Greater China Jewellery - Splash

Transcription

28 OCTOBER 2014
SECTOR REPORT
GREATER CHINA JEWELLERY
IMPROVING
Long-term growth from rising gem-set demand
n
Weak share prices and SSS performance may continue before picking up in 4Q14
Share prices of the jewellery and watch retailers have been weak, down 7-40% YTD, due to (1) weak
SSS in April-June and July-September, affected by a high base from last year’s gold rush; (2) poor
sentiment in Hong Kong arising from the pro-democracy protests, which may lead to weaker tourist
traffic flow; and (3) weakness in the gold price, which has retreated to USD1,200/oz. We expect to
see sequential improvement in SSS in October-December as the “gold rush” impact fades and the
festive season drives jewellery demand.
n
Analysing the jewellery space from the gem-set sales angle
We expect event-driven demand for gold products to remain relatively stable but we expect growth to
be driven by gem-set demand. According to The Diamond Insight Report by DeBeers, sales of
diamond jewellery to Chinese consumers were the fastest growing in the world in 2003-13, at a
CAGR of 21%. We believe this segment presents high potential for growth both in the top and the
bottom lines, from higher ASP than gold products and from margin expansion. We see players with
the potential to take market share in this segment as being the winners in the long run.
n
Preference is for Chow Tai Fook and Chow Sang Sang in the jewellery space
We believe Chow Tai Fook and Chow Sang Sang can expand their market shares over the long run in
both Hong Kong and China on their efforts to grow their gem-set businesses and their prudent
operating strategies. We initiate coverage on Chow Tai Fook and Chow Sang Sang with BUY
recommendations. We initiate coverage on Luk Fook with a HOLD due to slower-than-peer margin
expansion and greater operational risks. We initiate coverage on Emperor Watch & Jewellery with a
BUY recommendation on its cheap valuations at 8x FY15 P/E and 0.5x P/BV.
BNPP recommendations
Company
BBG code
Rating
Share price
Target price
Emperor Watch
887 HK
BUY
0.36
0.45
Upside/downside
+26.8%
Chow Tai Fook
1929 HK
BUY
10.80
12.45
+15.3%
Chow Sang Sang
116 HK
BUY
18.82
21.60
+14.8%
Luk Fook
590 HK
HOLD
22.35
24.50
+9.6%
Source: BNP Paribas
Emily Lee
emily.w.lee@asia.bnpparibas.com
+852 2825 1862
Our research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for
authorisation. Please see the important notice on the inside back cover.
PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD
THIS MATERIAL HAS BEEN APPROVED FOR U.S. DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 76
Emily Lee
Greater China Jewellery
Investment thesis
Sequential improvement in SSS.
Putting aside the political unrest in Hong Kong, we believe
long-term growth for the jewellery retailers remains intact,
driven by rising demand for gem-set jewellery alongside the
rising middle income group in the PRC and stable demand
for gold products from event-driven demand, such as
weddings and new-borns.
While July-September 2014 SSS remained weak, at around
20% declines y-y, affected by the high base last year, arising
from the “gold rush” effect, the SSS retreat has already
improved from -40-50% in April-June 2014. We expect SSS
performance to improve as the base effect fades and we
expect SSS to turn positive again in 1Q15.
Among the jewellery retailers, we prefer Chow Tai Fook due
to its higher exposure to the China market, which is seeing
decent growth in the gem-set segment. We believe the
market leader could further gain market share from its more
aggressive store expansion and high-quality product
offerings. We also like Chow Sang Sang for its prudent
operating strategy with all stores being run in the selfoperated format. Its foothold in China remains
underpenetrated, which may present room for growth. We
favour Luk Fook the least due to its heavy reliance on sales
of gold products. Its low hedging policy on gold could lead to
greater volatility in margins and earnings. We also initiate
coverage on Emperor Watch & Jewellery with a BUY
recommendation. Despite the gloomy outlook for luxury
watch demand, we believe the current valuation has already
factored in all the negatives and the share price presents an
attractive risk-reward profile.
Valuation
CONTENTS
We have BUYs on Chow Tai Fook (TP: HKD12.45), Chow
Sang Sang (TP: HKD21.60) and Emperor Watch & Jewellery
(TP: HKD0.45), and a HOLD on Luk Fook (TP: HKD24.50).
Our target prices are based on P/E valuations.
HK retail vs jewellery, watches, clocks & valuable gift sales
Jan-14
May-14
Sep-13
May-13
Company reports ......................................................................... 21
Jan-13
China the key growth driver...................................................... 19
Sep-12
0
Jan-12
Risks ............................................................................................... 17
May-12
20,000
Jan-10
Valuations and recommendations ........................................... 14
Sep-11
40,000
May-11
60,000
Jan-11
China is the fastest-growing diamond jewellery market
in the world .................................................................................. 11
(HKD m)
Sep-10
Jewellery retailer comparison .................................................... 6
May-10
Investment thesis .......................................................................... 3
RSV: ex-Jewellery, Watches, Clocks & Valuable Gift (LHS)
RSV: Jewellery, Watches, Clocks & Valuable Gift (LHS)
RSV (RHS)
RSV: Jewellery, Watches, Clocks & Valuable Gift (RHS)
(y-y %)
80
60
40
20
0
(20)
(40)
(60)
Source: Census and Statistics Department of Hong Kong
China retail vs jewellery sales
Retail Sales of Gold, Silver and Jewelry (LHS)
(RMB b)
Retail Sales of Gold, Silver and Jewelry (RHS) (y-y %)
40
Retail Sales of Consumer Goods (RHS)
30
20
10
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
0
100
80
60
40
20
0
(20)
(40)
Source: National Bureau of Statistics of China
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28 OCTOBER 2014
Emily Lee
Investment thesis
Share prices of jewellery and watch retailers have retreated 6.6-39.8% YTD,
negatively affected by (1) the depressed SSS since April 2014 arising from the “gold
rush” that occurred in April-June 2013, causing an abnormally high base; (2)
weakness in the gold price, which has retreated to the USD1,200/oz level; and (3)
the impact of the pro-democracy protests in Hong Kong, which may negatively affect
retail store performance due to weak consumer sentiment, tourists cancelling their
trips to Hong Kong and a negative impact from store closures because of protests in
different tourist areas of the city.
Among the jewellery and watch retailers, players most exposed to the areas where
the protests have been occurring, like Emperor Watch & Jewellery (mostly in
Causeway Bay and Tsim Sha Tsui) as well as sales concentration in higher-end
goods have seen the sharpest declines in their share prices.
EXHIBIT 1: Share price movement
(HKD)
116 HK EQUITY (LHS)
1929 HK EQUITY (LHS)
45
590 HK EQUITY (LHS)
887 HK EQUITY (RHS)
(HKD)
1.8
40
1.6
35
1.4
30
1.2
25
1.0
20
0.8
15
0.6
10
0.4
5
0.2
0
Oct-08
0.0
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Source: Bloomberg
Share price retreat due to the pro-democracy looks too excessive?
According to the Hong Kong Immigration Department, the number of PRC tourists
inbound to Hong Kong was up 2% y-y to 813,257 over 1-5 October (16% growth in
2013), accounting for 37% of total visitors.
EXHIBIT 2: Tourists inbound to Hong Kong in 1-5 October 2014
(nos)
Mainland
All
600,000
500,000
400,000
300,000
200,000
100,000
0
1-Oct-14
2-Oct-14
3-Oct-14
4-Oct-14
5-Oct-14
6-Oct-14
7-Oct-14
Sources: Hong Kong Immigration Department
Based on our conversations with management, store closures due to the protest only
occurred in the first two days of the demonstrations (29-30 September) and these
stores eventually resumed operations on the third or fourth days of the protest. In
addition, stores located in non-prime areas like Shatin, Sheung Shui and Yuen Long,
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28 OCTOBER 2014
Emily Lee
etc. (away from the protest areas), saw heavy traffic flow for the jewellery retailers.
Hence, we believe the impact on the jewellery retailers’ 3Q14 performance of the
protests is minimal (only two days of 3Q). All jewellery retailers reported m-m
improvements in 3Q14. Luk Fook reported that, in its Golden Week performance,
SSS grew 3% for Hong Kong and Macau and 28% for China. The better-thanexpected performance, particularly in Hong Kong (despite the ongoing protests) was
due to: (1) the gold price remaining relatively low, causing high demand for gold
products; and (2) despite traffic being low in some shops affected by the protests, the
adverse impact was mitigated by a substantial growth of sales in other locations.
Looking into 4Q14, the overall impact of the protests on tourist spending inevitably
hinges largely on how long the protests will last and how large the slowdown in
growth of visitor arrival continues to be, which is tough to estimate. However,
generally speaking, we believe 4Q, which is traditionally a peak season for retailers,
should perform better than 1Q-3Q.
Putting aside the potential impact from political unrest in Hong Kong, which may
affect sentiment on Hong Kong retail stocks as a whole in the short term, we believe
it is important to analyse which jewellery retailers are doing better than others, which
may allow further market share gain over the long run.
Event-driven demand for gold to be stable but demand for gem-sets to grow
We believe event-driven demand from weddings and new-borns, which constitutes
approximately 30-40% of sales, will remain relatively stable over the long run, while
sales of gem-set products could increase along with the rising disposable income of
Chinese consumers. Increasing sales of gem-set products will inevitably heighten
sales and profitability, resulting from their higher ASP and margins compared to gold
products, allowing margin upside for the jewellery retail names.
Those with larger exposure to China and gem-set sales could be the winners
Within the jewellery space, we believe recent trends suggest that China’s recovery is
swifter than Hong Kong’s (Chow Tai Fook, Chow Sang Sang and Luk Fook all
reported positive growth for gem-sets in July-September 2014) and we believe the
winner in the jewellery retail space will be differentiated by a strategy of enhancing
sales in gem-set products. As a result, we favour players with higher exposure to
China and stronger positions to gain market share in the gem-set category (e.g., a
longer operating history, creating higher consumer confidence and higher marketing
efforts to boost gem-set sales and brand image).
Initiate coverage on jewellery retailers with Chow Tai Fook as our preferred pick
We initiate coverage on the jewellery retailers with Chow Tai Fook as our preferred
pick due to its better penetration and better product offerings in the gem-set category
(which should allow better margins than peers), its larger scale and stronger
profitability and its substantial hedge policy on gold, which should mitigate risks from
fluctuating gold prices. Our target price of HKD12.45 is based on 15x CY15E P/E.
We also like Chow Sang Sang for its prudent strategy, while we are also positive on
its efforts to uplift the store image to gain share in the gem-set segment. We initiate
on Chow Sang Sang with a BUY rating and a target price of HKD21.60 based on 11x
FY15E P/E. Luk Fook is our least preferred stock, as we believe it is the least
favourably positioned to benefit from potential rising demand in gem-sets. We also
expect Luk Fook to see the greatest rental pressure and impact from the prodemocracy protests in Hong Kong due to its larger contribution from Hong Kong. We
initiate coverage with a HOLD with a target price of HKD24.50 based on 10x CY15
P/E. We also initiate coverage on Emperor Watch & Jewellery with a BUY
recommendation and a target price of HKD0.45 based on 10x FY15 P/E. Despite the
gloomy outlook for luxury watch demand, we believe the current valuation has
already factored in all the negatives and the share price presents an attractive riskreward profile.
Among the jewellery retailers, our stance can be summarized as: (1) China to be the
key growth engine while Hong Kong sales may be hindered by slower PRC inbound
tourists; (2) rising gem-set sales to drive growth over the long run; (3) higher hedging
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28 OCTOBER 2014
Emily Lee
ratios can lower volatility in margins and earnings; and (4) higher percentage of selfoperated stores can minimize operating risks.
EXHIBIT 3: Summary of differences among the jewellery retailers
China as a % of
total sales
Gold % of total
sales
Hedging ratio
Self-operated
stores % of total
Chow Tai Fook
54.5
61.2
70.0
64.7
Luk Fook
22.0
67.2
20.0
11.3
Chow Sang Sang
43.1
62.0
40-50
100.0
(%)
Sources: Company; FY14 for CTF and LF, 1H14 for CSS
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Jewellery retailer comparison
Market share
Based on our estimates, Chow Tai Fook is the leading jewellery retailer in Hong
Kong and China, capturing 29.8% of the market in Hong Kong and 11.1% in China in
2013 in terms of sales value. Its retail network is almost double Luk Fook’s and 4.5x
Chow Sang Sang’s, while turnover is 3-4 times larger than Luk Fook and Chow Sang
Sang.
EXHIBIT 4: Market share in Hong Kong
(%)
35
Chow Sang Sang
EXHIBIT 5: Market share in China
Chow Tai Fook
(%)
Luk Fook
Chow Sang Sang
Chow Tai Fook
Luk Fook
16
30
14
25
12
10
20
8
15
6
10
4
5
2
0
0
2008
2009
2010
2011
2012
2008
2013
Sources: Census and Statistics Dept; Companies; BNP Paribas estimates
2009
2010
2011
2012
2013
Sources: National Bureau of Statistics; BNP Paribas estimates
Store productivity analysis
Sales productivity is much higher in Hong Kong than in China due to higher
consumer confidence in Hong Kong and its greater variety and product mix (e.g., a
much larger proportion of gem-set sales than in China).
In Hong Kong, Luk Fook has been growing its sales per store and has taken the lead
among jewellery retailers. We believe this was partly due to heightened demand for
gold during the gold rush, which inflated Luk Fook’s sales during the period. Chow
Sang Sang has the highest store productivity in China mainly due to its higher focus
on gem-set sales.
EXHIBIT 6: Sales per store in Hong Kong
(HKD '000)
Chow Sang Sang
EXHIBIT 7: Sales per store in China
Chow Tai Fook
Luk Fook
(HKD'000)
350,000
30,000
300,000
25,000
250,000
Chow Sang Sang
Chow Tai Fook
Luk Fook
20,000
200,000
15,000
150,000
10,000
100,000
5,000
50,000
0
0
FY09
FY10
FY11
FY12
FY13
Sources: Companies; BNP Paribas estimates for Chow Sang Sang in FY14
FY14
FY09
FY10
FY11
FY12
FY13
FY14
Sources: Companies; BNP Paribas estimates for Chow Sang Sang in FY14
SSS growth comparison
SSS growth for the jewellery retailers was extremely weak in April-June 2014,
declining at 50-54% in Hong Kong and a decline of 27-52% in China. The sharp
decline was mainly attributable to the “gold rush” which occurred in the same period
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28 OCTOBER 2014
Emily Lee
in 2013, as Chinese consumers lined up to purchase gold products when the gold
price saw a sharp retreat.
Based on our conversations with management, we understand that store closures
due to the protests in Hong Kong were highest in the first two days, with Chow Tai
Fook closing 30, Chow Sang Sang six and Luk Fook five. These stores eventually
resumed operations on the third or fourth days of the protests.
We believe sales of gem-sets are likely to have been muted in the first week of the
protest, contrary to the trend observed in July-September. Sales of gold products are
likely to outperform in the weeks after the protests started, benefiting from a low gold
price, despite the potential downward pressure on ASP.
EXHIBIT 8: Hong Kong SSS growth
(%)
CSS SSSG
EXHIBIT 9: China SSS growth
CTF SSSG
LF SSSG
(%)
CSS SSSG
CTF SSSG
LF SSSG
Note: Semi-annual data used for Chow Sang Sang due to differnet financial year end
Source: Companies
.
Sep-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
(80)
Jun-14
(60)
Mar-14
(40)
Dec-13
(20)
Sep-13
0
Jun-13
20
Mar-13
40
Dec-12
60
Sep-12
80
Jun-12
140
120
100
80
60
40
20
0
(20)
(40)
(60)
(80)
100
Note: Semi-annual data used for Chow Sang Sang due to differnet financial year end
Source: Companies
Retail network and expansion plans
The jewellery retailers have opened stores aggressively in past years, in an effort to
capture rising demand for jewellery products by the PRC consumer. Looking ahead,
the strategies adopted by each company differ, although the major focus remains
China.
Chow Tai Fook: Management aims to maintain its expansion strategy of opening
200 stores per year in China, with 60-70% located in tier-3 and tier-4 cities. The
proportion of franchisee POSs is expected to increase as the company relies more
on franchisees’ local knowledge to find suitable retail locations in lower-tier cities.
Chow Sang Sang: The company is adding 50 new directly managed stores per year
in China in the next few years, according to management. All stores will be in the
self-operated format and 60% of the new stores will be in the 97 cities in which it
already has a presence, in an effort to increase penetration.
Luk Fook: The company is adopting a more prudent strategy following its aggressive
expansion in FY13-14. It aims to open one or two in Hong Kong, one in Macau, five
self-operated stores in China and around 160 licensee shops in China. Management
stated that the outlook in China is still not too visible, so they would rather slow down
expansion in FY15.
Variety of hedging strategies and product mix lead to differing gross margins
A strong gold price creates a positive impact on jewellery retailers due to: (1)
consumer demand rising in anticipation of a further increase in the gold price; (2)
higher ASP for gold products, hence higher turnover; and (3) realized holding gains
on gold inventory (Luk Fook and Chow Sang Sang have adopted the first-in, first-out
accounting policy while Chow Tai Fook uses a weighted average).
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Any potential gain/loss from gold inventory would be more acute for Luk Fook as the
company only hedges 20% of its gold exposure, while Chow Sang Sang hedges 4050% and Chow Tai Fook 70%.
Chow Tai Fook has the highest gross margin among peers. We attribute this to
product mix as well as geographical breakdown differences. Looking ahead, we
expect margins to trend higher for the jewellery retailers as we expect demand on
the higher-margin gem-set products to increase over time.
EXHIBIT 10: Group-level gross margin
(%)
35
CTF GPM (LHS)
LF GPM (LHS)
CSS GPM (LHS) (USD/oz)
EWJ GPM (LHS)
Gold Price (RHS)
2,000
1,800
30
1,600
25
1,400
20
1,200
1,000
15
800
10
600
400
5
200
0
0
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Note: CTF and LF year ended March. CSS and EWJ year ended December
Source: Companies
EXHIBIT 11: Share price movement vs gold price
(Index)
180
GOLDLNPM INDEX
116 HK EQUITY
1929 HK EQUITY
590 HK EQUITY
160
140
120
100
80
60
40
20
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
0
Source: Bloomberg
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EXHIBIT 12: Gold price trend
(USD/oz)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Source: Bloomberg
Online
The online channel is becoming increasingly important around the globe, but is still
relatively immature in China. In 2013, more than one-tenth of diamond jewellery
sales in the US were made online. While online is not yet a significant sales channel
in China, the internet is used by a quarter of acquirers for research purposes before
purchasing, according to The Diamond Insight Report by DeBeers.
For the listed jewellery retailers, online sales only take up low- to mid-single digits of
total China sales. Their strategy is to capture the potential sales of younger Chinese
consumers through the online platform, hence ASPs tend to be much lower than at
their physical stores, at around RMB1,500-2,000, with a focus on gold products.
Pricing is the same for online and offline, but the number of SKUs will be much
smaller for online.
While we believe the online platform will increasingly become more important to the
jewellery retailers, the effect should be less than for other discretionary retailers, due
to the high ticket price nature of jewellery items. The online platform will be an
important marketing tool for the jewellery retailers in penetrating the younger
generation of Chinese, but it is not expected to replace the bricks and mortar format
for the jewellery retailers.
