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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 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 poor outlook followed that of restaurants operator Tsui Wah Holdings Ltd., which said Wednesday profit for the year ended March 2016 will drop by more than 50 percent, also attributing it to a drop in Chinese customers. Mainland tourists, who account for about 70 percent of visitors to Hong Kong, fell 16 percent in 2015 and slumped a further 13 percent in the first four months of this year, according to the city’s tourism board.
“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.
Sa Sa, which gets about 80 percent of sales from Hong Kong and Macau, rose 2.6 percent to HK$2.78 by the close of trading after it declared a special dividend. Tsui Wah, which specializes in Hong Kong snacks such as condensed milk buns, fell 2.1 percent, extending Wednesday’s loss of 8.5 percent. The benchmark Hang Seng Index rose 0.4 percent.
“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, after the company announced results.
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.
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.
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.
(Updates with comments from Sa Sa Chairman in sixth paragraph, Luk Fook results in eighth paragraph.)
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©2016 Bloomberg L.P. This article was written by Daniela Wei from Bloomberg and was legally licensed through the NewsCred publisher network.