China / Wuhan Retail

The growth potential for China's tier 2/3 cities is still bright. Wuhan's GDP grew 15.2% in 2009, well ahead of the 9.7% average of four tier 1 cities (namely, SH, BJ, GZ, SZ). Massive infrastructure investments are taking place, and local government is linking the 8 satellite cities close to Wuhan's development. Wuhan's properties are 20-25% Shanghai prices, suggesting income/consumption has significant room to grow.

The department store format, compared with street-standing stores (usually for brand building rather than profit making) or malls, has strong competitiveness and viability. The space allocated to each brand in department store is smaller than in the mall space. Additionally, the ability to change tenants as frequently as on a six-month basis (compare to mall tenancy contracts which normally last for 3 years) which makes department store very nimble to adjusting product mix to changing fashion and taste.

Domestic sports brand saturation appears uncomfortably high, with rising rent being the single biggest challenge. As rent increases continue to outpace sales productivity gains, the economics of domestic sports brand business model could face significant challenges in the coming year.

While the demand side remains bright, we see a significant amount of new modern retail capacity coming up in the next 2-3 years. Dalian Wanda has three shopping centers under construction. The quality of new projects and growth scalability will become increasingly more important in differentiating companies from others.

Buy: Intime 1883.HK; Maoye 0848.HK; Belle 1880.HK; Xtep 1368.HK
Sell: NWDS 0825.HK; Anta 2020.HK; Ports Design 0529.HK

From GS Report: Thoughts from Wuhan: Retail field trip takeaways