It is still far too early and risky for anything that looks like a Chinese retail stock to be a good buy.
WITH A CONSUMER-LED BOUNCE detectable in much of Asia, picking shares in companies that will profit from the theme should be as easy as shooting fish in a barrel. Unfortunately it is not.
For one thing, the rebound is uneven and stuttering around the region. For another, the heavy tread of US Federal Reserve chief Alan Greenspan has created a hostile interest rate environment that might stall the American economy before Asia has a chance to achieve recovery and, crucially, to cut unemployment further.
Although many Asian retailers are racking up higher sales, their margins remain under pressure, because they cannot pass on higher prices to shoppers in what is still an ultra low-inflation environment.
In Japan, it looked for a few weeks as if the long sweltering summer might achieve what all the government stimulation measures have failed to mobilise - the country's consumers. Despite falling incomes, retail spending was up 2% in July, arresting a 24-month slide in sales. Shoppers snapped up light clothing, air conditioners, beer and happoshu malt beverages, as well as soft drinks and ice creams. By autumn, confidence had turned fragile again in the wake of unemployment figures stuck at 4.9%, or a record 3.3 million jobless people.
Employment in the wholesale and retail sector, which accounts for a quarter of all workers and represents 60% of GDP, dipped 0.1% to 14.75 million. However, the 'feel good' effect from a resurgent yen, and buoyant Japanese share prices that pushed the Nikkei index briefly through 18,000, helped to encourage a highest ever 85.62 million people to take short holidays over the summer, according to the Japan Travel Bureau. The consumer price Index (CPI) has crawled up 0.3%, at last leaving deflation behind, and indicating some momentum for the economy. The big Japanese department stores are still struggling, but convenience and discount stores are doing well as are beverage companies. It might be worth looking at the shares of 7-Eleven Japan and Kirin breweries. An attractive IPO, Asahi Soft Drinks, recently went to a modest premium in early dealings. Small companies will soon make their mark if foreign enthusiasm for Japanese equities continue. One of these, Kadokawa Shotew Publishing, which publishes magazines and books and is diversifying into software development, has some admirers. Private investors can best play the long-running recovery story by buying one of the mutual funds with a leaning to Japanese consumer stocks.
Elsewhere in the region, value may still be found in the shares of the biggest retail and consumer groups. According to Goldman Sachs Investment Research, the top-10 non-Japanese Asian retailers by market capitalisation are: the Australian supermarkets and stores giants, Coles Myer and Woolworths, the President Chain Stores and Far East Department Stores in Taiwan, Singapore-listed Dairy Farm, trading company Li & Fung in Hong Kong, the Shinsegae stores group in South Korea and its counterpart Ramayana Lestari in Indonesia.
The two Hong Kong clothing retailers that make the list are Esprit Holdings and Giordano, both of which are warm favourites with brokers and fund managers.
Hong Kong is limping out of recession behind every other Asian country, apart from Indonesia. Retail sales in the SAR bottomed last May and have gradually perked up in recent months. HSBC Securities expects the sales number to finish the year showing an average decline of 1.7%, before stepping ahead smartly to score an 8% rise in 2000. The brokers' retail analysts recommend the shares of Giordano as a buy up to HK$8.25, and they tip Esprit up to HK$7.50. Their next best bet is fast foods chain Café de Coral. Goldman Sachs likes Esprit too, but they point out that the shares are not a pure Asian play for investors who want one, since the company derived 62% of its sales from Europe.
Esprit executive director Surinder Chhibber and his team have been able to maintain operating margins at around 10% due to economies of scale and targeting the company's popular medium cost clothing brands at the younger end of the market. Esprit could double its margins in the coming years thanks to lower cost structures in Asia, and their bargaining power when it comes to negotiating cheaper store leases in a soft retail property sector. One of the few Hong Kong retailers to hold a candle to Esprit is Giordano Holdings, which recently produced eye-popping interim profits - up 500% at HK$132 million. Giordano has been hugely successful in Hong Kong, Taiwan and Singapore marketing funky casual gear under the slogan 'Simply Tanks'. A new white and khaki line launched in Singapore sold out in a matter of days. Analyst Anne Ling at SG Securities has raised her 1999 earnings forecast for Giordano three times and she is now looking for HK$260 million for the full year.
China is even more desperate than Japan to flush money out of private bank accounts into the real economy. Last month the government flagged a 20% flat savings tax on the thrifty, who are sitting on an estimated 5.92 trillion renminbi, (US$716.32 billion) while they fret over soaring unemployment and the near collapse of the socialist welfare system.
