• Retail sales growth remain modest
• Still have room for downside
• Sticking to our preferred picks

No clear signs of a pickup for Indonesia

Bank Indonesia (BI) recently kept its policy rate unchanged, against a backdrop of rising inflation and global financial risks. Since the slowdown in 1Q, government spending has been disappointing and this impinged on consumer sentiments as well.

Retail sales survey by BI suggests weakening consumer spending, and despite some optimism from BI for a better 2H15, a pick-up in 2Q seems unlikely and there is room for further disappointment according to OCBC Treasury Research. Thus, with Indonesia making up about 70% of Petra Foods’ [SELL, S$3.61] topline, we think the risk of earnings downside continues to loom for the group.

China and Hong Kong retail scene still uninspiring

Hong Kong’s retail sales in May fell for the fifth month straight, albeit at a smaller decline of 0.1% YoY, with the luxury segment as the main drag. The retail sector in HK will likely see weak tourist spending in the near term amid tighter regulations and inherent economy slowdown in China.

For China, retail sales growth in May was lower at 10.1% vs. an average growth rate of 12% for 2014. With the equity market rout, concerns may arise over the negative wealth effect on consumption but as equity investments typically comprise only 15-20% of household financial assets, the actual impact could be limited.

Nonetheless, we had previously stated that structural changes in China and e-commerce growth have contributed to waning footfall in malls, resulting in underperforming sales for retail and F&B companies such as BreadTalk [SELL, S$1.14]. OSIM’s [HOLD, S$1.87] share price seemed to already bore the brunt of a challenging environment in its key markets as it had fallen to a low of S$1.415.

Its upcoming 2Q results this Thurs should reveal indicative signs on whether their new flagship chair is able to drive good growth for the year.

Looking towards a better 2H

Performance from the consumer indices, FTSE Consumer Goods (FSTCG) and FTSE Consumer Services (FSTCS) remain muted with YTD returns of -1.2% and -3.9% respectively vs. the FSSTI of -0.5%. We are still NEUTRAL on the sector as we look to a better 2H with regional growth driven by government reforms, and opt to stick to our preferred picks Thai Beverage [BUY, S$0.83] for its market dominance and defensive Sheng Siong Group.

More recently, data showed Singapore’s retail sales in May rose 1.8% MoM and 0.9% YoY, excluding motor vehicles. In particular, retail sales for supermarkets in May grew 1.0% MoM and 3.6% YoY, which bodes fairly well for Sheng Siong [BUY, S$0.92]. (Jodie Foo)

Source: OCBC Research - 20 Jul 2015