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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
The Bling Dynasty
The growing Chinese influence on Asian luxury markets
The Great Mall of China is on the move in Asia. Hong Kong, Korea, Taiwan and Singapore – as well as
the highly unusual Macau market – all benefit from China’s increasingly mobile big spenders
As in Europe, the trick for brands is to maintain a high profile in a crowded market without losing
exclusivity. Ubiquity is the enemy.
Our preferred stocks are PPR and Hugo Boss in Europe, Prada in Asia (an Asia Super Ten portfolio
constituent) and Coach in the US
By Erwan Rambourg, Antoine Belge and Sophie Dargnies
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Summary
In past thematic reports – Around the world, around the world,
13 October 2011, Luxury “red bull”: a sequel, 2 September 2012 – we
focused on the influence of Chinese travellers on luxury consumption
globally. Here the focus is closer to home: the so-called Asian tigers –
Hong Kong, Singapore, South Korea, Taiwan – and the highly unusual
market of Macau. The Chinese traveller is increasingly influencing, if
not already dominating, these markets but we also look at the specifics
of local luxury consumption patterns there
Chinese influence on Asian luxury markets
Travel patterns are changing: The Asian region generally and the five markets of Hong Kong,
Singapore, South Korea, Taiwan and Macau specifically are benefiting from the increasing flows of
mainland Chinese tourists – who account for as little as 15% of luxury sales in Taiwan to as much as
75% in Macau. We acknowledge that travel trends are correlated to greater disposable income, but we
view ease of travel as the more important driver of this development. In other words, we believe the
reason Chinese nationals travel more and more in the region is basically because they can and we think
there is evidence that regulation and infrastructure notably will support further increases. With sheer
numbers going up, other parts of the equation must evolve with a natural long-term evolution from group
to individual travel and from an initial focus on shopping as the key reason to spend/travel to more
holistic experiences.
The impact of greater Chinese consumption: With Chinese travellers having an impact on several local
Asian markets, brands and retail operators need to adapt quickly. This is changing the luxury retail
landscape of certain cities. Prices and currencies matter as Chinese consumers are increasingly travelled
and demanding. In turn, differentiated concepts are costly but necessary for the brands to stand out in a
crowded space. The key risk for brands operating in the luxury space remains ubiquity ("I see this
brand/product everywhere I turn") in our view and with Chinese outbound travel likely to be sustained
over the next few years, the concept of "first-mover disadvantage" we introduced in October 2012 in our
Red Bull report has a long life expectancy. We believe that long after the Korean influence on pop culture
in Asia (so-called Hallyu), Korea is now gradually replacing Japan as the main influence for cosmetics,
fashion and potentially luxury itself with the Chinese.
4 "tigers", 1 Macau exception and other less relevant destinations
Korea: consumer is king. Despite a long-lasting presence of luxury brands, an indebted consumer and
political uncertainties, we believe the Korean luxury market is far from mature. However, looking at
hyper-segmentation, significant product breadth and prolific brand launches, early movers are under
pressure as substitutes abound. The Korean consumer is spoilt for choice. With the downtown duty-free
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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
sector seeing strong developments, Chinese nationals will likely be under the influence of Korean trends.
For imported brands, growth won't come without a fight.
Singapore: (too) extravagant ambitions? The stereotype of a half-asleep city disappeared with
phenomenal architectural projects and entertainment from amusement parks to casinos, shopping, fine
dining and arts. However, we believe the architect's dreams and the consumer's delight do not necessarily
mean brands are winning with their Singapore footprint as there could be a case of retail over-capacity
short term. Furthermore, although the city is a great location to capture Indonesian and Chinese demand,
the issue is with sluggish spending from the locals and a political context that may cap population growth.
Hong Kong: servicing the mainland. We are bullish on luxury prospects for Hong Kong. This may seem
counter-intuitive (especially if you live there) but we believe there is not enough luxury retail offer in Hong
Kong. With its impressive infrastructure projects, we are convinced the city will continue to be the go-to
destination for mainland shoppers. We also take the view that same-day travel will structurally force
retailers to choose between “commoditisation” and differentiation, in other words consciously target the
Chinese or decide to take a more global/cosmopolitan approach. Although the slight pick-up seen short
term may be influenced by currency swings and European price increases, we think Hong Kong will
continue to grow into one of the most profitable luxury hubs on the planet, and this despite increasing rents
Taiwan: Japan with tourists? We find the Taiwanese luxury market dynamics resemble those of Japan,
not just for historical and cultural reasons. We take the view that local demand for luxury will go down or
sideways from here. However, with the tourist-targeting infrastructure becoming more qualitative and the
greater opening to mainland China, local operators may hope potentially to become the next Hong Kong.
We believe this is wishful thinking unless one takes a very long-term view.
Macau: soon a retail destination? The dominant neon-lit gaming capital of the world has taken a while
to diversify into entertainment and retail: this is now changing. However, until retail becomes a real reason
to travel to Macau (instead of a gaming sideshow), we look for efficiency and metrics in the luxury trade,
not sophistication. We see more opportunities than risks locally but question marks on the viability of the
business model will be recurrent.
What about the rest of Asia? Japan remains a tough market dominated by local consumption for a good
reason: it is amongst the most expensive markets. The four "Asian tiger cubs" – Thailand, Malaysia,
Vietnam and Indonesia – may one day grow to become tigers, but there are clear limitations to these
luxury markets linked to infrastructure, import issues, regulation, lack of a sufficient target market or a
combination. Similarly, we are not too optimistic short term on the prospects in India for luxury. Some
markets (Australia and yes, New Zealand) are small yet also highly influenced by Chinese travel.
Key changes
We have made no rating changes in this report but we have revised some of our estimates and target prices. If
anything, the theme of the increased influence of the travelling Chinese consumers on the luxury sector has
reinforced our view that the bigger brands will now find it structurally more difficult to expand as consumers
learn about alternatives. “Ubiquity” remains a key concern as brands hit the paradox of trying to sell more of
what should theoretically be exclusive. Our favourite stocks are PPR and Hugo Boss in Europe, Coach in the
US and Prada in Asia (an Asia Super Ten portfolio constituent). We also have Overweight ratings on Tiffany,
Tod’s and Hengdeli. Although we do not see much downside risk, we would nonetheless not advise buying
other stocks in the space at this stage.
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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
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Key data
Key data for luxury goods
Stock RIC _____Rating ______ Currency Share price at __ Target price __ Potential _______ PE ________ Implied 2014e PE
New Old 25/03/2013 New Old return*** 2012e 2013e 2014e (based on target price)
Coach* COH.N OW(V) unchanged USD 49.72 71.00 71.00 42.8% 13.9 12.9 11.5 16.4
Hengdeli 3389.HK OW(V) unchanged HKD 2.28 3.00 3.75 31.6% 11.3 11.1 9.6 12.7
Hugo Boss BOSSn.DE OW unchanged EUR 84.85 110.00 110.00 29.6% 19.0 15.9 13.7 17.8
PPR PRTP.PA OW unchanged EUR 170.55 220.00 186.00 29.0% 16.9 15.7 13.2 17.0
Prada 1913.HK OW(V) unchanged HKD 78.60 100.00 100.00 27.2% 32.0 23.4 19.1 24.3
Tiffany TIF.N OW unchanged USD 68.23 82.00 74.00 20.2% 21.0 18.9 15.8 18.9
Tod's TOD.MI OW unchanged EUR 110.00 130.00 130.00 18.2% 23.2 20.0 16.9 20.0
Burberry* BRBY.L N(V) unchanged GBP (p) 13.17 15.30 15.00 16.2% 19.3 17.1 15.1 17.5
LVMH LVMH.PA N unchanged EUR 129.65 147.00 150.00 13.4% 19.0 17.4 15.8 17.9
Christian Dior DIOR.PA N unchanged EUR 127.85 144.00 147.00 12.6% 14.0 12.1 11.0 12.4
Richemont (*) CFR.VX N unchanged CHF 73.55 82.00 83.00 11.5% 18.7 16.3 14.7 16.3
The Swatch Group UHR.VX N unchanged CHF 531.00 590.00 550.00 11.1% 17.9 15.9 14.2 15.8
Ferragamo SFER.MI N unchanged EUR 21.36 23.00 21.00 7.7% 34.1 25.8 21.7 23.4
Luxottica LUX.MI N unchanged EUR 39.24 42.00 36.00 7.0% 31.0 25.8 22.9 24.5
Hermès HRMS.PA N unchanged EUR 265.70 280.00 260.00 5.4% 37.7 34.9 32.3 34.0
*Based on calendar data
**Averages do not include Hermès
*** Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates
Average 20.8 17.7 15.4 18.2
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Summary of HSBC sales estimate changes and comparison with Bloomberg consensus
____________________ 2013e sales _____________________ _____________________ 2014e sales ______________________
______ HSBC _______ HSBC vs _______HSBC _______ HSBC vs
(m) Currency New Old Change Consensus Consensus New Old Change Consensus Consensus
Burberry* GBP 2,353 2,260 4% 2,277 3% 2,588 2,485 4% 2,529 2%
Christian Dior EUR 32,817 33,112 -1% 32,911 0% 35,519 35,785 -1% 35,580 0%
Coach** USD 5,500 5,500 0% 5,518 0% 6,025 6,025 0% 6,085 -1%
Ferragamo EUR 1,275 1,280 0% 1,265 1% 1,410 1,415 0% 1,408 0%
Hengdeli CNY 13,136 13,125 0% 14,103 -7% 14,201 14,300 -1% 16,220 -12%
Hermès EUR 3,750 3,722 1% 3,805 -1% 4,100 4,058 1% 4,229 -3%
Hugo Boss EUR 2,565 2,565 0% 2,514 2% 2,820 2,820 0% 2,734 3%
Luxottica EUR 7,715 7,761 -1% 7,650 1% 8,271 8,346 -1% 8,185 1%
LVMH EUR 30,124 30,420 -1% 30,269 0% 32,537 32,830 -1% 32,862 -1%
PPR EUR 10,458 10,379 1% 10,376 1% 11,343 11,224 1% 11,276 1%
Prada EUR 3,885 3,885 0% 3,904 0% 4,353 4,350 0% 4,540 -4%
Richemont* EUR 10,780 10,975 -2% 11,038 -2% 11,600 11,700 -1% 12,015 -3%
The Swatch Group CHF 8,970 8,950 0% 8,897 1% 9,791 9,770 0% 9,795 0%
Tiffany USD 4,060 4,020 1% 4,036 1% 4,451 4,337 3% 4,332 3%
Tod's EUR 1,066 1,066 0% 1,042 2% 1,188 1,188 0% 1,142 4%
* FY March n+1; ** FY June n+1 Source: HSBC estimates, Bloomberg consensus
Summary of HSBC EBIT estimate changes and comparison with Bloomberg consensus
____________________ 2013e EBIT _____________________ _____________________ 2014e EBIT ______________________
______ HSBC _______ HSBC vs _______HSBC _______ HSBC vs
(m) Currency New Old Change Consensus Consensus New Old Change Consensus Consensus
Burberry* GBP 480 460 4% 454 6% 538 515 4% 524 3%
Christian Dior EUR 6,987 7,144 -2% 7,104 -2% 7,670 7,859 -2% 7,917 -3%
Coach** USD 1,715 1,715 0% 1,747 -2% 1,910 1,910 0% 1,964 -3%
Ferragamo EUR 230 226 2% 221 4% 271 269 1% 259 5%
Hengdeli CNY 1,374 1,402 -2% 1,540 -11% 1,547 1,572 -2% 1,802 1,374
Hermès EUR 1,204 1,164 3% 1,209 0% 1,298 1,276 2% 1,355 -4%
Hugo Boss EUR 500 507 -2% 489 2% 575 583 -1% 552 4%
Luxottica EUR 1,150 1,175 -2% 1,147 0% 1,280 1,305 -2% 1,280 0%
LVMH EUR 6,480 6,608 -2% 6,457 0% 7,093 7,279 -3% 7,121 0%
PPR EUR 2,034 2,023 1% 1,977 3% 2,318 2,304 1% 2,234 4%
Prada EUR 1,156 1,156 0% 1,087 6% 1,391 1,368 2% 1,304 7%
Richemont* EUR 2,520 2,515 0% 2,631 -4% 2,780 2,739 1% 2,895 -4%
The Swatch Group CHF 2,285 2,209 3% 2,254 1% 2,550 2,458 4% 2,525 1%
Tiffany USD 770 758 2% 746 3% 892 869 3% 831 7%
Tod's EUR 239 242 -1% 230 4% 282 283 0% 259 9%
* FY March n+1; ** FY June n+1 Source: HSBC estimates, Bloomberg consensus
Summary of HSBC EPS estimate changes and comparison with Bloomberg consensus
____________________ 2013e EPS ______________________ _____________________ 2014e EPS ______________________
______ HSBC _______ HSBC vs _______HSBC _______ HSBC vs
(m) Currency New Old Change Consensus Consensus New Old Change Consensus Consensus
Burberry* GBP 79.33 75.96 4% 76.86 3% 89.98 86.10 5% 87.98 2%
Christian Dior EUR 10.55 11.12 -5% 11.13 -5% 11.61 12.27 -5% 11.85 -2%
Coach** USD 4.07 4.07 0% 4.13 -1% 4.58 4.58 0% 4.75 -4%
Ferragamo EUR 0.83 0.85 -2% 0.81 2% 0.98 1.02 -3% 0.97 2%
Hengdeli CNY 0.16 0.18 -11% 0.20 -18% 0.19 0.21 -9% 0.23 -19%
Hermès EUR 7.61 7.37 3% 7.64 0% 8.23 8.10 2% 8.64 -5%
Hugo Boss EUR 5.32 5.36 -1% 5.10 4% 6.19 6.23 -1% 5.85 6%
Luxottica*** EUR 1.52 1.59 -5% 1.47 3% 1.71 1.79 -4% 1.67 2%
LVMH EUR 7.47 7.77 -4% 7.58 -1% 8.23 8.68 -5% 8.50 -3%
PPR EUR 10.86 10.46 4% 10.72 1% 12.94 12.45 4% 12.48 4%
Prada EUR 0.33 0.33 0% 0.30 10% 0.41 0.40 1% 0.36 12%
Richemont* EUR 3.82 3.81 0% 3.92 -3% 4.22 4.16 1% 4.33 -3%
The Swatch Group CHF 33.46 32.31 4% 33.01 1% 37.34 35.96 4% 36.88 1%
Tiffany USD 3.62 3.68 -2% 3.49 4% 4.33 4.32 0% 3.94 10%
Tod's EUR 5.50 5.64 -3% 5.31 3% 6.52 6.63 -2% 6.01 8%
* FY March n+1; ** FY June n+1 *** HSBC EPS for Luxottica is before trade-mark amortisation Source: HSBC estimates, Bloomberg consensus
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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Contents
Calendar of events 6
Valuation and ratings 7
Chinese influence on “Asian
Tigers” and Macau 14
Korea: consumer is king 26
Singapore: (too) extravagant
ambitions? 34
Hong Kong: servicing the
mainland 37
Macau: soon a retail
destination? 43
Taiwan: Japan with tourists? 48
Other Asian destinations? 53
Company profiles 55
Burberry 56
Christian Dior 60
Coach 64
Ferragamo 68
Hengdeli Holdings 72
Hermès 76
Hugo Boss 80
Luxottica 84
LVMH 88
PPR 92
Prada 96
Richemont 100
Swatch 104
Tiffany 108
Tod’s 112
Disclosure appendix 117
Disclaimer 120
We would like to thank Scott Chan* (The Hongkong and Shanghai Banking Corporation Limited) and Anne-Laure Jamain* (HSBC
Bank Plc) for their contribution to this report.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
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Calendar of events
Luxury Goods calendar of events
Company Type of event Date
Burberry H2 2012/2013 sales 17-Apr-13
Burberry Preliminary earnings release FY 2012/2013 21-May-13
Burberry Q1 2013/2014 sales July-13
Burberry H1 2013/2014 results November-13
Christian Dior FY ending April 2013 earnings June 2013
Coach Q3 earnings 24-Apr-12
Ferragamo Q1 13 results 13-May-13
Ferragamo H1 13 results 29-Aug-13
Ferragamo Q3 13 results 14-Nov-13
Hengdeli H1 13 results 01-Aug-13
Hermès Q1 13 sales 22-Apr-13
Hermès Q2 13 sales 18-Jul-13
Hermès H1 13 results 30-Aug-13
Hermès Q3 13 sales 07-Nov-13
Hugo Boss Q1 13 results 02-May-13
Hugo Boss H1 13 results 31-Jul-13
Hugo Boss Q3 13 results 31-Oct-13
Luxottica Q1 13 results 29-Apr-13
Luxottica Q2 13 results 30-Jun-13
Luxottica Q3 13 results 29-Oct-13
LVMH Q1 13 sales 15-Apr-13
PPR Q1 13 sales 25-Apr-13
PPR H1 13 results July-13
Prada FY 12 results 05-Apr-13
Prada H1 13 results 17-Sep-13
Prada Q3 13 results 05-Dec-13
Richemont FY 13 earnings 16-May-13
Richemont 5 month sales September-13
Richemont H1 2013/2014 results 08-Nov-13
Swatch H1 13 results 15-Aug-13
Tiffany Q1 13 results 28-May-13
Tod's Q1 13 results 14-May-13
Tod's H1 13 results 07-Aug-13
Tod's Q3 13 results 13-Nov-13
FHS Data March period 23-Apr-13
FHS Data April period 28-May-13
FHS Data May period 20-Jun-13
FHS Data June period 18-Jul-13
FHS Data July period 22-Aug-13
FHS Data August period 19-Sep-13
FHS Data September period 22-Oct-13
FHS Data October period 21-Nov-13
FHS Data November period 19-Dec-13
FHS Data December period 06-Feb-14
Source: Company data
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Valuation and ratings
We favour PPR, Hugo Boss, Coach and Prada and also have
Overweight ratings on Hengdeli, Tiffany and Tod’s
We are still relatively cautious on the rest of the space
We highlight four investment themes
Ratings
Even though we are making some target price
changes in this report (most notably a steep cut to
Hengdeli on the back of this theme), our ratings are
unchanged. The bulk of the sector players will find
H1 more difficult than H2 this year, in our view, as a
combination of a tough basis of comparison,
wholesale downsizing and continuing challenges for
consumers (peer pressure on gifting in China,
sluggish economies in Europe, sequestration in the
US) might impact psychology.
The first-mover disadvantage theme that we started
highlighting in our Luxury “red bull”: a sequel
report in September 2012 has legs. With Chinese
consumers incrementally buying abroad and spoilt
for choice, we see pressure ongoing for the bigger
brands. It is no surprise that most of our Overweight
ratings are on mono-brand companies we consider
under-developed. The exceptions are PPR where we
see a re-rating story on the back of a cleaner and outperforming
portfolio and Hengdeli which, in our
view, still does not trade on fundamentals.
Overweight ratings
Our highest conviction calls are:
PPR (OW): It has a purer portfolio and
importantly one that is set to outperform peers.
In our view, the re-rating of this stock has only
just begun.
Hugo Boss (OW): With slow growth in Asia,
high exposure to wholesale and Europe, and a
cautious outlook for 2013, many concerns are
priced in but won't necessary play out, in our
view. This makes it a stock to look at now.
Prada (OW(V)): This remains the fastest EPS
grower in luxury. The bear case, still focusing
on PE, misses the point of sustainable, superior
growth and an almost Zara-like business model.
Coach (OW(V)): The investor community
seems to find it difficult to accept that this
company has gone from hyper growth to simply
growth. It is now trading at a very reasonable
price with the market basically implying that the
story is broken. We disagree.
We also have Overweight ratings on:
Tod's (OW): After years of trying, finally the
group is growing more outside of Italy, outside
of shoes and with a clearer retail focus. The
eponymous brand is going through a phase all
luxury giants went through 10 years ago,
suggesting the call has duration.
Tiffany (OW): Although sales and margin
metrics in 2012 were disappointing and pointed
to market share losses, we believe the brand still
has a very strong positioning to expand globally
and company guidance is now quite reasonable,
in our view.
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Hengdeli (OW(V)): Given where the stock is
trading, we see a potentially large reward but
have significantly reduced our target price on the
view that Chinese consumption of watches has
gradually shifted to markets where Hengdeli
does not operate.
Neutral ratings
LVMH (N): Yes, the stock may have
underperformed the sector lately but we think
there was a reason for it and the theme reinforces
our view that parts of the portfolio (and notably
Louis Vuitton) will cap growth relative to peers
over the next 9-12 months.
Christian Dior (N): The holding company of
LVMH has strongly outperformed and does not
appear in our view like the value play it may
have been six months ago given the now 20%
discount to RNAV.
Richemont (N): The smaller brands (except
for Baume&Mercier) are getting traction but
the issue remains more that Cartier could
disappoint in sales and margins. We have few
issues for the long term but are cautious as we
believe trends could remain lacklustre until
September 2013.
Swatch (N): A good deal (Harry Winston) and
strong results have underpinned a phenomenal
share price performance. We fail to see what the
near-term positive catalysts could be.
Burberry (N(V)): Upside risk to estimates (c5%
for FY March 2014e) as GBP weakness is not
reflected in consensus numbers, in our view, but
valuation is not compelling in light of
normalising growth rates after a
transformational period.
Luxottica (N): It is a captain of industry with a
lot of self-help (Coach and Armani licences,
M&A, retail margin recovery and FX), but
valuation remains quite unattractive, in our view.
Ferragamo (N): The company should continue
to outperform peers but we now believe the
valuation takes that into account quite well.
Hermès (N): The shares continue not to trade on
fundamentals but downside is limited by
technical effects (limited free float, grants of
shares to employees).
Share prices performances - Luxury goods
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Q1 12 Q2 12 Q3 12 Q4 12 FY12 Q1 13
TD
LVMH -35 -14 47 -2 33 7 3 -42 64 57 -11 18 -7 -2 19 27 -7
Hermes 15 -24 17 -4 44 35 -9 16 -7 68 47 10 -4 -14 8 -2 17
Richemont -29 -16 15 27 52 24 10 -74 71 58 -14 20 45 9 27 51 3
The Swatch Group -26 -23 29 12 17 37 27 -57 80 59 -17 19 -10 0 23 33 15
Christian Dior -32 -7 50 4 50 8 11 -55 78 49 -14 26 -6 -4 23 40 0
Burberry nm -2 63 10 5 54 -12 -61 170 88 6 26 -11 -24 22 3 8
Tod's 6 -34 13 1 63 7 -22 -37 72 42 -15 34 -6 7 14 52 15
PPR -37 -52 9 -4 29 19 -3 -58 81 41 -7 17 -13 6 18 27 21
Luxottica 20 -32 9 9 43 9 -7 -42 42 26 -5 25 6 0 13 43 26
Hugo Boss 90 -58 59 54 21 31 0 -58 70 130 1 52 -10 0 2 45 6
Ferragamo** nm nm nm nm nm nm nm nm nm nm 13 53 6 -1 3 63 28
Average -6 -28 34 12 33 22 -1 -47 68 60 -1 27 -1 -2 16 35 12
Eurotop 300 -18 -32 12 9 22 16 2 -45 26 7 -11 9 -4 7 4 13 5
Prada* nm nm nm nm nm nm nm nm nm nm -12 46 2 12 29 112 6
Hengdeli nm nm nm nm nm 220 37 -73 268 57 -46 31 -26 -8 26 14 -20
Hang Seng Index -24 -18 35 13 5 34 39 -48 52 5 -20 12 -5 7 9 23 -2
Tiffany -1 -24 89 -29 20 2 17 -42 61 45 8 3 -23 17 -7 -14 19
Coach 36 69 129 49 18 29 -29 -32 76 52 11 -9 -24 -4 -1 -9 -10
S&P 500 -13 -23 26 9 3 14 4 -38 23 13 0 12 -3 6 -1 13 9
Share prices at 25 March 2013 * Prada's IPO on 23 June 2011, **Ferragamo's IPO on the 18 June 2011
Source: Thomson Reuters Datastream
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Sector valuation history (forward PE)
40.0 x
2000 bubble
35.0 x
30.0 x
25.0 x
20.0 x
SARS
epidemic
China starts
to matter
2007 market
peak
Average since 01/01/2003: 16.8x
15.0 x
10.0 x
5.0 x
Asian financial
09/11 attacks
crisis
Post-Lehman collapse
0.0 x
Jun-97 May-98 Apr-99 Mar-00 Feb-01 Jan-02 Dec-02 Nov-03 Oct-04 Sep-05 Aug-06 Jul-07 Jun-08 May-09 Apr-10 Mar-11 Feb-12 Jan-13
Source: FactSet, HSBC estimates
Outlook
Killing me softly? Not really but still…
The luxury goods industry entered 2012 facing
one of the highest bases of comparison in its
history: the 20% organic sales growth rate seen in
2011 was itself on top of the 15% registered in the
recovery year of 2010. The issue for the sector
thus was that growth rates could only slow from
there, which they did but in a gradual way: 16% in
Q1 2012, 12% in Q2, 8% in Q3 and an aggregate
9% in Q4, meaning 2012 organic sales growth
was still an impressive 11% (2pp higher than our
original forecast 15 months ago).
We believe that as growth stabilises, there will be
market share gainers and losers, companies better
positioned to capture tourism trends, and winners
and losers on currency impacts. Overall, however,
the fact that trends are still in a soft landing phase
(ie 2013 will not, in our view, see an acceleration
on 2012) should not be supportive overall to this
“momentum” sector.
What is quite supportive is this widespread (and
fairly true) idea that if luxury demand is not
booming, other sectors are not either and the
barriers to entry, cash generation and returns for
this industry remain extremely compelling on a
long-term view.
Although the stocks in the sector have tended to
move together in the past 18 months, with a derating
in autumn 2011 on the back of fears of a
hard landing for China, a re-rating early in 2012
on greater confidence, a pullback in Q2, and then
another leg up since last summer, we believe there
are reasons for stocks to behave differently short
term.
So far in 2013 the outperformers have been
Ferragamo (+28%), Luxottica (+26%) and PPR
(+21%) and the underperformers Hengdeli (-20%),
Coach (-10%) and LVMH (-7%).
Are you in it for a quarter or for five
years?
The difficulty in the sector remains how to align
family or management imperatives (where will
brand equity be for the next generation?) and
short-term share price performance.
2013 will be a game of two halves in terms of
sales, mirroring the basis of comparison of a
strong 2012 H1 and weaker H2 but also linked to
the issue of ongoing wholesale rationalisation,
which should weigh in the next six months for
many players.
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Taking the brand equity view, it is natural for many
operators to continue to invest heavily in retail,
production capex and people and this means that
lower sales and still punchy costs will see some
margins get squeezed in H1 before they potentially
pick up later in the year.
What to expect
In H1 2013, we believe that wholesale’s historically
lesser resilience and initiatives by some brands to
close some unsuitable points of sale will weigh on the
performance of companies still exposed to this
channel (Swatch, Richemont, Tod’s, Hugo Boss,
Ferragamo and Burberry).
Over the full year 2013e, we forecast a limited sales
deceleration y-o-y (10% versus 11% in 2012e), but
with mid single-digit growth in H1 (with Q2 2013e
marking the trough of the current cycle) and low
double-digit growth in H2.
Asia: finally more sustainable growth
Although trends elsewhere surprised positively,
growth rates in Asia ex-Japan did not meet
expectations in 2012. After years when growth rates
in mainland China were sustained in spite of the
country reaching 10% of global industry sales in
2011, growth was eventually expected to start
‘normalising’.
Two factors supported the trends: the weakness of the
EUR, which made it even more compelling for
Chinese shoppers to buy when travelling in Europe,
and the slowdown in gift giving (wait-and-see
attitude ahead of the once-in-a-decade government
change, fewer real estate deals, and government
officials being more vocal against corporate gifting).
The ‘first-mover disadvantage’ theme described in
the next section is clearly playing out, with Chinese
shoppers becoming more sophisticated and
discriminating, which means some established brands
are losing market share. That theme also explains the
widely disparate performances of the different brands
seen in other non-Japan Asian countries.
Finally, Japan continues to be in a stabilisation phase
(low- to mid-single-digit growth rates).
For 2013 local trends should be analysed in tandem
with sales to Chinese tourists abroad (part of the
reason we are publishing on our theme).
Certain brands which had seen slower growth in
China (and even Hong Kong) recently mentioned
that sales trends had picked up since October,
notably in Hong Kong. Certainly, the fact that the
change in government has now taken place in
China and that Chinese GDP is expected to gather
pace in 2013 (HSBC economists forecast 8.6%
GDP growth in China in 2013 vs 7.8% in 2012)
should boost consumer sentiment in the region.
But, as outlined in the paragraph below (travel
theme), Chinese demand must be analysed
globally, and if the basis of comparison is
favourable in terms of local sales in China, this is
not the case for Chinese consumption as a whole
(ie including sales to Chinese tourists abroad,
especially in Europe).
In 2013, a risk for luxury companies is a possible
reversal of the trends seen in 2012, ie Chinese
consumers buying more at home, but less abroad
(notably because the EUR recently strengthened
and because several brands have increased prices
in the eurozone in September/October 2012). This
trend of buying closer to home has already
affected regional mix in calendar Q4 in our view,
with Hong Kong so far benefiting greatly.
We forecast Japan will grow by 1% this year (vs
3% in 2012), mainland China by 20% (vs 19%)
and the rest of Asia 15% (vs 14%).
The West: a 2012 positive surprise, brace
yourself for a light slowdown now
In Europe, despite the economic uncertainties,
business has been stronger than expected in 2012
as:
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(i) tourism flows (mostly, but not only, Chinese
visitors) have been very supportive; (ii) demand
from locals was flat y-o-y rather than down 5-
10% (our forecast entering 2012) as affluent
customers were more resilient than we thought.
In the US we have not so far seen another
psychological shock of the magnitude of that
which accompanied the collapse of Lehman in
September 2008, which explains why trends in
luxury consumption in the US have continued to
outperform overall consumer trends.
Although it is difficult to assess the psychology of
high-end consumers, demographic trends remain
supportive (notably the increasing weight of non-
Caucasians in the total US population as US
citizens of Hispanic and Asian origin have a
higher propensity to buy luxury goods).
Investment themes
We continue to argue that it is more relevant to
look at the luxury sector in terms of sales by
nationality instead of sales by region as the luxury
consumer, notably the Chinese, Russian, Indian,
Brazilian or Middle Eastern consumer purchases
more abroad than at home. Obviously, this is not
how companies report numbers and, over the last
two years, this has led to positive surprises in
terms of sales reported for Europe (where more
than 50% of sales are made by people from
outside Western Europe).
‘First-mover disadvantage’/ubiquity
On 2 September 2012, we published a sector
report called Luxury “red bull”: a sequel, the
purpose of which was to analyse how Chinese
demand had evolved since January 2010 when we
published our first “red bull” report. Our two key
conclusions were:
Chinese consumption of luxury products
abroad is growing at a faster rate than local
consumption, putting pressure on the brands’
Chinese operations.
Chinese shoppers have become more
sophisticated and discriminating, which means
some established brands may lose market
share (we call this a ‘first-mover
disadvantage’).
Luxury goods: contribution of each geographic region to organic sales growth
2007 2008 2009 2010 2011 1H12 2H12e 2012e 2013e 2014e
Geographic breakdown
Europe 42% 42% 39% 36% 34% 32% 32% 32% 31% 29%
Japan 12% 12% 11% 9% 8% 8% 8% 8% 8% 7%
US 20% 19% 18% 18% 18% 18% 18% 18% 18% 18%
China 3% 5% 6% 8% 10% 10% 10% 10% 11% 12%
Rest of Asia & other 22% 23% 25% 28% 29% 31% 31% 31% 32% 33%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Organic sales growth rate
Europe 13% 5% -7% 9% 12% 9% 5% 7% 6% 4%
Japan 6% -9% -15% -4% 4% 5% 1% 3% 1% 2%
US 16% 2% -14% 14% 24% 17% 10% 14% 9% 8%
China 40% 45% 30% 45% 47% 28% 10% 19% 20% 22%
Rest of Asia & other 22% 13% 8% 23% 27% 17% 11% 14% 15% 12%
Total 15% 6% -4% 15% 20% 14% 8% 11% 10% 9%
Contribution to growth
Europe 5.1% 1.9% -2.8% 3.1% 4.4% 3.1% 1.5% 2% 2% 1%
Japan 0.9% -1.1% -1.8% -0.5% 0.4% 0.4% 0.1% 0% 0% 0%
US 3.5% 0.3% -2.7% 2.4% 4.3% 3.1% 1.9% 2% 2% 1%
China 1.2% 1.5% 1.4% 3.4% 3.6% 2.7% 1.1% 2% 2% 2%
Rest of Asia & other 4.7% 2.9% 1.8% 6.4% 7.8% 5.0% 3.4% 4% 5% 4%
Total 15% 6% -4% 15% 20% 14% 8% 11% 10% 9%
Source: Company data, HSBC estimates
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Not just focusing on the fast-growing Chinese
clientele, we believe “ubiquity” is a key current
theme for luxury brands globally, especially mega
brands. The risk of ubiquity is the idea that the
consumer, seeing the same products everywhere,
all the time, starts to perceive a brand as being
“too common”.
In our view, the main victims of this theme are
likely to be Louis Vuitton, Burberry and Gucci as
customers from developed economies and now
even Chinese tier-1 cities are less eager to buy
logo products, and winners should be notably
Prada, smaller luxury brands within PPR, Hermès,
and Tod’s.
M&A and use of cash
Despite stepping up capex, most companies in the
sector will be faced with cash piles sooner or
later. Richemont and Swatch already are in
substantial net cash positions (Swatch a bit less so
after the Harry Winston deal), and other groups
should get there quickly. We doubt, however, that
any sizeable deal is imminent and we believe
investors should remember that synergies are
scarce in the luxury industry, thus limiting the
potential for value creation via M&A. Dividend
hikes, and to a lesser degree, buy-backs are
options corporates might consider.
There may be tactical opportunities arising and
Harry Winston at Swatch or Qeelin and Brioni at
PPR have been, in our view, recent examples of
very sensible and opportunistic deals, yet nontransformational.
We continue to believe that
Luxottica is the only player for which small deals,
such as Tecnol in Brazil or Alain Mikli in Europe
recently, as well as the acquisitions of retail
chains in emerging markets, should continue to be
successful, rapidly profitable, add-ons.
Currency
Currency remains key for this sector with
European listed companies benefiting when the
EUR (and CHF) is weak against USDdenominated
currencies and JPY.
FX was a significant tailwind in 2012 for
European companies, but should become a slight
headwind in 2013e (compared to a significant
tailwind in 2012) as the EUR has strengthened in
recently against most currencies (notably against
the Japanese yen).
Although European companies’ sales were
boosted by a c3-6% FX impact in 2012, we
estimate the impact should be slightly negative
(-1%) in 2013e based on EUR/USD=1.30.
Sales growth at constant forex and perimeter
% FY 01a FY 02a FY 03a FY 04a FY 05a FY 06a FY 07a FY 08a FY 09a FY 10a FY 11a Q1 12a Q2 12a Q3 12a Q4 12a FY 12a FY 13e FY 14e
Hermès 8 6 8 12 7 8 11 9 4 19 18 18 13 16 19 16 11 9
LVMH 4 4 4 11 11 12 13 7 -3 14 14 14 10 6 8 9 10 8
of which Louis Vuitton 12 7 14 13 12 11 14 12 7 15 15 12 6 5 5 7 7 7
Richemont** 0 0 0 13 17 16 16 2 -5 19 30 25 15 10 5 8 7 7
Swatch Group 1 1 1 6 8 12 17 4 -8 22 22 16 12 8 11 12 8 8
Burberry** 14 12 15 10 3 15 19 7 1 15 21 15 11 5 9 8 9 10
PPR Luxury na 5 13 16 18 15 8 -4 12 22 18 17 12 14 15 12 9
Gucci brand 1 -8 4 13 18 17 11 4 -1 11 11 12 10 7 8 9 8 8
Hengdeli na na na na na na na 20 7 39 38 8 4 4 9 7 8 8
Prada na na na na na na na na -6 24 25 41 19 25 13 23 19 10
Tod's 27 13 8 15 20 14 17 9 0 9 14 7 8 -1 7 5 12 11
Luxottica na 3 -2 11 11 14 10 -1 -4 7 9 9 5 6 4 6 9 7
Tiffany 0 4 14 8 9 11 13 -4 -5 12 15 8 3 5 4 4 7 8
Coach*** 21 32 37 29 26 29 20 -1 9 14 14 16 12 11 4 6 9 10
Hugo Boss na na na 13 12 14 12 6 -8 5 19 10 14 0 19 10 10 10
Ferragamo na na na na na na na na -10 17 24 19 17 8 11 13 11 11
* Half-year. ** Year ending March n+1 *** Year ending Jun. Note: Richemont, Burberry, Hengdeli and Coach have not reported FY12/13 earnings
Source : Company data, HSBC estimates
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A very recent move has been the 3% surge in the
EUR against the CHF. Swatch should be the main
beneficiary of this move and to a lesser extent
Richemont (since it reports in EUR).
In terms of profits, the FX impact for European
companies should still be positive in H2 2012 and
possibly in H1 2013 as some of the positive
impact on profits related to euro weakness seen
early 2012 has been delayed to 2013 due to
hedging.
In H2 2013, though, hedging should have faded
and the FX impact on earnings should be
negative.
EUR/USD since 1 January 2005
1.6
1.55
1.5
1.45
1.4
1.35
1.3
1.25
1.2
1.15
1.1
Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13
Source: Thomson Reuters Datastream
EUR to JPY since 1 January 2005
170
160
150
140
130
120
110
100
90
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: Thomson Reuters Datastream
EUR to CHF since 1 January 2005
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13
Source: Thomson Reuters Datastream
Luxury goods sector performance vs FTSE Eurofirst 300
In the past, European luxury brands used to
increase their prices in local currencies to mitigate
adverse FX movements, but we believe the scope
to do so is now more limited, except in Japan
where Louis Vuitton, as a leader, has opened up
opportunities for others by increasing prices by
c12% recently despite evidence of a sluggish
market.
300
250
200
150
100
50
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Luxury Goods index
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
FTSE300 Price index
Jan-
13
Source: Thomson Reuters Datastream
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Chinese influence on
“Asian Tigers” and Macau
Chinese purchases of luxury goods are now more substantial in Asia
ex-China than in China itself
Travel patterns are changing quickly with greater ease of travel
(regulation) and changing habits (individual travel)
Chinese consumption influences the retail landscapes of Asia as well
as the perception of brands. Korea seen as a trendsetting country
In Asia: more business with
Chinese outside of China
Starting in October 2011 in our report Around the
world, around the world, we have looked at the
luxury goods sector in terms of sales by nationality
(guesstimates from speaking to industry observers,
retail operators, regional MDs, CFOs, etc) rather
than sales by region (what corporates report). Travel,
in our view, remains the key driver for the industry
and while some markets are resolutely local or
"closed", others are structurally tourism-driven or
"open".
Out of the large luxury markets, "closed" markets
include Japan, China and the US; the "open" markets
are Europe and Asia ex-Japan ex-China. Japan is
structurally hampered by prohibitive price points
and, we would argue, has also seen its trendsetter
status waning. China also suffers from high price
points (VAT, import taxes and consumption taxes
hit) and while domestic tourism has soared, inbound
travel to China from the rest of the world is still
relatively muted. The US has long been a difficult
country to enter for Chinese nationals (and tourists
generally) and while European tourism is strong,
these consumers tend to buy at home. Also, the local
US consumer tends to make purchases domestically.
In other words, we think the US will move but very
gradually from a "closed" to an "open" market with
the country for the time being only having a few
points of contact for luxury consumers (NYC,
Florida, California, Hawaii, Guam, Saipan).
The "open" markets of Europe and Asia ex-Japan
ex-China are only going one way: less local, more
global even though some markets (Germany in
Europe, Korea and "tiger cubs" in Asia) still have the
potential for growing sales from locals. Looking at
the table below, we view travel as accounting for
c37.5% of sales in the luxury sector and 22 points of
that (or c60%) is down in our view to Chinese
nationals travelling outside of China.
Luxury getting a tad touristy: estimates for 2013
Contribution to sales
Of which tourists
Rest of Asia 32.0% 15.0%
China 11.0% 0.5%
Europe 31.0% 19.0%
US 18.0% 3.5%
Japan 8.0% 0.5%
Global sales 100.0% 37.5%
Source: HSBC estimates
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Mainland China in 2013 should represent "only"
10% of sector sales while we estimate mainland
Chinese will account for 32% all in. More than twothirds
of mainland Chinese purchases take place
outside of China and while previously we have
focused on how this was beneficial to reported
trends in Europe, we look in this report at the
mainland Chinese influence closer to home, in Asia.
The Asian region generally and the five markets of
Hong Kong, Singapore, South Korea, Taiwan and
Macau specifically, are benefiting from the
increasing flows of mainland Chinese tourists.
Chinese punching above China’s weight: estimates for 2013
Contribution to sales
Of which Chinese
Rest of Asia 32.0% 11.5%
Hong Kong 10.0% 6.0%
Korea 7.0% 1.5%
Macau 2.0% 1.5%
Other Asia 7.0% 1.0%
Singapore 4.0% 1.0%
Taiwan 3.0% 0.5%
China 10.0% 10.0%
Europe 31.0% 9.0%
US 18.0% 1.5%
Japan 8.0% 0.0%
Global sales 100.0% 32.0%
Source: HSBC estimates
Luxury goods companies - 2012 geographical sales breakdown
Europe Americas Japan Asia & others Mainland China HK + Taiwan +
Macau
Rest of Asia &
others
Hermès 35% 16% 16% 33% 10% 10% 13%
Richemont* 33% 14% 9% 44% 9% 20% 15%
LVMH 31% 23% 8% 38% 10% 9% 18%
of which Louis Vuitton 28% 21% 15% 37% 11% 8% 18%
PPR 30% 20% 12% 38% 8% 8% 22%
of which Gucci Brand 27% 19% 12% 43% 13% 10% 20%
Burberry* 30% 24% 4% 42% 12% 9% 21%
Tod's 61% 8% 4% 27% 10% 10% 8%
The Swatch Group 37% 8% 2% 53% 17% 20% 16%
Luxottica 20% 63% 1% 16% 2% 1% 13%
Ferragamo 25% 22% 12% 41% 11% 11% 18%
Hugo Boss 59% 24% 2% 15% 7% 2% 6%
European average 36% 22% 7% 35% 10% 10% 15%
Coach** 1% 69% 17% 13% 3% 4% 8%
Tiffany*** 12% 49% 17% 21% 3% 9% 9%
Hengdeli 0% 0% 0% 100% 72% 28% 0%
Prada*** 39% 15% 9% 37% 11% 11% 15%
Total average 29% 26% 8% 37% 13% 11% 13%
Note: this average including PPR (rather than the Gucci Group) *FY March 12 **FY June 12 ***FY Jan 2012
Source: Company data, HSBC calculations
Luxury revenue breakdown in different markets (our 2013 projection)
100%
80%
20%
30%
20%
40%
10% 10%
30%
25%
15% 10%
20%
5%
60%
40%
20%
0%
70%
35% 50%
80%
50% 65% 75%
40%
75%
60%
35% 30%
20%
10%
10%
25% 20% 15%
US France Italy UK Germany HK Singapore Korea Taiw an Macau
Chinese Local Other
Source: HSBC estimates
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Sales by nationality 2012
LVMH LV brand Gucci brand Burberry* Prada Richemont Swatch Tod's
Western Europe 17% 12% 14% 13% 11% 12% 12% 41%
Eastern Europe 5% 5% 5% 4% 3% 3% 4% 5%
Middle East 6% 8% 3% 5% 4% 8% 9% 5%
North America 18% 15% 16% 6% 10% 9% 5% 11%
LatAm 4% 5% 3% 3% 3% 4% 3% 2%
Rest of Asia 12% 9% 11% 19% 20% 15% 13% 6%
China Mainland 21% 27% 28% 25% 34% 33% 40% 21%
HK+Taiwan+Macau 6% 5% 5% 5% 4% 7% 10% 5%
Japan 12% 18% 15% 6% 12% 11% 4% 5%
Total 100% 100% 100% 100% 100% 100% 100% 100%
* For Burberry, figures are based on sales at retail equivalent
Source: HSBC estimates
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Travel patterns
Ease of travel
Before 1983, outbound tourism was extremely
restricted in China. The authorities then made it
easier travel to Hong Kong and Macau on a family
or friend sponsored basis. In 1990, the Chinese
National Tourism Administration (CNTA) started
authorising travel to a few Asian countries (initially
Thailand, Singapore and Malaysia), still on a family
or friend sponsored basis, before opening up to more
Asian destinations and Russia.
Later in the 1990s, non-Asian countries started to get
the Approved Destination Status (ADS) and whilst
there are many restrictions still, that is when
outbound travel started booming. In 1994, there were
3.7m outbound trips. In 2000, that figure had tripled
to 10.4m. For 2013, the China Tourism Academy
has predicted close to 88m trips will be made abroad
by Chinese nationals.
Relatively softer regulations in China have gone
hand in hand with numerous bilateral agreements on
visas that have contributed to lifting some of the
barriers that weigh on travel.
The US is one of many examples and is finally on
the map for Chinese tourists. A memorandum of
understanding (MOU) was signed in 2008 between
China and the US to facilitate group leisure travel.
Leisure arrivals quadrupled from 2007 to 2011 to
reach 587,000.
The total number of Chinese arrivals in 2011
reached 1.1m, double the figure for 2009
(Euromonitor). In January 2012, President Obama
passed an executive order to increase visa processing
capacity, make sure interviews with non-immigrant
applicants would be dealt with within three weeks of
the application and launch a pilot programme to
obtain or renew visas without interviews for low-risk
applicants. Speaking at Disney World in February
2012, he announced his vision to expand
international tourism as a means of spurring a US
economic recovery. “Every year, tens of millions of
tourists from all over the world come and visit
America,” Obama said. “And the more folks who
visit America, the more Americans we get back to
work.” Obviously, there is a huge economic
incentive in making the Chinese traveller welcome.
For that traveller, there is also a huge economic
incentive to travel.
Territories much closer to home (Taiwan, Korea,
Hong Kong) have made travel very easy and are
now moving the needle for luxury consumption.
China outbound tourism (millions)
160
140
120
100
80
60
40
20
3 3 5 7 7 9 10 11
15 17
22
28 31
35
41
46 48
57
70
80
88
97
105
113
122
130
140
148 155
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2013
2014
2015
2016
2017
2018
2019
2020
Source: China National Tourism Administration, WTO projected tourism figures
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Who is travelling?
With sheer travel numbers going up, other parts of
the equation will see a natural long-term evolution
from group to individual travel related to the
financial capacity of the consumers, less
constraining regulation and personal interest and an
initial focus on shopping as the key reason to
spend/travel to more holistic experiences. This
means there is an obligation for brands to understand
the differences in catering to groups vs individuals
and has offered differentiated retail concepts (DFS
notably) to expand significantly in Asia.
Why it’s a “no brainer” to buy abroad
Motivations for travel have changed. Mass tourism
in the 1960s was driven by increasing disposable
income, a thirst for novelty and the emergence of
commercial airlines. Today, as well as cultural/
entertainment considerations, tourists also take
economics into account. Buying an iPad in the US to
benefit from a weaker USD, or buying a Swiss-made
watch in Hong Kong rather than in mainland China
to benefit from lower VAT and to avoid
consumption and import tax, are more common than
before. We estimate that more than c60% of
handbags and c80% of watches sold in Hong Kong
are purchased by mainland Chinese. Indeed, the
price for a return flight to Hong Kong from the
mainland is more than offset by more favourable tax
and duties on high-end watches.
According to the CEIC, 72% of total visitors in
Hong Kong came from mainland China in 2012,
compared to 21% in 1997 at the time of the Hong
Kong handover to China with the faster increase
coming from day travellers to Hong Kong.
In 2011, a survey conducted by the Ministry of
Commerce (MOFCOM) also revealed that the prices
of 20 luxury brands over five categories, (watches,
leather goods, apparel, liquor and electronic
products) were found to be about 45%, 51% and
72% higher than those sold in Hong Kong, the US
and France, respectively.
Outgoing Chinese tourists expenditure, 2011
Local transport
5%
Shopping
32%
Others
29%
Source: Euromonitor International, March 2012
Food
12%
Accommodation
11%
Entertainment
6%
Ex cursions
5%
If the EUR weakens, which was the case in 2011,
and with the possibility to claim back tax (with
the likes of Global Blue or others), purchasing
goods in Europe when you are a Chinese national
can make sense. Chinese consumers do not even
need to travel as far as Europe for a good deal,
given Hong Kong’s tax-free prices. Should a
consumer choose to buy a watch or jewellery item
in China versus Hong Kong, the price will be
marked up by three layers of taxes: (1) import
taxes: 20-35% for jewellery and 11% for watches;
(2) consumption taxes: 5% for gold, silver,
platinum and diamond jewellery, 10% on gemsets
and 20% for high-end watches; and (3) valueadded
tax (VAT): 17.5%. In accordance with
China’s commitments to the World Trade
Organization, tariffs on imported luxury goods
have been reduced since 2005 but they still exist.
Retail price breakdown of an imported luxury watch (HKD)
150
100
50
0
M ainland China
Wholesale
price
Hong Kong
Import pric e VAT (17.5%*)
Cons ump. tax (20%)* Import duty (11%)*
Wholes ale price
Distributor's gross margin
Source: HSBC estimates- *: calculated on import price
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Price comparison against France: the mainland usually pricier than other Asian markets (prices taken in February 2013)
UK
France
US
India
Hong Kong
Singapore
Japan
Malaysia
Macau
Vietnam
Taiwan
Thailand
South Korea
China
Indonesia
Louis Vuitton Speedy 30
-0.3%
13%
16%
18%
18%
22%
23%
23%
24%
24%
28%
29%
32%
33%
France
US
Japan
UK
South
Hong Kong
Taiwan
Macau
China
Thailand
Singapore
Malaysia
Prada BN2274 tote bag
0.5%
9%
11%
14%
28%
31%
34%
37%
41%
46%
50%
Cartier Tank Anglaise W5310014
-13%
-12%
Japan
Hong Kong
-12%
Macau
-9%
Indonesia
-9%
Malaysia
-7%
US
-6%
Taiw an
-3% Singapore
France 0%
India 0.3%
UK 1%
Thailand 2%
South Korea 5%
Vietnam
China
9%
18%
-10% 0% 10% 20% 30% 40%
0% 10% 20% 30% 40% 50% 60%
-20% -10% 0% 10% 20%
Source: Company data, HSBC calculations
For instance, the 28-40% tariff that was levied on
imported watches until the end of 2004 was cut to
12.5% and then further reduced to 11% as of end
2006. Although eventually import tariffs should
theoretically disappear and should thus constitute a
positive risk for the sector, for the time being
mainland China is still a tougher place to do business
than some others.
Other reasons why the Chinese prefer shopping
abroad include:
Holiday indulgence: Most people will be
keener to spend during holidays, whether on a
restaurant meal or a handbag, all the more as
low-cost airlines increasingly allow savings on
travel costs.
Gift-giving: Gift-giving is an important
tradition in some Asian countries, like Japan
and China. In China, reciprocity underlies giftgiving,
and holidays are one of the many
occasions that trigger the offering of gifts.
Snobbery: Overseas purchases reinforce
status. Beyond the shopping experience,
purchasing luxury goods abroad can enhance
a traveller’s apparent status. It also shows
that one does not buy counterfeit items. This
gives the Chinese customer a sense of
belonging to an international, yet more
exclusive and sophisticated group of
customers.
Quality assurance: Another reason mainland
tourists prefer to shop abroad is for the
assurance that they are buying authentic, high
quality products. With the prevalence of
counterfeit goods in China, we believe
Chinese consumers can feel more assured
that the products they purchase are what they
claim to be when they purchase those items
in, say, Hong Kong. For jewellery in
particular, measures can be taken to provide
quality assurance to customers.
Better shopping experience: The product
range can be different from one region to
another: it is not uncommon to find in Hong
Kong the rarer designs of Swiss watches or LV
handbags that cannot necessarily be found on
the mainland. Product collections can be wider
abroad. The product assortment and the service
that goes with it (ie knowledgeable staff) are
other reasons to shop outside the mainland.
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Why focus on the four Asian tigers
and Macau?
In this report we focus on the key Asian markets
for Chinese luxury shoppers. These are countries
for which the Chinese traveller is the first by
nationality (Macau, HK, Taiwan) or where we
take the view that it will be shortly be the case
(Chinese should overtake Japanese travellers in
Korea and Indonesian travellers in Singapore).
Apart from Korea, these are also countries where
cultural, historical and/or ethnic ties with China
are extremely strong, making them natural
destinations.
Of course in Asia, Japan remains a key market for
luxury but one that is dominated by local
consumption and for which price points are
prohibitive. The so-called “tiger cubs” (Thailand,
Vietnam, Indonesia, Malaysia) may well be seen
as the next leg of growth in Asia beyond the tigers
and Macau but we believe they suffer from a lack
of infrastructure, import issues, regulation, lack of
a sufficient target market or a combination.
Macro at a glance (2011)
Country
Top 10 destinations for Chinese and expected growth
Destination
GDP CAGR HSBCe GDP per
last 5 years 2013 GDP capita
growth
Trips in 2011 (in
thousands)
Absolute
growth by 2016
HNWI per
1,000
people
HNWI
CAGR
(06-11)
Hong Kong 3.7% 4.7% 34,259 11.810 -3%
China 10.8% 8.6% 5,417 0.415 8%
Taiwan 2.2% 4.2% 20,083 3.815 6%
Japan -0.2% 1.2% 45,870 14.257 5%
South Korea 3.6% 3.8% 22,424 2.880 5%
Macau 13.3% - 65,550 - -
Malaysia 4.4% 5.8% 10,085 - -
India 7.8% 5.5% 1,514 0.104 1%
Indonesia 6.0% 6.4% 3,512 0.135 7%
Thailand 2.7% 6.8% 5,395 1.014 10%
Singapore 5.9% 2.7% 59,711 17.130 4%
Vietnam 6.7% 5.5% 1,374 - -
Source: HSBC Economics estimates, CEIC, World Bank, Capgemini
Expected
growth (%)
Hong Kong 13,055 5,731 44%
Macau 7,672 1,888 25%
South Korea 2,183 2,113 x 2
Taiwan 2,150 1,424 66%
Thailand 1,680 1,458 87%
Singapore 1,640 1,627 x 2
Malaysia 1,225 477 39%
USA 1,098 1,899 x 2.7
Vietnam 1,027 830 81%
France 984 648 66%
Source: Euromonitor, 8 March 2012
Luxury and tourism at a glance
Country
Tourist
arrivals
over
population Top arrivals
Second top
arrivals
Third top
arrivals
Mainland
Chinese
tourist vs
total arrivals
(2008)
Mainland
Chinese
tourist vs
total arrivals
(latest)
Respondent
who will spend
more or the
same on
luxury in 2013
Average amount
respondents
intend to spend
on luxury in
2013 (HKD)
LV store
per m
population
LV store
per
thousand
HNWI
Prada store
per m
population
Prada store
per
thousand
HNWI
Hong Kong 684% China Taiwan Japan 57% 72% 75% 34,055 0.98 0.08 1.12 0.10
China 10% Hong Kong Macau Taiwan na na 72% 40,147 0.03 0.07 0.02 0.04
Taiwan 31% China Japan HK & Macau 9% 35% 36% 25,779 0.39 0.10 0.39 0.10
Japan 13% Korea China Taiwan 22% 20% 37% 36,520 0.45 0.03 0.25 0.02
South Korea 22% Japan China USA 17% 25% 45% 21,832 0.62 0.22 0.60 0.21
Macau 4825% China Hong Kong Taiwan 51% 60% - - 6.87 - 3.44 -
Malaysia 85% Singapore Indonesia Thailand 4% 6% 50% 22,027 0.10 - 0.07 -
India 1% USA UK Bangladesh 2% 2% 39% 8,011 0.00 0.04 - -
Indonesia 3% Singapore Malaysia Australia 5% 8% 21% 7,480 0.02 0.13 - -
Thailand 28% Malaysia China Japan 11% 14% 60% 24,999 0.06 0.06 0.05 0.05
Singapore 270% Indonesia China Malaysia 11% 14% 38% 20,725 0.94 0.05 0.94 0.05
Vietnam 8% China South Korea Japan 15% 21% 51% 9,017 0.02 - - -
Australia 66% New Zealand China UK 3% 4% 46% 25,350 0.44 0.06 0.31 0.04
New Zealand 108% Australia China UK 3% 4% 45% 22,043 0.91 - 0.23 -
1 HKD = USD7.8
Source: HSBC calculations, CEIC, MasterCard survey, company data
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Chinese influence
A changing retail landscape
In many Asian cities, Chinese tourism has helped
changed the retail landscape, if not the landscape
full stop.
Remember mentions of Singapore as an ultraclean,
half-asleep city? Clearly Singapore has now
developed entertainment and shopping on a
stunning scale with tourists, and notably the
mainlanders, in mind. The Marina Bay Sands and
Sentosa casinos have opened the city to new
tourism inflows. The traditional Orchard Road
shopping area has expanded massively and caters
to group travellers (DFS store being refurbished
one floor after the other) and individual wealthy
consumers (ION Orchard complex far more
Chinese-driven than the more Indonesian and
locally-driven department stores next door).
The new Taipei 101 shopping mall is a shopping
paradise for international travellers and although
the 101 building itself is nine years old, the highend
mall has been totally transformed with the
“food court” on the fifth floor disappearing to
make way for possibly the most extraordinary
luxury brand flagships on the planet.
Hong Kong of course is the most striking
phenomenon. Although all retailers benefit from
the inflow of mainlanders who are now coming
more often on same day rather than overnight
travel, in luxury there are centres that live by and
target the mainlanders (TST/Canton Road/
Harbour City, Times Square/Causeway Bay,
Elements) and others that consciously do not
over-focus on the mainland (IFC, Lee Gardens,
Pacific Place) to keep the experience quieter for
the locals. "Hong Kong before and after" pictures
are a testament to a real estate and retail boom.
The key to success in these cities is
differentiation:
Tour operators work with China-driven
centres to minimise the queues, offer easy
transport access, brands ensure mandarin
speakers are at hand, etc.
Shopping malls targeting locals look for
edgy/ differentiated concepts (library at
Hysan Place in Hong Kong), unique tenants
(first Apple store at the IFC in Hong Kong)
and incidentally attract the more
sophisticated, sometimes higher-spending
tourists.
From common to acquired tastes
A few years ago, it was common for Chinese men
to leave the label sewn on the sleeve of their suits
so that people knew what brands they were
wearing. We’re not saying this doesn’t happen
anymore but it has become a rarer sight. Chinese
consumers have become more sophisticated and
are increasingly seeking out more subtly designed
luxury goods.
In our view, Chinese luxury consumption is
becoming increasingly lifestyle-focused, with
consumer preferences moving away from logodriven
designs and favouring leather over canvas.
We believe Chinese consumption has entered
what we call the “French Paradox”, ie how to
create the illusion of scarcity to sell more of what
is supposed to be exclusive, and appeal to
consumers who want to move beyond mainstream
labels and aspire to be “in the know”.
In Abraham Maslow’s hierarchy of needs
described in his 1943 paper A Theory of Human
Motivation, most luxury purchases would today
correspond to “esteem needs” that include the
search for self-esteem, confidence, achievement,
and respect by others, in other words “social
status”.
In 2007, we defined a pyramid of “mass-lux” (see
page 23) where luxury products are ranked by
accessibility (price and distribution) and we
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argued consumers who become aware of the
principle of luxury have only one way to go: up.
Michael Silverstein (BCG) has shown that there is a
common element between Starbuck’s and luxury
brands: they all benefit from trading-up. Why buy a
coffee three times the normal price? Essentially,
because consumers value the moment, the
experience, the brand and the way it acts in terms
of social recognition.
As luxury goods enable consumers to display
social status, first-comers will purchase the lowerpriced
items from the most established brands that
is, those that are immediately recognisable. Yet,
as a consumer becomes more educated, he/she
will want to purchase less “mass-appealing”
products. There are then two opportunities:
trading-up within a brand or moving towards a
more “selective” brand.
Megabrands have started to show signs of
suffering brand weariness owing to their early
entry into several markets – we term this the
“first-mover disadvantage”.
Similarly, we would argue Coach is a victim of a
first-mover disadvantage in the US but a
beneficiary in China. Omega is a victim in China
and a beneficiary in the US. Prada, oddly, seems
to be a beneficiary on a global basis.
Maslow's hierarchy of needs
Self-actualization
Esteem
Love/Belonging
Safety
Physiological
Source: Maslow
Morality,
creativity,
spontaneity,
problem solving,
lack of prejudice,
acceptance of facts
Self esteem,
Confidence, achievement,
Respect of others, respect by others
Friendship, family, sexual intimacy
Security of body, of employment, of resources,
of morality, of the family, of health, of property
Breathing, food, water, sex, sleep, homeostasis, excretion
In The Cult of the Luxury Brand, Inside Asia’s Love
Affair with Luxury, authors Chadha and Husband
argue that the development of the luxury market
follows a five-stage process. The first is subjugation.
Deprivation builds a hunger for luxury, however,
distant its satisfaction might be. Stage two coincides
with the advent of disposable income. The economy
grows and people have cash to spend for the first
time. The emerging middle class buys washing
machines, TV sets, while a smaller number, within
the upper end, are already buying Hermès or LV
bags. Stage three is when consumers start “tripping
over each other trying to acquire symbols of wealth
and displaying them in a conspicuous manner”. The
bulk of the population carries status markers from
so-called compulsory brands. This leads to stage
four, in which consumers conform to a new set of
rules: to fit in. In stage five, luxury brands become a
way of life. We argue that Japan may have even
moved beyond that to a stage in which luxury has
lost its relevance and the Chinese are already
moving away from “fitting in”/conformism in our
view.
Asian countries’ stages of luxe evolution: China’s show off phase should evolve quickly as sophistication kicks in
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Subjugation
Start of
money
INDIA
Source: The Cult of the Luxury Brand, Inside Asia’s Love Affair with Luxury, Radha Chadha and Paul Husband
Show off Fit in Way of life
JAPAN
HONG KONG / SINGAPORE
TAIWAN / S. KOREA
CHINA
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The mass-lux pyramid: trading out of Louis Vuitton, up Hermès, Bottega), down (Coach) or sideways (Prada, Tod’s)
Bespoke
Very few
Price Points
in USD
50,000 >
Ultra High End
Leviev Graff
Harry Winston
Number of
points of sale
Patek Philippe
Bréguet
Superpremium
100 >
Panerai
IWC
5,000 >
Hermes
Chopard
Bulgari
Cartier
Rolex
Omega Premium core
Tiffany excl. silver
Berluti
Tag Heuer
1,500 >
Louis Vuitton
Designer accessories Gucci
David Yurman
Accessible core
& apparel
Prada
Tod’s
Tissot
300 >
Montblanc
Designer eyewear
Designer fragrances
Bottega Veneta
Coach
Geox
Van Cleef & Arpels
Restaurant/Entertainment
Swatch
Starbucks
Tiffany silver jewellery
Spirits
Champagne
Imported beer/wine
Affordable luxury
Everyday
luxury
Many
Source: HSBC
Still a solid appetite for luxury in Asia
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Hong
Kong
China Thailand Vietnam Malay sia Austrailia New
Zealand
South
Korea
India Singapore Japan Taiw anPhilippinesIndonesia
80%
70%
60%
50%
40%
30%
20%
10%
0%
Average amount
respondents
intend to spend
on luxury
shopping in 2013
Percentage of
respondents
who intend to
spend more or
the same on
luxury in 2013
Source: MasterCard Survey, HSBC
China's travel and leisure market value (RMBbn), 2010-20e China's travel and leisure market, number of trips (m), 2010-20e
6,000
5,000
4,000
3,000
2,000
1,000
0
1,163
321
3,911
1,544
3,000
2,500
2,000
1,500
1,000
500
0
1,021
2,380
37 101
2010 2020e
2010 2020e
Outbound trips
Domestic trips
Outbound trips
Domestic trips
Source: BCG
Source: BCG
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This is the other reason why we believe purchases
abroad will outperform purchases in the mainland
for luxury goods. Chinese nationals are evermore
connected, aware, and will be looking for the next
big thing and finding that abroad.
As both tables below show, in a very short period
of time, Chinese consumers have built a large
repertoire of brand knowledge whilst also being
more connected to peers exchanging on all topics
whether political, social and yes, trends as well.
Brand recognition level for middle-class Chinese (aided recall)
Number of brands in
list (2006)
Average number
recognised (2006)
Number of brands in
list (2011)
Average number
recognized (2011)
Source: KPMG-TNS
Clothes
Bags &
Shoes
Watches
Jewellery
36 15 25 9
9.3 4.7 7.6 2.5
39 40 26 13
13.5 15.9 8.8 5.6
China is connected: what a difference five years make
_______ 2007 _______ _______ 2012 ________
Internet
users (m)
% of total Internet
users (m)
% of total
National 210 15.9% 564 42.1%
Beijing 7.4 46.6% 14.6 68.4%
Shanghai 8.3 45.8% 16.1 72.2%
Guangdong 33.4 35.9% 66.3 63.1%
Source: CNNIC 2012
The “Korean wave” replaces
the Japanese influence
Travelling around Asia region over the past 12
months, we have been very surprised in
interviews with consumers, retail operators and
brand managers to find how influential the Korean
culture has been in many aspects of consumption.
The so-called "Hallyu" (Korean wave) is of
course nothing new and has been highlighted
since 1999 across music, soap operas, film. "Pop
goes Korea" was published in 2009 and is a good
recap of this influence.
The point we want to make is that the Korean wave
now goes beyond pure pop culture (and that
annoying viral song on YouTube) and shows strong
in-roads in cosmetics, fashion and we believe
increasingly in "bridge brands" not competing
directly with the high-end space but certainly bound
to create an ever more competitive landscape. For
more on this massive product breadth, the "spoilt
Korean consumer" and the negative impacts on
traditional imported brands please refer to the
following section "Korea: consumer is king".
We think the social/cultural trends leading Korean
culture to become more influential than Japanese
influence are key to understanding how luxury
demand has now become a much more complex
topic than during the "noughties".
Indeed, our so-called "COJAC" evolution for luxury
brands may now appear to become obsolete for the
up and coming luxury consumer. Like any theory of
evolution, "COJAC" has a beginning (a set number
of countries of origin whether France, Italy, US and
the UK) and an end (the Chinese consumer).
Although we believe that the end game may still be
to tap into Chinese potential for a while, we also
acknowledge that quite rapidly the country of origin
may be far less relevant than the consumer
experience. If Korean cosmetics are more efficient or
edgy than Japanese, the switch will happen (as in
cars or smartphones). If tomorrow design talents are
Chinese, Indonesian, Brazilian rather than French or
Italian, the consumer will shift again. We have long
been sceptics on media reports that Western brands
in the luxury space will be challenged.
And true, no Asian locally grown brand has
centuries of history. But look at it this way: with a bit
of a story and real product quality, there are reasons
for consumers to become more open-minded.
Having worked in the industry for a long time and
covered it for longer, we cannot ignore the power
of marketing and story-telling.
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Our C-O-J-A-C theory risking obsolescence
We long ago took the view that the global expansion
of luxury players and branded goods generally
should follow certain steps, as some consumers may
be early adopters (typically the Japanese) and others
laggards (typically the Westerners and Chinese).
This was linked to various cultural, social and
economic factors. Looking at both brands that have
successfully and not so successfully expanded, we
came to the conclusion that there is a logical path.
CO: it is logical that first adopters of a product
should be situated in the Continent of Origin of the
brand that produces it. French and British used to
drink cognac. Italians were the ones who made
Gucci’s and Prada’s success and are still the main
buyers of Tod’s. Coach was virtually unknown
outside the US during the brand’s first 50 years.
J: we do not know if it is fascination with the
Western lifestyle, eagerness to adopt new trends or
wealth but Japan has been a trendsetter in the
consumer sector. Louis Vuitton and Hennessy
cognac boomed in Japan in the early 1990s, Hermès’
and Bulgari’s presence is still massive there because
of early investments, Coach and Tiffany’s largest
expansion after the US was there and Burberry’s
Japanese licence was signed decades ago making
Japan its largest market still today (at retail). It is not
surprising either that some of Louis Vuitton’s
successes have been thought up in Japan, including
the Takashi Murakami collaboration starting in 2003
and collaboration with artist Yasoi Kusama in 2012.
L’Occitane in a different subsector made it here
before they expanded elsewhere in Asia.
A: when a brand succeeds at home and in Japan, the
next logical step becomes to attack the “Atlantic
alternative” (the US if the brand is European, and
Western Europe if it is a US brand). Cartier and
Louis Vuitton made it big in the US long after Japan
while Tiffany for instance is still under-penetrated in
Europe (c50% of European sales are still in London)
and Coach is virtually nowhere.
CO-J-A-C: diffusion of a luxury brand globally
Source: HSBC
Continent of Origin
(up to now, Europe or America)
Japan
Atlantic alternative
(America or Europe)
China
C: this is when the brand finally makes it to
China. All major luxury brands have invested
heavily in China over the past few years.
There are brands in the space which have skipped
phases and thus could be facing theoretical risks:
Lancel: this French brand (part of Richemont)
started off developing in Japan and made an
unsuccessful attempt in the US before entering
China with high ambitions and a local partner.
Coach: for a number of reasons including limited
awareness, strong local competitors, less
profitable retail operations (key money), Coach
has not made it in Europe yet.
However, with a dominating social media scene
implying an uber-knowledgeable consumer, the
waning influence of Japan, the rising influence of
Korea and a “pick and choose” purchasing
attitude, we believe the “COJAC” model is
looking more like a rule of thumb of times that are
gone now.
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Korea: consumer is king
Despite a long-lasting presence of many luxury brands and a very
concentrated distribution, the market is far from mature in our view
Hyper-segmentation, significant product breadth and prolific brand
launches make differentiation key and put pressure on early movers,
spoilt consumer leaves no place for a middle ground
Large duty-free market seeing accelerated Chinese-driven growth
Not mature yet
Some fatigue
Surprisingly, Louis Vuitton’s nicknames in Seoul
are “the national brand” – as everyone owns it –
and “the 3 second bag” as you see it in the street
every 3 seconds. That's how common some luxury
items are being perceived. Furthermore, when
talking about the positioning of brands with
department store managers, Louis Vuitton, Gucci
and Burberry are often referenced as "mass". The
idea of commonplace brands in the space can be
surprising but at the same time, considering
brands have been in Korea for quite a while and
that luxury goods are a traditional wedding gift,
the idea that some products belong to "my
mother's brand" comes quickly. According to a
McKinsey survey in 2011, the percentage of
household income that luxury consumers spend on
luxury is already higher in Korea (5%) than in
Japan (4%).
It is easy for a newcomer to luxury goods to take
the view that Korea is probably the next Japan, ie
a mature, if not saturated market in which brands
have been present for a while, whose population is
ageing and where the only way is down. Although
we believe the view may be justified over the long
term, we also believe it might take years before
Korea becomes a no-growth market. The consumer
is savvy and sophisticated, but unlike Japan, middleclass
consumers still seem to be brand-obsessed,
distribution of luxury goods is innovative in finding
ways to keep consumers interested and the wealthier
repeat purchasers are still hungry for more.
Furthermore, clearly from a macro perspective, even
though a recent survey showed that Korea is the only
Asian country where consumer confidence is not
rebounding, GDP growth, while slowing, is still
structurally outperforming Japan.
Korea GDP growth outpaced Japan
15%
10%
5%
0%
1980 1985 1990 1995 2000 2005 2010
-5%
-10%
Japan GDP yoy Korea GDP yoy
Source: HSBC, CEIC
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Consumer Brands & Retail
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Korea GDP y-o-y growth
% y -o-y
15.0
10.0
5.0
0.0
Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13
-5.0
-10.0
GDP % y -o-y
HSBC forecast
Source: HSBC Economics estimates, CEIC
Few operators
Although new channels are developing, fatigue may
also come from the fact that the top three department
stores (Shinsegae, Lotte, Hyundai) we estimate still
control c85% of duty paid luxury sales, if not more.
Shopping malls only represent 2% of sales (vs 54%
in the US) and although they will likely be
developed in future, this should be done by the
existing department store operators. Lotte
department stores we believe will continue to
allocate more space to duty free as this channel is
well supported in downtown locations by the
Chinese and to a lesser extent Japanese tourists, who
combined are more relevant than the domestic
Korean consumer for that channel. The end game for
luxury brands is to gain space visibility and move
out of the 50-70 square metre locations for
bigger/brighter stores. There are many projects that
will help, the most noticeable one, in our view, being
the Hyundai COEX store refurbishment, adding
52% more space (to 51,500m2), with completion in
Q3 this year and a stated goal of strengthening the
line-up of luxury goods and imported apparel (eg
Goyard, Chanel, MiuMiu).
Unlike China, department store chains are national
and dominant. Unlike Japan, they are very proactive,
operating different models (outlets, duty free, regular
downtown department store) to be unavoidable for
the brands to work with.
Freestanding brand boutiques are rare and used for
brand-building/PR, notably in the Rodeo Street and
Galleria developments of the Apgujeong/
Cheondam-dong neighbourhood.
Korean retail market breakdown
Total sales (KRWtr)
40
30
20
10
0
24%
40%
17%
19 %
+34%
20%
38%
19 %
23%
2011 2016e
Hy undai Shinsegae Lotte Others
Source: Hyundai company estimates, HSBC estimates
Shinsegae: Sales contribution from luxury goods reached
18% in 2012, double the 9% seen in 2007
100%
80%
60%
40%
20%
0%
2007 2008 2009 2010 2011 2012
Cosmetics & Accs Lux ury Women's clothing
Men's clothing Sports goods Groceries
Home appliances
Source: Shinsegae company data
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Department store and duty-free outlets remain the two major channels for luxury goods, but online is also emerging as a format
visited often (sales channel visited by current customers in the past 12 months, as a percentage of category respondents)
Fashion apparel
Leather goods
Watches/jewelry
(n=300)
(n=300)
(n=200)
Department store
Duty-free store (airport)
Duty-free store (in town)
Online fashion retailer
18
16
43
79
19
12
37
77
9
23
43
71
Department stores remain the
biggest channel for luxury goods
Duty free is the 2nd-largest
channel for luxury goods
Online channels are quite
preval ent, but not new
Premium outlet
Store abroad
12
12
8
13
7
13
Premium outlets are the most
commonly visited format among
non-traditional offline channels
Online exc lusive
General retailer (G market)
Online duty free
13
12
12
10
9
13
Online channels are quite
preval ent, but not new
Discounter (Costco)
9
5
6
Brand shops in shopping mall
(Timesquare)
Brand shops on the street
8
7
7
5
4
3
Brand shops on the street or at
shopping malls are not so popular
Brand website
Multi brand store
(e.g. Boon the Shop)
TV home shopping
6
5
4
5
1
5
6
2
8
Home shopping is less popular
than online channels
“n”: number of respondents
Source: McKinsey 2010 Korea Luxury Survey
Although luxury brands only represent 8% of
Lotte Shopping sales, the contribution for
Shinsegae, the higher-end department store, was
18% in 2012 and has increased regularly for the
past few years.
Department stores have gone to great lengths to
differentiate store space for the better brands; Lotte
launched its "AvenueL" concept a few years back in
Seoul, in a separate building fully dedicated to
luxury. On the main floor it has the big flagships of
Cartier, Chanel, Bulgari and Louis Vuitton. A
second AvenueL is set to open next year. Similarly,
Shinsegae uses its 1930 initial building for luxury
brands only with the ground floor dominated by
Louis Vuitton, Chanel, Van Cleef & Arpels as well
as Hermès and Bottega Veneta. The demand is such
that luxury brands benefit from the lowest
concessionary rates (apart for specialty retailers of
private label apparel – SPAs – such as Uniqlo, Zara
and H&M which generate more traffic) in the midteens
to low 20s age groups.
We believe some brands like LV or Cartier may
benefit from a fixed lease-only contract within
certain department stores. Besides, as fewer
people go to department stores for food, preferring
to go online or to hypermarkets, this frees up
additional space for other categories (luxury,
apparel, cosmetics) in department stores.
Outdoor/climbing gear (North Face and the like)
seems to be the latest thing in Korea, with sales
growing by 33% and 22%, respectively, at Lotte
Shopping on a same store basis in 2011 and 2012.
Nevertheless overseas luxury goods saw a no less
staggering 19% and 7% SSSG at Lotte in
those years.
So much for a mature market. According to
Euromonitor, luxury demand increased by c12%
on average every year between 2006 and 2010 and
2011 saw an acceleration of the trend.
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Compared to other countries, Korean customers are happier
about how much they spend on luxury goods
Korean customers feel less uncomfortable about showing off
luxury goods to others
"I feel guilty about how much I spent on luxury goods"
% of res pondents w ho s elected agree & s trongly agree
20%
50%
"I feel that showing off luxury goods is in bad taste"
% of respondents who selected agree & strongly agree
15%
40%
10%
5%
0%
11%
15% 14%
10%
5%
30%
20%
10%
0%
27% 27%
38%
45%
22%
US EU China Japan Korea
US EU C hina Japan Korea
Source: McKinsey primary consumer research (Italy, France, UK, Chins, US, March 2010:
Japan, Korea, May 2010)
Few happy spenders
Korean consumers remain keen on luxury and as
retail consultant Radha Chaddha puts it: “the
combination of a natural obsession with beauty, easy
credit and the competitive nature of Korean society”
are long-term social/cultural drivers that will remain
supportive.
In 2010, a McKinsey survey showed that Korean
consumers felt both less guilty about buying luxury
goods and less uncomfortable about showing these
off to others than Americans, Europeans, Japanese
and, yes, Chinese, in other words appetite for luxury
comes in Korea without the afterthought. Also, the
younger generation seems to be enthusiastic about
the sector, with Prada apparently one of the brands
that women in their 20s like the most, based on
anecdotal feedback.
Luxury consumption has been very driven by
female wealthy consumers and we get the sense
based on our conversations that male-driven
consumption, after being been muted for a while, is
now developing strongly with local Korean
consumers. Unlike in China, the presence of watch
stores is relatively subtle and projects from smaller
brands are multiplying as men move from buying
flashy cars to displaying watches as more affordable
social status symbols.
Source: McKinsey primary consumer research (Italy, France, UK, Chins, US, March 2010:
Japan, Korea, May 2010)
Wide product breadth putting
pressure on early movers
Never too much?
If you don't know Seoul but have been to Japan and
thought the Japanese were the most spoilt consumers
in terms of choice for consumer goods, think again.
The array of products is mind-boggling, whether in
hard luxury, leather goods or handbags, and more
impressive still on access price points such as
cosmetics and outdoor clothing.
Niche concepts abound, from refrigerated Korean
cosmetics to imported Italian cashmere brands, duty
free and duty paid, ultra high-end to mass, while VIP
programmes dominate the top three department store
luxury sales (Lotte Shopping, Shinsegae and
Hyundai). It is very hard for new brands to emerge
and live on in Korea, however. We also see a sort of
first-mover disadvantage as the likes of Louis
Vuitton, Gucci and Burberry in handbags can almost
only lose share given the increase in choice.
Spending half a day in a Seoul department store can
give you a headache as the number of brands is
dizzying, especially in the cosmetics section, outdoor
and sportswear as well as luxury goods.
In handbags and accessories, the "mainstream" Louis
Vuitton is situated not that far from the MCM, Daks
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and Louis Quatorze brands, all Korean owned, the
latter providing according to its COO the same
quality as Louis Vuitton at half the price or less.
Daks presents itself as "the leading British classic
brand" with patterns that remind us of the Burberry
check. Similarly, in cosmetics, the Face Shop (part
of local giant LG H&H) competes head on with the
Body Shop but at an average 40% discount and now
has close to 1,000 locations in Korea and more than
that elsewhere in Asia.
In the Myung-Dong neighbourhood, streets are filled
with free-standing cosmetic stores from Innisfree
(part of AmorePacific group), Missha, Skinfood
(important chain since 1957), The Saem, Etude
House (part of AmorePacific group), Nature
Republic and very niche concept Too Cool for
School. LG H&H has launched a unique concept
called Frostine's, selling refrigerated cosmetics (yes,
department store counters actually carry small
fridges for these products).
With this vast array of products, it is difficult to build
brand loyalty and stimulate repeat purchases unless
product launches and execution are impeccable.
Established brands will inevitably suffer from these
new entrants. Louis Vuitton, for which growth is
now quite subdued in Korea, is nevertheless
described by department store operators as by far the
best in class in terms of execution, managing to
generate queues of consumers on a regular,
impressive, basis.
Exit the middle man
Our view from the different conversations we have
had locally is that currently the middle class is being
squeezed and like-for-like growth for luxury is
suffering from a slower economy and a very tough
comparison basis from last year. In this context, entry
level price points are outperforming (L'Occitane
increased sales by 40% in the year ended March
2012, local mass cosmetics are doing well) as well as
very high price points (Chanel, Hermès, Bottega
Veneta). The middle (mid-priced cosmetics, Gucci
and Louis Vuitton) for now is losing out, hit by macro
factors (eg Kospi, property, debt levels).
Most of the interviews we had in Seoul pointed to a
middle class suffering and trading down currently in
most consumer sub-sectors (and also trading less in
luxury). In cosmetics, for instance, while there is an
acceptance and willingness to pay more for technical
products (whitening, anti-wrinkle), trading down has
accelerated for the basics (cleanser, colour cosmetics,
masks, etc).
Lotte’s outlook for luxury this year is for SSSG in
luxury of more than last year (2012: 6.8%), as
notably tourism helps and the economy and, even
more, the Kospi are correlated quite directly in
their view to high-end consumption. Hyundai
believes SSSG of luxury can increase by at least
5%. However, the drivers of this growth (apart
from more tourism) are mainly the high-end
consumers, in our view.
Shinsegae has mentioned that while VIPs spends
more, the middle class has heavily reduced
purchases in luxury as they have been more
impacted by the macro situation. This means that
the middle is being squeezed and as such, we
think Gucci, Burberry and Louis Vuitton are
likely losing share.
With trading down on the one hand and VIPs buying
more on the other, the market is increasingly
polarised. A 2011 McKinsey survey shows that
"heavy" consumers of luxury have recently switched
to buying more expensive brands while "non-heavy"
consumers are trading down to more accessible
labels. At Shinsegae, 20% of consumers represent
well over 80% of sales with VIPs representing 33%
of sales. There are five VIP tiers at Shinsegae, the
first, called "Trinity", is made up of its top 999
clients: they spend on average USD150k a year in the
department store.
At the other end of the spectrum, Shinsegae runs
outlets in partnership with Chelsea Outlets very
successfully. Polarisation can also be seen in the two
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best performing categories at Shinsegae: luxury and
SPA brands. See the similar correlation at Hyundai
in the chart below.
National preference?
On our anecdotal evidence, we find that Korean
brand managers have great consumer insights and
can develop products that are particularly adapted to
local needs, whether it's in edgy, pricey cosmetics or
more accessible brands targeted at teenagers.
On a long-term view, we consider the real
competition to be local brands with speed to
market and local insights vs global developments.
Some will consider consumers are playing the
national preference. Yet, factually, insights in the
automobile, smart phone, cosmetics, fashion and
accessories sector have enabled local Korean
brands to gain great relevance.
Interviewing department store staff, anecdotally the
two imported concepts that seem to work are Sk-II, a
brand launched originally by P&G in the 1980s that
comes across clearly as an Asian brand, and Kiehl's,
the L'Oréal-owned, New York pharmacy hip lower
price point brand sold to college students and well
represented among men.
A bit like Louis Vuitton globally or Coach in the US,
the imported brands in cosmetics (Lauder, Clinique,
Lancôme, Dior, etc) seem to be structurally
declining from a very high market share. The
number of cosmetics propositions for a nation of
50m is dumbfounding and in department stores,
high-end brands from notably AmorePacific and LG
H&H (AmorePacific, Sulwhasoo, Hera, O Hui,
Whoo, Ohui, Su:m, etc) are gaining space from the
imported brands.
Free-standing concepts (Etude House, The Face
shop, SkinFood "beauty food for the urban sweety"
etc) are also becoming ubiquitous. There is in Korea
a natural link between beauty and luxury as the
desire to look good moves from cosmetics and
skincare to bags and clothes.
It looks like Korean brands are addressing local
consumer needs more acutely than international
concepts can.
Platinum customers (3% of total) contributed 30% of sales in Hyundai Department Store
Number of customer (thousand)
1400
1200
1000
800
600
400
200
0
2%
8%
90%
2%
8%
90%
2%
8%
90%
3%
9%
88%
2009 2010 2011 y r to
aug 11
yr to
aug 12
General Gold Abov e Platinum
3%
9%
88%
Sales (KRWbn)
3500
3000
2500
2000
1500
1000
500
0
28%
28%
29%
22%
23%
30%
23%
29%
23%
23%
49% 50%
48%
47%
48%
2009 2010 2011 y r to
aug 11
yr to
aug 12
General Gold Abov e Platinum
Source: Company data, HSBC calculations
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The duty-free opportunity
A great retail duopoly
Regulation has it that foreign duty-free operators
have not been able to develop in the duty-free
market in Korea (although a third concession will
be up for grabs in 2015 in Incheon airport) and
this important market is dominated by Lotte Duty
Free (part of the Lotte conglomerate that owns the
department stores, food retail, food products,
finance, amusement parks and much more) and
Hotel Shilla (part of Samsung). These two
operators control about 80% of the duty-free
market, meaning they make about KRW5tn in
sales. About KRW1.5tn of that is made with
luxury goods alone. This will put the duty-free
channel at c40% of the total market as of 2013, in
our view.
Welcome, new stranger
Duty free remains a very important market for local
consumption as prices are typically 10% to 20%
below the full price department store equivalent.
Besides airports and downtown locations, locals can
also order online (the website is Shilla's third
biggest store after Incheon airport and Seoul
downtown). However, the restraint on Korean
consumers is to declare purchases above USD400
and to be forbidden to make purchases of items
above USD3,000 (typically high-end watches),
which dates from the 1988 Seoul Olympics, to cap
spending on credit is still enforced. This is putting a
ceiling on Korean sales in that channel. Recent
monthly travel statistics show that recently the
number of Japanese inbound travellers to Korea has
fallen. Despite still welcoming more Japanese than
Chinese tourists, the latter have already become far
more relevant to luxury sales at duty free than the
former as traffic and average ticket are both
much higher.
Shilla duty-free breakdown by nationality
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
5%
38%
38%
19%
Source: Company data, HSBC estimates
6%
35%
16%
43%
2011 2013e
Chinese Japanese Korean Other
Looking at Shilla's split of sales by nationality; it
seems that the shift has taken place in a snap.
As odd as it may sound, there is a project to
develop a single-digit number of locations in
downtown areas for "foreigners only" to tap into
the Chinese potential, counter the opening of
Chinese duty free areas in China – as in China's
"Hawaii" Hainan – and answer the complaint
amongst foreigners (see CNN website) that
Korean downtown duty free locations were
crowded with too many... Korean consumers.
Surprise comes full circle when the project
includes the obligation to carry not 30% but 40%
of Korean products.
Chinese the second biggest group in terms of visitors in
Korea in 2012
China
31%
Japan
39%
Source: Korea Tourism Organization
US
8%
Rest of the
world
22%
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According to a Bloomberg article dated 13 March
2013:
Japanese visits to Korea have fallen five straight
months to the lowest in two years in January,
according to the Korea Tourism Organization.
Korean Air Lines Co. passenger traffic between
the two countries fell 9% last quarter from a year
earlier, the biggest drop since the second quarter
2011, after Japan was struck by its most powerful
recorded earthquake. To weather the downturn,
Korean companies that relied on Japanese
visitors are offering charter flights and prizes to
lure Chinese who more than doubled their
spending in January and February from a year
earlier at Lotte Duty Free. Japanese tourists in
Korea cut their spending by about a fifth the first
two months of this year at Lotte Duty Free, the
country’s biggest.
The number of Japanese tourists in Korea
dropped 22% to 683,182 between November and
January from the same period a year earlier,
according to the Korea Tourism Organization.
About 3.52m Japanese visited Korea last year
where the average visitor spent USD1,273,
generating approximately $4.5bn in revenue,
based on information from the Korea Tourism
Organization and Korea Culture and Tourism
Institute. While a rise in Chinese visitors may help
offset the drop in Japanese tourists the two groups
spend disproportionately on luxury items and
accommodation. Japanese prefer high-end hotels
while Chinese splurge more on selective retail,
said Lee Sung Tae, chief researcher at the Korea
Culture and Tourism Institute.
Although quasi-irrelevant two years ago, the
Chinese consumer is now on everyone’s mind in
luxury retail in Korea.
What's on top of the wish list of people planning to go to
Korea in 2013
Healthcare
products Others
Souvenir
2% 4%
4%
Beauty
IT products
products
7%
32%
& Food
groceries
12%
Peformance
tickets
16%
Source: visitkoreayear.com
Fashion
products
23%
Chinese tourists travelling to Korea by purpose in 2012
Official
0. 2%
Business
2.6%
Others
22.8%
Source: Korea Tourism Organization
Tourism
74.4%
Arrivals from China to Korea increasing at 25% CAGR since
2008
Arri vals from China (mill ion)
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Source: Korea Tourism Organization
CAGR=25%
2008 2009 2010 2011 2012
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Singapore: (too)
extravagant ambitions?
An architect's dream and a consumer's delight does not mean all
brands are winning with their Singapore footprint
Great location to capture Indonesians and Chinese but local
demand to remain sluggish, in our view
Rely on tourists and entertainment for the future
Luxury retail overcapacity?
In 2009, the luxury retail scene was pretty much
focused around Orchard Road with Ngee Ann city
shopping centre (opened late 1993) and its anchor
tenant Takashimaya as well as the Paragon mall,
opened in 1997 catering to locals and Indonesians
travelling mostly for medical purposes. In line
with the stereotype of a relatively peaceful, quiet
city, the luxury environment was not exactly
"happening" either. At the time, tourism was not
as buoyant. The landscape for luxury has evolved
significantly since then.
In a very short period of time, Singapore has gone
from having this quiet luxury retail exposure to
becoming a real international hub with sharp
contemporary designs that appeal more to the
international crowd (ION Orchard opened in July
2009), casino operations, a new shopping
neighbourhood and Universal Studios all opened
early 2010 as part of ResortsWorld Sentosa,
innovative concepts (the first "island luxury
boutique" in the world with LV in Marina Bay
Sands) in yet another casino/hotel site mall driven
and tourist-targeting highlights (Scottswalk DFS
revamp including a "beauty concierge").
Visitors to Singapore are spending more on sightseeing and entertainment
2009 Singapore Tourism receipts by major expenditure items
Medical
Others
8%
Local transport
1%
6%
Shopping
Food and
36%
bev erages
15%
Sightseeing and
entertainment
Accommodation
3%
31%
Source: Singapore Tourism Board
2011 Singapore Tourism receipts by m ajor expenditure items
Medical
Others
18%
Shopping
20%
4%
Local transport
3%
Food and
Sightseeing and
bev erages
entertainment
10%
25%
Accommodation
20%
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With a population 30% lower than in Hong Kong
but more importantly tourist arrivals at less than a
third (c14m vs c48m in 2012), it is surprising to
see there are already five Louis Vuitton stores in
Singapore vs "only" seven in Hong Kong.
These stores may be profitable but believe that
following the frenzy of openings, many secondtier
brands wanting to use Singapore as a window
to the world are probably not making much
money locally. Marina Bay Sands is probably the
most comparable to HK shopping centres as far as
tourism is concerned with we believe up to 70%
of sales made by non-Singaporean customers.
As Singapore shifts to being an entertainment and
sightseeing capital of Asia, this also means that
tourist spending focuses less on shopping,
Speaking to store managers at Marina Bay Sands,
many complained that the consumers who were
brought in for gambling usually did not spend
much in the retail part of the development,
meaning traffic and conversion were frustratingly
low. There are some exceptions, of course, and
once again Prada stands out, having currently two
floors of selling surface and working on
developing a third. On the whole, however, we
believe most luxury stores are low on sales
density relative to other Asian cities.
A change in spending behaviour of visitors in Singapore
Tourism Receip ts per capita (SGD)
450
400
350
300
250
200
150
100
-
50
2007 2008 2009 2010 2011
Shopping
Strong tourism but sluggish
local demand
Sightseeing &
entertainment
Accommodation
Food and
beverages
Local transport
Medical
Others
Source: Singapore Tourism Board *Figures includes Sightseeing and entertainment
(including gaming) at the two integrated resorts from 2010 onwards
Tourist arrivals reached 14m in 2012. In H1,
Chinese and Indonesians represented 14% and 19%
of total visitors respectively. Singapore is known as a
medical destination for wealthy Indonesians but
given the scarcity of luxury malls in Jakarta (see
page 53) and higher price points there, Indonesians
constitute a welcome flow, with Indonesian of
Chinese origin (c4% of the Indonesian population)
being particularly attracted to brands, according to
brand managers interviewed.
From our understanding, Chinese tourism flows
have been drawn in by the multiplication of
entertaining options but are at the same time more
inclined to purchase luxury goods in areas in the
region (Hong Kong notably) where prices are lower.
Chinese are the major shopping spenders in Singapore, and growing
Shopping expenditure (SGDm)
1200
1000
800
600
400
200
0
+35%
+10%
2010
2011
+19% -4% +35% -2%
+15% +29%
+22% +19% -8%
China Indonesia Malay sia India Phillipines Australia Thailand Japan Hong
Kong
South
Korea
USA
Source: Singapore Tourism Board
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High beta economy in which retail sales have slowed
Breakdown of Singapore population (2012)
% y-o-y
20
10
0
Non-residents
27%
-10
-20
09 10 11 12
Source: CEIC, HSBC calculations
Nominal retail sales: Total
Nominal retail sales: Ex. auto
Citizen
63%
Source: Department of Statistics Singapore
Perm anent
residents
10%
According to our economists, the uncertain global
economic conditions have weighed on retail sales in
Singapore with elevated inflation and slower wage
growth also contributing. Favourable labour market
conditions will likely provide some support, but
consumers will likely await clearer signs of a
recovery before they begin to loosen their purse
strings again.
It has a population growing at only c2.5% per annum
and importation of foreign workers, many in the
construction industry, not necessarily "qualified
shoppers" for luxury; anecdotally the local market
from the interviews we have done in Singapore may
not be doing that well. With some political
uncertainties, a low birth rate and the cost of living
(property, schools) quite high, many luxury shop
managers note that local consumers tend to think
about it twice when buying luxury goods.
Singapore has a target of reaching 6m inhabitants by
2020 (from 5.3m in 2012) and 7m by 2030, a CAGR
of only 2%. Recent measures from the government
are aimed at enhancing productivity and curbing
foreign-worker inflows in what is already a pretty
tight employment market. In general retail in 2012,
inflation was up 4.5% and rents around 2% but sales
were up only 1%. Luxury goods will benefit much
more from tourism flows (about half the purchases
now in our view) but growth will have been limited
to single digits last year for the sector as well.
FX strength unhelpful
Singapore remains an export-driven economy
(electronics, the world's largest cargo seaport, etc)
and the administration continues with a currency
appreciation policy to attempts to rein in inflation –
CPI in December 2012 was up 4.3% y-o-y. This has
implications for tourism luxury receipts: not only are
wealthy tourists drawn to other spending areas than
luxury, but also gradually Singapore is not that
attractive in terms of price points.
Two-thirds of the inflation increase in December
2012 y-o-y was down to transport prices (notably a
higher “Certificate of Entitlement” on cars in
November) and housing. HSBC Economics believes
accommodation and car prices will continue to add
to inflation this year. Efforts to cool property
markets by raising stamp duties and tightening
macro-prudential measures have helped contain
house price increases but they have risen again in
recent months.
Exchange rate between RMB and SGD
5.4
5.2
5
4.8
4.6
4.4
Mar-03
Mar-05
Mar-07
Mar-09
Mar-11
Mar-13
Source: Thomson Reuters Datastream, HSBC calculations
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Hong Kong: servicing the
mainland
The go-to destination will continue to benefit from proximity and
reinforced infrastructure
Same-day visitors to dominate structurally, influencing a split
between Chinese and local retail neighbourhoods
Short-term pick-up an early sign of China's revival or a benefit of
Euro strength and European price increases?
Never too much?
Not enough luxury (seriously)
Tell any local in Hong Kong that there aren’t enough
luxury stores in his city and you’ll be faced with an
intrigued and slightly worried look. True,
everywhere you turn, it seems you have another
flagship store for a European brand, food courts
within malls and urban hubs are disappearing to
welcome yet another luxury retailer and ubiquity
seems to be at its maximum.
But look at it differently: Hong Kong is not about
local consumption, it is a tax-free hub for the
mainlanders. Our assessment is that price arbitrage
means more than 75% of watches sold in Hong
Kong are bought by mainlanders and close to 60%
of handbags and accessories. If consumers are
queuing outside Cartier, Chanel, Louis Vuitton
stores on Canton Road (Tsim Sha Tsui on the new
territories), presumably this means that there aren’t
enough stores to cater to the eager mainlanders. And
with many infrastructure projects under way, it looks
like the tourism flows are not about to come to
a halt.
Chinese tourists to Hong Kong have been increasing at 20%
CAGR since 2008
Arrivals from China (million)
40
35
30
25
20
15
10
5
0
CAGR=20%
2008 2009 2010 2011 2012
Source: Hong Kong Tourism Board
Many projects will be developed over the next few
years, an important one being the West Kowloon
Cultural District for which an express rail link
(Guangzhou-Shenzhen-Hong Kong) is being built
that will be able to carry 99,000 passengers daily by
2016, ie the same amount that the Hong Kong
international airport welcomes today. The MTR
corporation, currently already running the next door
Elements shopping mall, will be running another
large shopping mall connected to the West Kowloon
terminal and this should double the facilities to
cater to mainland shoppers in that part of town.
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Same-day visitors spending logically much less
HKD (mn)
120,000
100,000
80,000
60,000
40,000
20,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Same day v isitor spend Ov ernight v isitor spend
y oy grow th (same day ) y oy grow th (ov ernight)
Source: CEIC
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Mainland tourists (same-day + overnight) contribution to
total tourist shopping revenue
85%
80%
75%
70%
65%
60%
Source: CEIC
2002 2004 2006 2008 2010
Commoditisation of travel and retail
The most important change in our view with
Chinese travel to Hong Kong is that structurally
same-day visitors will outpace overnight visitors.
This has many implications but the most relevant
one, we believe, is that shopping in Hong Kong will
gradually be seen as a commodity. This will separate
the retail concepts between the efficient/limited
added value ones and those for consumers “in the
know”, looking for more differentiation.
The phenomenon now known by locals as the “milk
powder run” (mainlanders crossing the border to
purchase milk powder for personal use or the grey
market because it’s cheaper) can apply to a certain
extent to luxury products given how accessible it has
become to just visit for the day and go back
to China.
The danger is that Hong Kong might appear to the
wealthiest of mainlanders as déjà vu and that firsttier
city visitors develop some fatigue with Hong
Kong and decide to do their shopping elsewhere.
In the affordable luxury/branded space, there is a
race to develop retail in Sha Tin, near the Lowu
border (the most heavily used immigration control
point to and from the mainland) notably in New
Town Plaza (eg Coach, Burberry Black & Blue
labels, Uniqlo, Hilfiger, Gap, H&M).
Hong Kong has more same day than overnight mainland
arrivals since 2011
Arrivals from China (million)
20
18
16
14
12
10
8
6
4
2
0
2007 2008 2009 2010 2011 2012
Same-day v isitors from China Ov ernight v isitors from China
Source: Hong Kong Tourism Board
Same-day arrivals from mainland has outpaced overnight
arrivals
40%
30%
20%
10%
0%
2008 2009 2010 2011 2012
Total grow th rate
Sameday grow th rate
Source: Hong Kong Tourism Board
Ov ernight grow th rate
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Total visitor shopping spending as a percentage of retail sales
HKDmn
120,000
100,000
80,000
60,000
40,000
20,000
0
Source: CEIC
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total overnight visitor shopping spending Total same-day visitor shopping sending % of retail sales
40%
35%
30%
25%
20%
15%
10%
5%
0%
Commoditisation of travel and retail, in our view,
is forcing shopping mall operators, department
stores and brands to make clear-cut choices.
Differentiating retail concepts
and neighbourhoods
Ready for the mainlanders
On average, Chinese travellers spend more than
one-third of their travel budget on shopping
versus 11% on accommodation or food. This
differs from Americans or Germans, who are
likely to spend more on accommodation. Given
the current low level of per capita spending on
travel, the potential for shopping spending by
Chinese travellers to increase further is
substantial, in our view. When travelling to Hong
Kong (see chart on right), this pattern of spending
by Chinese consumers is even more extreme, with
the purpose of the visit clearly being to shop.
Harbour City (in Kowloon’s TST area) and Times
Square (in Causeway Bay) are both run by The
Wharf Holdings Limited and between the two of
them account for close to 10% of total retail sales
throughout Hong Kong. Since 2003, they have
benefited from a rental income CAGR of
respectively 12% and 9%. As far as the luxury
trade is concerned, these are the two anchors for
mainland sales.
Harbour City is the same neighbourhood as Canton
Road, Peking Road and the 1881 Heritage building
(where many Richemont stand-alone stores are
located) and welcomes tour buses and the highest
concentration of Chow Tai Fook stores (more than
20 on Canton Road alone). Queues form regularly,
even outside the priciest stores, and air con is up
high (a sign of wealth, we’re told).
Times Square will soon welcome one of the largest
Louis Vuitton store and faces Russell Street, the
most expensive luxury street in the world where
jewellery and watch stores, many run by the
Emperor group, are concentrated. Next door in
Causeway Bay, the Sogo department store is a long
established go-to place for cosmetics and luxury.
Times Square has Lane Crawford as an anchor
tenant and right beside it electronic stores are very
appealing to mainlanders.
Spending mode of Chinese tourists in Hong Kong (2011)
Hotel bills
13%
Meals
Shopping
9%
71%
Others
7%
Source: CEIC
Elements (West Kowloon) caters to a mix of
mainlanders and local Hong Kong office workers,
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but we believe gradually mainlanders will dominate,
especially with the arrival of the West Kowloon
Cultural District.
The influence of mainland purchasers is such that
some brands will invest in Hong Kong mostly to be
seen by these tourists as being legitimate, global
companies. But when the test is not passed
convincingly, this could have tough consequences.
Some less successful brands have had to hand back
space: Pandora shut its store in the IFC shopping
mall and Melbourne Plaza as awareness was limited
in the mainland. FJ Benjamin shut the Bell&Ross
store it was running. Shanghai Tang gave up its
flagship location on Pedder Street and this was taken
up by Abercrombie & Fitch.
Think global, act local
Outside of the mainland targeting malls and streets
of TST, Causeway Bay and Elements, many
shopping centres pride themselves on targeting
mostly local shoppers and compete on innovation,
capturing the exclusive, edgier brands and being
truly cosmopolitan.
Swire Properties has been running Pacific Place and
City Plaza (both on Hong Kong island) and used to
run Festival Walk in Kowloon before selling it to
Mapletree and all three have focused thoroughly on
better servicing the local Hong Kong shopper.
Pacific Place’s refurbishment was typically not
aimed at mainlanders, with an understated,
Scandinavian minimalism. The Hysan group runs
Lee Gardens and Hysan Place in the Causeway
Bay area. The former is often described as a treelined
European-style street and mall chic shopping
area. The latter, opened August 2012, was designed
for a younger, trendy, posh local with much buzz
initially around the Eslite Taipei bookshop frenzy (a
trendy Taiwan bookstore concept for which
excitement in Hong Kong was very strong initially).
The Landmark in Central (operated by Hong Kong
Land) targets high net worth locals and by extension
sophisticated mainlanders.
In our view, the most exciting and forward-looking
retail concept addressing local consumer is the IFC
shopping mall (a consortium between Sung Hun Kai
Properties, Henderson Land and Towngas). The mall
has brands for all consumers with a mix of fast
fashion retailers, luxury, niche/edgy brands (from
Bunello Cuccinelli cashmere to Diptyque candles,
Moncler quilted jackets, Maje and Sandra dresses
and soon the first store in Hong Kong from macaron
legend Pierre Hermé) and what is probably the most
productive Apple store – and incidentally the first
opened in Hong Kong – in the world.
The success story of the IFC is to be the first to
launch imported brands into Hong Kong and to be
extremely demanding on the brands. Leases run for
three years generally (Apple we believe much more)
but there are break-up clauses for underperformers.
That is the reason why, as a consumer, you get the
impression there is always something new
happening at the IFC.
Although targeting the local crowd and successfully
launching new coming brands, inevitably the IFC
will become a core destination for mainlanders
looking for something different/hip and looking to
leave the Kowloon crowds and queues.
Unsurprisingly, the IFC does not carry Louis
Vuitton, will soon not be carrying Burberry anymore
(many large stores in Hong Kong already) but will
shortly have the largest MiuMiu store on the island.
The insight is the same as in every other
cosmopolitan city in the world: as Chinese people
travel more and more, they are fast learners, more
demanding and knowledgeable and they are longing
for the latest concept, the best brands and not
necessarily looking to carry what everyone else has.
Brands need to stay true to their roots and not adapt
to the Chinese to precisely attract them.
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Consumer Brands & Retail
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Short-term pick-up: several
possible explanations
Late last year and early this year, the retail rent
explosion seems to have calmed down. Savill’s
believes on average rents in Hong Kong were up
30% in 2011, 15% in 2012 and should be up
“only” 5% in 2013 (with shopping malls
outperforming free-standing locations) with some
streets such as Russell having, at least for now,
reached an upper limit.
However, it’s not all bad and while mainland
China sales seem to still be struggling to develop
quickly, notably on the back of continuous
economic uncertainties and for certain categories
a will from the new Xi administration to put an
end to graft/corruption practices, Hong Kong sales
of luxury products seem to be rebounding.
What happens outside of China stays
outside of China? We don’t buy that
Many investors believe that as there is a
crackdown on corruption in China, gifting/guanxi
could relocate to Hong Kong. We believe this is
incorrect: usually “B to B” or government official
gifting takes place in China so the person who
receives the gift can theoretically exchange the
gift at the store it came from.
More importantly, where the gift is bought
matters less in our view than actually displaying
that gift (watch, handbag) as the public is now
scrutinising politicians more than ever, helped by
increased press and social media coverage.
A big trigger for the anti-watch sentiment was the
incident of the so-called "smiling official" in the
Shaanxi bus crash in August 2012 (source: Global
Times, 21 September 2012), where a safety
official in Shaanxi was spotted smiling at a road
crash scene and later revealed by web users to be
wearing many different luxury watches. Since
then, other "luxury-watch-wearing" officials have
also been discovered and posted.
Jewellery, Watches & Clock Retail Sales by value: slight
pick- up recently in Hong Kong
12,000
10,000
8,000
6,000
4,000
2,000
-
Source: CEIC
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Jewellery, Clock & Watch Retail Sales Value
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
y oy grow th
For Louis Vuitton specifically, there is the story of
the deputy secretary general of Fushun in the
Liaoning province (source: The Star Online, 21
September 2012) who possessed 253 Louis Vuitton
bags (and 48 Rolex watches) and was sentenced to
life in prison for taking bribes. For Cartier, the
minister of publicity in Guangzhou was discovered
to own a series of Cartier watches after fighting with
a flight attendant on an airplane (source: NTDTV, 13
September 2012).
Pictures and reactions have gone around the internet
in China and this, along with the obsession of the
new administration around social unrest, has dried
up gifting but we think this has not transferred to
Hong Kong.
A much simpler set of explanations, in
our view
Ease/affordability of travel: During the official
Lunar year holiday period from 9-15 February this
year, the number of mainland tourists arriving in
Hong Kong increased by 25% y-o-y. Based on our
store visits in major tourist shopping areas
(Causeway Bay, Tsim Sha Tsui) and on general
feedback from shopping mall operators, store traffic
within retail areas appeared to be quite high.
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We think sentiment and the general propensity to
spend was better than we observed in the October
Golden Week last year and in December 2012.
Chinese nationals know more and more that it is
easy and cheaper to purchase goods in Hong Kong.
Not as much price arbitrage vs Europe: The
EUR/USD strengthening combined with price
increases put through by many brands during last
summer and up until October in Continental
Europe started to mean that whilst it was an easy
decision to purchase luxury goods in Europe in
the spring of 2012, more recently the price
arbitrage is not as clear-cut as it used to be. In
other words, both Chinese and Hong Kong
citizens may have thought about European
purchases twice and bought again more in Hong
Kong recently.
There are more mainland arrivals in HK than from any other
part of the world
Japan
3%
Taiwan
4%
Others
21%
Source: Hong Kong Tourism Board
China
72%
Optimists will see Hong Kong as an early
positive indicator: Many optimists take the view
that Hong Kong retail is an early indicator of what
will eventually happen in mainland China. In
other words, as local and tourist consumption
gains traction in Hong Kong, consumer
confidence and the optimism needed to purchase
luxury products may trickle down in China. If that
were to be the case, we think this would be bullish
for trends generally in the sector.
For the long term, we remain extremely bullish on
the growth prospects of Hong Kong with
structural growth underpinned by travel and a
very quickly adapting infrastructure
accompanying the changes.
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Consumer Brands & Retail
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Macau: soon a retail
destination?
The dominant gaming capital of the world has taken a while to
diversify into entertainment and retail: this is now changing
Look for efficiency, metrics, not sophistication just yet
We see more opportunities than risks locally but question marks
on viability of business model will be recurrent
From gaming central to onestop
shop
Macau has become gaming heaven very quickly and
projects abound for more. Despite generating about
six times the gaming revenues of Las Vegas (Galaxy
Entertainment on its own generates more gaming
revenues than Las Vegas), other entertainment areas
have significantly lagged whether it is shows or
indeed high-end retail.
Las Vegas welcomes 40m tourists a year, Macau
28m (in 2012). Out of these however, more than
60% are Chinese nationals (6m coming on average
three times a year so 18m visits in all) who have a
keen interest in luxury.
Retail area by concessionaire
Name District GFA (sq ft)
Venetian Shoppes Cotai 1,000,000
Sands Cotai Central Phase 1 Cotai 100,000
Sands Cotai Central Phase II Cotai 200,000
Fishermans Wharf Peninsula 475,000
One Central Peninsula 400,000
Four Seasons Cotai 211,000
City of Dreams Cotai 175,000
Wynn Macau Peninsula 46,000
Galaxy Macau Phase I Cotai 23,000
Total 2,630,000
Source: HSBC estimates. Assumes partial build-out of Sands Cotai Central
Retail area under development
Name
GFA (sq ft)
Galaxy Macau Phase II 1,000,000
Cotai Central 450,000
Studio City 300,000
Total 1,750,000
Source: HSBC estimates
The big difference between Macau and Las Vegas is
the propensity of the consumers to spend. In terms of
gaming revenues alone, Macau became bigger than
Las Vegas in 2006 and is now close to seven times
larger (cUSD35bn revenues for Macau, cUSD5bn
for Las Vegas in 2012). All three leaders – Stanley
Ho’s SJM, Sands China and Galaxy Entertainment –
commanded respectively 27%, 19% and 19%
market share, meaning they were in isolation
generating more than all the casinos of Las Vegas in
2012. We believe the Louis Vuitton store in Wynn
Macau makes as much sales as the NYC Fifth
Avenue flagship (ie in excess of USD60m a year)
despite being a quarter of the size. Despite this,
Louis Vuitton runs “only” four stores in Macau
while it has five in Las Vegas, which in our view
means there is a lot more potential for retail
developments to come in Macau.
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Looking at the current construction pipeline gives a
good sense of how bullish operators are on future
prospects for retail activities. Besides, the fact that
gross floor area (GFA) should be increasing by more
than 50% once the current projects are done is just
the beginning. The pipeline goes way beyond,
notably with the many development planned in Cotai
from 2015 to 2020 (see chart below).
Apart from One Central (part of Hong Kong Land),
which is a shopping mall in its own right near the
MGM resort, all other high-end retail operations are
within casino/hotel complexes with the Wynn
Esplanade (facing One Central), The Macau Grand
Lapa hotel and Casino on the Peninsula and The
Venetian/Shoppes at Four Seasons/Grand Canal
Shoppes/Cotai Central (all part of Las Vegas
Sands), DFS as well as The Shops at the Boulevard
at “The City of Dreams” (part of Melco Crown) on
the Cotai strip. Three hubs really stand out: One
Central/Wynn on the Peninsula with the latter
generating much more traffic we estimate than the
latter, the Sands Cotai operations and the City of
Dreams. Nothing is static in Macau and looking at
the biggest ongoing development (Galaxy Phase II),
it seems clear that new retail cards are about to be
distributed again.
On its own the new Galaxy development will
enable the group to go from running 26 stores
today to close to 200 stores (not all luxury of
course) in 2015 and this will be transformational
for the luxury scene. Beyond phase II, there will
be a phase III and IV with potentially another
million or two sq ft of additional retail space
planned. Looking at the investments below, we
this is only the beginning of exponential retail
space expansion in Macau.
2012 market share, total revenue of HKD295bn
SJM
27%
Source: Galaxy, DICJ
MGM
10%
Wy nn
12%
2013 y-t-d arrivals to Macau by country
China
64%
Source: Macau DSEC
Galax y
19%
Melco
13%
Sands
China
19%
Hong Kong
22%
Taiw an
3%
Asia Others
8%
International
3%
Capital Investment in new Macau casino resorts by concessionaire
8000
7000
6000
5000
4000
3000
2000
1000
0
USD18bn
USD26.2bn
Sites 7&8?
Redev elopment
Marina
Grand Waldo
Macau Jockey Club
2002 2004 2006 2008 2010 2012e 2014e 2016e 2018e 2020e
SJM SCL Galax y WML MCE MGMC
Source: Company data, HSBC estimates
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All about the Chinese
Most travellers to Macau are from mainland China
and as gambling is the go-to reason, luxury stores are
efficient. In other words, for the time being, the
market is not about sophistication. Galaxy is the only
Chinese operator apart from Stanley Ho (Grand
Lisboa) and we think it has the best insight to cater
to a more “bling”-driven tourist crowd.
As Chinese tourists dominate the space and local
consumption is broadly irrelevant given the ratio of
tourist to locals (48x), we believe it is both logical
and sustainable that watches and jewellery, which is
over-represented in China relative to the rest of
luxury categories, gets a strong representation as
well in Macau. This is reflected in sales growth and
contribution already.
Macau retail sales of jewellery & watches rising at an
astounding rate
Watches, Clocks & Jewellery retail sales (MOPm)
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
Source: CEIC, HSBC calculations
CAGR=41%
2002 2004 2006 2008 2010 2012
China continues to develop extensive infrastructure
that is making it easier for mainlanders to visit
Macau. The Hong Kong-Zhuhai-Macau Golden Sea
bridge, which at 50km in length and costing over
USD10bn, is the world’s largest sea bridge and one
of the largest infrastructure initiatives of its kind
stands out as an impressive example. But it is not the
only one as there are projects to expand the Gongbei
border gate in Zhuhai and build a Guangzhou-
Zhuhai Intercity mass rapid transit as well as the
Super Highway.
Tourists from China are the biggest spenders in Macau (Sept
2012)
Tou rist spendi ng per capi ta (MOP)
2, 500
2, 000
1, 500
1, 000
500
Source: CEIC
0
China
Hong Taiw an Japan SE AsiaEuropeAmerica
Kong
Macau retail sales growth correlated to “hard luxury” sales
100%
80%
60%
40%
20%
0%
-20%
Mar-04
Mar-06
Source: CEIC, HSBC calculations
Mar-08
Mar-10
Mar-12
Macau retail sales yoy grow th
Watche s and jew e lle ry sales y oy g ro w th
Hengqin Island in Zhuhai was designated in China’s
12th Five-Year Plan, as one of the three new special
economic zones (the others being in Guangzhou and
in Shenzhen). Hengqin Island is largely undeveloped
with a land mass of 96 sq km or about three times
the size of Macau. There are c30 major projects
planned for development over the next decade on
Hengqin Island involving investment of over
USD20bn. This island faces Cotai, will not welcome
any gaming (as is part of the mainland) but will help
in addressing the space issue (28,000 hotel rooms in
Macau vs 160,000 rooms in Las Vegas).
Today 6m Chinese individuals come to Macau every
year, with the IVS (Individual Visit Scheme) and
infrastructure; theoretically 100m are now able to go
there within a 90-minutes radius. Many mainlanders
used to go to Hong Kong for a day of shopping
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before going to play in Macau; we think Macau
could rapidly become a one-stop shop now as prices
and product offer becomes similar.
Out of all the operators, we believe the Galaxy
Group has an interesting part to play, given it is the
only “Chinese” resort offering (vs MGM, Wynn,
Sands which have more of a US feel) expanding
rapidly in terms of space. SJM, the other “Chinese”
operator is not expanding its footprint as much.
Elements of doubt
Gaming has been banned from China since Mao’s
days in 1949, hence the development of Macau
but given the recent anti-corruption stance of the
new Xi administration, there has been a lot of
nervousness on growth prospects. Regardless of
economic growth, the gambling activity is at risk
of increased regulation from the Chinese
administration.
Hu Jintao’s November 2012 speech was centred
on anti-corruption, keeping the masses happy,
setting the example. Many cynical investors told
us at the time: “it’s like parents telling their kids
to stop playing video games, shut the door and
they will start playing again”. Well it looks like
the parents have changed – and since mid-March
they are now officially in place – and they now
actually mean it.
Junkets (gambling chips credit agents) contribute
90% of VIP gross gaming revenue and VIP
represents 65% of the entire Macau market. Any
crackdown specifically targeting a major junket
could therefore impact total Gross Gaming
Revenue (GGR) in Macau and while the Times
article on 5 February 2013 “Door is about to slam
shut on high-rolling holidays to Macau” has for
now not been supported by action, investors
are wary.
Arrivals from China to Macau have outpaced the total growth
50%
40%
30%
20%
10%
0%
-10%
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Total v isitors y oy grow th
Chinese v isitors y oy grow th
Source: Macau Government Tourist Office
Jul-12
Jan-13
However, while the shift in administration
initially impacted VIP figures, the latest
datapoints are better, although some VIP players
may adopt a lower profile in the short term.
Another element of doubt has been the smoking
ban, implemented in January 2013 (50% of any
casino’s gaming area). Since its introduction, we
have not detected any impairment to casino
revenue specifically attributable to these changes
but it is early days.
We are convinced that on a recurring basis there
will be a questioning around the sustainability of
the Macau business model. But in the absence of
clear alternatives for Chinese nationals (no
casinos in Taiwan or Hainan despite discussions/
projects), we do not believe the cross-border trade
will be significantly impacted.
As Macau becomes a destination rather than just a
gaming centre, we expect this to fuel diversity and
sustain growth for a number of years.
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Macau retail sales breakdown (2011-12)
MOPbn
60
50
40
30
20
10
0
+22%
36%
37%
11%
9%
11%
9%
14%
14%
29%
30%
2011 2012
Others
Adults'
Clothing
Leather
Goods
Department
Store
Watches &
Jewelry
Source: Macau DSEC
On a per capita basis, Macau ranks first in terms of tourism
receipts (USD50,002 per citizen)
4500
4000
>50,000
3917
3500
3000
2500
2000
1500
1000
1388 1296
822 708
573 475 373
500
0
36
Macao
Hong Kong
Australia
Spain
France
Italy
United Kingdom
Germany
United States
China
Source: UNWTO (as of June 2012), HSBC calculations
Macau gross gaming revenue
30
25
20
15
10
5
0
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
VIP GGR Mass GGR Mass grow th (RHS) VIP grow th (RHS)
150%
100%
50%
0%
-50%
Source: HSBC calculations, DSEC
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Consumer Brands & Retail
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Taiwan: Japan with
tourists?
Market dynamics resembling those of Japan, not just for historical
and cultural reasons, Chinese influence barely starting to be felt
Tourist-targeting infrastructure slowly becoming more qualitative
Becoming the next Hong Kong? Wishful thinking, for now…
China/Japan influences
Why history counts
Consumers, brand managers and retailers that we
have met in Taipei haven’t conveyed a message
that would make us at all confident about the
prospects of the local consumer for high-end
brands.
Historically and culturally, the Taiwanese have
very strong ties with Japan. There is also a long
history with mainland China; remember that the
People's Republic succeeded the Republic of
China (which had withdrawn to Taiwan in 1949)
as the holder of China's seat in the United Nations
in 1971; neither has Taiwan succeeded in its
attempts to join the WTO.
If history has any influence on consumer
behaviour, it is not surprising that Taiwan is stuck
between a sluggish Japan-like local luxury market
and the prospects of strong growth coming from
mainland tourists.
We take the view though that for now the former
dominates the latter and that overall, growth
should not impress in the near term.
Taiwanese may be in awe of China’s economic
growth but are wary of the side effects (pollution,
corruption, single party politics, speed) and the
society is probably one of the most
environmentally aware. Interviewees also pride
themselves on a better work/life balance than in
many other parts of Asia. Taiwan ranked as one of
the highest Asian countries on Forbes’ ranking of
the world’s happiest countries.
The Japanese influence can be felt in manners,
attention to detail, fascination for food, general
retail (Far East Sogo and Shinkong Mitsukoshi are
the two dominant operators) as well as edgy niche
retail concepts that are not “me-too” but really
draw on local consumer insights (eg 85 o C coffee
chain not imitating Starbuck’s slavishly).
Many of the successful Chinese consumer and
tech companies are of Taiwanese origin (Tingyi,
WantWant, Daphne, UniPresident, Yue Yuen,
Stella, Foxconn). Online retailing is also a big
thing with Yahoo very successful and again, edgy
concepts such as Lativ, a well-known online
fashion retailer (with no brick and mortar stores).
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Often the conflicting influences of Japan and China
cultures lead the younger generation to look
elsewhere and like many in Asia, look at Korea for
trends.
Taipei’s retail transformation
On the luxury scene, we have identified three main
neighbourhoods which in our view exemplify well
the evolution in terms of local sophistication and the
move from a predominant Japanese tourist to a now
prevailing Chinese visitor.
Sharp rise of Chinese tourists in Taiwan
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Taiwan Tourism Board
Japan
Hong Kong and
Macau
Korea
Mainland China
USA
Europe
SE Asia
Zhongshan North Road: freestanding but old
Zhongshan North road is a waning retail
neighbourhood and probably quite representative of
"old Taiwan" which catered to Japanese tourists. The
Regent hotel is in the neighbourhood and still a
favourite with the Japanese.
Most of the luxury stores are freestanding, along the
tree lined road at street level and some of them
(Coach for instance) are closing down. Not too far
from there is the Nanjing Mitsukoshi and another
Japanese department store called IDEE.
Zhong Xiao East Road: trendy locals
This is a busy, more local shopping district
morphing very slowly into a more international,
albeit still mid-market area. The Ming Yao
department stores is quite emblematic, carrying
many mid-priced brands with a laid-back feel and
faces Uniqlo and Zara which have become
anchors for the retail area. There is an interesting
hotchpotch of stores with casual apparel,
boutiques next to high-end watch stores, wig
specialist, Pierre Cardin lingerie and other midmarket
products.
Down the street there is a small Sogo store (quiet)
and further down a very large one, Tokyo-style, ie
attached to the station (ZhongXiao Fuxing) so
extremely busy. Further away is the so-called
“Breeze centre”, a shopping mall facing a train
track bridge, so quite an odd location but with a
great feel. The area looks like no other shopping
district we’ve seen in Asia in the sense that there
is a definite local Taiwanese feel to it. The mix of
brands is both intricate and edgy.
Xinyi/Taipei 101: new CBD welcomes the world
The Xinyi area was developed 25 years ago as a way
to stretch Taipei East and given a lot more attention
in 2004 when the landmark 101 building was ranked
the tallest in the world (before the opening of the
Burj Kahlifa in Dubai in 2010).
The entire area includes the 101 mall of course but
also several department store locations (three
Mitsukoshi locations, one Hankyu location) as well
as traditional luxury malls (Bella Vita).
According to the tourism board, Chinese visitors
spent about 60% of their budget in Taiwan on
shopping and 98% are satisfied with their trip and
said they would consider returning. A survey found
that the three most popular tourist attractions in
Taiwan are night markets, the National Palace
Museum and the Taipei 101 skyscraper.
Spending mode of Chinese tourists in Taiwan in 2012
Source: CEIC
shopping
60%
others
1%
hotel bills
17%
meals
7%
transport
entertainment
6%
9%
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Correlation between consumption & stock market
170
165
2001=100 2001=100
160
155
150
145
140
135
130
125
120
07 08 09 10 11 12
Commercial sales (sa) (Lhs)
TAIEX mkt cap (Rhs)
Consumer confidence: Job opportunity (Rhs)
Source: CEIC, HSBC calculations
250
200
150
100
Taiwan remains an export-driven economy and
while our economists do factor in a punchier GDP
rebound than consensus this year (4.2% vs 3.5%),
we are convinced that penetration of luxury
brands with locals, a bit like in Japan, is
fairly high.
In other words, trends seen for luxury and
premium brands generally in Japan tend to be
replicated in Taiwan whether it is Louis Vuitton
or L’Occitane. In other words, same store sales
growth in our view should be flat at best. We are
not sure if this is part of the Japan legacy or not;
Taiwan people like brands but are not as crazy or
flashy about them as in Hong Kong, so there
probably won’t be a drastic uptick even if the
economy does improve; more spending is
probably made on food and travel rather than
luxury goods.
Taiwan has evolved more to a tourist destination
50
Chinese visitors to drive Taiwan tourism services revenue in
the coming years
2.5
2.0
1.5
1.0
0.5
0.0
Visitors to Taiwan, mn
2008 2009 2010 2011 2012
China Japan HK US Korea
Source: CEIC, HSBC calculations
Taipei, the next Hong Kong?
Not so fast
Infrastructure is a bit better, there are
cultural ties and rents are cheap
The recently re-elected president, Ma Ying-jeou, has
been criticised by the opposition party for lack of
decisiveness and some projects being delayed. There
are concerns on pensions, healthcare and
unemployment; the latter is historically high by local
standards and the perception is that the middle class
is being seriously squeezed. Projects like the
renovation of the Taipei airport and the second
palace museum in the south of island seem to have
been going on for a while. From a luxury retail
perspective though there are many positives,
especially when compared to Hong Kong.
On a recent trip to Taiwan, we met brand operators
at the newly refurbished Taipei 101 luxury mall,
2001 Arrivals to TW by purpose
Business
Medical
30%
Treatment
16%
Ex hibition
4%
Study
1%
Conference
1%
Relativ e
Visiting
Pleasure
12%
36%
2006 Arrivals to TW by purpose
Medical
Business
Treatment
27%
11%
Ex hibition
6% Study
Conference
1%
1%
Relativ e
Visiting
Pleasure
11%
43%
Business
12%
Others
Medical 15%
Treatment
1%
Ex hibition
0%
Study
1% Conference
1%
Relativ e Visiting
6%
2012 Arrivals to TW by purpose
Pleasure
64%
Source: Taiwan Tourism Board
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telling us that Taipei is Hong Kong’s biggest rival
for luxury. We think this makes a lot of sense on
paper for the following reasons.
Tension between HK locals and mainlanders:
With different dialects and social norms, there is
growing tension between HK locals and mainland
Chinese visitors. This was highlighted in the
Dolce & Gabbana incident in January 2012 (see
various press sources, 8 January 2012): the store
had released a policy forbidding Hong Kong
residents from taking photos inside or outside its
flagship store, purportedly in order to protect its
"intellectual property." But residents were
enraged, especially after learning that mainland
Chinese and foreign tourists were excluded from
the photo ban.
Hotel capacity: In HK this is now close to 100%
(87% in January 2013), car traffic (with incoming
mainlanders) is becoming more severe and the lack
of commercial space is becoming an issue. Recently,
many global hotel chains are finally expanding into
Taiwan after a very long time (eg new W Hotel, the
first Mandarin Oriental is due to open soon).
Taiwanese speak Putonghua (Mandarin) rather
than the Cantonese spoken in Hong Kong, the flight
time from Shanghai is just over an hour and there is
no congestion in the shops. We estimate Chinese
nationals represent 25% of sales in the Taipei 101
Mall, and the stores are brand new and amongst the
most impressive in the world (notably the Christian
Dior flagship). Malls are also a standard stop for tour
groups (which we regard as a captive audience).
Taiwan opening up for mainland Chinese visitors
Date
Jun-11 Travel ban was lifted and 500 individual visitors from Shanghai,
Beijing, Xiamen can travel to Taiwan.
Apr-12 Twelve more cities have been admitted in two stages, quota
doubled to 1000 each day.
Aug-12 4 more cities added including Jinan, Xi'an, Fuzhou and
Shenzhen.
May-13 Proposed to double limit to 2000 individuals a day.
Source: Taiwan Tourism Bureau, SCMP, HSBC
Comparing HK and TW - Mode of travelling and spending: Taiwan not really there yet
Average daily spending by arrivals from
China in 2011 (HKD)
$2,500
$2,000
$1,500
$1,000
$500
$-
Hong Kong
Taiwan
0% 10% 20% 30% 40% 50% 60% 70%
Proportion of individual travellers to total arrivals from China (to date since effective)
Size of t he indicat or represent s the t ot al number of arrivals from China in 2011
Source: HSBC estimates, Hong Kong Tourism Board, Taiwan Tourism Bureau
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Ease of travel: China and Taiwan have lifted
restrictions on visits from mainland Chinese to
Taiwan. Direct flights have multiplied. The ban
on solo Chinese travellers was lifted in June 2011.
Although only people from Beijing, Shanghai and
Xiamen were allowed to visit, under the new
measures independent travellers from six more
cities have been admitted, with another four cities
added in 2012. In 2012, more than 2m Chinese
visited Taiwan (versus 34m in HK), making
China the biggest source of visitors to the island
(ahead of Japan), according to the Tourism
Bureau.
Many of the direct flights from mainland China
fly into Songshan airport, which is directly in the
city (rather than Taoyuan airport), thus making
travel even easier.
The audacity of hope: comparing
Taipei to HK is for now wishful thinking
If local consumption isn’t great and tourism is
strong but mostly made up of group travel with
“unqualified shoppers”, why are brands investing
still so much in Taiwan? Once again, rents are
limited and so the margin risk is as well.
More importantly, we believe brand managers are
willing to have their retail presence well set up for
the day Chinese travel evolves from being a
potential opportunity to a distinct scale. With
Matsu residents voting to allow Taiwan’s first
casino to be built open on their island, Taiwan
could become the next Macau is what some are
thinking. Ironically, the casino business could
help fill the void left in the economy by the
decline in military personnel numbers in Taiwan
(from 50,000 during the Cold War to 3,000
today), which was reinforced by the détente
between Beijing and Taipei in 2008.
Chinese visitors represent the biggest portion of arrivals (2012)
Rest of the
world
China
31%
35%
HK/Macau
14%
Japan
20%
Source: Taiwan Tourism Bureau
Chinese tourists are growing rapidly in Taiwan
3.00
Arrivals from China (million)
2.50
CAGR =67%
2.00
1.50
1.00
0.50
0.00
2008 2009 2010 2011 2012
Source: Taiwan Tourism Bureau
Chinese travelling to Taiwan by purpose in 2012
Pleasure
Business
78%
2%
Visiting
relativ es
2%
Medical
treatment
Others 2%
16%
Source: Taiwan Tourism Bureau
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Other Asian destinations?
The emergence of luxury tiger cubs?
Why we see no “Big Bangalore” in India
The next small frontiers: esoteric and again driven by Chinese
Luxury “tiger cubs”?
Looking at the potential of luxury in so-called tiger
cubs (Thailand, Indonesia, Malaysia, Vietnam) may
be relevant for another report a few years from now.
Despite pockets of wealth, a very high degree of
sophistication and the multiplication of high-end
concepts (Gaysorn, Emporium, Siam Paragon,
Central Embassy), Bangkok is not yet as important a
business as other cities part of the “Tigers”.
Similarly, Jakarta in Indonesia may have several
luxury malls (Plaza Indonesia, Plaza Senayan,
Pacific Place, etc) and there is even a Louis Vuitton
store in Surabaya but import duties, business
regulations (have to be run by a partner agent like
Mitra Adiperkasa or other) and the fact many
wealthy locals have a residence in Singapore or
elsewhere also limits the market.
When speaking to luxury brand managers and asking
about what the future holds, many answer that Brazil
and Indonesia are key future growth areas. This may
be the case but unless you play stocks 15 years out,
we wouldn’t really see these markets as a big theme.
No Big Bangalore in India
A population soon to be the world’s largest, a great
potential for star endorsement (Bollywood never
stops!), a traditional interest in jewellery and a
growing affluence (via industrial dynasties, new
money and the BPO – business process outsourcing
– boom) have still not been enough to trigger a
sizeable luxury market in India. Why? A
combination of high import duties and the lack of
proper retail space (eg no high street concept, limited
number of malls, few five-star hotel locations) have
probably not helped. Wealthy Indians already shop
in London or in Singapore and we believe it will be a
long time before the local market becomes
significant.
The next small frontiers for
Chinese in Asia
Earlier this year, Christian Dior made some noise by
opening its first flagship boutique in Sydney,
Australia, a multi-level store. As reported by the
Australian Financial Review: Chanel, Canali, Louis
Vuitton, Prada, Miu Miu, Ferragamo, Gucci and
Bottega Veneta have either set up for the first time in
Australia, opened in more locations, or rejuvenated
existing stores, as they look to tap a hungry market.
Similarly, of all places, there is a Louis Vuitton store
today in Queenstown, New Zealand, yes, in the
middle of ale houses, merino wool sweater sellers
and backpackers. But then, when you take a cruise
on the nearby Milford Sound, the tourist boat carries
a majority of… you guessed it: Chinese shoppers.
Unless there is local wealth or it is in the local
culture to display social status, many of the new up
and coming luxury centres will be influenced by the
Chinese.
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Company profiles
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Burberry
Upside risk to estimates (c5% for FY March 14e) as GBP weakness
not reflected in consensus numbers, in our view
Valuation nevertheless not compelling (no longer trading at a
premium but no longer outgrowing peers either)
Remain Neutral (V); increase target price to 1,530p (from 1,500p) on
higher estimates (weaker GBP)
FX a specific booster vs euro
peers
GBP weakness a tailwind
Leaving aside Swatch and Richemont, for which the
weakness of the USD and the JPY will be mitigated
by the weakness of the CHF, FX will become a
slight headwind in 2013e (compared to a significant
tailwind in 2012) for European luxury companies.
Things will be different for Burberry, however,
which reports in GBP and has a significant cost base
in EUR. Based on recent spot rates (EUR/GBP=
1.15 and GBP/USD=1.50), we estimate that
Burberry sales will be boosted by a 4% FX impact in
FY March 2013e. Analysing consensus figures, we
believe the GBP weakness is not reflected in sellside
estimates. This explains why our FY March 14-
15e EBIT estimates are respectively 6% and 3%
above consensus.
So Q2 was just a blip?
On 11 September 2012, Burberry warned on FY
March 2013 profits, which triggered consensus
estimates for that period to be revised down by close
to 10%. However, according to our estimates, FY
March 2013e earnings (to be released 21 May)
should be close to pre-warning estimates. When
Burberry reported Q2 sales on 11 October 2012,
retail comps had already recovered from the 1%
figure for the whole July-September quarter
compared to a flat reading for the 10 weeks to 8
September. On 15 January 2013, Burberry reported
6% retail same-store-sales growth (SSSG), which is
a robust figure even though management advised
investors not to take 6% as the new norm, rather the
consequence of a strong week in the run-up to
Christmas. In hindsight, it appears that Q2 was just a
blip, with the traffic disruption around the Olympics
and a wait-and-see attitude from Chinese consumers
ahead of the government change playing a role.
However, since these elements were not companyspecific,
we believe that part of the seasonal product
offering in stores during the period was not well
received by some customers. Therefore this blip may
have been only a gentle reminder that, compared to
companies focusing on ‘hard luxury’ or handbags,
Burberry will always be more exposed to (i)
seasonal hiccups risks and (ii) the lesser resilience of
‘aspirational’ consumers in spite of the significant
increase in the company’s average price points over
the last few years.
Burberry’s growth rates may be merely normalising
after a transformational period. The company has
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been repositioned from a UK outerwear
manufacturer to a successful global brand,
embracing a strong retail roll-out and investing
heavily in digital marketing to capture a younger and
more connected generation. Over the last few years,
the British icon has consistently outperformed the
industry in terms of sales growth and has taken
advantage of this to clean up its distribution network.
Compared to five years ago, Burberry has come a
long way in two areas:
Geographic footprint: in FY09/10, China
accounted for less than 5% of total sales (now
12%) and was still booked as wholesale (now
retail); moreover, Burberry was underdistributed
in Continental Europe and the US,
allowing the brand to open more stores than
peers in non-emerging countries in the years
since that time.
Consumer elevation: over a short period,
Burberry has significantly narrowed the gap
with its competitors in terms of average retail
price in categories such as bags and shoes. In
addition, the brand discontinued the entry-level
range such as the Nova Check.
With fewer company-specific drivers to boost topline
growth, we believe it will become more difficult
for Burberry to outgrow the sector average in terms
of top-line growth. Moreover, Burberry needs to
address our concerns about operating leverage,
which was missing even before the Q2 blip. We
reiterate our view that we understand the rationale
for investing in new avenues for growth, and it
makes sense to invest in the development of a
second-to-none digital marketing platform. From a
stock market standpoint, this may be an issue, if
other companies (notably Prada) display strong sales
potential with significant operating leverage.
Over the medium term, the expiry of the apparel
licence for Japan in 2015 is a cause for uncertainty.
Although we acknowledge that terminating the
licence will be a good thing in terms of brand image,
we believe the market needs to have some clarity on
how this business will be operated and at what cost.
Earnings, valuation and risks
On 15 January, Burberry reported Q3 sales to end-
December 2012. Sales growth at constant FX was
9%, with retail up 13% (of which 6% SSSG) whilst
wholesale was down 5% and licensing up 4%.
Company guidance for FY March 2013 (sales due
17 April, full earnings due 21 May) includes:
Retail space (average) increase of 14% in H2,
which we estimate should translate into 7% sales
growth on top of a 5% comp (4% for Q4 ending
March 2013e)
Wholesale revenue to be down low to midsingle
digits at constant FX in H2 (lower sales to
specialty accounts in Europe). We factor in a 3%
decline at constant FX
Licence revenues over the full year should be
flat at constant FX and in reported terms. We
factor in a 1% decline at constant FX
(flat reported).
We have raised our FY March 2013e-15e EBIT
estimates by 1%, 4%, and 4% due to the abovementioned
FX boost. For FY March 2014e and
2015e, we forecast sales growth (at constant FX and
excluding the impact of the perfume licence business
model) of 9% and 10%, respectively. In terms of
EBIT margin, we expect 20.8%, 20.4% and 20.8%,
respectively, for FY March 2013e-15e. The
integration in-house of the perfume & cosmetics
business will dilute margins as a percentage of sales
(although having a neutral impact on EBIT in
euro terms).
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We increase our DCF-based target price to 1,530p
from 1,500p on the back of the above-mentioned
earnings increase. The assumptions used to generate
our target price are detailed on page 59. Under our
research model, the Neutral band for volatile UK
stocks is 10 percentage points above and below the
hurdle rate of 7.5%. Our target price provides a
16.2% potential return, which is within the Neutral
range; therefore we reiterate our Neutral (V) rating.
Potential return equals the percentage difference
between the current share price and the target price,
including the forecast dividend yield when indicated.
If we are right in saying there is less potential for
Burberry to outgrow its peer group, then the
valuation is not compelling: the stock is trading at
17.1x FY13e calendar PE, in line with peers. The
main downside risks to our rating include a failure to
address the above-mentioned issue of expiry of the
Japanese licence in 2015. In addition, as the brand
has attracted outside talent in recent years, there is a
risk that this talent may prove difficult to retain.
Risks to the upside include a potential takeover bid
(Burberry remains a 100% free float company), and
the possibility that market share gains translate into
much greater sales growth than we have factored
into our model.
Burberry P&L full year ending March
GBPm 2008a % 2009a % 2010a % 2011a % 2012a % 2013e % 2014e % 2015e %
Sales 995 17 1,202 21 1,280 7 1,501 17 1,857 24 1,988 7 2,353 18 2,588 10
Gross profit 618 18 666 8 804 21 1010 26 1299 29 1429 10 1694 19 1873 11
Gross profit margin 62.1% 55.4% 62.8% 67.3% 69.9% 71.9% 72.0% 72.4%
Operating expenses 416 14 485 17 584 20 709 21 922 30 1,016 10 1,215 20 1,335 10
As a % of sales 41.8% 40.4% 45.6% 47.2% 49.6% 51.1% 51.6% 51.6%
Adjusted EBIT 206 11 181 -12 220 22 301 37 377 25 413 10 480 16 538 12
EBIT margin 20.7% 15.0% 17.2% 20.1% 20.3% 20.8% 20.4% 20.8%
Reported EBIT 202 28 -10 -105 171 -1,828 302 77 367 21 334 -9 465 39 523 12
EBIT margin 20.3% -0.8% 13.4% 20.1% 19.7% 16.8% 19.8% 20.2%
Pre-tax profit 196 25 -16 -108 166 -1,131 296 78 366 24 334 -9 470 41 533 13
Reported net profit 135 23 -6 -104 81 -1,456 208 156 263 26 251 -5 352 41 400 13
Clean net profit 140 27 132 -6 155 17 217 40 263 21 251 -5 352 41 400 13
EPS (clean diluted) 31.6 28 30.2 -5 35.1 16 48.8 39 61.6 26 70.4 14 81.9 16 92.5 13
Source: Company data, HSBC estimates
Burberry sales by geography – full year ending March
GBPm 2008a YOY
% chg
2009a
YOY
% chg
2010a
YOY
% chg
2011a
YOY
% chg
2012a
YOY
% chg
2013e
YOY
% chg
2014e
YOY
% chg
2015e
YOY
% chg
Europe 453 19 524 16 515 -2 475 7 553 16 559 1 685 23 733 7
North America 235 19 305 30 321 5 387 35 435 12 455 5 548 20 591 8
Asia Pacific 189 13 240 27 283 18 457 131 653 43 742 14 893 20 1,018 14
Rest of the world 33 79 50 50 64 28 85 71 109 29 123 13 148 20 167 13
Licensing 85 -2 83 -3 97 18 98 11 109 10 109 - 79 -27 79 -
Total sales 995 17 1,202 21 1,280 7 1,501 17 1,857 24 1,988 7 2,353 18 2,588 10
Source: company, HSBC estimates
Burberry sales and EBIT by network – full year ending March
GBPm 2008a YOY
% chg
2009a
YOY
% chg
2010a
YOY
% chg
2011a
YOY
% chg
2012a
YOY
% chg
2013e
YOY
% chg
2014e
YOY
% chg
2015e
YOY
% chg
Retail sales 484 18 630 30 749 19 962 29 1,270 32 1,404 11 1,620 15 1,815 12
Wholesale sales 426 20 489 15 434 -11 441 2 478 9 475 -1 654 38 694 6
License Sales 85 -2 83 -3 97 18 98 1 109 10 109 - 79 -27 79 -
Total sales 995 17 1,202 21 1,280 7 1,501 17 1,857 24 1,988 7 2,353 18 2,588 10
Retail & Wholesale EBIT 136 21 110 -19 138 25 220 59 287 31 323 13 414 28 472 14
Retail & Wholesale EBIT margin 14.9% 9.8% 11.6% 15.6% 16.4% 17.2% 18.2% 18.8%
License EBIT 71 -4 71 0 82 16 82 -1 90 10 90 - 66 -27 66 -
License EBIT margin 83.3% 85.6% 84.3% 82.9% 82.9% 82.9% 82.9% 82.9%
Source: Company data, HSBC estimates
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Financials & valuation: Burberry Group
Financial statements
Year to 03/2012a 03/2013e 03/2014e 03/2015e
Profit & loss summary (GBPm)
Revenue 1,857 1,988 2,353 2,588
EBITDA 454 435 576 645
Depreciation & amortisation -88 -101 -111 -122
Operating profit/EBIT 377 413 480 538
Net interest -1 0 5 10
PBT 366 334 470 533
HSBC PBT 366 334 470 533
Taxation -101 -84 -117 -133
Net profit 264 251 352 400
HSBC net profit 274 313 352 400
Cash flow summary (GBPm)
Cash flow from operations 358 325 438 503
Capex -153 -190 -190 -190
Cash flow from investment -161 -332 -190 -190
Dividends -99 -109 -123 -143
Change in net debt -40 48 -135 -164
FCF equity 181 135 248 313
Balance sheet summary (GBPm)
Intangible fixed assets 133 133 133 133
Tangible fixed assets 329 489 568 636
Current assets 1,003 1,015 1,233 1,456
Cash & others 547 499 635 798
Total assets 1,611 1,782 2,079 2,371
Operating liabilities 493 526 583 624
Gross debt 209 209 209 209
Net debt -338 -291 -426 -590
Shareholders funds 867 1,009 1,239 1,496
Invested capital 425 612 717 803
Ratio, growth and per share analysis
Year to 03/2012a 03/2013e 03/2014e 03/2015e
Y-o-y % change
Revenue 23.7 7.0 18.4 10.0
EBITDA 24.6 -4.3 32.4 12.0
Operating profit 25.2 9.6 16.2 12.1
PBT 23.8 -8.7 40.6 13.4
HSBC EPS 26.2 14.2 12.8 13.4
Ratios (%)
Revenue/IC (x) 4.9 3.8 3.5 3.4
ROIC 70.8 48.3 52.5 51.6
ROE 34.6 33.3 31.4 29.2
ROA 17.8 14.8 18.3 18.0
EBITDA margin 24.5 21.9 24.5 24.9
Operating profit margin 20.3 20.8 20.4 20.8
EBITDA/net interest (x) 649.0
Net debt/equity -38.0 -28.1 -33.7 -38.8
Net debt/EBITDA (x) -0.7 -0.7 -0.7 -0.9
CF from operations/net debt
Per share data (GBPp)
EPS Rep (fully diluted) 59.33 56.42 79.33 89.98
HSBC EPS (fully diluted) 61.63 70.35 79.33 89.98
DPS 25.00 28.14 32.75 37.00
Book value 199.20 231.75 284.53 343.56
DCF analysis
HSBC assumptions
DCF, comprising
Neutral (V)
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 7.3
Equity premium (%) 4.50 EBIT growth 22-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.10 WACC (%) 8.45
Sensitivity and valuation range (GBP/share)
Cost of capital vs fade period 4 years 8 years 12 years
7.5% 17.12 17.52 17.80
8.0% 16.01 16.35 16.62
8.5% 15.02 15.30 15.55
9.0% 14.13 14.37 14.60
9.5% 13.33 13.53 13.74
Valuation data
Year to 03/2012a 03/2013e 03/2014e 03/2015e
EV/sales 2.9 2.7 2.2 2.0
EV/EBITDA 11.8 12.4 9.2 7.9
EV/IC 12.6 8.8 7.4 6.4
PE* 21.4 18.7 16.6 14.6
P/Book value 6.6 5.7 4.6 3.8
FCF yield (%) 3.2 2.4 4.3 5.5
Dividend yield (%) 1.9 2.1 2.5 2.8
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (GBPp) 1,317 Target price (GBPp) 1,530
Reuters (Equity) BRBY.L Bloomberg (Equity) BRBY LN
Market cap (USDm) 8,841 Market cap (GBPm) 5,823
Free float (%) 100 Enterprise value (GBPm) 5,408
Country United Kingdom Sector Global Luxury Goods
Analysts Sophie Dargnies Contact 331 5652 4348
Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Price relative
1713
1713
1613
1613
1513
1513
1413
1413
1313
1313
1213
1213
1113
1113
1013
1013
913
913
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Burberry Group Rel to FTSE ALL-SHARE
Source: HSBC
Note: price at close of 25 Mar 2013
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Christian Dior
Dior’s discount to our estimated restated net asset value (RNAV)
is now 20%, in line with its historical average of 20%
Lowering target price to EUR144 from EUR147 on the back of the
decrease in our LVMH target price to EUR147 (from EUR150)
Remain Neutral as the potential return is limited (12.6%)
Discount to RNAV in line with
its historical average of 20%
20% discount to RNAV
Christian Dior is the main holding company for
LVMH, controlling 40.9% of the shares and
57.5% of the voting rights. As well as its stake in
LVMH (89% of assets), Dior’s only operational
entity is the Dior Couture brand (10%).
In 2012, Dior shares gained 40% vs 27% for
LVMH shares and are flat vs -7% y-t-d in 2013.
Dior’s discount to our estimated restated net asset
value (RNAV) is thus now 20%, in line with its
historical average. There is nothing surprising
here as conglomerate/holding discounts to RNAV
tend to fall during bull market phases and vice
versa. The below-mentioned press speculation
(see Risks section, next page) may also have
played a role.
As evidenced by the chart on the next page, the
discount to RNAV has moved within a 6%-34%
range (average 20%) since 2005. Note that higher
levels of discounts were witnessed in the 1995-
2005 period, but we would discard them from the
analysis since the LVMH control structure was
much more complicated and moreover the French
tax regime back then (taxation on capital gains)
implied a higher discount for most French
conglomerates.
We are Neutral on LVMH with a EUR147 target
price – see our detailed LVMH investment case
on page 88. As we base our sum-of-the-parts
target price for Dior on LVMH reaching our new
target price of EUR147 (vs EUR150 previously)
and a Dior-targeted discount to RNAV of 20%,
our new Dior target price is EUR144 – see our
detailed assumptions on page 63.
Under our research model, for stocks without a
volatility indicator, the Neutral band is 5
percentage points above and below the hurdle rate
for eurozone stocks of 9.0%. Our target price of
EUR147 provides a potential return of 12.6%,
which is within the Neutral band of our model;
therefore, we remain Neutral on Christian Dior
stock. Potential return equals the percentage
difference between the current share price and the
target price, including the forecast dividend yield
when indicated.
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Two consecutive changes in reporting
end dates
Christian Dior has made two consecutive changes
in its fiscal year-end dates (the first from
December to April, the second from April to
June). As a result, the group reported a very short
fiscal year for the period 1 January to 30 April
2012, will report FY May-April 2013, then again
a very short fiscal year for May-June 2013, and
will move to a FY July-June format going
forward.
The first change was aimed at better aligning the
Dior dividend with that of LVMH. Having
realised that these new accounting periods were
not ideal (vis a vis those of its subsidiary LVMH),
Dior decided to change its closing date again to
match its reporting with LVMH’s half-year
reporting period.
Strong performance for Dior Couture
Dior reported 9M sales to end-January 2013 on 4
March. Dior Couture registered sales up 19%
reported, c17% organically vs 18% organic
growth in H1 2012 (ending 31 October ),
implying still robust trends in Q3 ended January
2013 (especially if one takes into account the later
date on Chinese New Year – February instead of
January last year).
For FY April 2013, we forecast 15% organic sales
growth and an EBIT margin of 12% on the back
of a higher proportion of its own stores sales
(c85% of sales), higher gross margin and better
SG&A leverage (including improved store
productivity). For FY June 2014e and June 2015e,
we forecast 12% and 10% organic sales growth
respectively, and EBIT margins of 13.5% and
14%.
Risks
The main downside/(upside) risks to our rating on
Dior would be a negative/(positive) development
in LVMH’s share price. Another risk would be a
change in the market’s view of the discount to
apply to holding companies (positive or negative).
Since Dior’s IPO in 1995, there has been
recurring press speculation about a potential
streamlining of the current LVMH control
structure. More recently, an article in The
Independent (25 November 2012) elaborated on
several scenarios putting Dior in play.
In theory, any expectations or announcements
about such a simplification (eg an LVMH/Dior
merger or a Dior minority buy-out) – provided it
benefited Dior’s minority shareholders – could
trigger a sharp narrowing in the company’s
discount to RNAV. We think this could be a
potential upside catalyst for Dior.
Dior discount to our estimated net asset value
0%
-10%
-20%
-30%
-40%
-50%
-60%
Source: Thomson Reuters Datastream, using share price close at 25 March 2013
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Dior Couture sales & EBIT evolution
EURm 1993a 1994a 1995a 1996a 1997a 1998a 1999a 2000a 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012/
13e*
Sales 124 137 157 187 200 200 220 296 350 492 523 595 663 731 787 765 717 826 1,000 1,365 1,487 1,665
EBIT 19 22 24 24 11 -1 9 14 -5 33 40 50 53 56 74 9 13 35 85 164 201 233
EBIT margin 15.3 16.1 15.1 13.1 5.6 -0.3 3.9 4.7 -1.5 6.7 7.7 8.4 8.0 7.7 9.4 1.2 1.8 4.2 8.5 12.0 13.5 14.0
Y-o-y evolution (%)
Sales 10 15 19 7 0 10 35 18 41 6 14 11 10 8 -3 -6 15 21 37 9 12
EBIT 16 8 3 -54 nm nm 64 nm nm 21 25 6 6 32 -88 44 nm 143 93 23 16
* FY ending April N+1, ** FY ending June N+1
Source: company, HSBC estimates
2013/
14e**
2014/
15e**
Dior restated net asset value
EURm % stake Restated NAV Method % of RNAV
LVMH 40.89% 26,944 Share price EUR129.65 89%
Dior Couture 100.00% 2,887 2x 2013e calendar sales 10%
Property 100.00% 108 90,000m2 at EUR12,000/m2 0%
Treasury stocks 1.43% 358 Share price EUR127.85 1%
Restated NAV 30,298 100%
Parent company debt -1,168
RNAV (EURm) 29,130
RNAV per share (EUR) 160.30
Share price (EUR) 127.85
Discount (%) -20%
Source: Company data, HSBC estimates
Dior target price calculation based on HSBC's LVMH target price
EURm % stake Restated NAV Method % of RNAV
LVMH 40.89% 30,550 HSBC target price EUR147 90%
Dior Couture 100.00% 2,887 2x 2013e sales 9%
Property 100.00% 108 90,000m2 at EUR12000/m2 0%
Treasury stocks 1.43% 358 Share price 1%
Restated NAV 33,903 100%
Parent co.debt -1,168
RNAV (EURm) 32,735
Targeted discount to RNAV (%) -20%
HSBC Dior target price (EUR per share) 144
Source: Company data, HSBC estimates
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Financials & valuation: Christian Dior
Financial statements
Year to 12/2011a 04/2013e 06/2014e 06/2015e
Profit & loss summary (EURm)
Revenue 24,628 30,142 32,817 35,519
EBITDA 6,393 7,265 8,056 8,810
Depreciation & amortisation -1,070 -994 -1,069 -1,140
Operating profit/EBIT 5,323 6,271 6,987 7,670
Net interest -300 -91 -116 -102
PBT 4,910 6,031 6,779 7,477
HSBC PBT 4,910 6,031 6,779 7,477
Taxation -1,462 -1,929 -2,197 -2,422
Net profit 1,279 1,635 1,884 2,073
HSBC net profit 1,279 1,635 1,884 2,073
Cash flow summary (EURm)
Cash flow from operations 4,097 4,433 5,351 5,817
Capex -1,749 -1,702 -1,702 -1,802
Cash flow from investment -6,309 -2,048 -1,702 -1,802
Dividends -448 -560 -644 -740
Change in net debt 1,958 -747 -1,343 -1,331
FCF equity 2,348 2,731 3,649 4,015
Balance sheet summary (EURm)
Intangible fixed assets 21,738 22,615 22,615 22,615
Tangible fixed assets 8,371 9,401 10,400 11,306
Current assets 13,679 15,022 16,101 17,167
Cash & others 2,428 2,373 2,373 2,373
Total assets 51,207 54,790 57,242 59,537
Operating liabilities 6,695 6,947 7,530 8,107
Gross debt 8,824 8,022 6,679 5,348
Net debt 6,396 5,649 4,306 2,975
Shareholders funds 9,633 12,457 15,053 17,508
Invested capital 34,665 37,718 39,213 40,609
Ratio, growth and per share analysis
Year to 12/2011a 04/2013e 06/2014e 06/2015e
Y-o-y % change
Revenue 16.6 22.4 8.9 8.2
EBITDA 23.5 13.6 10.9 9.4
Operating profit 22.7 17.8 11.4 9.8
PBT 3.5 22.8 12.4 10.3
HSBC EPS 1.4 27.8 15.3 10.0
Ratios (%)
Revenue/IC (x) 0.8 0.8 0.9 0.9
ROIC 11.9 11.8 12.3 13.0
ROE 14.8 14.8 13.7 12.7
ROA 7.9 7.9 8.3 8.8
EBITDA margin 26.0 24.1 24.5 24.8
Operating profit margin 21.6 20.8 21.3 21.6
EBITDA/net interest (x) 21.3 80.2 69.7 86.2
Net debt/equity 25.6 20.2 13.8 8.7
Net debt/EBITDA (x) 1.0 0.8 0.5 0.3
CF from operations/net debt 64.1 78.5 124.3 195.5
Per share data (EUR)
EPS Rep (fully diluted) 7.16 9.16 10.55 11.61
HSBC EPS (fully diluted) 7.16 9.16 10.55 11.61
DPS 2.61 3.26 3.75 4.31
Book value 53.96 69.78 84.32 98.07
Dior restated net asset value (target price)
EURm
Neutral
RNAV
LVMH (40.89% stake) @ EUR147 per share 30,550
Dior Couture (2x 2013e sales) 2,887
Property (90,000m2 at EUR12,000/m2) 108
Treasury stocks 358
Restated NAV 33,903
Parent co.debt -1,168
RNAV (EURm) 32,735
Target price for Dior (EUR per share) 144
Target discount (%) -20%
Valuation data
Year to 12/2011a 04/2013e 06/2014e 06/2015e
EV/sales 2.4 1.9 1.7 1.6
EV/EBITDA 9.4 8.1 7.1 6.3
EV/IC 1.7 1.6 1.5 1.4
PE* 17.8 14.0 12.1 11.0
P/Book value 2.4 1.8 1.5 1.3
FCF yield (%) 4.4 5.1 6.9 7.7
Dividend yield (%) 2.0 2.6 2.9 3.4
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 127.85 Target price (EUR) 144.00
Reuters (Equity) DIOR.PA Bloomberg (Equity) CDI FP
Market cap (USDm) 29,932 Market cap (EURm) 23,234
Free float (%) 29 Enterprise value (EURm) 58,740
Country France Sector Global Luxury Goods
Analysts Sophie Dargnies Contact 331 5652 4348
Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Price relative
152
152
142
142
132
132
122
122
112
112
102
102
92
92
82
82
72
72
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Christian Dior Rel to SBF-120
Source: HSBC
Note: price at close of 25 Mar 2013
63

