• Rosier picture in Hong Kong, Singapore, Philippines and Vietnam; Impending elections in Malaysia, Indonesia and Thailand could reignite consumer sentiment
• Thailand’s beer demand declines for the 5^th month post-excise tax in Sep-17; Will review assumptions for ThaiBev after release of March and April data
• FNN should benefit from the fast-growing dairy market in Vietnam
• We maintained our Overweight view on Singapore Consumer Sector

Strong Feb-18 data affirmed a sustainable momentum into 2018

• Retail sales in China grew 9.7% YoY in the first two months of 2018. E-commerce continue to gain traction, with online sales growing at 37.3% in Jan-Feb, contributing to 20.1% of total retail sales, more than double the 9.9% recorded 3 years ago.
• Multi-year high double-digit growth in retail sales and two-decade level low unemployment rate painted a rosy picture in Hong Kong. Retail sales jumped 15.7% YoY while unemployment rate improved to 2.9% for Jan-Feb. Upbeat consumption sentiment amid favorable employment and income conditions alongside further pick-up in inbound tourism should continue to underpin retail sales momentum.

Notably, sales of luxury products (jewellery, watches and valuable gifts) rose 21% YoY in the first two months.

• Singapore retail sales, excluding motor vehicle sales, rebounded strongly at 14.0% YoY in Feb-18 due to Chinese New Year effect. However, combining the first two months of 2018, retail sales was up by 1.96% YoY, and c.4% of the total sales are transacted via online.

Food & Beverages Services increased 4.9% YoY in Feb-18, but fell 4.5% for the first two months. This is in contrast with Food retailers, which recorded sales growth of 61.2% in Feb-18 and 14.3% in the first two months. This could imply a potential change in consumer preference to dine-in.

• Indonesia retail sales remained bleak with 1.7% YoY increase in Mar-18. Moreover, consumer confidence was weighed by concerns over future job availability and income. We expect the upcoming local elections in Jun-18 to underpin consumer confidence while the government pushes for higher investment in infrastructure. The Asian Development Bank (ADB) expects the Indonesia economy to expand by 5.3% YoY in 2018 and 2019.
• Consumer spending in Malaysia continues to expand at a steady pace. We expect strengthening ringgit, controlled inflationary pressure, and the upcoming election campaign would underpin domestic spending.
• Strong exports and tourism recovery continued to lift Thailand‘s consumer sentiment, and thus private consumption. Consumer sentiment private picked up in Mar-18, after a slight dip in Feb-18. Global trade tensions, political uncertainty and low farm prices remained a concern. The Bank of Thailand raised its 2018 economic growth forecast for the fourth time, to 4.1% from 3.9% projected earlier in Dec-17.
• Philippines posted firmer sales in Feb-18. Net Sales Index recorded growth for second consecutive month, in terms of both value and volume, after a contractionary 2H17.
• Vietnam has outdone itself. Retail sales for 1Q18 increased 10.3% YoY – the highest rate in the past 10 years. The strong consumption is a reflection of rising purchasing power – against a backdrop of low inflation and rising wages (average wages increased c.8% YoY in 2017).

Slower than expected Beer demand in Thailand

Historically, the road to recovery post-excise tax hike takes about 4 months (see Figure 17). However, domestic beer sales continue to slide in Feb-18 – the 5^th month since Sep-17. We are still hopeful of a recovery in domestic beer demand on the back of a low 2017 base and as the excise tax effect subside. The March and April (Songkran) sales will paint a better picture on consumer sentiment. Notwithstanding that, we also expect the 2018 FIFA World Cup to kick up beer sales in both Thailand and Vietnam by c.10% this year.

FNN, a proxy to Vinamilk’s strong growth and market dominance

Strong demand for Dairies should bolster the slowdown in non-alcoholic beverages (NAB). The strong demand for milk in Vietnam should support the FNN’s Dairies profitability.

Vinamilk posted revenue of VND51.135trn (USD2.24bn) and earnings of VND10.278trn (USD0.45bn) in 2017. It aims to increase its total revenue by 8.5% and its earnings by 4.6% in 2018. Vinamilk also plans to raise its market share in Vietnam by 1% each year, reaching at least 60% in the next five years. Its current market share is 58%, up 2% from 2017.

FNN currently has c.19.95% stake in Vinamilk and intends to further accumulate its interest in Vinamilk. However, it may face competition from Jardine C&C, whom has acquired c.10% interest in Vinamilk and has one representative on Vinamilk’s board. On a brighter note, the strategic partnership between Vinamilk and Jardine Matheson Group could accelerate Vinamilk’s plan to boost its export sales.

Worth noting that Vinamilk will issue preferential shares to existing shareholders at the ratio of 5:1, which would increase its chartered capital by 20% to VND17.415trn.

Expect upcoming elections to underpin consumer confidence, particularly in Malaysia

Consumer could be adopting a wait-and-see attitude on retail spending. The start of official election campaign (which could include government cash handout) would spur consumer spending. Post-election, consumer spending could improve further with stimulus spending and consumers releasing pent-up demand.

The Malaysia government has disbursed the first of three parts of the cash handout (under BR1M programme) in Feb-18, aimed at increasing household spending for lower income households. The next payouts are scheduled for June and in August. The government paid a total amount of RM6.8bn for BR1M last year.

On top of BR1M disbursements, the Prime Minister Najib’s generous pre-election budget of RM280bn has also set aside a one-time RM1,500 payments to 1.6 million civil servants, income tax relief and aid to rural communities.

Investment actions

Maintain Overweight on Consumer Sector. Brighter regional economy outlook would lift job and wage growth, thus fuelling consumer spending.

• Both supermarket operators Sheng Siong (Accumulate/TP: S$1.13) and Dairy Farm (Buy/TP: US$9.83) are expanding their store counts to drive topline. Margins should continue to improve from better economies scale, improved operating efficiencies from central warehouse, and ramping up fresh product offerings. Fresh products have higher margins compared to groceries and the least vulnerable to Amazon’s threat.
• We also like Old Chang Kee (Buy/TP: S$0.98). It has completed its transformation in Dec-17. Successful integration with the new factory would be the inflection point for OCK. Its new factory will yield manufacturing efficiencies and increase capacity to fuel its expansion domestically and regionally.
• Thai Beverage (Buy/TP: S$1.05) and FNN (Buy/TP: S$2.83) are tapping onto the fast-growing emerging markets such as Cambodia, Myanmar, Laos and Vietnam (CMLV). Both beverage giants should benefits on their recent acquisitions.

North Asia and ASEAN Retail Landscape at a Glance