Wealthy Asia
Market strategy
Amar Gill, CFA Head of Research (Special Projects) [email protected] (65) 65122337 Xun Ming Ip (65) 64167856
5 September 2011
Asia ex-Japan Thematics
Large-cap picks
Commonwealth Bk (O-PF)
China MGM (O-PF)
EVA Airways (BUY)
Genting Berhad (BUY)
Golden Eagle (O-PF)
LG H&H (O-PF)
L’Occitane (BUY)
Parkson Retail (BUY)
Prada (BUY)
Sands China (BUY)
Shinhan Financial (BUY)
Wynn Macau (BUY)
Fat cats in fast lanes
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Wealthy Asia
Contents
Executive summary...... 3
Asian wealth surge ...... 5
Asian currency boost ...... 13
HNWI analysis - Key markets ...... 16
Risks to Asian wealth ...... 25
Plays on Asian wealth ...... 28
Appendix: Extract from Dipped in gold - From head to toe...... 38
All prices quoted herein are as at close of business 1 September 2011, unless otherwise stated
Return of key themes
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Executive summary Wealthy Asia
Fat cats in fast lanes Asian wealth surge The Asia ex-Japan countries we examine are home to about 1.2 million high- net-worth individuals (HNWI), which we define as those with investible assets of US$1m and above (excluding the property they live in). This is just 0.06% of the adult population, puny in the context of its two city-states, Singapore and Hong Kong, where 1.5% of adults are fat cats. With per-capita GDP of US$20,000 (about half of the USA) approximately 0.4% of South Korea and Taiwan’s adults enjoy high net worth. That is 8x the ratio in China, and 20x India and Indonesia. As the region develops, the surge in Asian fat cats and the impact of their spending-power will be a multi-decade theme.
HNWIs to rise by 2.4x Within five years we estimate there will be 2.4x as many HNWIs in the region in five years as in 2010. We project their numbers to grow at 19% per annum for the coming years, thus the ratio of HNWIs to adult population to double, yet still remain at only 0.13% for the region in 2015. Over this period, China will account for more than half of those getting into the wealth set for these countries. With rising net worth of those already in this category, we project HNWIs’ wealth in these countries to enjoy a 23% Cagr over the next five years, rising from about US$6tn to close to US$16tn by 2015.
Asian currency boost In US-dollar terms, currency appreciation will boost HNWI growth, a driver of Asian spending power for internationally priced goods that is often underemphasised. We factor in an average 4% annual rise in Asian currencies over the coming years. The compounded effect lifts the numbers by just over one quarter, contributing to some 600,000 additional dollar millionaires in the region over the coming five years.
Strongest growth in Five-year growth estimate in HNWIs by country HNWI numbers Indonesia, China with Indonesia India not far behind China Thailand India Philippines S Korea Malaysia Singapore Taiwan (%) Hong Kong
0 5 10 15 20 25
Source: CLSA Asia-Pacific Markets
HNWI analysis: China will make up the largest part of the increase in wealth for these 10 Key markets countries, given our projected nominal-GDP growth of 14.5% pa, combined with a currency appreciating at 5% per year against the dollar. By our estimate, about 0.1% of its population or almost 900,000 mainland Chinese will move into the wealthy set over the next five years. Together with Hong Kong, this will make up more than 60% of the estimated increase in total wealth, with India a distant second, accounting for 15% of the projected rise in HNWIs’ investible assets for these countries. Indonesia, however, has the fastest estimated expansion in HNWIs at a 25% Cagr. Growth in HNWIs for India and Thailand will also be strong, at around 20% pa. Hong Kong, with a pegged currency, is likely to see the slowest growth in dollar millionaires, unless our stock-market and property-gain projections prove too conservative.
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Executive summary Wealthy Asia
Risks to Asian wealth Asian economies are extremely open and a global downturn is a significant risk for the region’s expansion. Key concerns relate to how robust China’s growth is, the risk of an unexpected dollar rally, and if Asian assets do not rise to the extent assumed. Our sensitivity analysis indicates the projections are much more sensitive to assumptions on currency and GDP growth than stock-market returns. Asia’s rich generally have a larger part of their wealth in properties than equities. Only one-sixth of the growth in HNWIs for the region is driven by projected stock-market gains. Savings from annual income along with investment yields underpin the increase in wealth over the coming years.
Plays on Asian wealth Rising Asian wealth has positive implications for a range of sectors from high- end retail, autos, properties, leisure and gaming, travel, hotels, healthcare, pharmaceuticals, as well as for asset managers with distribution in the region. Listed companies with upside from rising Asian wealth have an aggregate US$600bn capitalisation and are set to outperform market indices. Superlative prospects inevitably will attract competition. The most compelling investments are companies generating positive economic value with a durable competitive advantage to allow them to continue to be value-creators, where stock prices are at attractive valuations.
Prefer franchise Among EVA®-positive companies with business franchises catering for Asian businesses catering to wealth, our key picks are Prada, L’Occitane, Parkson Retail, Golden Eagle, Ports Asian wealth Design and LG Household & Health Care in the consumer space; Sands China, Wynn Macau, China MGM and the Genting group offer gaming exposure; EVA Airways and Formosa International are among the plays for travel and high-end hotels; while asset management in the region provides upside for Commonwealth Bank of Australia and Shinhan Financial, among others.
Attractive valuations on a Franchise businesses to play on Asian HNWI theme (sorted by ROIC) number of franchise plays Code ROIC EVA®/IC ROE EV/Ebit on Asian wealth (%) (%) (%) (x) Titan Industries TTAN IB >100 >100 43.7 19.6 Wynn Macau 1128 HK >100 >100 90.9 15.5 Ctrip CTRP US >100 90.2 16.4 20.3 China MGM 2282 HK 94.0 85.1 88.6 13.7 Formosa International 2707 TT 85.4 80.7 42.0 24.3 Golden Eagle 3308 HK 60.0 50.5 29.1 16.0 Evergreen 238 HK 54.6 39.8 15.7 2.0 Megastudy 072870 KQ 52.8 40.8 23.3 7.2 L'Occitane 973 HK 40.0 28.6 20.7 12.5 Ports Design 589 HK 29.4 19.4 29.0 8.5 Sands China 1928 HK 25.6 19.1 22.7 19.4 Prada 1913 HK 24.4 18.5 28.0 14.8 Tata Motors TTMT IB 23.7 40.5 32.0 4.6 Parkson Retail 3368 HK 22.8 14.3 25.0 13.3 LG H&H 051900 KS 22.4 13.8 30.7 17.4 Amore Pacific 090430 KS 22.4 12.5 18.1 18.2 Genting Singapore GENS SP 22.1 16.0 19.0 12.1 Genting Berhad GENT MK 22.0 12.4 18.2 5.3 China Merchant Bank 3968 HK 21.9 12.4 21.9 8.6 Hengdeli 3389 HK 20.0 9.4 19.3 10.2 Commonwealth Bank CBA AU 19.8 17.9 19.8 9.8 Genting Malaysia GENM MK 18.0 5.5 13.0 6.2 Shinhan Financial 055550 KS 15.7 6.5 15.7 6.4 Celltrion 068270 KQ 15.4 4.6 19.1 27.0 Chinatrust Financial 2891 TT 11.7 2.9 11.7 12.5 OCBC OCBC SP 10.5 2.5 10.5 12.4 Cathay Pacific 293 HK 9.5 3.7 13.2 9.1 EVA Air 2618 TT 9.1 5.2 13.8 10.6 Note: Financials are averaged for 2011-12; PE not EV/Ebit for banks. Source: CLSA Asia-Pacific Markets
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Section 1: Asian wealth surge Wealthy Asia
Asian wealth surge There were 1.2m HNWIs We examined wealth distribution in 10 of the most significant economies in in the region as of 2010 Asia that we cover. We estimate these countries have almost 1.2m HNWIs, defined as those with investible assets of US$1m or above (excluding their first homes). While a fairly large number are already in the wealthy set, they comprise just 0.06% of the population. We estimate less than one person of every 15,000 to be in the category of HNWIs in this region.
HNWIs approximately Our study does not include analysis of the Western world, nevertheless it 1.5% of adult population allows comparisons of this Asian average with the more developed economies in Singapore and HK in the region. HNWIs in Singapore and Hong Kong make up approximately 1.5% of their adult populations. These richer city-states have high wealth concentrations even by global standards. South Korea and Taiwan, with per- capita GDP of around US$20,000 are about half the US per-capita income level; HNWIs are approximately 0.4% of adults. That is 8x as many HNWIs than the ratio for China, and 20x relative to India and Indonesia.
But only 0.02% of adults Strikingly, in India and Indonesia only 0.02%, or one in five thousand adults, in India and Indonesia in are in the HNWI category; in China it is just 0.05% or one in two thousand. HNWI category As the economies develop and wealth accumulates, the extremely low ratios of HNWIs will rise sharply. We project within five years there will be 2.4x as many HNWIs in the region compared with 2010. With the number of HNWIs forecast to grow at 19% per year, the ratio of HNWI to adult population will double, taking it to 0.13% for the region by 2015.
Figure 1 Highest ratio of HNWI HNWI to adult population (2010) to population in Singapore Singapore and HK Hong Kong Taiwan S Korea Malaysia Thailand China Philippines India Indonesia HNWIs/adults (%)
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
Figure 2 China and HK just over Composition of HNWIs in Asia ex Japan (2010) half of the HNWIs in Singapore Taiwan Thailand countries surveyed 5% 6% 4% Philippines 1%
Malaysia China 3% 44%
S Korea 12%
Indonesia 3% India Hong Kong Total: 1.16m 15% 7% Source: CLSA Asia-Pacific Markets
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Section 1: Asian wealth surge Wealthy Asia
Chindonesia makes up The nations we examined for this report range from large, developing 91% of adult population economies with big populations, namely China, India and Indonesia, to fairly- of countries in our sample developed countries like South Korea and Taiwan, as well as the city-states Hong Kong and Singapore, which have relatively small populations but high wealth concentration. The analysis excludes Japan and Australia, where wealth growth is likely to be more modest. China makes up just under half of the adult population for the countries examined. Together with India and Indonesia, the countries that we term Chindonesia® account for 91% of this region’s adult population and 76% of its GDP.
Wealth skew Wealth especially Wealth is never evenly distributed. This is especially true for developing unevenly distributed in countries. The differences between those able to accumulate and build on developing countries wealth relative to the many who live at subsistence levels are compounded over time. A statistical measure of the disparity, represented by the Gini coefficient, is greater for wealth than for incomes. There are significant differences in income and very large disparity in wealth between the countries in Asia, as illustrated in the chart below.
Figure 3 Median wealth levels Wealth levels in Asia (2010) much lower than mean Hong Kong Singapore Taiwan S Korea Malaysia Thailand Mean wealth China Median wealth Indonesia Philippines India (US$ '000)
0 50 100 150 200 250 300
Source: CLSA Asia-Pacific Markets
Much greater skew in Average disposable incomes for the top-three nations in our sample are 14x wealth distribution those of the lowest three. By estimates of median wealth however, the top- compared to incomes three countries are some 28x of the bottom-three countries. That is a clear illustration of both the compounded effect of higher savings enjoyed by wealthier countries, as well as the skew in wealth distribution, which pushes down the median, especially in poorer nations.
Average person’s wealth The chart also makes an important distinction in the average, understood in is much lower than mean terms of the mean versus the median. The mean is simply total wealth divided by total adult population. The median is the level that divides into equal halves those who are above, and those who are below, that level. Because a relatively large portion of wealth is usually held by a disproportionate few, the average person’s net assets as represented by the median is generally much lower than the statistical mean.
In developing countries By our estimates, median wealth in these countries is typically about half of the median wealth only about mean. The skew is more pronounced in some of the developing countries, with 30% of the mean median wealth only about 30% of the mean in India and Indonesia. Wealth distribution is less skewed in more developed countries like Singapore and South Korea; but even there, median wealth is only around 60% of the mean.
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Section 1: Asian wealth surge Wealthy Asia
The average adult has The major differences in the wealth levels of the different countries are worth little wealth in a number noting. In Singapore and Hong Kong, the average adult’s wealth, the median, of developing countries is estimated at just above US$150,000 per head. For the less developed countries, wealth levels are a fraction of these. The typical person has less than US$5,000 wealth in India, the Philippines and Indonesia. In China, mean wealth is around US$22,000 per adult but the median is only half that level.
Wealth explosion Three drivers of People get wealthy in different ways but across nations, wealth-creation wealth creation drivers can be analysed in terms of: Increase in savings as a function of economic growth Return on assets - the yield and appreciation in capital values Appreciation of Asian exchange rates, impacting wealth defined in US dollar terms
Strong wealth The forces for wealth creation are extremely favourable for Asia over the creation prospects coming years. The economies are growing faster than any other region in the world. Savings ratios are high and the stock markets are likely to provide strong returns over time. The value of business investments is rising on strong growth and low capital costs. Property prices are escalating as the middle class move their cash out of low-yielding bank accounts into appreciating real assets. Meanwhile, rising Asian currencies are lifting the dollar value of these assets.
Conservative estimates In Figure 4, we show the assumptions we input in estimating the increase in on property wealth over the five years to 2015. By and large they err on the conservative side, especially with regards to property-price appreciation. Our property team expects prices to be held down in Singapore and projects only moderate property gains in South Korea, Hong Kong and Taiwan. Our research heads expect stock markets to provide better returns, averaging 12% annually across the region, while we look for currencies to appreciate at an average rate of just under 4% pa.
Figure 4 Robust nominal GDP Key assumptions for wealth projections: 2010-15 (%) growth and stock market Nominal Exch rate Nom GDP Property Stock mkt returns anticipated GDP Cagr appreciation growth in US$ returns returns China 14.5 5.1 20.3 6.6 11.2 Hong Kong 6.8 0.0 6.8 3.5 11.0 India 15.9 2.4 18.6 4.5 13.6 Indonesia 16.5 5.9 23.5 11.0 14.9 S Korea 8.2 3.3 11.8 2.5 8.1 Malaysia 10.9 3.7 15.0 11.0 12.0 Philippines 10.7 4.8 16.0 8.8 10.8 Singapore 7.2 3.8 11.3 (0.1) 9.3 Taiwan 5.3 3.8 9.3 1.8 12.2 Thailand 10.0 5.1 15.6 10.0 16.8 Simple avg 10.6 3.8 14.8 5.9 12.0 Source: CLSA Asia-Pacific Markets
It is nominal GDP The more buoyant, but nevertheless realistic projection is on economic growth that is relevant growth. Our economics team estimates nominal GDP growth to range from for estimating 5.0% to 16.5% pa and on average to rise at approximately 10.5% pa in wealth creation nominal terms for these countries. Note that rising wealth is a function of the increase in savings and rising asset values denominated in the relevant currency. Thus, the growth for our analysis is nominal rather than inflation- adjusted “real” terms.
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Section 1: Asian wealth surge Wealthy Asia
Number of HNWIs in The results of combining these relatively conservative assumptions, however, region estimated to grow are staggering. Over the next five years, the number of HNWIs in the region 19% compounded is set to increase at a 19% Cagr. We estimate wealth to grow 23% pa. Within five years, the number of HNWIs is set to rise to 2.4x on 2010 levels, climbing from approximately 1.2m to 2.8m. The dollar value of their assets is set to almost triple from US$5.6tn to close to US$16tn.
Figure 5 On average only 0.06% Estimates of wealth and HNWIs: 2010 in HNWI category Adult Mean Median No. of HNWI/ Wealth of in the region pop wealth wealth HNWIs adults HNWIs (m) (US$) (US$) ('000) (%) (US$bn) China 975.0 22,082 10,921 502 0.05 2,627 Hong Kong 5.8 287,701 151,719 86 1.49 484 India 729.7 9,254 3,495 173 0.02 949 Indonesia 153.4 18,099 4,706 33 0.02 129 S Korea 36.8 81,351 47,667 138 0.37 412 Malaysia 17.2 47,084 17,607 32 0.19 143 Philippines 50.5 9,214 4,698 16 0.03 60 Singapore 3.8 274,249 160,695 64 1.67 312 Taiwan 17.9 102,036 35,404 70 0.39 269 Thailand 49.7 38,205 19,479 47 0.10 214 Sum/Weighted avg 2,039.8 88,927 45,639 1,161 0.06 5,599
Figure 6 In five years, percentage Projections of wealth and HNWIs: 2015 in HNWI category Adult No of 5Y Cagr HNWIs/ Wealth of Wealth Cagr will double pop HNWIs in HNWI adults HNWIs of HNWIs (m) (%) (%) (US$bn) (%) China 1,024.7 1,378 22.4 0.13 8,764 27.2 Hong Kong 6.2 131 8.7 2.12 711 8.0 India 805.6 403 18.5 0.05 2,465 21.0 Indonesia 161.0 99 24.7 0.06 487 30.4 S Korea 38.5 310 17.6 0.81 1,074 21.1 Malaysia 19.2 68 16.1 0.36 329 18.2 Philippines 56.9 38 18.0 0.07 164 22.1 Singapore 4.1 129 15.2 3.12 616 14.6 Taiwan 18.7 136 14.4 0.73 593 17.1 Thailand 52.2 128 21.9 0.24 609 23.2 Sum/Weighted avg 2,187.2 2,821 19.4 0.13 15,812 23.1
Figure 7 Number of HNWIs to Five-year growth estimate in HNWIs by country grow over 20% in Indonesia, China Indonesia and Thailand China Thailand India Philippines S Korea Malaysia Singapore Taiwan (%) Hong Kong
0 5 10 15 20 25
Source: CLSA Asia-Pacific Markets
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Section 1: Asian wealth surge Wealthy Asia
Figure 8
Over 60% of wealth Composition of wealth increase for HNWIs: 2010-15 increase for HNWIs to be in China/Hong Kong Other 7 Asian countries 23%
China + India Hong Kong 15% 62%
Source: CLSA Asia-Pacific Markets
Just under 0.1% of China will make up the largest part of the increase in wealth for the region, Chinese adult population given our economics team’s 14.5% pa nominal-GDP-growth projection, to enter HNWI category combined with a currency appreciating at 5% per year in dollar terms. By our estimate just under 0.1% of its population will enter the HNWI category over the coming five years. This will mean almost 900,000 individuals will be added to the wealth bracket in China alone. Together with Hong Kong, it will make up over 60% of our estimated increase in HNWIs’ total wealth in the region. India is a distant second, accounting for 15% of the projected increase in investible assets of HNWIs for these countries. The other nations contribute a much smaller share of the wealth generation.