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Coach
A new era begins after another US-driven disappointment. It brings
with it renewed uncertainties (notably about profitability)
After the 38% decline in its share price since its March 2012 peak,
Coach is trading at 12.9x calendar PE (a 30% discount to European
luxury stocks); the EBIT margin (31%) and ROIC (above 100% still)
remain amongst the highest in the industry
Remain Overweight (V), target price unchanged (USD71)
Transformation brings doubts
and, we think, an opportunity
US disappoints and prompts a reset
On 23 January, Coach reported Q2 ending
December EPS at USD1.23, missing consensus
(USD1.29) and our own expectations (USD1.28) on
further signs of US weakness. No doubt external
factors (Hurricane Sandy had a 1% impact on comps
and the macro environment was muted) have
impacted performance in the US but Coach’s
management is far from complacent in the release
acknowledging the brand needs a bit of a reset in its
core domestic market.
North American comps declined 2% (vs consensus
of +3% and our own +1% estimate). Coach had
flagged that the basis of comparison was tough and
the environment unhelpful but clearly this is a
disappointment to them, the culprit being women's
handbags and an increasingly relevant competitive
landscape. All in, North American retail sales were
up 2% (thanks to openings, 2 full price and 15
factory locations) but all in growth was just 1% as
wholesale continued to decline.
Coach clearly does not face the same issues outside
the US as international sales increased 12% with
China sales increasing 40% (and comps remaining in
the double digits). Japan saw a decline of 2% in sales
organically translating into a 7% decline in USD.
Despite the 4.5% miss on the top line (USD1,503m
vs HSBC USD1,575m), gross margin held up
(72.2%, ie in line with Q2 last year and 20bps lower
than our estimate) and operating margin was actually
a tad better than we expected (20bps higher at
35.0%) as SG&A was again have been kept under
tight wraps. The absolute operating income
(USD527m) was 4% below our estimate.
A new era begins
"We're now transforming Coach into a global
lifestyle brand". Who could have imagined this
statement just three years ago? Clearly a tipping
point where Coach acknowledges that a new
competition (Michael Kors, Tory Burch, Kate
Spade) has emerged and that fundamentally the
competitive space and of course the consumers are
not just focused on accessories. While the
transformation to becoming a lifestyle brand is proof
that the management of Coach has a great capacity
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to reinvent the brand and question itself, there are
undeniable risks on the journey. First, any brand
leaving its core competency may find it also leaves
its comfort zone, but it will also be seen as a sign of
maturity in the US. A bit like Louis Vuitton went
into watches and jewellery, shoes, ready-to-wear and
now stationery, the move from Coach to be more
encompassing (footwear push, apparel, etc) signals a
few limits in their core category (women's handbags)
in their core market (the US). The other issue with
diversification is the structural margin dilution of the
new product categories, which puts a question mark
on the level of margin that the company can hope for
in the future.
We do not doubt that comps should be able to
rebound in the next few quarters from the -2% US
comp. We don't think that's the most relevant
question though as the brand enters a new phase of
its development. The market needs to accept Coach
has moved from a category killer to a very large,
dominant share player that can only stabilise if not
lose share in its core market.
Does that make it non-investable? Not in our view.
When looking at valuation, cash generation and
ROIC metrics (still above 100%), there will be a
price to pay for everything and the market de-rating
of the stock has probably already taken into account
the change in business model and prospects.
For H2 ending June 2013, Coach now expects to
grow sales mid-single digits (with flat comps), (ii)
GM to increase modestly. For FY June 2013, Coach
still expects a c150bp SG&A increase due to the
integration of the above-mentioned Asian
businesses, and a c31% EBIT margin. In other
words, the EBIT margin indication is unchanged but
the sales indication is lower than before the Q2
results publication.
Earnings, valuation and risks
Coach published its Q2 results on 23 January and
should be publishing Q3 results on 23 April.
Although Coach has guided towards flat North
American comps in H2 ending June 2013e, we
believe it makes sense to forecast a 3% decline in Q3
followed by a 3% increase in Q4 due to the different
comparison bases. Indeed, last year comps rose 7%
in Q3 and 2% in Q4. For both FY13/14 and
FY14/15, we forecast 2.5% comps.
In terms of EBIT margin, we forecast 30.6% in
FY12/13, then 31.2% in FY13/14 and 31.7% in
FY14/15. A greater proportion of “lifestyle
categories” vs the more profitable handbags and
accessories should weigh. However, the negative
150bp impact from the integration of former partners
in Asia which affects FY12/13 should progressively
wane.
Our DCF-based target price (USD71) is unchanged
(no change in estimates either). The assumptions
used to generate our DCF-derived target price are
detailed on page 67.
Under our research model, for US stocks with a
volatility indicator, the Neutral band is 10 percentage
points above and below the hurdle rate of 7.0%. Our
target price implies a 42.8% potential return, which
is above the Neutral band; therefore we reiterate our
Overweight (V) rating. Potential return equals the
percentage difference between the current share
price and the target price, including the forecast
dividend yield when indicated.
The stock is trading at a calendar PE of 12.9x for
2013e, a 30% discount to European luxury stocks.
Downside risks in the long term include the brand’s
different positioning in its two channels (full-price
retail and factory outlets), which could pose a threat
to its image, a lack of success in diversifying out of
the core handbags and accessories product and a lack
of traction in the European market.
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Coach simplified P&L
USDm FY07/08e FY08/09 FY09/10a FY10/11a 1Q12a 2Q12a 3Q12a 4Q12a FY11/12a 1Q13a 2Q13a FY12/13e FY13/14e FY14/15e
Net sales 3,181 3,230 3,608 4,159 1,050 1,449 1,109 1,155 4,763 1,161 1,504 5,060 5,500 6,025
Cost of sales 774 908 974 1,135 286 403 291 317 1,297 316 418 1,361 1,468 1,597
Gross Profit 2,407 2,323 2,634 3,024 765 1,045 818 838 3,466 845 1,085 3,699 4,031 4,428
Gross margin 75.7% 71.9% 73.0% 72.7% 72.8% 72.2% 73.8% 72.6% 72.8% 72.8% 72.2% 73.1% 73.3% 73.5%
Selling, G&A 1,228 1,322 1,484 1,719 443 544 481 487 1,954 513 559 2,149 2,317 2,518
SG&A as % of sales 38.6% 40.9% 41.1% 41.3% 42.1% 37.6% 43.3% 42.1% 41.0% 44.2% 37.2% 42.5% 42.1% 41.8%
Operating Income 1,179 1,000 1,150 1,305 322 501 337 352 1,512 332 527 1,550 1,715 1,910
Operating margin 37.1% 31.0% 31.9% 31.4% 30.7% 34.6% 30.4% 30.4% 31.7% 28.6% 35.0% 30.6% 31.2% 31.7%
Interest income 37.1 3.2 1.8 -3.7 -1.4 -1.8 -1.7 -1.5 -6.3 -2.0 -1.2 3.0 25.0 45.0
PBT 1,216 1,003 1,152 1,301 321 499 336 350 1,506 330 525 1,553 1,740 1,955
Income taxes 474 381 417 420 106 152 111 99 467 108 173 512 574 645
Tax rate 39.0% 38.0% 36.2% 32.3% 32.9% 30.4% 33.0% 28.2% 31.0% 32.8% 32.8% 33.0% 33.0% 33.0%
Minority interest
Net income 742 622 735 881 215 347 225 251 1,039 221 353 1,040 1,166 1,310
Net EPS common (Diluted) 2.06 1.91 2.33 2.92 0.73 1.18 0.77 0.86 3.53 0.77 1.23 3.64 4.07 4.58
Weighted avg com share 360.3 325.6 315.8 301.6 296.1 295.5 293.5 291.8 294.1 288.5 286.2 286.2 286.2 286.2
outst. (D) (m)
Net sales 22% 2% 12% 15% 15% 15% 17% 12% 15% 11% 4% 6% 9% 10%
Cost of sales 31% 17% 7% 17% 21% 15% 12% 9% 14% 11% 4% 5% 8% 9%
Gross profit 19% -4% 13% 15% 13% 14% 18% 13% 15% 11% 4% 7% 9% 10%
Operating expenses 19% 8% 12% 16% 13% 18% 10% 14% 14% 16% 3% 10% 8% 9%
Income before tax &
19% -15% 15% 13% 13% 10% 33% 13% 16% 3% 5% 3% 11% 11%
minority interest
Diluted EPS 22% -7% 22% 25% 16% 18% 24% 27% 21% 6% 5% 3% 12% 12%
North America retail comps 10% -7% 4% 11% 9% 9% 7% 2% 7% 6% -2% 1% 2.5% 2.5%
Source: Company data, HSBC estimates
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Financials & valuation: Coach
Financial statements
Year to 06/2012a 06/2013e 06/2014e 06/2015e
Profit & loss summary (USDm)
Revenue 4,763 5,060 5,500 6,025
EBITDA 1,645 1,699 1,879 2,090
Depreciation & amortisation -133 -149 -164 -180
Operating profit/EBIT 1,512 1,550 1,715 1,910
Net interest -6 3 25 45
PBT 1,506 1,553 1,740 1,955
HSBC PBT 1,506 1,553 1,740 1,955
Taxation -467 -512 -574 -645
Net profit 1,039 1,040 1,166 1,310
HSBC net profit 1,039 1,040 1,166 1,310
Cash flow summary (USDm)
Cash flow from operations 1,261 1,111 1,269 1,424
Capex -184 -206 -227 -250
Cash flow from investment -238 -252 -227 -250
Dividends -260 -384 -442 -508
Change in net debt -216 -76 -601 -666
FCF equity 970 905 1,042 1,174
Balance sheet summary (USDm)
Intangible fixed assets 481 481 481 481
Tangible fixed assets 819 922 985 1,055
Current assets 1,596 1,768 2,447 3,198
Cash & others 917 993 1,594 2,260
Total assets 3,104 3,379 4,121 4,942
Operating liabilities 1,088 1,107 1,124 1,143
Gross debt 23 23 23 23
Net debt -894 -970 -1,570 -2,237
Shareholders funds 1,993 2,249 2,974 3,776
Invested capital 891 1,072 1,195 1,331
Ratio, growth and per share analysis
Year to 06/2012a 06/2013e 06/2014e 06/2015e
Y-o-y % change
Revenue 14.5 6.2 8.7 9.5
EBITDA 15.0 3.3 10.6 11.3
Operating profit 15.9 2.5 10.6 11.4
PBT 15.7 3.1 12.0 12.4
HSBC EPS 20.9 2.9 12.0 12.4
Ratios (%)
Revenue/IC (x) 5.8 5.2 4.9 4.8
ROIC 127.2 105.8 101.4 101.3
ROE 57.6 49.1 44.6 38.8
ROA 36.2 32.1 31.1 28.9
EBITDA margin 34.5 33.6 34.2 34.7
Operating profit margin 31.7 30.6 31.2 31.7
EBITDA/net interest (x) 260.0
Net debt/equity -44.9 -43.1 -52.8 -59.2
Net debt/EBITDA (x) -0.5 -0.6 -0.8 -1.1
CF from operations/net debt
Per share data (USD)
EPS Rep (fully diluted) 3.53 3.64 4.07 4.58
HSBC EPS (fully diluted) 3.53 3.64 4.07 4.58
DPS 1.20 1.38 1.59 1.83
Book value 6.97 8.09 10.69 13.57
DCF analysis
HSBC assumptions
DCF, comprising
Overweight (V)
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 6.1
Equity premium (%) 4.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.25 WACC (%) 8.50
Sensitivity and valuation range (USD/share)
Cost of capital vs fade period 4 years 8 years 12 years
7.5% 78.6 80.6 82.2
8.0% 73.9 75.6 77.0
8.5% 69.6 71.0 72.3
9.0% 65.7 66.9 68.0
9.5% 62.1 63.1 64.1
Valuation data
Year to 06/2012a 06/2013e 06/2014e 06/2015e
EV/sales 2.7 2.6 2.3 1.9
EV/EBITDA 7.9 7.6 6.6 5.6
EV/IC 14.7 12.1 10.4 8.8
PE* 14.1 13.7 12.2 10.9
P/Book value 7.1 6.1 4.7 3.7
FCF yield (%) 6.9 6.5 7.5 8.4
Dividend yield (%) 2.4 2.8 3.2 3.7
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (USD) 49.72 Target price (USD) 71.00
Reuters (Equity) COH.N Bloomberg (Equity) COH US
Market cap (USDm) 13,961 Market cap (USDm) 13,961
Free float (%) 100 Enterprise value (USDm) 12,991
Country United States Sector Global Luxury Goods
Analysts Erwan Rambourg Contact 852 2996 6572
Antoine Belge Contact 331 5652 4347
Sophie Dargnies Contact 331 5652 4348
Price relative
85
80
75
70
65
60
55
50
45
40
35
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Coach Rel to S&P 500
Source: HSBC
Note: price at close of 25 Mar 2013
85
80
75
70
65
60
55
50
45
40
35
67

