SINGAPORE (Sept 23): The ongoing Hong Kong protests have reached Week 16, and it is dimming the outlook for Dairy Farm International Holdings, the retail business which derives some 70% of its operating profit from Hong Kong.

Juliana Cai, an analyst at RHB Group Research, believes the company will see headwinds as protests are likely to impact retailers, especially those located at Causeway Bay near the rallying points.

“Based on data provided by the Census and Statistic Department of Hong Kong, retail sales in June and July fell 7% and 11%,” Cai says in a Sept 23 report.

The analyst is maintaining her “neutral” call on Dairy Farm, but lowering her target price by 10.2% to US$6.63.

While the health and beauty segment is still expected to be the main contributor to Dairy Farm’s earnings in Fy19-20F, Cai warns that the segment is likely to shrink in 3Q19.

She notes that medicine and cosmetic sales in Hong Kong have declined 5% y-o-y and 16% y-o-y in June and July, respectively.

“The chief supervisor of The Cosmetic and Perfumery Association of Hong Kong cited that cosmetics sales are estimated to have dropped by close to 40% in the city’s popular tourist shopping areas,” says Cai.

This segment is also exposed to tourism spending, which has been affected by the ongoing protests.

Even if the protests taper down, Cai expects the downward pressure on the health and beauty segment to continue in 4Q19, as mainland China tourist arrivals are likely to decline.

“In July, y-o-y growth in mainland China tourist arrivals also slowed to 5.5%. The Travel Industry Council of Hong Kong also cited that the number of Chinese group tours to Hong Kong has declined by 90% y-o-y in the first ten days of September and was down 63% y-o-y in August,” she adds.

Factoring in the potential decline in Hong Kong sales, which is likely to be partially offset by improving sales at its Manning stores in China and Guardian stores in Southeast Asia, Cai is cutting the earnings forecast for Dairy Farm by 2% for FY19-20F.

After closing at US$6.65 on Sept 20 – the lowest level since July 2016 – shares in Dairy Farm have climbed 8 US cents higher, or up 1.2%, to US$6.73 as at 11.54am on Monday.

According to RHB valuations, this implies an estimated price-to-earnings ratio of 25.3 times and a dividend yield of 3.3% for FY19F.