Methodology: Estimating wealth To estimate the number of HNWI and their wealth, we used public data on private-sector savings in these countries over the past 50 years. Based on our research on the middle class in Asia, in particular the Mr and Mrs Asia 2009 regional survey, we took data on average composition of middle-class assets in each country to reflect the composition of savings in various asset classes, namely properties, equities, bonds, cash and private investments. We applied historical data on the returns of these assets to arrive at total wealth in these countries. From this, we used data on wealth distribution from an academic study (JB Davies, S Sandstrom, A Shorrocks, and EN Wolff, ‘The World Distribution of Household Wealth’, United Nations University, February 2008).
Incorporated data on We also took the most recent 2010 estimates by Forbes for the number of über-rich from Forbes list billionaires and the wealth of the richest individuals in each country (see the weblink: http://www.forbes.com/lists/2010/10/billionaires-2010_The-Worlds- Billionaires_Rank_13.html). The wealth distribution data allows us to create a Pareto function of the best fit for the number of individuals as a function of wealth levels. The academic literature indicates that across observed countries, there is a similar inverse relationship in the number of individuals and wealth levels shown on a log scale for both variables. At the extremes of very high and very low wealth levels, the distribution might be away from the best-fit Pareto function, but for the middle range of wealth distribution including to those with assets crossing over US$1m, this function for each country gives a fairly reliable fit.
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Section 1: Asian wealth surge Wealthy Asia
Figure 9
China estimated to have Number of dollar billionaires and wealth of richest individual 100 billionaires Wealth of richest individual (US$bn) China 100 9.4
India 55 31.1
Hong Kong 36 26.0
Taiwan 25 6.8
South Korea 16 8.6
Indonesia 14 5.0
Malaysia 9 12.6
Singapore 4 5.8
Philippines 4 5.8
Thailand 3 6.5
(No.) 0 20 40 60 80 100 120
Source: Forbes.com, CLSA Asia-Pacific Markets
Figure 10 A large increase in those Impact on population as wealth function moves up at any given wealth level as the function (Log scale of population) moves right 10
9
8
7
Increase in 6 population at same wealth level 5
4
3 Increase in wealth
2
1
0 012345678910 (Log scale of wealth)
Source: CLSA Asia-Pacific Markets
Slope greater than one The function for the log scales of population on the vertical axis to wealth on means faster increase in the horizontal axis has a slope greater than one in all countries observed. For HNWIs as wealth instance, the equation has a slope of minus 1.4 for China. This indicates that levels rise as we move down the best-fit line, the number of people at lower levels of wealth rises proportionately faster than the change in wealth. It also indicates that as wealth levels rise for the country, moving this function up and to the right, the number of people at a given level will grow at a faster rate than the wealth increase, as illustrated schematically in the previous chart.
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Section 1: Asian wealth surge Wealthy Asia
China’s median wealth Our estimate is that median wealth rises 2.4x over the coming five years for estimated to rise 2.4x China (a 19.3% compounded annual rate). If the wealth function does not over coming five years change its slope of minus 1.4 but only moves out to the right on the chart, then the number of people at any given level of wealth rises 3.4x (ie, 2.4 times 1.4). As we use log scales, the equation shows proportionate changes that are equal across the range that the equation applies to.
Rising wealth has It is significant that rising wealth has an amplified impact on the number amplified impact on of people at given wealth levels. This is true for all the countries we number of wealthy examined as they all have a slope of greater than minus one in their corresponding Pareto functions of number of adults to wealth levels (represented in log scales).
Inputs are from our Our projections are based on our economics team’s estimates for nominal research team GDP growth. Our heads of research estimated the upside from the stock markets in each country, and our property analysts project sector values for each of the countries. We calculate the growth in wealth initially in local currency as a function of the return on existing assets, combined with incremental wealth from each year’s savings. To derive the wealth expansion in US dollar terms, we apply currency-appreciation estimates for each currency, except for the Hong Kong dollar, which we assume will remain pegged to the US dollar.
Wealth estimates can only The numbers we arrive at can only be approximations given the lack of be approximations as information at an individual level about total wealth and composition. The they do not explicitly inputs for the growth in wealth are subject to assumptions that could err on include the grey economy either side, but we believe they are realistic and if anything slightly conservative. As we derive the data from estimates of accumulated savings on official GDP over the last 50 years, one element of underestimation comes from the grey economy in each of these countries, which may in some cases account for more than 30% of the officially recorded economy.
Total wealth of HNWIs With or without unofficial sources of income, the rise in investible wealth is a rises faster than the function of: 1) the increase in the number of HNWIs; and 2) the rise in wealth numbers in this category for those already in this group. Combining these two factors, investible wealth is set to grow faster than the number of HNWIs. Across Asia, wealth will also generally rise at a faster clip than incomes, driven by returns on existing assets, combined with the incremental wealth from additional savings, as incomes grow.
Conservative on property We assume flat property Notably the assumptions we have used are generally conservative on prices in Singapore and property prices. In Singapore, the estimate is that over the five years to very minor rise in 2015, property prices will be essentially flat, while in Taiwan, South Korea and Taiwan, Korea and HK Hong Kong prices are not estimated to rise much more than an annual rate of 3% pa. Underlying factors remain bullish for property with low interest rates, rising inflation, which pushes down real interest rates, high savings, wealth creation and individuals’ desire to upgrade their properties. However, the view is that the authorities will act to keep a lid on property prices.
Property assumption The assumption on properties is important as around 40% of total wealth in is key the region is in properties (in estimating the number of HNWIs, where we use the definition of investible assets in excess of US$1m, we make adjustments in each country for the estimated percentage of total assets tied up in the home these individuals live in). On average we estimate property prices in
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Section 1: Asian wealth surge Wealthy Asia
these 10 countries to rise close to 6% pa. For China, CLSA estimates that the curbs on the property sector could ease soon, as they have been effective in controlling price increases over the last twelve months. The officials will be comfortable if property price increases are not higher than income growth. We estimate over the coming five years, property prices in the mainland to rise at around 7% pa.
Price appreciation likely Properties in choice locations, however, generally appreciate much faster than to be higher for the average. As HNWIs are likely to own assets in better areas, most of them properties owned will see gains in their property investments that are higher than the estimates by HNWIs we use for general price appreciation. As our projection for property prices is relatively modest, there is upside in the wealth estimates if properties rise faster than anticipated.
Figure 11 Prices to rise 10% pa in Projected average property appreciation 2010-15 Indonesia, Malaysia, Thailand but muted Indonesia assumptions for others Malaysia Thailand Philippines China India Hong Kong S Korea Taiwan (%) Singapore
(2)024681012
Source: CLSA Asia-Pacific Markets
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Section 2: Asian currency boost Wealthy Asia
Asian currency boost Appreciation of Asian The Asian currency index has appreciated 8% against the US dollar from the currencies will start of 2010 to mid-August 2011. Currency appreciation has been as high as boost numbers of 17% for the Singapore dollar and 15% for the Malaysian ringgit, while the dollar millionaires Taiwan dollar, Thai baht and Indonesian rupiah have gained over 10% against the dollar in the period. Robust economic expansion in the region has pushed inflation rates up, resulting in high nominal GDP growth. Usually, rising inflation leads to depreciating currencies but in Asia most currencies are undervalued. Thus high nominal GDP growth is coupled with appreciating currencies, which will significantly boost the number of US dollar millionaires.
Number of HNWIs We estimate the number of HNWIs for these countries to rise at almost 14% boosted by one-quarter Cagr if the currencies do not appreciate. The growth rate gets a 5.5ppt boost because of currencies to more than 19% pa with the effect of Asian currencies appreciating at an average of 4% pa. For China, yuan appreciation pushes up the growth rate of HNWIs from 16% to just over 22% pa. The impact of Asian currencies’ higher dollar values will lift the number of HNWIs in dollar terms by 600,000, or just over 25% on average for these countries.
Figure 12 Asian currencies well Asian currency index past their previous peak in 2007 125
120
115
110
105
100
95 Jan 05 Feb 06 Mar 07 Apr 08 May 09 Jul 10 Aug 11
Figure 13 S$ and RM have seen Gains in Asian currencies to US$ from end 2009 to August 2011 some of the strongest gains since last year S$ RM Bt NT$ Rp P won Rmb Rs HK$ (%)
(2)024681012141618
Source: Bloomberg, CLSA Asia-Pacific Markets
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Section 2: Asian currency boost Wealthy Asia
Lack of currency Figure 15 shows Hong Kong has the lowest projected growth in HNWIs appreciation holds down defined in US dollar terms. One of the main reasons is that there is no boost HNWI growth in HK in its numbers from currency gains, as the HK dollar peg to the US dollar is likely to remain in place. For the other countries, the growth rate in HNWIs on a US-dollar base is an average 6ppts higher pa, or boosting the growth rate in HNWIs by about half on average, compared with the wealth increase without currency appreciation.
Figure 14 Faster growth in Asian Nominal GDP growth 2010-15 in local currency and US$ terms economies when converted into US$ terms 5Y Cagr in HNWI ex-FX Currency boost to HNWI Cagr Indonesia China Thailand India Philippines S Korea Malaysia Singapore Taiwan (%) Hong Kong
0 5 10 15 20 25
Figure 15 Significant added growth Impact of currency appreciation on growth of HNWIs in Asia: 2010-15 in HNWIs due to currency appreciation in all Cagr in HNWIs without currency appreciation Growth in HNWIs from currency appreciation countries other than HK Indonesia China Thailand India Philippines S Korea Malaysia Singapore Taiwan (%) Hong Kong
0 5 10 15 20 25
Source: CLSA Asia-Pacific Markets
Rmb estimated to be In 2009, CLSA undertook a purchasing-power-parity (PPP) analysis of the fair some 25% below value for various Asian currencies. The following chart shows the estimate of PPP value the relative value of the currencies adjusting for nominal exchange rate appreciation as well as relative inflation rates since then. We estimate that the yuan is 25% below its PPP value, that is, the value by which the basket of goods used for comparison would have an equal price as in the USA.
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Section 2: Asian currency boost Wealthy Asia
House view for Rmb to The appreciation of real exchange rates will continue through both higher appreciate around 5% pa inflation rates as well as currency appreciation. Our economics team estimates that the yuan will continue to appreciate by 5% pa. Other countries are likely to allow their currencies to appreciate at about this rate or even slightly higher. The Indonesian rupiah, which on the PPP analysis is one of the most undervalued, is projected to be the fastest appreciating currency for the 10 countries, rising close to 6% pa over 2010 to 2015.
Figure 16 S$ only currency in the PPP value of currencies (as at May 2011) region that appears expensive on PPP basis Japan 1.66 Australia 1.42 Singapore 1.35 UK 1.21 Korea 1.03 US 1.00 Hong Kong 0.97 Thailand 0.93 Malaysia 0.83 China 0.75 Taiwan 0.74 Indonesia 0.71 India 0.69 Philippines 0.69
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
Source: CLSA Asia-Pacific Markets
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Section 3: HNWI analysis - Key markets Wealthy Asia
HNWI analysis - Key markets Our study covers 10 Asia Our study of wealth and growth in HNWIs is for the 10 Asia-Pacific countries ex-Japan countries covered by CLSA research, excluding Japan and Australia. Below we provide a summary of our findings for the larger countries in our study - China, India, Indonesia and South Korea - as well as the city-states, Hong Kong and Singapore, which have the highest concentration of wealth.
Figure 17 Some 900k Chinese could Increase in number of HNWIs over 2010-15 enter HNWI category in next five years China India S Korea Thailand Taiwan Indonesia Singapore Hong Kong Malaysia Philippines ('000)
0 200 400 600 800 1,000
Source: CLSA Asia-Pacific Markets
Just under 0.1% of China will make up the largest part of the increase in wealth for the region, Chinese adult population given the projection of nominal GDP growth of 14.5% pa, combined with a to enter HNWI category currency appreciating at 5% per year in dollar terms. By our estimate, just under 0.1% of its population will enter the HNWI category over the coming five years. This will mean almost 900,000 individuals will be added to the wealth bracket in China alone. Together with Hong Kong, it will make up over 60% of the estimated increase in total wealth of HNWIs in the region. India is a distant second, accounting for 15% of the estimated increase in investible assets of HNWIs for these countries.
Indonesia estimated to South Korea already has one of the highest ratios of HNWIs to adult have highest growth population. Over the next five years it will have one of the largest increases in rate in HNWIs HNWI numbers, although its growth rate in HNWIs, at around 17.5% over the coming five years, is slightly lower than our estimated growth rate of 19% for the region. The countries we forecast to have the fastest growth rates in HNWIs are Indonesia (25% Cagr) followed by China (22% growth rate). For Thailand, we project growth in HNWIs at slightly higher than 20%, while for India at just under 20% pa.
China China accounts for just China has a massive population, strong economic growth and high savings over half of increase in leading to rapid wealth creation. Presently, we estimate just one in two HNWIs in the region thousand of the population (0.05%) to be in the HNWI category, or approximately half a million people. One of the highest economic growth rates combined with an undervalued currency, appreciating at about 5% pa will lead to almost 900,000 mainland Chinese getting into the wealth set. China will thus account for over half of the HNWI growth in the region.
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China’s economy growing In real terms, the economy is growing at around 9% pa. With inflation we around 15% pa in local estimate the growth in nominal terms at 14.5% pa, which is slightly lower currency terms compared with the 16.1% growth rate over the past five years. The GDP deflator, namely the difference between real and nominal economic growth rates, has consistently been higher than the official inflation figure, underscoring that much of the data is not totally reliable. Nevertheless, the rapid wealth creation is plain to see, with a build-up in the momentum in recent years. The official data is what we go by, even if often the data is revised up, as more of the unofficial economy gets captured in the measurement of economic activity.
In US$ terms, China’s Currency appreciation of 5% pa compounded on a 14.5% local currency economy growing growth rate leads to a growth rate in US dollar terms pushing 20% pa. By around 20% pa 2015, this will lead to an economy in dollar terms that is 2.5x the size it was in 2010, a much faster expansion compared with the 97% growth over the period without yuan appreciation.
Assume 11% pa gains on Our head of A-share research, Manop Sangiambut, estimates that the A-share Chinese equities and 7% stock market will provide mainland equity investors with returns of for property-price approximately 11% pa for the coming five years, driven mainly by earnings gains per year growth. There is upside risk to these estimates as current valuations for the market are well below historical averages. Property prices have been almost unchanged for the last year after the government imposed restrictions to control speculation. These measures reduce the risk of a bubble developing in the sector. Our assumptions are that property prices in China rise on average by just under 7% pa over the coming years.
Median wealth estimated In dollar terms, we project median wealth to rise 19% pa. The number of to rise 19% pa individuals in the HNWI category rises at a faster rate (owing to the downward slope with a gradient larger than minus one for the Pareto function of population to wealth). We project the number of HNWIs in China to grow just over 22% pa. Rising numbers entering this set, together with the increasing wealth of those already in the group, leads to projected growth in HNWIs investible assets from US$2.6tn to US$8.8tn, an explosive compounded growth rate of 27% pa. China will thus contribute more than 60% of the growth in wealth for HNWIs in the region.
