Consumer, casino stocks should still enjoy CNY effect

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LOCALLY-LISTED consumer and gaming companies are hopeful of basking in the Chinese New Year (CNY) effect despite the current weak consumer sentiment. Traditionally, companies such as Carlsberg Brewery Malaysia Bhd, Guinness Anchor Bhd (GAB), Fraser & Neave Holdings Bhd (F&N), Genting Malaysia Bhd, Aeon Co. (M) Bhd and Hai-O Enterprise Bhd, are known to experience seasonal sales spikes before and/or during the CNY celebrations.

However, the implementation of the Goods and Services Tax (GST) on April 1 might be a dampener on these counters this year, as prices and cost of living are expected to increase.

According to a Nielsen survey, in the fourth quarter of 2014 (4Q2014), Malaysian consumers were the most pessimistic among their fellow Southeast Asians. In fact, consumer confidence among Malaysians was at its lowest level since 2Q2009.

Nevertheless, GAB (fundamental: 1.7; valuation: 0.9) managing director Hans Essaadi tells The Edge that he still expects a CNY effect this year, as festive periods usually bode well for the brewery. “In fact, CNY is one of our strongest-performing periods. During my visits to various outlets, I saw many consumers making purchases,” he says.

Essaadi says nobody can be certain about the effects of GST but he thinks the volatility in consumer sentiment will stabilise over the next six months.

He adds that GAB will continuously monitor its stock levels, distribution network, brand visibility and product quality to maintain healthy sales. Besides, the group will also invest in new products and create new beer categories to reach beyond its existing consumer market.

F&N (fundamental: 2.1; valuation: 0.9) concurs that higher demand during the festivities generally translates into good sales periods for the group, as its products have always been popular during such occasions.

“We do anticipate higher demand during the CNY period and are ensuring high visibility and availability through intensive trade and market execution. Our festive activations are typically very well-received by consumers and help boost sales considerably,” an F&N spokesperson says.

F&N says prices are commonly expected to rise after the implementation of GST, while inflationary trends will dampen consumer confidence and ease household and private consumption.

The beverage manufacturer, however, remains confident that the new tax system will stabilise in the long term and foresees minimal impact from its implementation as its products are affordably priced.

Traditionally, consumers are more willing to spend during the November to February period, thanks to the school holidays, year-end sales and promotional activities and Christmas and CNY festivities.   

Shopping mall operator Aeon (fundamental: 1.75; valuation: 0.3) and producer of Chinese traditional health products Hai-O (fundamental: 3; valuation: 1.2) are expected to benefit from the CNY effect, as people are likely to spend more during the festivities, especially when they receive bonuses and salaries.

The leisure and hospitality business of Genting Malaysia (fundamental: 2.4; valuation: 0.6), which covers theme parks, gaming, hotels and entertainment, is also expected to draw bigger crowds during the festive season.

A gaming analyst attached to a local bank-backed research house remains optimistic that Genting Malaysia, Hai-O and Aeon will continue to see a CNY effect this year, but it will not be as strong as in previous years. “For sure, the gamblers, especially Chinese ones, will still visit the casinos. For Hai-O and Aeon, people will still buy hampers and shop,” he says.

Having said that, the layoffs in the oil and gas sector and media industry in the past two months could have a negative effect on the buying power of certain groups of people.

Last year, the first quarter was the strongest by revenue for Carlsberg (fundamental: 2.3; valuation: 2.1) and Aeon (see table). The CNY effect also helped GAB and Genting Malaysia to record their highest revenues in the last quarter. For instance, GAB generated revenue of RM520.768 million, which was 26% higher than the RM412.87 million received from April to June, its second-strongest quarter of the year.

Dr Yeah Kim Leng, economist and dean of the School of Business at Malaysia University of Science and Technology (MUST), says companies with a greater focus on their Chinese clientele will benefit from the spending during the festive season.

“Unless there is a downturn, festive spending is always higher than normal periods. The key question for this CNY is whether it will be higher than in the previous year,” he says.

As the Chinese comprise a quarter of the population and generally have higher disposable incomes, the CNY effect will still be evident, albeit at a lower magnitude, says Yeah.

“The mood this year may be less upbeat due to the greater economic uncertainties. Consumer sentiment has eased but not to a level associated with a downturn. Earnings and income, employment, asset prices, interest rates and credit conditions all remain supportive,” he says.

Dr Teo Wing Leong, head of the School of Economics at The University of Nottingham Malaysia Campus, says GST is expected to affect consumer sentiment, but it makes sense for consumers to stock up on items that are on sale during CNY. “Some people might decide to stock up before the [GST] implementation date, so we might actually see an increase in consumer spending before April 1,” he says.

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Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.