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Emily Lee
EXHIBIT 13: KPI comparison
2009
2010
2011
2012
2013
2014
Turnover (HKD m)
Chow Tai Fook
18,410.90
22,933.60
35,042.50
56,571.10
57,433.90
77,407.10
Luk Fook
3,959.23
5,386.43
8,091.12
11,907.44
13,411.69
19,214.93
Chow Sang Sang
9,463.44
11,705.29
17,158.29
18,260.23
25,142.44
21,137.85
Emperor Watch & Jewellery
2,686.46
4,095.31
5,862.38
6,531.47
6,624.37
6,482.74
na
24.57
52.80
61.44
1.53
34.78
Turnover growth (%)
Chow Tai Fook
Luk Fook
17.58
36.05
50.21
47.17
12.63
43.27
Chow Sang Sang
(4.22)
23.69
46.59
6.42
37.69
(15.93)
45.81
52.44
43.15
11.41
1.42
(2.14)
28.93
28.58
28.33
29.07
28.35
27.33
Luk Fook
22.07
24.01
23.70
23.17
21.10
21.93
Chow Sang Sang
19.94
19.67
18.97
18.80
16.73
20.91
25.82
25.58
28.75
25.98
24.15
25.22
12.54
13.84
15.85
15.81
13.15
12.39
Luk Fook
8.04
12.23
13.14
13.51
11.06
11.65
Chow Sang Sang
7.89
8.63
8.87
6.66
3.71
6.77
9.11
10.27
13.15
7.66
5.30
4.55
Gross margin (%)
Chow Tai Fook
Operating margin (%)
Chow Tai Fook
Net profit (HKD m)
Chow Tai Fook
1,896.70
2,138.60
3,537.60
6,340.60
5,505.30
7,272.00
Luk Fook
275.16
531.48
866.22
1,333.94
1,242.95
1,864.93
Chow Sang Sang
574.09
757.20
1,097.98
984.85
1,218.46
1,121.67
195.59
125.64
627.08
404.33
290.32
250.08
na
12.75
65.42
79.23
(13.17)
32.09
(12.37)
93.15
62.98
54.00
(6.82)
50.04
Net profit growth (%)
Chow Tai Fook
Luk Fook
Chow Sang Sang
22.22
31.90
45.01
(10.30)
23.72
(7.94)
(12.12)
(35.76)
399.11
(35.52)
(28.20)
(13.86)
(1,398.10)
(683.30)
(1,597.20)
(4,819.40)
2,469.10
(7,119.80)
111.13
(26.75)
965.89
1,538.06
1,186.81
1,236.94
(211.03)
(1,207.43)
(1,757.72)
(1,597.45)
(1,257.95)
(321.81)
238.58
424.70
463.57
453.82
657.10
557.04
Net cash (HKD m)
Chow Tai Fook
Luk Fook
Chow Sang Sang
Free cash flow (HKD m)
Chow Tai Fook
550.10
966.80
(3,413.10)
(7,778.90)
8,846.50
(6,660.70)
Luk Fook
302.78
(6.92)
139.69
(257.20)
124.54
716.09
Chow Sang Sang
221.18
(992.50)
(171.71)
707.04
557.99
927.71
133.31
(405.75)
(667.08)
162.22
205.15
(41.82)
ROE (%)
Chow Tai Fook
na
29.50
36.35
31.48
17.79
20.75
Luk Fook
23.54
36.45
34.07
29.58
20.68
26.52
Chow Sang Sang
16.09
15.76
18.24
14.74
16.31
13.50
13.27
6.58
20.47
10.16
6.82
5.60
Chow Tai Fook
965
1179
1358
1627
1836
2077
Luk Fook
455
557
700
862
1073
1268
Chow Sang Sang
215
250
310
352
375
426
40
61
80
80
74
91
Retail outlets
Note: FY14 figures are actual for CTF and LF, BNP Paribas estimates for EWJ and CSS
Source: Companies
10
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
China is the fastest-growing diamond jewellery market in the world
According to The Diamond Insight Report by DeBeers, global diamond jewellery
sales were an estimated USD79b in 2013, growing at over 3% y-y in nominal value
in 2013 in USD terms, ahead of the CAGR of 3% in 2008-12. The two biggest
markets, the US and China, both grew by more than the global average, with sales of
polished diamonds increasing 7% in the US and 14% in China. Sales of diamond
jewellery to Chinese consumers were the fastest growing in the world over the last
decade, with a CAGR of 21% from 2003-13. The share of polished diamonds sold in
jewellery to Chinese consumers grew from 3% in 2003 to over 13% of global
demand in 2013. The growth in demand for diamond jewellery has been driven by
growing numbers of consumers able to buy into this category, and by the increase in
the average price and the sizes of diamonds they can afford to buy. Average prices
paid jumped 32% in real terms between 2003 and 2013 to over RMB8,000. Average
carats per piece over the same period rose from 0.18 to 0.25.
EXHIBIT 14: Diamond jewellery value, growth by geography
(%)
US
Japan
Gulf
China
India
Rest of World
80
70
60
50
40
30
20
10
0
2008
2009
2010
2011
2012
2013
Source: DeBeers
Based on a survey conducted by DeBeers, which covered over 10,000 women in
China (representative of 123 tier 1-3 cities), fine jewellery is the object or experience
most desired by urban women in China. In addition, China remains underpenetrated:
while diamond jewellery ownership has risen to 20% in the top urban cities surveyed
by DeBeers (from 10% in 2003), it is still far below the US ownership rate of c.70%.
This showcases growth in gem set sales has great potential over the long run, in our
view.
EXHIBIT 15: Chinese women's desire for diamonds and competing items
(%)
Gift
Self purchase
60
50
40
30
20
10
0
A piece of fine
jewellery
A desktop PC,
laptop, netbook,
tablet PC
A genuine
designer
handbag
A holiday
abroad
A genuine
luxury watch
Source: DeBeers
11
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
Differentiating winners and losers by gem-set sales
While the positioning of Chow Tai Fook, Chow Sang Sang and Luk Fook (considered
to be the mass jewellery retailers) is largely similar, with similar ASPs and product
ranges, we believe certain players are doing a better job of capturing rising gem-set
jewellery sales over the long run as Chinese consumers’ disposable income
increases. This should help the jewellery retailers to enhance group-level gross
margins as gem-set jewellery commands a gross margin of 35-45% compared to
gold jewellery’s 10-15%.
Judging from the product mix, Chow Tai Fook has the highest contribution from nongold products, accounting for 38.8% of total sales in FY14. This explains partly why
Chow Tai Fook commands a higher margin than Chow Sang Sang and Luk Fook.
EXHIBIT 16: Chow Tai Fook product mix – FY14
Watches
4.3%
Gem-set
jewellery
21.1%
Platinum/karat
gold products
13.4%
Gold products
61.2%
Source: Company
EXHIBIT 17: Chow Sang Sang product mix – 1H14
Watch
4.0%
Non gold
jewellery
34.0%
Gold
62.0%
Source: Company
12
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
EXHIBIT 18: Luk Fook product mix – FY14
Gemstone
32.8%
Gold
67.2%
Source: Company
EXHIBIT 19: Gem-set ASP comparison
------------- HK gem-set -------------
------------- China gem-set -------------
FY13
FY14
FY13
FY14
(HKD)
(HKD)
(RMB)
(RMB)
Chow Tai Fook
15,355
14,062
7,155
6,743
Chow Sang Sang
16,800
15,200
10,900
10,800
8,600
7,700
3,900
4,000
Luk Fook
Note: China ASP denominated in HKD for CTF. 1H14 figures used for CSS for FY14.
Source: Company
EXHIBIT 20: Gem set SSS growth
(%)
EXHIBIT 21: Gross margin trend
CTF SSSG
(%)
LF SSSG
25
CTF GPM
LF GPM
CSS GPM
35
20
15
30
10
5
25
0
(5)
20
(10)
(15)
15
(20)
13
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Source: Companies
Sep-10
10
(25)
Note: CTF and LF year ended March. CSS and EWJ year ended December
Source: Companies
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
Valuations and recommendations
Chow Tai Fook, Luk Fook, Chow Sang Sang and EWJ are trading at 13.0x CY15E
P/E, 9.1x, and 9.6x FY15E P/E and 7.9x respectively, compared with a 10.4x
average P/E for Hong Kong retailers and 12.7x for PRC retailers, based on
Bloomberg consensus estimates.
EXHIBIT 22: Valuation summary
Company
BBG code
Reco
Price
Tgt price
Mkt cap
--------- P/E ---------
2 yr EPS
CY14E
CY15E
CAGR
PEG
Net gearing
ROE
Div yield
(HKD)
(HKD)
(USD m)
(x)
(x)
(%)
(x)
(%)
(%)
(%)
Hong Kong retailers
Chow Tai Fook
1929 HK
BUY
10.80
12.45 13,999.54
15.00
13.00
16
0.8
19.80
17.90
3.3
Chow Sang Sang
116 HK
BUY
18.82
21.60
1,640.51
11.34
9.60
17
0.6
10.20
13.50
3.3
Luk Fook
590 HK
HOLD
22.35
25.14
1,701.09
9.00
9.10
10
0.8
(14.00)
17.30
4.2
887 HK
BUY
0.36
0.45
310.52
9.86
7.89
12
0.6
(14.90)
5.60
3.0
Sa Sa
178 HK
NA
5.43
NA
1,991.12
16.02
14.48
6
NA
(39.11)
39.25
4.4
Bonjour
653 HK
NA
1.00
NA
435.26
11.65
10.42
10
NA
(80.63)
55.30
6.6
I.T
999 HK
NA
2.54
NA
401.95
10.04
8.11
19
NA
(11.60)
10.66
4.3
Bossini
592 HK
NA
0.74
NA
155.22
7.68
6.35
22
0.41
(50.63)
18.75
8.9
Giordano
709 HK
NA
3.87
NA
785.19
12.74
11.88
(12)
4.32
(34.01)
15.24
7.1
Oriental Watch
398 HK
NA
1.71
NA
125.78
21.38
13.68
86
NA
2.99
2.03
1.1
Bauhaus
483 HK
NA
2.85
NA
135.49
NA
NA
NA
NA
(37.64)
NA
NA
Veeko
1173 HK
NA
0.26
NA
79.83
NA
NA
NA
NA
0.65
NA
NA
Lifestyle
1212 HK
NA
14.60
NA
3,066.62
11.35
10.52
(3)
NA
(9.57)
19.77
3.6
Int’l Housewares Retail
1373 HK
NA
2.28
NA
212.60
11.62
9.39
5
NA
(55.56)
17.58
2.4
Perfect Shape
1830 HK
NA
1.43
NA
203.87
15.89
11.00
25
0.59
(84.63)
29.20
6.3
84 HK
NA
1.79
NA
241.47
NA
NA
NA
NA
27.86
NA
NA
1,592.88
12.58
10.42
13
1.16
(23.17)
20.16
4.49
Stelux
Simple average
PRC retailers
Daphne
210 HK
NA
3.74
NA
807.84
16.49
12.53
24
3.30
1.41
7.77
2.13
1880 HK
NA
8.48
NA 10,078.81
13.77
13.07
2
1.22
(27.95)
16.02
2.64
738 HK
NA
3.65
NA
310.24
10.64
8.94
(2)
NA
(45.80)
15.15
5.39
Evergreen
238 HK
NA
0.88
NA
107.63
12.61
13.09
(19)
NA
(18.58)
3.76
4.47
Bosideng
3998 HK
NA
1.18
NA
1,207.70
10.69
9.90
4
NA
(20.46)
10.16
4.84
China Lilang
7.33
Belle
Le Saunda
1234 HK
NA
5.45
NA
850.29
9.55
8.70
7
0.99
(41.09)
20.33
Trinity
891 HK
NA
1.80
NA
397.44
15.65
12.24
(9)
NA
2.64
5.48
4.78
Ports Design
589 HK
NA
2.71
NA
192.27
3.86
3.35
10
NA
(6.23)
NA
13.06
Hengdeli
3389 HK
NA
1.22
NA
742.38
9.16
7.51
24
NA
28.54
8.11
3.43
Golden Eagle
3308 HK
NA
9.53
NA
2,207.94
12.72
11.55
1
36.35
(26.87)
20.40
2.59
Parkson
3368 HK
NA
2.18
NA
791.86
13.12
12.73
4
NA
(28.48)
6.20
3.32
NWDS
825 HK
NA
2.77
NA
602.09
7.78
6.69
16
NA
(12.94)
8.69
6.35
Intime
1833 HK
NA
6.54
NA
1,900.86
12.76
11.53
(8)
NA
44.58
10.13
3.22
Maoye
848 HK
NA
1.15
NA
783.93
6.34
6.04
(2)
NA
79.00
11.34
4.08
Li Ning
2331 HK
NA
4.08
NA
740.43
NA
55.45
NA
NA
(7.69)
(22.92)
-
Anta
2020 HK
NA
14.90
NA
4,789.10
17.88
15.17
21
NA
(65.62)
21.24
3.90
Xtep
1368 HK
NA
3.40
NA
949.02
10.19
9.47
1
NA
(45.13)
12.43
5.19
361 Degrees
1361 HK
NA
2.21
NA
594.37
9.96
9.17
36
NA
(38.37)
7.20
3.73
Peak
1968 HK
NA
2.23
NA
614.03
12.04
10.40
20
NA
(51.99)
7.27
4.61
Embry
1388 HK
NA
3.85
NA
206.79
NA
NA
NA
NA
(13.79)
NA
NA
Cosmo Lady
2298 HK
NA
4.72
NA
1,159.99
17.72
13.78
NA
NA
(42.18)
31.04
1.88
Stella
1836 HK
NA
22.40
NA
2,257.98
16.99
14.58
13
3.00
(29.78)
14.05
4.26
1,467.86
12.00
12.66
7
8.97
(16.67)
10.69
4.34
Simple average
Sources: BNP Paribas estimates for Chow Tai Fook, Luk Fook, Chow Sang Sang and Emperor Watch & Jewellery; Bloomberg consensus estimates for others
14
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
Net profit analysis
Following the extremely weak April-June quarter of 50-54% declines in SSS in Hong
Kong for the jewellery retailers, we expect SSS to see a mild improvement,
narrowing to a -20-30% drop in July-September, before turning to a slight positive in
4Q14. This will place Chow Tai Fook and Luk Fook’s SSS at -16% and -15% in
FY15, and -20% for Chow Sang Sang in FY14.
Luk Fook’s turnover and net profit CAGR growth in the past five years outperformed
the other two due mainly to its aggressive expansion through the licensing business
model and its relatively small base. We expect Chow Tai Fook and Chow Sang Sang
to see swifter net profit growth over the next three years due to their market share
gain in the gem-set business, allowing them to see higher gross margin expansion
than Luk Fook.
EXHIBIT 23: Jewellery retailers’ CAGR comparison
-------- Past 5yr CAGR -------Turnover
Chow Tai Fook
-------- CAGR FY15-17E --------
Net profit
Turnover
Net profit
(%)
(%)
(%)
(%)
33.3
30.8
13.3
15.8
Luk Fook
37.2
46.6
11.5
10.3
Chow Sang Sang*
20.5
16.2
16.0
17.4
Sources: Companies, BNP Paribas estimates
Our forecast vs consensus
While our forecasts are largely in line with market consensus for Chow Tai Fook and
Chow Sang Sang, our forecast is 16.6% below market consensus for Luk Fook. We
believe the impact of the protests in Hong Kong will be the severest for Luk Fook,
which generates the highest revenue from Hong Kong of the jewellery retailers. In
addition, we believe Luk Fook will see the highest rental cost increase following its
aggressive store openings in the past few years. We expect net profit to decline by
28.3% for Luk Fook in FY15, compared to Chow Tai Fook’s 1.2% decline and Chow
Sang Sang’s 7.9% decline in FY14.
EXHIBIT 24: Chow Tai Fook - BNPP vs Consensus
EXHIBIT 25: Chow Sang Sang - BNPP vs Consensus
TP (HKD)
TP (HKD)
16
31
15
26
14
BNPP
13
21
12
11
BNPP
10
16
9
8
11
7
6
0.50
0.60
Source: Bloomberg
15
2014E EPS (HKD)
2015E EPS (HKD)
0.70
0.80
0.90
1.00
1.10
6
1.50
1.60
1.70
1.80
1.90
2.00
2.10
Source: Bloomberg
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
EXHIBIT 26: Luk Fook - BNPP vs Consensus
EXHIBIT 27: EWJ - BNPP vs Consensus
TP (HKD)
36
TP (HKD)
0.51
31
0.50
0.49
26
0.48
21
0.47
BNPP
16
0.46
11
6
1.50
BNPP
0.45
2015E EPS (HKD)
2.00
2.50
3.00
3.50
Source: Bloomberg
4.00
2014E EPS (HKD)
0.44
0.020
0.025
0.030
0.035
0.040
Source: Bloomberg
Balance sheet analysis
Inventory turnover days were at 227 for Chow Tai Fook in FY14, 138 for Luk Fook in
FY14, and 174 for Chow Sang Sang in 1H14. We believe the key difference is due to
their product mix, as inventory turnover for gold is usually two to three months, while
that for gem-sets is about 10-12 months.
Luk Fook is in a net cash position of HKD1.2b while Chow Sang Sang and Chow Tai
Fook are at a net debt position of HKD433.7m and HKD7.1b, or a net gearing ratio of
5.4% and 19.1%, respectively.
Chow Tai Fook is our preferred pick in the space
Looking ahead, we believe Chow Tai Fook is in a better position than peers to
capture further market share from faster store expansion in China, more efforts in the
gem-set segment to capture rising demand in China, and its higher contribution from
China, meaning it should benefit from the rising disposable income of consumers
there. Its higher hedging ratio to gold should also translate into more stable margins
than peers.
We initiate coverage on Chow Tai Fook with a BUY recommendation. Our target
price of HKD12.45 is based on 15x CY15E P/E, implying potential upside of 15.3%.
We initiate coverage on Chow Sang Sang with a BUY recommendation. Our target
price of HKD21.60 is based on 11x FY15E P/E. The valuation attached is in line with
the average P/E of Hong Kong retailers. We initiate coverage on Luk Fook with a
HOLD recommendation. Our target price of HKD24.50 is based on 10x CY15E P/E,
in line with its historical long-term P/E. The valuation attached represents a 33%
discount to Chow Tai Fook. We also initiate coverage on EWJ with a BUY
recommendation. Our target price of HKD0.45 is based on 10x FY15E P/E.
16
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
Risks
Among the jewellery retailers, although we believe long-term growth remains intact
coming from stable demand for gold and rising gem-set sales alongside a rising
middle income group in China, we believe Luk Fook has the highest potential
operational risks due to its licensing business model and lowest hedging policy on
gold, which may create higher volatility on margins. The key risk to our BUY
recommendation on Chow Tai Fook, Chow Sang Sang and EWJ is a prolonged
weakness in consumer sentiment affected by the anti-corruption campaign in China
and the ongoing protests in Hong Kong affecting inbound tourists.
EXHIBIT 28: Chow Tai Fook historical forward P/E
(x)
25
20
+1 SD
Avg
15
-1 SD
10
Historical forward PE ratio
1 yr: 15.20x, 3 yrs: 15.50x.
5
0
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Source: Bloomberg
EXHIBIT 29: Chow Sang Sang historical forward P/E
(x)
25
Historical Forward PE ratio
1 yr: 10.57x, 3 yrs: 10.36x, long term: 10.37x.