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Ferragamo
The perfect “glass half full or half empty” story as EBIT margin
remain well below peers (16.9% vs c29% in 2012) even after a
580bp increase in just two years
Ferragamo should grow faster than peers in 2013 and beyond, but
valuation (25.8x 2013e PE, a 46% premium to peers) is not
compelling in light of higher execution risk
Reiterate Neutral; increase target price to EUR23 from EUR21 on
higher estimates
Perfect “glass half full or half
empty” story
Ferragamo a margin catch-up story
The Ferragamo investment case over the medium
term is relatively simple: this is a story of
improved execution for a medium-sized mono
brand (EUR1.15bn in sales in 2012), which
should in our view lead to a combination of
above-average top-line and margin expansion.
Indeed, in spite of attractive products and
geographic and distribution mixes (in 2012, Asia
and retail already accounted for 36% and 65% of
sales, respectively), Ferragamo's EBIT margin lags
those of 'soft' luxury peers (companies primarily
involved in leather goods, apparel and shoes). Even
if Ferragamo’s EBIT margin improved 480bps in
2011 and 100bp in 2012 demonstrating the ongoing
changes at the company, this level of margin
remained well below peers (c29% on average).
Since its 2011 listing, Ferragamo has moved to a
more aggressive/pragmatic management
approach, leading to better execution.
Ferragamo’s issues of lower profitability by
product line and lower profitability in its retail
store network are linked. In the luxury industry,
EBIT margins in retail are usually 15-20
percentage points higher than EBIT margins in
wholesale, but Ferragamo – which already
generates 67% of its sales in retail – does not
seem to benefit from that yet.
In our view, the key way to improve store
productivity will be to reduce the average level of
markdowns, which remains high compared to
peers even after three years of improvement. We
believe achieving a higher share of sales at full
price will notably require (i) a higher share of
permanent (‘evergreen’) products, (ii) more highmargin
entry-level products (notably more small
leather goods), (iii) a more focused offer (the Fall-
Winter 2013 collection should see a c20%
reduction in the number of SKUs compared to the
Fall-Winter 2012 collection), and (iv) better
replenishment and in-store merchandising.
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Earnings, valuation and risks
Organic growth for Q4 2012 was 11%, with retail
up 10%, wholesale up 9% and licence revenues
doubling. The FY12 EBIT margin rose 100bp (vs
HSBC 40bp) to 16.9%. Gross margin was up only
20bp as lower markdowns was offset by negative
FX hedging impacts and negative distribution mix
(outperformance of wholesale). Ferragamo
characterises itself by a different accounting for
hedging, which is booked at the sales level. A
modest SG&A leverage was mitigated by a 30bp
surge in the communication-to-sales ratio to 6.2%.
Our 2013-2015e forecasts call for organic sales
growth of 11%, 11% and 9%, and 350bp EBIT
margin gains over the period (with the EBIT margin
reaching 20.4% in 2015e). The improvement in
store profitability should, in our view, translate into
a 260bp gross margin enhancement and 90bp
SG&A leverage over the period.
We have raised our 2013 and 2014 EBIT estimates
by 2% and 1%, respectively, on the back of betterthan-expected
2012 results. Due to the buy-backs of
minorities, we forecast the share of minorities of
total net profit to drop from 16% in 2012 to 9% in
2013e and beyond. This explains why we forecast
EPS will grow much faster than EBIT in 2013e
(44% vs 20%).
We increase our DCF-based target price to EUR23
from EUR21 on the back of the above-mentioned
EBIT estimates upgrade as well as higher mediumterm
sales forecasts in Europe and the US after
better-than-expected results in 2012 in these two
regions . The assumptions used to generate our target
price are detailed on page 71. Under our research
model, for stocks without a volatility indicator, the
Neutral band is 5 percentage points above and below
the hurdle rate for eurozone stocks of 9.0%. Our
target price provides a potential return of 7.7%
which is within the Neutral band of our model;
therefore, we reiterate our Neutral rating. Potential
return equals the percentage difference between the
current share price and the target price, including the
forecast dividend yield when indicated.
Company-specific upside risks include wholesale
sales continuing to grow significantly in spite of
the high basis of comparison. Company-specific
downside risks include failure to execute
initiatives aiming at increasing store sales
productivity and a placement of shares from
Ferragamo family members.
In 2012, the stock rose 63% and in 2013 y-t-d is
up 28%. Ferragamo should grow faster than peers
in 2013 and beyond, but valuation (25.8x 2013e
PE, a 46% premium to peers) is not compelling in
our view in light of higher execution risk. In
addition, from a top-line perspective, it is worth
noting that the main reason behind Ferragamo’s
outperformance in 2012 (13% organic sales vs
11% for the sector) is that wholesale sales (33%
of sales) grew at 19% vs 10% for wholesale. From
at least Q1 2011 (we do not have data before that
since Ferragamo was listed in June 2011) to Q2
2012, stellar wholesale sales growth has been a
significant booster to the overall performance,
driven by buoyant sales in the travel retail
segment and in emerging markets where
Ferragamo is using third-party distributors
(notably part of China, Indonesia, Philippines,
Vietnam, Brazil, Colombia, Venezuela, Middle
East, Russia, US department stores). That trend
was interrupted in Q3 2012 (5% wholesale growth
vs 9% retail growth) and Q4 12 (9% wholesale
growth vs 10% retail growth), but in light of the
stock’s valuation premium, we would like to see a
stronger performance of retail (which for us is the
best measure of a luxury brand momentum).
Finally, the success of the diversification outside
of shoes (which are a less profitable category) was
not obvious in 2012 (shoes grew 16% vs 13%
total sales growth).
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March 2013
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Ferragamo - P&L
(EURm) FY 08a FY 09a FY 10a FY 11a Q1 12a Q2 12a Q3 12a Q4 12a FY 12a FY 13e FY 14e FY 15e
Revenues 690.8 619.6 781.6 986.4 259.6 305.5 267.5 320.4 1,153.0 1,275.0 1,410.0 1,540.0
COGS 271.9 256.1 289.4 352.9 96.5 96.0 205.6 96.0 411.0 444.3 478.6 508.9
% of sales 39.4% 41.3% 37.0% 35.8% 37.2% 31.4% 76.9% 30.0% 35.6% 34.8% 33.9% 33.0%
Gross profit 419.0 363.5 492.2 633.5 163.1 196.5 171.5 211.0 742.0 830.7 931.4 1,031.1
Gross margin 60.6% 58.7% 63.0% 64.2% 62.8% 64.3% 64.1% 65.8% 64.4% 65.2% 66.1% 67.0%
Operating expenses -355.2 -327.1 -405.8 -476.8 -133.0 -138.2 -127.7 -148.9 -547.7 -600.8 -660.4 -717.1
% of sales -51.4% -52.8% -51.9% -48.3% -51.2% -45.2% -47.7% -46.5% -47.5% -47.1% -46.8% -46.6%
Operating profit (EBIT) 63.8 36.5 86.4 156.6 30.1 58.3 43.8 62.1 194.3 230.0 271.0 314.0
EBIT margin 9.2% 5.9% 11.1% 15.9% 11.6% 19.1% 16.4% 19.4% 16.9% 18.0% 19.2% 20.4%
EBITDA 86.0 61.9 113.1 183.7 38.2 66.6 52.2 66.3 223.3 261.9 306.1 352.6
EBITDA margin 12.4% 10.0% 14.5% 18.6% 14.7% 21.8% 19.5% 20.7% 19.4% 20.5% 21.7% 22.9%
Net financial result -0.4 -2.1 2.4 -3.0 -1.5 0.8 -1.7 -4.3 -6.6 -1.0 1.0 3.0
Associates 0.8 0.4 0.5 0.7 0.2 0.3 0.0 0.1 0.6 0.0 0.0 0.0
Profit before tax 64.2 34.8 89.3 154.3 28.9 59.4 42.2 57.9 188.4 229.0 272.0 317.0
Income tax expense 25.3 49.5 28.5 51.1 11.9 20.5 13.4 17.3 63.1 75.6 89.8 104.6
Effective tax rate 39.5% 142.1% 31.9% 33.1% 41.2% 34.5% 31.9% 29.8% 33.5% 33.0% 33.0% 33.0%
Net profit for the period 38.9 -14.7 60.8 103.3 17.0 38.9 28.7 40.6 125.3 153.4 182.2 212.4
o/w group 29.8 -20.9 48.9 81.3 12.0 32.8 24.8 35.9 105.6 139.6 165.8 193.3
o/w minority interests 9.1 6.2 11.9 22.0 5.0 6.1 3.9 4.7 19.7 13.8 16.4 19.1
Diluted EPS 0.22 -0.12 0.29 0.48 0.07 0.19 0.15 0.21 0.63 0.83 0.98 1.15
YoY Variation
Net sales 1% -10% 26% 26% 23% 23% 11% 12% 17% 11% 11% 9%
Operating expenses 2% -8% 24% 17% 22% 23% 11% 6% 15% 10% 10% 9%
EBIT -18% -43% 137% 81% 43% 17% 4% 43% 24% 18% 18% 16%
PBT -5% -46% 157% 73% 78% 24% -8% 30% 22% 22% 19% 17%
Net profit (group share) -23% -170% -334% 66% -1% 37% -7% 94% 30% 32% 19% 17%
* As from 2013, we forecast share of minority interest to 6% from 18% of net profit
Source: company report, HSBC estimates
70

