KGI Asia Commentary

2023.10.04 09:00

HSI fell 478 points on Wednesday

The Hang Seng Index fell 478 points or 2.7% to 17,331 on Tuesday. HSTECH fell 103 points or 2.6% to 3,817 and HSCEI fell 199 points or 3.2% to 5,949. Daily market turnover was HK$86.1bn.

Dow loses more than 400 points as interest rates spike

The Dow Jones Industrial Average fell on Tuesday and turned negative for the year as data showed unexpected strength in the labor market, raising further concerns about the Federal Reserve raising interest rates and pushing U.S. Treasury yields to multi-year highs. The Dow Jones Industrial Average fell 430.97 points, or 1.29%, to close at 33,002.38 points. The S&P 500 fell 1.37%, hitting its lowest level since June, closing at 4,229.45 points. The Nasdaq index, which is dominated by technology stocks, fell 1.87% to close at 13059.47 points. Affected by rising interest rates, growth stocks suffered the largest decline. The 10-year U.S. Treasury bond yield hit 4.8%, the highest level in 16 years. Treasury yields have surged in the past month as the Federal Reserve signaled it would keep interest rates higher for longer. The 30-year U.S. Treasury bond yield hit 4.925%, the highest level since 2007. The average interest rate on a 30-year fixed mortgage is nearly 8%. Technology stocks Microsoft Corp. and Meta Platforms led the decline. Energy stocks fell less than 1% as oil prices rebounded from weakness a day earlier, limiting losses ahead of an OPEC+ meeting scheduled for Wednesday.

Labor demand unexpectedly rises in August

Stocks move inversely with U.S. Treasury yields, and as interest rates surge, stocks move lower. The latest catalyst for rising interest rates was the U.S. Department of Labor's latest Job Openings and Labor Turnover Survey (JOLT) report, which measures labor demand, showing that job openings unexpectedly increased by about 9.6 million in August, higher than the expectations of 8.8 million. The strong labor market has raised further concerns about the Federal Reserve raising interest rates.

Hong Kong Stock Connect will be suspended due to the National Day holiday until October 9.

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Compared with 1H19, the Group's net sales in 1H23 increased by 16.2%, and net sales in Asia, North America, Europe and Latin America increased by 18%, 1.3%, 26.6% and 69.0% respectively yoy. The gross profit margin of the company expanded by 310 basis points to 58.8% for 1H23, compared to 55.7% for the corresponding period in 2022. This increase was driven mainly by Asia, where we have the highest gross profit margin, increasing its share of net sales. This increased gross profit margin also was driven by a higher proportion of total net sales from the Tumi brand, changes in channel mix, and overall lower promotional activity. The combination of strong net sales and gross margin performance plus disciplined expense management helped the Group deliver a significant increase in profitability. Adjusted EBITDA margin expanded to 18.8% for 1H23, compared to 15.4% for the corresponding period in 2022. In view of the ongoing recovery in net sales and significantly enhanced profitability, the Company intends to resume annual cash distributions in 2024, subject to its Dividend and Distribution Policy. Overall, the company has completely overcome the impact of the epidemic and is expected to benefit from the continued growth in global travel demand in the second half of the year. Target price: $33; Stop- Loss price: $25.3.

Wen Kit Kenny is a SFC licensed person accredited to KGI Group to carry on regulated activities (for details, please refer to:https://apps.sfc.hk/publicregWeb/indi/AJF244/details). He and/or his associate do not have any financial interest in the recommended issuer or new listing applicant.

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