20
15
+1 SD
Avg
10
-1 SD
5
0
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Source: Bloomberg
17
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
EXHIBIT 30: Luk Fook historical forward P/E
(x)
25
Historical forward P/E ratio
20
15
+1 SD
10
Avg
-1 SD
5
0
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Source: Bloomberg
EXHIBIT 31: EWJ historical forward P/E
(x)
30
25
20
+1 SD
15
Avg
10
-1 SD
5
0
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Source: Bloomberg
18
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
China the key growth driver
Luk Fook
As at FY3/14, the company had 83 self-operated stores and 1,125 licensed stores in
the PRC. Luk Fook has opted to focus on the licensing format in the PRC, with selfoperated stores on a much smaller scale. This allows the company to market its
brand and speed up business growth with low capital requirements.
Luk Fook generates income from licensees in different forms. In addition to the markup from sales of merchandise, the firm collects income from a one-off joining fee
costing RMB100,000 per outlet, and royalty, renewal, consultation and training fees.
Sales of merchandise are recorded in wholesale turnover, while the others are
recorded under licensing in the financial statements. Licensees are required to pay
cash on delivery, which helps to provide stable cash flows.
Gross margin for the segment has been largely stable at 15% historically as the firm
charges licenses on a mark-up basis. We view the growth outlook of 15-25% as
largely in line with the planned opening of licensee outlets in FY15-17.
The drawback of the licensing strategy is that the company does not have full control
over quality in terms of shop layout and product quality. For instance, licensees may
be tempted to source from third parties that offer lower quality at cheaper prices. This
may potentially create an inconsistent brand image for Luk Fook among consumers.
The advantage of this strategy is that it allows the company to expand at an
aggressive pace, and raise brand awareness in the eyes of consumers with minimal
capital risk.
The company opened its first self-operated retail store in the PRC in 2004, and now
has 83. Self-operated stores are mostly located in top-tier cities such as Beijing,
Shanghai, Wuhan and Jiangsu, and are intended to showcase to its licensees how a
model shop should be run. We are projecting a net addition of five new stores in
FY15-17.
Chow Sang Sang
Chow Sang Sang has opted for a directly operated format for its China expansion.
The trade-off between direct operation and franchising is overall control and brand
management and product quality in exchange for the speed of network expansion.
Around 95% of its stores are counters in department stores with an average of 700
sqm, with the remainder being street-front stores. The capex required to open a
regular store in China is HKD9m-11m, 90% of which is inventory, with the remainder
going to renovations. Historically, payback periods have ranged from 12-18 months,
according to management. Capex of HKD20m-30m is required to open a flagship
store.
Management intends to add at least 50 shops in China per annum, in locations
where they already have a presence, thereby enhancing efficiency and profitability.
Chow Tai Fook
As at FY14, 64.7% of Chow Tai Fook’s retail network is self-operated in terms of
POS and the remainder is franchised. In terms of sales value, self-operated stores
contributed 71.7% to China’s total revenue. Broken down by city tier, stores located
in first- and second-tier cities accounted for 17.2% and 51.7% of total China sales
respectively while the rest comes from third- or lower-tier cities.
Management intends to add 200 new stores per year in China, with 60-70% located
in tier-3 and tier-4 cities. The proportion of franchisee POSs is expected to increase
as the company relies more on franchisees’ local knowledge to find suitable retail
locations in lower-tier cities.
19
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
The company has undergone store consolidation in the past couple of years in China
as it closed down the underperforming stores for watches, and re-focused on
jewellery shops. Following the completion of the store consolidation exercise, the
company was able to turn the business profitable, generating HKD4.7m in 1H14
(versus a loss of HKD11.7m in 2013). Management is speeding up store expansion,
with plans to add 13 stores in 2014, mainly in tier 2-3 cities.
20
BNP PARIBAS
28 OCTOBER 2014
28 OCTOBER 2014
INITIATION
16 HONG
HONG
KONG / RETAILING
KONG
CHOW TAI FOOK
BUY
1929 HK
TARGET PRICE
HKD12.45
CLOSE
HKD10.80
UP/DOWNSIDE
CHANGE IN TP
+15.3%
HKD
%
HOW WE DIFFER FROM CONSENSUS
MARKET RECS
TARGET PRICE (%)
(2.7)
POSITIVE
20
EPS 2015 (%)
(2.1)
NEUTRAL
7
EPS 2016 (%)
0.5
NEGATIVE
1
KEY STOCK DATA
A China gem-set growth story
n
n
n
n
Market leader in Hong Kong and China
Chow Tai Fook’s (CTF) HK sales could be impacted by the prodemocracy protests, but China sales should be relatively strong.
Compared to peers, CTF has more China exposure and should
benefit the most. We also appreciate CTF’s efforts to grow its gemset category (example the recent acquisition of Hearts on Fire),
which should enhance margins over the long run.
Gem-set sales: key growth engine in the medium- to long term
While sales of gold products should be relatively stable due to eventdriven demand, we believe gem-set sales will be a more important
key growth driver. CTF’s 85-year long operating history has given it
high brand recognition, as well as its wide product offerings in the
gem-set category should allow it to take market share from peers.
This should translate into margin expansion over the long run.
China business should trend better than Hong Kong
We favour players with higher exposure to the China market as
same-store sales (SSS) should outperform that of Hong Kong. It also
helps to alleviate the rental pressure in Hong Kong.
Initiate at BUY: attractive valuation for long-term growth
CTF is the market leader in the jewellery space in Hong Kong and
China in terms of scale and profitability. We initiate coverage with a
BUY rating and HKD12.45 target price based on 15x CY15E PER.
Turnover and net profit trend
(HKD m)
Turnover (LHS)
Net profit (LHS)
(%)
120,000
100,000
Turnover growth (RHS)
Net profit growth (RHS)
100
80
80,000
60
2014A
2015E
2016E
2017E
Revenue
77,407
77,331
88,883
99,229
7,272
7,187
8,664
9,645
Recurring EPS (HKD)
0.73
0.72
0.87
0.96
EPS growth (%)
32.1
(1.2)
20.6
11.3
Recurring P/E (x)
14.9
15.0
12.5
11.2
3.3
3.3
4.0
4.5
11.2
11.4
9.7
8.9
Rec. net profit
Dividend yield (%)
EV/EBITDA (x)
Price/book (x)
2.9
2.6
2.3
2.1
Net debt/Equity (%)
19.8
23.3
28.3
32.5
ROE (%)
20.7
18.3
19.7
19.6
Oct-13
Jan-14
(7)
5.00
(HKD)
(27)
Chow Tai Fook
Share price performance
3 Month
12 Month
4.7
(3.9)
(11.6)
Relative to country (%)
2.6
(1.4)
(17.3)
Next results
6.7
Free float (%)
11
Major shareholder
3m historic vol. (%)
Issued shares (m)
+852 2825 1862
Chow Tai Fook Holdings (89%)
12m high/low (HKD)
ADR closing price (USD)
Emily Lee
13,922
3m avg daily turnover (USD m)
0
(20)
Sources: Chow Tai Fook; BNP Paribas estimates
November 2014
Mkt cap (USD m)
20
FY17E
(47)
(%)
1 Month
20,000
0
FY16E
Rel to MSCI Hong Kong
Absolute (%)
40,000
FY15E
Oct-14
10.00
40
FY14
Jul-14
13
60,000
FY13
Apr-14
15.00
ADR ticker
FY12
21
YE Mar (HKD m)
Sources: Bloomberg consensus; BNP Paribas estimates
14.32/9.93
19.5
10,000
Chow Tai Fook
Emily Lee
1929 HK
Investment thesis
Catalyst
Chow Tai Fook is our preferred pick in the jewellery space.
As the market leader both in Hong Kong and China with over
80 years of operating history, we believe the company is well
positioned to benefit from rising gem-set demand from the
PRC consumers. Growing gem-set sales should translate into
higher long-term gross margins for jewellery retailers.
Stronger-than-expected recovery in consumer sentiment
both in Hong Kong and China.
We expect sequential SSS improvement from 3QFY15 for
both Hong Kong and China, mainly due to base effect. We
forecast SSS growth of 7.5% in 2HFY15 for Hong Kong,
Macau and Taiwan and 9% for China.
Prolonged protests in Hong Kong could negatively impact
Hong Kong retailers’ performance, due to lower traffic and
depressed consumer sentiment.
Risks to our call
Greater-than-expected volatility from gold price movement
which could affect gross margin of gold products.
Management targets new store additions of about 200 pa in
FY15-17, focused on tier three and tier four cities in China.
Key assumptions
Company background
Chow Tai Fook retails jewellery and watches. The company
operates stores in Mainland China, Hong Kong and Macau as
well as other Asian countries such as Singapore, Malaysia and
Taiwan. The company has an extensive retail network, with
over 2,000 points of sale in more than 470 cities.
New stores
PRC SSSG (%)
HK SSSG (%)
FY15E
FY16E
201
202
(5.5)
8.0
(16.0)
13.8
% of total - gem-set
24.7
25.0
% of total - platinum/karat gold products
13.5
13.7
% of total - gold products
57.5
57.0
4.3
4.3
% of total - watches
Source: BNP Paribas estimates
Principal activities (FY15E revenue split on our estimates)
Gross profit sensitivity
Gem-set jewellery (24.7%)
Gold product weight (%)
Gross margin of gold (%)
FY15E
FY16E
FY15E
57.5
57.0
62.5
62.0
52.5
52.0
5.0
5.0
(5.0)
(5.0)
15.0
14.4
14.8
Change (%)
Gold products (57.5%)
Gross profit (HKD m)
Change (%)
Watches (4.3%)
Key executives
22,215
25,629
------- Bull ------FY16E
10.0
10.0
15.0
(4.4)
(4.8)
0.6
0.2
18,588
21,331
23,958
27,375
(16.3)
(16.8)
7.8
6.8
Age
Joined
Dr. Cheng Kar-Shun, Henry
67
1971
Chairman and Executive
Director
Mr. Wong Siu-Kee, Kent
58
1977
Executive Director
Mr. Cheng Chi-Kong, Adrian
34
2007
Executive Director
Mr. Cheng Chi-Heng, Conroy
36
2007
Executive Director
Mr. Chan Sai-Cheong
51
1985
Executive Director
22
------ Bear -------
FY16E
Change (%)
Platinum/karat gold products
(13.5%)
http://www.chowtaifook.com
------- Base -----FY15E
Title
A 5% increase/decrease in gold product weight, all else
equal, would decrease/increase FY15/16E gross profit by
6.8%/6.5%.
A lower gold gross profit margin at 10% would decrease
FY15/16E gross profit by 8.8%/9.5%.
A higher gold gross profit margin at 15% would increase
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Market leader with the highest profitability
Chow Tai Fook (CTF) is our top pick in the jewellery retail space as we believe it has
the strongest gem-set product offerings and campaigns that should allow it to benefit
from rising demand for diamonds and other gem-set products. While gold product
sales will continue to take up a big portion of jewellery retailers’ sales in the short to
medium term, we believe CTF’s strategy of substantially hedging its gold exposure
will mean it has the lowest margin fluctuation. Its strategy of open 200 new stores per
annum should allow it to take market share from peers.
Acquisition of Hearts on Fire
In June 2014, CTF acquired Hearts on Fire for a total consideration of USD150m.
Based on the company’s audited sales of USD105m in 2013, the implied price-tosales of the acquisition is 1.4x.
Hearts on Fire is a luxury brand diamond company offering premium bridal and
fashion jewellery products using The World’s Most Perfectly Cut Diamond. It was
ranked by InDesign Magazine as the third most visible jewellery brand in 2012,
behind Tiffany and Pandora. Hearts of Fire has a global presence with over 500
points of sale (POS) in 31 counters with the US being its largest market and with
80% wholesale and 20% retail.
We believe this acquisition complements CTF’s portfolio and product offerings. It also
showcases CTF’s desire to broaden its sales and reputation by offering higher value
gem-set products. CTF intends to launch Hearts of Fire products in its existing
network in China, which we believe could create long-term benefits for the brand.
2QFY15 operational update
CTF’s 2QFY15 saw SSS retreat 20% (-40% in 1QFY15), still being affected by the
relatively high base of last year resulting from the ‘gold rush’, where sales of gold
spiked following the sharp retreat in gold prices in April 2013. By market, SSS in
Hong Kong, Macau and other Asian markets fell 29% (-50% in 1QFY15) while SSS
in China fell 12% (-28% in 1QFY15). The better performance in China was mainly
due to the relatively lower base effect, as well as a better consumer sentiment in
China as reflected in stronger sales of gem-set jewellery. By product, the SSS of
gem-set jewellery was flat y-y (+2% in 1QFY15) and that of products fell 33% (-56%
in 1QFY15).
We have seen continued improvement in terms of product mix, with the proportion of
gold products falling to 49% of total sales (50% in 1QFY15, 61.2% in FY14), which
should be favourable for gross margin expansion.
China to be the key growth engine
CTF opened its first point of sale in Mainland China in Beijing in 1998 and has since
achieved substantial growth in this market (sales up 33.3% CAGR in FY09-14), now
the group’s biggest market. For FY14, Mainland China accounted for 54.5% of group
revenue. The retail network of CTF comprises more than 2,100 points of sale, with
nearly 95% in Mainland China.
While the outlook for Hong Kong is still relatively misty for local retailers, we believe
CTF’s large contribution from China should allow it to perform better than peers. We
believe the listed jewellery retailers are not directly impacted by the anti-corruption
campaign in China as sales over RMB100,000 accounts for less than 4% of total
China sales.
23
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Hong Kong: rentals remain the key challenge
The company had 86 POS in Hong Kong as at FY14 and management believes this
is optimal, but that it would consider closing some if they not perform.
Rents remain the key challenge in Hong Kong. We expect CTF’s rental reversion to
be 30-40% in FY15, slightly better than the 40-50% increase last year. We expect
rents-to-sales to be 2.5% in FY15, up from 2.3% in FY14.
Retail network
CTF’s retail network comprises both retail and wholesale channels. It uses different
distribution formats, including self-operated and franchisees. The gross floor area of
its POS in Hong Kong and Macau is typically c170sq m; in the PRC it is c80sq m. Its
flagship stores, however, are significantly larger at c400sq m in Hong Kong and
Macau, and c1,000sq m in the PRC.
EXHIBIT 1: Retail network
FY08
PRC total POS
821
Change (%)
PRC jewellery POS
752
Change (%)
Tier 1
146
Change (%)
Tier 2
405
Change (%)
Tier 3 and others
201
Change (%)
PRC watch POS
FY09
FY10
FY11
FY12
FY13
FY14
965
1,115
1,287
1,532
1,731
1,965
17.5
15.5
15.4
19.0
13.0
13.5
895
1,034
1,206
1,448
1,640
1,828
19.0
15.5
16.6
20.1
13.3
11.5
166
174
188
207
227
234
13.7
4.8
8.0
10.1
9.7
3.1
470
536
611
726
786
847
16.0
14.0
14.0
18.8
8.3
7.8
259
324
407
515
627
747
28.9
25.1
25.6
26.5
21.7
19.1
-
-
64
71
84
91
137
10.9
18.3
8.3
50.5
69
70
81
81
95
105
112
1.4
15.7
0.0
17.3
10.5
6.7
1,035
1,196
1,368
1,627
1,836
2,077
16.3
15.6
14.4
18.9
12.8
13.1
Change (%)
Hong Kong, Macau & other
Asian Markets
Change (%)
Total POS
Change (%)
890
Source: Chow Tai Fook
Store format
Self-operated POS accounted for 64.7% of the group’s total jewellery POS in FY14
(68.2% in FY13). Using this operating format allows the company to maintain control
over brand and marketing strategies, as well as providing greater operational control
and access to end customers. Over 85% of its self-operated POS are operated as
concessionaire counters located in department stores.
Outlook
Management guided that it would continue to open 200 new POS per year in China,
with 60-70% located in tier three and four cities. The proportion of franchisee POS is
expected to increase as the company relies more on franchisees’ local knowledge to
find suitable retail locations in lower tier cities.
24
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
EXHIBIT 2: Tsim Sha Tsui K11 store layout
th
EXHIBIT 3: Wuhan – Chow Tai Fook’s 2000 POS
25
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Product category
CTF has a wide range of jewellery products, encompassing jewellery made from
different raw materials and spanning mass luxury to high-end luxury.
EXHIBIT 4: Product mix – FY14
Watches
4.3%
Gem-set
jewellery
21.1%
Platinum/karat
gold products
13.4%
Gold products
61.2%
Its average selling price trended lower in FY14, affected by the anti-corruption
campaign by the Chinese government, which led to an increase in sales of more
affordable products.
EXHIBIT 5: Chow Tai Fook's average selling price
China gem set (HKD)
FY13
FY14
7,155
6,743
Change (y-y %)
HK gem set (HKD)
(5.8)
15,355
Change (y-y %)
China gold (HKD)
(8.4)
4,195
Change (y-y %)
HK gold (in HKD)
14,062
3,503
(16.5)
6,451
Change (y-y %)
5,417
(16.0)
26
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
EXHIBIT 6: Gem-set product
EXHIBIT 7: Gem-set product
EXHIBIT 8: Caprice collection
EXHIBIT 9: Bao Bao family collection
27
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
EXHIBIT 10: Reflection of Siem
EXHIBIT 11: Reflection of Siem
28
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Production and procurement
CTF’s jewellery park in Wuhan, Hubei commenced production in Sep 2014 when it
completed the first stage of construction of the first phase production facilities. The
jewellery park serves as an integrated production and development base, comprising
six main functions, namely jewellery production, logistics and distribution, sales
exhibition and tourism, training, e-commerce and jewellery business support.
The jewellery park is targeted to reach an annual production capacity of 1m jewellery
pieces by the end of FY15. An investment of HKD2.6b has been allocated for the first
phase of the project, of which HKD130.2m had already been spent as at 31 March
2014 (c.77% on land and construction and 23% on production and office equipment).
The temporary plant for training delivers a monthly production of over 50,000
jewellery pieces, and has distributed over 270,000 pieces to POS across the country
since June 2013. Monthly production is targeted to reach over 200,000 pieces in
2015 with total annual production reaching 1m by the end of FY15.
In addition to the jewellery park, the company has 12 factories (nine jewellery
factories and three diamond cutting/polishing factories). Of its nine jewellery
factories, one is in Hong Kong (produces gem-set products), four are in Shunde,
PRC (gem-set jewellery, platinum/karat gold and gold products), and four are in
Shenzhen (gem-set jewellery, platinum/karat gold and gold products). Of its gem-set
jewellery products, 74.4% were produced in house in FY14. From order to POS
delivery, the production lead time is 30-50 working days.
Around 60% of its polished diamonds used are purchased from trade dealers and
wholesalers. The remaining 40% are produced from rough diamonds polished at its
factories. The company is a DTC Sightholder.
29
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Financials
Turnover analysis
We expect turnover to post a 13.3% CAGR over FY15-17 driven by: 1) 8.2-9.7% new
store addition; 2) -5.5% to +10.5% SSS growth in the PRC and -16.0 to +13.8%
growth in Hong Kong, Macau and Taiwan; and 3) a 15.0-40.0% increase in
wholesale turnover.
EXHIBIT 12: Turnover analysis
(HKD m)
Turnover (LHS)
(%)
120,000
70
60
100,000
50
80,000
40
60,000
30
20
40,000
10
20,000
0
0
(10)
FY12
FY13
FY14
FY15E
FY16E
FY17E
Gross margins and operating margins
Gross margin has been relatively stable for CTF as it hedges 70% of its gold
exposure and hence its margin fluctuation from gold price movement is relatively
small compared to peers’. We expect its gross margin to gradually improve to 29.0%
in FY17, from 27.3% in FY14, benefiting from the favourable product mix shift to
higher margin gem-set products.
We expect its operating margin to be flattish y-y in FY15 at 12.4% before picking up
in FY16 to 13.0% due to the product mix shift and slower growth in rental costs in
Hong Kong.