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Financials & valuation: Salvatore Ferragamo
Neutral
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 1,153 1,275 1,410 1,540
EBITDA 223 262 306 353
Depreciation & amortisation -29 -32 -35 -39
Operating profit/EBIT 194 230 271 314
Net interest -7 -1 1 3
PBT 188 229 272 317
HSBC PBT 188 229 272 317
Taxation -63 -76 -90 -105
Net profit 106 140 166 193
HSBC net profit 106 140 166 193
Cash flow summary (EURm)
Cash flow from operations 124 165 194 229
Capex -59 -70 -75 -80
Cash flow from investment -59 -56 -75 -80
Dividends -67 -83 -101 -119
Change in net debt 28 -26 -18 -28
FCF equity 65 95 119 149
Balance sheet summary (EURm)
Intangible fixed assets 105 103 103 103
Tangible fixed assets 147 185 225 266
Current assets 495 560 619 690
Cash & others 110 137 155 185
Total assets 748 850 949 1,062
Operating liabilities 261 280 298 317
Gross debt 168 168 168 170
Net debt 58 31 13 -14
Shareholders funds 300 383 464 557
Invested capital 374 431 494 558
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 16.9 10.6 10.6 9.2
EBITDA 21.6 17.3 16.9 15.2
Operating profit 24.0 18.3 17.8 15.9
PBT 22.0 21.5 18.8 16.6
HSBC EPS 29.8 32.3 18.8 16.6
Ratios (%)
Revenue/IC (x) 3.4 3.2 3.0 2.9
ROIC 38.2 38.3 39.2 40.0
ROE 41.3 40.9 39.2 37.9
ROA 20.6 19.2 20.3 21.1
EBITDA margin 19.4 20.5 21.7 22.9
Operating profit margin 16.9 18.0 19.2 20.4
EBITDA/net interest (x) 33.9 261.9
Net debt/equity 19.2 8.2 2.9 -2.6
Net debt/EBITDA (x) 0.3 0.1 0.0 0.0
CF from operations/net debt 215.8 528.9 1455.1
Per share data (EUR)
EPS Rep (fully diluted) 0.63 0.83 0.98 1.15
HSBC EPS (fully diluted) 0.63 0.83 0.98 1.15
DPS 0.33 0.41 0.49 0.57
Book value 1.78 2.27 2.75 3.31
DCF analysis
HSBC assumptions
DCF, comprising
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 13.1
Equity premium (%) 6.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.10 WACC (%) 9.53
Sensitivity and valuation range (GBP/share)
Cost of capital vs fade period 4 years 8 years 12 years
8.6% 23.6 24.2 24.7
9.1% 22.0 22.5 22.9
9.6% 20.6 21.0 21.4
10.1% 19.3 19.6 20.0
10.6% 18.1 18.4 18.7
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 3.2 2.8 2.6 2.3
EV/EBITDA 16.4 13.9 11.8 10.2
EV/IC 9.8 8.4 7.3 6.4
PE* 34.1 25.8 21.7 18.6
P/Book value 12.0 9.4 7.8 6.5
FCF yield (%) 1.8 2.6 3.3 4.1
Dividend yield (%) 1.5 1.9 2.3 2.7
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 21.36 Target price (EUR) 23.00
Reuters (Equity) SFER.MI Bloomberg (Equity) SFER IM
Market cap (USDm) 4,634 Market cap (EURm) 3,597
Free float (%) 25 Enterprise value (EURm) 3,628
Country Italy Sector Global Luxury Goods
Analysts Sophie Dargnies Contact 331 5652 4348
Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Price relative
25
23
21
19
17
15
13
13
Mar-12 Sep-12 Mar-13
Salvatore Ferragam Rel to BCI ALL-SHARE INDEX
Source: HSBC
Note: price at close of 25 Mar 2013
25
23
21
19
17
15
71

