September 10, 2021

Incrementally Better Data And Newsflow

While 2021 will remain challenging for DFI given margin pressures, we point to incrementally positive newsflow that should benefit the company in the medium term. These include higher vaccination numbers in DFI’s key markets, the opening up of Hong Kong to mainland travelers, and the stabilisation of retail spending in Hong Kong. Maintain BUY. Target price: US$4.53.


• Incrementally positive newsflow. We highlight that the newsflow for Dairy Farm International’s (DFI) key markets in North and South Asia have been incrementally positive in the past couple of months, in our view. These include: a) increased vaccination rates in Hong Kong, Indonesia, Malaysia, Singapore and Thailand as well as in China, b) upgrades to some economics forecasts for both Hong Kong and Singapore, and c) stabilisation of retail spending numbers from Hong Kong.

• Vaccination status more positive. With an increasing number of Asia’s population obtaining the first and second doses of vaccines, we expect a gradual reopening of economies over the next 3-6 months. In the medium term, this in turn should result in better tourism-related spending as well as higher domestic spending in DFI’s food & beverage business (including Maxim’s) and Ikea stores in Indonesia for example.

• Travel gradually opening up between Hong Kong and China. Earlier this week, the Hong Kong government stated that it will allow quarantine-free entry for up to a total of 2,000 residents from mainland China and Macau each day, subject to certain requirements such as a negative COVID-19 test prior to arrival. While visitors would have to undergo 14 days of quarantine upon their return to the mainland or Macau, thus deterring day tourists, we nevertheless view such developments as incrementally positive for Hong Kong’s overall retail sales, thus benefiting DFI’s Mannings business.

• Stronger retail sales in Hong Kong on a yoy basis, but weaker supermarket numbers. The latest data from Hong Kong’s Census & Statistics Department (CSD) shows that retail sales rose 3% yoy in Jul 21 as the local COVID-19 situation stabilised, with the government’s HK$5,000 consumption voucher scheme expected to boost spending in 3Q21. While yoy comparables for 2021’s supermarket sales will remain challenging due to the high base effect of the panic-buying in 2020, we note that average sales for 2021 have reverted to pre-COVID-19 numbers. 


• Upward trajectory for some macro estimates. Based on Bloomberg consensus, growth forecasts for Hong Kong have been raised by 0.7ppt to 6.7% for 2021, while Singapore’s growth outlook was most recently upgraded by 20bps to an expansion of 6.5%. For Thailand however, its economic planning agency expects the Thai economy to only grow by 0.7-1.2% in 2021, down from its prior forecast of 1.5-2.5% made three months ago. In addition, Indonesia has downgraded its forecast for 2021 economic growth to range between 3.5-4.3% vs 4.1-5.1% previously.


• None.


• Maintain BUY with a target price of US$4.53. We peg our 2022 EPS estimate to a target multiple of 24.7x which is 1SD below its 5-year average PE of 30.6x. We believe that the discount to its average PE is fair and reasonable given the continued COVID-19-related challenges that the company faces in its various business segments and geographies. However, we note that DFI – despite its size and organisational capabilities – could improve on its reporting transparency as it only discloses its geographic segments as either “North Asia” or “South Asia”.

• Vaccination and business transformation progression. As the region progresses towards having a greater proportion of its population vaccinated, and further evidence of DFI’s business transformation surfaces in the near to medium-term reporting periods, we expect DFI to trade at higher multiples compared with the present.


• Relaxation of lockdowns in Malaysia and Thailand thus taking pressure off margins

• Increase in number of travelers allowed into Hong Kong from China

• Increased vaccination rates across Asia leading to more stable economic conditions 

BUY by UOB Kay Hian Research. Share priced closed at US$3.61.