EXHIBIT 13: Gross margin and operating margin trend
(%)
35
Gross profit margin
Operating profit margin
30
25
20
15
10
5
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Net profit analysis
We forecast a net profit CAGR of 15.8% in FY15-17. The swifter growth in net profit
than turnover growth is due to gross margin expansion expected from favourable
product mix shift as well as the expected slowdown in growth for rental costs.
30
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
EXHIBIT 14: Net profit analysis
(HKD m)
Net profit (LHS)
(%)
12,000
100
10,000
80
8,000
60
6,000
40
4,000
20
2,000
0
0
(20)
FY12
FY13
FY14
FY15E
FY16E
FY17E
Inventory
In FY14, 44.8% of total inventory was gem sets, 36.5% was gold products and the
rest was platinum/karat gold products and watches. Inventory turnover days were
slightly higher than its peers at 227 and we attribute this to its larger amount of gemset products in its inventory which has a longer turnover period than gold.
Capex
Management expects capex to be HKD3.5b-4.0b in FY15 earmarked for its jewellery
park project in Wuhan and spending on new stores and store renovations.
Management expects to invest HKD2.6b in the jewellery park up to FY18.
31
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Valuation and recommendation
We initiate coverage on CTF with a BUY rating and target price of HKD12.45, based
on a target CY15E P/E of 15x. Our target multiple is in line with the company’s longterm average P/E, but it is higher than the average valuation of 10.4x for Hong Kong
retailers and 12.7x for China retailers, based on our own and Bloomberg consensus
estimates. In our view, CTF’s premium valuation is reasonable given its market
leader positions in Hong Kong and China with larger scale, higher margins and
higher profitability than peers. We also anticipate further market share gains from the
company’s aggressive store expansion and potential market share gains in the gemset segment.
EXHIBIT 15: Historical forward P/E
(x)
25
20
+1 SD
Avg
15
-1 SD
10
1 yr: 15.20x, 3 yrs: 15.50x.
5
0
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Sources: Bloomberg; BNP Paribas estimates
32
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Corporate governance
Board structure
Number of Independent Directors (ID)
15
Percentage of IDs in the board
33%
ID participation/attendance at board meetings
4/4 (100%)
ID participation in audit/remuneration committees
100%/60%
ID terms (years of service, re-election/replacement procedures)
No more than three years; rotation at least once every three years
Sources: Chow Tai Fook; BNP Paribas
Additional comments: N.A.
Audit Practices
Auditor
Deloitte
Length of service
3
Reporting incidents
nil
Fee track record
Fee paid to auditor in FY14 was HKD6.8m, up 3% y-y
Policy on change of Audit firm
Subject to annual assessment by an audit committee
Compensation and remuneration
Directors' remuneration vs. earnings/ROE/share performance
HKD62.7m in FY14, up 9% y-y, accounting for 0.9% of earnings
Changes/stability in senior management
Most of the senior management team has been a part of the company for decades
Incidents of termination of senior management
nil
Track record on Insider sales
nil
Shareholders' rights
Communication - shareholder participation in AGMs/EGMs
1
Related party transactions
Subject to annual audit; reviewed by INEDs
Voting issues - policies, incidents of rejected proposals
All ordinary resolutions were passed by poll
33
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Financial statements
Chow Tai Fook
Profit and Loss (HKD m) Year Ending Mar
2013A
2014A
2015E
2016E
2017E
Revenue
57,434
77,407
77,331
88,883
99,229
(40,676)
(55,647)
(54,349)
(62,296)
(69,305)
16,758
21,760
22,981
26,587
29,924
324
482
506
531
558
(9,182)
(12,245)
(13,141)
(14,643)
(16,406)
Operating EBITDA
7,899
9,997
10,347
12,475
14,075
Depreciation
(475)
(608)
(767)
(958)
(1,180)
Cost of sales ex depreciation
Gross profit ex depreciation
Other operating income
Operating costs
Goodwill amortisation
0
0
0
0
0
Operating EBIT
7,425
9,389
9,580
11,517
12,895
Net financing costs
(466)
(330)
(223)
(353)
(406)
Associates
0
(3)
0
0
0
Recurring non operating income
0
0
0
0
0
Non recurring items
Profit before tax
Tax
0
0
0
0
0
7,095
9,163
9,227
11,112
12,428
(1,417)
(1,714)
(1,845)
(2,233)
(2,548)
Profit after tax
5,678
7,449
7,382
8,878
9,881
Minority interests
(173)
(177)
(195)
(214)
(236)
Preferred dividends
0
0
0
0
0
Other items
0
0
0
0
0
5,505
7,272
7,187
8,664
9,645
Reported net profit
Non recurring items & goodwill (net)
0
0
0
0
0
5,505
7,272
7,187
8,664
9,645
Recurring EPS *
0.55
0.73
0.72
0.87
0.96
Reported EPS
0.55
0.73
0.72
0.87
0.96
DPS
0.22
0.36
0.36
0.43
0.48
Recurring net profit
Per share (HKD)
Growth
Revenue (%)
1.5
34.8
(0.1)
14.9
11.6
Operating EBITDA (%)
(11.4)
26.6
3.5
20.6
12.8
Operating EBIT (%)
(12.9)
26.5
2.0
20.2
12.0
Recurring EPS (%)
(19.6)
32.1
(1.2)
20.6
11.3
Reported EPS (%)
(19.6)
32.1
(1.2)
20.6
11.3
Gross margin inc depreciation (%)
28.4
27.3
28.7
28.8
29.0
Operating EBITDA margin (%)
13.8
12.9
13.4
14.0
14.2
Operating EBIT margin (%)
12.9
12.1
12.4
13.0
13.0
9.6
9.4
9.3
9.7
9.7
Effective tax rate (%)
20.0
18.7
20.0
20.1
20.5
Dividend payout on recurring profit (%)
40.0
49.5
50.0
50.0
50.0
Interest cover (x)
22.5
42.1
27.2
28.4
27.7
Operating performance
Net margin (%)
Inventory days
255.8
229.1
299.8
294.4
304.2
Debtor days
29.5
20.9
23.0
21.5
21.8
Creditor days
16.1
19.3
29.1
28.6
29.1
Operating ROIC (%)
18.5
20.3
15.9
16.4
15.7
ROIC (%)
18.0
19.6
15.5
16.0
15.4
ROE (%)
17.8
20.7
18.3
19.7
19.6
ROA (%)
13.1
14.5
11.7
12.5
12.4
*Pre exceptional, pre-goodwill and fully diluted
Revenue By Division (HKD m)
2013A
2014A
2015E
2016E
2017E
Gem-set jewellery
13,165
16,332
19,101
22,221
25,105
Platinum/karat gold products
Gold products
Watches
8,339
10,358
10,440
12,177
13,694
32,955
47,360
44,465
50,664
56,263
2,976
3,357
3,325
3,822
4,168
34
BNP PARIBAS
28 OCTOBER 2014
Chow Tai Fook
Emily Lee
1929 HK
Chow Tai Fook
Cash Flow (HKD m) Year Ending Mar
2013A
2014A
2015E
2016E
2017E
5,505
7,272
7,187
8,664
9,645
Depreciation
475
608
767
958
1,180
Associates & minorities
183
180
195
214
236
Other non-cash items
23
81
539
669
792
Recurring cash flow
6,186
8,141
8,687
10,505
11,854
Change in working capital
3,849
(13,496)
(3,620)
(6,859)
(7,923)
0
0
0
0
0
(1,174)
(1,368)
(3,552)
(2,487)
(2,536)
8,861
(6,723)
1,515
1,159
1,394
(41)
0
0
0
0
0
0
0
0
0
21
25
0
0
0
Net cash flow
8,842
(6,698)
1,515
1,159
1,394
Equity finance
139
72
23
25
28
(10,686)
7,658
(1,383)
(1,790)
(1,899)
(1,705)
1,032
154
(606)
(478)
1.19
Capex - maintenance
Capex - new investment
Free cash flow to equity
Net acquisitions & disposals
Dividends paid
Non recurring cash flows
Debt finance
Movement in cash
Per share (HKD)
Recurring cash flow per share
0.62
0.81
0.87
1.05
FCF to equity per share
0.89
(0.67)
0.15
0.12
0.14
2013A
2014A
2015E
2016E
2017E
Balance Sheet (HKD m) Year Ending Mar
Working capital assets
31,472
48,088
52,356
60,139
68,923
Working capital liabilities
(3,049)
(6,485)
(6,302)
(7,005)
(7,639)
Net working capital
28,423
41,603
46,054
53,135
61,284
Tangible fixed assets
2,155
3,054
5,839
7,368
8,724
30,578
44,657
51,894
60,503
70,008
Goodwill
0
0
0
0
0
Other intangible assets
0
0
0
0
0
Investments
0
0
0
0
0
Other assets
1,287
1,209
1,246
1,286
1,330
Operating invested capital
Invested capital
31,865
45,866
53,139
61,789
71,338
Cash & equivalents
(8,305)
(9,467)
(9,621)
(9,016)
(8,538)
5,836
17,086
19,649
22,597
25,986
0
0
0
0
0
(2,469)
7,620
10,028
13,581
17,448
694
633
652
671
691
0
0
0
0
0
32,926
37,173
41,517
46,380
51,806
Short term debt
Long term debt *
Net debt
Deferred tax
Other liabilities
Total equity
Minority interests
935
1,279
1,474
1,688
1,924
Invested capital
32,337
46,930
53,896
62,546
72,095
* includes convertibles and preferred stock which is being treated as debt
Per share (HKD)
Book value per share
3.29
3.72
4.15
4.64
5.18
Tangible book value per share
3.29
3.72
4.15
4.64
5.18
Net debt/equity (%)
(7.3)
19.8
23.3
28.3
32.5
Net debt/total assets (%)
(5.7)
12.3
14.5
17.5
19.9
4.5
2.4
2.4
2.3
2.3
31.5
(23.0)
15.4
10.0
9.4
Financial strength
Current ratio (x)
CF interest cover (x)
Valuation
2013A
2014A
2015E
2016E
2017E
Recurring P/E (x) *
19.6
14.9
15.0
12.5
11.2
Recurring P/E @ target price (x) *
22.6
17.1
17.3
14.4
12.9
Reported P/E (x)
19.6
14.9
15.0
12.5
11.2
Dividend yield (%)
2.0
3.3
3.3
4.0
4.5
P/CF (x)
17.5
13.3
12.4
10.3
9.1
P/FCF (x)
12.2
(16.1)
71.3
93.2
77.5
Price/book (x)
3.3
2.9
2.6
2.3
2.1
Price/tangible book (x)
3.3
2.9
2.6
2.3
2.1
EV/EBITDA (x) **
13.4
11.2
11.4
9.7
8.9
EV/EBITDA @ target price (x) **
15.4
12.8
13.0
11.1
10.1
3.3
2.5
2.2
2.0
1.8
EV/invested capital (x)
* Pre exceptional, pre-goodwill and fully diluted
** EBITDA includes associate income and recurring non-operating income
35
BNP PARIBAS
28 OCTOBER 2014
28 OCTOBER 2014
INITIATION
12 HONG
HONG
KONG / RETAILING
KONG
CHOW SANG SANG
BUY
116 HK
TARGET PRICE
HKD21.60
CLOSE
HKD18.82
UP/DOWNSIDE
+14.8%
PRIOR
TPIN TP
CHANGE
HKD21.56
%
MARKET RECS
TARGET PRICE (%)
(1.7)
POSITIVE
5
EPS 2014 (%)
(6.7)
NEUTRAL
11
EPS 2015 (%)
(4.8)
NEGATIVE
1
KEY STOCK DATA
Solid and prudent strategy
n
n
n
n
China penetration set to improve
Chow Sang Sang had 300 stores in China in 1H14, covering 97
cities. Management expects to open 50 stores per year in China, with
60% in cities where it already has a presence. Key cities like Beijing
and Shanghai remain under-penetrated with only 13-15 stores.
Gem-set segment the long-term growth engine
The company continues to differentiate itself from peers by offering
in-house product lines for its gem-set segment. This should be
beneficial in the long run, as Chinese consumers upgrade their
preference from gold to gems. We expect its gem-set SSS in China
to see double digit growth in 2H14, with Hong Kong fairly flat.
Organic growth in Hong Kong
The company had 47 Hong Kong stores as at 1H14, and we expect
this count to remain static. Its growth in Hong Kong will be organic, in
our view, and we project SSS growth of 8% in FY15 and 10% in
FY16, after a 20% decline in FY14 as the gold rush effect fades.
A prudent operating strategy: BUY with a TP of HKD21.60
We initiate coverage with a BUY rating. Our TP of HKD21.60 is
based on 11x FY15E PER, representing a 26.7% discount to CTF
(1929 HK; BUY), which we think is reasonable due to its smaller
scale and profitability. We like Chow Sang Sang for its prudent
operating strategy, including its self-operated business model, careful
expansion of 50 stores pa and 40-50% hedging ratio
Turnover (LHS)
(HKD '000)
Net profit (LHS)
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
2013A
2014E
2015E
2016E
Revenue
25,142
21,138
24,330
28,448
1,219
1,122
1,329
1,547
Recurring EPS (HKD)
1.80
1.66
1.96
2.28
EPS growth (%)
23.7
(8.0)
18.5
16.4
Recurring P/E (x)
10.5
11.4
9.6
8.2
Dividend yield (%)
3.6
3.3
3.9
4.5
EV/EBITDA (x)
8.1
8.3
7.1
6.3
Rec. net profit
Price/book (x)
1.6
1.5
1.3
1.2
Net debt/Equity (%)
10.2
3.2
6.2
8.5
ROE (%)
16.3
13.5
14.5
15.5
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
30.00
(8)
25.00
(28)
20.00
(48)
15.00
10.00
(HKD)
Chow Sang Sang
(68)
(%)
1 Month
3 Month
12 Month
Absolute (%)
(4.2)
(8.4)
(21.6)
(7.5)
(6.0)
Next results
(28.6)
March 2015
Mkt cap (USD m)
1,642
0.6
Free float (%)
44
(%)
Major shareholder
60
12m high/low (HKD)
Everwin (18%)
25.70/17.48
16.4
40
ADR ticker
20
0
Issued shares (m)
(20)
FY11
FY12
FY13
Sources: Company data; BNP Paribas estimates
Emily Lee
+852 2825 1862
36
YE Dec (HKD m)
FY14E
FY15E
FY16E
677
Chow Sang Sang
Emily Lee
116 HK
Investment thesis
Catalyst
We like Chow Sang Sang for its prudent strategy and we
appreciate its effort in growing its gem set business as
reflected from its store image uplift and promotional strategy
to focus on gem-set products. Chow Sang Sang’s gem-set
SSS has been growing in the mid-teens in China and we
expect the trend to continue.
Swifter-than-expected recovery in Hong Kong and China
consumer sentiment.
Chow Sang Sang’s retail network remains underpenetrated in
China and we see ample room for its retail network to grow.
The rising middle class in China, and a faster-than-expected
shift in consumer preference from gold to gems.
A slowdown in rental growth in Hong Kong could benefit
local retailers and could lead to faster-than-expected growth
in operating margin.
Risks to our call
A slower-than-expected increase in gem-set demand, which
could slow down the pace of group-level gross margin
expansion.
Gold price volatility could lead to lower ASPs and lower
gross margins for gold products.
Key assumptions
Company background
Chow Sang Sang is a jewellery retailer in mainland China,
Hong Kong, Macau and Taiwan. The company owns and
operate every one of its shops and has never entered into any
licensing or franchising arrangements on its name. At the end
of July 2014, the company has 301 stores in mainland China
covering 97 cities; 54 in HK, 21 in Taiwan and five in Macau.
FY14E
New stores (nos)
PRC SSSG (%)
HK SSSG (%)
FY15E
50
50
(8.0)
12.0
(20.0)
8.0
Gold as % of sales
61.0
60.0
Gem set as % of sales
35.0
36.0
4.0
4.0
Watch as % of sales
Principal activities (revenue split in FY15E)
Jewellery retail (84.77%)
------- Base -------
------- Bear -------
FY14E
FY15E
FY14E
FY15E
61.0
60.0
66.0
65.0
56.0
55.0
5.0
5.0
(5.0)
(5.0)
10.0
10.0
15.0
15.0
(3.0)
(3.0)
2.0
2.0
3,787
4,464
4,898
5,743
(14.3)
(14.0)
10.8
10.6
Change (%)
Wholesale of precious metals
(14.2%)
13.0
13.0
Change (%)
------- Bull ------FY14E
FY15E
Other business (1.03%)
Change (%)
Key executives
5,192
Age
Since
Title
Mr. Vincent CHOW
Wing Shing
67
1983
Executive Director, Chairman
Dr. CHOW Kwen Lim
87
1986
Executive Director, Co-Founder
Dr. Gerald CHOW King
Sing
57
1988
Executive Director
Mr. Winston CHOW
Wun Sing
56
1984
Executive Director, Deputy General
Manager
http://www.chowsangsang.com
37
4,419
being equal, would decrease/increase FY14/15E gross
profit by 6.3%/6.2%.
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
A name with a long history
Chow Sang Sang has a 76-year history and high brand equity. Founded in 1934,
Chow Sang Sang has transformed into a reputable jewellery retailer with
geographical coverage spanning Hong Kong, China, Taiwan and Macau.
Management has opted to expand its geographical reach through a self-operated
store format. This approach is intended to retain better overall control and to
safeguard its brand prestige.
Chow Sang Sang engages in four major businesses:
Jewellery retail
§
One of the largest operators, with 380 jewellery retail stores in Greater China
under the “Chow Sang Sang” and “Emphasis Jewellery” brands.
§
The mainstay is gem-set and gold jewellery.
§
This business generated 88.0% of total revenue for 1H14 and 96.9% of total
profit.
Precious metals wholesale
§
Trading service for physical metals
§
High-volume, low-margin, minimal-risk business operated on a commission basis.
§
Only generated 10.7% of total revenue in 1H14 and 1.5% of total profit.
Securities and futures broking
§
Boutique retail brokerage with eight Hong Kong offices and an internet platform;
§
Minimal risk operating on a commission basis;
§
No proprietary trading;
§
Generated 0.2% of total revenue in 1H14.
Other investments – passive long-term investments
§
Investment properties;
§
4.95m shares of HK Exchanges (388 HK; BUY), valued at HKD 734.5m as at
1H14.
§
Generated 1.1% of total revenue in 1H14.
38
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
EXHIBIT 1: Bejing Sanlitun store
EXHIBIT 2: Hong Kong Tsim Sha Tsui store
Source: Chow Sang Sang
Hong Kong
Chow Sang Sang had 47 stores in Hong Kong as at 1H14. Management does not
expect to see major changes in store count in Hong Kong and will instead focus
efforts on store relocation/location upgrades.
Rent accounted for 3.5% of the group’s total sales in FY13. While management
shared that landlords have become more open to negotiating on rents, there is only
so much room, especially for stores located in prime area like Canton Road in Tsim
Sha Tsui. We expect rental reversion to increase by 30-40% in FY14.
China
Chow Sang Sang’s retail store network is substantially smaller than its peers, mainly
due to its reluctance to use the franchise business model. The company is 100%
self-operated to ensure its stores convey a consistent image and product quality to
customers, which should be beneficial over the long run, in our view.
Management aims to open 50 stores per year, with 60% of these located in cities in
China in which it already has a presence. This is because Chow Sang Sang has
fewer than 15 stores in tier-1 cities like Beijing, Shanghai and Guangzhou, thus it
would like to further penetrate these cities to gain market share.
