Consumer – When the purse string tighten up

• Consumer spending is slowing down till 3Q23F amid sluggish export growth, rising interest rates and weak VND.
• Luxury goods might get lower risk from a demand downturn, in our view.
• Sector leading stocks are stock with good financial status and less affected by the reduction in people demand, including PNJ and VRE.

Still good so far but brace for a weakening consumer spending
Total retail sales of goods and services grew healthily 25.3% yoy in 10M22, largely thanks to low base 2021. We see a few signals that consumers are tightening their purse strings amid rising interest rates and the weakening of labour – intensive industries (property, textiles, …). We think this downturn might linger till 3Q23 when interest rates are expected to subside and minimum wage hike will give a slight boost.
Retailers postpone business expansion to solidify the financials
Per our market research, large retailers are slowing down or postpone their business expansion amid growing concerns over a downturn. MWG’s An Khang pharmacy chain expansion has been delayed since 3Q22; number of Bach Hoa Xanh and Circle K stores also saw a reduction ytd to prove the caution of retail chains to the current market status. Thus, listed consumer companies tent to maintain better financial health shape with low leverage and net cash position.
Luxury goods might get lower risk from a demand downturn
Although still being at nascent stage, Vietnam’s luxury market is expected to grow significantly thanks to the rise of high-net-worth individuals who have increasing appetite for luxury goods. Conventionally, the affluent are often the last to feel the effects because of the cushion their extreme wealth provides. Thus, we expect retail companies with large exposure to luxury segment might get lower risk from a pullback in spending.
Our stock picks: PNJ and VRE
We prefer stocks with 1) a net cash position which less risky than others stocks in an unstable market, and 2) a less affected by the demand downturn than peer thanks to business has large exposure to luxury spending. Thus, we believe PNJ and VRE are attractive to put in the portfolio. Upside catalysts: stronger than expected consumer demand, lower than expected effect from FX and rising interest rate to company’s results or supply disruptions of Apple products are quickly resolved. Downside risks: a longer than expected downturn in consumer spending or supply disruptions of Apple products, a stronger than expected effect from FX and interest rising.

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