It only seems like yesterday that some conspicuous consumers in Guandong had so much money to throw around that they were having gold dust sprinkled on their sharks fin soup at banquets.
No more. China has been officially suffering deflation since October 1997.
A new 60 billion renminbi bond issue has just been unleashed, which Finance Minister Xiang Huaicheng says could have a stimulus effect worth 300 billion renminbi, principally through increased bank lending. Earlier this year the banks were urged to tend more for local punters to invest in the domestic stockmarkets. But only 40 million Chinese hold shares and the overall mood remains subdued.
Exporters are, however, now benefiting from a lift in external markets and added competitiveness derived from the sharp appreciation of the yen. The upside of deflation has been cheaper costs for manufactured exports - which account for 20% of the economy. Official statistics for July showed a possible consumer turning point, with sales of electric fans, fridges, computers and telecom equipment all up strongly from a low base.
A 16% growth in imports also pointed to some Chinese shoppers finally being tempted into the stores by successive price cuts. It is still too early to buy anything which looks like a PRC retailing stock. Should more money begin to filter through the urban areas, a better way to leverage into brighter prospects might be the shares of Southern Airlines.
Singapore has come out of its shallow succession doing handsprings. Consumer confidence has been restored by the robust performance of the stock market and the decline in unemployment from 4.5% late last year to under 3.9%. Retailing in the Lion City has been in the doldrums for years. A recovery began in May, led by department stores and supermarkets, clothing and personal effects.
HSBC Securities predicts retail sales will rise 6% by volume this year, compared with a 9.9% decline in 1998. But stiff competition keeps pressure on margins. Over 80% of Singaporeans shop for grocery and household products at the largest local chain, NTUC Fair Price, which occasionally boasts that it will sell 'at cost' to ensure that essential items it offers are the cheapest in town. Competition is not restricted to local retailers, with the French-owned Carrefour empire among several foreign invaders.
There is a palpable sense of confidence in Singapore these days, and it is flowing through to listed consumer companies. A relatively low-risk investment in this sector could be the shares of Fraser & Neave, a venerable old trading company that is undergoing a face lift. Salomon Smith Barney expects Fraser & Neave to hoist its net profits 28% to S$93 million (US$55.24 million) in 2000 and to maintain the improvement in the following year. The firm gives holders exposure to Malaysia, where it controls 68% of the soft drinks market in an economy firmly on the comeback trail.
Fraser & Neave is strong in condensed milk, powdered milk and ice cream as well as the bottling of soda pop. It is cash rich and has a significant property portfolio.
There is a rustling of baht through the shop tills in Thailand again after two years of retail stagnation, which almost put swish stores like Central, Robinson and the Mall out of business.
The economy is now growing at a cracking pace, with the official growth rate of 4.5% likely to run out closer to 6% by year-end. Although opinion polls show many Thais do not fully believe in the recovery, they are whipping out their credit cards. Sales of liquor, soft drinks, motor cycles, cars and imported consumer goods are all up. Merrill Lynch has an 'accumulate' tag in its research note on Big C Supercenter, and there are takeover rumours surrounding that company. Another popular pick is stores group Siam Makro.
South Korea, pulled its collective belt so tight last year that two popular stores chains, New Core and Midopa, went bankrupt.
Now, with the economy fairly fizzing and factories taking on workers again, South Koreans have a spring in their step. During the financial crisis, discount stores came into their own with bargain-hunting consumers flocking to buy essential items. That trend will not be easily reversed, although the top three department stores - Lotte, Hyundai and Shingsegae - are seeing old customers come back.
But it is the discount houses that are gearing up for expansion - particularly since that class of retailer is no longer banned from operating in Seoul under one of South Korea's more bizarre old restrictive practices.
HSBC Securities predicts discount store sales will jump 20% this year to 6 trillion won (US$4.8 billion).
Among the beneficiaries will be Hanaro Club, Lotte's Magnet, and LG Mart.
The evidence around the region supports the case that the legendary Asian consumer is still alive - but they are not all well.
The US$500 billion or more destruction of wealth in the meltdown has left some deep psychological scars.
Many among the emerging middle classes were heavily geared into real estate and the stock markets when the crunch came. With several of the Asian bourses now developing a speed wobble, it might not pay to chase the shares of retail companies too high, until further banking restructures and corporate reform become a reality, and employment prospects are restored.