Products
The ‘gold rush’ of 2Q13 led to a substantial increase in sales of gold, with gold
products accounting for 69.0% of total turnover in FY13. Product mix normalization
was fast for Chow Sang Sang, with the mix of gold normalizing to 62% of total sales
by 1H14. We expect the mix of gem-set products to gradually increase from 27% in
FY13 to 36% by FY16.
39
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
116 HK
Emily Lee
EXHIBIT 3: Infini Love
EXHIBIT 4: Diamond In Motion
EXHIBIT 5: Wedding series
EXHIBIT 6: Wedding series
40
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
Financials
Turnover analysis
We expect a 16.0% CAGR in turnover over FY14-16E, driven by (1) 10.1-13.6% new
store additions, (2) -8.0% to 15.0% SSS growth in the PRC and -20.0 to 10.0%
growth in Hong Kong & Macau, and (3) a 40% decline in wholesale and other
business in FY14, to 10% growth in FY15.
Turnover (LHS)
(HKD '000)
(%)
30,000,000
50
25,000,000
40
30
20,000,000
20
15,000,000
10
10,000,000
0
5,000,000
(10)
0
(20)
FY11
FY12
FY13
FY14E
FY15E
FY16E
Sources: Chow Sang Sang; BNP Paribas estimates
Gross and operating margin
Group level gross and operating margins look low compared to peers’ due to Chow
Sang Sang’s precious metals wholesale business, which is high volume but low
margin in nature. The operating margin for its wholesale business was only 1.4% in
FY13.
We expect Chow Sang Sang’s group level gross margin to improve driven by an
expected increase in gem-set sales mix. We project its group level gross margin to
improve to 21.7% by FY16 from 20.9% in FY14.
Management guided that landlords are currently more open to negotiate on rents due
to the weak overall retail environment in Hong Kong, except for rents on stores
located in prime locations like Canton Road. We expect rental reversion to increase
by 30-40% in FY14. We expect staff costs to rise in the high single digits in FY14-16.
Front line staff’s payroll remains 60% commission and 40% fixed.
EXHIBIT 8: Gross and operating margin trend
(%)
Gross profit margin
25
20
15
10
5
0
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
41
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
Net profit analysis
We project a net profit CAGR of 17.4% over FY14-16. The swifter growth in net profit
than turnover is due to the expected gross margin expansion from a favourable
product mix shift as well as the expected slowdown in growth for rental costs.
(HKD '000)
Net profit (LHS)
(%)
1,800,000
50
1,600,000
40
1,400,000
30
1,200,000
1,000,000
20
800,000
10
600,000
0
400,000
(10)
200,000
0
(20)
FY11
FY12
FY13
FY14E
FY15E
FY16E
Inventory
We expect inventory to rise in conjunction with the company’s plan to add new stores
in China. We expect inventory turnover days to increase from 117 days in FY13 to
152 days in FY14 as the company stocks up more on gem-set products, which
usually have longer turnover days than gold products.
Capex
Capex is projected by management at around HKD200m in FY15, mainly for new
store expansion and store refurbishments.
42
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
We believe Chow Sang Sang has a prudent operating strategy with low operational
risks. We initiate coverage on Chow Sang Sang with a BUY recommendation. Our
target price of HKD21.60 is based on 11x FY15E PER. Our target multiple is in line
with the average valuation for Hong Kong retailers and Chow Sang Sang’s long-term
historical forward PER. We value Chow Sang Sang at a 26.7% discount to Chow Tai
Fook (1929 HK; BUY) which we believe is reasonable due to its relatively smaller
scale and lower profitability. We value Chow Sang Sang at a 10% premium to Luk
Fook (590 HK; HOLD) which we believe fair since we think Chow Sang Sang is
better positioned to capture the rising demand on gem sets due to its better brand
recognition and product quality.
EXHIBIT 10: Historical forward PER
(x)
25
20
15
+1 SD
Average
10
-1 SD
5
0
Oct-07
Jul-08
Apr-09
Jan-10
Oct-10
Jul-11
Apr-12
Jan-13
Oct-13
Jul-14
Source: Bloomberg
43
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
Board structure
4
36%
4/4 (100%)
67%
No more than three years; rotation at least once every three years
Sources: Chow Sang Sang; BNP Paribas
Audit Practices
Auditor
Ernst & Young
Length of service
>6 years
Reporting incidents
nil
Fee track record
Audit fee in FY13 was HKD4.3m, up 15% y-y
Reviewed every year with regard to audit fees, process and effectiveness
HKD14m in 2013, up 21% y-y, accounting for 1.16% of 2013 earnings
Most of the senior mgmt. served more than five years in the company
nil
nil
Additional comments: The remuneration of Directors consists of a basic annual fee
with additional payments for serving on Committees. It is not set individually. EDs
receive additional pay packages by virtue of their positions in management. It is not
linked to earnings/ROE/share performance.
1
Subject to annual audit; need pre- approval of INEDs;
all ordinary resolutions were passed by poll
44
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
Chow Sang Sang
Profit and Loss (HKD m) Year Ending Dec
2012A
2013A
2014E
2015E
2016E
Revenue
18,260
25,142
21,138
24,330
28,448
(14,688)
(20,767)
(16,544)
(18,963)
(22,095)
3,572
4,375
4,594
5,367
6,354
142
174
178
181
185
(2,318)
(2,839)
(3,167)
(3,680)
(4,374)
Operating EBITDA
1,396
1,710
1,605
1,869
2,164
Depreciation
(140)
(167)
(174)
(176)
(192)
0
0
0
0
0
1,257
1,542
1,431
1,693
1,972
(35)
Operating costs
Operating EBIT
(39)
(32)
(33)
(34)
Associates
Net financing costs
4
2
2
3
3
0
0
0
0
0
Non recurring items
0
0
0
0
0
Profit before tax
1,222
1,512
1,400
1,661
1,940
Tax
(233)
(288)
(273)
(327)
(388)
989
1,224
1,127
1,334
1,552
Profit after tax
Minority interests
(4)
(5)
(5)
(5)
(5)
Preferred dividends
0
0
0
0
0
Other items
0
0
0
0
0
985
1,218
1,122
1,329
1,547
Reported net profit
0
0
0
0
0
985
1,219
1,122
1,329
1,547
Recurring EPS *
1.46
1.80
1.66
1.96
2.28
Reported EPS
1.45
1.80
1.66
1.96
2.28
DPS
0.55
0.68
0.61
0.73
0.85
Per share (HKD)
Growth
6.4
37.7
(15.9)
15.1
16.9
Revenue (%)
(11.2)
22.5
(6.2)
16.4
15.8
16.5
Operating EBIT (%)
(14.2)
22.7
(7.2)
18.3
Recurring EPS (%)
(9.9)
23.7
(8.0)
18.5
16.4
Reported EPS (%)
(9.9)
23.7
(7.9)
18.5
16.4
18.8
16.7
20.9
21.3
21.7
7.6
6.8
7.6
7.7
7.6
6.9
6.1
6.8
7.0
6.9
Net margin (%)
5.4
4.8
5.3
5.5
5.4
19.1
19.1
19.5
19.7
20.0
37.8
37.8
37.0
37.0
37.0
Interest cover (x)
32.2
48.0
43.5
49.7
55.7
159.2
118.4
153.4
146.6
146.3
Debtor days
Inventory days
16.3
13.5
15.7
13.5
12.6
Creditor days
11.5
10.0
12.6
11.0
10.5
Operating ROIC (%)
14.2
16.5
14.5
15.8
16.2
ROIC (%)
12.4
14.4
12.7
13.9
14.4
ROE (%)
14.7
16.3
13.5
14.5
15.5
ROA (%)
10.2
11.5
9.8
10.7
11.4
2012A
2013A
2014E
2015E
2016E
Jewellery retail
14,861
19,943
17,919
20,800
24,576
3,244
5,001
3,001
3,301
3,631
155
199
219
229
241
Wholesale of precious metals
Other business
45
BNP PARIBAS
28 OCTOBER 2014
Chow Sang Sang
Emily Lee
116 HK
Chow Sang Sang
Cash Flow (HKD m) Year Ending Dec
2012A
2013A
2014E
2015E
2016E
985
1,219
1,122
1,329
1,547
Depreciation
140
167
174
176
192
(4)
(2)
(2)
(3)
(3)
96
(411)
41
32
40
Recurring cash flow
1,217
973
1,335
1,534
1,776
(227)
(125)
(128)
(1,135)
(1,182)
Capex - maintenance
(267)
(280)
(283)
(285)
(291)
0
0
0
0
0
723
568
925
114
302
Dividends paid
Net cash flow
Equity finance
0
0
0
0
0
(408)
(399)
(415)
(491)
(572)
1
11
19
19
20
316
180
528
(358)
(250)
0
0
0
0
0
(275)
140
133
76
45
41
320
662
(283)
(205)
1.80
1.44
1.97
2.27
2.62
1.07
0.84
1.37
0.17
0.45
2012A
2013A
2014E
2015E
2016E
Debt finance
Movement in cash
Per share (HKD)
Balance Sheet (HKD m) Year Ending Dec
7,989
8,407
8,446
9,712
11,123
(1,333)
(1,343)
(1,285)
(1,426)
(1,674)
Net working capital
6,657
7,064
7,161
8,286
9,449
663
779
888
890
901
7,320
7,844
8,049
9,176
10,350
Goodwill
0
0
0
0
0
0
0
0
0
0
901
917
952
990
1,029
Investments
Other assets
197
229
233
235
218
8,419
8,990
9,234
10,401
11,598
Cash & equivalents
(674)
(1,009)
(1,671)
(1,388)
(1,184)
Short term debt
1,265
1,375
1,457
1,479
1,531
606
454
499
509
550
1,198
820
286
600
898
138
152
152
152
152
0
0
0
0
0
7,007
7,935
8,711
9,559
10,454
Invested capital
Long term debt *
Net debt
Deferred tax
Other liabilities
Total equity
Minority interests
76
84
85
90
95
Invested capital
8,419
8,990
9,234
10,401
11,598
Per share (HKD)
10.35
11.72
12.87
14.12
15.44
10.35
11.72
12.87
14.12
15.44
Net debt/equity (%)
16.9
10.2
3.2
6.2
8.5
11.5
7.2
2.3
4.5
6.2
3.3
3.5
3.7
3.8
3.8
19.5
18.7
29.0
4.3
9.5
Financial strength
Current ratio (x)
Valuation
2012A
2013A
2014E
2015E
2016E
Recurring P/E (x) *
12.9
10.5
11.4
9.6
8.2
14.8
12.0
13.0
11.0
9.5
Reported P/E (x)
12.9
10.5
11.4
9.6
8.2
Dividend yield (%)
2.9
3.6
3.3
3.9
4.5
P/CF (x)
10.5
13.1
9.5
8.3
7.2
P/FCF (x)
17.6
22.4
13.8
111.6
42.1
Price/book (x)
1.8
1.6
1.5
1.3
1.2
1.8
1.6
1.5
1.3
1.2
EV/EBITDA (x) **
10.1
8.1
8.3
7.1
6.3
11.4
9.2
9.5
8.1
7.1
1.7
1.5
1.4
1.3
1.2
46
BNP PARIBAS
28 OCTOBER 2014
28 OCTOBER 2014
INITIATION
10 HONG
HONG
KONG / RETAILING
KONG
LUK FOOK
HOLD
590 HK
TARGET PRICE
HKD24.50
CLOSE
HKD22.35
UP/DOWNSIDE
+9.6%
HKD
%
MARKET RECS
TARGET PRICE (%)
(5.3)
POSITIVE
11
EPS 2015 (%)
(13.2)
NEUTRAL
10
EPS 2016 (%)
(18.2)
NEGATIVE
2
KEY STOCK DATA
Inferior margin trend
n
Our least preferred jewellery stock
Luk Fook’s large sales and profit contribution from HK, Macau &
Overseas in FY14 (78% and 74%, respectively) means a relatively
big impact from HK’s pro-democracy protests and weak sentiment.
We see Luk Fook as an inferior choice for gem sets, due to lower
brand recognition. Also, the company’s focus on gold (67.2% of FY14
sales) and low hedging ratio of 20% on gold could mean margin
fluctuation from gold price movements.
YE Mar (HKD m)
2014A
2015E
2016E
2017E
Revenue
19,215
17,522
19,457
21,766
1,872
1,345
1,483
1,636
Recurring EPS (HKD)
3.18
2.28
2.52
2.78
EPS growth (%)
47.2
(28.2)
10.3
10.3
Recurring P/E (x)
7.0
9.8
8.9
8.1
Dividend yield (%)
5.7
4.1
4.5
4.9
EV/EBITDA (x)
5.0
6.8
6.2
5.7
Rec. net profit
Price/book (x)
n
Heavily reliant on gold products and less popular in China
Gold products accounted for 69% of Luk Fook’s FY14 sales in HK
and Macau and 87% in China – both higher than at peers. We think
Luk Fook is relatively less popular with Chinese consumers, due to it
being a more recent brand (less reputable with lower consumer
confidence), having lower A&P spending on gems and a narrower
product range.
Net debt/Equity (%)
ROE (%)
Oct-13
41.00
Jan-14
1.7
1.6
1.4
1.3
(14.0)
(13.3)
(9.7)
(7.1)
26.6
16.9
17.0
16.9
Apr-14
Jul-14
Oct-14
36.00
15
31.00
(5)
26.00
(25)
21.00
n
n
Facing more rental pressure than peers
Luk Fook has accelerated its store expansion since FY13 (five new
stores in Hong Kong in FY13 and eight in FY14). We believe this
could lead to higher rental pressure for Luk Fook than for peers as
growth of retail rents was the highest during the period. Management
has guided that rental reversion so far this year is slightly less than
50%, compared with peers’ 30-40%.
Initiate at HOLD with a target price of HKD24.50
We initiate at HOLD with a target price of HKD24.50, based on 10x
CY15E P/E, a 33% discount to Chow Tai Fook (1929 HK).
(45)
16.00
11.00
(HKD)
Luk Fook
1 Month
3 Month
12 Month
(2.0)
(6.9)
(18.7)
(0.9)
(3.3)
(20.9)
Next results
November 2014
Mkt cap (USD m)
1,697
3.6
Free float (%)
55
LUK FOOK (CONTROL) LTD (40%)
12m high/low (HKD)
Turnover (LHS)
Net profit (LHS)
(%)
60
ADR ticker
20,000,000
40
15,000,000
20
Issued shares (m)
10,000,000
0
(HKD '000)
25,000,000
5,000,000
(20)
0
(40)
FY12
FY13
FY14
Sources: Luk Fook; BNP Paribas estimates
Emily Lee
+852 2825 1862
47
FY15E
FY16E
FY17E
(65)
(%)
Absolute (%)
Major shareholder
33.65/19.44
29.0
589
Luk Fook
Emily Lee
590 HK
Investment thesis
Catalyst
Luk Fook is our least preferred pick in the jewellery retail
space. We believe it will report lower-than-peer margins due
to its high sales concentration in gold products, as well as
higher reliance on the Hong Kong market.
A pick-up in consumer sentiment both in China and Hong
Kong would be beneficial for Luk Fook.
The company has aggressively expanded its retail network in
Hong Kong in the past two years, a period that is widely
considered to be the peak for rents in Hong Kong. This could
lead to higher rental cost pressure for Luk Fook than for its
peers.
The company’s focus on a licensing model in China and low
hedging policy on gold exposure could lead to operational
risks and higher volatility in gross margin for gold products.
Risks to our call
Downside risks to our call include:
1
2
3
A decline in gold price, which would hurt Luk Fook the
most among peers due to its low hedging ratio
Failure to expand its gem-set business, which would
dampen gross margin expansion
Risks of licensees hurting the Luk Fook brand name,
including selling products with low quality
Upside risks to our call include:
1
2
3
A rising gold price would benefit Luk Fook the most
among the jewellery retailers due to its low hedging
ratio
Faster-than-expected growth in gem-set sales could
drive up the gross margin
Accelerated expansion by licensees may allow Luk
Fook to expand its network faster than expected
Key assumptions
Company background
Luk Fook is a jewellery retailer in Hong Kong and mainland
China. The company engages in the sourcing, designing,
wholesaling, trademark licensing and retailing of gold and
platinum jewellery, gold ornaments and gem-set jewellery, with
a total over 1,200 shops in Hong Kong, Macau, Mainland
China, Singapore, the United States, Canada and Australia.
FY15E
FY16E
New store (nos)
167
159
PRC SSSG (%)
(20.5)
8.0
HK SSSG (%)
(14.8)
8.0
Gold as % of sales
63.0
62.5
Gem set as % of sales
37.0
37.5
Principal activities (FY15 revenue split on our estimates)
------ Base ------ ------- Bear -------
Retailing - HK & Macau
(71.07%)
Retailing - PRC (7.63%)
FY16E
FY15E
FY16E
63.0
62.5
68.0
67.5
58.0
57.5
5.0
5.0
(5.0)
(5.0)
10.0
10.0
15.0
15.0
(2.2)
(2.2)
2.8
2.8
3,322
3,691
4,321
4,787
(12.3)
(12.7)
14.1
13.3
Change (%)
Manufacuring and wholesale
(16.89%)
12.2
12.2
Change (%)
Licensing (4.41%)
Change (%)
Key executives
------- Bull -------
FY15E
3,788
4,227
FY15E
FY16E
Age Title
Mr. WONG Wai Sheung
63 Chairman, Executive Director, CEO and
Founder
Mr. TSE Moon Chuen
63 Deputy Chairman, Executive Director, Deputy
General Manager and Co-Founder
Ms. WONG Hau yeung
41 Executive Director, Deputy General Manager
Ms. WONG Lan Sze, Nancy
33 Executive Director and Business Manager
Ms. CHUNG Vai Ping
44 Executive Director and Senior Product
Development Manager
equal, would decrease/increase FY15/16E gross profit by
6.0%/5.8%.
http://www.lukfook.com.hk
48
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Recent developments
2QFY15 operational update
Luk Fook’s 2QFY15 SSS retreated 21% (-54% in 1QFY15), still being affected by the
relatively high base last year resulting from the ‘gold rush’, when sales of gold
products spiked after the gold price retreated sharply in April 2013. By product, gold
SSS retreated 28% (-65% in 1QFY15) and gem-set SSS fell 6% (-19% in 1QFY15).
In Hong Kong & Macau, the group’s core market, SSS fell 20% (-54% in 1QFY15),
with gold down 27% (-65% in 1QFY15) and gem sets 7% (-20% in 1QFY15).
Luk Fook’s China self-operated stores accounted for just 8.6% of total sales, but their
SSS fell 30% (-52% in 1QFY15) driven by a 38% decline in gold products (-59% in
1QFY15), with gem sets up 14% (+7% in 1QFY15).
Golden Week operational update
Over the 2014 Golden Week, SSS grew 3% for Hong Kong & Macau and 28% for
China. The better-than-expected performance, particularly in Hong Kong despite the
ongoing protest, was due to: 1) the gold price remaining relatively low recently,
causing high demand for gold products, and 2) the adverse impact of low traffic in
some shops affected by the protests being mitigated by substantial growth of sales in
other locations.
Acquisition of 3D-Gold stake
Luk Fook acquired a 50% share of CGS from Hong Kong Resources Holdings
(HKRH; 2882HK, Not rated) on 6 June 2014 for a consideration of 50% of the
balance of the audited net asset value less HKD60m. Based on the unaudited
financial statements of CGS as at 30 Sep 2013, the consideration is about
HKD282.7m.
CGS is a wholly owned subsidiary of HKRH principally engaged in trading and selling
gold, platinum and jewellery products in HK, Macau and the PRC through retailing,
franchising and e-commerce under the brand name 3D-GOLD and La Milky Way.
