• Retail scene remains tough
• Macro environment not helping
• No change to preferred picks

Not picking up yet

There has been a lack of signs towards a sustained pickup in growth for relevant key markets to our coverage (i.e. Singapore, China, Indonesia, Thailand). In addition, the US Fed rate hike decision, China’s slowdown and recent Renminbi devaluation have added to market volatility on a broad level. Within our coverage of consumer stocks, the outperformer was our top pick Sheng Siong whose share price had gained 22% YTD. Our other preferred pick, Thai Beverage (Thai Bev) has also done reasonably decent with a 1.4% rise in share price as compared to the benchmark STI (-14.5%).

2Q results within expectations, albeit some unspectacular

Results from our coverage were mostly within our expectations, although OSIM and Petra Foods were unspectacular. Sheng Siong displayed another strong quarter with improved margins, proving stability as a consumer staples stock. We also like that Thai Bev’s beer business continued to see more profits.

Soft retail scene in China persists but not all are experiencing this

The soft retail scene in China seems to persist as sales for OSIM and BreadTalk remain slow there. BreadTalk had to close two under-performing Food Atrium outlets in China. But we note that not everyone is seeing the slowdown in consumption. For instance, Capitaland Retail China Trust’s (CRCT) shopper traffic was up 1.8% YoY this quarter and they do not see a visible impact from the recent stock market volatility.

The latter is supported by OCBC Treasury Research and Strategy’s view that the impact of negative wealth effect is perhaps limited as equity investments only account for 15-20% of household financial assets. The rather mixed accounts on consumption in China suggest that there are still growth opportunities given good management execution.

Maintain NEUTRAL

We are keeping our NEUTRAL call for the consumer sector amid challenging times while government reforms support a better outlook in the longer term. On the macro front, we saw a cabinet reshuffle for both Indonesia and Thailand in a bid to improve their economy. But domestic consumption for Indonesia could remain soft for 2H, thus we kept our call on Petra Foods [SELL, S$2.74].

While the recent bomb blast in Thailand is expected to adversely impact tourism and consumption for the short term, Thai Bev’s [BUY, S$0.83] defensive alcoholic portfolio underpins our long term positive view on the stock. Sheng Siong Group [BUY, S$0.95] remains as our top pick within the sector, backed by strong management, productivity initiatives such as their new self-check-out counters to sustain good margins, refurbishments of old stores, as well as a dividend payout of ~90%.

Source: OCBC Research - 2 Sep 2015