Figure 18 By 2015, near 1.4m China: 2010-15 key wealth estimates HNWIs in China 2010 15CL 5-year Cagr (%) Adult population (m) 975 1,025 1.0 Median wealth (US$) 10,921 26,341 19.3 No. of HNWIs ('000) 502 1,378 22.4 HNWIs to adult population 0.05 0.13 21.1 Wealth of HNWIs (US$bn) 2,627 8,764 27.2 Nominal GDP (Rmbbn) 39,798 78,311 14.5 Rmb/US$ 6.61 5.16 5.1 Nominal GDP (US$bn) 5,880 14,829 20.3 Property market returns 6.6 Stock-market returns 11.2 Source: CLSA Asia-Pacific Markets
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Section 3: HNWI analysis - Key markets Wealthy Asia
Figure 19
Downward sloping with China’s fitted Pareto distribution of adult population to wealth levels gradient greater than one . . . 100,000 Adult population ('000)
10,000
1,000
100 Relationship in log scale y = -1.4063x + 10.232
10 . . . thus, rise in HNWIs grows faster than wealth 1 as function moves right
0.1
0.01
Wealth (US$ '000) 0.001 0.0010.01 0.1 1 10 100 1,000 10,000 100,000 1,000,000
Source: CLSA Asia-Pacific Markets
India India’s median wealth at India is the second-largest economy in Asia, excluding Japan. Its total a third of China’s population is now at 1.2bn, close to China’s (1.3bn). However, a much larger segment of India’s population is made up of children. Measured by adults over the age of 20, India’s population is just under three-quarters that of China. Its economic development has lagged its larger neighbour, with total GDP of US$1.7tn compared with China’s US$5.9tn in 2010. India’s disposable income per capita was at US$1,100 last year, less than half of China’s. Lower income levels, coupled with a smaller savings ratio, result in much lower wealth. Median wealth, estimated at US$3,500 per adult for 2010, is about one-third of China’s.
However economic India’s economic growth should, however, be stronger than China’s over the growth should be next few years. Coming from a lower income level, it has greater growth faster in India opportunities. Demographics are also in India’s favour. China’s adult population is now barely growing (and in about five years will start to decline), India’s, however, will continue to grow at around 2% pa for at least the next decade. We expect India’s economy to grow at close to 16% pa in local currency terms, some 1.5ppts faster than China’s growth.
But we are less bullish on However, we are less bullish on rupee appreciation. India’s current account rupee appreciation deficit contrasts with China’s surplus and will lead to muted currency relative to Rmb appreciation. We project the rupee to appreciate by 2.4% pa over the next five years, just under half the rate of the yuan. Thus in US dollar terms, the expansion of India’s economy will be slightly slower than China’s.
Number of HNWIs set to Wealth growth in India will nevertheless be extremely strong. Median wealth more than double over is projected to double over five years on GDP rising at approximately 19% pa five years . . . in dollar terms. Robust returns from key asset classes will push up Indian wealth. The stock market should provide almost 14% annual returns, while we estimate Indian properties to rise on average close to 5% pa. The number of HNWIs is set to rise from approximately 170,000 in 2010 to over 400,000
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Section 3: HNWI analysis - Key markets Wealthy Asia
in five years. From being one in five thousand of the adult population, in five years we estimate one in two thousand to be HNWIs, similar to the ratio for China last year. We estimate investible assets of this segment of the Indian population are estimated to grow at 21% pa; thus in five years assets of Indian HNWIs are set to be 2.6x of what they were in 2010.
Figure 20 . . . from around 170,000 India: Key wealth estimates currently to cross 2010 15CL 5-year Cagr (%) 400,000 by 2015 Adult population (m) 730 806 2.0 Median wealth (US$) 3,495 6,962 14.8 No. of HNWIs ('000) 173 403 18.5 HNWIs to adult population 0.02 0.05 16.2 Wealth of HNWIs (US$bn) 949 2,465 21.0 Nominal GDP (Rsbn) 78,779 164,433 15.9 Rp/US$ 45.0 40.0 2.4 Nominal GDP (US$bn) 1,731 4,065 18.6 Property market returns 4.5 Stock-market returns 13.6
Figure 21 Downward slope greater India’s fitted Pareto distribution of adult population to wealth levels than one . . . 100,000 Adult population ('000)
10,000
1,000
100 Relationship in log scale y = -1.2672x + 9.3675 10
. . . hence faster increase 1 in numbers at given wealth level as line moves right 0.1
0.01
Wealth (US$ '000) 0.001 0.001 0.01 0.1 1 10 100 1,000 10,000 100,000 1,000,000
Source: CLSA Asia-Pacific Markets
Indonesia Indonesia to have fastest Indonesia is positioned for the fastest growth in HNWIs as well as in investible growth of HNWIs wealth of the countries we examined. This is due to the economy’s fastest in the region growth rates. In local currency terms, we estimate nominal GDP to grow at 16.5% pa over 2010-15. The rupiah is also one of the strongest currencies with 29% upside to its PPP value. Over the coming five years we estimate that the rupiah will appreciate close to 6% pa. Thus in US dollar terms, we expect the Indonesian economy to grow at 23.5% pa.
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Expect 15% pa gains Wealth will be boosted by robust returns on key assets. Our Indonesian from Indonesian property analyst, Sarina Lesmina, expects property values in Indonesia to rise equities and 11% pa 11% pa in local currency terms, while Dee Senaratne, our head of research from properties for the market projects the stock market to provide returns close to 15% pa, matching earnings growth.
Number of HNWIs Wealth levels are still low but will see robust growth. Currently, we estimate expected to roughly just 0.02% or one in five thousand Indonesians to be in the HNWI bracket. triple in five years Their numbers, at around 33,000 estimated for 2010, is projected to triple over five years and reach close to 100,000. We estimate that the wealth of the HNWIs will grow at the fastest rate in the region, at approximately 21%, without currency gains or around 30% pa, taking into account rupiah appreciation. It is not surprising to find reports of busty private bankers at a large American banking group driving customers to death in dubious attempts to get a slice of this business.
Figure 22 Estimated 33,000 HNWIs Indonesia: Key wealth estimates in 2010 which could reach 2010 15CL 5-year Cagr (%) almost 100,000 by 2015 Adult population (m) 153 161 1.0 Median wealth (US$) 4,706 12,173 20.9 No. of HNWIs ('000) 33 99 24.7 HNWIs to adult population 0.02 0.06 23.5 Wealth of HNWIs (US$bn) 129 487 30.4 Nominal GDP (Rptn) 6,423 13,805 16.5 Rs/US$ 9,009 6,750 5.9 Nominal GDP (US$bn) 708 2,029 23.5 Property market returns 11.0 Stock-market returns 14.9
Figure 23 Like other countries, Indonesia’s fitted Pareto distribution of adult population to wealth levels the line-of-best fit slope is greater than 10,000 Adult population ('000) minus one . . .
1,000
100
Relationship in log scale y = -1.3439x + 8.7563 10
1 . . . hence faster growth in number of HNWIs as wealth levels rise 0.1
0.01
Wealth (US$ '000) 0.001 0.001 0.01 0.1 1 10 100 1,000 10,000 100,000
Source: CLSA Asia-Pacific Markets
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Section 3: HNWI analysis - Key markets Wealthy Asia
South Korea Economic growth in US$ South Korea is not one of the fastest-growing economies in the region. terms around 12% pa However, it has a relatively high number of HNWIs and our appraisal of wealth prospects indicates it is set to have the third-largest increase in HNWIs in Asia Pacific, after China and India. Our economics team estimates Korea’s nominal GDP to grow 8% pa over the coming five years. With the won projected to appreciate 3% annually, economic growth in US dollar terms will be close to 12% pa.
Conservative assumptions We forecast only fairly conservative asset-price appreciation of 2.5% pa for on asset prices properties and 8% pa for Korean equities. The result is that median wealth is likely to grow at 12.5% and thus, the number of HNWIs is set to rise at faster rate of almost 18% annually. From approximately 140,000 in 2010, within five years the number of HNWIs could rise to 310,000. In absolute terms this is the third-highest increase in HNWIs in the region. However, the growth rate of Korea’s HNWI is slightly lower than the overall average for the countries surveyed. While South Korea has 12% of the estimated HNWIs of these 10 countries as at 2010, we project it will make up a 10% lower share of the new HNWIs for the region over the coming five years.
Figure 24 Just over 400,000 HNWIs South Korea: Key wealth estimates currently, which could 2010 15CL 5-year Cagr (%) reach 1m by 2015 Adult population (m) 36.8 38.5 0.9 Median wealth (US$) 47,667 85,822 12.5 No. of HNWIs ('000) 138 310 17.6 HNWIs to adult population 0.37 0.81 16.6 Wealth of HNWIs (US$bn) 412 1,074 21.1 Nominal GDP (tn won) 1,170 1,735 8.2 won/US$ 1,120 950 3.3 Nominal GDP (US$bn) 1,012 1,769 11.8 Property market returns 2.5 Stock market returns 8.1
Figure 25 Like other countries, South Korea’s fitted Pareto distribution of adult population to wealth levels downward slope greater than one . . . 10,000 Adult population ('000)
1,000
100 Relationship in log scale y = -1.3746x + 9.4762 10
1 . . . hence faster growth in HNWIs as wealth levels rise 0.1
0.01
Wealth (US$ '000) 0.001 0.001 0.01 0.1 1 10 100 1,000 10,000 100,000
Source: CLSA Asia-Pacific Markets
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Section 3: HNWI analysis - Key markets Wealthy Asia
Singapore Highest concentration of The highest concentration of HNWIs relative to population in the region is in HNWIs in Singapore Singapore. The island-republic had almost exactly the same GDP as Hong Kong at approximately US$225bn for 2010, but with Singapore-dollar appreciation its economy is surpassing Hong Kong this year in US dollar terms. The red dot has a smaller population, a higher savings rate and thus higher income, as well as wealth per capita. We estimate 1.7% of its population to be in the HNWI bracket, slightly more than the 1.5% for Hong Kong. On its smaller population base this translates to 64,000 HNWIs, compared with 86,000 for Hong Kong.
Our assumptions for wealth growth are relatively modest for Singapore. We project nominal GDP to rise 7% pa. With the appreciation of the Singapore dollar, this translates to around 11% pa in US dollar terms. Wealth grows steadily as a large part of income is saved with a national savings ratio (savings to GDP) of 46%, the second-highest in the region after China.
We project Singapore However, we expect only moderate returns on Singapore assets. After a rapid property prices to be appreciation in property values over the past two years, the government has about flat over five years come out with a series of measures to put a lid on speculation. The recent electoral setback for the government is likely to keep the authorities vigilant on property prices, a major issue for a large part of the local population. Over the next five years, we project property prices to be about flat. We are more positive on Singaporean equities, which we expect to provide an average 9% annual return.
Median wealth estimate Median wealth is estimated to rise 9% pa in US dollar terms. The number of to rise 9% pa HNWIs and their total wealth is thus set to grow just over 15% pa. In five years, HNWIs in the island-republic will thus double to reach close to 130,000. Currently, one-third of the population are non-Singaporeans. The election result is likely to temper growth in visas for foreigners to work and live in Singapore, but we believe the authorities will remain open to immigration for those with targeted skills and substantial wealth. The city state maintains its policy of allowing those with S$10m in investible assets in Singapore and a total net worth of S$20m to join their investment visa programme. HNWI resident inflow gives upside to our estimates.
Figure 26 From 64,000 last year, by Singapore: Key wealth estimates 2015 estimated 129,000 2010 15CL 5-year Cagr (%) HNWIs in Singapore Adult population (m) 3.8 4.1 1.7 Median wealth (US$) 160,695 250,558 9.3 No. of HNWIs ('000) 64 129 15.2 HNWIs to adult population 1.67 3.12 13.3 Wealth of HNWIs (US$bn) 312 616 14.6 Nominal GDP (S$bn) 305 433 7.2 S$/US$ 1.28 1.06 3.8 Nominal GDP (US$bn) 224 383 11.3 Property market returns (0.1) Stock market returns 9.3 Source: CLSA Asia-Pacific Markets
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Section 3: HNWI analysis - Key markets Wealthy Asia
Figure 27
Like other countries, Singapore’s fitted Pareto distribution of adult population to wealth levels the function has negative slope greater 10,000 Adult population ('000) than minus one . . .
1,000
100
Relationship in log scale y = -1.446x + 9.4624 10
1
. . . thus implying faster growth in HNWIs as 0.1 wealth levels rise
0.01
Wealth (US$ '000) 0.001 0.001 0.01 0.1 1 10 100 1,000 10,000
Source: CLSA Asia-Pacific Markets
Hong Kong Higher number of HNWIs Hong Kong has a lower ratio of HNWIs to its population relative to but lower concentration Singapore but has a higher total at 86,000. The 2010 Forbes rich list relative to population illustrates the greater number of ultra-HNWIs in Hong Kong, in which it than Singapore estimates there are 36 US-dollar billionaires in the territory. Singapore has just four with the highest net worth for a Singaporean estimated at US$4bn. Hong Kong has 10 individuals thought to have greater wealth than the highest in Singapore, with Li Ka Shing calculated to be worth US$26bn. The figures from the Forbes wealth list need to be taken with care as they are based on holdings mainly of publicly listed assets and will not fully capture privately held assets, but also will not take into account their debt. Nevertheless, they demonstrate the likely size of the über-rich in each country with rough estimates of their wealth.
Singapore’s growth in With a currency pegged to the US dollar, the growth in income and wealth in dollar terms is faster than Hong Kong is tied to just what is achieved in local dollars. We estimate the Hong Kong due to economies of both Hong Kong and Singapore to grow at about 7% pa in local currency appreciation currency terms but appreciation means that the rise in wealth in US dollars should be faster in Singapore. A currency that remains undervalued will however mean asset prices appreciate in local currency terms at a slightly higher rate. We estimate somewhat higher returns on Hong Kong properties and equities than Singapore. Nevertheless, property-price inflation is also an issue targeted by the authorities in the territory, and we project average property prices to rise just 3.5% pa.
Growth in wealth in US$ With the pegged currency, the growth in wealth in dollar terms in Hong Kong terms held back in Hong will be the slowest of the countries we examined. We estimate HNWI numbers Kong due to currency peg to rise close to 9% pa, which would take it up to 130,000 by 2015. Nevertheless, the size of this wealth set with investible assets expanding around 50% over five years is still solid for a territory that already has high levels of wealth.
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Section 3: HNWI analysis - Key markets Wealthy Asia
Figure 28
From almost 90,000 Hong Kong: Key wealth estimates HNWIs estimated to rise 2010 15CL 5-year Cagr (%) to cross 130,000 by 2015 Adult population (m) 5.8 6.2 1.3 Median wealth (US$) 151,719 200,668 5.8 No. of HNWIs ('000) 86 131 8.7 HNWIs to adult population 1.49 2.12 7.4 Wealth of HNWIs (US$bn) 484 711 8.0 Nominal GDP (HK$bn) 1,748 2,431 6.8 HK$/US$ 7.77 7.77 0.0 Nominal GDP (US$bn) 225 313 6.8 Property market returns 3.5 Stock market returns 11.0
Figure 29 Shape of best fit function Hong Kong’s fitted Pareto distribution of adult population to wealth levels means faster growth in number of HNWIs as 100,000 Adult population ('000) wealth levels rise 10,000
1,000
Relationship in log scale 100 y = -1.2263x + 8.9328
10
1
0.1
0.01
Wealth (US$ '000) 0.001 0.001 0.01 0.1 1 10 100 1,000 10,000
Source: CLSA Asia-Pacific Markets
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Section 4: Risks to Asian wealth Wealthy Asia
Risks to Asian wealth Some of the key risks What could go wrong with these strong projections? Asian economies are relate to China and extremely open and a global downturn will clearly affect the region’s growth. currency rates A key concern is the strength of China’s growth, which has implications for the region. An unexpected dollar rally could also impact asset values in Asia. From our sensitivity analysis, our projections are more sensitive to assumptions on property prices than to stock-market returns, as Asia’s rich generally have a larger part of their wealth in properties than equities. Geopolitical risks also need to be kept in mind, which could impact economic growth and wealth across the region.
Limited gearing will A number of commentators are concerned over the strength of the Chinese reduce negative impact if economy with fears of a property bubble that might affect its banks. Property property market prices are certainly high in Tier-1 cities, but these are just four of more than in China corrects 150 cities with a population of over one million. Most mainland Chinese buy their properties with little or no mortgage debt, reducing the risk to banks. Still, hiccups in Chinese growth, now a major driver of Asian as well as global growth, are a risk on the income and wealth projections for the region.
Risk if undervalued US$ We noted in the earlier section that rising Asian currencies accounts for over a has a counter trend rally quarter of the number of Asian HNWIs in 2015 when calculated in US dollar terms. The outlook for the US dollar remains weak but the dollar is becoming increasingly undervalued against major currencies. An unexpected rally in the greenback would not just impact the dollar translation of Asian wealth. Because of the dollar carry-trade, essentially using cheap dollars to finance the purchase of Asian equities and other assets, a rise in the dollar would also have a negative impact in the local value of these assets.
