• Maintain NEUTRAL with a lower Target Price of USD6.63, from USD7.38, 0% upside and 3.3% yield.
• While contribution from Health & Beauty business should still be Dairy Farm’s main driver for FY19-20F earnings, we remain cautious on the outlook amidst ongoing protests in Hong Kong. A sustainable 4% dividend yield should provide support to Dairy Farm's share price.
• Trading at 25x FY20F P/E (historical average: 26x), we think there is currently a limited upside to the stock price given the weakened outlook.

Ongoing Protests in Hong Kong Dull Dairy Farm’s Outlook

• Based on data provided by the Census and Statistic Department of Hong Kong, retail sales in June and July fell 7% and 11%. We estimate that 70% of Dairy Farm (SGX:D01)’s FY18 operating profit was derived from Hong Kong therefore, ongoing protests there are likely to impact retailers, especially those located in Causeway Bay near the rallying point for protests.

Health & Beauty Is Likely to See a Negative Growth in 3Q19

• Health & Beauty is likely to see a negative growth in 3Q19 with medicine and cosmetics sales in Hong Kong declining 5% y-o-y and 16% y-o-y in June and July. The chief supervisor of The Cosmetic and Perfumery Association of Hong Kong cited that cosmetics sales are estimated to have dropped by 40% in the city’s popular tourist shopping areas.
• Sales from the Health & Beauty segment are also exposed to tourism spending. As a result, even as the protests taper down in size, we expect the downward pressure on Hong Kong medicine and cosmetics sales to persist in 4Q19 as tourist arrivals from Mainland China are likely to decline.
• In July, y-o-y growth in mainland China tourist arrivals also slowed to 5.5%. The Travel Industry Council of Hong Kong also cited that the number of Chinese group tours to Hong Kong has declined by 90% y-o-y in the first ten days of September and was down 63% y-o-y in August.

We Cut Our Earnings Forecast by 2% for FY19-21F

• We cut our earnings forecast by 2% for FY19-21F as we expect potential decline in Hong Kong sales, partially offset by improving sales for its Manning stores in China and Guardians stores in ASEAN.
• We also reduced our DCF terminal growth rate to 2% from 2.5% on the back of a weakened economic outlook for Hong Kong following the civil unrest. This lowered our DCF-derived Target Price to USD6.63 from USD7.38 previously.

Source: RHB Invest Research - 23 Sep 2019