For Hong Kong's Dollar Tree Equivalent, A Turnaround Looks Unlikely

Hong Kong's Dollar Tree equivalent is being undermined by locals crossing the border to shop in China, and Chinese e-commerce companies encroaching on its home turf

Key Takeaways:

• International Housewares' net profit plunged by more than half in its latest fiscal year, as the company slashed its dividend 
• The fading Hong Kong houseware seller's visionary founder appears to have lost interest in the business, making a turnaround unlikely

Many things have changed since the pandemic, including Hong Kong shopping habits. Nowadays, Hong Kong residents often head across the border to shop on the Mainland, putting together fun daytrips that include meals, shopping and perhaps a trip to the spa. That trend, coupled with the rise of Chinese e-commerce giants like Taobao and Pinduoduo, have left Hong Kong's local retail industry facing an increasingly harsh winter. 

The shift has put suffering Hong Kong restaurants in the spotlight, but another local brand feeling the pain is International Housewares Retail Co. Ltd. (1373.HK), parent of the JHC housewares chain. The company shared its pain with investors when it reported not only a profit plunge for its fiscal year through April, but also slashed its final dividend for the year.

After previously warning of the downturn, International Housewares' final report, issued late last month, showed revenue for its latest fiscal year fell 5.6% to HK$2.54 billion ($350 million), while its profit plunged 52.8% to HK$47.73 million. The second half of its fiscal year was especially weak, with its profit falling by an even larger 70.6% to HK$14.77 million, down sharply from its HK$32.96 million first-half profit. The company's already-thin net profit margin also took a beating, dropping 1.4 percentage points in the second half of the year to just 1.2%.

International Housewares responded to its worsening situation by shuttering nine stores in Hong Kong in the second half of its fiscal year, reducing its total store count to 306. It also reduced its headcount by 3% to 2,007 over that time. International Housewares said it constantly reviews its store network, seeking rent reductions, closing underperforming outlets, and holding clearance sales in stores with high inventories.

Low-cost pioneer

International Housewares has itself become a household name in Hong Kong, with 34 years of history in the city. Its story began when founder Lau Pak Fai opened his first JHC housewares store on Java Road in the city's North Point district in the early 1990s. Ngai Lai Ha, the company's current chairwoman, joined at that time as a part-time employee. Impressed by her diligence, Lau invited the soon-to-graduate Ngai to become a shareholder, and together they built the JHC empire.

Inspired by Japan's popular 100-yen stores in the 1990s, Lau introduced the concept to Hong Kong. He opened the first HK$10 shop in Hong Kong in 1993, akin to the U.S. Dollar Tree chain, becoming a local pioneer in such discounters. After the Asian Financial Crisis of 1997, the company seized on depressed rents to expand aggressively, growing its store count to over 100. It also acquired local competitors to further solidify its position as Hong Kong's leading discount housewares chain.

Singapore expansion

International Housewares didn't just limit itself to Hong Kong. In 2011 it expanded to nearby Singapore, which has a similar retail profile, with its acquisition of a local housewares chain. Two years later it went public in Hong Kong. In addition to JHC, the company's stable of other similar brands includes "123 by ELLA" "Day Day Store" "$MART" and "Japan Home."

Despite its Southeast Asian presence, International Housewares remains heavily reliant on Hong Kong and Macao, which contributed 87.4% of its revenue in its latest fiscal year. Of its 367 stores, 315 are located in those two core areas.

In a changing retailing landscape, a return to the brand's former glory days now looks increasingly difficult. The company faces intense pressure not only from Mainland e-commerce platforms, but also from the popular Japanese variety store 3COINS. Within the company, leadership dynamics have also undergone a key shift. While founder Lau Pak Fai remains an executive director, he is stepping back from frontline operations. Day-to-day management now rests with Ngai Lai Ha, known for her focus on back-end operations and logistics.

Founder's disengagement 

In the more than a decade since his company's IPO, Lau has shifted his focus to personal pursuits in the world of horse racing. The year of the listing, he acquired his first racehorse, Housewares King, under his own name. He went on to build a stable of racehorses, developing a second career. He shot to fame on the success of one of his horses, Romantic Warrior, which is currently Hong Kong's top racehorse with a total prize purse of nearly HK$215 million.

In the process of developing his second career, Lau gradually disengaged from his corporate duties at International Housewares, stepping down as CEO in 2016 and handing over the reins to Ngai Lai Ha. The company's current situation resembles that of Apple after the death of creative visionary Steve Jobs. The more practical Tim Cook has carried on as CEO, bringing operational efficiencies and strong internal management and cost control skills to extend the company's past glory under Jobs.

International Housewares is especially vulnerable because most of its products come from the Mainland, putting it in direct competition with the e-commerce giants whose products often come from the same or similar suppliers. Unlike its online peers, JHC's high rents for its brick-and-mortar stores have taken away its cost advantage. By comparison, CEC International Holdings(0759.HK), parent of local snack store 759, has managed to maintain a viable niche in Hong Kong's retail market by primarily sourcing its products from Japan and Korea, avoiding direct competition with Mainland products and e-commerce companies.

Given its stumbling performance, it comes as little surprise that International Housewares currently trades at a relatively low price-to-earnings (P/E) ratio of about 14 times. The stock is likely to remain under pressure as Hong Kong's retail sector continues to suffer. And with the disengagement of its founder, a turnaround from its sinking status seems unlikely. In such a state, a sale of the company to a larger Mainland rival might be the only viable way forward, similar to the recent sale of discount Hong Kong supermarket chain Kai Bo to e-commerce giant JD.com.   

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.