Photographer: Philippe Lopez/AFP via Getty Images

Hong Kong Retailers’ Chinese Malaise Deepens From Bling to Buns

  • Sa Sa profit plunge 54% on poorer cosmetic sales to Chinese
  • Jewelry chain Luk Fook profit fell 40% amid China’s slowdown

Hong Kong’s sharp drop in visitor arrivals from mainland China has hurt retailers’ sales from luxury watches and gems, to anti-wrinkle cream and pastries as the slowdown deepens in the world’s second-biggest economy.

Net income at Sa Sa International Holdings Ltd. fell 54 percent to HK$383.5 million ($49 million) in the year ended March 2016 on poorer sales to Chinese customers, and the cosmetics stores operator said Hong Kong’s retail market “will continue to face a number of challenges” amid China’s weak economy and stricter entry rules for mainland visitors.

Sa Sa’s outlook followed that of restaurants operator Tsui Wah Holdings Ltd., which said Wednesday profit for the year ended March 2016 probably fell more than 50 percent, also attributing it to the decline in Chinese customers. Mainland tourists, who account for more than two-thirds of visitors to Hong Kong, fell 16 percent in 2015 and slumped a further 13 percent in January to April this year.

“It would continue to be tough for retailers to do business in Hong Kong this year, for both high-end and low-end brands,” said Dickie Wong, executive director of Kingston Securities Ltd. Chinese consumers have gradually shifted their buying of luxury goods to other cities, while the weakness of the yuan curbed demand for cheaper products such as food and cosmetics, Wong said.

Chow Tai Fook Jewellery Group Ltd., the world’s largest publicly traded jewelry chain, earlier this month predicted market conditions in the region to remain challenging, and said it would chase Chinese tourist dollars overseas as well as negotiate for lower rents after full-year profit fell 46 percent. Its smaller Hong Kong-based rival Luk Fook Holdings (International) Ltd. reported Thursday net income fell 40 percent to HK$958.7 million, citing uncertainties in the global economy and China’s slowdown.

Luk Fook fell as much as 2.9 percent to the lowest in more than a month, amid volatility in Hong Kong trading ahead of full results from Britain’s European Union referendum. Tsui Wah, which specializes in local snacks such as condensed milk buns, was unchanged while Sa Sa extended gains to rise 1.1 percent after declaring a special dividend Thursday. The benchmark Hang Seng Index rose 0.2 percent, reversing an earlier drop of as much as 1.8 percent.

Shutting Stores

“We expanded in tourist locations to capture the strong demand from visitors in the previous years and now we need to adjust our store network as the market has changed,” Sa Sa Chairman Simon Kwok said at a briefing held in Hong Kong on Thursday. The retailer chain gets about 80 percent of sales from Hong Kong and Macau.

Sa Sa will adjust its stores network in Hong Kong by shutting down some in areas frequented by tourists, and opening more in other districts, as rental costs in popular areas such as Causeway Bay can be as much as six times higher, Kwok said. The retailer will only consider lease renewals in tourist districts if it is able to obtain rent cuts of at least 45 percent to 50 percent, Chief Financial Officer Guy Look said at the briefing.

The situation for retailers in Hong Kong “will still be difficult until rental costs further decline to offset sales slump,” said Kingston’s Wong. Efforts by retailers to strike deals with landlords in Hong Kong to cut rents would help limit this year’s profit declines, according to Bloomberg Intelligence.

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