Retail stocks lose sheen under global fluctuation

(SGI) - Globally the purchasing power of consumers has been significantly affected by rising inflation, exchange rate fluctuations, high interest rates, supply chain disruptions and the ongoing Russia-Ukraine conflict. This impact is now also being felt in retail stocks which are now losing their sheen in the eyes of investors.
Illustrative photo.
Illustrative photo.

iPhone 14 raises hope

Much before the present crisis, Digiworld Joint Stock Company (DGW) had set a target for the fourth quarter to show a net revenue of VND 7,500 bln, up 23.7% compared to the third quarter, and a net profit of VND 300 bln, up by 66.4% compared to the third quarter. DGW set this ambitious goal after opening the sale of iPhone 14 in Vietnam earlier than other years. At the ‘Far Out’ event on 7 September, Apple launched the new generation iPhone 14, Apple Watch, and Air Pods Pro products. Accordingly, iPhone 14 Pro and 14 Pro Max were expected to be pre-ordered on 9 September and delivered on 16 September in tier 1 markets. This timeline is about 8 days earlier than when the iPhone 13 model was announced on 14 September last year. This is how iPhone 14 was open for sale in Vietnam one week earlier.

According to analysis of the Rong Viet Securities Company (VDSC), the early launch of the iPhone 14 is a big support factor in the fourth quarter sales for Information Technology Retailers (ICT). Currently, non-essential consumption is under pressure from rising inflation. In terms of the impact on sales of listed ICT retailers, the early iPhone 14 launch will affect the sales of retail businesses, such as FPT Digital Retail Joint Stock Company (FRT), Mobile World Joint Stock Company (MWG), PetroVietnam General Services JSC Corporation (PET), and DGW.

According to the Center for Trade and Industry Information, the value of iPhone imports increased by 160% in 2021, reaching  USD 1.23 bln. The total market size of genuine Apple products is estimated to be worth about USD 1.5 bln and expected to continue to grow by double digits this year only because of favorable factors created by the early opening time of the iPhone 14.

Bleak reality

According to the Bao Viet Securities Company (BVSC), at the moment, DGW fourth quarter business results are quite negative  because of two factors, namely, decline in demand and supply chain disruptions. Shortage of supply of iPhone 14 Pro and Pro Max is due to production activities slowing under the Zero-Covid policy of China. This has led to a decrease in revenue for ICT retailers in the last months of the year. The same negative impact has been felt on supply as DGW and MWG were hit even harder as sales of low-end mobile phones and consumer electronics slowed in the first month of the fourth quarter.

A representative of MWG said at an investor meeting held on 23 November that the net revenue in October of Mobile World and Dien May Xanh chains decreased by 18% compared to the same period last year. The decrease is partly due to the high growth rate in the same period last year after the Covid-19 lockdown, but it also shows that the demand for mobile phones is slowing down. In particular, the revenue from iPhone products and Apple network may be lower than before as supply is expected to be short due to China's Covid-19 control measures, as well as strike of workers at Foxconn, which produces about 70% of the iPhones in the world.

Retail under pressure

At the same meeting with investors on 23 November, MWG leaders forecast the possibility of completing only 90% of the 2022 target plan, as they took a pessimistic view of growth in 2023 under the current situation of a growing weaker purchasing power. This is also the reason why MWG did not emphasize and did not set specific goals for the expansion of stores in each business chain in 2023. MWG restrain in sharing their plan shows that the retail market is facing untoward and perplexing problems.

According to analysts, in addition to decreasing purchasing power, retail businesses are also under pressure from a sharp increase in credit interest rates, which are affecting profits. As in the case of FRT, although the ratio of net interest on average net debt is relatively low in recent years, it is still carrying a net debt of VND 2,499 bln as of September, including receivables from short-term loans. This is a fairly high increase compared to the figure of VND 1,562 bln at the end of 2021.

The ongoing exchange rate fluctuations are also significantly impacting FRT debts because foreign currency debt accounts are only 6% of total bank debt which has a negative impact on the gross profit margin of the FPT Shop chain since most of the products are imported. In the current situation of a weak purchasing power, the ability of FRT to transfer all the increase in COGS to consumers is difficult.

According to the third-quarter financial report of PET, the phone segment contributed the most towards revenue. Specifically, revenue from phones reached VND 1,721 bln, accounting for 42%, while laptop and plastic beads accounted for 41% and 9%, respectively. However, PET gross profit margin was only 4.9%, compared with 5.1% in the third quarter of last year.

The reason is that the selling price of products such as laptops had plummeted when offices and schools returned back to normal soon after the Covid-19 pandemic was brought under control. Now with a less bright forecast for the phone segment, the possibility of PET entering a negative growth cycle is very likely. Even more worrisome is that PET often uses the revenue to invest indiscriminately. In the third quarter, PET had to make a provision of VND 166 bln for investing in the stock market and paying off interest, and expenses then increased sharply to VND 94 bn, up by 158%.

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