CGS registered a net loss of HKD59.9m in FY13, from a net profit of HKD37.8m in
FY12.
As at 31 December 2013, CGS had seven points of sale in Hong Kong, three in in
Macau and 414 in Mainland China under the brand name 3D-Gold. Of those in
Mainland China, 109 were self-operated and 305 were franchisees. The retail value
of the 3D-Gold brand, that is sales made by all 3D-Gold stores including selfoperated and franchise stores, amounted to HKD1.7b in FY1H14, +9% y-y.
The deal will enable HKRH and Luk Fook to inject HKD100m each into CGS for its
expansion. Part of the proceeds will be used to repay HKRH’s debt and improve its
gearing. At completion, Luk Fook will subscribe for the HKRH convertible bonds with
a principal amount of HKD57m and a conversion price of HKD0.18 per share. The
full conversion of the convertible bonds represents c9.99% of the existing shares of
HKRH. CGS will grant a share option to Luk Fook representing c6.15% of existing
CGS shares after they are exercised. Also at completion, CGS and Luk Fook will
enter into supply and competitiveness enhancement agreements.
Luk Fook believes that the cooperation of the two brands with similar business and
operating strategies will produce synergies to facilitate both parties’ development in
the long run and to achieve economies of scale. Management believes the
acquisition will have a minimal impact on Luk Fook’s financials in the short-tomedium term but believes 3D-GOLD could grow after a brand revamp. Management
also believes that the different positioning of the 3D-GOLD and Luk Fook brands
could help them capture market share (3D-GOLD has a lower ASP than Luk Fook)
and that its bargaining power with department store operators could be enhanced.
49
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Financials
Turnover analysis
We expect turnover to grow at an 11.5% CAGR over FY15-17 driven by: 1) 9.813.2% new store addition (self-operated and licensee shops); 2) -21% to +13% SSS
growth in the PRC and -15 to +10% growth in Hong Kong & Macau; and 3) a 12-25%
increase in licensing turnover, in line with the expected increase in licensee shops.
(HKD '000)
Turnover (LHS)
(%)
25,000,000
60
20,000,000
40
15,000,000
20
10,000,000
0
5,000,000
0
(20)
FY12
FY13
FY14
FY15E
FY16E
FY17E
Luk Fook’s gross margin trend has been more volatile than its peers’. We attribute
this to its low hedging ratio of 20%, such that gold price movement is more
pronounced for Luk Fook. In addition, its large sales mix of gold products leads to a
lower gross margin. Gold products have a gross margin of 10-15% compared to 3545% for gem sets. We expect Luk Fook’s gross margin to remain relatively flat in
FY15-17, as we expect its product mix shift to the higher-margin gem-set to be
slower than its peers. We expect gold to account for 63% of total sales in FY15,
higher than Chow Tai Fook’s 57.5% and Chow Sang Sang’s 61%.
We expect Luk Fook’s operating margin to retreat 2.7ppt y-y to 9.3% in FY15 due to
operational deleverage arising from a decline in turnover against rising rental and
staff costs. We expect its rental-to-sales ratio to rise to 4.7% in FY15 (3.6% in FY14)
and its staff costs to increase to 4.7% in FY15 (3.8% in FY14).
(%)
Gross profit margin
30
25
20
15
10
5
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
50
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Net profit analysis
We forecast a net profit CAGR of 10.3% in FY15-17, vs 15.8% for Chow Tai Fook
and 17.4% Chow Sang Sang due to: 1) expected slower growth in gem-set sales
leading to weaker-than-peer margin expansion, and 2) higher rental pressure faced
by Luk Fook.
Net profit (LHS)
(HKD '000)
(%)
60
2,000,000
40
1,500,000
20
1,000,000
0
500,000
(20)
0
(40)
FY12
FY13
FY14
FY15E
FY16E
FY17E
Inventory
In FY14, 61% of its total inventory was gem sets while gold and platinum accounted
for 39%. Its inventory turnover days are lower than its peers at 138 days and we
attribute this to Luk Fook’s greater focus on gold products. Its gold product inventory
turnover days were 67, platinum 189 and gem set 319.
Capex
Management guides for capex of HKD200m in FY15 with c35% earmarked for store
renovation, c35% for the showroom in Shenzhen and the rest for the warehouse in
Hong Kong, its factories and other equipment.
51
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Valuation and risks
While we expect demand for gold and gem-set jewellery to remain intact long term
as the middle income class grows in China, we believe Luk Fook is the least
favourable pick among the jewellery retailers, due to potential operational risks
arising from its licensing business model and its relatively low brand recognition due
to its shorter operating history, which could lead to lower consumer confidence and
slower gem-set sales growth, as well as the low hedging ratio on gold, which may
mean higher volatility in margins and profit.
We initiate coverage on Luk Fook with a HOLD recommendation. Our target price of
HKD24.50 is based on 10x CY15E P/E, which is lower than the 15x we attach to
Chow Tai Fook and 11x to Chow Sang Sang (116 HK), both its closest rivals. The 10x
P/E attached to Luk Fook is largely in line with its long-term PER and slightly below
the average P/E of 10.4x for Hong Kong retailers and 12.7x for China retailers under
our coverage.
EXHIBIT 4: Historical forward P/E
(x)
25
Historical forward P/E ratio
20
15
+1 SD
10
Avg
-1 SD
5
0
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Source: Luk Fook
52
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Board structure
5
36%
6/6 (100%)
100%/71%
One-third of the directors shall retire by rotation at each AGM
Sources: Luk Fook; BNP Paribas
Audit Practices
Auditor
PwC
Length of service
>10 years
Reporting incidents
nil
Fee track record
Auditor’s remuneration in FY14 was HKD6.5m, up 55% y-y
Reviewed every year with regard to independence, objectivity and effectiveness
HKD95m in FY14, up 5% y-y, accounting for 5% of earnings
Most of the senior management has been with the company for >5 years
nil
Insiders’ holdings were down 0.3% in FY14
1
Do not constitute connected transactions for FY14;
All ordinary resolutions were passed by poll
53
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Luk Fook
Profit and Loss (HKD m) Year Ending Mar
2013A
2014A
2015E
2016E
2017E
Revenue
13,412
19,215
17,522
19,457
21,766
(10,482)
(14,877)
(13,581)
(15,065)
(16,825)
2,930
4,338
3,941
4,392
4,940
120
169
173
177
182
(1,426)
(2,074)
(2,329)
(2,593)
(2,948)
1,624
2,433
1,785
1,975
2,174
(94)
(117)
(146)
(158)
(188)
(6)
(7)
(7)
(7)
(7)
1,524
2,309
1,632
1,810
1,979
14
Operating costs
Operating EBITDA
Depreciation
Operating EBIT
Net financing costs
Associates
Non recurring items
Profit before tax
6
12
(3)
(3)
(1)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1,530
2,321
1,629
1,807
1,993
Tax
(260)
(454)
(290)
(329)
(363)
Profit after tax
1,269
1,867
1,339
1,478
1,630
Minority interests
(3)
(2)
(2)
(2)
(2)
Preferred dividends
0
0
0
0
0
Other items
0
0
0
0
0
1,266
1,865
1,337
1,476
1,628
Reported net profit
6
7
7
7
7
1,272
1,872
1,345
1,483
1,636
Recurring EPS *
2.16
3.18
2.28
2.52
2.78
Reported EPS
2.15
3.17
2.27
2.51
2.76
DPS
0.86
1.27
0.91
1.00
1.11
Revenue (%)
12.6
43.3
(8.8)
11.0
11.9
(2.5)
49.8
(26.6)
10.7
10.1
Operating EBIT (%)
(4.3)
51.5
(29.3)
10.9
9.3
Recurring EPS (%)
(11.1)
47.2
(28.2)
10.3
10.3
Reported EPS (%)
(11.4)
47.3
(28.3)
10.4
10.3
21.1
22.0
21.7
21.8
21.8
12.1
12.7
10.2
10.2
10.0
11.4
12.0
9.3
9.3
9.1
9.5
9.7
7.7
7.6
7.5
17.0
19.5
17.8
18.2
18.2
39.8
39.9
39.8
39.8
39.8
-
-
610.6
523.0
-
161.7
137.2
176.7
181.7
188.5
Per share (HKD)
Growth
Net margin (%)
Interest cover (x)
Inventory days
Debtor days
6.5
5.2
4.5
4.1
4.1
Creditor days
31.6
23.5
25.2
22.8
22.8
Operating ROIC (%)
28.3
33.6
20.9
20.1
19.0
ROIC (%)
26.6
31.3
19.4
18.9
18.0
ROE (%)
21.2
26.6
16.9
17.0
16.9
ROA (%)
17.8
21.9
13.8
13.9
13.8
Retailing - HK & Macau
2013A
2014A
2015E
2016E
2017E
9,920
14,514
12,454
13,585
15,088
Retailing - PRC
1,014
1,650
1,336
1,496
1,717
Manufacuring and wholesale
2,028
2,433
2,959
3,487
3,964
451
618
773
889
996
Licensing
54
BNP PARIBAS
28 OCTOBER 2014
Luk Fook
Emily Lee
590 HK
Luk Fook
Cash Flow (HKD m) Year Ending Mar
2013A
2014A
2015E
2016E
2017E
1,272
1,872
1,345
1,483
1,636
94
117
146
158
188
1
0
0
0
0
(78)
198
10
12
(5)
Recurring cash flow
1,289
2,187
1,501
1,653
1,818
(864)
(1,226)
(735)
(1,097)
(1,168)
Capex - maintenance
(174)
(183)
(202)
(181)
(185)
0
0
0
0
0
251
778
564
374
466
Depreciation
0
3
0
0
0
Dividends paid
(477)
(654)
(535)
(591)
(651)
(126)
(225)
3
3
21
Net cash flow
(352)
(98)
32
(214)
(165)
Equity finance
0
0
0
0
0
Debt finance
0
565
28
30
31
(352)
467
61
(184)
(133)
2.19
3.71
2.55
2.81
3.09
0.43
1.32
0.96
0.63
0.79
2013A
2014A
2015E
2016E
2017E
Movement in cash
Per share (HKD)
Balance Sheet (HKD m) Year Ending Mar
5,499
6,741
7,383
8,582
9,871
(1,004)
(1,230)
(1,149)
(1,254)
(1,379)
Net working capital
4,495
5,511
6,233
7,328
8,492
516
566
608
632
629
5,011
6,077
6,841
7,960
9,121
Goodwill
0
0
0
0
0
190
184
187
191
195
Investments
7
21
7
6
6
Other assets
163
270
278
282
286
Invested capital
5,371
6,552
7,313
8,439
9,607
(1,187)
(1,646)
(1,707)
(1,522)
(1,389)
Short term debt
0
568
596
626
658
Long term debt *
0
0
0
0
0
(1,187)
(1,078)
(1,111)
(896)
(732)
Deferred tax
42
55
55
55
55
Other liabilities
38
35
36
38
40
6,425
7,641
8,272
9,180
10,181
Cash & equivalents
Net debt
Total equity
Minority interests
53
58
60
62
63
Invested capital
5,371
6,710
7,313
8,439
9,607
Per share (HKD)
10.91
12.97
14.04
15.58
17.28
10.58
12.66
13.72
15.26
16.95
Financial strength
Net debt/equity (%)
(18.3)
(14.0)
(13.3)
(9.7)
(7.1)
(15.7)
(11.4)
(10.9)
(8.0)
(5.9)
6.7
4.7
5.2
5.4
5.5
-
-
211.1
108.6
-
2013A
2014A
2015E
2016E
2017E
Current ratio (x)
Valuation
Recurring P/E (x) *
10.4
7.0
9.8
8.9
8.1
11.3
7.7
10.7
9.7
8.8
Reported P/E (x)
10.4
7.1
9.8
8.9
8.1
3.8
5.7
4.1
4.5
4.9
P/CF (x)
10.2
6.0
8.8
8.0
7.2
P/FCF (x)
52.5
16.9
23.3
35.2
28.3
Price/book (x)
2.0
1.7
1.6
1.4
1.3
2.1
1.8
1.6
1.5
1.3
EV/EBITDA (x) **
7.0
5.0
6.8
6.2
5.7
7.8
5.5
7.5
6.8
6.3
2.2
1.8
1.7
1.5
1.3
Dividend yield (%)
55
BNP PARIBAS
28 OCTOBER 2014
28 OCTOBER 2014
INITIATION
18 HONG
HONG
KONG / RETAILING
KONG
EMPEROR WATCH & JEWELLERY
BUY
TARGET PRICE
HKD0.45
CLOSE
HKD0.36
UP/DOWNSIDE
+26.8%
HKD
CHANGE IN TP
%
MARKET RECS
TARGET PRICE (%)
(6.2)
POSITIVE
2
EPS 2014 (%)
(1.7)
NEUTRAL
6
EPS 2015 (%)
(3.8)
NEGATIVE
0
KEY STOCK DATA
Attractive risk/reward profile
n
n
887 HK
YE Dec (HKD 1000)
Stabilisation expected from 2H14
The anti-corruption campaign of the Chinese government is limiting
demand for luxury watches and it remains a key concern. Following
the 10.6% retreat in SSS for Emperor Watch & Jewellery (EWJ) and
net profit decline of 33.2% in 1H14, we expect stabilization in
operational performance in 2H, mainly on a base effect and resilient
demand for mass luxury watches priced below HKD200,000.
Gross margin has already bottomed
We see upside in gross margin given: 1) EWJ’s aggressive
expansion of its jewellery business, which earns a much higher gross
margin than watches; and 2) watch brand owners are raising their
ASPs, which should be favourable for watch retailers’ margins.
2013A
Revenue
2014E
2015E
6,624,372 6,482,745 6,904,438 7,286,859
Rec. net profit
Recurring EPS (HKD)
EPS growth (%)
290,317
250,076
310,936
368,640
0.04
0.04
0.05
0.05
(29.3)
(13.9)
24.3
18.6
Recurring P/E (x)
8.4
9.8
7.9
6.6
Dividend yield (%)
3.5
3.1
3.8
4.5
EV/EBITDA (x)
4.5
5.1
4.4
3.9
Price/book (x)
Net debt/Equity (%)
0.6
0.5
0.5
0.5
(14.9)
(12.2)
(9.5)
(8.2)
6.8
5.6
6.6
7.5
ROE (%)
Oct-13
0.80
Jan-14
Apr-14
Jul-14
Oct-14
(9)
0.60
n
n
Currently trading at 7.9x 2015E P/E and 0.5x BVPS
EWJ’s inventory was HKD3.8b in 1H14, or HKD0.55/share. Net cash
was HKD443.1m, or HKD0.06/shr. These two items make up 95.5%
of the balance sheet. EWJ’s BVPS is HKD0.65, implying that it trades
at 0.5x BVPS.
Initiating coverage with BUY on depressed valuation
We believe the current price has already factored in all the negatives,
including suppressed demand and a potential delay in recovery. The
current valuation presents an attractive risk/reward with the macro
environment improving. We initiate with a BUY and a target price of
HKD0.45, based on 10x 2015E P/E.
(HKD '000)
10,000,000
(%)
500
400
300
200
100
0
(100)
6,000,000
4,000,000
2,000,000
0
FY11
FY12
FY13
FY14E
Emily Lee
+852 2825 1862
56
FY15E
(49)
(69)
0.20
(89)
0.00
(109)
(HKD)
Absolute (%)
(%)
1 Month
3 Month
12 Month
(6.6)
(31.7)
(42.7)
(13.5)
(27.2)
Next results
FY16E
(47.7)
March 2015
Mkt cap (USD m)
315
0.4
Free float (%)
47
EMPEROR WATCH & JEWELLERY GR (53%)
12m high/low (HKD)
8,000,000
Sources: Emperor Watch & Jewellery; BNP Paribas estimates
(29)
0.40
Major shareholder
Turnover (LHS)
Net profit (LHS)
2016E
ADR ticker
Issued shares (1000)
0.68/0.35
31.6
6,875,711
Emily Lee
887 HK
Investment thesis
Catalyst
Positioned in the high-end market, EWJ’s ASP for its watch
business is high, at HKD68,696 in 1H14. While EWJ is not
immune to the demand slowdown amid the weakened
consumer sentiment environment, we believe the share price
has already factored in the negatives and the current
valuation presents an attractive risk/reward profile, with an
improvement in the macro environment.
A high-beta play with high cyclicality. Demand of luxury
watches should pick up alongside the improving macro
backdrop.
EWJ trades at a 7.9x 2015E P/E, or 0.5x P/BV. Inventory
(finished goods booked at cost) together with net cash
represent HKD0.62 per share.
Brand owners’ reluctance to increase prices may affect the
potential upside in gross margin for retailers/distributors.
Risks to our call
Prolonged weakness in consumer sentiment and negative
impact from China’s anti-corruption campaign.
SSS are showing signs of stabilization and we expect 3Q14
SSS growth to be flattish y-y. Gross margin should have
bottomed in 2013 as some watch brand owners have started
to implement price hikes in 2014.
Company background
Key assumptions
Emperor Watch & Jewellery is a leading retailer of Europeanmade luxurious and internationally branded watches, together
with self-designed fine jewellery products under its own brand,
"Emperor". The group has extensive retail networks in Hong
Kong, Macau, the PRC and Singapore.
2014E
New stores
PRC SSSG (%)
2015E
17
7
(18.0)
5.0
HK SSSG (%)
(5.0)
2.0
Watches as a % of sales
78.9
77.5
Jewellery as a % of sales
21.1
22.5
Principal activities (2014 revenue split on our estimates)
-------- Base --------
2014E
2015E
2014E
2015E
78.9
77.5
83.9
82.5
73.9
72.5
5.0
5.0
(5.0)
(5.0)
22.0
23.0
20.0
20.0
25.0
25.0
(2.0)
(3.0)
3.0
2.0
1,635
1,779
1,469
1,586
1,815
1,954
(10.2)
(10.8)
11.0
9.8
Change (ppt)
Jewellery (21.1%)
Gross margin of watch
(%)
Change (ppt)
Others (0%)
Change (%)
Key executives
Age
Joined
Cindy Yeung
49
1990
Chairperson and
Managing Director
Chan Hung Ming
65
2005
Executive Director
Wong Chi Fai
58
1998
Executive Director
Fan Man Seung, Vanessa
51
1998
Executive Director
http://www.emperorwatchjewellery.com/
57
--------- Bull --------
2015E
Watch products weight
(%)
Watch (78.9%)
------- Bear --------
2014E
Title
A 5ppt increase/decrease in watches as a percentage of
total sales, all else being equal, would decrease/increase
2014/15E gross profit by 2.8%/2.8%
A lower watch gross profit margin at 20% would decrease
2014/15E gross profit by 6.9%/7.5%, all else being equal.
A higher watch gross profit margin at 25% would increase
2014/15E gross profit by 8.8%/7.5%, all else being equal.
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
Investment thesis
The luxury watch retail industry is more cyclical than ordinary discretionary retailers
due to its big-ticket prices. The operational performance of watch retailers depends
highly on consumer sentiment, as big-ticket discretionary items spends are the first
to be cut by customers when the macro backdrop sours. SSS have been weak for
EWJ since 2012, with flat growth in 2012, -1.2% in 2013 and -10.6% in 1H14.
Together with the gloomy macro outlook, share price performance has been weak for
EWJ, down 40% YTD.
As Chinese tourists account for about 80% of total Hong Kong luxury watch sales, a
weakening of spending by them in Hong Kong and their increasing travel to Europe
have caused the market to become concerned on whether growth has peaked for
watch retailers in Hong Kong.
