Jan retail sales below expectation HK retail sales dropped 14.6% YoY in Jan (vs -4% in Dec), below market expectation of a 6.1% YoY decline. Apart from the calendar shift for CNY (from Jan 31 2014 to Feb 19 2015), we think the declining purchasing power of mainland visitors, led by a decrease of overnight mainland visitors, was another reason for the weak retail sales. Food and supermarkets sales growth saw a noticeable slowdown from +7.4% to -8.7% and 0% to -13.1%, respectively, compared to Dec due to the CNY calendar shift. For other categories, consumer durable goods sales growth eased most compared to Dec (from 3.8% to -20.3%), followed by apparel (from -4% to -13.8%), department stores (from -5.6% to -11.3%), jewelry (from -16.3% to -21.4%) and cosmetics and medicines (from +4.2% to -0.1%).

　　Slowdown in mainland Chinese tourist arrivals Mainland Chinese tourist arrivals rose 3.3% YoY in Jan 2015, lower than the 13.2% in Dec. Growth in same-day and overnight visitors dropped MoM from 17.6% to 8% and 6.6% to -4.5%, respectively. Such a mix of mainland visitors resulted in lower purchasing power. Though this set of figures was distorted by the different timing of the CNY holiday, the subsequent decline in mainland visitors seen during the CNY holiday showed a softening in mainland tourist arrivals. We believe this is due to the strong US$ and the protests against parallel traders.

　　Sector underperformed in Feb Shares across the sector fell 6% MoM on average in Feb, weaker than the flat HSI. The unexpected 0.2% YoY decline in mainland visitor arrivals during the CNY holiday negatively affected sector sentiment. Watch retailers led the decline with Emperor Watch (887 HK, NR) and Oriental Watch (398 HK, NR) dropping 27% and 9%, respectively. Jewelry names also saw 5-12% decline as Chow Tai Fook (1929 HK, Hold) reported disappointing SSS during the CNY period.

　　Street-shop rental to fall in 2015 According to Savills, overall prime street shop rental fell 3% QoQ in 4Q14 as retailers have been increasingly selective and cautious in committing to new space with tighter rental budgets. Savills cut its forecast for prime street shop rental from a 5% decline in 2015 to a 10-15% decline. On the other hand, rental growth in shopping centers is expected to increase 5-10% in 2015.

　　Outlook We expect the consolidated Jan & Feb 2015 retail sales growth to improve significantly compared to Jan 2015 thanks to the extended festive shopping season. Looking forward, softening mainland visitor arrivals and their decreasing purchasing power are major challenges for HK retail sector. Sector visibility is also clouded by a potential spate of protests against parallel traders. The key point to watch this month is the discussion of the Individual Visitor Scheme during the NPC meeting.