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Hengdeli Holdings
Hengdeli is losing out on the Chinese traveller theme with
consumers buying outside their retail footprint
We believe there are structural growth and cash generation issues
but stock’s de-rating has been exaggerated
Reiterate OW(V), cut TP to HKD3.00 (from HKD3.75) on lower
estimates, long-term growth rates and balance sheet issues
Why the stock does not trade
on fundamentals but on fear
Fundamentals not that bad, actually
Hengdeli’s results (26 March) were broadly
uncontroversial. Retail sales growth was 6.6% with
mainland doing well (8%) and Hong Kong up only
1% on a constant FX basis and wholesale
performing strongly (15%). This is basically down to
entry price points – dominating in wholesale and to a
lesser degree in mainland retail – being more
resilient than high-end watch demand; dominating in
Hong Kong and probably being affected by the
drying up of gifting on the mainland. The absolute
sales level was right in line with our expectations.
Gross margin was up and slightly higher than we
had expected by 90bps (to 26.0% vs HSBC 25.7%).
This is again a function of selling more entry level
product, which generates higher gross margin, and
regional mix has been favourable as well (more
China, less Hong Kong). EBIT margin was 10.3%
(ie up 10bps vs last year and broadly in line with our
estimates) with the gain from gross margin partly
offset by higher distribution costs as there was
pressure from both staff and rental costs,
representing respectively 5.5% and 6.1% of sales, up
respectively 20bps and 60bps. If we look at core net
margin (eg stripping out one-off gains like the
OMAS disposal in H1 2012), it was very much in
line with our expectations at 6.5%.
But environment in China is still unfavourable
Evidence of gifting drying up can be seen in
mainland China whether it is via Hengdeli’s
lacklustre high-end performance or Rolex and
Cartier performance as mentioned by distributors as
well as Swiss watch exports down for the mainland
and other anecdotal feedback from shop owners and
luxury industry observers.
And the market gives no benefit of the doubt
We believe Hengdeli does not trade on
fundamentals. We view the sharp share price move
down as linked more to fears that the company will
face financing issues and corporate governance
concerns (Chairman personal loan from Swatch,
Next Magazine article speculation in January 2013).
Following up on this idea that Hengdeli is not
trading on fundamentals, we have looked at our
dislocation barometer and see that while earnings
estimates have gone up slightly y-t-d, shares are
down 20%.
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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
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Why does Hengdeli lose out on the theme?
With Chinese citizens incrementally travelling to
Hong Kong, Europe today and potentially the US,
Taiwan, Singapore, Seoul tomorrow, we believe
Hengdeli, not being invested in other markets than
China, Hong Kong and Taiwan, will not capture the
bulk of incremental buyers. This is the main reason
we are cautious on sales versus consensus.
Unlike Emperor Watches and Jewellery (not rated),
which is currently expanding in Singapore and
looking at other parts of Asia, with a solid balance
sheet, we do not believe Hengdeli has the will or the
means to replicate this type of approach.
Commenting after its results release, it confirmed it
was committed to grow the Greater China watch
market and nothing else.
The consequence is quite simple: the sustainable
growth rate will never return, in our view, to the high
double-digit rates that prevailed in mainland China a
few years back.
The good thing for Hengdeli, however, is that unlike
watch retailers focusing on the high-end (and thus on
brands that are currently pursuing their own retail
strategy), one of the key growth drivers of the
company is entry price point brands, which are
structurally a lot more wholesale-driven and thus
need a strong wholesale partner.
China won’t get much worse for Hengdeli
Hengdeli commented that it thought high-end sales
would come back in mainland China only starting in
H2 2014, but we believe that figures for China
overall (ie including the lower price points) should
not deteriorate from 2012 as the high end is “only”
30% on their China sales. Current trading (ie the first
two months of 2013) is fairly healthy with Hong
Kong sales up 15% y-o-y, high-end China sales
down (no magnitude given) and lower price points
up 25% y-o-y.
Cash conversion could be better and
communication as well
We still do not believe in the doom and gloom
scenarios that certain investors have in mind in terms
of Hengdeli struggling to finance their inventories
and finance growth. However, it is noticeable that
financial constraints (a lower dividend than
expected, higher financing costs) are ongoing and
the inventory levels, while the company prides itself
on being best-in-class (which can be argued against)
are not exactly low at 212 days. The guidance is not
for this to lower during 2013 as the high end is cut
back but the entry price points supported by 40-60
new stores in tier 2 to 4 cities in China.
The lack of clear communication around the
Chairman’s loan with the Swatch Group as well as
the limited access to management has been seen by
investors as unhelpful. Besides the dividend payout
of 20%, the company is proposing a bonus issue of 1
bonus ordinary share for every 10 existing ordinary
shares in return for shareholders' support: we are not
sure at present how dilutive/useful this will be.
Earnings, valuation and risks
Following the results, we cut our 2013e-2014e EBIT
estimates by 2% on the back of higher rents and staff
costs and have cut our net income projection by 9%
for FY 13 and 7% for FY 2014 on the back of higher
finance costs.
We reduce our DCF-based target price to HKD3.00
(from HKD3.75) on the back of this net income
revision as well on lower long-term growth and
higher operating risk linked to our view that
Hengdeli needs to manage staff cost and rent
increases with a high inventory level and limited
cash generation.
Our key assumptions are a RFR of 3.0%, ERP of
6.5% and a WACC of 12.33% (vs 11.68%
previously).
73

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppts above
and below the hurdle rate for Chinese stocks of
9.5%. Our HKD3.00 target price implies a 31.6%
potential return, which is above the Neutral band;
therefore, we reiterate our Overweight (V) rating on
Hengdeli stock. Potential return equals the
percentage difference between the current share
price and the target price, including the forecast
dividend yield when indicated. Downside risks to
our thesis include execution risk in managing the
store expansion plans, and higher-than-expected rent
and M&A activity (eg buyout of retail stores, further
investment in Ming Fung) that could be negatively
viewed by the market.
Hengdeli – Profit & Loss
Year to Dec (RMBm) 2009 2010 H1 2011 H2 2011 2011 H1 2012 H2 2012 2012a 2013e 2014e
Total number of stores 270 350 380 405 405 428 452 452 495 533
+/- 58 80 30 25 55 23 24 47 43 38
% POS yoy 27% 30% 16% 12% 10% 7%
PRC retail (RMBm) 2,722 3,770 2,596 2,614 5,210 2,825 2,803 5,628 6,158 6,717
- No. of stores 224 286 311 332 332 352 374 374 414 449
same-store sales growth 11% 33% 38% 22% 30% 0% 1% 1% 3% 4%
% change yoy 17% 38% 46% 31% 38% 9% 7% 8% 9% 9%
HK retail (RMBm) 1,705 2,412 1,449 1,708 3,157 1,415 1,699 3,114 3,238 3,336
- No. of stores 13 16 16 19 19 16 22 22 22 22
+/- 3 3 0 3 3 -3 6 3 0 0
% change yoy 20% 41% 39% 25% 31% -2% -1% -1% 4% 3%
Taiwan retail (RMBm) 8 193 103 120 222 100 115 215 212 217
- No. of stores 33 48 50 4 54 60 56 56 59 62
% change yoy 51% -4% 15% -3% -4% -3% -1% 2%
Retailing (RMBm) 4,428 6,375 4,148 4,442 8,589 4,339 4,617 8,956 9,609 10,269
y/y 44% 44% 27% 35% 5% 4% 4% 7% 7%
Wholesale (RMBm) 1,330 1,661 1,156 1,395 2,551 1,284 1,641 2,925 3,276 3,669
y/y -19% 25% 54% 53% 54% 11% 18% 15% 12% 12%
Others (RMBm; e.g., after-sales) 134 180 104 132 235 127 113 239 251 264
y/y -6% 34% 37% 26% 31% 22% -15% 2% 5% 5%
Sales (RMBm) 5,892 8,216 5,407 5,968 11,375 5,750 6,371 12,120 13,136 14,201
y/y 6.8% 39.4% 45.6% 32.6% 38.5% 6.3% 6.7% 6.6% 8.4% 8.1%
Gr profit (RMBm) 1,401 2,049 1,392 1,465 2,857 1,536 1,619 3,154 3,450 3,663
GP margin 23.8% 24.9% 25.7% 24.5% 25.1% 26.7% 25.4% 26.0% 26.3% 25.8%
bp change -35.4 115.6 112.9 -66.0 17.7 95.9 86.6 90.9 23.6 -46.7
EBIT 578 819 643 516 1,160 678 571 1,248 1,374 1,547
y/y 6.2% 41.6% 66.3% 19.5% 41.6% 5.3% 10.5% 7.6% 10.1% 12.6%
EBIT margin 9.8% 10.0% 11.9% 8.7% 10.2% 11.8% 9.0% 10.3% 10.5% 10.9%
Pre-tax profit 513 816 603 595 1,198 771 460 1,231 1,274 1,463
y/y -14.0% 58.9% 42.1% 52.1% 46.9% 27.8% -22.7% 2.7% 3.5% 14.9%
Tax -128 -198 -147 -133 -280 -158 -128 -285 -299 -351
Eff tax rate (excl CB loss) 24.9% 24.3% 22.7% 22.4% 23.4% 20.4% 27.8% 23.2% 23.5% 24.0%
Minorities -21 -63 -52 -51 -103 -51 -39 -90 -102 -117
Net profit/(Loss) - reported 364 554 405 410 815 563 292 855 873 995
y/y -16.8% 52.0% 32.6% 64.9% 47.1% 39.1% -28.7% 4.9% 2.0% 14.0%
Net margin 6.2% 6.7% 7.5% 6.9% 7.2% 6.9% 4.6% 7.1% 6.6% 7.0%
HSBC core net profit 360 528 402 392 793 424 368 792 806 929
y/y -17.9% 46.8% 43.7% 57.4% 50.1% 5.5% -5.9% -0.1% 1.8% 15.2%
Core net margin 6.1% 6.4% 7.4% 6.6% 7.0% 6.6% 5.8% 6.5% 6.1% 6.5%
Source: Company data, HSBC estimates
74

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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
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Financials & valuation: Hengdeli Holdings Ltd
Overweight (V)
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (CNYm)
Revenue 12,120 13,136 14,201 15,233
EBITDA 1,361 1,485 1,667 1,826
Depreciation & amortisation -113 -111 -119 -127
Operating profit/EBIT 1,248 1,374 1,547 1,699
Net interest -108 -175 -207 -188
PBT 1,231 1,274 1,463 1,632
HSBC PBT 1,168 1,208 1,397 1,566
Taxation -285 -299 -351 -392
Net profit 855 873 995 1,118
HSBC net profit 792 806 929 1,052
Cash flow summary (CNYm)
Cash flow from operations 391 185 1,138 1,188
Capex -475 -180 -180 -180
Cash flow from investment -483 -275 -134 -134
Dividends -281 -175 -262 -299
Change in net debt -1,012 2,348 -407 -456
FCF equity -407 -398 506 596
Balance sheet summary (CNYm)
Intangible fixed assets 474 468 463 457
Tangible fixed assets 1,026 1,138 1,207 1,268
Current assets 9,810 9,844 10,491 11,232
Cash & others 2,870 2,392 2,499 2,656
Total assets 11,925 12,076 12,798 13,599
Operating liabilities 2,389 1,532 1,702 1,857
Gross debt 2,160 4,030 3,730 3,431
Net debt -710 1,638 1,232 775
Shareholders funds 5,457 6,155 6,888 7,708
Invested capital 6,051 7,526 7,959 8,444
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 6.6 8.4 8.1 7.3
EBITDA 10.2 9.1 12.2 9.6
Operating profit 7.6 10.1 12.6 9.8
PBT 2.7 3.5 14.9 11.5
HSBC EPS 0.2 1.8 15.2 13.2
Ratios (%)
Revenue/IC (x) 2.2 1.9 1.8 1.9
ROIC 17.3 15.5 15.2 15.8
ROE 15.3 13.9 14.2 14.4
ROA 9.3 9.6 10.5 10.7
EBITDA margin 11.2 11.3 11.7 12.0
Operating profit margin 10.3 10.5 10.9 11.2
EBITDA/net interest (x) 12.6 8.5 8.1 9.7
Net debt/equity -11.9 24.1 16.1 9.0
Net debt/EBITDA (x) -0.5 1.1 0.7 0.4
CF from operations/net debt 11.3 92.4 153.3
Per share data (CNY)
EPS Rep (fully diluted) 0.17 0.18 0.20 0.23
HSBC EPS (fully diluted) 0.16 0.16 0.19 0.21
DPS 0.04 0.06 0.07 0.08
Book value 1.24 1.40 1.57 1.75
DCF analysis
HSBC assumptions
DCF, comprising
Risk-free rate (%) 3.0 EBIT growth 2012-22e CAGR (%) 8.8
Equity Premium (%) 6.5 EBIT growth 22-42e CAGR (%) 3.5
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.40 WACC (%) 12.33
Key forecast drivers
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Total number of stores 452 495 533 0
PRC retail sales growth (%) 8 9 9 0
HK retail sales growth (%) -1 4 3 0
Retail turnover growth (%) 4 7 7 0
Wholesales revenue growth (%) 15 12 12 0
Total sales growth (%) 7 8 8 0
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 0.6 0.7 0.7 0.6
EV/EBITDA 5.3 6.5 5.6 5.0
EV/IC 1.2 1.3 1.2 1.1
PE* 11.3 11.1 9.7 8.5
P/Book value 1.5 1.3 1.2 1.0
FCF yield (%) -5.1 -5.0 6.2 7.2
Dividend yield (%) 2.2 3.3 3.7 4.2
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (HKD) 2.28 Target price (HKD) 3.00
Reuters (Equity) 3389.HK Bloomberg (Equity) 3389 HK
Market cap (USDm) 1,283 Market cap (HKDm) 9,955
Free float (%) 15 Enterprise value (CNYm) 9,681
Country China Sector Distributors
Analysts Erwan Rambourg Contact 852 2996 6572
Antoine Belge Contact 331 5652 4347
Sophie Dargnies Contact 331 5652 4348
Price relative
7
6
5
4
3
2
1
1
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Hengdeli Holdings Ltd Rel to SSE COMPOSITE INDEX
Source: HSBC
Note: price at close of 25 Mar 2013
7
6
5
4
3
2
75

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Hermès
2012 was another year of earnings growth outperformance
Technical effects (limited free float and grants of shares to
employees) should put a floor to the shares
Remain Neutral, raising target price to EUR280 (from EUR260) on
the back of higher estimates
Reiterate Neutral on Hermès
Slight share price catch-up y-td
Hermès’ shares were down 2% in 2012 and are up
17% year-to-date whilst our overall European
luxury coverage stocks have increased by 35%
and 12% in FY12 and year-to-date respectively.
Hermes' share price performance since January 2010
300
250
200
150
100
50
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Source: Thomson Reuters Datastream
Technical effects (a shares grant
programme and limited free float)
should put a floor to the shares
At the last AGM (on 29 May 2012), the group
received authorisation to raise the share buyback
maximum price from EUR250 to EUR400. In
2012, Hermès bought 89.5k shares for an amount
of EUR21m in order to cover the grants of shares
to employees. True, the group mentioned that all
grants of shares to employees for 2012 have been
covered but we believe the group will have to
continue to buy shares in order to cover future
grants. In addition, as the free float is so limited
(c5% on our estimates), this technical effect
should put a floor to the shares. At end-2012,
LVMH owned 22.6% of Hermès International. On
3 December 2011, the Hermès family created a
private holding company in France, named H51.
H51 has 50.2% of total Hermès International
share capital and has preferential rights on 12.3%
of total share capital directly owned by family
group members. Only 20 people from the family
who owned c10% of the stock decided not to be
part of this holding company or to be subject to
preferential rights. More recently an investigating
magistrate has been named to review the
conditions of LVMH’s stakebuilding in Hermès.
During the last analyst meeting, Hermès
mentioned that it would like to see LVMH reduce
its stake (currently 20.6%) to restore the free float
(to 15-20% vs c5% today).
Earnings, valuation and risks
Hermès reported its FY2012 results on 21 March.
FY2012 sales had already been reported on 12
February 2013.
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FY2012 EBIT was EUR1,119m up 26.4% y-o-y,
5% above expectations. The EBIT margin
improved 90bp to 32.1%. A 70bp decline in the
gross margin (due to unfavourable EUR/USD
hedging) was more than offset by SG&A
leverage. The communication-to-sales ratio was
flat y-o-y at 5.2%.
Hermès’ FY 2012 organic sales growth was
16.4%, implying 18.5% in Q4 (vs 16% in Q3,
13.4% in Q2, 17.6% in Q1). By region (at
constant FX) in Q4: all regions recorded doubledigit
growth rates: Asia ex-Japan up 29.7% with
Greater China (20% of sales) up 25% and
Mainland China (10% of sales) up more than
30%. The Americas were up 20.8%, Japan 15.1%.
France and Europe excluding France slightly
slowed down to 10.6% and 12.5%, respectively.
Sales to travellers remained high in Q4 in all
regions. According to management, Hermès
benefited from a trading-up phenomenon amongst
Chinese clients.
The group plans only three DOS openings in 2013
(China, Harrods, Nagoya) after two in 2012
(Taiwan and China).
For FY2013, management reiterated its guidance
of an organic sales growth of c10% and an EBIT
margin down y-o-y due to limited price increases,
raw material inflation, less SG&A leverage and a
willingness to increase the communication. No
significant price increases are planned for 2013.
Hedging rates (104.5 for the JPY, 1.28 for the
USD in 2013 vs 112 for the JPY and 1.41 for the
USD in 2012) will protect margins from the JPY
weakness in 2013, so Hermes will reassess the
need for price increases in 2014 depending on the
JPY rate at that time.
of 9% and EBIT margin improvement of 50bp to
31.6%.
Since March 2009, we have believed Hermès
should trade structurally at a premium to its DCF
value (and as a result, we continue to apply a 25%
premium). For many years, Hermès’ stock has
been supported by the limited free float, takeover
speculation in the press (eg Bloomberg) and the
potential for short squeezes. On our fundamental
DCF valuation, we now value Hermès at EUR224
(from EUR208) on the back of our higher estimates.
Continuing to apply our 25% premium, we derive a
new target price of EUR280 (from EUR260). A full
breakdown of our DCF assumptions is provided in
the financials and valuation on page 79.
Under our research model, for French stocks
without a volatility indicator, the Neutral band is 5
percentage points above and below the hurdle rate
for eurozone stocks of 9.0%. Our target price of
EUR280 implies a potential return of 5.4%, which
is within the Neutral band; therefore we reiterate
our Neutral rating on Hermès. Potential return
equals the percentage difference between the
current share price and the target price, including
the forecast dividend yield when indicated.
Although the current 34.9x 2013e PE multiple
still seems very high relative to peers (98%
premium on average), we believe those investors
who still own Hermès’ free float should hold on to
the shares. Upside risks include the current thin
free float (c5%) being further reduced by share
purchases by LVMH on the market or a buy-back
by Hermès to cover employees’ grant shares. On
the downside, the top line may suffer more than
expected if the company loses share to other highend
leather-goods manufacturers.
We raise our 2013 and 2014 estimates by 3% and
2% respectively. We anticipate 11% organic sales
growth and a stable EBIT margin at 32.1% in
2013. For 2014 we expect organic sales growth
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Hermès FY results and forecasts
EURm 2006a YoY 2007a
(%)
YoY 2008a
(%)
YoY 2009a
(%)
YoY 2010a
(%)
YoY 2011a
(%)
YoY 2012a
(%)
YoY 2013e
(%)
YoY 2014e
(%)
YoY 2015e
(%)
YoY
(%)
Sales 1,515 6 1,625 7 1,765 9 1,914 8 2,401 25 2,841 18 3,484 23 3,750 8 4,100 9 4,470 9
Gross profit 990 7 1,055 7 1,140 8 1,213 6 1,586 31 1,955 23 2,373 21 2,569 8 2,789 9 3,054 10
Gross margin (%) 65.4% 64.9% 64.6% 63.3% 66.1% 68.8% 68.1% 68.5% 68.0% 68.3%
Communication 90 18 93 3 98 5 91 -7 126 38 148 18 182 23 207 14 231 11 256 11
as a % of sales 5.9% 5.7% 5.5% 4.8% 5.2% 5.2% 5.2% 5.5% 5.6% 5.7%
Other operating costs 499 6 547 10 593 8 658 11 792 20 921 16 1073 16 1158 8 1261 9 1372 9
EBIT 401 5 415 3 449 8 463 3 668 44 885 32 1119 26 1204 8 1298 8 1426 10
EBIT margin 26.5 25.5 25.5 24.2 27.8 31.2 32.1 32.1 31.6 31.9
Financial income 0 12 18 -13 -13 12 -19 15 20 25
Pre-tax profit 409 6 438 7 455 4 444 -3 653 47 893 37 1100 23 1219 11 1318 8 1451 10
Net profit 268 9 288 7 290 1 289 0 422 46 594 41 740 25 799 8 864 8 951 10
HSBC EPS (EUR) 2.50 11 2.71 8 2.76 2 2.74 -0.5 4.00 46 5.66 41 7.05 25 7.61 8 8.23 8 9.06 10
Source: Company data, HSBC estimates
Hermès sales by geographic and product category
EURm 2006a YoY 2007a
(%)
YoY 2008a
(%)
YoY 2009a
(%)
YoY 2010a
(%)
YoY 2011a
(%)
YoY 2012a
(%)
YoY 2013e
(%)
YoY 2014e
(%)
YoY 2015e
(%)
YoY
(%)
By product category
Silk 174 6% 193 11% 208 8% 227 9% 284 25% 347 22% 425 22% 461 9% 514 12% 565 10%
Handbags & Travel 664 17% 675 2% 763 13% 936 23% 1,205 29% 1,348 12% 1,597 18% 1,711 7% 1,885 10% 2,072 10%
RTW & accessories 294 0% 315 7% 337 7% 360 7% 445 24% 576 29% 746 30% 827 11% 901 9% 982 9%
Other activities 77 -45% 86 11% 80 -6% 78 -2% 87 11% 109 25% 165 52% 172 4% 184 7% 197 7%
Perfume 101 38% 119 18% 125 5% 117 -6% 138 17% 159 16% 184 15% 198 7% 212 7% 226 7%
Watches 110 6% 105 -5% 95 -10% 87 -8% 113 30% 139 23% 173 25% 179 4% 192 7% 205 7%
Tableware 45 21% 51 14% 48 -6% 38 -20% 44 14% 51 17% 61 19% 62 3% 65 5% 69 5%
Other products 52 8% 82 60% 109 33% 71 -35% 86 21% 113 31% 135 19% 140 4% 147 5% 154 5%
Total 1,515 1,625 1,765 1,914 2,401 2,841 3,484 3,750 4,100 4,470
By geographic
France 290 8% 327 13% 359 10% 370 3% 437 18% 495 13% 556 12% 597 8% 638 7% 676 6%
Europe 280 15% 346 24% 382 10% 385 1% 463 20% 560 21% 662 18% 724 9% 774 7% 821 6%
Total Europe 570 11% 673 18% 741 10% 756 2% 901 19% 1,055 17% 1,217 15% 1,321 9% 1,413 7% 1,497 6%
Japan 410 -1% 382 -7% 393 3% 408 4% 453 11% 472 4% 545 16% 460 -16% 469 2% 479 2%
Asia 261 6% 282 8% 321 14% 423 32% 631 49% 808 28% 1,100 36% 1,294 18% 1,488 15% 1,711 15%
Total Asia 671 2% 664 -1% 713 7% 831 16% 1,084 30% 1,280 18% 1,645 29% 1,754 7% 1,957 12% 2,190 12%
America 232 8% 246 6% 265 8% 294 11% 385 31% 464 21% 569 23% 617 9% 667 8% 713 7%
Rest of the world 42 8% 43 1% 46 7% 34 -25% 31 -8% 43 37% 53 23% 58 10% 64 10% 70 10%
Total 1515 1,625 1,765 1,914 2,401 2,841 3,484 3,750 4,100 4,470
Source: Company data, HSBC estimates
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Financials & valuation: Hermès
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 3,484 3,750 4,100 4,470
EBITDA 1,243 1,338 1,441 1,581
Depreciation & amortisation -124 -133 -144 -155
Operating profit/EBIT 1,119 1,204 1,298 1,426
Net interest -19 15 20 25
PBT 1,100 1,219 1,318 1,451
HSBC PBT 1,100 1,219 1,318 1,451
Taxation -349 -408 -441 -486
Net profit 740 799 864 951
HSBC net profit 740 799 864 951
Cash flow summary (EURm)
Cash flow from operations 742 895 964 1,057
Capex -370 -275 -288 -301
Cash flow from investment -370 -275 -288 -301
Dividends -742 -262 -283 -306
Change in net debt 339 -373 -414 -439
FCF equity 354 635 696 781
Balance sheet summary (EURm)
Intangible fixed assets 135 135 134 132
Tangible fixed assets 1,116 1,257 1,402 1,550
Current assets 1,708 2,135 2,605 3,138
Cash & others 704 1,078 1,490 1,964
Total assets 3,332 3,900 4,513 5,193
Operating liabilities 899 919 940 962
Gross debt 39 39 39 39
Net debt -699 -1,072 -1,486 -1,925
Shareholders funds 2,356 2,892 3,473 4,117
Invested capital 1,355 1,531 1,710 1,895
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 22.6 7.6 9.3 9.0
EBITDA 22.9 7.7 7.8 9.7
Operating profit 26.4 7.7 7.8 9.9
PBT 23.1 10.9 8.1 10.1
HSBC EPS 24.5 8.0 8.1 10.1
Ratios (%)
Revenue/IC (x) 3.0 2.6 2.5 2.5
ROIC 66.0 55.5 53.2 52.6
ROE 31.7 30.5 27.1 25.1
ROA 22.8 22.4 20.8 19.9
EBITDA margin 35.7 35.7 35.2 35.4
Operating profit margin 32.1 32.1 31.6 31.9
EBITDA/net interest (x) 66.8
Net debt/equity -29.4 -36.6 -42.2 -46.1
Net debt/EBITDA (x) -0.6 -0.8 -1.0 -1.2
CF from operations/net debt
Per share data (EUR)
EPS Rep (fully diluted) 7.05 7.61 8.23 9.06
HSBC EPS (fully diluted) 7.05 7.61 8.23 9.06
DPS 2.50 2.70 2.92 3.21
Book value 22.01 27.02 32.44 38.47
DCF analysis
HSBC assumptions
DCF, comprising
Neutral
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 6.5
Equity premium (%) 6.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 0.40 WACC (%) 5.64
Sensitivity and valuation range (DCF) to which we then add a 25% premium to
derive our target price (EUR272 per share)
Cost of capital vs fade period 4 years 8 years 12 years
5.2% 229.9 239.7 248.1
5.4% 222.5 231.6 239.9
5.6% 215.5 224.0 232.0
5.8% 208.8 216.8 224.4
6.0% 202.5 209.9 217.3
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 7.7 7.1 6.4 5.8
EV/EBITDA 21.7 19.9 18.2 16.3
EV/IC 19.9 17.4 15.3 13.6
PE* 37.7 34.9 32.3 29.3
P/Book value 12.1 9.8 8.2 6.9
FCF yield (%) 1.3 2.3 2.5 2.8
Dividend yield (%) 0.9 1.0 1.1 1.2
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 265.70 Target price (EUR) 280.00
Reuters (Equity) HRMS.PA Bloomberg (Equity) RMS FP
Market cap (USDm) 36,137 Market cap (EURm) 28,050
Free float (%) 6 Enterprise value (EURm) 26,605
Country France Sector Global Luxury Goods
Analysts Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4348
Price relative
372
322
272
222
172
122
122
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Hermes Rel to SBF-120
Source: HSBC
Note: price at close of 25 Mar 2013
372
322
272
222
172
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Hugo Boss
European wholesale seen improving in H2 this year and
company-specific untapped potential in China
Valuation discount to peers (10% on 2013e PE) despite good
growth and strong visibility
Remain Overweight, unchanged target price of EUR110
Why play this laggard?
Wholesale to rebound
Amongst our global luxury coverage, Hugo Boss
(HB) is the most exposed company to Europe (59%
of sales in 2012) together with Tod’s (61%) and we
believe local European customers account for c80%
of sales reported in Europe for HB (vs c40- 50% on
average for the luxury brands). In addition, the
weight of wholesale within Europe is c60% of sales
vs 49% worldwide.
HB organic sales growth in Europe remained robust
in H1 2012 (12%). However, European retailers took
a cautious stance when ordering for deliveries in H2.
In Q3 2012, this led to a 9% decline worldwide
wholesale. Wholesale sales growth was double digit
in Q4. Realising that sales to the final consumer
exceeded their expectations, retailers placed robust
replenishment orders in Q4. In addition, earlier
shipments of Spring-Summer 2013 boosted the Q4
figure.
In a Reuters interview in January, HB’s CFO
unsurprisingly indicated that sales growth in 2013
should be softer in H1 than in H2 due to the
demanding basis of comparison in wholesale
(+12%) and the above-mentioned timing difference
(earlier shipments of Spring-Summer 2013). Even
though the business model of the company is aiming
at increasing retail sales at a faster pace than
wholesale sales (see below), we are confident
wholesale growth at HB will resume in H2 2013
once the basis of comparison becomes more
favourable.
Untapped China potential
HB organic sales growth in Greater China (9% of
sales in 2012) slowed from 13% in Q1 to 1% in
Q2, one of the slowest growth rates within our
coverage. The trends reported for Q3 were
somewhat better (5%), but Q4 was lacklustre (flat
y-o-y).
Beyond this short-term volatility in sales trends in
China, which is common to the whole luxury
industry, what matters more is that HB has in our
view some specific untapped potential, notably
because we believe execution has not been perfect
over the recent years. China is HB’s most profitable
retail market, but management itself indicates that
sales productivity is lower than at Zegna in China
(the only region where Zegna is ahead of HB, and
significantly since it is twice the size of HB). In
China, we believe that HB missed the trend for
tailored products by overly focusing on the lifestyle
part of its product offering. In addition, some stores
need to be upgraded or relocated (notably some of
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the legacy stores acquired from franchise partners).
A positive element in our view is that HB, unlike
some of its competitors, is not blaming the macro
uncertainties for all of what went wrong in China in
the recent period.
2015 targets to be exceeded?
Amidst a tough economic environment in 2012
(especially in Europe), HB managed to post a 13%
increase in EBITDA over the FY12, with Q4 2012
alone registering a 42% increase. We estimate
EBITDA growth should be 13% in 2013e (initial
guidance HSD), 14% in 2014e and 13% in 2015e.
Our model assumes that HB will exceed its 2015
target of EUR3bn in sales and EUR750m in
EBITDA: we forecast EUR3,075m in sales and
EUR770m in EBITDA by 2015. We thus believe the
strategy outlined in the 2015 plan is sound, in
particular:
The retail push, which should result in an
over-proportionate growth in retail sales
(which should reach at least 55% of sales in
2015e vs 40% in 2010), including a midsingle-digit
average comps increase, 50 store
openings per annum (70 in 2012 due to the
partnership with Galeries Lafayette), some
franchise buy-backs and conversion of
corners into shop-in-shops.
The search for better efficiencies (notably
thanks to the "DRIVE" programme),
particularly in terms of supply chain, logistics
and customer service.
HB did not deliver the targeted over-proportionate
growth in sales in Asia in 2012, which should
account for 21% of sales in 2015e according to HB
(18% according to our estimates) vs 13% in 2010,
but stronger-than-expected developments in the
Americas are also a positive factor (margins are
lower in the Americas, but improving significantly
sequentially).
Earnings, valuation and risks
Over FY12, organic growth was 10% and
EBITDA growth was 13% and net profit 8% (with
adverse FX movements resulting in a higher
financial charge).
The initial 2013 guidance is calling for HSD
growth in sales and EBITDA, which we take as an
unsurprisingly conservative assumption given the
uncertain macro background. We forecast 13% on
the back of 10% organic sales growth (16% in
retail). HB has already highlighted that Q1 2013
should be the weakest quarter of 2013 due to the
high basis of comparison and the reversal effect of
the Q4 12 boost on wholesale sales (earlier
shipments of Spring-Summer 2013).
We have left our 2013-2015 EBITDA estimates
barely changed and thus our DCF-derived target
price (EUR110) is unchanged. The assumptions
used in our DCF-derived target price are detailed
on page 83. Under our research model, for stocks
without a volatility indicator, the Neutral band is 5
percentage points above and below the hurdle rate
for eurozone stocks of 9.0%. Our target price
provides a potential return of 29.6%, which is
above the Neutral band of our model; therefore,
we maintain our Overweight rating. Potential
return equals the percentage difference between
the current share price and the target price,
including the forecast dividend yield when
indicated.
HB is trading at 15.9x13e, ie a 10% discount to
peers, which we believe is unwarranted as 2012
demonstrated that HB was not more cyclical than
the peer group and 2013- 15e EPS growth should
slightly above the average of the peer group.
Downside theoretical risks include another partial
share placement by Permira (which still owns
66% of HB) and failure to deliver on 2015 targets.
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Hugo Boss - Profit & loss
(EURm) 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e
Sales 1,632.0 1,686.1 1,561.9 1,729.4 2,058.8 2,345.9 2,565.3 2,820.4 3,075.6
% yoy 9.1% 3.3% -7.4% 10.7% 19.0% 13.9% 9.4% 9.9% 9.0%
Gross profit 946.4 1,010.6 850.1 1,027.1 1,264.8 1,453.2 1,614.9 1,800.6 1,992.0
Gross profit margin 58.0% 59.9% 54.4% 59.4% 61.4% 61.9% 62.9% 63.8% 64.8%
Total SG&A -658.7 -723.0 -691.7 -762.6 -870.2 -1,020.0 -1,115.2 -1,225.8 -1,287.0
% yoy 6.1% 9.8% - 10.3% 14.1% 17.2% 9.3% 9.9% 9.0%
ratio (%) -40.4% -42.9% -44.3% -44.1% -42.3% -43.5% -43.5% -43.5% -43.4%
Adjusted EBITDA 287.7 287.6 270.2 349.0 469.5 529.3 599.0 682.1 890.8
Yoy 23.3% -0.0% -6.0% 29.1% 34.5% 12.7% 13.2% 13.9% 13.2%
adjusted EBITDA margin (%) 17.6% 17.1% 17.3% 20.2% 22.8% 22.6% 23.3% 24.2% 25.1%
One-off adj. EBITDA to EBITDA 0.0 -36.0 -42.7 -13.6 -1.5 -4.2 0.0 0.0 0.0
EBITDA 287.7 251.6 227.5 335.4 468.0 525.1 599.0 682.1 772.3
EBITDA margin (%) 17.6% 14.9% 14.6% 19.4% 22.7% 22.4% 23.3% 24.2% 25.1%
Amortization & Depreciation -67.5 -60.9 -69.1 -70.9 -73.4 -91.9 -99.3 -107.2 -115.8
EBIT 220.2 190.7 158.4 264.5 394.6 433.2 499.7 574.8 656.5
% yoy 19.4% -13.4% -16.9% 67.0% 49.2% 9.8% 15.3% 15.0% 14.2%
EBIT margin (%) 13.5% 11.3% 10.1% 15.3% 19.2% 18.5% 19.5% 20.4% 21.3%
Net financial Result -7.9 -41.7 -21.8 -14.8 -11.7 -23.6 -10.0 -5.0 -2.0
EBT 212.3 149.0 136.6 249.7 382.9 409.6 489.7 569.8 890.8
Income tax expenses -58.3 -36.4 -32.7 -59.9 -91.4 -98.1 -117.5 -136.8 -157.1
Tax rate (%) -27.5% -24.4% -23.9% -24.0% -23.9% -24.0% -24.0% -24.0% -24.0%
Net profit 154.0 112.6 104.0 189.8 291.5 311.5 372.1 433.1 497.4
Minorities -0.1 -0.1 -0.1 -3.3 -6.5 -4.1 -5.1 -6.1 -7.1
Net profit after minorities 153.9 112.5 103.9 186.4 285.0 307.4 367.0 427.0 490.3
EPS preferred 2.24 1.63 1.51 2.70 4.13 4.46 5.32 6.19 7.11
% yoy 20.4% -27.2% -7.4% 79.0% 53.0% 7.9% 19.4% 16.3% 14.8%
Number of shares 68.7 69.0 68.8 69.0 69.0 69.0 69.0 69.0 69.0
Sources: Company data, HSBC estimates
Hugo Boss - Split of Sales
(EURm) 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e
By Region
Europe 1,124 1,170 1,041 1,073 1,245 1,378 1,474 1,570 1,666
Americas 299 307 312 381 455 559 629 710 788
Asia 161 162 165 230 309 353 400 472 547
Licenses 49 47 44 45 49 57 62 68 74
Total 1,632 1,686 1,562 1,729 2,059 2,346 2,565 2,820 3,076
Europe 69% 69% 67% 62% 60% 59% 57% 56% 54%
Americas 18% 18% 20% 22% 22% 24% 25% 25% 26%
Asia 10% 10% 11% 13% 15% 15% 16% 17% 18%
Licenses 3% 3% 3% 3% 2% 2% 2% 2% 2%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
By Distribution Network
Wholesale na 1,183 1,008 993 1,085 1,140 1,185 1,250 1,304
Retail na 456 510 691 924 1,150 1,318 1,502 1,698
Licenses na 47 44 45 49 57 62 68 74
Total na 1,686 1,562 1,729 2,059 2,346 2,565 2,820 3,076
Wholesale na 70% 65% 57% 53% 49% 46% 44% 42%
Retail na 27% 33% 40% 45% 49% 51% 53% 55%
Licenses na 3% 3% 3% 2% 2% 2% 2% 2%
Total na 100% 100% 100% 100% 100% 100% 100% 100%
Sources: Company data, HSBC estimates
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Financials & valuation: Hugo Boss
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 2,346 2,565 2,820 3,076
EBITDA 525 599 682 772
Depreciation & amortisation -92 -99 -107 -116
Operating profit/EBIT 433 500 575 656
Net interest -24 -10 -5 -2
PBT 410 490 570 654
HSBC PBT 410 490 570 654
Taxation -98 -118 -137 -157
Net profit 307 367 427 490
HSBC net profit 307 367 427 490
Cash flow summary (EURm)
Cash flow from operations 405 432 494 567
Capex -166 -166 -166 -166
Cash flow from investment -139 -166 -166 -166
Dividends -199 -215 -257 -343
Change in net debt -47 2 -73 -59
FCF equity 226 266 328 401
Balance sheet summary (EURm)
Intangible fixed assets 142 142 142 142
Tangible fixed assets 357 424 483 533
Current assets 1,005 1,054 1,185 1,302
Cash & others 255 253 325 384
Total assets 1,585 1,700 1,889 2,057
Operating liabilities 335 346 358 371
Gross debt 395 395 395 395
Net debt 100 102 29 -30
Shareholders funds 613 717 893 1,047
Invested capital 915 1,021 1,126 1,222
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 13.9 9.4 9.9 9.0
EBITDA 12.2 14.1 13.9 13.2
Operating profit 9.8 15.3 15.0 14.2
PBT 7.0 19.5 16.4 14.9
HSBC EPS 7.9 19.4 16.3 14.8
Ratios (%)
Revenue/IC (x) 2.7 2.6 2.6 2.6
ROIC 37.6 39.2 40.7 42.5
ROE 55.2 55.2 53.1 50.6
ROA 20.7 22.7 24.1 25.2
EBITDA margin 22.4 23.3 24.2 25.1
Operating profit margin 18.5 19.5 20.4 21.3
EBITDA/net interest (x) 22.3 59.9 136.4 386.2
Net debt/equity 15.7 13.7 3.2 -2.8
Net debt/EBITDA (x) 0.2 0.2 0.0 0.0
CF from operations/net debt 406.1 424.4 1690.0
Per share data (EUR)
EPS Rep (fully diluted) 4.46 5.32 6.19 7.11
HSBC EPS (fully diluted) 4.46 5.32 6.19 7.11
DPS 3.12 3.73 4.33 4.98
Book value 8.89 10.39 12.95 15.18
DCF analysis
HSBC assumptions
DCF, comprising
Overweight
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 11.2
Equity premium (%) 6.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.00 WACC (%) 9.49
Sensitivity and valuation range (EUR/share)
Cost of capital vs fade period 4 years 8 years 12 years
8.5% 123 126 129
9.0% 115 118 120
9.5% 108 110 112
10.0% 101 103 105
10.5% 95 97 98
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 2.6 2.4 2.1 1.9
EV/EBITDA 11.6 10.2 8.8 7.7
EV/IC 6.7 6.0 5.4 4.9
PE* 19.0 15.9 13.7 11.9
P/Book value 9.5 8.2 6.6 5.6
FCF yield (%) 3.8 4.4 5.5 6.7
Dividend yield (%) 3.7 4.4 5.1 5.9
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 84.85 Target price (EUR) 110.00
Reuters (Equity) BOSSn.DE Bloomberg (Equity) BOSS GR
Market cap (USDm) 7,696 Market cap (EURm) 5,973
Free float (%) 34 Enterprise value (EURm) 6,101
Country Germany Sector Global Luxury Goods
Analyst Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4348
Price relative
99
89
79
69
59
49
49
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Hugo Boss Rel to DAX-100
Source: HSBC
Note: price at close of 25 Mar 2013
99
89
79
69
59
83