EXHIBIT 1: EWJ SSS trend
(%)
50
40
30
20
10
0
(10)
FY08
FY09
FY10
FY11
FY12
FY13
Source: Emperor Watch & Jewellery
Although we believe the long-term luxury consumption growth outlook remains intact,
benefiting from the rising affluence of China consumers and their low ownership of
luxury watches, a meaningful short-term impact may result from a slowdown in
demand and potential downside on gross margin, if brand owners remain reluctant to
implement price hikes, like in 2012-13.
EXHIBIT 2: Watch price differences between HK and other Asian countries
Market
Price difference against HK-listed price
Hong Kong
-
Macau
-
PRC
plus 25-30%*
Singapore
plus 5-10%
Japan
plus 20-25%
Korea
plus 10-15%
Taiwan
plus 3-5%
Thailand
plus 3-5%
*The above price difference is mainly attributable to VAT and regional price differences dictated by watch suppliers.
Despite the misty outlook for watch retailers as demand remains suppressed, we
believe EWJ’s current share price and valuations have already factored in the
negatives. We believe gross margin has already bottomed for EWJ as the company
switches its focus to jewellery in the PRC and as brand owners have resumed price
hikes in 2014.
Within EWJ’s dealership, 11 brands (A Lange & Sohne, Audemars Piguet, Bedat &
Co, Breguet, Cartier, Panerai, Piaget, Rolex, Tag Heuer, Zenith) have increased their
prices year-to-date; the magnitude is 3-5%. For Rolex, the increment only applies to
58
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
some of the models priced below HKD150,000. IWC has also increased prices by 610% effective 1 October 2014. Hence, we expect gross margin to rise 1.1ppts to
25.2% in 2014.
We initiate coverage on EWJ with BUY and a target price of HKD0.45, based on a
10x 2015E P/E. We believe the company’s intent to expand its jewellery business in
China will help to expand the gross margin besides offsetting partly the impact from
slowing demand for luxury watches in China. In addition, price differentials between
Hong Kong and China should make EWJ more resilient than other players with a
major presence only in China.
The 10x 2015E P/E attached to EWJ is below the average valuation of 10.3x for
Hong Kong retailers and 12.7x for China retailers (based on Bloomberg consensus
estimates). We believe the discount is fair due to the cyclical nature of the luxury
watch business, large working capital requirement and heavy reliance on brand
owners.
59
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
Synergies for the watch & jewellery business from Emperor group
EWJ has an operational history of 70 years and it has built strong relationships with
international watch brand owners. Its jewellery business is a key differentiator from
other watch retailers. While watches remain the key revenue contributor, accounting
for 81.0% of total sales in 1H14, management’s long-term vision is to grow its
jewellery business to 50% of total sales (up from 11.9% of total sales in 2008 to
22.4% in 2013). This will ultimately enhance margins as jewellery commands a gross
margin of 35-45%, higher than 22-25% for watches.
Enjoying group synergies
We see a synergies effect from other sister companies within the Emperor group,
with their ability to find prime retail location, offering EWJ a major advantage. Some
store outlets in Hong Kong (around 25%) and all outlets in Macau are leased from
the Emperor group’s property arm and its hotel arm, respectively. While EWJ still
pays market rents, it is able to ensure the supply of scarce prime retail locations,
particularly in Hong Kong.
Additionally, EWJ enjoys strong celebrity participation and media coverage for its
promotional campaigns riding on the Emperor group’s entertainment businesses.
The company also invites VIP guests to its movie premieres and sponsors jewellery
for all artistes from the Emperor Entertainment group. Such advantages can further
enhance the “Emperor” brand, particularly in the China market.
The group effectively markets and promotes the brand through a range of joint
promotions, sponsorships and exhibitions. To sustain its decades-old relationship
with watch suppliers, the group separately runs cooperative advertising campaigns
and organizes joint promotion events with world-class watch suppliers to foster the
relationships and to enhance the reputation of the leading watch brands and the
Emperor brand.
EXHIBIT 3: Advertorial featuring the Heartbeat collection
60
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
Watch business
EWJ distributes 29 watch brands, both in Hong Kong and China, and four brands in
Singapore.
EXHIBIT 4: Brand mix
------------ Hong Kong & Macau shops ---------- -------------------- China shops --------------------
Singapore shops
A. Lange &
Sohne
Franck Muller
Patek
Philippe
A. Lange &
Sohne
Hamilton
Rado
Cartier
Audemars
Piguet
Girard
Perregaux
Piaget
Baume &
Mercier
IWC
Raymond
Weil
Patek Philippe
Baume &
Mercier
Hamilton
Rado
Blancpain
JaegerLeCoultre
Rolex
Rolex
Bedat & Co
IWC
Rolex
BVLGARI
Longines
Tag Heuer
Tudor
Blancpain
JaegerLeCoultre
Tag Heuer
Carl F.
Buncherer
Mido
Tissot
Breguet
Montblanc
Tissot
Chopard
Movado
Tudor
Cartier
Mido
Tudor
Cyma
Omega
Vacheron
Constantin
Certina
Omega
Vacheron
Constantin
Franck Muller Oris
Chopard
Panerai
Zenith
Girard
Perregaux
Panerai
Chronoswiss
Parmigiani
Glashutte
Original
Piaget
Zenith
Hong Kong
EWJ’s retail network in Hong Kong encompasses multi-brand shops as well as
specialty outlets for specific watch brands, which enables the group to reap synergy
benefits from international watch brand suppliers. Its retail shops are strategically
situated in the tourist areas, which enables high exposure to tourists from China. Its
store location is very dense in prime locations, including Russell Street in Causeway
Bay and Canton Road in Tsim Sha Tsui.
Capex required to open a store in HK is about HKD70m, of which 90% is inventory
cost. Store sizes ranges from 3,000 sqft to 10,000 sqft. The payback period is
around two months, excluding inventory costs, according to management. The
company has added three stores in 2014, bringing the total to 25.
EXHIBIT 5: Image store in 1881 Heritage, Hong Kong
61
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
EXHIBIT 6: Multi-brand watch and jewellery shop
EXHIBIT 7: Patek Philippe Independent Corner and jewellery
shop
China
The company has undergone store consolidation in the past couple of years in China
as it closed down the underperforming stores for watches, and re-focused on
jewellery shops. Following the completion of the store consolidation exercise, the
company was able to turn the business profitable, generating HKD4.7m in 1H14
(versus a loss of HKD11.7m in 2013). Management is speeding up store expansion,
with plans to add 13 stores in 2014, mainly in tier 2-3 cities.
It costs about HKD15m to open a shop in China with an average size of 1,000 sqft.
The payback period is longer compared to Hong Kong, at four to five months.
Gross margin for the watch business should have bottomed
Management says that it is still observing volume growth for watches priced below
HKD200,000, while demand for luxury watches priced at HKD300,000-500,000
remains weak with no signs of recovery.
According to the company, 11 brands have increased their prices so far in 2014, by
3-5%.
EXHIBIT 8: Watch business - turnover and turnover growth trend
(HKD '000)
Watch turnover (LHS)
Growth (RHS)
(y-y %)
6,000,000
60
5,000,000
50
40
4,000,000
30
3,000,000
20
2,000,000
10
1,000,000
0
0
(10)
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E FY16E
62
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
EXHIBIT 9: 1H14 product mix
EXHIBIT 10: 2013 product mix
Emperor Watch & Jewellery 1H14
Emperor Watch & Jewellery FY13
Jewellery
19.0%
Jewellery
22.4%
Watch
77.6%
Watch
81.0%
Source: Emperor Watch & Jewellery data
Source: Emperor Watch & Jewellery data
EXHIBIT 11: Volume growth vs ASP growth
No. of goods sold
2012
2013
1H13
1H14
74,969
73,902
36,057
36,283
Change (%)
ASP (HKD)
Change (%)
(1.4)
70,963
69,592
0.6
70,583
(1.9)
68,696
(2.7)
63
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
Jewellery business
The jewellery products offered by EWJ are designed in-house and cover the full
range of jewellery, including diamonds, jade, pearls, rubies and gold with a primary
focus on diamond and jade gem-set products. The company outsources the
production of jewellery to independent third-party contractors in Hong Kong and
China.
Turnover of the jewellery business grew at a 46.5% CAGR in 2008-13. The swift
growth was mainly attributable to its low base as well as to the company’s strategy to
open jewellery shops in China, which management expects will raise the group’s
gross margin.
EXHIBIT 12: Jewellery business - turnover and y-y change
Jewellery turnover (LHS)
(HKD '000)
Growth (RHS)
(y-y %)
2,000,000
80
1,800,000
70
1,600,000
60
1,400,000
50
1,200,000
40
1,000,000
30
800,000
20
600,000
10
400,000
0
200,000
(10)
0
(20)
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E FY16E
Splitting EWJ’s business into diamond & jade and ‘others’ (mainly gold), diamond &
jade is the key product category, accounting for 70.0% of total jewellery sales in
1H14. This segment is still seeing decent volume growth but has posted a downtrend
in ASP, due mainly to PRC consumers’ preference for cheaper products since the
implementation of the anti-corruption campaign.
The others category saw a 28.4% retreat in sales volume in 1H14. We believe this is
attributable to the gold rush that occurred in 2013. We expect the decline in sales
volume to narrow in 2H14 as the high-base effect fades.
EXHIBIT 13: Volume growth vs ASP growth
No. of goods sold (diamond & jade)
FY12
FY13
1H13
1H14
22,312
23,183
11,547
12,382
3.9
Change (%)
ASP (HKD)
39,017
40,638
67,477
90,015
5,045
5,987
Change (%)
32,404
51,225
36,681
(22.9)
33.4
Change (%)
ASP (HKD)
42,044
4.2
Change (%)
No. of goods sold (others)
7.2
(28.4)
5,144
18.7
4,696
(8.7)
64
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
EXHIBIT 14: Diamond jewellery
EXHIBIT 15: Jewellery
EXHIBIT 16: Jade jewellery
EXHIBIT 17: Jewellery
65
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
Financials
Turnover analysis
EWJ recorded a sales CAGR of 29.2% in 2008-13 and we project sales to grow at a
6.0% CAGR in 2014-16E. The much slower growth is due to our conservative SSS
growth assumption of -7% in 2014, 2% in 2015 and 4% in 2016, factoring in the slow
growth we expect owing to a prolonged anti-corruption campaign in China. We
expect the company’s retail network to grow 23.0% in 2014, with the key contribution
from the China market (up 31% to 55 POS in China in 2014).
(HKD'000)
Turnover (LHS)
(y-y %)
Growth (RHS)
8,000,000
60
7,000,000
50
6,000,000
40
5,000,000
30
4,000,000
20
3,000,000
10
2,000,000
0
1,000,000
0
(10)
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E FY16E
EXHIBIT 19: Store network
2008
Hong Kong
11
Change (%)
Macau
4
Change (%)
Singapore
0
2009
2010
2011
2012
4
Change (y-y %)
Total
19
Change (y-y %)
2014E
2015E
2016E
12
17
18
21
22
25
26
27
9.1
41.7
5.9
16.7
4.8
13.6
4.0
3.8
4
4
5
5
6
6
7
7
0.0
0.0
25.0
0.0
20.0
0.0
16.7
0.0
0
0
0
0
Change (y-y %)
PRC
2013
4
5
5
5
25.0
0.0
0.0
0.0
65
24
40
57
54
42
55
60
500.0
66.7
42.5
(5.3)
(22.2)
31.0
9.1
8.3
40
61
80
80
74
91
98
104
110.5
52.5
31.1
0.0
(7.5)
23.0
7.7
6.1
We believe the gross margin has already bottomed in 2013 as brand owners have
started to implement price hikes in 2014. The ongoing gradual business mix shift to
the higher-margin jewellery business should enable EWJ to expand group level
gross margin gradually over the years. We expect gross margin to expand 1.1ppts to
25.2% in 2014.
66
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
(%)
Gross margin
Operating margin
35
30
25
20
15
10
5
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
Rental and store staff costs are the biggest operating cost components, accounting
for 9.9% and 4.1% of total sales in 2013, respectively. All leases up for renewal in
2014 have already been settled, according to management, with a rental reversion of
15% increase, implying effective increment each year would be 5%.
EXHIBIT 21: Key operating cost (as a percentage of sales)
(HKD '000)
Rental cost (LHS)
Staff cost (LHS)
900,000
Rental cost as % of sales (RHS)
Staff cost as % of sales (RHS)
(%)
12
800,000
10
700,000
600,000
8
500,000
6
400,000
300,000
4
200,000
2
100,000
0
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E FY16E
Net profit analysis
The company reported a net profit CAGR of 5.5% in 2008-13 and we expect 21.4%
in 2014-16E. We expect net profit to decline 13.9% in 2014 (1H14 net profit fell
33.2%), due to weak demand for luxury watches, which created operational
deleverage. Following the net profit contraction since 2012, we expect net profit
growth to resume in 2H14, mainly benefiting from the low base as well as the
company’s shift in focus to jewellery shops in China, which could enlarge margins.
67
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
(HKD '000)
Net profit (LHS)
Growth (RHS)
(y-y %)
700,000
500
600,000
400
500,000
300
400,000
200
300,000
100
200,000
0
100,000
0
(100)
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E FY16E
Balance sheet
The company was in a net cash position of HKD443.1m in 1H14 with no debt. Net
cash per share is HKD0.06, accounting for 17% of the current share price.
Watches account for 60-65% of the total inventory while jewellery makes up the
remaining 35-40% for EWJ. Inventory turnover days have been stable at around 200
days for watches and 380-420 days for jewellery. Inventory per share is HKD0.55.
Inventory and net cash account for 95.5% of the total balance sheet.
68
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
We initiate coverage on EWJ with a BUY recommendation. Our target price of
HKD0.45 is based on 10x 2015E P/E. EWJ is trading at a 7.9x 2015E P/E, or 0.5x
BVPS. We believe the current valuation has already factored in all the negatives,
including the potential delay in recovery impacted by suppressed demand from the
anti-corruption campaign and the operational deleverage from weakened sales and
rising costs. We see an attractive risk/reward profile at the current valuation for EWJ.
The 10x 2015E P/E attached to EWJ is below the average valuation of 10.3x for
Hong Kong retailers and 12.7x for China retailers (based on Bloomberg consensus
estimates). We believe the discount is fair due to the cyclical nature of the luxury
watch business, large working capital requirement and heavy reliance on brand
owners. The valuation attached to EWJ is also lower than its long-term P/E of 11.7x.
EXHIBIT 23: EWJ historical forward P/E chart
(x)
30
25
20
+1 SD
15
Avg
10
-1 SD
5
0
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
69
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
887 HK
Board structure
Number of independent directors (ID)
3
43%
4/4 (100%)
100%/67%
With initial term of two years, subject to early termination and retirement rotation
Sources: Emperor Watch & Jewellery; BNP Paribas
Audit Practices
Auditor
Deloitte
Length of service
>6 years
Reporting incidents
nil
Fee track record
Audit fee in 2013 was HKD3.3m, down 5% y-y
Policy on change of audit firm
Reviewed every year with regard to independence, process and effectiveness
HKD8.7m in 2013, down 10% y-y, accounting for 3% of 2013 earnings
Most have served more than five years in the company
nil
Track record on insider sales
nil
1
Related-party transactions
Amount of HKD240m in 2013. The rest are connected transactions
Voting issues – policies, incidents of rejected proposals
All ordinary resolutions were passed by polls
70
BNP PARIBAS
28 OCTOBER 2014
887 HK
Emily Lee
Profit and Loss (HKD 1000) Year Ending Dec
Revenue
Operating costs
2012A
2013A
2014E
2015E
2016E
6,531,474
6,624,372
6,482,745
6,904,438
7,286,859
(4,761,929)
(4,965,807)
(4,779,752)
(5,055,108)
(5,293,398)
1,769,545
1,658,565
1,702,993
1,849,330
1,993,460
3,482
5,006
5,156
5,414
5,685
(1,202,249)
(1,253,772)
(1,345,170)
(1,415,410)
(1,486,519)
Operating EBITDA
570,778
409,799
362,979
439,335
512,626
Depreciation
(72,805)
(58,874)
(68,219)
(70,575)
(72,644)
Operating EBIT
Net financing costs
0
0
0
0
0
497,973
350,925
294,760
368,760
439,981
6,313
(2,747)
4,905
6,536
6,766
Associates
0
0
0
0
0
0
0
0
0
0
Non recurring items
0
0
0
0
0
Profit before tax
495,226
355,830
301,296
375,526
446,295
Tax
(90,899)
(65,513)
(51,220)
(64,590)
(77,655)
Profit after tax
404,327
290,317
250,076
310,936
368,640
Minority interests
0
0
0
0
0
Preferred dividends
0
0
0
0
0
Other items
0
0
0
0
0
404,327
290,317
250,076
310,936
368,640
Reported net profit
0
0
0
0
0
404,327
290,317
250,076
310,936
368,640
Recurring EPS *
0.06
0.04
0.04
0.05
0.05
Reported EPS
0.06
0.04
0.04
0.05
0.05
DPS
0.02
0.01
0.01
0.01
0.02
Per share (HKD)
Growth
Revenue (%)
11.4
1.4
(2.1)
6.5
5.5
(31.3)
(28.2)
(11.4)
21.0
16.7
Operating EBIT (%)
(34.9)
(29.5)
(16.0)
25.1
19.3
Recurring EPS (%)
(37.7)
(29.3)
(13.9)
24.3
18.6
Reported EPS (%)
(38.2)
(29.8)
(13.9)
24.3
18.6
26.0
24.1
25.2
25.8
26.4
8.7
6.2
5.6
6.4
7.0
7.6
5.3
4.5
5.3
6.0
Net margin (%)
6.2
4.4
3.9
4.5
5.1
18.4
18.4
17.0
17.2
17.4
30.0
29.8
29.9
30.0
30.0
Interest cover (x)
181.3
-
-
-
-
Inventory days
265.4
263.6
289.4
295.9
305.6
Debtor days
11.1
10.2
9.6
9.2
9.3
Creditor days
28.8
26.9
28.6
27.6
27.9
Operating ROIC (%)
12.1
8.2
6.7
7.7
8.5
ROIC (%)
11.5
7.7
6.3
7.3
8.1
ROE (%)
10.2
6.8
5.6
6.6
7.5
ROA (%)
8.9
6.2
5.0
6.0
6.7
Revenue By Division (HKD 1000)
2012A
2013A
2014E
2015E
2016E
Watch
5,319,978
5,143,745
5,114,886
5,350,939
5,538,013
Jewellery
1,211,496
1,480,627
1,367,859
1,553,499
1,748,846
Sources: Emperor Watch; BNP Paribas estimates
71
BNP PARIBAS
28 OCTOBER 2014
887 HK
Emily Lee
Cash Flow (HKD 1000) Year Ending Dec
Depreciation
Recurring cash flow
Capex - maintenance
Dividends paid
Net cash flow
Equity finance
2012A
2013A
2014E
2015E
2016E
404,327
290,317
250,076
310,936
368,640
72,805
58,874
68,219
70,575
72,644
0
0
0
0
0
(57,442)
21,410
3,708
6,152
9,218
419,690
370,601
322,003
387,662
450,502
(174,909)
(103,463)
(283,344)
(325,981)
(314,424)
(79,814)
(66,889)
(70,233)
(73,745)
(75,589)
0
0
0
0
0
164,967
200,249
(31,574)
(12,064)
60,488
0
0
0
0
0
(173,337)
(101,860)
(75,023)
(93,281)
(110,592)
1,568
1,739
6,536
6,766
6,313
(6,802)
100,128
(100,061)
(98,578)
(43,790)
0
100,000
0
0
0
Debt finance
(343,570)
(952)
0
0
0
Movement in cash
(350,372)
199,176
(100,061)
(98,578)
(43,790)
0.06
0.05
0.05
0.06
0.07
0.02
0.03
0.00
0.00
0.01
2012A
2013A
2014E
2015E
2016E
3,725,984
3,824,298
4,099,906
4,450,350
4,787,023
(365,985)
(388,567)
(403,124)
(445,324)
(482,868)
Net working capital
3,359,999
3,435,731
3,696,782
4,005,026
4,304,155
Per share (HKD)
Balance Sheet (HKD 1000) Year Ending Dec
102,020
107,744
109,758
112,929
115,873
3,462,019
3,543,475
3,806,540
4,117,955
4,420,028
Goodwill
0
0
0
0
0
0
0
0
0
0
Investments
0
0
0
0
0
Other assets
184,830
206,836
216,948
227,584
238,772
Invested capital
3,646,849
3,750,311
4,023,488
4,345,539
4,658,800
Cash & equivalents
(454,768)
(657,099)
(557,038)
(458,460)
(414,670)
950
0
0
0
0
0
0
0
0
0
(453,818)
(657,099)
(557,038)
(458,460)
(414,670)
Deferred tax
0
0
0
0
0
Other liabilities
0
0
0
0
0
4,100,667
4,407,410
4,580,527
4,804,000
5,073,471
Short term debt
Long term debt *
Net debt
Total equity
Minority interests
0
0
0
0
0
Invested capital
3,646,849
3,750,311
4,023,489
4,345,540
4,658,801
Per share (HKD)
0.61
0.64
0.67
0.70
0.74
0.61
0.64
0.67
0.70
0.74
Net debt/equity (%)
(11.1)
(14.9)
(12.2)
(9.5)
(8.2)
(10.2)
(13.7)
(11.2)
(8.7)
(7.5)
Current ratio (x)
11.4
11.5
11.6
11.0
10.8
61.1
-
-
-
-
2012A
2013A
2014E
2015E
2016E
Financial strength
Valuation
Recurring P/E (x) *
5.9
8.4
9.8
7.9
6.6
7.5
10.7
12.4
10.0
8.4
Reported P/E (x)
5.9
8.4
9.8
7.9
6.6
Dividend yield (%)
5.0
3.5
3.1
3.8
4.5
P/CF (x)
5.7
6.6
7.6
6.3
5.4
14.5
12.2
(77.3)
(202.3)
40.4
Price/book (x)
0.6
0.6
0.5
0.5
0.5
0.6
0.6
0.5
0.5
0.5
EV/EBITDA (x) **
3.3
4.5
5.1
4.4
3.9
4.4
6.1
6.9
5.9
5.2
0.5
0.5
0.5
0.5
0.4
P/FCF (x)
Sources: Emperor Watch; BNP Paribas estimates
72
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
NOTES
NOTES
\
\
\
\
\
\
\
\
\
\
73
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
NOTES
NOTES
\
\
\
\
\
\
\
\
\
\
74
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
NOTES
NOTES
\
\
\
\
\
\
\
\
\
\
75
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
Disclaimers and Disclosures
APPENDIX
DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP Paribas Securities (Asia) Ltd
ANALYST(S) CERTIFICATION
Emily Lee, BNP Paribas Securities (Asia) Ltd, +852 2825 1862, emily.w.lee@asia.bnpparibas.com.
