not rich” has not improved

Sasha released sales data for 19Q1, maintaining the decline in 18Q4. Revenue in Hong Kong and Macau fell 8.4% year on year, and same-store sales fell 10.8% year on year, close to the end of 15-16. This was mainly due to a 6% drop in the number of transactions. Among them, the transaction volume of mainland tourists fell 3.7% and local visitors fell 8.8%; while the transaction price fell 3.5% year on year. Among them, the transaction price of mainland tourists fell 5.9% and local visitors fell 0.7%. After the release of Sasha's Spring Festival sales data, we said that although the number of people visiting Hong Kong from mainland China surged 31.6% year on year during the Spring Festival, there was no “money rush”. TVB indicated that cosmetics, pharmacies, jewelry, etc. did not increase at the same time. The number of tour groups rose by nearly 50%, but the number of tour groups rose by nearly 50%, and “Wangding doesn't have a good fortune” spread throughout the Hong Kong and Macao market. Taking into account the overall situation in the Hong Kong retail market in the first two months of '19, the number of visitors to Hong Kong from the mainland rose 18.7% year on year, overall sales fell 1.6% year on year, and sales of pharmaceuticals and cosmetics rose 2.3%. However, sales of luxury goods such as jewelry and watches fell 2.8%. “Wangding did not have a good fortune” had not improved significantly, and customer consumption attributes and products were all declining.

Q2 ushered in a high base, and competitive pressure on the procurement process and customer acquisition increased

We continue to believe that Sasha still needs to experience a quarter of performance pressure. 1) The impact of the high base for the first half of last year: Q1 and Q2 in 2018 increased 15.1% and 25.3% year-on-year. Among them, Q2 sales of trendy products represented by masks reached 22%, and revenue growth reached 65% year-on-year, while the life cycle of trendy products was short and seasonal changes were fast, but no new hits kept up, making it difficult for the company to make up for the decline in sales. 2) Competition has intensified from upstream stocking: Shasha has faced fierce price competition from the preparation channel, limiting the attractiveness of the product mix and leading to rising costs. As overseas prices become more transparent, mainland cross-border e-commerce platforms such as Tmall International, NetEase Koala, SF Express Haitao, Shanhui, Yangdou, Xiaohongshu, etc. have accelerated the rise of standardized and large-scale e-commerce platforms. It can reduce prices through large-scale procurement, making full use of the advantages of deepening mainland warehousing and logistics and e-commerce networking to provide mainland consumers with multi-channel comparison and supply comparison. 3) Downstream, including drugstores, also cater to the influx of visitors to Hong Kong, actively opening stores in tourist-gathering areas such as Sheung Shui, Mongkok, Tsim Sha Tsui, and Causeway Bay, which adversely affected the salsa market share.

Hong Kong retail still does not reflect policy dividends, Sasha opens 10+ new stores to tap consumption potential

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, and it is difficult to translate the increase in lower-end passenger traffic attracted by the new infrastructure in the first place into actual purchasing power. The “bridge effect” for overnight visitors brought about by the opening of the Hong Kong-Zhuhai-Macao Bridge was mainly like taking photos of the Golden Gate Bridge, which 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 “Bridge One-Day Tour” tours for the west bank of the Pearl River estuary, including Zhuhai, Zhongshan, Foshan, Jiangmen, etc., and low-cost groups from Guangxi, Sichuan and other Guangdong provinces nurtured the surrounding area. However, as the government clears traffic and restricts tour groups, the early bird effect will weaken. 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.

However, management gave a positive signal at the performance meeting. It is expected that more than 10 new stores will be opened in Hong Kong within the new fiscal year, and will respond more positively to the increase in passenger flow and the improvement in consumption power. We think that in the future, Sasha should explore sales opportunities in the Ohashi port area and open new stores in the Ohashi tourist area, but it is difficult to reflect this in the short term. We also believe that the new passenger flow consumption power brought by the Hong Kong-Zhuhai-Macao Bridge and the Guangzhou-Shenzhen-Hong Kong High Speed Rail, and the policy dividends of the Greater Bay Area have not yet been fully released.

Salsa remains “sold” for the time being, and the target price remains at HK$2.1

We think it is difficult to replicate the current success of Sasha in Q1 last year, benefiting from the favorable RMB exchange rate of 6.25 and the fact that there has been no diversion of the visit to Korea. Currently, improvements in fundamentals have not reached an inflection point. Sasha said it will increase exclusive agency products, increase distribution channels, cooperate with payment platforms to launch discounts, etc., to deal with changes in market competition, including developing proxy purchasing into a “agent-like” form of delivery promotion as purchasing agents is lukewarm. It is only limited, and it may also put pressure on profit margins.

However, we believe that if the high base is digested and the consumer market stabilizes and the number of newly opened stores increases, Salsa still has a chance to lead the Hong Kong retail industry again. Furthermore, although it is difficult for the RMB exchange rate to return to the 6.3 level in the first half of 2018 in the short term, maintaining the stability of the current 6.7 level will not further weaken price-sensitive customers. We are currently maintaining the Salsa “sell” rating and target price of HK$2.1 for the time being.

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