Retail sector: Look beyond the dark cloud of COVID-19

Retail companies reported a good recovery in 1Q21 business performance, indicating that they were on pace to recover from the pandemics that occurred a in period of 2020 to 1Q21.

Vietnam’s retail sales come back to strong growth in 4M21 with a growth rate of 9% yoy, but the recovery pace has been halted due to the 4th Covid wave on May 21, lead to the growth rate in 5M21 only at 6.3% (ex-inflation).

Vietnam has overcome previous Covid-19 outbreaks and still maintains a high Consumer Confidence Index, reaching 117 points and ranking 2nd in the region after the Philippines. After the first Covid-19 wave, the unemployment rate continuously decreased during the next three quarters, from 2Q20 to 1Q21, showing the potential for  recovery of the Vietnam economy. Therefore, Vietnam's retail recovery prospect is very positive even though the 4th outbreak is more severe than the previous one.

Unlike the previous two Covid-19 outbreaks in Jul-20 and Jan-21, the 4th Covid-19 outbreak has a sharp increase in the number of cases in HCMC, leading to a social distancing in Jun-21.

The impact of the 4th outbreak on the non-essential retail segment was more substantial than two previous outbreaks. In contrast, the grocery and pharmacy segment maintained good performance as mobility decreased by only 6% compared to pre-pandemic.

VNDirect said, due to the heavy impact by the 4th wave of Covid-19, the bounce-back of retail sector  since 4Q20 will be stopped for  a short period, but consumer confidence can bounce back in 3Q21, especially if a vaccine becomes widely.

While the Covid-19 outbreak has directly affected the retail industry, it has also opened up opportunities for  large retailers with sound strategies to strengthen their retail networks and achieve greater market shares. “We believe retail companies with large market shares and efficient operations (MWG and PNJ) could benefit from this and achieve long-term growth”, VNDirect forecasted.

When the Covid-19 epidemic was present, PNJ consistently outperformed the jewelry industry's demand in Vietnam, confirming its supremacy in the local jewelry market. MWG has also aggressively expanded the number of DMX supermini since Q4/20 when MWG recognized DMX supermini could improve market share in remote urban regions.

According to Google, Temasek, and BAIN&COMPANY, users moved online for  Food Delivery, Groceries, Education, Entertainment. “We believe MWG’s grocery chain, Bach Hoa Xanh, will stil bel a key beneficiary in 2H21F – FY22F”, VNDirect said.

Vietnam's Internet economy is booming in the next five years with a CAGR of 29% to reach GMV US$52bn in 2025F. As such, the online channel has become more important in the next stage of the retail economy. Companies that built a good logistics system or  well-managed inventory system for  an online channel can achieve a substantial growth from the booming of the Internet economy. VNDirect believes that MWG, FRT, and PNJ have prepared their systems to catch this wind. Therefore, Bach Hoa Xanh chain is enjoying the shift in buying behavior  on the Internet economy, which toward online groceries. Along with the boom of the internet economy, MWG's online revenue grew again in 1Q21, while FRT's online revenue maintained a double-digit growth momentum. PNJ's online revenue grew strongly, 400% yoy in 1Q21, but the value was still low compared to PNJ's total revenue.

Bach Hoa Xanh chain is enjoying the shift in buying behavior  on the Internet economy, which toward online groceries. 

With the trend of smart homeization, ICT equipment distributors and retailers, including DGW, MWG, and FRT, will catch this growth, especially DGW as a distributor  of Xiaomi devices, a technology company with a diversified smart-home products ecosystem and an increasingly large market share in the world.

In 1H21, many large international brands opened their stores in Vietnam, for  example, Uniqlo, Hadilao, Kohnan Japan. VNDirect believes Vietnam’s retail real estate operators will see their top and bottom lines quickly return to the pre-Covid-19 levels once the pandemic is under control and the Covid-19 vaccine widely distributed to achieve strong growth thereafter, given that Vietnam has the lowest mall net leasable area (NLA) per capita and the lowest rentals in the ASEAN region.

“With the retail segment's growth drivers continuing in place and the enormous potential for  retail development in Vietnam in the future, VRE continues its goal to expand its gross floor  area around the construction of Vincom megamalls to attain the total floor  area of around 4.5 - 5m sq m by 2026F, VNDirect forecasted, adding that retail businesses showed strong growth in both revenue and net profit (excluding FRT) in 1Q21, indicating a post-pandemic recovery trend. This recovery to continue in 2H21 to create attractiveness for  retail stocks. Stock picks are MWG, PNJ, and VRE.