Incidents:
The Hong Kong Tourism Board announced that, driven by the peak summer travel season, the initial number of visitors to Hong Kong in August 2023 was about 4.1 million, which is equivalent to 84% of the average number before the pandemic (same month in '17 to '19).
Comments and opinions:
Benefiting from strong summer travel in July-August, the recovery rate of mainland visitors to Hong Kong increased:
The number of mainland visitors to Hong Kong in July/August reached 29.8/ 343 million respectively, recovering further to 68%/71% of the same period in '18. In the 6/30 quarter, the recovery rate of mainland visitors to Hong Kong/retail sales in Salsa Hong Kong and Macau was 59%/46%, respectively, compared to the same period in '18. Among them, the proportion of visitors to the Hong Kong and Macau stores during the quarter was 47%, compared to 70% before the epidemic. The recovery in the flow of visitors from the Mainland to Hong Kong is higher than the recovery in retail sales in Salsa, Hong Kong and Macao. The reason may be that after the pandemic, the mainland has more channels for beauty shopping, and visitors to Hong Kong may prefer experiential consumption.
In terms of the competitive trend of local beauty retail in Hong Kong, compared to the online prices on the official website of Sa Sa Sa and the China Free Day discount, there is still a price advantage of about 10% for big-name celebrity products (see Table 1). Before the pandemic, the main rivals, Zhuo Yue and Colourmix, were weak; compared to Matsumoto Kiyoshi, who mainly sold Japanese beauty products in Hong Kong, salsa products were relatively diverse, customers were sticky, and 60% of sales came from VIP members.
It is expected that profit improvement and elasticity will take priority over revenue recovery. The driving force is the gradual reflection of cost reduction and efficiency and refined store operations in Hong Kong and Macao in China:
During the epidemic, Sa Sa implemented a lot of cost reduction and efficiency improvement and refined operation measures for stores in Hong Kong and Macau. It has rich experience in retail operations in Hong Kong and Macao, and single-store efficiency has been significantly restored. Includes:
(1) Store location optimization, and loss-making or inefficient stores closed during the pandemic. Previously, on 2019/3/31, the number of Macau stores in Shasha Port reached 118. As of 6/30, there were 81 stores in Macau in Hong Kong. Take well-located stores in Tsim Sha Tsui, Causeway Bay, and Mongkok as examples. Recently, single stores have recovered to 8-90% before the pandemic.
(2) Sa Sa has extensive experience in selecting store locations in Hong Kong, China, and has optimized the salary structure of store staff. As a local retailer, Sa Sa has extensive experience in store traffic, customer base, and location selection in Hong Kong and Macau, China. It divides retail operations into store types according to customer groups, and optimizes the salary commission structure for store staff.
Looking forward to the future, benefiting from store optimization and refined operations during the pandemic, if the number of visitors to Hong Kong continues to recover and gross margin remains stable (the company's gross margin is 40% in the 2023/3/31 fiscal year), it is expected that the rent ratio of salsa stores in Hong Kong and Macao in China is expected to be around 10% or lower in double digits, and the profit margin before tax in Hong Kong and Macao is expected to return to a high of about 10% per unit.
The focus of business during the year was to further optimize the Hong Kong and Macao markets to attract spending from visitors to Hong Kong. The company had a high interest rate before the pandemic:
During the year, the company focused on optimizing the performance of single stores in the Hong Kong and Macau markets. The store opening strategy was relatively cautious. It is expected that there will be a single-digit increase in stores in Hong Kong and Macao during the year. Amid the integration and optimization of mainland business, the mainland business is expected to be close to break-even; profit margins in Malaysia are expected to remain stable. In the 17-19 fiscal year before the pandemic, the company's dividend rate was over 100%, and dividend payments were interrupted during the pandemic. As the flow of visitors to Hong Kong recovers, the performance and cash flow of China's Hong Kong and Macao regions recover, and if dividend payments resume in the future, the company's valuation is attractive.