North Korea, Pakistan as Various geopolitical risks emanate from North Korea, Pakistan as well as lower well as Taiwan represent level risks over Taiwan sovereignty and islands in the South China Seas. A geopolitical risks blowout in these could hit regional investments and asset values. Terrorism continues to be a risk but does not appear to be a bigger issue for the region than in the West. Unexpected events could slow the tide of Asian wealth. Nevertheless, its governments’ reserves and fiscal positions, resourcefulness and ambition of its people, intraregional growth reinforcement, and rising prosperity off a very base, provide structural support for a surge in Asian wealth over the coming decade and beyond.
Projection sensitivities Projections are most Figure 20 and 31 show our projections are most sensitive to assumptions on sensitive to currencies currencies. Every 1ppt change in the assumed appreciation for regional currencies, for example reducing the average expected currency appreciation of 3.8% to 2.8% pa, will have around a 1.5ppt impact in the annual growth rate of HNWIs and their wealth. The high sensitivity to currency assumption is because of the translation effect into dollars, which impacts both existing total assets as well as the incremental wealth from income saved each year.
Low sensitivity to returns For the other variables, the sensitivity is much less as each of these on asset classes constituents a relatively small portion of the increase in wealth. Thus a 1ppt difference in the growth rate for property prices has a 0.6ppt impact on HNWI wealth; for GDP growth and stock-market gains, the sensitivity is only 0.4ppt and 0.2ppt respectively on wealth growth.
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Section 4: Risks to Asian wealth Wealthy Asia
Cumulative effect over Over five years, however, the cumulative impact can become more significant. five years can, however, A 1ppt difference in property-price appreciation has slightly more than 3% be significant impact on the rise in wealth over five years; a similar difference in GDP expansion would lead to just over a 2% impact on the growth rate of HNWIs, while a 1ppt difference in assumed stock-market returns impacts the growth in HNWIs by 1.3% over five years. Our projections are more sensitive to property prices than the stock market as on average HNWIs in these countries have a larger part of their wealth in properties (especially for those who are just entering into the HNWI category). Meanwhile, a 1ppt difference in currency appreciation over five years would have almost a 10% impact on the growth of HNWIs and their wealth - a much greater impact than changes in other assumptions.
Figure 30 A 1% change in currency Sensitivity to 1ppt change in assumptions assumption would lead to Chg in pa growth rate (ppt) Impact on 2010-15 growth (%) almost 10% difference in HNWI estimate 5Y Cagr in HNWI 5Y Wealth Cagr HNWIs Wealth GDP growth rate 0.3 0.4 2.1 2.3 Currency appreciation 1.5 1.6 9.6 9.4 Property prices 0.5 0.6 3.3 3.4 Stock market 0.2 0.2 1.3 1.3
Figure 31 If zero returns on assets, Sensitivity to zero growth in inputs and no currency Chg in pa growth rate (%-pt) Impact on 2010-15 growth (%) appreciation, estimates of HNWIs drop significantly 5Y Cagr in HNWI 5Y wealth Cagr HNWIs Wealth GDP growth rate (3.4) (4.1) (22.7) (24.2) Currency appreciation (5.7) (6.3) (36.6) (35.5) Property prices (2.9) (3.3) (19.7) (19.9) Stock market (2.3) (2.5) (15.8) (15.3) Cumulative impact (13.5) (15.3) (66.9) (66.9) Source: CLSA Asia-Pacific Markets
Without currency An alternative perspective is the impact on the projections if these variables appreciation, growth in did not rise but hypothetically stayed stagnant for the next five years. The HNWIs would be two right columns in Figure 31 show the impact if there was no growth over down by a third five years in the inputs. On average we estimate the currencies to appreciate by almost 4% per year for the region. If instead they remain unchanged against the US dollar, the growth over the next five years in HNWIs would be reduced by just over one-third and similarly for their wealth.
GDP growth next most GDP growth is the next most important factor, as it drives annual savings, important input in which adds to wealth. For the 10 countries, we project an average 10.6% estimating HNWI growth annual GDP growth in nominal terms. If these economies do not grow, the increase in HNWIs would fall by 23%, with a slightly greater impact on their estimated wealth.
If property prices did not Properties are a larger part of the HNWI’s wealth, on which we project an rise in the region, average 6% annual gains across these countries. The increase in HNWIs and increase in HNWIs would their wealth over the coming five years would be reduced by about 20% if be reduced by 20% property prices do not rise. Meanwhile, if Asian equities stay unchanged over five years, compared to our estimate of 12% average annual appreciation, the growth in HNWIs would fall by about 15%, and similarly for their wealth.
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Section 4: Risks to Asian wealth Wealthy Asia
High savings in the region In the unlikely scenario that there is no growth in these economies, that their gives underlying support currencies do not appreciate against the dollar, and property prices as well as to growth in HNWI even if stock markets are completely stagnant in the region, the cumulative impact is assets provide zero return that the growth in HNWIs over the next five years would be reduced by two- thirds (similarly for their wealth). No growth in any of these factors would nevertheless still allow the number of HNWIs to rise approximately 6% and their wealth by almost 8% pa. That comes from the portion of income saved each year, which incrementally adds to wealth.
Number of HNWIs would The number of HNWIs only declines if there is a significant fall in asset decline only if significant values. Otherwise, savings from annual income, plus the yield on decline in asset values investments, underpin the wealth increase. Over the coming years, growth in wealth for the region is thus pretty much a given. Our unaggressive assumptions compounded together, point to Asian wealth set to surge quite significantly. These projections may even be exceeded if some of the inputs turn out to be too conservative.
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Section 5: Plays on Asian wealth Wealthy Asia
Plays on Asian wealth Positive for wide Rising Asian wealth has positive implications across a range of sectors from range of sectors high-end retail, autos, properties, leisure and gaming, travel, hotels, healthcare and pharmaceuticals, as well as for asset managers with distribution in this region. Listed companies we identify in these segments have an aggregate US$600bn in market capitalisation, which is set to rise faster than overall market indices. Excellent prospects, however, will attract competition. The most compelling investments will be companies generating positive economic value with some competitive advantage allowing them to continue to be value-creators, where stock prices are at attractive valuations.
Prefer franchise Among the EVA®-positive companies with business franchises catering for businesses catering to Asian wealth, our top picks are Prada, L’Occitane, Parkson Retail, Golden Asian wealth Eagle, Ports Design, LG H&H in the consumer space; Sands China, Wynn Macau, China MGM and Genting Berhad, as well as its subsidiaries for exposure to gaming; EVA Airways and Formosa International among plays on travel and high-end hotels; while Commonwealth Bank of Australia and Shinhan Financial will enjoy wealth management upside from the region.
Wealth sectors Multi-decade theme Just 0.06% of the region’s population were in the HNWI category as of 2010, while the developed parts of Asia have 1.5% of their adult population in the wealth set. As these countries develop, the rise in the numbers of the wealthy
Asians and their high-end spending power will be a multi-decade theme. For the next five years, we estimate Asian wealth to grow 23% on a compounded basis. Meanwhile, our regional consumer and gaming team, led by Aaron Fischer, in their classic January 2011 Dipped in gold report estimate luxury spending in Asia ex-Japan to record a 17% Cagr (although we estimate that luxury spending in China will grow at a faster rate of 25% pa).
Luxury goods spending in Asia ex-Japan was around 17% of the global total last year. Our consumer team estimate that in 10 years that will more than double to 36%. We show our regional consumer team’s estimates in Figures 32-33, while their analysis of luxury spending in China, which represents 60% of the increase in wealth for the region, is attached in the Appendix.
Figure 32 Asia ex-Japan domestic Luxury market size and Cagr by domestic spending luxury spending was 17% 2010-20CL Cagr of global total in 2010, set 400 (€bn) to rise to 36% by 2020 Other 5% 350 Japan 4%
300 Americas 5%
250 Europe 7% 200
150
100 Asia ex-Jp 17% 50
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: CLSA Asia-Pacific Markets
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Section 5: Plays on Asian wealth Wealthy Asia
Figure 33
Luxury-goods-market estimates (€bn) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cagr 10-20 (%) China 9 12 14 18 22 28 34 41 50 61 74 23 % of total 5 6 7 9 10 12 13 14 16 18 19 Japan 18 19 20 20 21 22 22 23 24 25 26 3 % of total 11 11 10 10 9 9 8 8 8 7 7 Japanese 16 17 17 17 17 17 17 18 18 18 18 1 Mainland tourists 1 1 1 2 2 2 3 3 3 4 5 16 Others 1 1 1 2 2 2 2 2 3 3 3 12 Americas 50 53 55 57 60 63 66 70 73 78 82 5 % of total 30 29 28 28 27 26 25 24 23 22 21 Americans 44 45 47 48 50 51 53 54 56 58 59 3 Mainland tourists 1 2 2 3 4 5 6 7 8 10 12 25 Others 5 5 6 6 7 7 8 9 9 10 11 8 Europe 62 66 69 74 78 84 89 96 103 112 121 7 % of total 37 36 36 36 35 34 34 33 33 32 31 Europeans 47 48 50 51 53 54 56 57 59 61 63 3 Mainland tourists 6 7 8 10 12 15 18 21 26 31 37 21 Others 10 11 12 13 14 15 16 17 19 20 22 8 Hong Kong 4 5 6 7 8 10 12 14 16 19 23 18 % of total 3 3 3 3 4 4 4 5 5 6 6 HK locals 2 2 2 3 3 3 3 3 4 4 4 8 Mainland tourists 2 3 3 4 5 7 8 10 12 15 18 23 Others 0 0 0 0 0 0 0 0 0 0 0 7 Taiwan 3 3 4 4 4 4 5 5 5 5 6 6 % of total 2 2 2 2 2 2 2 2 2 2 2 Taiwan locals 3 3 3 3 4 4 4 4 4 4 5 5 Mainland tourists 0 0 0 0 1 1 1 1 1 1 1 13 Others ------Macau 1 1 1 1 2 2 3 4 5 6 7 27 % of total 0 0 1 1 1 1 1 1 1 2 2 Macau locals 0 0 0 0 0 0 0 0 0 0 0 5 Mainland tourists 1 1 1 1 2 2 3 4 5 6 7 27 Others ------South Korea 6 6 7 7 8 9 9 10 11 12 13 8 % of total 3 3 4 4 4 4 4 4 3 3 3 Korea locals 5 6 6 6 7 7 8 8 9 10 10 7 Mainland tourists 1 1 1 1 1 1 1 2 2 2 3 17 Others 0 0 0 0 0 0 0 0 0 0 0 10 Singapore 3 3 4 4 5 6 6 7 8 9 10 13 % of total 2 2 2 2 2 2 2 2 3 3 3 Singapore locals 3 3 3 4 4 4 5 6 6 7 8 12 Mainland tourists 0 0 0 1 1 1 1 1 2 2 2 22 Others 0 0 0 0 0 0 0 0 0 0 0 8 Thailand 1 1 1 1 1 2 2 2 2 2 3 11 % of total 1 1 1 1 1 1 1 1 1 1 1 Thailand locals 1 1 1 1 1 1 1 1 1 2 2 8 Mainland tourists 0 0 0 0 0 0 0 0 1 1 1 22 Others 0 0 0 0 0 0 0 0 0 0 0 10 India 1 1 1 1 1 2 2 2 2 3 3 15 % of total 0 1 1 1 1 1 1 1 1 1 1 India locals 1 1 1 1 1 2 2 2 2 3 3 15 Mainland tourists ------Others ------Others 10 10 11 11 12 13 13 14 15 15 16 5 % of total 6 6 6 6 5 5 5 5 5 4 4 Global luxury market 168 180 193 207 224 243 264 288 316 348 385 9 Source: CLSA Asia-Pacific Markets
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Direct beneficiaries are This has significant implications across sectors from luxury retail, retail companies in Asia landlords, high-end residential properties, wealth management, as well as exposed to wealth surge private banking, leisure and hotels, autos and airlines to name some of the key sectors set to enjoy high growth. The direct beneficiaries are companies in Asia exposed to this wealth surge. However, global luxury brands will also enjoy upside from this segment, as well as from Asia’s wealthy shopping for high-end goods, through their increasing international travel.
