China Retail Market Outlook – Our top market pick

The PRC government policy today aims to rebalance the contribution, which is to encourage more domestic consumption instead of continue to rely heavily on exports. Under the growing emphasis of domestic consumption together with the growing affluent especially not only in the coastal cities but also in a good progress to extend to the second and third tier cities, we are very optimistic towards the consumer sector in the year of 2008.
Retail Sales in China, reflecting a strong domestic consumption
With the continuous strong increase of consumer goods spending, we expect the consumer sector will be directly benefited from such rising trend. According to the National Bureau of Statistics of China, total sales of consumer goods reached 826.3 billion yuan, representing 18.1% yoy increase. In the urban area, total retail sales of consumer goods were 559.8 billion yuan, increased by 18.6% compared to the same period last year. In addition, the retail sales for clothing, shoes, hats and textiles increased by 32.6 % yoy. According to the National Bureau of Statistics of China, for the first ten months of 2007, cumulative total retail sales of consumer goods reached 7,209 billion yuan, representing a yoy increase of 16.1%.
Olympic Game- We expect a strong spending effect
The long-waiting Beijing Olympic Game will be held in August 2008, we expect the whole country will be overwhelmed by the game. We believe that June to August will be the peak season for retail sales especially in those provinces with Olympic arenas. Among all the consumer shares, our first top pick is sportswear share with direct relationship with the Olympic Game. In addition, department stores with the benefit from strong surge of tourists during, and the beverage sectors are also our favorites
Investment Recommendations
Given the expected Olympic spending effect, accelerating RMB appreciation, and government policies to boost domestic consumption in the nation, consumer sector is one of our most favorable sectors in 2008. We expect that big retail name will be benefited the most because of their stronger bargaining power to pass increasing costs to customers. And we also expect the consolidation in this industry will go further in 2008, which implies that there will be growing M&A activities in the consumer sector. Our stock pick for this year are those with strong brand name and market leadership position in China. It includes Li Ning (2331.HK), China Mengniu (2319.HK), Tingyi (322.HK), and Parkson (3368.HK).