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Sunday, May 03, 2020 12:43
PM / by Fitch Ratings/ Header Image Credit: China Daily
China's consumer-retail sector will face operating
cash flow pressures in 1H20, propelling the exit of some small and financially
weak players, says Fitch Ratings. However, we expect overall retail revenue to
return to yoy growth by 2H20 as the economy recovers.
Chinese consumer companies' business performance in
1H20 will depend on their demand stickiness, with daily necessities
outperforming other parts of the market. China retail sales fell by 20.5% yoy
over January-February. They posted another steep decline, of 15.8%, in March,
even though various lockdowns in place across the country were eased over the
course of the month.
The impact of the pandemic on profitability will be
greater than on revenue for many retailers. Several may find it difficult to
avoid price discounting as they seek to fend off competition for scarce demand.
Firms will also face a variety of fixed costs, such as long-term leases, and
with revenue falling, the ratio of costs to sales will rise.
The authorities have attempted to encourage spending
through the distribution of shopping coupons and extended weekends since
end-March. As of 27 April, 20 provinces had issued over CNY4.5 billion in
consumption vouchers, and eight provinces and cities had urged companies to
extend weekends to 2.5 days. Policy support for retailers may also extend to
loan forbearance from financial institutions for some larger companies.
Consumption growth has rebounded in provinces with
stimulus measures in place, but the effectiveness of such moves, particularly
over the longer term, is difficult to quantify. The capacity of some local
governments to adopt consumption subsidy programmes remains constrained by
their financial position.
The sub-sectors hit hardest by the retail downturn
include catering, department stores and tourism, where businesses rely heavily
on outdoor traffic. The lingering effects of the coronavirus on consumer
confidence mean sales for many sub-sectors that rely on outdoor traffic will
continue to contract yoy in 2H20. Same store sales (SSS) of Yum China, a good
indicator of consumer traffic, fell by 20% yoy over March 2020. SSS for
Starbucks (BBB+/Negative) in China also contracted, declining by 42% yoy for
the last week of March, although this was an improvement from the 78% plunge in
February. Fitch affirmed department-store operator Golden Eagle Retail Group's
Long-Term Issuer Default Rating at 'BB' in April, but revised the Outlook to
Negative from Stable, reflecting the coronavirus' impact on sales and
uncertainty over the timing of the recovery.
Some consumer-focused sub-sectors still expect to post
earnings growth, even over 1Q20. These include pork breeders, frozen-food
producers and milk-powder makers. Large corporates with stronger pricing power
and supply chains that faced less disruption from lockdowns are more likely to
outperform. Wens Foodstuff (BBB+/Stable) recorded net profit of CNY1.9 billion
in 1Q20, compared with a CNY460 million loss in 1Q19, on the back of tighter
supply conditions and high pork prices.
E-commerce sales rose by 3% yoy in January-February,
accelerating to 6.3% in March. Their contribution to total retail revenue rose
to 27.6% in March, up 6 percentage points from a year earlier. The coronavirus
crisis may prompt many retailers to accelerate digital investments.
Online-focused retailers continue to outperform the
sector as a whole. JD.com anticipates revenue will rise by over 10% yoy in
1Q20. Fitch expects Alibaba (A+/Stable) to record a revenue decline in 1Q20 on
temporary supply disruptions. However, transactions at its 'new retail' platform, Freshippo, surged by over 300% during the period, according to
iResearch. The rising audience for livestreaming during the crisis has also
stimulated the medium's popularity among merchants and may help to drive online
sales.
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