Figure 34 Beneficiaries of Asian wealth surge Code Mkt cap Description (US$m) Australia CFS Retail CFX AU 4,925 Property trust that invests in, manages, and develops a portfolio of retail assets throughout Australia Charter Hall Reit CQR AU 966 Owns a portfolio of supermarkets and shopping centres located in non-metropolitan areas throughout Australia, New Zealand and the United States Commonwealth Bank CBA AU 77,160 Banking group with strong fund management through Colonial First State with funds sold in Asia Echo Entertainment EGP AU 2,703 Owns and operates the Star City Casino in New South Wales, Jupiters Hotel & Casino on the Gold Coast, Treasury Casino & Hotel in Brisbane and Jupiters Townsville Casino MAP Group MAP AU 6,236 An infrastructure investment company, whose portfolio is comprised of airport assets located throughout the world Mirvac MGR AU 3,820 Manages hotels and resorts in Australia and New Zealand Qantas QAN AU 3,617 Network of domestic and intercontinental routes mainly in the Asia-Pacific region Westfield Group WDC AU 18,920 Property trust that invests in, leases and manages retail shopping centres in Australia, New Zealand, the United States and the United Kingdom. Operations also include funds and asset management Westfield Reit WRT AU 7,722 Owns and manages a portfolio of shopping malls in Australia and New Zealand China Agile 3383 HK 4,710 Mix caters to higher end developments in China Air China 753 HK 17,405 Provides passenger, cargo, and airline-related services in China, primarily based in Beijing. The main airline for international travel for mainlanders China Merchant Bank 3968 HK 41,367 Provides a wide range of commercial banking services and has a strong wealth management brand under Sunflower Wealth Management China Zhengtong 1728 HK 2,769 Automotive dealerships throughout China for BMWs and Audis COLI 688 HK 17,571 Significant part of development for the well-heeled in China CR Land 1109 HK 8,871 Projects catering to high-end in their mix of developments in China Ctrip CTRP US 5,962 Consolidator of hotel accommodations and airline tickets in China Evergreen 238 HK 305 Operates a nationwide retail network in the PRC targeting the high-end business formal and casual menswear market Golden Eagle 3308 HK 4,417 Operates department stores in China located in prime areas Hengdeli 3389 HK 1,800 Retails and wholesales international brand watches in China, backed by Swatch and LVMH who are shareholders, as well as Richemont and Rolex Longfor Prop 960 HK 7,548 Higher-end development projects in the mainland NWDS 825 HK 1,166 Owns and operates second largest department store network in the PRC Parkson Retail 3368 HK 3,602 Network of department stores in the PRC in prime locations and runs a successful VIP programme Hong Kong Brilliance 1114 HK 6,461 Assembles BMWs for the PRC market Cathay Pacific 293 HK 8,035 Leader among global airlines operating out of Hong Kong China MGM 2282 HK 7,459 Owns a luxury resort, hotel and casino in Macau Chow Sang Sang 116 HK 2,544 Manufactures and retails gold and gem-set jewellery products; also retails watches and trades in gold bullion Dah Chong 1828 HK 2,262 Distributes Bentleys in China and Hong Kong Dickson Concepts 113 HK 234 Has the Harvey Nicholls franchise for HK/China as well as brands including ST Dupont, Brooks Brothers, Tommy Hilfiger, Rolex, Chopard and Longines Emperor Watch 887 HK 1,440 Retails luxurious branded watches, and offers design and sales of jewellery products. Galaxy 27 HK 10,845 Operates casino, hotel and other entertainment facilities in Macau Genting HK 678 HK 2,672 Operates cruise ships under the Star Cruises brand Hang Lung 101 HK 15,061 Invests in, develops, and manages properties, establishing higher-end malls in China HK & Sh Hotels 45 HK 2,168 Owns the Peninsula chain of hotels Hong Kong Resources 2882 HK 91 Hong Kong Resources , through its subsidiaries, operates and franchises shops that retail gold and jewellery in China, including Hong Kong and Macau Continued on the next page
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Figure 34
Beneficiaries of Asian wealth surge (cont’d) Code Mkt cap Description (US$m) Hong Kong I.T Ltd 999 HK 1,102 Offers a wide range of apparel products, including items under the Fcuk, D&G, YSL, Zucca among other brands Kerry Prop 683 HK 6,293 Invests in and develops real estate including projects in JV with sister company, Shangri La Asia Lifestyle 1212 HK 5,341 Operates the Sogo store and Nufron in Hong Kong and expanding into China L'Occitane 973 HK 3,875 Manufactures and retails cosmetics and personal-care products from natural and organic ingredients Luk Fook 590 HK 2,996 Retails gold jewellery, gold ornaments, gem-set jewellery and gemstones, and other accessory items Mandarin Oriental MAND SP 1,724 Owns hotels under the Mandarin Oriental brand as well The Oriental, Bangkok Melco Crown MPEL US 6,426 Owns and operates casino gaming and entertainment resort facilities in Macau Ming Fung 860 HK 374 Designs, manufactures, and sells a broad range of gem-set jewellery products on ODM/OEM basis; also trades diamonds and gemstones Oriental 398 HK 414 Retailer of watches Ports Design 589 HK 1,090 Designs, manufactures, and retails ladies' and men's fashion garments, and sells accessories such as shoes, handbags, scarves, and fragrances in China and Hong Kong under its brand name Ports International Prada 1913 HK 14,133 Italian fashion company that designs, manufactures, promotes and sells high-end leather goods, ready-to-wear and footwear through the Prada, Miu Miu, Church's, and Car Shoe brands Sands China 1928 HK 23,648 Owns and operates integrated resorts and casinos in Macau Shangri La 69 HK 7,518 Owns and operates hotels primarily in Asia, and provides management and related services SJM 880 HK 12,840 Operates casinos, hotels, and other tourism-related facilities in Macau SHKP 16 HK 36,143 Broad range of projects including higher end Sino Land 83 HK 8,240 Rich pipeline including some up-market projects to be launched Sparkle Roll 970 HK 443 Distributes Rolls Royce and Bentleys in China; its subsidiaries distribute other luxury goods Trinity 891 HK 1,711 Retails higher-end men's clothing with stores in the PRC, Hong Kong, Macau and Taiwan Value Partners 806 HK 1,107 An independent, value-oriented asset management group with a focus on China and Asia-Pacific Wharf 4 HK 20,055 Diversified group but a major asset are high-end retail properties in Tsim Sha Tsui in Hong Kong Wynn Macau 1128 HK 16,806 Owns and operates Wynn Macau India EIH EIH IB 1,051 Operates luxury hotels in India under the name "Oberoi" in addition to hotels in Egypt, Australia, Sri Lanka, Indonesia and Saudi Arabia Hotel Leela Venture LELA IB 326 Owns and operates hotels, palaces and resorts; known for strategic location, individuality, architectural aesthetics, lush greens and the intrinsic Indian heritage Indian Hotels IH IB 1,189 Operates The Taj Group of hotels Jet Airways JETIN IB 667 Operates between all of India's major cities and building out a global network Oberoi Realty OBER IB 1,614 Real estate development company operating in Mumbai, focused on premium developments Tata Motors TTMT IB 10,505 Jaguar Land Rover accounts for 58% of Tata Motors' consolidated revenue and 64% of Ebitda Titan Indus TTAN IB 4,086 Manufactures and retails jewellery and watches Indonesia Lippo Karawaci LPKR IJ 1,989 Develops higher-end residential units Panin Sek PANS IJ 116 Securities broking as well as investment management and advisory Summarecon SMRA IJ 1,040 Develops higher-end residential houses and apartments as well as shopping and recreational centres Trimegah Se TRIM IJ 40 Securities broking as well as investment management and advisory Japan Frontier Reit 8964 JP 1,729 Reit mainly investing in commercial buildings in metropolitan area and local cities Japan Retail Fund 8953 JP 2,424 Reit mainly investing in shopping centres and roadside retail stores which are managed by Mitsubishi Corp-UBS Realty Toyota 7203 JT 129,882 Upside for the Lexus although currently only a small part of revenues for Toyota group Korea Amore Pacific 090430 KS 6,545 Manufactures and exports skincare, make-up, and fragrance products aiming for the higher end through brands like Hera and Sulwhasoo Celltrion 068270 KQ 5,000 Biosimilars produced by the Co are half the price of bio-drugs but still costs US$10-30k pa per patient; Company benefits from Asia's ageing population coupled with rising wealth class supports Grand Korea 114090 KS 1,342 Casino operator in Korea Korean Air 003490 KS 4,116 Provides domestic and international airline services LG H&H 051900 KS 6,681 Markets skincare and make-up products aimed at high end consumers including OHUI, WHOO, S:UM. Megastudy 072870 KQ 911 Offers on-line and off-line educational programmes to high school students, which remains a priority for HNWIs in the region Mirae Asset 037620 KS 1,589 Provides mutual funds, asset management and brokerage services Osstem 048260 KS 137 Manufactures dental implant systems; provides products for dental surgery and exports abroad Paradise 034230 KQ 662 Operates casino facilities including hotel and retail in South Korea and Kenya Shinhan Financial 055550 KS 20,064 Businesses include banking, securities brokerage, trust banking, and asset management Shinsegae 004170 KS 2,911 Having spun off Emart, Shinsegae is now purely a departmental store business with prospects supported by the country's growing wealth Continued on the next page
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Figure 34
Beneficiaries of Asian wealth surge (cont’d) Code Mkt cap Description (US$m) Malaysia C&C Bintang CNCB MK 125 Assembles, distributes, and retails Mercedes Benz in Malaysia Genting Berhad GENT MK 12,584 90% of NAV from gaming activities, which span Asean region as well as UK and also has cruise operations under Genting Hong Kong Genting M’sia GENM MK 7,070 Owns and operates gaming and resort operations in Malaysia KPJ Healthcare KPJ MK 876 Specialist medical centres in Malaysia and Indonesia M’sia Airport MAHB MK 2,395 Operates the KLIA airport Poh Kong PKH MK 58 Manufactures and retails jewellery mainly in Malaysia Philippines Alliance Global AGI PM 2,768 Casino operations in JV with the Genting Berhad in the Philippines Ayala Land ALI PM 4,888 Develops and invests in higher end real estate properties; also operates hotels BDO BDO PM 3,748 Wealth management division still relatively small but estimated to contribute around 7% of net income Belle BEL PM 891 Constructing a casino that will be operational by 2013 Shang Prop SHNG PM 215 Develops, manages and invests in real estate; portfolio includes the Shangri-La Hotel and Plaza Mall Singapore Banyan Tree BTH SP 479 Owns and manages premier hotels; operates spas, galleries and golf courses as well CapitaMall Trust CT SP 4,673 Reit which owns and invests in retail properties primarily in Singapore CapitaMalls Asia CMA SP 3,798 Shopping mall developer with a pan-Asian portfolio ranging from Singapore, China, Malaysia, Japan and India City Dev CIT SP 7,818 Mix of projects with higher-end tilt in Singapore Cortina CTN SP 67 Retails and distributes luxury watches in the Asia Pacific region Fortune Reit FRT SP 798 Reit investing in a portfolio of retail shopping malls in Hong Kong, eg, The Metropolis Mall, Ma On Shan Plaza, Smartland, The Household Center, and Jubilee Court Shopping Centre Frasers FCT SP 934 Reit investing in retail properties in Singapore and overseas Genting Sing GENS SP 16,466 Operates one of the two integrated resorts with casino operations in Singapore Hotel Prop HPL SP 846 Operates and manages hotels, including Concorde, Four Seasons, Hilton Hour Glass HG SP 208 Retails and wholesales watches, jewellery and also manufactures watches Jardine C&C JCNC SP 12,834 Distributor of Mercedes Benz in Singapore OCBC OCBC SP 25,091 Fully-owned subsidiary, Bank of Singapore, came about from acquisition of ING Asia Private Bank and is positioned for wealth management in the region OUE OUE SP 1,936 Diversified real estate owner of prime properties in Singapore including the Meritus hotels Raffles Medical RFMD SP 982 Operates medical clinics and dental treatment services SC Global SCGD SP 426 Higher-end residential property developer Singapore Airlines SIA SP 11,040 Leading global airline operating out of Singapore positioned as the preferred airline for Asean travellers among others Starhill Global SGREIT SP 981 Reit which invests in retail and office buildings in Singapore and overseas UOL Group UOL SP 2,968 Diversified group which also manages hotels under the Pan Pacific brand WBL Corp WBL SP 652 Distributes high-end cars in Singapore including Bugatti, McLaren, Bentley Taiwan China Airlines 2610 TT 2,513 One of only three Taiwanese airlines flying direct to China Chinatrust 2891 TT 8,139 Financial group; asset management is approximately 25% of group profit E.Sun 2884 TT 2,438 Financial group; asset management is approximately 15% of group profit EVA Air 2618 TT 2,355 One of only three Taiwanese airlines flying direct to China Far Eastern 2903 TT 2,513 Operates department stores in Taiwan Formosa 2707 TT 1,314 Operates restaurants, night clubs, and hotel management consulting and own the Regent hotel International brand globally Prince Housing 2511 TT 969 Operates the W hotel in Taiwan Taishin 2887 TT 3,071 Financial group; asset management is approximately 15% of group profit Thailand Airports Of Thailand AOT TB 2,254 Operates the Bangkok International Airport (Don Muang) as well as provincial airports in Chiang Mai, Chiang Rai, Hat Yai, and Phuket; is developing the new Bangkok international airport (Suvarnabhumi) Bangkok Dusit Md BGH TB 3,290 Operates Bangkok General Hospital which specialises in cardiovascular, lung, neurological, eye and genitourinary cancer Bumrungrad BH TB 924 Owns and operates the Bumrungrad Hospital in Bangkok Erawan Group ERW TB 214 Develops and operates hotels, offices and shopping centres in Bangkok, including Grand Hyatt, JW Marriott and the Renaissance in Koh Samui Land & Houses LH TB 2,293 Develops real estate projects including single-detached homes, townhouses, and condominiums Minor Int MINT TB 1,421 Owns and operates restaurants and hotels in Asia Quality Houses QH TB 549 Developer specialising in single-house, apartment, and condominium development projects Robinson Dept St ROBINS TB 1,487 Owns and operates Robinson department store chain Thai Airways THAI TB 2,132 Thailand's national airline providing with domestic and international routes including Asia, Europe, North America, Africa and South West Pacific Source: CLSA Asia-Pacific Markets
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Array of companies Figure 34 shows an array of companies positioned to capitalise on high-end to see upside spending power in Asia. Catering to the high-end segment may not yet be a large part of the business for a number of these companies. That, however, is precisely because this market segment is quite small. As it grows at a faster rate, the companies with a durable competitive advantage will grow faster than peers. Prada, Ports Design, Hengdeli, Emperor Watch and Dickson Concepts. IT Ltd. is already seeing the bulk of its business coming from the luxury segment. Departmental stores such as Golden Eagle, Parkson Retail, Shinsegae, LG H&H and Robinson Department Store all provide exposure to higher-end spending.
High-end hospitality Various listed companies operate five- and six-star hotel chains including and gaming Hong Kong Shanghai Hotels, Mandarin Oriental, Shangri-la, as well as Formosa International Hotels (which owns the Regent hotel brand), Banyan Tree in Singapore, and the premier hotel groups from the subcontinent, Indian Hotels (operates the Taj chain) and also EIH (which operates Oberoi). Meanwhile, gaming companies in Macau get the bulk of revenue from high- rollers; this segment is also significant for Genting Singapore’s operations. In the Philippines, Alliance Global operates a casino together with the Genting group, while Belle will open its gaming doors in 2013.
High-end developers and The wealthy in Asia have a large choice of developers and projects to choose various Reits from. Most of the listed property companies cater for the burgeoning middle- class segment. However, those with upside from premier developments include CR Land, Agile and China Overseas Land, Sino Land, India’s Oberoi Realty, City Developments and SC Global in Singapore, Ayala in the Philippines, Land and Houses in Thailand, as well as Lippo Karawaci and Summarecon in Indonesia. The indirect beneficiaries of high spenders are landlords such as Wharf, as well as Hang Lung, Capitamalls Asia and various Reits that give indirect exposure to rapidly-rising retail spending in the region.
Figure 35 Luxury brand sales China domestically made luxury segment vs overall auto sales growth growing faster, despite overall auto market in 140 (%) Luxury brand YoY Overall YoY China slowing since 2H10 120
100
80
60
40
20
0
(20) Jan 10 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11
Source: Chinese Association of Automobile Manufacturers, CLSA Asia-Pacific Markets
Growth in top-end of auto Growth for autos will be stronger at the top-end. For instance, the overall sector more robust auto market in China has been subdued, growing at just 6% YoY in 1H11; meanwhile the luxury segment raced ahead with 56% YoY growth. Our China autos analyst, Scott Laprise points out that luxury car sales are only 3% of
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Section 5: Plays on Asian wealth Wealthy Asia
total sales and expects domestically-made BMW sales to rise 99% and Mercedes Benz to grow 76% for the full year. Efforts by makers in these segments to price their products at a premium so as to maintain their cache, should mean there is less risk of margin erosion, unlike the mass segment where distributors are in a fist-fight for market share.
Figure 36 Figure 37 Shanghai motor show Shanghai auto show’s high bid at US$7m China is Porsche Cayenne’s No.1 market saw it highest ever bid at US$7m for an Aston Martin
Source: autohome.com.cn
Prefer automakers Auto makers and distributors in the premier segment include Brilliance and distributors of (assembling BMWs in China), Dah Chong Hong (distributing Bentleys in the luxury makes PRC), Sparkle Roll (Bentley distribution in Beijing), Cycle and Carriage Bintang, as well as Jardine C&C for Mercedes distribution in Malaysia and Singapore. Tata Motors’ big bet in the acquisition of Jaguar Land Rover should also pay off handsomely, supported by growth in this region.
Asian wealthy will fill up Filling aircraft up at the front will also help airlines get a better yield. the front-end of airplanes Prospects are much better in Asia than the developed world, where HNWI the growth is more subdued. This should be a medium-term fillip for the likes of Cathay Pacific, Singapore Airlines, and even Air China, as well as China Airlines and EVA Airways (which is part of an oligopoly controlling direct flights between Taiwan and the mainland).
Wealth management in Wealth management is still very much in its infancy in Asia and thus a small Asia is a growth business part of most banking group’s earnings. However, OCBC’s acquisition of ING’s Asian wealth management business, now renamed Bank of Singapore, positions it to tap Asia’s wealth. Meanwhile the likes of Mirae Asset Management in Korea, Value Partners in Hong Kong, as well as Commonwealth Bank in Australia, through subsidiary Colonial First State, are likely to be among the asset managers set to find tremendous growth in wealth.
Positive for healthcare The well-heeled in Asia will also propel growth for healthcare groups such as Raffles Medical, KPJ Healthcare and Bumrungrad, as well as pharmaceutical companies catering to those with higher spending power like Celltrion’s bio- similar drugs.
Aggregate market cap of The market cap of companies we identified benefiting from rising Asian wealth US$600bn to rise faster adds up to some US$600bn (excluding giants like Toyota and Commonwealth than regional indices Bank, where the exposure to Asian wealth is still relatively limited). This is significant but not yet a large part of Asian markets. However, the spending power of Asia’s wealthy will rise faster than for the average person, thus opportunities for these companies will drive higher returns for this segment relative to market averages.
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Franchises tapping Asian wealth Business franchises As in any area where prospects are strong, new entrants will emerge. In The catering to Asian wealth moat report issued in February 2011 we argued that companies with a business franchise that had a return on capital higher than their cost of capital and a durable competitive advantage to remain value-creators, were likely to be the best investments when their stocks are attractively priced. Similarly, for companies positioned to benefit from the massive growth in the wealth set in Asia: the best investments will be stocks representing franchises able to withstand the inevitable competition. The preferred exposure should be through companies that have some competitive advantage or moat around their business to grow profitably on the tide of Asian wealth.
Figure 38 shows companies that we believe have a business franchise and give the current valuations on their stocks, while Figure 39 summarises the positioning of these companies and their competitive advantage. Some of these stocks may have held up better and thus have less upside relative to Recs are relative to the market over the next six to 12 months, thus have a negative expected market upside recommendations (CLSA bases it recommendations on expected relative stock performance to the market).
Franchise stock in Where valuations appear reasonable (EV/Ebit multiple at 14x or less), we consumer retail reiterate positive recommendations on the business franchises that will and gaming capitalise on Asian wealth, including L’Occitane, Parkson Retail, Golden Eagle, Ports Design and smaller cap, Evergreen in China. The Genting group of companies represent a brand name for gaming in the region and is attractively valued, with the ultimate Malaysian parent company at just 6x EV/Ebit; similarly valuations on the recently listed China MGM are reasonable relative to other Macau plays.