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Luxottica
More than ever in control of the eyewear frame industry after the
addition of Coach (2012) and Armani (2013) licences
Valuation (25.8x 2013e, ie a 46% premium to peers vs 10%
historical average)
Remain Neutral, increase DCF-based target price to EUR42 (from
EUR36) on lower WACC
How far can the re-rating of
this industry captain go?
Now trading at a c50% premium to peers
Luxottica shares have risen 43% in 2012 and 26%
y-t-d (vs respectively 35% and 12% for European
luxury stocks on average). As outlined in the chart
below, this performance was much more driven
by a significant re-rating than by consensus
earnings upgrades (10% in 2012, 0.7% y-t-d).
Luxottica is now trading at 25.8x 2013e PE (note
that our EPS estimates exclude trademark
amortisation), implying a 46% premium to its
peers (compared to a c10% historical level).
As outlined below, Luxottica is more than ever in
control of the eyewear frame industry after the
addition of Coach (2012) and Armani (2013)
license. New licences add to the size of the
Wholesale division (leveraging existing fixed
distribution costs and reinforcing Luxottica’s
position as the supplier of choice for eyewear
retailers) and create significant value: they can be
considered the equivalent of an acquisition at zero
cost. The addition of Coach, together with a weak
EUR which had a 6% impact, explains why EBIT
growth was 22% in 2012, and the addition of
Armani will boost EBIT by c4% in 2013, leading
to a 17% EBIT increase in 2013.
Luxottica – Forward PE (not restated for trademark
amortisation)
28
26
24
22
20
18
16
14
12
Jan-
03
Jan-
04
Source: Factset
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
On top of valuing the group’s status as a ‘captain
of its industry’, we believe the market is also right
to factor in the fact that Luxottica is, in our view,
one of the few M&A winners in a luxury sector
for which we believe it is difficult to create value
via acquisitions. Although the days of
transforming deals like Oakley in 2007 are
probably behind us, smaller deals like Tecnol in
Brazil or Alain Mikli in Europe as well as the
acquisitions of retail chains in emerging markets
will still be successful add-ons.
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In the absence of a new deal adding significant
value or a weakening of the EUR, EBIT growth
should normalise in 2014 and 2015 (we forecast
11% for both years), leaving less room for a
further re-rating of the stock, we believe.
More than ever in control of the eyewear frame
industry
We believe the additions of the Coach licence in
2012 and the Armani licence in 2013 mean that
Luxottica is even more in control of the industry
than before. Before these additions to its portfolio,
Luxottica was already by far the leader in eyewear
licensing with a global market share of more than
40%. We now estimate that share at more than 50%.
Luxottica also owns Ray-Ban and Oakley, the two
star ‘house’ brands of the industry. For an eyewear
retailer (independent optician or optical chain), it is
extremely difficult not to be “in the hands” of
Luxottica.
The Coach licence contributed EUR50m in sales
in year 1 (2012), ie cEUR10m more-than-initially
expected by management. The Armani licence
(won from competitor Safilo) should generate
EUR130m in sales in year 1 (2013) with the
potential, in our view, to reach EUR200m in year
3 once distribution channels will have been
cleared from old inventories.
Punchy management US targets in spite of fiscal
cliff
Still accounting for c60% of Luxottica’s sales, North
America (NA) continues to be the company’s main
growth driver. Overall, NA sales increased 6% in
2012. Wholesale sales rose 15%, boosted by the
successful launch of Coach, a further increase in
demand for luxury, Oakley and Ray-Ban “still on
fire”, and management forecasts a 10-15%
increase in 2013. NA retail comps increased 6%
(excluding Pearle) and management targets 4-5%
for 2013. We believe the potential impact of the US
fiscal cliff on eyewear sales (lenses and frames) is
extremely difficult to estimate. At this juncture, our
estimate is that its impact will be minimal, on both
Luxottica’s wholesale and retail sales in the US.
Acquisitions should, in our view, be a significant
driver in the EM expansion of the group. The EM
exposure of Luxottica’s Wholesale division was
22% in 2012e, but only 5% for its Retail division,
putting the overall group exposure at c12-13% in
2012 (vs 11% in 2011).
Earnings, valuation and risks
2012 ended on a strong note with 8% reported
sales growth in Q4 (including a 3% impact from
FX and a 0.9% impact from acquisitions) and a
160bp EBIT margin improvement. On that basis,
over FY12, Luxottica posted a 22% increase in
EBIT, ie a 90bp margin improvement to 13.9%.
2013e should be boosted by the Armani
acquisition but FX could become a slight
headwind (compared to a significant tailwind in
2012). Although Luxottica sales were boosted by
a 6% FX impact in 2012, we estimate the impact
should be slightly negative (-1.2%) in 2013e
based on EUR/USD=1.30. We forecast worldwide
Retail comps of 4.5% for 2013e (vs 5.5% in 2012
and 2011) and we expect Wholesale sales growth
at constant FX to reach 13% (7% excluding
Armani and the Mikli acquisition). At the group
level, Luxottica sales and EBIT should thus grow
at a respective 9% and 17% in 2013e.
We have cut our 2013e and 14e EBIT estimates
by 2% on the back of a slight Q4 2012 margin
miss.
We increase our DCF-based target price to EUR42
from EUR36 on the back of a lower WACC
(7.47% vs 7.92% to reflect the ‘industry captain’
status of the group: we have lowered Luxottica’s
specific beta from 0.9 to 0.8 to factor in the group’s
ability to further increase its already very high
number 1 market share). The assumptions used in
our target price are detailed on page 87. Under our
research model, for stocks without a volatility
indicator, the Neutral band is 5ppts above and
85

Consumer Brands & Retail
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March 2013
abc
below the hurdle rate for eurozone stocks of 9.0%.
Our new target price implies a 7.0% potential
return, which is within the Neutral band of our
model; hence we reiterate our Neutral rating.
Potential return equals the percentage difference
between the current share price and the target price,
including the forecast dividend yield when
indicated.
Upside risks to our rating include a better-thanexpected
resilience of the group’s North American
business, a faster-than-expected development in EM,
a USD/EUR strengthening, value-enhancing
acquisitions and new license deals. Downside risks
include poor execution in integrating new deals and
non-renewal of licence contracts.
Luxottica P&L summary
EURm
2007a
2008a** 2009e 2010a 2011a 2012a 2013e 2014e 2015e
07 vs
06
08 vs
07
09 vs
08
10e vs
09
11e vs
10e
12e vs
11e
13e vs
12e
14e vs 15e vs
13e 14e
Wholesale 1,993 2,092 1,955 2,236 2,456 2,773 3,173 3,411 3,667 16% 5% -7% 14% 10% 13% 14% 8% 8%
Retail 3,234 3,109 3,139 3,562 3,766 4,313 4,542 4,860 5,200 -2% -4% 1% 13% 6% 15% 5% 7% 7%
Inter-Segments -348 4% -100%
Oakley 88
Total sales 4,967 5,202 5,094 5,798 6,222 7,086 7,715 8,271 8,867 6% 5% -2% 14% 7% 14% 9% 7% 7%
Wholesale 528 440 356 462 529 604 718 793 876 18% -17% -19% 30% 15% 14% 19% 11% 11%
Retail 362 431 367 424 437 553 618 683 755 -16% 19% -15% 15% 3% 27% 12% 11% 11%
Inter-Segments -60 -121 -140 -174 -159 -175 -186 -196 -211 -50% 101% 16% 25% -9% 10% 6% 6% 8%
Oakley EBIT 3
Total EBIT 833 750 583 712 807 982 1,150 1,280 1,420 10% -10% -22% 22% 13% 22% 17% 11% 11%
Wholesale 26.5% 21.0% 18.2% 20.7% 21.5% 21.8% 22.6% 23.2% 23.9%
Retail 11.2% 13.8% 11.7% 11.9% 11.6% 12.8% 13.6% 14.1% 14.5%
TOTAL EBIT margin 16.8% 14.4% 11.4% 12.3% 13.0% 13.9% 14.9% 15.5% 16.0%
Reported diluted EPS 1.07 0.83 0.69 0.83 0.98 1.15 1.41 1.60 1.81 14% -23% -17% 21% 18% 18% 22% 14% 13%
HSBC diluted EPS* 1.10 0.96 0.80 0.99 1.09 1.26 1.52 1.71 1.92 17% -13% -17% 23% 10% 16% 20% 13% 12%
Retail comps (worldwide) 1.2% -5.4% -4.2% 4.5% 5.5% 5.8% 4.5% 5.0% 5.0%
*excl. Exceptional items and trademark amortisation ** change in sales & EBIT breakdown methodology
Source: Company data, HSBC estimates
86

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March 2013
abc
Financials & valuation: Luxottica
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 7,086 7,715 8,271 8,867
EBITDA 1,340 1,526 1,675 1,835
Depreciation & amortisation -358 -376 -395 -415
Operating profit/EBIT 982 1,150 1,280 1,420
Net interest -119 -125 -112 -99
PBT 856 1,025 1,168 1,321
HSBC PBT 856 1,025 1,168 1,321
Taxation -310 -359 -409 -462
Net profit 542 661 753 851
HSBC net profit 594 713 805 851
Cash flow summary (EURm)
Cash flow from operations 1,083 968 1,097 1,273
Capex -365 -380 -403 -427
Cash flow from investment -495 -521 -414 -438
Dividends -226 -269 -327 -373
Change in net debt -369 -172 -349 -394
FCF equity 660 588 694 846
Balance sheet summary (EURm)
Intangible fixed assets 4,494 4,494 4,494 4,494
Tangible fixed assets 1,488 1,633 1,653 1,676
Current assets 2,218 2,339 2,448 2,564
Cash & others 790 790 790 790
Total assets 8,421 8,688 8,816 8,956
Operating liabilities 1,769 1,816 1,868 1,922
Gross debt 2,452 2,280 1,931 1,537
Net debt 1,662 1,490 1,141 747
Shareholders funds 3,993 4,385 4,811 5,289
Invested capital 5,642 5,861 5,937 6,022
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 13.9 8.9 7.2 7.2
EBITDA 18.5 13.9 9.8 9.5
Operating profit 21.7 17.1 11.3 10.9
PBT 23.2 19.7 14.0 13.1
HSBC EPS 16.1 20.1 12.9 5.8
Ratios (%)
Revenue/IC (x) 1.3 1.3 1.4 1.5
ROIC 11.1 13.0 14.1 15.4
ROE 15.6 17.0 17.5 16.9
ROA 7.5 8.7 9.5 10.4
EBITDA margin 18.9 19.8 20.3 20.7
Operating profit margin 13.9 14.9 15.5 16.0
EBITDA/net interest (x) 11.2 12.2 14.9 18.5
Net debt/equity 41.6 34.0 23.7 14.1
Net debt/EBITDA (x) 1.2 1.0 0.7 0.4
CF from operations/net debt 65.1 65.0 96.2 170.5
Per share data (EUR)
EPS Rep (fully diluted) 1.15 1.41 1.60 1.81
HSBC EPS (fully diluted) 1.26 1.52 1.71 1.81
DPS 0.58 0.70 0.80 0.91
Book value 8.73 9.58 10.51 11.56
DCF analysis
HSBC assumptions
DCF, comprising
Neutral
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 10.0
Equity premium (%) 6.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.00 Fade period 2042-48e
Specific beta 0.90 WACC (%) 7.47
Sensitivity and valuation range (EUR/share)
Cost of capital vs fade period 4 years 8 years 12 years
6.47% 49.0 50.9 51.9
6.97% 44.6 46.1 47.3
7.47% 40.7 42.0 43.1
7.97% 37.3 38.4 39.5
8.47% 34.3 35.2 36.2
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 2.9 2.6 2.4 2.2
EV/EBITDA 15.1 13.2 11.8 10.5
EV/IC 3.6 3.4 3.3 3.2
PE* 31.0 25.8 22.9 21.6
P/Book value 4.5 4.1 3.7 3.4
FCF yield (%) 3.5 3.2 3.7 4.5
Dividend yield (%) 1.5 1.8 2.0 2.3
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 39.24 Target price (EUR) 42.00
Reuters (Equity) LUX.MI Bloomberg (Equity) LUX IM
Market cap (USDm) 23,969 Market cap (EURm) 18,605
Free float (%) 25 Enterprise value (EURm) 20,083
Country Italy Sector Global Luxury Goods
Analysts Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4348
Price relative
54
54
49
49
44
44
39
39
34
34
29
29
24
24
19
19
14
14
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Luxottica Rel to BCI ALL-SHARE INDEX
Source: HSBC
Note: price at close of 25 Mar 2013
87

Consumer Brands & Retail
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abc
LVMH
LVMH recently underperformed the sector. This will make it more
tempting to look at as it remains the most liquid stock in our universe
Nevertheless, the transition period on LV may mean that capacity
for upward earnings revisions will be hampered over the next 9 to 12
months
Remain Neutral, lower DCF-based target price to EUR147 (from
EUR150) on lower estimates
Market share cap could
continue to weigh on shares
Is underperformance an opportunity?
Looking at the luxury sector, share price
performance is far from homogeneous. The sector
has become an interesting stock-picking field where
market share gains and losses count. Over the past
six months, LVMH shares have done well in
absolute terms but stand out as a relative
underperformer in luxury. Is this an opportunity?
Our view is that on a five-year approach, pretty
much any luxury goods stock should do well as
despite the emergence of alternative propositions,
the barriers to entry remain high as it is difficult to
replicate a Cartier or a Louis Vuitton in a short
period of time. On a 12-month view, however, we
are convinced that the capacity to generate earnings
upgrades at LVMH is hampered by the structurally
lower growth and decreasing operating margin at LV
(c48% of the 2012 group EBIT) and a less
favourable FX environment.
We see upside from the current share price, but we
believe there are better investment opportunities in
the sector. LVMH has become a proxy for the sector
to a certain extent so any big macro reliefs (China
growth) or fears (terrorism, currency) could benefit
or hit the shares more than others as the stock is also
a lot more liquid (EUR66bn market cap).
Although watch players Swatch and Richemont have
a higher exposure to the Chinese consumer (see table
page 15), many investors consider LVMH as ‘safer’,
notably due its balanced portfolio (which includes
wines & spirits, assets which are often perceived as
more defensive, especially the Cognac brand
Hennessy). LVMH will do well in an uncertain
environment: currently we see better growth
elsewhere.
LV globally similar to Coach in the US?
LV management is top of class and Michael Burke
at the helm of the brand, given his track record in the
group, is reassuring. Although we do not view the
LV brand as mature, there are several signs that
point to the difficulty in growing it, given its scale:
New product initiatives: LV will be
launching a fragrance, developing stationery
stand-alone stores, opened its first watches
and jewellery flagship in Place Vendome,
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Consumer Brands & Retail
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Paris. As penetration of the core handbag and
accessory category is high, LV is branching
out, leading to the development of structurally
less profitable categories.
Brand elevation: as the consumer (not just
Asian) becomes more demanding and seeks
more discrete, higher quality products, LV is
gradually shifting from plastic/canvas
handbags (with a somewhat industrialised
production process) to greater leather content.
This is a key to long-term success but a shortterm
drag on gross margin as leather bags for
the time being carry lower margins.
Controlled space expansion: very conscious
of the risks linked to ubiquity ("I see this
brand everywhere I go"), LV is focusing on
same store sales growth rather than store
openings. The brand is closing small stores in
the EU and US and opening/refurbishing/
expanding flagships notably in Asia. This
sends the message to the consumers that "no,
we are not common at all as a brand";
however, it also weighs on margins as more
space is dedicated to structurally lower
margin categories (apparel, hard luxury, etc).
Management overhaul: the management
restructuring initiated by Jordi Constans is
being rolled out at present and while this will
ensure cost savings and increased efficiency,
we cannot rule out some short-term
disruption.
Based on our store observations, we think LV has
implemented double-digit price increases for many
non-leather handbags in several key markets since
the beginning of 2013. This is probably the right
way to address our ‘ubiquity’ theme, but we fear that
the short-term impact on volumes may be negative.
To a certain extent, LV's growth profile globally is
similar to Coach's conundrum in the US: when
market share is so high (LV generated c EUR7.3bn
in 2012 according to our estimates), even with the
best execution, management team and focus, the
brand can only lose share and structurally
underperform its peers. It would not be an issue for
LVMH if LV were 20% of the group's EBIT. At
c47% of contribution, LV's underperformance will
continue to be a drag.
In 2012, LV organic growth was c6% and the EBIT
margin of the Fashion & Leather division (which for
LV account for c74% of sales) declined 240bps in
the year. LVMH also owns smaller brands – notably
Fendi, Céline, Loewe and Marc Jacobs – which are
growing at a faster rate than LV, but are too small
relative to the size of LV and other group assets to
really matter in terms of numbers.
LVMH: 2013e EBIT by division
Other
Fashion
brands
5%
Louis
Vuitton
brand
47%
Source: HSBC estimates
Champagne
and Wines
10%
Cognac &
spirits
11%
Perfumes
and
Cosmetics
7%
Selective
retailing
14%
Watches
and
Jewellery
6%
Other divisions will deliver strong growth and
notably we thing the Cognac and Selective
distribution will continue to register the strongest
growth in 2013. We forecast 10% organic sales
growth in 2013 (volumes 5% and price/mix 5%) in
cognac. In selective distribution, as from December
2012, LVMH is benefiting from the addition of three
new concessions at Hong Kong International Airport
for liquor & tobacco, perfumes & cosmetics and
general merchandise. These contracts will generate
USD800m in sales, but carry a much lower EBIT
margin (c5% vs the current DFS margin of c13%.
Earnings, valuation and risks
We forecast FY13 organic sales growth of 10% and
believe Q1 should be lower than that owing to a
89

Consumer Brands & Retail
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March 2013
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tough basis of comparison (Q1 2012 was up 14%
whilst FY12 was up 9%). Note the new DFS
concessions in HK alone should contribute 2% to the
total figure for the year. We expect a 9% y-o-y rise
in EBIT, implying a 30bp EBIT margin
improvement (dragged down by the new DFS
concessions and the fact that we expect the LV brand
to register a 6% organic growth, below the group
average). We have cut our 2013e and 2014e EBIT
estimates by 2% and 3% following lower-thanexpected
2012 results, hence our DCF-based target
price (EUR147 vs EUR150 previously).
The assumptions used in our target price are detailed
on page 91. Under our research model, for stocks
without a volatility indicator, the Neutral band is
5ppts above and below the hurdle rate for eurozone
stocks of 9.0%. Our new target price implies a
13.4% potential return, which is within the Neutral
band of our model; hence we reiterate our Neutral
rating.
Potential return equals the percentage difference
between the current share price and the target price,
including the forecast dividend yield when indicated.
The main specific upside risks to our rating are
higher sales and margins at the LV brand. The main
specific downside risks would be destocking of the
wholesale businesses (Wines & Spirits, Watches,
Perfumes) and value destruction linked to M&A
activities (past and future).
LVMH FY results & forecasts
EURm
2008a
YoY%
chg
2009a
YoY%
chg
2010a
YoY%
chg
2011a
YoY%
chg
2012a
YoY%
chg
2013e
YoY%
chg
2014e
YoY%
chg
2015e
YoY%
chg
Sales 17,193 4 17,053 -1 20,320 19 23,659 16 28,103 19 30,124 7 32,537 8 35,171 8
Current operating income (EBIT) 3,628 2 3,352 -8 4,321 29 5,263 22 5,921 13 6,480 9 7,093 9 7,781 10
Other operating income and expenses -143 -191 -152 -109 -182 -100 -100 -100
Operating income 3,485 2 3,161 -9 4,169 32 5,154 24 5,739 11 6,380 11 6,993 10 7,681 10
Net financial expenses -281 -342 612 -242 -14 -85 -51 -68
Income before taxes 3,204 1 2,819 -12 4,781 70 4,912 3 5,725 17 6,295 10 6,942 10 7,613 10
Taxes -893 -849 -1,469 -1,453 -1,820 -2,046 -2,256 -2,474
Associates 7 3 7 6 4 6 8 10
Minority interests -292 -218 -287 -400 -485 -503 -560 -630
Net pft before goodwill and exceptionals 2,026 0 1,755 -13 3,032 73 3,065 1 3,424 12 3,752 10 4,134 10 4,519 9
EPS 4.26 1 3.70 -13 6.32 71 6.23 -1 6.82 9 7.47 10 8.23 10 9.00 9
Sales by division
Wines & Spirits 3,126 -3 2,740 -12 3,261 19 3,524 8 4,137 17 4,419 7 4,776 8 5,161 8
Leather and Fashion 6,010 7 6,302 5 7,581 20 8,712 15 9,926 14 10,332 4 11,086 7 11,906 7
Perfume and cosmetics 2,868 5 2,741 -4 3,076 12 3,195 4 3,613 13 3,775 4 3,964 5 4,162 5
Selective distribution 4,376 5 4,533 4 5,378 19 6,436 20 7,879 22 8,934 13 9,775 9 10,702 9
Watches 879 6 764 -13 985 29 1,949 98 2,836 46 2,975 5 3,272 10 3,600 10
Others -66 nm -27 nm 39 nm -157 nm -288 nm -311 nm -335 nm -359 nm
Total sales 17,193 4 17,053 -1 20,320 19 23,659 16 28,103 19 30,124 7 32,537 8 35,171 8
EBIT by division
Wines & Spirits 1,060 0 760 -28 930 22 1,101 18 1,260 14 1,407 12 1,538 9 1,698 10
Leather and Fashion 1,927 5 1,986 3 2,555 29 3,075 20 3,264 6 3,509 8 3,788 8 4,084 8
Perfume and cosmetics 290 13 291 0 332 14 348 5 408 17 438 7 468 7 499 7
Selective distribution 388 -12 388 0 536 38 716 34 854 19 961 13 1,092 14 1,238 13
Watches 118 -16 63 -47 128 103 265 107 334 26 381 14 442 16 511 16
Others -155 -8 -136 -12 -160 18 -242 51 -199 -18 -217 9 -234 8 -250 7
Total EBIT 3,628 2 3,352 -8 4,321 29 5,263 22 5,921 13 6,480 9 7,093 9 7,781 10
EBIT margin by division
Wines & Spirits 33.9% 27.7% 28.5% 31.2% 30.5% 31.8% 32.2% 32.9%
Leather and Fashion 32.1% 31.5% 33.7% 35.3% 32.9% 34.0% 34.2% 34.3%
Perfume and cosmetics 10.1% 10.6% 10.8% 10.9% 11.3% 11.6% 11.8% 12.0%
Selective distribution 8.9% 8.6% 10.0% 11.1% 10.8% 10.8% 11.2% 11.6%
Watches 13.4% 8.2% 13.0% 13.6% 11.8% 12.8% 13.5% 14.2%
Others nm nm nm nm nm nm nm nm
Total EBIT margin 21.1% 19.7% 21.3% 22.2% 21.1% 21.5% 21.8% 22.1%
Source : Company data, HSBC estimates
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Financials & valuation: LVMH
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 28,103 30,124 32,537 35,171
EBITDA 6,738 7,346 8,012 8,754
Depreciation & amortisation -817 -867 -918 -974
Operating profit/EBIT 5,921 6,480 7,093 7,781
Net interest -14 -85 -50 -68
PBT 5,729 6,301 6,951 7,623
HSBC PBT 5,725 6,295 6,943 7,613
Taxation -1,820 -2,046 -2,256 -2,474
Net profit 3,424 3,752 4,134 4,519
HSBC net profit 3,424 3,752 4,134 4,519
Cash flow summary (EURm)
Cash flow from operations 3,380 4,409 4,822 5,287
Capex -1,702 -1,702 -1,802 -1,902
Cash flow from investment -2,048 -1,702 -1,802 -1,902
Dividends -1,447 -1,621 -1,783 -1,961
Change in net debt -399 -1,087 -1,238 -1,424
FCF equity 2,389 3,121 3,434 3,799
Balance sheet summary (EURm)
Intangible fixed assets 19,316 19,316 19,316 19,316
Tangible fixed assets 8,769 9,604 10,488 11,416
Current assets 14,427 15,281 16,301 17,414
Cash & others 2,551 2,551 2,551 2,551
Total assets 50,285 52,295 54,520 56,885
Operating liabilities 6,861 7,323 7,874 8,475
Gross debt 6,812 5,725 4,488 3,064
Net debt 4,261 3,174 1,937 513
Shareholders funds 24,564 26,696 29,047 31,605
Invested capital 33,100 34,328 35,680 37,120
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 18.8 7.2 8.0 8.1
EBITDA 8.9 9.0 9.1 9.3
Operating profit 12.5 9.4 9.5 9.7
PBT 16.5 10.0 10.3 9.7
HSBC EPS 9.5 9.6 10.2 9.3
Ratios (%)
Revenue/IC (x) 0.9 0.9 0.9 1.0
ROIC 12.7 13.0 13.7 14.4
ROE 14.6 14.6 14.8 14.9
ROA 8.0 8.4 8.9 9.3
EBITDA margin 24.0 24.4 24.6 24.9
Operating profit margin 21.1 21.5 21.8 22.1
EBITDA/net interest (x) 481.3 86.8 159.0 128.7
Net debt/equity 16.6 11.2 6.2 1.5
Net debt/EBITDA (x) 0.6 0.4 0.2 0.1
CF from operations/net debt 79.3 138.9 249.0 1030.0
Per share data (EUR)
EPS Rep (fully diluted) 6.82 7.47 8.23 9.00
HSBC EPS (fully diluted) 6.82 7.47 8.23 9.00
DPS 2.91 3.20 3.52 3.88
Book value 48.33 52.53 57.15 62.19
DCF analysis
HSBC assumptions
DCF, comprising
Neutral
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 9.0
Equity premium (%) 6.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 0.90 WACC (%) 8.71
Sensitivity and valuation range (EUR/share)
Cost of capital vs fade period 4 years 8 years 12 years
7.7% 170 174 176
8.2% 156 160 162
8.7% 144 147 149
9.2% 134 136 138
9.7% 124 126 128
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 2.5 2.3 2.1 1.9
EV/EBITDA 10.5 9.4 8.5 7.6
EV/IC 2.1 2.0 1.9 1.8
PE* 19.0 17.4 15.8 14.4
P/Book value 2.7 2.5 2.3 2.1
FCF yield (%) 3.6 4.7 5.2 5.8
Dividend yield (%) 2.2 2.5 2.7 3.0
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 129.65 Target price (EUR) 147.00
Reuters (Equity) LVMH.PA Bloomberg (Equity) MC FP
Market cap (USDm) 84,796 Market cap (EURm) 65,819
Free float (%) 47 Enterprise value (EURm) 69,337
Country France Sector Global Luxury Goods
Analyst Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 33 1 5652 4348
Price relative
160
150
140
130
120
110
100
90
90
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
LVMH Rel to SBF-120
Source: HSBC
Note: price at close of 25 Mar 2013
160
150
140
130
120
110
100
91