The analyst(s) or strategist(s) herein each referred to as analyst(s) named in this report certify(ies) that (i) all views expressed in this report accurately
reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part
of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research
analyst herein.
Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE
and/or FINRA regulations.
IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS
"BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP
Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to
relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other
entities within the BNP Paribas Group (collectively, "BNP Paribas").
The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this
report:
Company
Ticker
Disclosure (as applicable)
Chow Tai Fook
1929 HK
6
Luk Fook
590 HK
6
BNP Paribas represents that:
1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees.
2. It had an investment banking relationship with this company in the last 12 months.
3. It received compensation for investment banking services from this company in the last 12 months.
4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months.
5. It beneficially owns 1% or more of any class of common equity securities of the subject company.
6. It makes a market in securities in respect of this company.
7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in
securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted.
8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the
company.
IMPORTANT DISCLOSURES REQUIRED IN KOREA
The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or
recommended in this report:
Company
N/A
Ticker
N/A
Price (as of 27-Oct-2014 closing price)
N/A
Interest
N/A
1.
The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of
payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.
2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company.
3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act.
4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the
transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares.
5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year.
6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,
BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision
shall apply only where tender offer has not expired.
7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering
into arrangement for public offering or underwriting-related agreement for issuance of stocks
8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation.
9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No. 8.
10. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the
following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading.
1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited.
2) Stock options of the Company whose securities dealings are being solicited.
3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.
76
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
History of change in investment rating and/or target price
Chow Tai Fook (1929 HK)
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Date
16.98
17-Sep-12
3-Oct-14
Reco
TP
BUY
12.74
Not Rated
14.98
12.98
10.98
8.98
6.98
(HKD)
Chow Tai Fook
Target Price
Emily W Lee started covering this stock from 28-Oct-2014
Price and TP are in local currency
Valuation and risks: Key risks to our P/E-based TP are: greater-than-expected volatility from gold price movement which could affect gross margin of gold products; and
prolonged protests in Hong Kong could negatively impact retailers’ performance due to lower traffic and depressed consumer sentiment.
Sources: Bloomberg; BNP Paribas
Luk Fook (590 HK)
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Date
27-Oct-11
38.24
17-Sep-12
3-Oct-14
33.24
Reco
TP
Not Rated
BUY
30.00
Not Rated
28.24
23.24
18.24
13.24
(HKD)
Luk Fook
Target Price
Emily W Lee started covering this stock from 28-Oct-2014
Price and TP are in local currency
Valuation and risks: Downside risks to our P/E-based TP are: 1) a decline in gold price, which would hurt Luk Fook the most among peers due to its low hedging ratio; 2) failure to
expand its gem-set business, which would dampen gross margin expansion; and 3) risks of licensees hurting the Luk Fook brand name, including selling products with low quality.
Upside risks: 1) rising gold price would benefit Luk Fook the most among the jewellery retailers due to its low hedging ratio; 2) faster-than-expected growth in gem-set sales could
drive up the gross margin; and 3) accelerated expansion by licensees may allow Luk Fook to expand its network faster than expected.
Sources: Bloomberg; BNP Paribas
GENERAL DISCLAIMER
This report was produced by BNP Paribas Securities (Asia) Ltd, member company(ies) of the BNP Paribas Group.
This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without
our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein.
This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any
trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other
investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report.
Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the
recipient’s own independent verification, or taken in substitution for the exercise of judgment by the recipient. Additionally, the products mentioned in this
report may not be available for sale in certain jurisdictions.
As an investment bank with a wide range of activities, BNP Paribas may face conflicts of interest, which are resolved under applicable legal provisions and
internal guidelines. You should be aware, however, that BNP Paribas may engage in transactions in a manner inconsistent with the views expressed in this
document, either for its own account or for the account of its clients.
Australia: This report is being distributed in Australia by BNP Paribas Sydney Branch, registered in Australia as ABN 23 000 000 117 at 60 Castlereagh Street
Sydney NSW 2000. BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no. 238043 and
therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document
you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial
services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001,
division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001).
Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an
offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer
or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant
Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the
dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under
no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent
77
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory
of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in
Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein,
and any representation to the contrary is an offence.
Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose
business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP
Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, providing automated trading
services, dealing in futures contacts and advising on corporate finance. For professional investors in Hong Kong, please contact BNP Paribas Securities (Asia)
Limited for all matters and queries relating to this report.
India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5th floor, BNP Paribas
House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 (Tel. no. +91 22 3370 4000 / 6196 4000 / Fax no. +91 22 3370
4363). BNPPSIPL is registered with the Securities and Exchange Board of India (“SEBI”) as a stockbroker in the Equities and the Futures & Options segments of
National Stock Exchange of India Ltd. and Bombay Stock Exchange Ltd. (SEBI Regn. Nos.: INB/INF231474835, INB/INF011474831; CIN:
U74920MH2008FTC182807; Website: www.bnpparibas.co.in).
Indonesia: This report is being distributed by PT BNP Paribas Securities Indonesia and is delivered by its licensed employee(s), including marketing/sales
person, to its client. PT BNP Paribas Securities Indonesia, having its registered office at Menara BCA, 35th floor, Grand Indonesia, JL. M.H. Thamrin No.1,
Jakarta 10310, Indonesia, is a subsidiary company of BNP Paribas SA and licensed under Capital Market Law no. 8 year 1995, a holder of broker-dealer and
underwriter licenses issued by the Capital Market and Financial Institution Supervisory Agency (now Otoritas Jasa Keuangan/OJK). PT BNP Paribas Securities
Indonesia is also a member of Indonesia Stock Exchange and supervised by Otoritas Jasa Keuangan (OJK). Neither this report nor any copy hereof may be
distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This report is not
an offer of securities in Indonesia and may not be distributed within the territory of the Republic of Indonesia or to Indonesian citizens in circumstance which
constitutes an offering within the meaning of Indonesian capital market laws and regulations.
Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not
registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange
Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and
Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial
Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan
affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not
disclosed according to the Financial Instruments and Exchange Law of Japan.
Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of
the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research
report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is
being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or
reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose
without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd.
Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head
office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No. 1034 (PD 1034), and regulated by
the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its
entirety to the products and services allowed under PD 1034.
Singapore: This report is distributed in Singapore by BNP Paribas Securities (Singapore) Pte Ltd ("BNPPSSL") and may be distributed in Singapore only to an
Accredited or Institutional Investor, each as defined under the Financial Advisers Regulations ("FAR") and the Securities and Futures Act (Chapter 289) of
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certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact
BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore
049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report.
South Africa: In South Africa, BNP Paribas Cadiz Securities (Pty) Ltd and BNP Paribas Cadiz Stock Broking (Pty) Ltd (hereinafter referred to as “BNPP Cadiz”)
are licensed members of Johannesburg Stock Exchange and are authorised Financial Services Providers and subject to regulation by the Financial Services
Board. BNPP Cadiz does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are
appropriate to the particular investment objectives, financial situation or particular needs of the recipient.
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CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to
sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea.
Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act
on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22
November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management
companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional
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Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of
Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss
Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH-270-3000542-1. BNP
Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva.
Taiwan: Information on securities that trade in Taiwan is distributed by BNP Paribas Securities (Taiwan) Co., Ltd. Such information is for your reference only.
The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not
trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas
Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or
quoted or used by the public media without the express written consent of BNP Paribas.
Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia
Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under
the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name
“FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are
the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views
expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas.
Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad.
Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment
and BNP Paribas. Information, comments and suggestions on investment given in this material are not within the scope of investment consulting. The
investment consulting services are rendered tailor made for individuals by competent authorities considering the individuals’ risk and return preferences.
However the comments and recommendations herein are based on general principles. These opinions may not be consistent with your financial status as
well as your risk and return preferences. Therefore, making an investment decision only based on the information provided herein may not bear
consequences in parallel with your expectations. This material issued by TEB Yatırım Menkul Değerler A.Ş. for information purposes only and may be
changed without any prior notification. All rights reserved. No part of this material may be copied or reproduced in any manner without the written consent
78
BNP PARIBAS
28 OCTOBER 2014
Emily Lee
of TEB Yatırım Menkul Değerler A.Ş. Although TEB Yatırım Menkul Değerler A.Ş. gathers the presented material that is current as possible, it does not
undertake that all the information is accurate or complete, nor should it be relied upon as such. TEB Yatırım Menkul Değerler A.Ş. assumes no responsibility
whatsoever in respect of or arising out or in connection with the content of this material to third parties. If any third party chooses to use the content of this
material as reference, he/she accepts and approves to do so entirely at his/her own risk.
United States: This report may be distributed in the United States only to U.S. Persons who are “major U.S. institutional investors” (as such term is defined in
Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a “major U.S.
institutional investor”. U.S persons who wish to effect transactions in securities discussed herein must do so through BNP Paribas Securities Corp., a USregistered broker dealer and member of FINRA, SIPC, NFA, NYSE and other principal exchanges.
Certain countries within the European Economic Area: This document may only be distributed in the United Kingdom to eligible counterparties and
professional clients and is not intended for, and should not be circulated to, retail clients (as such terms are defined in the Markets in Financial Instruments
Directive 2004/39/EC (“MiFID”)). This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London
Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas SA is incorporated in France with limited liability with its registered
office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000;
fax: [44 20] 7595 2555) is authorised by the Autorité de Contrôle Prudentiel and the Prudential Regulation Authority and subject to limited regulation by the
Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation
Authority, and regulation by the Financial Conduct Authority are available from us on request.This report has been approved for publication in France by BNP
Paribas, a credit institution licensed as an investment services provider by the Autorité de Contrôle Prudentiel whose head office is 16, Boulevard des Italiens
75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main,
regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).
Other Jurisdictions: The distribution of this report in other jurisdictions or to residents of other jurisdictions may also be restricted by law, and persons into
whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report you agree to be bound by
the foregoing instructions. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or
located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
All research reports are disseminated and available to all clients simultaneously through our internal client websites. For all research available on a
particular stock, please contact the relevant BNP Paribas research team or the author(s) of this report.
Additional Disclosures
Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in
our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this
note or your BNP Paribas representative.
All share prices are as at market close on 27 October 2014 unless otherwise stated.
RECOMMENDATION STRUCTURE
Stock Ratings
Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price.
BUY (B). The upside is 10% or more.
HOLD (H). The upside or downside is less than 10%.
REDUCE (R). The downside is 10% or more.
Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a
temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.
* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will
reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our
recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.
Industry Recommendations
Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months.
Stable (previously known as Neutral) (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12
months.
Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.
Country (Strategy) Recommendations
Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine
market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index
returns relative to the market cost of equity.
Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market
recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns
relative to the market cost of equity.
Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine
market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index
returns relative to the market cost of equity.
RATING DISTRIBUTION (as at 28 October 2014)
Total BNP Paribas coverage universe
691
Investment Banking Relationship
(%)
Buy
359
Buy
8.10
Hold
240
Hold
5.00
92
Reduce
4.30
Reduce
Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.
© 2014 BNP Paribas Group
79
BNP PARIBAS
28 OCTOBER 2014
HONG KONG
BEIJING
BANGKOK
BNP Paribas (China) Ltd
Beijing Branch
Room 2001, 20/F
China World Tower
1 Jianguomenwai Avenue
Beijing, China
Tel: +86-10-6535 0888
Fax: +86-10-6535 0883
BNP Paribas Equities (Asia) Ltd
Shanghai Representative Office
Room 2630, 26/F
Shanghai World Financial Center
100 Century Avenue
Shanghai 200120, China
Tel (86 21) 6096 9000
Fax (86 21) 6096 9018
JAKARTA
BNP Paribas Securities (Asia) Ltd
63/F, Two International Finance Centre
8 Finance Street, Central
Hong Kong SAR
China
Tel (852) 2825 1888
Fax (852) 2845 9411
(In cooperation with BNP Paribas)
FSS International Investment Advisory
Securities Co., Ltd
990 Abdulrahim Place, 12/F, Room 1210
Rama IV Road, Bangrak
Bangkok 10500
Thailand
Tel (66 2) 611 3500
Fax (66 2) 611 3551
PT BNP Paribas Securities Indonesia
Grand Indonesia, Menara BCA, 35/F
JI. M.H. Thamrin No. 1
Jakarta 10310
Indonesia
Tel (62 21) 2358 6586
Fax (62 21) 2358 7587
KUALA LUMPUR
MUMBAI
BNP Paribas Capital (Malaysia) Sdn Bhd
Vista Tower, Level 48C
The Intermark, 182 Jalan Tun Razak
50400 Kuala Lumpur
Malaysia
Tel (60 3) 2179 6222
Fax (60 3) 2179 6226
TOKYO
SHANGHAI
SEOUL
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BNP Paribas House
1 North Avenue, Maker Maxity
Bandra Kurla Complex
Bandra East
Mumbai 400 051
Tel (91 22) 3370 4000
Fax (91 22) 3370 4386
SINGAPORE
TAIPEI
BNP Paribas Securities Korea Co Ltd
25/F, State Tower Namsan
100 Toegye-Ro
Jung-Gu, Seoul 100-052
Tel (82 2) 2125 0500
Fax (82 2) 2125 0593
BNP Paribas Securities
(Singapore) Pte Ltd
(Co. Reg. No. 199801966C)
10 Collyer Quay
34/F Ocean Financial Centre
Singapore 049315
Tel (65) 6210 1288
Fax (65) 6210 1980
BNP Paribas Securities
(Taiwan) Co Ltd
72/ F, Taipei 101
No. 7 Xin Yi Road, Sec. 5
Taipei, Taiwan
Tel (886 2) 8729 7000
Fax (886 2) 8101 2168
CAPE TOWN
ISTANBUL
NEW YORK
BASEL
TEB Investment
(A JV between TEB Bank and BNP Paribas)
TEB Kampus D7 Saray Mahallesi
Sokullu Sok No 7
Umraniye 34768 Istanbul
Turkey
Tel: (90 216) 636 44 44
Fax: (90 216) 631 44 00
BNP Paribas
The Equitable Tower
787 Seventh Avenue
New York
NY 10019, USA
Tel (1 212) 841 3800
Fax (1 212) 841 3810
BNP Paribas
Aeschengraben 26
CH 4002 Basel
Switzerland
Tel (41 61) 276 5555
Fax (41 61) 276 5514
BNP Paribas Securities (Japan) Ltd
GranTokyo North Tower
1-9-1 Marunouchi, Chiyoda-Ku
Tokyo 100-6740
Japan
Tel (81 3) 6377 2000
Fax (81 3) 5218 5970
BNP Paribas Cadiz Securities (Pty) Ltd
Ground floor, Fernwood House
The Oval, 1 Oakdale Road, Newlands
Cape Town
South Africa 7700
Tel (27 21) 657 8300
Fax (27 21) 657 8301
FRANKFURT
GENEVA
LONDON
MADRID
BNP Paribas
Mainzer Landstrasse 16
60325 Frankfurt
Germany
Tel (49 69) 7193 6637
Fax (49 69) 7193 2520
BNP Paribas
2 Place de Hollande
1211 Geneva 11
Switzerland
Tel (41 22) 787 7377
Fax (41 22) 787 8020
BNP Paribas
10 Harewood Avenue
London NW1 6AA
UK
Tel (44 20) 7595 2000
Fax (44 20) 7595 2555
MILAN
BNP Paribas SA, sucursal en Espana
Hermanos Becquer 3
PO Box 50784
28006 Madrid
Spain
Tel (34 91) 745 9000
Fax (34 91) 745 8888
BNP Paribas Equities Italia SIM SpA
Piazza San Fedele, 2
20121 Milan
Italy
Tel (39 02) 72 47 1
Fax (39 02) 72 47 6562
PARIS
ZURICH
MANAMA
BNP Paribas Equities France
Société de Bourse
20 boulevard des Italiens
75009 Paris
France
Tel (33 1) 4014 9673
Fax (33 1) 4014 0066
BNP Paribas
Talstrasse 41
8022 Zurich
Switzerland
Tel (41 1) 229 6891
Fax (41 1) 267 6813
BNP Paribas Bahrain
PO Box 5253
Manama
Bahrain
Tel (973) 53 3978
Fax (973) 53 1237
https://eqresearch.bnpparibas.com
.

Greater China Jewellery - Splash

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