Figure 38 Valuations on a Franchise businesses to play on Asian HNWI theme (sorted by ROIC) number of Franchise Code ROIC (%) ROE (%) EV/Ebit (x) Rec plays on Asian wealth Titan Industries TTAN IB >100 43.7 19.6 SELL are quite attractive Wynn Macau 1128 HK >100 90.9 15.5 BUY Ctrip CTRP US >100 16.4 20.3 U-PF China MGM 2282 HK 94.0 88.6 13.7 O-PF Formosa International 2707 TT 85.4 42.0 24.3 BUY Golden Eagle 3308 HK 60.0 29.1 16.0 O-PF Evergreen 238 HK 54.6 15.7 2.0 BUY Megastudy 072870 KQ 52.8 23.3 7.2 U-PF L'Occitane 973 HK 40.0 20.7 12.5 BUY Ports Design 589 HK 29.4 29.0 8.5 BUY Sands China 1928 HK 25.6 22.7 19.4 BUY Prada 1913 HK 24.4 28.0 14.8 BUY Tata Motors TTMT IB 23.7 32.0 4.6 U-PF Parkson Retail 3368 HK 22.8 25.0 13.3 BUY LG H&H 051900 KS 22.4 30.7 17.4 O-PF Amore Pacific 090430 KS 22.4 18.1 18.2 SELL Genting Singapore GENS SP 22.1 19.0 12.1 BUY Genting Berhad GENT MK 22.0 18.2 5.3 BUY China Merchant Bank 3968 HK 21.9 21.9 8.6 U-PF Hengdeli 3389 HK 20.0 19.3 10.2 BUY Commonwealth Bank CBA AU 19.8 19.8 9.8 U-PF Genting Malaysia GENM MK 18.0 13.0 6.2 O-PF Shinhan Financial 055550 KS 15.7 15.7 6.4 BUY Celltrion 068270 KQ 15.4 19.1 27.0 U-PF Chinatrust Financial 2891 TT 11.7 11.7 12.5 U-PF OCBC OCBC SP 10.5 10.5 12.4 U-PF Cathay Pacific 293 HK 9.5 13.2 9.1 SELL EVA Air 2618 TT 9.1 13.8 10.6 BUY Note: Financials are averaged for 2011-12; PE not EV/Ebit for banks. Source: CLSA Asia-Pacific Markets
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Also in airlines and Among airlines with a franchise that will benefit from more passengers sitting wealth management in the front end of aircraft, our pick is EVA Air - one of the three Taiwanese companies operating direct flights to the mainland. Meanwhile, Commonwealth Bank of Australia and Shinhan Financial are well-positioned among financial groups to tap the potential in Asian wealth management.
Other franchise stocks we We have positive ratings on Sands China, Wynn Macau, Prada, LG H&H and are positive on benefiting Formosa International, although currently at somewhat higher multiples; they from Asian wealth nevertheless represent franchise stocks to benefit from HNWI spending. China Merchant Bank, OCBC, Chinatrust, Cathay Pacific, Singapore Airlines, Hengdeli, Celltrion, Megastudy and Tata Motors presently have a negative rating. However, valuations have become more attractive and are also positioned to benefit from growth in Asian wealth.
Franchise plays on Asian The list of franchise stocks to play on the theme of Asian wealth is a much wealth set to be smaller one compared with the overall list of companies in the relevant outperformers segments. However, it is these stocks that we believe have a competitive advantage in their markets. Already generating positive economic value, they should provide investors with strongest returns to ride on Asian wealth.
Figure 39 Key competitive advantage of franchise businesses on Asian HNWI theme (sorted by EVA®/IC)
Code Avg Competitive advantage EVA®/IC¹
Titan Industries TTAN IB >100 Largest manufacturer and retailer of watches (12,000 multibrand watch outlets) and jewellery in India with 65% market share in the organised watch market and 80% share in the organised jewellery market and recently moved into prescriptive eyewear market
Wynn Macau 1128 HK >100 Wynn is a destination casino resort in Macau with another casino, Encore, recently added to the portfolio; company chairman, Steve Wynn has an excellent track record developing nine luxury properties in Las Vegas and Macau with each better than the last. Wynn is the most profitable casino in Macau
Ctrip CTRP US 90.2 China's largest online travel agency, its brand enjoys a higher level of recognition, while its larger volumes lead to guaranteed room allocations by hotels and special discounts from airline operators as well, thus providing a significant competitive advantage
China MGM 2282 HK 85.1 One of five companies authorised to operate a gaming licence in Macau, deploying branding from its parent, MGM Resorts International
Formosa International 2707 TT 82.1 Becoming a global hotel play with Regent Hotel brand, the company is also focusing on expanding its own hotel brands as Silks and Just Sleep
Golden Eagle 3308 HK 45.2 Prime location of stores and ownership of flagship stores to cap rental pressure that most competitors will face plus a successful VIP programme and sophisticated ERP system
Evergreen 238 HK 39.8 One of China's leading menswear companies positioned at the mid-upper to high-end segment through two self-owned brands, has a nationwide retail network of 268 outlets
Tata Motors TTMT IB 39.5 Formidable reputation in domestic commercial vehicle market and amongst top-three car manufacturers, establishing itself as a price leader with the 'Nano' but with the fate of the group now tied largely to Jaguar Land Rover internationally
Megastudy 072870 KQ 32.2 One of the most innovative companies in Korea and has thus dominated the online education space. Focuses on the growing middle- and elementary-school businesses; scale confers network effects and improves competitiveness via strong returns funding the best lecturers who in turn bring in more students
L'Occitane 973 HK 28.6 French cosmetics company specialising in products based on natural ingredients; Asia accounts for almost half of sales. Has established a niche position in the fast-growing natural-ingredient and organic cosmetics segment, and a strong brand identity through expansion of its own managed-store network
Ports Design 589 HK 20.2 Consistently ranks among the top luxury women's wear brands in China thus well- positioned to capture the uptrend of China's fast-growing luxury market with over 300 stores in more than 60 cities across China Continued on the next page
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Figure 39
Key competitive advantage of franchise businesses on Asian HNWI theme (sorted by EVA®/IC) (cont’d) Code Avg Competitive advantage EVA®/IC¹ Sands China 1928 HK 19.1 Operates three casino-hotels in Macau with 3,573 hotel rooms and suites, as well as about 849,000 sq ft in casino space and 1.2m sq ft of meeting facilities; the Macau casinos follow the excellent track record of the parent group in Las Vegas of developing luxury properties leading to higher net win per tables and Ebitda margins
Prada 1913 HK 18.5 One of the world's luxury-goods companies with an iconic triangle logo; its impressive and longstanding heritage is a barrier to entry for potential competitors
Commonwealth Bank CBA AU 18.2 Sunk IT spend creates a sustainable competitive advantage versus its Aussie peers
Genting Singapore GENS SP 17.6 One of the two integrated resorts with a casino, which is strong in Singapore's mass segment; government licensing will prevent any further casinos opening until after 2017
Parkson Retail 3368 HK 14.9 The largest listed PRC department store chain with 40 stores in over 20 cities and a total floor area of approx 1m m²; prime location of stores nationally and a successful VIP programme and sophisticated ERP system. Brand equity being built with about 4m Parkson loyalty card member who account for around 40% of gross sales and about 500,000 co-branded China Merchants Bank credit card holders
LG H&H 051900 KS 13.8 Market leader in Household Products and No.2 in cosmetics as well as soft drinks; combines distribution power, strong sales and marketing execution which has driven market share gains in household products, cosmetics, beverages and the dairy market; is the Korean partner for Coke and Danone
China Merchant Bank 3968 HK 13.4 Perception of being the best retail bank and has the highest share of retail loans; one of the first to launch credit cards in China where it is a market leader (13% share) just behind ICBC. Also enjoys a good brand name in wealth management (Golden Sunflower)
Amore Pacific 090430 KS 12.5 Korea's most successful cosmetics company with 34% market share; sells two premium brands, Hera and Sulwhasoo
Genting Berhad GENT MK 12.4 Genting's 40 years of casino branding in Malaysia has successfully expanded into Singapore and the Philippines; the group is also making inroads into casino/leisure business in the UK and USA
EVA Air 2618 TT 8.8 A unique and integrated cargo logistics service under Evergreen group, which would add value for clients after China open skies for air cargo transhipment; unit cost 20% lower than regional airlines
Hengdeli 3389 HK 8.6 Watch retailer/wholesaler targeting mid to high-end segments with more than 250 stores mostly in China; this segment requires brand support thus relationship and trust with similar brand-management vision as suppliers; Hengdeli is backed by the four largest Swiss-watch groups, Swatch, LVMH, Richemont and Rolex with Swatch and LVMH shareholders of the company
Shinhan Financial 055550 KS 6.1 Korea's second-largest financial institution with superior nonbank positioning, its greatest strength is its culture of innovation and product leadership; has two asset- management businesses, a life-insurance operation and securities operation
Genting Malaysia GENM MK 5.5 The firm operates a near-monopoly franchise in Malaysia with its Genting Highlands Resorts; has 19.6% stake in Genting HK which operates Star Cruises, arguably another gaming firm
Celltrion 068270 KQ 4.5 Strong biologic drug development technology, built up in-house and through technology-transfer via a Genentech spinoff; likely to remain dominant in biosimilar space in emerging markets and expand in developed markets when patents expire with high barriers to entry in technology, production and marketing
Chinatrust Financial 2891 TT 2.9 Taiwan's best banking franchise, strong in consumer banking and wealth management, with the highest underlying profitability in the sector; already has the brand and a regional foundation to build on, and with good potential to build its business in China
Cathay Pacific 293 HK 2.8 Consistently ranks among the world's top-three airlines in customer surveys; owns Dragonair, which flies from HK to China and shorthaul regional routes; has an 18% stake in Air China, the largest airline in the mainland
OCBC OCBC SP 2.4 Has built a network of 480 branches in 15 countries with a significant presence in Malaysia and Indonesia; insurance subsidiary, Great Eastern is the largest insurance group in Singapore and Malaysia; acquired ING Asia Private Bank and has rebranded it as Bank of Singapore, which is the wealth management arm ¹ ROE-COE for financials, Source: CLSA Asia-Pacific Markets
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Appendix Wealthy Asia
Aaron Fischer, CFA Appendix: From head to toe Regional Head of Consumer The global luxury-goods market is evenly split among apparel, prestige and Gaming Research cosmetics, “hard luxury” items which includes watches and jewellery, and [email protected] others including accessories and leather goods. China’s market, however, (852) 26008256 leans more towards hard luxury and accessories, at the expense of apparel. Mariana Kou As we previously discussed, watches and jewellery top China’s luxury (852) 26008190 shopping list and accessories are great for displaying success and wealth.
Luxury market category breakdown
Others, incl. accessories and leather goods Hard luxury 100 (%) Prestige cosmetics 90 25 32 Apparel 80 70 60 25 29 50
40 25
30 25 20 25 10 14 0 China World
Source: Bain, CLSA Asia-Pacific Markets
We believe hard luxury should continue to lead growth of the luxury-goods market for cultural reasons, although apparel and prestige cosmetics would still expand at very impressive rates.
Luxury segment growth
We include an extract 80 (€bn) 2010-20 from Dipped in gold - our Cagr 20% consumer team’s analysis 70 Apparel of China’s luxury market Prestige cosmetics 14% 60 Hard luxury 50 Others (incl. accessories and leather goods) 27% 40
30
20
25% 10
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: CLSA Asia-Pacific Markets
Jewellery Strong momentum Jewellery retail sales in China reached Rmb113.6bn in the first 11 months of 2010, up 56% YoY, according to the National Bureau of Statistics of China. Momentum has been very strong with YoY growth accelerating to 23-82%. Gold prices have increased in the past 10 years, jumping from US$272/oz in 2000 to more than US$1,421/oz in December 2010. Jewellery sales, however, have outpaced the gold price increase.
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China jewellery sales (retail value) Accelerating growth
140 (Rmbbn)
120
100
80
60
40
20
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized 10CL
Source: Wind, CLSA Asia-Pacific Markets
Jewellery sales growing Jewellery sales versus gold prices faster than gold prices 60 (%) Jewellery sales YoY Gold prices
50
40
30
20
10
0
(10) 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized 10CL
Source: Wind, Bloomberg, CLSA Asia-Pacific Markets
Shining gold Gold is popular among Chinese consumers for its intrinsic value and as a symbol of wealth and social status. Gold accessories are often purchased as gifts for special occasions, especially weddings, baby showers and birthdays. The World Gold Council reports that mainland Chinese demand for gold in the 12 months ended 3Q10 reached 526.8 tonnes, up 21% YoY, compared with the global average of 8% YoY. The increase was driven by 70% YoY growth in net retail investment and an 8% YoY rise in jewellery demand. In Hong Kong, demand for gold jewellery supported by mainland tourists jumped by 17% in the same period.
Gold demand may double The council estimates in the past five years about 60% of gold demand from within a decade China was bought for jewellery. In the past 12 months, 71% of the demand was for jewellery. Nevertheless, our CRR middle-class panel still believes that gold is a good investment option, only after property and domestic stocks. The council expects gold demand in China may double within a decade.
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Appendix Wealthy Asia
Indian demand for gold is India continues to dominate world demand for gold. Although India is not a very strong key luxury-goods market, gold demand is very strong so this segment could be one way to play the rising income and consumption story there.
Japan, on the other hand, sees dishoarding gathering pace. As gold prices skyrocket, Japanese investors sold back 68 tonnes of gold in the past 12 months, offsetting the 21 tonnes demanded for jewellery consumption.
Gold consumption demand in value (3Q09-10), including jewellery & retail investment
India 31,807 China 19,616 USA 9,553 Middle East 9,168 Turkey 4,197 Germany 4,127 Thailand 2,934 Switzerland 2,801 Vietnam 2,776 Russia 2,543 Other Europe 1,631 Italy 1,381 Indonesia 1,287 UK 1,118 Hong Kong 770 South Korea 591 Taiwan 67 France 18 (US$m) Japan (1,711)
(5,000) 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Some 71% of Chinese Breakdown of consumption demand gold demand for jewellery (%) Jewellery Net retail investment 100 5 9 90 23 29 31 33 80 44 70 60 80 92 50 95 91 40 77 71 69 67 30 56 20 10 20 8 0 Hong Middle India China World Turkey USA Vietnam Thailand Kong East
Source: World Gold Council, CLSA Asia-Pacific Markets
Rose gold is the According to discussions with management of a few large players, rose gold is new favourite the new favourite among Chinese consumers. The growing popularity of gemstones and diamond rings in a country that was traditionally more interested in gold and jade also adds to the strong jewellery sales. According to the Ministry of Civil Affairs, more than 11 million couples tied the knot in the mainland in 2009. Industry leader De Beers estimates that nearly half of
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Appendix Wealthy Asia
the couples getting married in Beijing, Shanghai, and Guangzhou are now buying diamond engagement rings. With the 20-34 age group expected to stay at around 30% of total Chinese population in the next decade, demand for valuable jewellery should continue to be robust.
Jewellery also good The jewellery companies we surveyed also said mainland tourists are for investment increasingly looking for larger diamonds. One company said they just recently had a customer asking for a HK$4m pure jade bangle and another one buying a HK$10m diamond. Another large retailer also said mainlanders like to buy two to three-carat diamonds for investment. In 2009, the US accounted for about 40% of global consumer diamond demand.
Diamond demand based on polished wholesale price (2008)
Rest of world 19% Italy 4%
Hong Kong USA 2% 41% Taiwan 2%
India 8% Japan 11% China Gulf 5% 8%
Source: De Beers, CLSA Asia-Pacific Markets
Chinese diamond demand As the world’s largest diamond producer, De Beers forecasts China’s diamond to rise rapidly demand to grow from 6-7% of global demand to 16% by 2016 (15% cagr).
Chinese diamond demand as percentage of global demand
18 (%) 16 16
14
12
10
8 6 6
4
2
0 2009 2016
Source: De Beers, CLSA Asia-Pacific Markets
According to Euromonitor data, Chinese consumers have a strong preference for rings, contributing to almost 50% of jewellery sales.
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Appendix Wealthy Asia
Sale of jewellery in China by type (2009) Chinese love rings
Wristwear 8%
Earrings 23%
Rings Neckwear 50% 19%
Source: De Beers, CLSA Asia-Pacific Markets
Few dominant players There are a handful of big players in the jewellery industry in China, with the big three taking up 32% of real jewellery shares. A number of the top players are listed in Hong Kong, including Luk Fook (590 HK), Chow Sang Sang (116 HK), TSL Jewellery (417 HK) and 3D-Gold (870 HK). Euromonitor estimates that 99.5% of jewellery sales in China were made in retail stores.
3D-Gold’s corporate gift collection Jewellery and decor designed to cater to Chinese
Source: Company website Source: Chow Tai Fook’s online product catalogue
Aggressive expansion This strong demand is driving retailers to expand aggressively. Privately-held to capture segment Chow Tai Fook, for example, is looking to open 1,000 additional outlets on the growth potential mainland, doubling its existing network by 2020. It will also add more production lines to its two jewellery processing plants in Guangdong and Shenzhen. Half of the investment planned for the next decade will go to third and fourth-tier cities in rural areas, where management sees enormous potential. Kent Wong, managing director at Chow Tai Fook, said in an interview with a Hong Kong journal, “Consumers in big cities like Beijing and Shanghai now buy jewellery casually when they do their weekend shopping. We expect that will be happening in smaller cities as well in 10 years’ time.”
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Jewellery market more The jewellery market is considerably more consolidated than other segments consolidated than like clothing and drinks. We believe this is partially due to the high inventory other sectors that needs to be held on hand, thus creating a high barrier to entry for smaller players. More importantly, Chinese consumers highly value jewellery brands and retailer reputation. News of low-quality gold being sold in the market often encourages consumers to shop at big brand-name stores, which they believe should have a better-developed quality control system. The Chinese Gold & Silver Exchange Society recently said that at least 200 ounces of fake gold was discovered on the Hong Kong gold market and president Haywood Cheung estimates 10x that amount might have infiltrated the retail market.
