New HK visitor policy feared to shoo more Mainland tourists away

It's bad news for retailers.

Hong Kong’s Chief Executive Mr CY Leung recently stated that the Hong Kong government will discuss with Chinese authorities in March to tighten arrangements under the Individual Visit Scheme (IVS) for PRC tourists; and not to expand the scheme to cover more Chinese cities.

According to a research note from Nomura, Mr. Leung had proposed to cut the number of PRC visitor arrivals by 20% under IVS in May 2014. However, no agreement has been reached yet.

Nomura believes a curb on PRC visitors to Hong Kong will limit the sales growth of Hong Kong-based retailers in the long term. Specifically, this could hurt F&B retailers, supermarkets, personal care and cosmetics companies.

Here's more from Nomura:

This may compound with the current weak retail sentiment, partly due to the
month-long Occupy Central and the anti-parallel import protests.

The
number of PRC visitors to Hong Kong under the IVS (66% of total PRC visitors in 2014) declined by 5% y-y during the Chinese New Year (17-22 February), the first decline in around two decades.

We see two potential curbs: 1) through IVS, or 2) cut the number of daytrippers. The impact could differ depending on how Hong Kong curbs.

Daytrippers’ spending budget is lower vs. that for overnight visitors (IVS), and cosmetics and daily necessities are often on top of their shopping list. Areas along the railway are popular shopping destinations for daytrippers.

The correlation between PRC tourist arrivals and Hong Kong retail sales are high. Our conclusions based on our regression analysis of monthly Hong Kong retail sales by category and number of PRC visitors, from Jan-01-Dec-14 are: cosmetics (R-sq: 90%), jewelleries & watches (R-sq: 86%), dept stores sales (R-sq 85%), and apparels (R-Sq: 84%).

On average, over 35% of Hong Kong sales of the above categories come from PRC visitors.