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
PPR
Valuation still not fully reflecting PPR’s status post Fnac demerger
(planned for mid-June): a pure play on luxury (84% of EBIT) and
sporting goods & lifestyle (16%)
Fast growing smaller luxury brands to allow for continued aboveindustry
EBIT growth
Reiterate Overweight, raise target price to EUR220 (from
EUR186) on higher estimates and move from a sum-of-the-parts
to a DCF valuation
Moving from a sum-of-the-parts
to a DCF valuation
Repositioning almost complete
We are moving from a sum-of-the-parts to a DCF
valuation (see valuation section next page) as for
the rest of our coverage now that the repositioning
of the PPR group towards luxury, sports and
lifestyle is almost complete. PPR has launched a
project of demerger and flotation of Fnac (planned
for mid-2013) and post this event, PPR will be a
pure play on luxury (84% of EBIT) and sporting
goods & lifestyle (16%). Some small parts of
Redcats (La Redoute France and International)
might not have found a buyer by then, but we
value them at zero in our target price.
On 22 March, PPR announced it will change its
name to Kering once approval is obtained in the
summer. Even though this may sound irrelevant to
some investors, we believe this is another sign
that the group has now fully been repositioned.
Luxury division (84% of group EBIT): Potential
to continue to outperform peers in 2013
PPR Luxury EBIT growth was 28% in 2012 and
we forecast 2013e EBIT growth of 13%. Even
though the Gucci brand might suffer under our
‘first-mover disadvantage’ theme in some Asian
countries, it is only half the size of the LV brand in
terms of sales.
Organic growth should be high single digit (HSBC
8%) in the next three years with store openings
contributing for around half of the growth. Gucci
opened 53 stores (net) in 2012 (including 7 corners
at Bloomingdale). In 2013, the number of store
openings should slow to 30 (net of 10 closures). In
China, the number of net store openings should be
5 (c10 openings, c5 closures).
Average selling price for handbags has risen 40%
in four years (one- third due to price increases, twothirds
due to mix). Unlike LV, Gucci's profitability
is higher for leather bags than for non-leather bags
(because LV charges much higher retail prices for
non-leather bags and because LV is more
industrialised). Leather goods account for 55% of
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Gucci sales and within that, the share of logo
products is 60% (50-55% in Europe and US, 40%
in Japan, 78% in China, 90% in Korea).
Management believes that logos will not disappear
and the share of logo within leather goods will not
go below 40%.
Although the LV brand EBIT margin was down
more than 200bp in 2012 (according to our
estimates), the Gucci brand EBIT margin increased
80bp to 31% in 2012 and we forecast it to increase
to 32.8% in 2015 (with long-term potential to reach
35%): gross margin gains coming from a higher
share of retail and price/mix should be partly reinvested
in marketing and structure (need to
reinforce team in Asia).
Bottega Veneta opened 26 stores in 2012 (196
stores end 2012) and will open 20 in 2013. Due to
the distribution mix (85% retail) and product mix
(86% leather goods), the EBIT margin is very high
(31.8% in 2012). In the next three years, the need
to stretch the brand in other categories (shoes,
RTW) may limit the EBIT margin expansion, but
the long-term EBIT margin potential is 35-40%.
At YSL, 2013 will see an acceleration in terms of
store openings (17 vs 6 in 2012, total 89 stores at
end-2012). This should boost the top line in 2013
and limit the EBIT margin expansion to 15%.
Nevertheless, management believes a c25% level is
achievable over the longer term.
Puma is the true weak spot in PPR’s investment
case, but its ongoing restructuring means no
significant M&A in Sports Lifestyle before Puma
shows concrete signs of improvement. In luxury,
medium sized deals up to EUR1bn in terms of EV
can be envisaged, with a focus on watches &
jewellery as well as affordable luxury (US
contemporary brands for instance).
Earnings, valuation and risks
In Q4 2012, organic growth for the Luxury
division was 14% (of which 8% for Gucci), 9% at
Puma and -5% at Volcom. Note that YSL (13%)
was impacted by the change in designer which
resulted in wholesale shipments being delayed to
Q1 2013. Luxury EBIT increased 26% over
FY12. Although all brands registered a y-o-y
improvement, the divisional EBIT margin only
rose 20bp to 25.9% due to the integration of lower
margin businesses (Brioni and Girard-Perregaux)
and the over-proportionate growth of smaller
brands which carry a lower margin on average.
We have increased our 2013e and 2014e EBIT
estimates by 1% on the back of the 2012 beat. We
raise our target price to EUR220 (from EUR186).
We are moving from a sum of the parts to a DCF
valuation in line with the rest of our coverage now
that the repositioning of the PPR group towards
luxury, sports and lifestyle is almost complete.
The assumptions used in our DCF-derived target
price are detailed on page 95. We discount the
cash flow stemming from the combined luxury
and sporting goods business and value the nonoperating
assets separately (Fnac at 0.25x2013e
sales, ie EUR1bn or EUR8 per share and La
Redoute at zero). Note that PPR’s tax rate (23.5%
in 2013e) is much lower than that of French
luxury companies LVMH (32.5%) and Hermès
(33.5%) due to a supply chain optimisation in
Switzerland.
Under our research model, for eurozone stocks
without a volatility indicator, the Neutral band is 5
percentage points above and below the hurdle rate
of 9.0%. Since our target price implies a 29%
potential return, which is above the Neutral band,
we reiterate our Overweight rating on PPR.
Potential return equals the percentage difference
between the current share price and the target
price, including the forecast dividend yield when
indicated.
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Downside risks to our Overweight rating include
underperformance of the Gucci brand, failure to
turnaround Puma and value destruction linked
to acquisitions.
PPR - Earnings forecasts
EURm 2004 pro forma 2005a 2006a 2007a 2008a 2009a* 2010a* 2011a* 2012a 2013e 2014e 2015e
Sales
Luxury Goods 2,712 3,034 3,568 3,867 3,380 3,390 4,011 4,917 6,212 6,846 7,500 8,208
Retail 14,358 13,906 14,365 14,196 14,318 10,690 7,909 4,165 0 0 0 0
Puma 1,718 2,524 2,461 2,706 3,009 3,271 3,350 3,570 3,800
Volcom 147 261 274 288 302
Other -29 -2 -2 -20 -21 -16 -21 -10 -8 -12 -15 -16
Total PPR 17,042 16,938 17,931 19,761 20,201 16,525 14,605 12,227 9,736 10,458 11,343 12,294
Sales growth y-o-y (%)
Luxury Goods 5.3 11.9 17.6 8.4 -12.6 0.3 18.3 22.6 26.3 10.2 9.6 9.4
Retail 3.3 -3.1 3.3 -1.2 0.9 -25.3 -26.0 -47.3
Puma 47.0 -2.5 10.0 11.2 8.7 2.4 6.6 6.4
Volcom 78.1 5.0 5.0 5.0
Total PPR 3.6 -0.6 5.9 10.2 2.2 -18.2 -11.6 -16.3 -20.4 7.4 8.5 8.4
EBIT
Luxury Goods 288 392 565 731 731 692 897 1,263 1,612 1,827 2,058 2,316
Retail 760 729 759 785 695 422 353 103
Puma 236 350 320 337 333 290 316 364 416
Volcom 14 15 21 26 30
Holding companies & other -61 -59 -50 -57 -54 -50 -56 -110 -125 -130 -130 -130
Total PPR 986 1,063 1,275 1,696 1,721 1,383 1,531 1,602 1,792 2,034 2,318 2,632
EBIT margins (%)
Luxury Goods 10.6 12.9 15.8 18.9 21.6 20.4 22.4 25.7 25.9 26.7 27.4 28.2
Retail 5.3 5.2 5.3 5.5 4.9 3.9 4.5 2.5
Puma 13.7 13.9 13.0 12.5 11.1 8.9 9.4 10.2 10.9
Volcom 9.2 5.7 7.5 9.0 10.0
Total PPR 5.8 6.3 7.1 8.6 8.5 8.4 10.5 13.1 18.4 19.4 20.4 21.4
EBIT growth y-o-y (%)
Luxury Goods 15.3 36.3 44.2 29.3 0.0 -5.3 29.7 40.7 27.6 13.4 12.6 12.5
Retail 0.8 -4.0 4.1 3.4 -11.5 -39.3 -16.3 -70.9
Puma 48.2 -8.6 5.5 -1.2 -13.0 9.0 15.2 14.3
Volcom 9.6 39.0 26.0 16.7
Total PPR -1.7 7.7 19.9 33.1 1.5 -19.6 10.7 4.6 11.8 13.5 14.0 13.6
Other operating inc/charges nm 3 0 100 -361 -547 -194 -58 -25 0 0 0
Operating income nm 1,066 1,274 1,796 1,360 837 1,337 1,544 1,766 2,034 2,318 2,632
Net Interest nm -307 -290 -322 -373 -381 -254 -215 -148 -161 -91 -21
Tax nm -187 -260 -298 -335 -177 -304 -317 -298 -440 -523 -614
Tax rate (%) nm -24.7% -26.4% -20.2% -33.9% -38.8% -28.1% -23.9% -18.4% -23.5% -23.5% -23.5%
Equity Affiliate Share nm 3 2 1 1 0 36 47 37 0 0 0
Minorities nm -38 -47 -119 -117 -32 -51 -59 -34 -63 -73 -83
Net profit reported nm 536 685 922 537 985 964 986 1,048 1,370 1,631 1,915
Net profit (base of diluted EPS calculation) 578 698 904 875 712 932 1,055 1,269 1,370 1,631 1,915
Avg Number of shares used in diluted EPS nm 132.5 121.7 128.7 126.1 126.5 126.7 126.3 126.1 126.1 126.1 126.1
HSBC EPS (diluted)** nm 4.36 5.73 7.03 6.94 5.63 7.35 8.35 10.06 10.86 12.94 15.18
HSBC EPS growth nm nm 31.3 22.6 -1.2 -18.8 30.5 13.6 20.5 8.0 19.1 17.4
*2009 not restated for the disposal of Conforama, 2010 not restated for Redcats discontinuation and change in central costs accounting
**HSBC 2012-2014e EPS includes discontinued activities
Source: Company data, HSBC estimates
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March 2013
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Financials & valuation: PPR
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 9,736 10,458 11,343 12,294
EBITDA 2,067 2,327 2,630 2,964
Depreciation & amortisation -275 -293 -312 -332
Operating profit/EBIT 1,792 2,034 2,318 2,632
Net interest -148 -161 -91 -21
PBT 1,656 1,873 2,227 2,612
HSBC PBT 1,619 1,873 2,227 2,612
Taxation -298 -440 -523 -614
Net profit 1,324 1,370 1,631 1,915
HSBC net profit 1,269 1,370 1,631 1,915
Cash flow summary (EURm)
Cash flow from operations 1,102 1,527 1,801 2,096
Capex -442 -473 -506 -541
Cash flow from investment 409 325 -506 -541
Dividends -441 -480 -509 -539
Change in net debt -904 -1,345 -752 -976
FCF equity 906 1,090 1,334 1,598
Balance sheet summary (EURm)
Intangible fixed assets 15,290 14,492 14,492 14,492
Tangible fixed assets 1,376 1,557 1,750 1,960
Current assets 5,460 5,678 5,913 7,010
Cash & others 2,081 2,081 2,081 2,924
Total assets 25,257 24,857 25,285 26,592
Operating liabilities 8,189 8,244 8,303 8,367
Gross debt 4,584 3,239 2,487 2,354
Net debt 2,503 1,158 406 -570
Shareholders funds 11,414 12,304 13,426 14,801
Invested capital 11,856 11,401 11,771 12,171
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue -20.4 7.4 8.5 8.4
EBITDA 8.1 12.6 13.1 12.7
Operating profit 11.8 13.5 14.0 13.6
PBT 20.4 13.2 18.9 17.2
HSBC EPS 20.5 8.0 19.1 17.4
Ratios (%)
Revenue/IC (x) 0.8 0.9 1.0 1.0
ROIC 11.7 13.4 15.3 16.8
ROE 11.4 11.6 12.7 13.6
ROA 5.9 6.2 7.1 7.8
EBITDA margin 21.2 22.2 23.2 24.1
Operating profit margin 18.4 19.4 20.4 21.4
EBITDA/net interest (x) 14.0 14.5 29.1 144.6
Net debt/equity 20.7 8.9 2.9 -3.7
Net debt/EBITDA (x) 1.2 0.5 0.2 -0.2
CF from operations/net debt 44.0 131.8 443.4
Per share data (EUR)
EPS Rep (fully diluted) 10.50 10.86 12.94 15.18
HSBC EPS (fully diluted) 10.06 10.86 12.94 15.18
DPS 3.75 3.98 4.21 4.93
Book value 90.46 97.51 106.41 117.31
DCF analysis
HSBC assumptions
DCF, comprising
Overweight
Risk-free rate (%) 3.0 EBIT growth 2012-22e CAGR (%) 9.8
Equity premium (%) 6.0 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.00 WACC (%) 9.24
Sensitivity and valuation range (EUR/share)
Cost of capital vs fade period 4 years 8 years 12 years
8.8% 229.9 234.1 237.0
9.0% 223.0 226.9 229.9
9.2% 216.4 220.0 223.1
9.4% 210.1 213.5 216.6
9.6% 204.2 207.2 210.3
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 2.3 2.0 1.8 1.6
EV/EBITDA 10.7 9.2 7.8 6.6
EV/IC 1.9 1.9 1.7 1.6
PE* 16.9 15.7 13.2 11.2
P/Book value 1.9 1.7 1.6 1.5
FCF yield (%) 4.6 5.4 6.6 7.9
Dividend yield (%) 2.2 2.3 2.5 2.9
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 170.55 Target price (EUR) 220.00
Reuters (Equity) PRTP.PA Bloomberg (Equity) PP FP
Market cap (USDm) 27,710 Market cap (EURm) 21,509
Free float (%) 55 Enterprise value (EURm) 21,336
Country France Sector Multiline Retail
Analysts Antoine Belge Contact 33 1 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4348
Price relative
202
182
162
142
122
102
82
82
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
PPR Rel to SBF-120
Source: HSBC
Note: price at close of 25 Mar 2013
202
182
162
142
122
102
95

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Prada
It is tempting to take profits after a phenomenal run but with higher
consensus earnings likely, we think this is one to stick with
Prada to remain the fastest EPS grower in luxury. Bear case, still
focusing on PE, misses the point of sustainable, superior growth
and an almost Zara-like business model
OW(V), retain HKD100 target price, an Asia Super Ten stock
More akin to an Inditex model
than to luxury?
What to expect in the short term
FY results out 5 April (after HK market close)
should not be controversial and we expect EBIT
for the year of EUR900m, ie just 1% above
consensus. We think the relevant focus will be on
management indications on any of the following
topics:
- Current trading: we believe that Q1 ending April
will have started very strongly and expect mid
teen same store sales growth for the quarter, This
follows mid-single digit same store sales growth
"only" in Q4 ended January 2013. The rebound is
partly artificial as it is a function of Chinese New
Year timing (hitting Q4, helping Q1) and linked to
the non-recurrence of very low "off price" sales.
- Growth expectations: we have factored in high
single-digit same store sales growth for FY Jan
2014 (a logical slowdown from the 14% last year,
given the natural cannibalisation of new stores)
and will monitor what management has to say.
- Gross and operating margin: we have factored in
another year of strong operating leverage for
Prada with channel, product and regional mix
supporting gross margin and scale leveraging the
fixed cost base of SG&A. Since the IPO, we
believe management has guided quite
conservatively on margins and we expect this
should continue to be the case.
Why Prada is not a pure peer to other
European luxury brands
Aside from providing mostly leather-based
handbags and accessories with a more discrete
logo presence at a decent price (relative), we have
explained in several reports that Prada is a winner
on the "ubiquity" theme thanks to its
differentiated approach to product development
and notably the so-called "flash collections",
ensuring 75% of any given year's sales are driven
by new products. We have heard in the past from
investors that Prada should trade at a premium
because it is the only liquid stock in the sector
traded in HK or because it is a rare consumer and
retail stock in Asia which is both liquid and not
plagued by corporate governance issues. We
disagree but think that, yes, Prada does stand apart
in its luxury league as flash collections mitigate
the theoretical fashion risk and a bit like at Zara,
Prada has means to not go out of fashion. Prada is
one of the few brands to address this issue, which
makes it a more solid play than most. It is
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interesting to see as a reality check that Inditex
(ITX SM, OW, EUR100.9) trades at the same PE
as Prada with lower projected EPS growth and
HSBC analyst Paul Rossington uses a lower
WACC on Inditex than we do on Prada. Inditex
has a strong track record, but we would argue
Prada is gradually building that as well.
Why shares can continue to do well
Luxury is a momentum sector and the stocks that
can generate earnings upgrades will keep moving.
Prada is one of those. We remain 6% above
consensus on EBIT and while PE has never really
looked attractive, price to growth is still low.
Since we have had an Overweight (V) rating on
Prada, the pushback has been on valuation ("I
missed it, PE is now too demanding"). On a
momentum-driven sector, valuation can seem
high for companies that have the capacity to
generate earnings upgrades and our undergoing
transformation; in this case we believe the core
Prada brand moving from a “good to have, second
tier brand” status to becoming a real substitute to
leaders Gucci and LV.
We believe Prada should remain the fastest EPS
grower (37% in FY Jan 2014) in our coverage list
for the third year running and when looking at
valuation, one should consider that relative to
growth, this remains one of the most attractive
luxury plays.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppts
above and below the hurdle rate for Hong Kong
stocks of 8.5%. Our target price of HKD100
implies a potential return of 27.2%, which is
above the Neutral band; therefore we reiterate our
Overweight (V) rating. Potential return equals the
percentage difference between the current share
price and the target price, including the forecast
dividend yield when indicated.
Downside risks include a potential placement of
shares from family members and failure to
execute the retail strategy, translating into the
operating leverage we model.
Prada SPA – Integrated sales by nationality (Jan. 2013)
HK+Taiwan
+Macau
4%
China
mainland
34%
Japan
12%
Source: Company data, HSBC
W Europe
11%
E Europe
3%
Middle East
4%
North
America
10%
Latam
3%
Rest of Asia
20%
Earnings, valuation and risks
Prada should report FY12 earnings (sales have
been disclosed already) on 5 April after market.
Our full P&L estimates can be found on the table
on page 98.
We leave our estimates unchanged for FY Jan
2013e and FY Jan 2014e and our DCF-derived
target price remains HKD100 (see page 99 for
details).
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Prada SPA
(EURm) FY 08 FY 09 FY 10 H1 11 H211 FY 11 H1 12 H212e FY 12e FY 13e FY 14e FY 15e
Net Sales 1,604 1,531 2,017 1,117 1,406 2,523 1,525 1,726 3,251 3,839 4,301 4,656
Royalties 40 31 30 17 15 32 23 18 41 46 52 56
Net revenues 1,644 1,561 2,047 1,134 1,421 2,556 1,547 1,744 3,291 3,885 4,353 4,712
Gross Profit 953 975 1,388 805 1,023 1,828 1,107 1,280 2,386 2,859 3,260 3,572
Gross margin (%) 58.0% 62.4% 67.8% 71.0% 72.0% 71.5% 71.5% 73.4% 72.5% 73.6% 74.9% 75.8%
Product and development (88) (97) (97) (51) (52) (103) (56) (52) (109) (118) (128) (137)
as a % of sales 5.4% 6.2% 4.7% 4.5% 3.6% 4.0% 3.6% 3.0% 3.3% 3.1% 3.0% 2.9%
Advertising and promotion (100) (76) (85) (54) (75) (129) (68) (90) (158) (179) (192) (200)
as a % of sales 6.1% 4.9% 4.2% 4.8% 5.3% 5.1% 4.4% 5.1% 4.8% 4.6% 4.4% 4.3%
Selling expenses (428) (485) (643) (357) (446) (803) (489) (558) (1,047) (1,220) (1,349) (1,442)
as a % of sales 26.0% 31.0% 31.4% 31.5% 31.4% 31.1% 31.6% 32.0% 31.8% 31.4% 31.0% 30.6%
General and admin (146) (130) (145) (89) (75) (164) (98) (75) (173) (186) (200) (212)
as a % of sales 8.9% 8.4% 7.1% 7.9% 5.3% 6.7% 6.3% 4.3% 5.3% 4.8% 4.6% 4.5%
SG&A as a % of sales 47.4% 48.6% 45.5% 46.9% 46.0% 44.4% 45.2% 43.9% 43.0% 42.3%
EBIT 191.0 187 414 253 376 629 395 505 900 1,156 1,391 1,581
EBIT margin (%) 11.6% 12.0% 20.2% 22.3% 26.4% 24.6% 25.5% 29.0% 27.4% 29.8% 32.0% 33.6%
PBT 153.8 155 388 242 361 603 392 503 895 1,156 1,396 1,591
Taxation (53) (53) (135) (61) (106) (166) (103) (171) (274) (306) (356) (406)
Tax rate 34.2% 33.8% 34.7% 25.1% 27.6% 27.6% 26.2% 34.0% 30.6% 26.5% 25.5% 25.5%
PAT 101.2 103 254 181 255 437 289 332 621 850 1,040 1,185
Discontinued operations (1) (2) - (2) 0 - (2) - - - -
Net profit for group 101 101 254 180 257 437 288 334 621.3 850 1,040 1,185
Net margin (%) 6.1% 6.4% 12.4% 15.8% 17.1% 17.1% 18.6% 18.9% 18.9% 21.9% 23.9% 25.2%
Prof. attrib. to non-controlling interests 2 0 (3) 5 (10) (4.5) (3) (4) (6.5) (8.5) (10.5) (12.5)
Prof. attributable to equity owner 98 98 251 183 247 432 283 332 614.7 841 1,029 1,173
Weighted avg number of shares (m) 2,548 2,506 2,528 2,512 2,512 2,536 2,536 2,536 2,536 2,536 2,536 2,536
EPS (Basic) (EUR) 0.040 0.04 0.10 0.07 0.10 0.17 0.11 0.13 0.24 0.33 0.41 0.46
Source: company, HSBC estimates
98

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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Financials & valuation: Prada SPA
Financial statements
Year to 01/2012a 01/2013e 01/2014e 01/2015e
Profit & loss summary (EURm)
Revenue 2,556 3,291 3,885 4,353
EBITDA 759 1,048 1,331 1,587
Depreciation & amortisation -130 -148 -175 -196
Operating profit/EBIT 629 900 1,156 1,391
Net interest -26 -5 0 5
PBT 603 895 1,156 1,396
HSBC PBT 603 895 1,156 1,396
Taxation -166 -274 -306 -356
Net profit 432 615 841 1,029
HSBC net profit 432 615 841 1,029
Cash flow summary (EURm)
Cash flow from operations 530 697 970 1,193
Capex -257 -291 -320 -366
Cash flow from investment -257 -291 -320 -366
Dividends -6 -127 -175 -320
Change in net debt -419 -280 -474 -507
FCF equity 273 406 650 827
Balance sheet summary (EURm)
Intangible fixed assets 864 864 864 864
Tangible fixed assets 947 1,090 1,235 1,406
Current assets 1,118 1,592 2,218 2,844
Cash & others 362 642 1,117 1,624
Total assets 2,944 3,561 4,332 5,129
Operating liabilities 628 751 848 924
Gross debt 344 344 344 344
Net debt -18 -298 -773 -1,280
Shareholders funds 1,823 2,311 2,976 3,686
Invested capital 1,937 2,152 2,352 2,565
Ratio, growth and per share analysis
Year to 01/2012a 01/2013e 01/2014e 01/2015e
Y-o-y % change
Revenue 24.9 28.8 18.0 12.0
EBITDA 42.9 38.1 26.9 19.2
Operating profit 52.0 43.1 28.4 20.3
PBT 55.3 48.4 29.1 20.8
HSBC EPS 71.7 42.3 36.8 22.4
Ratios (%)
Revenue/IC (x) 1.4 1.6 1.7 1.8
ROIC 24.7 30.6 37.7 42.1
ROE 28.5 29.7 31.8 30.9
ROA 17.2 19.2 21.5 21.9
EBITDA margin 29.7 31.9 34.3 36.4
Operating profit margin 24.6 27.4 29.8 31.9
EBITDA/net interest (x) 29.2 209.7
Net debt/equity -1.0 -12.8 -25.8 -34.4
Net debt/EBITDA (x) 0.0 -0.3 -0.6 -0.8
CF from operations/net debt
Per share data (EUR)
EPS Rep (fully diluted) 0.17 0.24 0.33 0.41
HSBC EPS (fully diluted) 0.17 0.24 0.33 0.41
DPS 0.05 0.07 0.13 0.19
Book value 0.72 0.91 1.17 1.45
DCF analysis
HSBC assumptions
DCF, comprising
Overweight (V)
Risk-free rate (%) 3.00 EBIT growth 12-22e CAGR (%) 12.2
Equity premium (%) 5.50 EBIT growth 22-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 0.80 WACC (%) 7.84
Sensitivity and valuation range (HKD/share)
Cost of capital vs fade period 4 years 8 years 12 years
6.8% 112.4 115.9 118.5
7.3% 104.5 107.5 109.9
7.8% 97.5 100.0 102.1
8.3% 91.1 93.3 95.1
8.8% 85.4 87.2 88.8
Valuation data
Year to 01/2012a 01/2013e 01/2014e 01/2015e
EV/sales 7.9 6.0 5.0 4.3
EV/EBITDA 26.5 18.9 14.5 11.9
EV/IC 10.4 9.2 8.2 7.3
PE* 46.1 32.4 23.7 19.4
P/Book value 10.9 8.6 6.7 5.4
FCF yield (%) 1.4 2.0 3.2 4.1
Dividend yield (%) 0.6 0.9 1.6 2.5
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (HKD) 78.60 Target price (HKD) 100.00
Reuters (Equity) 1913.HK Bloomberg (Equity) 1913 HK
Market cap (USDm) 25,913 Market cap (HKDm) 201,124
Free float (%) 20 Enterprise value (EURm) 19,815
Country Hong Kong Sector Global Luxury Goods
Analysts Erwan Rambourg Contact 852 2996 6572
Antoine Belge Contact 331 5652 4347
Sophie Dargnies Contact 331 5652 4348
Price relative
87
77
67
57
47
37
37
Mar-12 Sep-12 Mar-13
Prada SPA Rel to HANG SENG INDEX
Source: HSBC
Note: price at close of 25 Mar 2013
87
77
67
57
47
99

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Richemont
We don’t see a short term pick-up in sales and we believe costs
could weigh, especially in H1 ending September 2013
Investments are 100% justified as focus should be on brand
equity building but this means there could be a better entry point
Remain Neutral; target price lowered to CHF82 (from CHF83)
Long-term brand building
implies short-term deleverage
Watch sales still on the pause button
in Greater China
There are both market and company-specific reasons
for watch sales to be lacklustre these days at
Richemont.
Speaking to Richemont competitors, watch retailers
and most contacts in the industry in Asia, there are
many indicators making us believe that caution
should prevail in H1 ending September 2013. Our
guesstimate is that gifting (political and "B to B")
will not resume before September 2013 at least.
Oriental watches saw positive SSSG in HK/Macau
in October-December and now, China remains
negative. Rolex – independent – alongside Cartier –
part of Richemont – and to a lesser extent Omega –
part of the Swatch group – are the three brands the
most driven by gifting in China. This is because they
are the “mainstream” brands, those for which most
recipients of gifts will know what the value of the
product is and could theoretically exchange it. In
other words they are “liquid” assets and the current
political peer pressure that we describe in the Macau
section of this report is clearly weighing.
Whether it’s anecdotal evidence from store
managers, continuous destocking seen in the
China/HK watch exports, speaking to watch retailers
or hearing the anti-corruption speeches from the Xi
administration, we do not believe gifting will resume
immediately in China.
Beyond the general context, Cartier jewellery should
continue to do well since the fragmented nature of
the jewellery segment allows the brand to increase
its market share from a very low base (worldwide
market share of less than 5% we estimate in spite of
being the number 1 brand). Cartier watches however
suffers specifically in our view from weak trends on
access price point watches (steel-based). Part of this
is linked to the basis of comparison – the Ballon
Bleu launch was a phenomenal success – and less
widely appealing introductions since: the Calibre is
more for “connoisseurs”, the Tank Anglaise is a
derivative within the Tank family but not a broad
new range.
Our understanding is that renewing with successful
entry level in watches is one of the tasks at hand for
the new coming CEO, Mr Stanislas de Quercize, a
Richemont – and Cartier – veteran who transferred
from Van Cleef to replace the newly nominated co-
CEO Mr Bernard Fornas.
100

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
We do not perceive there is much in the pipeline at
this stage before September 2013 that would enable
the brand to start addressing the issue.
Apart from Baume & Mercier, the only purely
wholesale-driven watch brand in the group and one
that should prove loss-making in FY March 2013, all
other watch brands are doing well at Richemont in
our view. So why be obsessed with Cartier? The
brand generates 70% of EBIT for the group and
watches probably half of that in our estimate.
Margins bound to be under pressure
For H2 ending March 2013, we believe organic sales
growth sales will slow to 5% (vs 12% in H1) – note
that it was 5% in Q3 – and with investments still
high (retail roll-out, production capacity admin costs
increasing after 3 years of hyper growth mode in
sales, etc), EBIT margin should get squeezed: we
have margin down 170bps for H2 y-o-y. Entering
the FY March 2014 year, we believe H1 (ending
September) should also suffer from a margin
contraction as sales should be in the mid-single digit
area while costs could increase still in the high single
digits. Greater China trends should remain lacklustre
as distributors cut back on inventories and endconsumers
remain hesitant and we believe Europe
and the US could very well slow from strong rates of
2012.
We appreciate the candid indication from
management on the Asian outlook: "At this stage, it
is unclear how business patterns may develop and
how the business in the Asia Pacific region will
evolve in the near future. Richemont takes a longterm
view in managing its business and will continue
to invest in the development of its Maisons." This at
least limits the wishful thinking camp. As for most
family-held, long-history brands, commitment to
long-term brand equity is logical and reassuring, and
though obviously short term, margins may be at risk.
We remain convinced that Cartier is gradually to
become the Louis Vuitton (or reference brand) of
watches and jewellery but timing the rebound of
sales given continued inventory concerns in Greater
China and uncertainty of the pick-up of gifting is
tricky and while many investors are telling us they
think it’s time to “reload”, we are not convinced the
timing is right yet.
Earnings, valuation and risks
Richemont published a trading statement for Q3
(ending December) on 21 January and should be
publishing FY March 2013 results on 16 May.
Our FY March 2014 estimates are unchanged and
we increase our FY March 15 estimates by 1%. We
forecast organic sales growth of 5% in Q4 ending
March 2013e, 7% in FY March 2014e and 8% in FY
March 2015e. We see limited EBIT margin
expansion over the FY March 2013-15e period due
to slowing top line growth and sustained
investments, unfavourable brand mix (greater
growth of Net a Porter vs other businesses) as well
as lower capacity utilisation for watches.
We lowered our DCF-derived target price to CHF82
(from CHF83) on the back of a slightly higher capital
intensity. The assumptions used to generate our
DCF-derived target price are detailed on page 103.
Under our research model, for stocks without a
volatility indicator, the Neutral band is 5 ppts above
and below the hurdle rate for Swiss stocks of 7.5%.
Our target price provides a potential return of 11.5%,
within the Neutral band; therefore, we remain
Neutral on the stock. Potential return equals the
percentage difference between the current share
price and the target price, including the forecast
dividend yield when indicated.
Risks on the downside include further watch retailer
destocking, currency and underperforming divisions
(Montblanc, Dunhill, etc) weighing more heavily on
H2 margins. Upside risks include a quicker-thanexpected
resumption of gifting, greater China GDP
growth and better consumer sentiment than
expected.
101

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Richemont FY results and forecasts
EURm, year ending March 2007a 2008a 2009a H1 10a H2 10a 2010 a H1 11a H2 11a 2011a H1 12a H2 12a 2012e H1 12a H2 12e 2013e 2014e 2015e
Net sales 4,827 5,302 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,653 8,867 5,106 4,999 10,105 10,780 11,600
% change 12.0% 9.8% 2.2% -15.0% 6.8% -4.5% 37.0% 29.9% 33.2% 29.3% 28.1% 28.7% 21.2% 7.4% 14.0% 6.7% 7.6%
Gross profit 3,074 3,405 3,417 1,464 1,727 3,191 2,113 2,281 4,394 2,665 2,986 5,651 3,310 3,218 6,528 6,974 7,527
Gross margin 63.7% 64.2% 63.1% 61.5% 61.7% 61.6% 64.8% 62.8% 63.8% 63.2% 64.2% 63.7% 64.8% 64.4% 64.6% 64.7% 64.9%
Selling & distribution 1,090 1,181 1,235 598 679 1,277 761 893 1,654 891 1,071 1,962 1,096 1,231 2,327 2,471 2,632
as a % of sales 22.6% 22.3% 22.8% 25.1% 24.3% 24.7% 23.3% 24.6% 24.0% 21.1% 23.0% 22.1% 21.5% 24.6% 23.0% 22.9% 22.7%
Administration 503 528 542 259 286 545 314 342 656 342 405 747 408 478 886 941 997
as a % of sales 10.4% 10.0% 10.0% 10.9% 10.2% 10.5% 9.6% 9.4% 9.5% 8.1% 8.7% 8.4% 8.0% 9.6% 8.8% 8.7% 8.6%
Communication 570 607 644 204 302 506 264 435 699 340 519 859 418 539 957 1,013 1,090
as a % of sales 11.8% 11.4% 11.9% 8.6% 10.8% 9.8% 8.1% 12.0% 10.1% 8.1% 11.2% 9.7% 8.2% 10.8% 9.5% 9.4% 9.4%
Other / Non-recurring items -5 -13 28 13 20 33 14 16 30 17 26 43 8 20 28 28 28
Total operating exps 2,158 2,297 2,449 1,074 1,287 2,361 1,353 1,686 3,039 1,590 2,021 3,611 1,930 2,268 4,198 4,453 4,748
as a % of sales 44.7% 43.3% 45.2% 45.1% 46.0% 45.6% 41.5% 46.4% 44.1% 37.7% 43.4% 40.7% 37.8% 45.4% 41.5% 41.3% 40.9%
EBIT reported 916 1,108 968 390 440 830 760 595 1,355 1,075 965 2,040 1,380 950 2,330 2,520 2,780
EBIT underlying 900 1,108 968 390 440 830 760 595 1,355 1,075 965 2,040 1,380 950 2,330 2,520 2,780
EBIT margin underlying 18.6% 20.9% 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 20.7% 23.0% 27.0% 19.0% 23.1% 23.4% 24.0%
Financial result 31 47 -101 24 -161 -137 -120 -163 -283 -227 -9 -236 -99 16 -83 19 25
Exceptional 102 0 102 0 0 0 0
Taxation -158 -195 -133 -70 -24 -94 -98 -98 -196 -139 -125 -264 -199 -161 -360 -406 -449
Minority interest -1 1 3 0 4 4 -2 103 101 0 0 0 0 0 0 0 0
Luxury net profit
(reported) 788 961 737 344 259 603 642 437 1,079 709 831 1,540 1,082 805 1,888 2,133 2,356
Source: company data, HSBC estimates
Richemont - FY sales and EBIT by segment
_____ 2010a ______ ______ 2011a ______ ______ 2012a ______ ______ 2013e ______
EURm, year ending March 2007a 2008a 2009a H1 H2 FY H1 H2 FY H1 H2 FY H1(a) H2(e) FY(e) 2014e 2015e
Sales by segment
Jewellery maisons 2,435 2,657 2,762 1,222 1,465 2,688 1,619 1,860 3,479 2,165 2,425 4,590 2,607 2,574 5,181 5,428 5,857
Specialist watchmakers 1,203 1,378 1,437 655 699 1,353 901 873 1,774 1,171 1,152 2,323 1,459 1,268 2,727 2,918 3,137
Writing instruments 585 637 587 238 313 551 303 369 672 334 389 723 368 395 763 786 826
Other businesses 604 630 632 264 320 584 436 531 967 544 688 1,232 672 762 1,434 1,647 1,781
Total Sales 4,827 5,302 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,653 8,867 5,106 4,999 10,105 10,780 11,600
EBIT by segment
Jewellery maisons 667 767 777 349 393 742 541 521 1,062 734 776 1,510 958 793 1,751 1,856 2,015
Specialist watchmakers 274 376 301 133 98 231 259 120 379 312 227 539 470 219 689 753 834
Writing instruments 110 120 69 29 50 79 48 61 109 54 65 119 53 54 107 116 126
Other businesses 9 2 -39 -29 -7 -36 -19 -16 -35 -17 -18 -35 -15 0 -15 22 49
Total EBIT before unallocated costs 1,060 1,265 1,108 482 534 1,016 829 687 1,516 1,083 1,050 2,133 1,466 1,066 2,532 2,747 3,023
EBIT reported 916 1,108 968 390 440 830 760 595 1,355 1,075 965 2,040 1,380 950 2,330 2,520 2,780
EBIT margin by segment (%)
Jewellery maisons 27.4% 28.9% 28.1% 28.6% 26.8% 27.6% 33.4% 28.0% 30.5% 33.9% 32.0% 32.9% 36.7% 30.8% 33.8% 34.2% 34.4%
Specialist watchmakers 22.8% 27.3% 20.9% 20.3% 14.0% 17.1% 28.7% 13.8% 21.4% 26.6% 19.7% 23.2% 32.2% 17.3% 25.3% 25.8% 26.6%
Writing instruments 18.8% 18.8% 11.8% 12.2% 16.0% 14.3% 15.8% 16.5% 16.2% 16.2% 16.7% 16.5% 14.4% 13.6% 14.0% 14.7% 15.2%
Other businesses
-
11.0% -2.2% -6.2% -4.4% -3.0% -3.6% -3.1% -2.7% -2.9% -2.2% -0.1% -1.1% 1.4% 2.8%
1.5% 0.3% -6.2%
Total EBIT margin before unallocated costs 22.0% 23.9% 20.4% 20.3% 19.1% 19.6% 25.4% 18.9% 22.0% 25.7% 22.6% 24.1% 28.7% 21.3% 25.1% 25.5% 26.1%
EBIT margin reported 19.0% 20.9% 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 20.7% 23.0% 27.0% 19.0% 23.1% 23.4% 24.0%
Source: Company data, HSBC estimates
102

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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Financials & valuation: Richemont
Financial statements
Year to 03/2012a 03/2013e 03/2014e 03/2015e
Profit & loss summary (EURm)
Revenue 8,867 10,105 10,780 11,600
EBITDA 2,359 2,681 2,906 3,204
Depreciation & amortisation -319 -351 -386 -425
Operating profit/EBIT 2,040 2,330 2,520 2,780
Net interest -236 -83 19 25
PBT 1,804 2,247 2,539 2,805
HSBC PBT 1,804 2,247 2,539 2,805
Taxation -264 -360 -406 -449
Net profit 1,540 1,888 2,133 2,356
HSBC net profit 1,540 1,888 2,133 2,356
Cash flow summary (EURm)
Cash flow from operations 1,236 1,550 2,265 2,530
Capex -511 -750 -803 -859
Cash flow from investment -511 -1,199 -803 -859
Dividends -204 -253 -326 -373
Change in net debt -598 -98 -1,155 -1,299
FCF equity 778 800 1,481 1,671
Balance sheet summary (EURm)
Intangible fixed assets 59 59 59 59
Tangible fixed assets 1,529 2,377 2,794 3,228
Current assets 8,595 8,669 10,199 11,900
Cash & others 4,036 3,308 4,463 5,762
Total assets 11,753 12,675 14,622 16,756
Operating liabilities 1,896 2,010 2,150 2,301
Gross debt 848 22 22 22
Net debt -3,188 -3,286 -4,441 -5,740
Shareholders funds 8,609 10,243 12,050 14,033
Invested capital 4,251 5,787 6,438 7,123
Ratio, growth and per share analysis
Year to 03/2012a 03/2013e 03/2014e 03/2015e
Y-o-y % change
Revenue 28.7 14.0 6.7 7.6
EBITDA 34.0 13.7 8.4 10.3
Operating profit 50.6 14.2 8.2 10.3
PBT 53.7 24.6 13.0 10.5
HSBC EPS 59.5 22.6 13.0 10.5
Ratios (%)
Revenue/IC (x) 2.3 2.0 1.8 1.7
ROIC 45.3 39.0 34.6 34.4
ROE 19.8 20.0 19.1 18.1
ROA 16.2 16.0 15.5 14.9
EBITDA margin 26.6 26.5 27.0 27.6
Operating profit margin 23.0 23.1 23.4 24.0
EBITDA/net interest (x) 10.0 32.3
Net debt/equity -37.0 -32.1 -36.8 -40.9
Net debt/EBITDA (x) -1.4 -1.2 -1.5 -1.8
CF from operations/net debt
Per share data (EUR)
EPS Rep (fully diluted) 2.76 3.38 3.82 4.22
HSBC EPS (fully diluted) 2.76 3.38 3.82 4.22
DPS 0.45 0.58 0.67 0.75
Book value 14.99 17.84 20.99 24.44
DCF analysis
HSBC assumptions
DCF, comprising
Neutral
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 8.4
Equity premium (%) 4.50 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.20 WACC (%) 8.94%
Sensitivity and valuation range (CHF/share)
Cost of capital vs fade period 4 years 8 years 12 years
7.9% 91.6 93.7 95.1
8.4% 85.8 87.5 88.9
8.9% 80.5 82.0 83.3
9.4% 75.8 77.1 78.2
9.9% 71.6 72.6 73.7
Valuation data
Year to 03/2012a 03/2013e 03/2014e 03/2015e
EV/sales 3.5 3.0 2.7 2.4
EV/EBITDA 13.0 11.4 10.1 8.8
EV/IC 7.2 5.3 4.6 3.9
PE* 21.9 17.8 15.8 14.3
P/Book value 4.0 3.4 2.9 2.5
FCF yield (%) 2.3 2.4 4.4 4.9
Dividend yield (%) 0.8 1.0 1.1 1.2
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (CHF) 73.55 Target price (CHF) 82.00
Reuters (Equity) CFR.VX Bloomberg (Equity) CFR VX
Market cap (USDm) 44,587 Market cap (CHFm) 42,232
Free float (%) 91 Enterprise value (EURm) 30,587
Country Switzerland Sector Global Luxury Goods
Analyst Erwan Rambourg Contact 852 2996 6572
Antoine Belge Contact 331 5652 4347
Sophie Dargnies Contact 331 5652 4348
Price relative
83
73
63
53
43
33
33
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Richemont Br Rel to SMI
Source: HSBC
Note: price at close of 25 Mar 2013
83
73
63
53
43
103