Real jewellery company shares in China % retail value (retail selling price) 2005 2006 2007 2008 2009 Company Chow Tai Fook Jewellery 10.5 10.7 10.9 11.3 11.6 Luk Fook Holdings (International) 9.5 9.6 9.7 9.9 10.1 Chow Sang Sang Holdings International 9.8 9.8 9.8 9.9 10.0 Gallop Jewellery 9.3 9.2 9.2 9.1 8.9 Shanghai Laofengxiang 7.6 7.6 7.7 7.8 7.9 TSL Jewellery (Macau) 5.8 5.8 5.9 6.0 6.2 Chow Tai Seng Jewellery 5.1 5.3 5.5 5.7 6.0 Fujian Fuhui Jewelry 4.3 4.3 4.4 4.5 4.5 3D-Gold Jewellery Holdings 3.6 3.7 3.9 4.1 4.3 Zhejiang Yuewang Jewellery 4.0 4.1 4.1 4.1 4.1 Others 30.6 29.9 29.0 27.5 26.4 Total 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor
Our CRR survey shows that Chow Tai Fook is a brand leader in the jewellery segment in China.
Leading by a wide margin CRR survey: Which jewellery brand did you buy?
Chow Tai Fook 14
Swarovski 4
Chow Sang Sang 3
King Liu Fook 3
Jinboli 2
Laofengxiang 2
Tiffany 1
Hermes 1 (No. of mentions) Cartier 1
0 2 4 6 8 10 12 14 16
Source: China Reality Research
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Appendix Wealthy Asia
Chinese millionaires’ favourite jewellery brands Cartier is the beloved jewellery brand 2006 2007 2008 2009 2010 Cartier Cartier Cartier Cartier Cartier Chanel Bulgari Chanel Van Cleef & Bvlgari Arpels Piaget Piaget Tiffany Tiffany Montblanc Tiffany Dior Van Cleef & Bvlgari Tiffany Arpels Bulgari Chanel Piaget Chanel Chanel Dior Tiffany Bvlgari Piaget Piaget Van Cleef & Adler Mikimoto Mikimoto Van Cleef & Arpels Arpels Adler Van Cleef & Harry Winston Harry Winston Mikimoto Arpels na Mikimoto Adler Adler Adler na na Dior Chaumet Chaumet Source: Hurun Research Institute
Watches The Swiss watch industry is worth SFr15.7bn (US$14.9bn). The industry did contract in 2009 due to the global financial crisis, by 22.8%, the first contraction after five consecutive years of growth. This year so far has been one of growth, up 21.8% to November. The largest buyer of Swiss watches in the world is Hong Kong, accounting for 19% of total Swiss watch exports by value. Hong Kong superseded the US as the largest Swiss watch importer from mid-2007, spurred on by a combination of a healthy financial and property markets (prior to the crisis) and the influx of mainland Chinese tourists. It is also well accepted (without official estimates though) that Hong Kong does serve as a re-export hub, hence some of the direct intake into Hong Kong does find its way to other parts of Asia, including China. As of November 2010, China is currently ranked the fourth-biggest buyer of Swiss watches, up from 10th place in November 2006.
China is currently the Largest buyers of Swiss watches fourth-largest imported Swiss watches 3,500 (CHF) 2006 2010 3,000 2,500 2,000 1,500 1,000 500 0 UK UAE USA Italy Spain China Japan Russia France Taiwan Thailand Germany Singapore Hong Kong Saudi Arabia Saudi
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers. Data is annualised to November 2010
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Swiss watch exports Jan-Nov 2010 Jan-Nov 2010 YoY growth of top-10 export markets
China
Hong Kong/ Hong Kong China together Singapore United Hong Kong is 26% Kingdom United Arab Emirates Others 19% 4% 31% China France 7% Germany USA 5% USA United Kingdom 10% Japan Japan Italy 5% France 7% Germany (%) Singapore Italy 6% 6% (10)0102030405060
Source: CLSA Asia-Pacific Markets, Federation of the Swiss Watch Industry (November 2010)
We believe a per-capita comparison is the ideal way to illustrate the significant growth potential of Swiss-watch consumption in China. In doing so, a number of adjustments were needed. Firstly, we assume that 50% of what goes to Hong Kong finds its way to China. As mentioned, there are no official estimates to support this, but an adjustment of size is a reasonable place to start. It is a meaningful adjustment as Hong Kong is the largest Swiss watch importer in the world. Secondly, we assume only the urban population of China are “realistic” consumers. Hence, we assume a population of 594 million.
China’s consumption per Global comparison of Swiss watch imports per capita capita is low, at only a third of Europe or Taiwan Hong Kong (unadjusted) 403.0 Hong Kong 201.5 Singapore 183.2 UAE 103.0 France 16.8 Italy 14.3 Taiwan 12.2 12 mths to 11/2010 Germany 8.7 UK 8.9 See footnote below for adjustments Saudi Arabia 8.7 made to China and Hong Kong Spain 6.9 Japan 5.8 South Korea 5.8 USA 5.0 China 4.0
Thailand 2.7 China (unadjusted) 1.6 Consumption per capita (US$) Russia 1.4
0 50 100 150 200 250 300 350 400 450
Note: Assuming 50% of exports to HK are re-exported to China. This is a meaningful adjustment for the purpose of achieving as conservative a result as possible, as Hong Kong is the largest importer of Swiss made watches in the world (imports are 3x larger than China). We also base our China per capita calculation on an urban population of 594m (not 1.3bn). The data is based on annual data, collected monthly. Source: CLSA Asia-Pacific Markets
China should close much Hong Kong (despite the adjustment), Singapore and the UAE significantly of the gap lead on a consumption per capita basis, reflecting the “trading hub” nature of these economies, the former two at a staggering US$180 and above. “Old
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Appendix Wealthy Asia
world” economies such as France, Italy, Germany and the UK are between US$8.90 and US$17. With the exception of France, the consumption in these economies has been stable for the past five years. The major decline is seen in the US, unsurprisingly, now consuming US$5.0 per capita, compared to US$6.2 five years ago. On the flipside, China is accelerating. Its per-capita consumption of Swiss watches increased by 117% between 2005 and 2010. However, at US$4.0 currently, China still significantly lags more developed (and higher GDP) economies. We believe China should close much of the gap in Swiss watch consumption per capita over the medium to longer term.
China’s share of Swiss China accounts for a 7% share of Swiss watch exports, up from 3% in 2005 watch exports has doubled in past five years 9 (%) China's share of Top 15 export destinations 16,000
8 Top 15 export value, CHFm (RHS) 14,000
7 12,000 6 10,000 5 8,000 4 6,000 3 2 4,000 1 2,000 0 0 2004 2005 2006 2007 2008 2009 2010
China was the quickest Asia ex-Japan leading the recovery in Swiss watch exports (YoY growth, quarterly) to recover from the financial crisis 120 (%) China Asia ex-J Europe USA 100
80
60
40
20
0
(20)
(40)
(60) Jun 05 Apr 06 Mar 07 Feb 08 Jan 09 Dec 09 Oct 10
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers (November 2010)
Rolex, Rolex, Rolex In terms of preferences, Chinese consumers like mechanical watches and also unique watches that require specific craftsmanship, such as enamel, mother- of-pearl engraving. Rolex is almost synonymous with luxury watches in China. When asked what brands come to mind when thinking about luxury watches, 48% of those surveyed in China said Rolex. That is far greater than the second brand Omega at 14%, followed by Vacheron, Cartier, and Longines.
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Which luxury brand would you like to own? Which luxury brands did you buy?
Watch Watch Rolex 21 Omega 9 Omega 10 Tissot 7 Vacheron 5 Longines 6 Rolex 5 Cartier 4 Rado 3 Longines 4 Cartier 3 Patek Philippe 4 Tudor 2 Tissot 1 Citizen 2 Piaget 1 Enigma 1 Swatch 1 Calvin Klein 1 (% of consumers) (No. of mentions) Rado 1 Casio 1
0 5 10 15 20 25 0246810
Source: China Reality Research
Executives from top luxury watch retailers told us that part of the reason Rolex is so popular is because Chinese consumers view it as almost hard cash given the liquid second-hand market. Its signature crown logo and easy to pronounce name have helped the brand gain recognition in the early days in China.
A lot of mainland customers also pay high regards to the Omega brand thanks to its association with the first moon landing. Trendy designs also help to attract younger customers. Longines is popular for its more affordable price points and it sells very well on the mainland.
Limited editions are even The limited supply for some models generates much excitement among the more popular wealthy and it serves as an effective way to display success and power. For example, the market price for the Rolex Daytona watch can reach HK$85,000-90,000, despite a list price at HK$75,000, due to limited supply. Getting one of these limited models is a way to show your influence and connections. “It is about face, not the money (the premium you are paying),” the executive said.
Retailer reputation is also When it comes to picking watch retailers, Chinese consumers are looking for a a key factor good selection and a reputable store.
Long waitlist Apply to spend more than HK$1m on a watch Patek Philippe minute repeater We asked management at Emperor Watch & Jewellery, one of the world’s largest buyers at the annual industry fair Baselworld, where we can buy a Patek Philippe minute repeater, one of the hottest collections that is in limited supply. Demand is so strong and the collection is so rare that we learnt each interested buyer would have to file an application form listing his personal information and occupation. To be considered, chances are you would have to be a frequent shopper (ie, have bought more than 10 Patek Philippe watches). Being a professional with a number of certificates may help push your application to the top of the pile as well. Source: Company website
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Appendix Wealthy Asia
How do you decide which watch retailer to purchase from?
Model selection
Store reputation/image
After sales service
Staff friendliness
Brand selections
Staff knowledge
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
5 is very important
Source: Hengdeli
Clothing Spend more on clothing Based on Bain’s estimate, the luxury apparel market in the mainland is worth as income rises Rmb9.8bn. The potential is huge given that wealthy consumers spend more on clothing as income rises. As consumers get wealthier in China, we expect to see more trading up.
Clothing and footwear spending as percentage of total expenditure
9 (%) 8.5 8.0 8 7.6 7.3 7.0 7 6.6 6.2 6 5.7
5.1 5
4 3.7
3 12345678910 (income by decile)
Source: Euromonitor, CLSA Asia-Pacific Markets
Menswear is a key Menswear is the key component of this market segment. As the luxury component market booms, leaders in luxury menswear are aggressively expanding. Trinity, which manages Altea, Cerruti 1881, D'urban, Gieves & Hawkes, Intermezzo and Kent & Curmen, said in April 2010 that it would add 50 or more stores in smaller Chinese cities to its 272-store network on the mainland. Evergreen, which owns V.E. DELURE and TESTANTIN and which went public recently, planned to add 63 new retail stores in China in 2010 and 172 in 2011 to bring total mainland store count to 491.
Players trying different To accelerate expansion in China, global brands have come up with a variety strategies of strategies. Hugo Boss started a joint venture with local fashion retailer Rainbow Group in July 2010 and planned to open as many as 20 stores in
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Appendix Wealthy Asia
China during the remainder of 2010, compared with a worldwide total of 50 additional outlets for the year. Meanwhile, Polo Ralph Lauren took back its Asian distribution rights and Burberry bought back its 50 franchise stores in China. In November 2010, Emporio Armani became the first Western fashion brand to debut on the online China market.
Emporio Armani Online Store, China Ports Design overcoat selling at Rmb8,999
Source: Company website
Being one of the early entrants into the luxury market in China, Ports Design is well-regarded in China as a top female luxury clothing brand. Many surveys in the past have named Ports as a top-five luxury apparel brand in China alongside names such as Chanel, Louis Vuitton, and Christian Dior. Our recent CRR survey found that Ports holds a strong brand presence on the mainland. However, note that there are numerous other strong brands that are not mentioned here - that include Prada, Bottega Veneta, Fendi etc.
Luxury shoe brands are With a pair of over-the-knee boots selling at about US$2,500, French also expanding presence shoemaker Christian Louboutin is also eyeing the luxury market in China and plans to operate as many as five stores in China in the next three years. Meanwhile, Salvatore Ferragamo expected its store count in China to reach 44 by the end of 2010, up from nine in 2008. The Italian shoemaker may open as many as eight new stores this year in the country.
Chinese millionaires’ favourite fashion labels 2006 2007 2008 2009 2010 Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Louis Vuitton Louis Vuitton Dunhill Louis Vuitton BOSS Boss Dunhill Valentino Dunhill Versace Dunhill Versace Burberry Zegna Burberry Hermes Hermes Chanel Hermès Zegna Prada Ports Versace Versace Dior Zegna Hugo Boss Louis Vuitton Dior Louis Vuitton Chanel Montblanc Hermès Givenchy Chanel Gucci Givenchy Burberry Ports Prada Ports Gucci Givenchy Ermenegildo Zegna Zegna Prada Gucci Chanel Dior Ports Source: Hurun Research Institute
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Appendix Wealthy Asia
Menswear We see strong growth According to research firm Frost & Sullivan, retail sales of menswear in China in the menswear increased at a 13.4% Cagr between 2006 and 2009 with sales reaching market in China Rmb300bn (or US$44.2bn) in 2009. Frost & Sullivan expects sales to achieve a 15.8% Cagr over 2009-13.
Retail sales of menswear in China
600 (Rmbbn) Retail value Growth rate (RHS) (%) 20 539.9 18 16.3 500 15.6 14.7 15.0 14.4 16.2 16 399.3 464.5 14 400 11.3 345.4 12 300.3 300 262.6 10 228.9 205.7 8 200 6 4 100 2 0 0 2006 2007 2008 2009 10F 11F 12F 13F
Source: Frost & Sullivan
Urbanisation and rising We believe that the increase in disposable income, accelerated urbanisation, a incomes are key drivers demographic shift in the male population towards the young and middle- aged, rising brand awareness as well as improved product design and quality have and will continue to underpin industry growth.
Low menswear More importantly, China menswear consumption per capita in urban areas is consumption per only about 25% of that in the USA and 20% of European countries. capita in China
Menswear consumption per capita in urban areas, 2008 Menswear consumption per capita, 2008
1,600 (US$) 1,489 500 (US$) First-tier cities US$378 Second-tier cities 1,400 Third-tier cities 1,175 US$318 400 US$5.4bn 1,200 Fourth-tier cities 14.3% US$10.3bn 1,000 27.3% 300 PRC average 800 US$15.4bn 600 40.7% 200
400 291 US$240
200 100 US$6.7 bn 17.7% 0 US$77 (US$bn) China USA European 0 countries 012345
Note: “European countries” refers to 15 countries within European Union as of 1 May 2004. Source: Frost & Sullivan
Menswear has different The consumption behaviour of male consumers in China differs significantly operating metrics from from that of their female counterparts. This results in substantially different ladieswear operating metrics for menswear versus ladieswear.
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Comparison of China’s menswear versus ladieswear markets
Menswear business Ladieswear business Brand loyalty High Low Consumers’ price sensitiveness Low High Product ASPs for similar market positioning High Relatively low Average ticket size per purchase High Relatively Low Stay-and-buy ratio High Low Consumers’ purchase frequency Low High Potential for ASP increase High Limited Purchase target More intentional purchases with clear More impulse purchases with no clear brand targets in most circumstances brand targets in most circumstances Purchase intention Less show-off factor More show-off factor Retail inventory risk Relatively low Relatively high Fashion risk Low High Product cycle Relatively long Short Market segmentation Relatively broad More defined Consumers’ product focus Product quality, fabrics and functionality Design, colour and trendiness Requirement for raw material procurement High Relatively low Requirements for accessories Low High Number of product SKUs Relatively low High Number of product collections Relatively low High Corporate sales More corporate sales Minimum corporate sales Source: CLSA Asia-Pacific Markets
Menswear brands should Menswear brands should enjoy more resilient gross margins and more enjoy more resilient gross sustainable same-store sales (SSS) growth compared with ladieswear brands. margins and SSS growth According to Frost & Sullivan, the business formal (including business suits, shirts and trousers) and smart casual (including casual suits, shirts, jackets and trousers) market accounts for 60.6% of the overall menswear apparel market in China.
Business and smart China’s menswear market by product, 2009 casual represent 61% of total menswear market Accessories 4.3%
Fashion Business formal casual and smart casual 35.1% 60.6%
Source: Frost & Sullivan
High-end segment Within the business-formal and smart-casual menswear market, Frost & expected to outgrow Sullivan expects the high-end segment (which is defined as a suit retailing for other segments Rmb5,000-15,000) to enjoy slightly higher growth rates (ie, a 17.5% 2009- 13F Cagr) than other segments.