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Swatch
Harry Winston a smart deal in our view, and highest exposure to
mainland China a positive factor if macro improves in the region
Valuation (15.9x 2013e PE) not overly demanding, but several
catalysts recently played out
Remain Neutral, increase target price to CHF590 (from CHF550)
on higher estimates
Harry Winston a smart deal
On 14 January, Swatch announced it was acquiring
the retail luxury division of Harry Winston, ie the
jewellery and watch brand, not the mining assets.
The price paid is USD750m plus assumption of up
to USD250m of debt, ie USD1bn EV for a brand
that produced USD412m in sales in 2011, USD32m
in EBITDA and USD19m in operating profit. In
9M12, sales increased by 5% and EBIT margin went
from 4.5% last year to 6.5%.
It may sound counter-intuitive but we think this is
a good price for Swatch as 2.4x sales is low in
terms of historical M&A in the space and we
believe looking at EBIT/EBITDA-type multiples
for a turnaround story (we believe the sustainable
EBIT margin for a brand like Harry Winston is
much higher than the current 6.5%) is not that
relevant. Harry Winston itself had a published
target of growing sales at a mid-teens CAGR by
2016, a low 50% gross margin (from 45.7% last
year) and with an EBIT margin in the low to midteens
by then. Besides, on a long-term view, we
believe this is a positive use of cash for Swatch as
there are very few jewellery brands with a solid
global reputation: Cartier, Piaget, Van Cleef &
Arpels (all part of Richemont), Tiffany (still
independent and listed), Bulgari (at LVMH) and
independent non-listed companies Chopard and
Graff (unless you consider the latter as more a
stone supplier than a brand).
The good things about Harry Winston are how
balanced it is between high-end jewellery and
watches (accounting for already 25-30% sales,
unlike Graff), and the strength of its brand equity
and perception. We believe that, similar to
Chopard, Harry Winston could eventually have a
stronger potential in the watch category and some
designs (eg Opus series) have already developed
credibility for the brand in that segment.
Becoming part of the Swatch Group cannot harm
this.
Nevertheless given the Swatch Group's size
(CHF26bn market cap), this USD1bn deal is far
from transformational yet immediately accretive:
1-2% in year 1 we estimate since Swatch is
yielding a very low return on its hefty cash pile.
Key brands enjoying strong momentum
Swatch is the company in our universe the most
exposed to China: Greater China accounted for
37% of sales in 2012 (and mainland China 17%
according to our estimates) and slowed
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significantly in 2012 (sales up c+6% in local
currency). The rest of the world was pretty strong
though, allowing for 12% worldwide growth at
constant FX: Europe was up c17%, the Americas
up c14%, Asia ex Greater China up c14% at
constant FX).
At the 6 March analyst meeting, regarding China,
CEO Hayek stated that gifting related sales had not
picked up yet, with limited visibility on the timing of
an improvement, and that Chinese retailers were still
quite cautious.
Although Omega may suffer from a slight ‘firstmover
disadvantage’ in China, we believe that
outside China the brand should continue to do very
well driven by retail investments, which are finally
starting to put the brand on the radar in the US, the
halo effect of the London Olympics’ global
advertising campaign, and the sponsorship of
Skyfall, the latest James Bond movie. In the steel
watch segment, we believe Omega has taken share
from Cartier (Richemont), which has been less
active in terms of product launches and may have
been too aggressive in terms of price increases.
Access price points (Tissot and Longines) in our
view should continue to perform well as they are
mostly volume-led brands (price increases have been
minimal so as not to alienate the consumer base).
Over the next few years, Swatch will be allowed to
scale down sales of watch movements and
components to third parties. This should result in the
group capturing a greater share of the value chain as
more movements and components will be used in
the manufacturing of watches sold under one of the
group’s brands.
We estimate that up to two-thirds of consumers
purchasing luxury products in China are new to the
brands they buy (ie not “repeat purchasers”) and are
taking the view that the proportion of clients “new to
a brand” is greater at the lower price points (Rado,
Mido, Longines, Tissot) than for the above-Omega
type of price points.
Earnings, valuation and risks
Organic sales growth was 10.9% in FY12,
implying an 8% increase in H2 12 following 13.9%
in H1 2012. In Watches and jewellery (90% of
total), organic growth was 9% in H2 (15.8% in
H1). The FY12 group EBIT margin improved
150bp, with a spectacular jump in Production
(+370bp) and an 80bp increase in Watches &
Jewellery more than offsetting a 360bp fall to 0.3%
in Electronic Systems.
CEO Nick Hayek has given a 5-10% sales growth
guidance for 2013, stating that 6-8% growth would
be a ‘good’ growth rate for the industry.
We factor in 15% reported sales growth for 2013e
(8.4% organic sales growth, 1.7% FX impact and
5% impact linked to the HW acquisition). We
estimate the EBIT margin should only increase 10bp
due to the HW integration, which carry a lower
margin.
We raise our 2013 and 2014 EBIT estimates by 3%
and 4% respectively on the back of a significant beat
in H2 2012.
We increase our DCF-based target price to CHF590
from CHF550 on the back of the above-mentioned
earning increases and our slightly higher mediumterm
EBIT margin assumptions for Tissot and
Longines. Our DCF assumptions are detailed on
page 107). Under our research model, for stocks
without a volatility indicator, the Neutral band is
5ppts above and below the hurdle rate for Swiss
stocks of 7.5%. Our target price implies a potential
return of 11.1%, hence we reiterate our Neutral
rating. Potential return equals the percentage
difference between the current share price and the
target price, including the forecast dividend yield
when indicated.
105

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March 2013
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Trading at 15.9x 13e, Swatch remains one of the
least expensive luxury stocks in Europe.
Nevertheless, we believe several catalysts played out
recently: improving macro sentiment on China, both
FY12 sales and subsequently earnings publications
above market expectations, Harry Winston
acquisition announcement, weakening of the CHF.
Upside risks to our rating include stronger-thanexpected
value creation on the Harry Winston
acquisition. Downside risks to our rating include a
slower-than-expected return of the Production
division’s EBIT margin to the 2007 peak; watch
movement shortages weighing on sales, and a
stronger CHF.
Swatch 2012 sales by region
Swatch 2012 sales breakdown
Greater
China
37%
Japan
2%
Oceania
1%
Low end
watch
segment
14%
Production
(external
sales) 7%
Electronic
Systems
4%
Asia ex GC
ex Japan
14%
Africa
1%
Source: Company data
Americas
8%
Europe
37%
Medium watch
segment
45%
High end
watch
segment* 30%
Source: HSBC estimates *Includes Breguet, Blancpain, Glasshütte, Léon Hatot,
Jacquet Droz, 60% of Omega sales
The Swatch Group - Results & forecasts
CHFm 2007a YoY 2008a YoY 2009a YoY 2010a* YoY 2011a YoY 2012a YoY 2013e YoY 2014e YoY 2015e YoY
Sales
Watches & Jewellery 4,456 20 4,547 2 4,187 -8 5,225 25 5,953 14 6,955 17 7,675 10 8,284 8 8,947 8
Harry Winston 387 - 534 38 614 15
Watches Production 1,624 22 1,742 7 1,429 -18 1,487 4 1,972 33 2,215 12 2,403 9 2,584 8 2,764 7
Electronics Systems 623 6 526 -16 391 -26 436 12 334 -23 308 -8 328 6 348 6 369 6
General services 5 7 5 5 5 5 5 5 5
Elimination internal sales -1,062 28 -1,145 8 -870 -24 -1,045 20 -1,500 44 -1,687 12 -1,828 8 -1,963 7 -2,099 7
Total net sales 5,646 17 5,677 1 5,142 -9 6,108 19 6,764 11 7,796 15 8,970 15 9,791 9 10,600 8
Total gross sales 5,941 18 5,966 0 5,421 -9 6,440 19 7,143 11 8,143 14 9,341 15 10,189 9 11,025 8
EBIT
Watches 920 25 828 -10 804 -3 1,257 56 1,352 8 1,633 21 1,834 12 2,013 10 2,210 10
Harry Winston 31 - 55 77 77 40
Watches production 235 60 281 20 94 -67 186 98 322 73 442 37 493 11 543 10 594 10
Electronics systems 99 -7 104 5 24 -77 62 158 13 -79 1 -92 20 1,868 35 77 41 17
General services -18 0 -11 -39 -19 73 -69 263 -73 6 -92 26 -93 1 -96 3 -99 3
Total 1,236 27 1,202 -3 903 -25 1,436 59 1,614 12 1,984 23 2,285 15 2,550 12 2,823 11
EBIT margin
Watches 20.6% 18.2% 19.2% 24.1% 22.7% 23.5% 23.9% 24.3% 24.7%
Harry Winston 8.0% 10.3% 12.6%
Watches production 14.5% 16.1% 6.6% 12.5% 16.3% 20.0% 20.5% 21.0% 21.5%
Electronics systems 15.9% 19.8% 6.1% 14.2% 3.9% 0.3% 6.0% 10.0% 11.0%
Total 21.9% 21.2% 17.6% 23.5% 23.9% 25.4% 25.5% 26.0% 26.6%
Net financial result & associates 37 -196 46 -38 -3 33 28 33 33
Taxes -258 -168 -186 -318 -335 -409 -497 -555 -614
Tax rate 20.3% 16.7% 19.6% 22.7% 20.8% 20.3% 21.5% 21.5% 21.5%
Minority interest -4 -4 -4 -6 -7 -8 -10 -12 -14
Net consolidated income (reported) 1,011 22 834 -18 759 -9 1,074 42 1,269 18 1,600 26 1,806 13 2,015 12 2,228 11
Earnings per bearer share (reported) 18.50 24 15.76 -15 14.48 -8 20.28 40 23.49 16 29.64 26 33.46 13 37.34 12 41.28 11
Earnings per bearer share (HSBC) 18.50 24 15.76 -15 14.48 -8 20.28 40 23.49 16 29.64 26 33.46 13 37.34 12 41.28 11
Source: Company data, HSBC estimates
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Financials & valuation: Swatch
Financial statements
Year to 12/2012a 12/2013e 12/2014e 01/2015e
Profit & loss summary (CHFm)
Revenue 7,796 8,970 9,791 10,600
EBITDA 2,245 2,569 2,845 3,137
Depreciation & amortisation -261 -284 -296 -314
Operating profit/EBIT 1,984 2,285 2,550 2,823
Net interest 15 28 33 33
PBT 2,017 2,313 2,583 2,856
HSBC PBT 2,017 2,313 2,583 2,856
Taxation -409 -497 -555 -614
Net profit 1,600 1,806 2,015 2,228
HSBC net profit 1,600 1,806 2,015 2,228
Cash flow summary (CHFm)
Cash flow from operations 895 1,634 1,907 2,107
Capex -495 -475 -475 -475
Cash flow from investment -815 -1,395 -475 -475
Dividends -310 -364 -451 -504
Change in net debt 246 113 -992 -1,137
FCF equity 400 1,159 1,432 1,632
Balance sheet summary (CHFm)
Intangible fixed assets 615 1,535 1,535 1,535
Tangible fixed assets 1,889 2,080 2,259 2,420
Current assets 7,827 8,271 9,776 11,468
Cash & others 1,967 1,854 2,846 3,983
Total assets 11,222 12,777 14,461 16,314
Operating liabilities 1,129 1,219 1,317 1,422
Gross debt 135 135 135 135
Net debt -1,832 -1,719 -2,711 -3,848
Shareholders funds 9,325 10,766 12,330 14,054
Invested capital 7,235 8,812 9,407 10,018
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 01/2015e
Y-o-y % change
Revenue 15.3 15.1 9.2 8.3
EBITDA 21.8 14.5 10.8 10.2
Operating profit 22.9 15.2 11.6 10.7
PBT 25.2 14.7 11.6 10.6
HSBC EPS 26.2 12.9 11.6 10.6
Ratios (%)
Revenue/IC (x) 1.2 1.1 1.1 1.1
ROIC 24.3 22.4 22.0 22.8
ROE 18.4 18.0 17.5 16.9
ROA 15.2 14.9 14.7 14.4
EBITDA margin 28.8 28.6 29.1 29.6
Operating profit margin 25.4 25.5 26.0 26.6
EBITDA/net interest (x)
Net debt/equity -19.6 -15.9 -21.9 -27.3
Net debt/EBITDA (x) -0.8 -0.7 -1.0 -1.2
CF from operations/net debt
Per share data (CHF)
EPS Rep (fully diluted) 29.64 33.46 37.34 41.28
HSBC EPS (fully diluted) 29.64 33.46 37.34 41.28
DPS 6.75 8.36 9.33 10.32
Book value 172.76 199.47 228.44 260.39
DCF analysis
HSBC assumptions
DCF, comprising
Neutral
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 10.8
Equity premium (%) 4.50 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.20 WACC (%) 8.94
Sensitivity and valuation range (CHF/share)
Cost of capital vs fade period 4 years 8 years 12 years
7.9% 671 686 694
8.4% 622 635 644
8.9% 580 590 599
9.4% 541 550 559
9.9% 507 514 522
Valuation data
Year to 12/2012a 12/2013e 12/2014e 01/2015e
EV/sales 3.2 2.8 2.5 2.2
EV/EBITDA 11.2 9.8 8.5 7.4
EV/IC 3.5 2.9 2.6 2.3
PE* 17.9 15.9 14.2 12.9
P/Book value 3.1 2.7 2.3 2.0
FCF yield (%) 1.5 4.3 5.3 6.1
Dividend yield (%) 1.3 1.6 1.8 1.9
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (CHF) 531.00 Target price (CHF) 590.00
Reuters (Equity) UHR.VX Bloomberg (Equity) UHR VX
Market cap (USDm) 29,403 Market cap (CHFm) 27,850
Free float (%) 73 Enterprise value (CHFm) 25,240
Country Switzerland Sector Global Luxury Goods
Analysts Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4347
Price relative
565
515
465
415
365
315
265
265
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Swatch Rel to SMI
Source: HSBC
Note: price at close of 25 Mar 2013
565
515
465
415
365
315
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Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
Tiffany
Tiffany suffers from missed opportunities and product issues but
the brand is not broken or suddenly irrelevant, we think
Initial FY Jan 2014 guidance should, in our view, limit the scope
for other profit warnings after a rough 2012 patch
Remain Overweight, increase target price to USD82 (from
USD74) on higher estimates
Serial underperformer but
time to look ahead not behind
Missed opportunities: mostly watches
Looking at many large high-end jewellers (Cartier,
Bulgari, Harry Winston), it is striking to see how the
watch category has complemented their jewellery
offering, giving those brands opportunities to
develop incremental in-store sales and make good
profits with wholesale partners. For Cartier, watches
have even become over time the first product
category (with an estimated 47% of sales for the
brand) and for both Bulgari and Harry Winston,
despite a lower recognition, the category represents
about a quarter of their business. Looking at
Tiffany’s developments (or lack of) in watches gives
the impression that it’s as if management considered
there could be more to lose in terms of
image/perception by developing into the category
than to gain in terms of sales and profits. For now,
the strategy remains to be refined (as the brand is
still dealing with the aftermath of the Swatch JV
breakup). We believe watches should have by now
brought more to the story, but they remain an easy,
profitable potential category that the management
could be looking to develop.
Other missed opportunities linked to what we think
is a cautious attitude from the company have been in
developing a very institutional, almost cold
merchandising and marketing experience, which in
our view does not necessarily attract as many
consumers outside the US.
Issues of place and product
Despite high awareness levels, we believe the brand
still has a too-limited retail presence outside its
domestic market. Efforts to develop in Asia ex-Japan
and where the Asian shopper goes (Champs Elysées
upcoming store in Paris), while they seem late
relative to peers, are bound to start developing a
perception that Tiffany is not just about the US.
Product remains an issue as an important part of
Tiffany’s core assortment (engagement jewellery) is
difficult to brand, which caps the pricing power as
the consumer is increasingly knowledgeable (“why
should I pay up for the blue box if I can get
something equivalent at a much lower price”).
However, Europe and Asia are more brand
conscious and willing to pay up for a name. Reliance
on silver jewellery has also increased the risk of
substitutes as increasing prices have had consumers
arbitrage more (“for that price I can get an iPad”).
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Rare brand in a non-branded space
Over the next 10 years, we expect the jewellery
market to benefit from a branding process, following
the same path as watches and leather goods. That is,
luxury brands will progressively take market share
from non-branded ‘mom & pop’ independent
jewellery designers and producers. More recently
though, consumers, especially in the US, have
sought substitutes. As US consumers become less
dominant in the company’s sales, we believe the
branding process should offer a bit of protection.
There are very few jewellery brands with a solid
global reputation: Cartier, Piaget, Van Cleef &
Arpels (all part of Richemont), Tiffany
(independent), Bulgari (at LVMH) and independent
non-listed companies Chopard and Graff (unless you
consider the latter as more a stone supplier than a
brand). We believe Tiffany has a great white space
to work within.
Unlikely to strongly disappoint now that
guidance looks realistic
2012 was a year during which Tiffany
underperformed peers operationally and
disappointed investors in terms of results with a
series of warnings on profits linked to lower growth
than management expectations and a hefty gross
margin contraction linked to negative product mix
(disappointing silver jewellery sales).
However, the FY Jan 2013 results beat consensus
and we believe initial expectations for FY Jan 14
recently communicated on 10 January and
confirmed on 22 March (6% to 9% EPS growth) are
very reasonable. Our interpretation of this guidance
is that after communicating to the market targets that
were not met several times in a row, management
has come out with an initial much less optimistic/
more realistic view of future growth.
Earnings, valuation and risks
For FY Jan 2014e, we forecast 7% reported sales
growth (comps 4.7%, contribution from new stores
+4.6%, FX -2.2%). Our worldwide 5% comps
forecast is based on the following regional comps
assumptions: Americas +4% after FY Jan 13e’s -2%,
Europe +3%, Japan +3% and Asia +8%. We expect
the EBIT margin to increase 70bp to 18.8%, all
down to a gross margin uptick of 100bps after a
200bps drop in FY Jan 2013. The silver category
underperformance should weigh less in our view and
Tiffany is controlling costs aggressively.
We increase our FY Jan 2014e and 2015e EBIT
estimates by 2% and 3% following the FY Jan 2013
beat.
We raise our DCF-based target price to USD82
(from USD74) on the back of the above-mentioned
earnings estimate upgrade as well as our higher
medium-term assumptions, which we had
conservatively reduced during the course of 2012
(note that we are still using a 1.25 specific beta to
reflect the higher risk profile of Tiffany)
The assumptions used to generate our DCFderived
target price are detailed on page 111.
Under our research model, for stocks without a
volatility indicator, the Neutral band is 5 percentage
points above and below the hurdle rate for US stocks
of 7.0%. Our target price implies a potential return of
20.2%, which is above the Neutral band. We
therefore reiterate our Overweight rating.
Potential return equals the percentage difference
between the current share price and the target price,
including the forecast dividend yield when indicated.
Downside risks to our rating include lower-thanexpected
pick-up in comps in the US, a continued
decline of silver jewellery sales and non-domestic
investment weighing on earnings (stores, ad spend).
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Consumer Brands & Retail
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March 2013
abc
Tiffany results & forecasts
USDm FY09 FY10a FY11a Q1 12a Q2 12a Q3 12a Q4 12a FY12a FY13e FY14e FY15e
Net sales 2,709.7 3,085.3 3,642.9 819.2 886.6 852.7 1,235.8 3,794.2 4,060.0 4,451.0 4,865.0
Gross Profit 1,530.2 1,822.3 2,151.2 469.0 499.2 464.3 730.8 2,163.3 2,322.3 2,572.7 2,841.2
Gross margin 56.5% 59.1% 59.0% 57.3% 56.3% 54.4% 59.1% 57.0% 57.2% 57.8% 58.4%
SG&A 1,089.7 1,227.5 1,442.7 334.0 344.6 347.0 440.5 1,466.1 1,552.3 1,680.6 1,816.0
SG&A as % of sales 40.2% 39.8% 39.6% 40.8% 38.9% 40.7% 35.6% 38.6% 38.2% 37.8% 37.3%
Operating Income reported 440.5 594.8 708.4 135.0 154.6 117.3 290.4 697.2 770.0 892.1 1,025.2
Operating Income HSBC* 440.5 610.8 750.9 135.0 154.6 117.3 290.4 697.2 770.0 892.1 1,025.2
Operating margin HSBC* 16.3% 19.8% 20.6% 16.5% 17.4% 13.8% 23.5% 18.4% 19.0% 20.0% 21.1%
Interest income 50.5 47.3 43.5 10.6 14.3 14.8 14.1 53.6 58.0 40.0 25.0
Earnings before tax 390.0 547.4 665.0 124.4 140.3 102.5 276.3 643.6 712.0 852.1 1,000.2
Income taxes 124.3 179.0 225.8 42.9 48.5 39.3 96.7 227.4 249.2 298.2 350.1
tax rate 31.9% 32.7% 34.0% 34.5% 34.6% 38.4% 35.0% 35.3% 35.0% 35.0% 35.0%
Net earnings 264.8 368.4 439.2 81.5 91.8 63.2 179.6 416.2 462.8 553.8 650.1
Net EPS common (Diluted) HSBC* 2.11 2.93 3.60 0.64 0.72 0.49 1.40 3.25 3.62 4.33 5.08
Net EPS common (Diluted) reported 2.11 2.87 3.40 0.64 0.72 0.49 1.40 3.25 3.62 4.33 5.08
Weighted avg com share outst. (D) 125.4 128.4 129.1 128.2 127.7 127.9 128.0 127.9 127.9 127.9 127.9
Americas 1,410.9 1,574.6 1,805.8 386.0 434.0 400.1 620.0 1,840.1 2,005.7 2,186.2 2,361.1
Japan 527.1 546.5 616.5 142.0 159.0 146.7 192.0 639.7 562.9 574.2 585.7
Asia ex-Japan 430.0 549.2 748.2 195.0 174.0 187.7 254.0 810.7 932.3 1,072.2 1,233.0
Europe 311.8 360.8 421.1 88.0 100.0 97.6 146.0 431.6 470.4 517.5 569.2
Other 29.9 54.2 51.3 9.0 20.0 20.6 24.0 73.6 88.6 101.0 116.0
Total sales 2,709.7 3,085.3 3,642.9 820.0 887.0 852.7 1,236.0 3,795.7 4,060.0 4,451.0 4,865.0
Americas 52% 51% 50% 47% 49% 47% 50% 48% 49% 49% 49%
Japan 19% 18% 17% 17% 18% 17% 16% 17% 14% 13% 12%
Asia ex-Japan 16% 18% 21% 24% 20% 22% 21% 21% 23% 24% 25%
Europe 12% 12% 12% 11% 11% 11% 12% 11% 12% 12% 12%
Other 1% 2% 1% 1% 2% 2% 2% 2% 2% 2% 2%
Total sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
YoY evolution
Sales -5% 14% 18% 8% 2% 4% 4% 4% 7% 10% 9%
Selling, G&A -7% 13% 18% 9% -8% 5% 2% 2% 6% 8% 8%
EBIT -7% 35% 19% -1% 10% -20% 2% -2% 10% 16% 15%
PBT 13% 40% 21% -1% 7% -25% 1% -3% 11% 20% 17%
Net earnings 20% 39% 19% 1% 2% -30% 1% -5% 11% 20% 17%
EPS Diluted (HSBC) 21% 39% 23% -5% -16% -29% 1% -10% 11% 20% 17%
Reported sales growth
Americas -11% 12% 15% 3% -1% 3% 2% 2% 9% 9% 8%
Japan -3% 7% 13% 15% 12% 0% -6% 4% -12% 2% 2%
Asia ex-Japan 20% 29% 36% 17% 0% 2% 13% 8% 15% 15% 15%
Europe 10% 16% 17% 3% -1% 6% 3% 2% 9% 10% 10%
Other -55% 81% -5% -11% 15% 73% 102% 43% 20% 14% 15%
Total sales -5% 14% 18% 8% 2% 4% 4% 4% 7% 10% 9%
Comp store sales
Americas -11% 8% 13% 0% -5% 1% -2% -2% 4% 5% 5%
Japan -12% -4% 4% 12% 10% 5% 2% 7% 3% 2% 2%
Asia ex-Japan 10% 14% 27% 10% -5% -4% 6% 2% 8% 8% 8%
Europe 9% 18% 6% 0% 2% 8% 0% 2% 3% 6% 6%
Total sales -7% 8% 13% 4% -1% 1% 0% 1% 5% 5% 5%
Source: company, HSBC estimates *restated for one-offs
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Financials & valuation: Tiffany
Financial statements
Year to 01/2013a 01/2014e 01/2015e 01/2016e
Profit & loss summary (USDm)
Revenue 3,794 4,060 4,451 4,865
EBITDA 861 943 1,076 1,220
Depreciation & amortisation -163 -173 -184 -195
Operating profit/EBIT 697 770 892 1,025
Net interest -54 -58 -40 -25
PBT 644 712 852 1,000
HSBC PBT 644 712 852 1,000
Taxation -227 -249 -298 -350
Net profit 416 463 554 650
HSBC net profit 416 463 554 650
Cash flow summary (USDm)
Cash flow from operations 428 565 593 689
Capex -220 -238 -257 -277
Cash flow from investment -245 -238 -257 -277
Dividends -162 -178 -196 -216
Change in net debt 184 -149 -140 -196
FCF equity 175 292 298 370
Balance sheet summary (USDm)
Intangible fixed assets 0 0 0 0
Tangible fixed assets 819 883 956 1,039
Current assets 3,072 3,339 3,675 4,081
Cash & others 505 654 794 990
Total assets 4,631 4,963 5,371 5,859
Operating liabilities 1,060 1,072 1,084 1,097
Gross debt 959 959 959 959
Net debt 454 306 165 -30
Shareholders funds 2,611 2,931 3,327 3,803
Invested capital 2,326 2,497 2,753 3,033
Ratio, growth and per share analysis
Year to 01/2013a 01/2014e 01/2015e 01/2016e
Y-o-y % change
Revenue 4.2 7.0 9.6 9.3
EBITDA 0.7 9.6 14.0 13.4
Operating profit -7.2 10.4 15.8 14.9
PBT -3.2 10.6 19.7 17.4
HSBC EPS -9.7 11.2 19.7 17.4
Ratios (%)
Revenue/IC (x) 1.7 1.7 1.7 1.7
ROIC 20.7 20.8 22.1 23.0
ROE 16.8 16.7 17.7 18.2
ROA 10.3 10.4 11.2 11.9
EBITDA margin 22.7 23.2 24.2 25.1
Operating profit margin 18.4 19.0 20.0 21.1
EBITDA/net interest (x) 16.0 16.3 26.9 48.8
Net debt/equity 17.4 10.4 5.0 -0.8
Net debt/EBITDA (x) 0.5 0.3 0.2 0.0
CF from operations/net debt 94.2 184.7 358.5
Per share data (USD)
EPS Rep (fully diluted) 3.25 3.62 4.33 5.08
HSBC EPS (fully diluted) 3.25 3.62 4.33 5.08
DPS 1.28 1.41 1.55 1.70
Book value 20.62 23.15 26.27 30.03
DCF analysis
HSBC assumptions
DCF, comprising
Overweight
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 6.1
Equity premium (%) 4.00 EBIT growth 2022-42e CAGR (%) 3.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.25 WACC (%) 8.50
Sensitivity and valuation range (EUR/share)
Cost of capital vs fade period 4 years 8 years 12 years
7.3% 94 97 99
7.8% 87 89 91
8.3% 80 82 84
8.8% 74 76 77
9.3% 69 70 72
Valuation data
Year to 01/2013a 01/2014e 01/2015e 01/2016e
EV/sales 2.4 2.2 2.0 1.8
EV/EBITDA 10.6 9.5 8.2 7.1
EV/IC 3.9 3.6 3.2 2.8
PE* 21.0 18.9 15.8 13.4
P/Book value 3.3 2.9 2.6 2.3
FCF yield (%) 2.0 3.4 3.4 4.3
Dividend yield (%) 1.9 2.1 2.3 2.5
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (USD) 68.23 Target price (USD) 82.00
Reuters (Equity) TIF.N Bloomberg (Equity) TIF US
Market cap (USDm) 8,650 Market cap (USDm) 8,650
Free float (%) 100 Enterprise value (USDm) 8,956
Country United States Sector Specialty Retail
Analyst Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4348
Price relative
85
85
80
80
75
75
70
70
65
65
60
60
55
55
50
50
45
45
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
Tiffany Rel to S&P 500
Source: HSBC
Note: price at close of 25 Mar 2013
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Tod’s
After years of hope, the group is finally benefiting from more Asian
consumers, more leather goods sales and more retail exposure
Winner on “first-mover disadvantage” theme: being a smallish
brand and discrete product line-up is a competitive advantage
Reiterate Overweight rating and EUR130 target price
A slow, durable transformation
Gradually getting there
After years of hope, the group is finally benefiting
from more Asian consumers, more leather goods and
more retail.
Over 2000-09, the share of Asia/ROW for the group
only rose from 5% to 16% of total sales, but it
almost doubled over the 2009-12 period to reach
31% in 2012, and should in our view reach 40% in
2015e. We think the main drivers of this should be
the increased focus on retail (65% of group sales in
2015e vs 60% in 2012) and the above-average
growth of Leather goods (20% of the group sales in
2015e vs 17% in 2012).
With Asia, Retail and Leather goods yielding above
average margins, we expect the group’s EBITDA
margin to increase 60bp in 2013e (which should be a
year of two halves), by 120bp in 2014e and by
100bp in 2015e to 28.8% in 2015e.
Hogan and Fay should weigh less from H2 2013.
The brands’ exposure to Italy (c90%) and the need to
streamline their Italian wholesale distribution will
still weigh on group profitability in H1 2013, less so
afterwards, and this will result in the strong
performance of the Tod’s brand being more visible.
In addition, Roger Vivier (although only a licence)
should be bigger as a percentage of total than Fay in
2013e.
Tod’s Group sales breakdown by region (2012) Tod’s Group sales breakdown by brand (2012)
Europe
Hogan
21%
25%
North
Italy
America
40%
8%
Rest of
World
31%
Source: company data
Fay
8%
Tod's
59%
Roger
Vivier
8%
Other
0%
Source: company data
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Late-mover advantage?
Tod’s is one of the key winners on our ‘first
mover disadvantage’/ubiquity theme: At a time
when the larger brands (LV, Gucci) are losing out
to brands like Bottega Veneta, Hermès, Chanel
and Prada which are perceived as more exclusive,
Tod’s should benefit from its distinctive
positioning (discrete, high-quality designed
product, comfortable and yet perceived as
Luxury).
As shoppers (not just Chinese ones) are more
travelled, sophisticated and knowledgeable about
brand, they become more demanding. This in turn
means that after an initial phase of fitting in (“I
want what my neighbour has”), consumers move
to alternative propositions.
The long-term story of Tod’s, for quite a few
years now, has been to become less domestic
(meaning less dependent on the Italian consumer),
less wholesale-driven and less shoe-focused. A
cynical observer of the company would quickly
conclude that after years, this has not really
happened convincingly.
After all, it is the sense of history for all brands in
the luxury space to increase their control over the
way they sell (hence the retail obsession) and to
move to higher growth markets and higher margin
categories. 2012 will have proven to be a real
tipping point in the company catching up with the
general industry expansion trends.
Earnings, valuation and risks
Tod’s reported FY 2012 sales on 23 January and
results on 13 March 2013. The next publication
will be Q1 results on 14 May.
FY2012 EBITDA of EUR250m up 7.6% was
broadly in line with expectations. Regarding
2013, management believes that consensus
expectations of a 7.5% sales growth (HSBC
10.7%) and EBITDA margin of 26.2% (HSBC
26.6%) are “a bit challenging but feasible”.
Tod’s Group sales breakdown by region (2012)
Tods Hogan Fay RV Total
Italy 16% 89% 95% 9% 40%
Europe 29% 6% 5% 20% 21%
US 12% 0% 0% 15% 8%
Asia-Pacific 43% 5% 0% 56% 31%
Total 100% 100% 100% 100% 100%
Source: Company data (for total), HSBC estimates (for individual brand)
Management mentioned H1 2013 sales growth
would be lower than H2 due to the well flagged
wholesale drag (streamlining of distribution in Italy).
Spring-Summer order backlog is slightly negative in
total; down double-digit in wholesale and up midsingle
digit in retail. We believe the guidance, a bit
like at Hugo Boss, is shy at the beginning of the year
as the company faces wholesale headwinds which
pollutes visibility in the short term
We have left our estimates unchanged and thus
maintain our DCF-derived target price of EUR130.
The assumptions used to generate our target price
are detailed on page 115.
Under our research model, for stocks without a
volatility indicator, the Neutral band is 5ppts above
and below the hurdle rate for eurozone stocks of
9.0%. Our target price implies a potential return of
18.2%, which is above the Neutral band; we
therefore remain Overweight on the stock. Potential
return equals the percentage difference between the
current share price and the target price, including the
forecast dividend yield when indicated.
Downside risks to our rating include: (i) longer-thanexpected
economic downturn in Italy; (ii) failure to
expand significantly beyond shoes, and (iii) new sale
of shares by the family, which has repeatedly said
that it wanted to increase the free float and only have
more than 50% (currently, the Della Valle family
holds c57%).
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Tod's FY results and forecasts
Fiscal year ending December (EURm) 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013e 2014e 2015e
Net Sales 503 573 657 708 713 788 894 963 1,066 1,188 1,312
Change in percent 19.5% 13.9% 14.7% 7.7% 0.8% 10.4% 13.5% 7.8% 10.7% 11.4% 10.4%
Total production costs 396 445 517 567 570 613 677 735 804 880 956
as % of sales 78.7% 77.6% 78.7% 80.1% 79.9% 77.9% 75.8% 76.3% 75.4% 74.1% 72.9%
Change in percent 17.8% 12.4% 16.3% 9.6% 0.6% 7.6% 10.4% 8.5% 9.4% 9.4% 8.6%
EBITDA 113 137 153 155 159 193 232 250 284 330 378
as % of sales 22.4% 24.0% 23.3% 22.0% 22.2% 24.5% 26.0% 26.0% 26.6% 27.8% 28.8%
Change in percent 27.0% 21.8% 11.3% 1.6% 2.0% 21.7% 20.4% 7.6% 13.5% 16.2% 14.5%
Amortization and reserves 23 24 27 30 32 33 38 41 45 48 52
EBIT 90 114 126 126 126 160 195 209 239 282 326
Percent of revenue 17.9% 19.9% 19.3% 17.8% 17.7% 20.3% 21.8% 21.7% 22.4% 23.7% 24.8%
Change in percent 34.3% 26.3% 11.2% -0.5% 0.5% 26.5% 21.7% 7.3% 14.6% 17.7% 15.7%
Financial Income 2 -1 0 -1 0 3 2 -1 1 3 5
Income before Taxes 92 113 127 125 127 163 197 208 240 285 331
Percent of revenue 18.3% 19.7% 19.3% 17.7% 17.7% 20.7% 22.0% 21.6% 22.5% 24.0% 25.2%
Change in percent 37.2% 23.2% 11.9% -1.2% 1.1% 29.1% 20.6% 5.5% 15.7% 18.5% 16.2%
Taxes 38 46 48 41 40 53 61 62 72 85 99
Tax rate 41.4% 41.0% 37.8% 33.2% 31.9% 32.2% 31.1% 29.8% 29.8% 29.8% 29.8%
Minority interests 1 1 1 1 0 2 1 0 0 0 0
Consolidated net Profit 53 66 77 83 86 109 135 145 168 199 232
Percent of revenue 10.6% 11.5% 11.8% 11.7% 12.0% 13.8% 15.1% 15.1% 15.8% 16.8% 17.7%
Change in percent 38.7% 23.8% 17.1% 6.7% 3.8% 27.3% 23.8% 7.7% 15.7% 18.5% 16.2%
EPS diluted 1.68 2.08 2.43 2.66 2.80 3.56 4.41 4.75 5.50 6.52 7.57
Variation % 36% 24% 17% 9% 5% 27% 24% 8% 16% 19% 16%
Source: Company data, HSBC estimates
Tod's FY sales by segment
Fiscal year ending December (EURm) 2005a 2006a 2007a 2008a 2009a 2010a 2011 2012a 2013e 2014e 2015e Split in 2009 Split in 2015e
Sales by brand
Tod's 289 326 348 357 349 407 488 570 629 694 760 49% 58%
Hogan 126 155 200 239 257 268 281 243 243 255 268 36% 20%
Fay 77 82 90 93 92 90 88 75 75 78 82 13% 6%
Roger Vivier & other 11 9 20 19 16 23 37 76 119 161 202 2% 15%
Total 503 573 657 708 713 788 894 963 1,066 1,188 1,312 100% 100%
Sales by product category
Shoes 315 358 427 486 506 565 647 710 784 870 953 71% 73%
Leather goods & accessories 112 133 139 127 111 123 145 166 189 220 256 16% 20%
Apparel 75 81 89 95 95 99 102 86 92 97 102 13% 8%
Other 1 1 1 1 1 1 1 1 1 1 1 0% 0%
Total 503 573 657 708 713 788 894 963 1,066 1,188 1,312 100% 100%
Sales by channel
DOS 259 283 318 336 349 404 474 574 651 744 853 49% 65%
Third parties 244 290 339 372 364 384 419 389 415 444 459 51% 35%
Total 503 573 657 708 713 788 894 963 1,066 1,188 1,312 100% 100%
Sales by region
Italy 241 280 334 384 405 426 449 384 393 417 440 57% 34%
Europe 135 145 161 161 151 164 182 200 213 225 239 21% 18%
North America 57 60 66 59 46 53 62 82 91 98 104 7% 8%
Rest of World 70 88 97 103 111 145 200 297 368 449 530 16% 40%
Total 503 573 657 708 713 788 894 963 1,066 1,189 1,313 100% 100%
Source: Company data, HSBC estimates
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Financials & valuation: TOD'S
Financial statements
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Profit & loss summary (EURm)
Revenue 963 1,066 1,188 1,312
EBITDA 250 284 330 378
Depreciation & amortisation -41 -45 -48 -52
Operating profit/EBIT 209 239 282 326
Net interest -1 1 3 5
PBT 208 240 285 331
HSBC PBT 208 240 285 331
Taxation -62 -72 -85 -99
Net profit 145 168 199 232
HSBC net profit 145 168 199 232
Cash flow summary (EURm)
Cash flow from operations 108 183 212 247
Capex -42 -70 -50 -50
Cash flow from investment -42 -70 -50 -50
Dividends -77 -83 -96 -113
Change in net debt 7 -17 -49 -63
FCF equity 66 113 162 197
Balance sheet summary (EURm)
Intangible fixed assets 198 198 198 198
Tangible fixed assets 195 220 222 220
Current assets 621 684 787 906
Cash & others 168 186 234 297
Total assets 1,073 1,161 1,266 1,383
Operating liabilities 178 194 212 231
Gross debt 65 65 65 65
Net debt -104 -121 -170 -232
Shareholders funds 758 831 917 1,015
Invested capital 668 723 761 796
Ratio, growth and per share analysis
Year to 12/2012a 12/2013e 12/2014e 12/2015e
Y-o-y % change
Revenue 7.8 10.7 11.4 10.4
EBITDA 7.6 13.5 16.2 14.5
Operating profit 7.3 14.6 17.7 15.7
PBT 5.5 15.7 18.5 16.2
HSBC EPS 7.7 15.7 18.5 16.2
Ratios (%)
Revenue/IC (x) 1.5 1.5 1.6 1.7
ROIC 23.2 24.1 26.6 29.4
ROE 20.2 21.2 22.8 24.0
ROA 13.8 15.1 16.5 17.5
EBITDA margin 26.0 26.6 27.8 28.8
Operating profit margin 21.7 22.4 23.7 24.8
EBITDA/net interest (x) 223.3
Net debt/equity -13.6 -14.5 -18.4 -22.8
Net debt/EBITDA (x) -0.4 -0.4 -0.5 -0.6
CF from operations/net debt
Per share data (EUR)
EPS Rep (fully diluted) 4.75 5.50 6.52 7.57
HSBC EPS (fully diluted) 4.75 5.50 6.52 7.57
DPS 2.70 3.12 3.70 4.30
Book value 25.06 27.47 30.31 33.55
DCF analysis
HSBC assumptions
DCF, comprising
Overweight
Risk-free rate (%) 3.00 EBIT growth 2012-22e CAGR (%) 11.8
Equity premium (%) 6.00 EBIT growth 2022-42e CAGR (%) 4.0
Sector beta 1.10 Fade period 2042-48e
Specific beta 1.00 WACC (%) 9.60
Sensitivity and valuation range (EUR/share)
Cost of capital vs fade period 4 years 8 years 12 years
9.2% 134.4 137.4 139.8
9.4% 130.8 133.6 136.0
9.6% 127.4 130.0 132.3
9.8% 124.1 126.5 128.7
10.0% 120.9 123.2 125.3
Valuation data
Year to 12/2012a 12/2013e 12/2014e 12/2015e
EV/sales 3.4 3.0 2.7 2.4
EV/EBITDA 13.0 11.4 9.7 8.3
EV/IC 4.9 4.5 4.2 3.9
PE* 23.2 20.0 16.9 14.5
P/Book value 4.4 4.0 3.6 3.3
FCF yield (%) 2.0 3.4 4.8 5.8
Dividend yield (%) 2.5 2.8 3.4 3.9
Note: * = Based on HSBC EPS (fully diluted)
Issuer information
Share price (EUR) 110.00 Target price (EUR) 130.00
Reuters (Equity) TOD.MI Bloomberg (Equity) TOD IM
Market cap (USDm) 4,338 Market cap (EURm) 3,367
Free float (%) 39 Enterprise value (EURm) 3,246
Country Italy Sector Gloabl Luxury Goods
Analysts Antoine Belge Contact 331 5652 4347
Erwan Rambourg Contact 852 2996 6572
Sophie Dargnies Contact 331 5652 4348
Price relative
150
130
110
90
70
50
50
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
TOD'S Rel to BCI ALL-SHARE INDEX
Source: HSBC
Note: price at close of 25 Mar 2013
150
130
110
90
70
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Notes
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Erwan Rambourg, Antoine Belge and Sophie Dargnies
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 27 March 2013, the distribution of all ratings published is as follows:
Overweight (Buy) 44% (30% of these provided with Investment Banking Services)
Neutral (Hold) 38% (29% of these provided with Investment Banking Services)
Underweight (Sell) 18% (23% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its longterm
investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price Date Disclosure
BURBERRY GROUP BRBY.L 13.38 26-Mar-2013 4, 7
COACH COH.N 49.50 26-Mar-2013 4
HENGDELI HOLDINGS LTD 3389.HK 2.21 26-Mar-2013 1, 2, 5
HERMES HRMS.PA 267.25 26-Mar-2013 2, 6, 7
LVMH LVMH.PA 131.30 26-Mar-2013 2, 5, 6, 7, 11
PPR PRTP.PA 172.35 26-Mar-2013 1, 2, 4, 5, 6, 7, 11
PRADA SPA 1913.HK 78.90 26-Mar-2013 6, 7
RICHEMONT(CIE FIN) CFR.VX 75.25 26-Mar-2013 2, 7
SALVATORE FERRAGAM SFER.MI 21.55 26-Mar-2013 7
SWATCH UHR.VX 543.00 26-Mar-2013 4
Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 28 February 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 January 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 January 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 31 January 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 28 March 2013.
2 All market data included in this report are dated as at close 25 March 2013, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 28 February 2013, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities
managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of,
1% or more of the total capital of the subject companies securities in the market for the following Company(ies):
BURBERRY GROUP, COACH, PPR, SWATCH
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Disclaimer
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Erwan Rambourg*
Analyst
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6572
erwanrambourg@hsbc.com.hk
Erwan Rambourg is Head of Consumer Brands and Retail Equity Research and is a top ranked analyst covering the luxury, sporting
goods and spirits sectors. He joined HSBC in January 2005 and in 2011 relocated from London to Hong Kong as many stocks under
coverage are now Asia-driven. Before moving to HSBC, Erwan worked for eight years as Marketing Manager in the luxury industry,
notably for Richemont and LVMH.
Antoine Belge*
Analyst
HSBC Bank Plc, Paris branch
+33 1 56 52 4347
antoine.belge@hsbc.com
Antoine Belge is Head of Consumer Brands and Retail Equity Research and is a top ranked analyst covering the luxury, sporting goods
and spirits sectors. He has been an analyst since 1998 and joined HSBC in 2003. Prior to this, he worked for seven years in the industry
as a Finance Controller for Christian Dior and Chanel.
Sophie Dargnies*
Analyst
HSBC Bank Plc, Paris branch
+33 1 56 52 4348
sophie.dargnies@hsbc.com
Sophie is an equity analyst covering the luxury, sporting goods and spirits sectors. She joined the Luxury and Sporting Goods
team at HSBC in May 2008. Before joining HSBC, Sophie worked as a consultant for three years. She is a graduate of EDHEC
Business School.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.