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Appendix Wealthy Asia
Breakdown and growth of business-formal and smart-casual menswear segment
(Rmbbn) 2006 2007 2008 2009 10F 11F 12F 13F Cagr Cagr 06-09 09-13F
Luxury-end 13 14 17 19 22 26 31 36
Growth (%) 12.6 15.4 15.8 16.2 17.1 17.7 17.3 14.7 17.1
High-end 9 10 11 13 15 18 21 25
Growth (%) 12.4 15.9 16.0 16.7 17.3 18.0 18.1 14.7 17.5
Mid-to-low-end 100 112 130 150 174 203 238 280
Growth (%) 12.4 15.8 15.4 16.2 16.7 17.4 17.3 14.6 16.9
Total 121 136 158 182 211 247 290 340
Growth (%) 12.5 15.7 15.5 16.2 16.7 17.5 17.3 14.6 17.0 Note: Market segmentation is defined by ASP of a suit: luxury=above Rmb15,000; high-end=Rmb5,000- 15,000; low-end=below Rmb5,000. Source: Frost & Sullivan
Highly fragmented high- It should be noted that China’s high-end business-formal and smart-casual end formal business and menswear market is extremely fragmented, with the top-five brands smart-casual menswear commanding only a 22% market share (versus 45% for the sportswear sector). As such, we see huge potential for market consolidation in favour of companies with strong brand equity and well-established retail networks such as Evergreen. See our 8 December 2010 report Tailored for success.
Lowest concentration in Market share of top-five players in China consumer space, 2009 high-end formal business and smart-casual menswear segment Carbonated drinks 95
Ready-to-drink (RTD) tea 75
Instant noodles 67
RTD coffee 66
Hair care 65
Beer 58
Milk 57
Bottled water 50
Down apparel 49
Sportswear 45
Bath and shower products 45
Fruit/vegetable juice 37
High-end business formal & casual menswear 22 (%)
0 20406080100
Note: Market share by retail sales value for carbonated drinks, RTD tea, instant noodles, hair care, RTD coffee, milk, bottled water, down apparel, fruit/vegetable juice, bath and shower products and bedding products; by total sales volume for beer, wine and spirits; by wholesale value for sportswear. Source: CLSA Asia-Pacific Markets (milk, down apparel and sportswear), Euromonitor (all others)
Only Satchi and VASTO have 5% or more of the high-end business-formal and smart-casual menswear market. However, Satchi has almost 2x as many stores in the mainland.
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Appendix Wealthy Asia
Market share in terms of retail sales, 1H10 China store networks, 1H10
Satchi VASTO V.E. DELURE Satchi 332 6% 5% 4% 201 S.D. Spontini V.E. DELURE 4% BONI 180 BONI 3% DIDIBOY 178 Lampo VASTO 170 3% Lampo 168 Didiboy Aquascutum 131 3% Other brands VSKONNE S.D. Spontini 100 67% 2% VSKONNE 100
Auta Son Auta Son 82 (No. of outlets) Aquascutum 2% 1% 0 50 100 150 200 250 300 350
Source: Frost & Sullivan
Market concentration The degree of concentration in the high-end business-formal and smart- below that of China casual menswear market segment is substantially below that of the China sportswear market sportswear market.
Market share China high-end business-formal and smart-casual menswear vs sportswear, 2009
70 (%) High-end business formal & smart casual menswear 62 60 Sportswear
50 45
40 33 33 30 22
20 15 13 10 6
0 Top 1 Top 3 Top 5 Top 10
Source: Frost & Sullivan (menswear), CLSA Asia-Pacific Markets (sportswear)
Middle-upper segment Within the casual fashion menswear market, the middle-upper segment (ie, a outgrows others in casual jacket together with a pair of trousers retailing for Rmb2,000-5,000) is expected fashion menswear to enjoy a higher growth rate (ie, 16.5% 2009-13F Cagr) than other segments.
Breakdown and growth of casual fashion menswear segment (Rmbbn) 2006 2007 2008 2009 2010F 2011F 2012F 2013FCagr Cagr 06-09 09-13F High to luxury end 6 7 8 9 10 12 13 15 Growth (%) 11.1 14.3 12.5 14.4 13.6 14.5 14.9 12.5 14.3 Middle upper end 6 7 8 9 10 12 14 16 Growth (%) 12.1 15.6 15.2 15.8 16.2 17.0 16.9 14.3 16.5 Mid to low end 64 70 78 88 99 112 127 144 Growth (%) 9.1 12.4 12.0 12.7 13.0 13.8 13.7 11.2 13.3 Total 76 83 94 105 119 135 154 176 Growth (%) 9.6 12.7 12.3 13.1 13.4 14.1 14.1 11.5 13.7 Note: Market segmentation is defined by ASP of a jacket and a pair of trousers: High to luxury- end=Above Rmb5,000; Middle-upper end=Rmb2,000 to Rmb5,000; Mid to low-end=Below Rmb2,000. Source: Frost & Sullivan
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Handbags and briefcases Not as male-dominant According to Hurun’s Best of the Best survey, men’s luxury brands dominated the accessory segment in 2008, but the same survey in 2010 shows that there is a shift towards a more balanced list.
Chinese millionaires’ favourite accessory brands 2008 2010 Dior Hermès Emporio Armani Armani BOSS Chanel Montblanc Louis Vuitton Louis Vuitton Dior Chanel Cartier Bally Gucci Dunhill na Source: Hurun Research Institute
Louis Vuitton’s world-class craftsmanship Dunhill’s leather collection
Source: Company website
As we mentioned before, girl power should be growing in China and we expect global premium luxury brands like Prada, Fendi and Tod’s to catch up very quickly. Burberry recently bought back 50 franchise stores in China to take control of its positioning in this key luxury market. Meanwhile, Coach recently made a number of senior appointments and expects its business in China to reach US$250m by FY12 and double by FY15.
Mens’ brands have a Points of sale in China wider store network Ports Cartier Alfred Dunhill Hugo Boss Cerruti Ermenegildo Zegna Salvatore Ferragamo Canali Giorgio Armani Burberry Coach Louis Vuitton Escada Gucci Tod's Hermes Bulgari Versace Givenchy Celine Fendi Prada Tiffany Chanel¹ Lanvin
0 50 100 150 200 250 300 350
¹ Only fashion/accessories. Source: Company websites, CLSA Asia-Pacific Markets
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Luxury cars Not discouraged at all by Dressed up in luxury clothing with a gold watch and a huge diamond ring, the high taxes and duties wealthy Chinese consumers are ready to hop into a vehicle to go out - a luxury car with a starting price of about Rmb850,000. Luxury car sales in China are on fire. The Big 3 in China have all recorded impressive growth rates this year, despite high mainland taxes. Sparkle Roll Group (970 HK), which operates Bentley, Rolls-Royce and Lamborghini showrooms in Beijing, estimates that for a car with an engine bigger than four litres, the combined import duties, value-added taxes and consumption taxes add up to more than 140%, compared with about 105% in Hong Kong and 60% in Macau.
Luxury car sales in China Top brands 2010 YoY (%) Volkswagen's Audi 227,938 43 BMW 168,998 87 Mercedes-Benz 147,670 115 Source: Company data
More expensive cars Mercedes-Benz is the fastest-growing major luxury brand enjoying higher growth 940,000 (Rmb) Starting price YoY growth (RHS) (%) 140
920,000 120 115 100 900,000
87 80 880,000 60 S-Class 860,000 7 Series 40 43 840,000 A8L 20
820,000 0 Audi BMW Mercedes-Benz
Source: Company data, CLSA Asia-Pacific Markets
Audi is the largest The Volkswagen China Group sold 1.92 million cars in 2010, up 37% YoY. Audi supplier of official cars sold 227,938 cars in 2010, more than the 200,000 units previously forecasted and up 43% YoY. The company plans to sell another one million vehicles there within the next three years. Audi has sold more than one million vehicles in China to date, thanks to an early entry of its parent firm Volkswagen in the 1980s. Audi is also the biggest supplier of official cars in China.
BMW and Mercedes-Benz However, BMW and Daimler’s Mercedes-Benz are quickly catching up as are catching up Chinese consumers’ appetite for luxury cars continues to grow. BMW’s sales in China almost doubled to September YTD and China is now the BMW Group’s third-largest market.
Meanwhile, Mercedes-Benz is the fastest-growing major luxury auto brand, with sales up 115% yoy in 2010 at 147,670 units, exceeding expectations of 120,000 units. Its parent Daimler expects China to become Mercedes-Benz’ largest market by 2014-16, aiming to sell 300,000 vehicles in China in 2015.
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As mentioned before, high-end market leader Audi sold one million units in China to date. We estimate that about 20% of Audi sales in China were from the government. Taking this into account and the Hurun Research Institute’s study which says Chinese millionaires on average own three cars, we believe China’s luxury car market has huge potential.
Bentley, Rolls-Royce and The super-luxury segment, where executive limousines generally retail at Maybach are the top three Rmb3,000,000-9,000,000 after taxes, shows strong demand. Volkswagen’s for super luxury Bentley, BMW’s Rolls-Royce and Daimler’s Maybach are the top choices for these ultra-wealthy individuals.
Bentley China chairman Peter Mak is amazed by the huge demand and rapid income growth on the mainland, since some of these buyers might not even have a car 15 years ago. Unlike buyers in the early days who would have bodyguards bringing in large travel bags filled with cash, buyers today usually pay a 10% deposit with a debit card and settle the balance with a bank transfer.
Super-luxury car sales in China Top brands October YTD YoY (%) Bentley 569 71 Rolls-Royce 156 438 Source: SCMP
Our CRR survey shows strong brand preference for BMW and Mercedes-Benz, which we believe explains the impressive September YTD growth of 89% and 98% the carmakers enjoyed.
BMW is the winning brand Which luxury car brands would you like to own?
BMW 13
Mercedes-Benz 12
Ferrari 10
Rolls-Royce 8
Porche 6
Audi 6
Bentley 4
Hummer 3
Maybach 2 (% of consumers) Land Rover 2
0246810121416
Source: China Reality Research
Chinese wealthy like Rich individuals from China also prefer longer cars that appear more longer cars extravagant and easier for those who would like to be chauffeured. This demand drove Audi to introduce an extended A6 sedan (13cm longer) in China back in 2000 and an extended A4 last year. BMW and Mercedes-Benz also introduced extended versions, adding 14cm to the BMW 5-Series and Mercedes E-Class sedans.
Gold-plated Volvo, which was purchased by China’s Geely Holding Group last year, plans Spirit of Ecstasy to hire a team of Chinese designers to cater to local tastes. Rolls-Royce has also outfitted vehicles with options such as gold-plated Spirit of Ecstasy hood
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ornaments and starlight roofliners that depict astrological signs. Some customers choose red, which is considered to be the lucky colour, and many like to get vehicle identification numbers that contain lucky numbers, with the most popular being “8”. BMW has also offered a Chinese version of its M3 sports car called the Tiger M3, for the year of Tiger (2010), with each of the headrests embroidered with an orange tiger’s head.
Extended A6 exclusively for Chinese consumers Rolls-Royce’s Spirit of Ecstasy
Source: Company website
Premium drinks Beer is the dominant Euromonitor estimates that the Chinese alcohol market is at 53 billion litres in alcohol, but the slow 2010, compared with 30 billion litres in the US, and expects the overall growth segment alcohol market to enjoy a 7% Cagr to 70bn litres by 2014. Consumption of alcoholic drinks per capita (at legal drinking age) has increased by 64% in 2000-10 in China. Beer remains the preferred drink, with each person consuming 38.7 litres in 2009 while the total alcohol consumption per capita in China was 45 litres.
Chinese alcohol market size and growth Consumption per capita (2009)
80,000 (m litres) Alcoholic drinks (%) 16 45 (litres) 70,000 YoY growth (RHS) 14 40 60,000 12 35 38.7 30 50,000 10 25 40,000 8 20 30,000 6 15 20,000 4 10 3.6 10,000 2 5 2.7 0 0 0 1998 2002 2006 2010 2014 Beer Wine Spirits
Source: Euromonitor, CLSA Asia-Pacific Markets
Whiskey and grape wine We expect whiskey to lead growth in the drinks segment at 17% annual should lead growth at growth, followed by grape wine at 12% in 2009-14. Sparkling wine is also double digits expanding quickly, but so far China is still a relatively small market for champagne. Despite being the dominant alcohol in the market, beer has been growing only moderately at a 6% Cagr in the past 10 years and we expect this level of growth to continue.
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Alcohol market growth 09-14CL
Whiskey 17 Grape wine 12 Sparkling wine 10 White Spirits 10 Rum 9 Beer 7 Average 7 Non-grape wine 5 Brandy and Cognac 4 (%)
0 2 4 6 8 1012141618
Source: Euromonitor, CLSA Asia-Pacific Markets
About 50% of the EU15’s Champagne market breakdown share is from France Other emerging Mainland China markets 0% 5% Other mature US markets 6% 4% Japan 2%
EU15 83%
Source: Cheuvreux
Chinese alcohol Chinese alcohol consumption is still relatively low compared with the rest of consumption still low the world and therefore we expect much potential in the drinks segment. As expected, Chinese wine consumption per capita ranks much lower than European counterparts, and spirit consumption per capita much lower than Japanese and Koreans who are big fans of shochu/soju (a very popular distilled beverage in the region).
Still a moderate drinker Beer consumption per capita (2009)
Germany USA United Kingdom Canada Japan South Korea China France Italy Taiwan Singapore
0 20 40 60 80 100 120 140
Source: Euromonitor, CLSA Asia-Pacific Markets
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Just the beginning Wine consumption per capita (2009) Spirits consumption per capita (2009)
Italy South Korea France Japan Germany France United Kingdom USA Canada Germany USA United Kingdom South Korea Canada Japan China Taiwan Italy China Taiwan Singapore (litres) Singapore (litres)
0 102030405060 0 10203040
Source: Euromonitor, CLSA Asia-Pacific Markets
In terms of channels, restaurants are more important in southern China and bars in the north. Because of the cold weather in the north, Chinese consumers there in general prefer stronger alcohol.
More trading up As income rises, we expect consumers to trade up to premium alcohol and this should drive growth in the prestige local spirits and the more expensive wine and spirit segments in general. Also, as economic activities continue to grow in the mainland, local spirits popular among businessmen and government officials should see strong growth. Gifting accounts for about 65% of the market, according to an executive from a premium alcohol company.
We believe this is also a segment where local brands can potentially develop into premium players. According to the executive, China is already in the top 10 globally in terms of wineries and plantation.
Wine consumption should Wine consumption and income per capita (2010) rise as income grows 70 Wine consumption (litre per capita) Luxembourg 60
50 Portugal
Italy France 40 Austria Denmark Switzerland Correlation = 0.69 Greece 30 Germany Belgium UK 20 Spain Netherlands Belgium Ireland Norway Russia Canada Finland 10 Sourth Korea China USA (US$ per capita) Taiwan Japan 0 Turkey Hong Kong Singapore Phils Malaysia (10)
(20) 0 20,000 40,000 60,000 80,000 100,000 120,000
Source: CLSA Asia-Pacific Markets
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Average retail selling price in China Many premium options 2009 Rmb per litre Taobao Beer 7 Non-grape wine 40 Grape wine 57 Premium local spirits 295 Kweichow Moutai 500ml
Rmb115 (US$17)
Rum 402 Bacardi black rum 750ml
Rmb97 (US$15)
White Spirits 405 Grey Goose 700ml
Rmb370 (US$56)
Brandy and Cognac 464 Hennessy VSOP 750ml
Rmb293 (US$44)
Sparkling wine 538 Moet & Chandon NV 750ml
Rmb340 (US$52)
Whiskey 727 Chivas Regal 700ml 18 years old
Rmb425 (US$64)
Source: Euromonitor, Taobao.com, CLSA Asia-Pacific Markets
Premium local spirits Premium local spirits Unlike other luxury segments, premium local spirits brands have a significant are popular presence in China, accounting for 6% of the total spirits market in China. Brands like Jian Nan Chun, Moutai and Wu Liang Ye are very popular nationwide. Together these three brands account for more than 27% of the premium local spirits segment. Average unit price in this segment is almost Rmb300 per litre, with the ultra premium ones priced much higher than top whiskey.
Moutai (500ml) gift set selling at Rmb1,588 on Taobao 500ml of Wu Liang Ye’s 68% selling at Rmb888
Source: Company website, Taobao.com Source: Taobao.com
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Premium local spirits market in China Steadily growing
250 (m litres) Volume YoY (RHS) (%) 10 230 8 210 6 190 4 170 2 150 0 130 (2) 110 90 (4) 70 (6) 50 (8) 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Euromonitor, CLSA Asia-Pacific Markets
Imports and global players While beer consumed in China is mostly produced locally with only 28 million litres imported out of the 40.7 billion litres consumed in 2008, imported wine and spirits are common. About 6% of wine and 1.4% of spirits was imported from overseas in 2008. The import share of wine has been growing rapidly. In total, 18% of the wine and 31% of the spirits imported came from France.
Alcohol imports growing Imports as a percentage of total volume
7 (%) Wine Spirits
6
5
4
3
2
1
0 2000 2001 2002 2003 2004 2005 2006 2007 2008
France has a large share Wine imports in volume (2008) Spirits imports in volume (2008)
United Others Others Sweden States 5% 9% 2% Japan 5% United 2% Italy Kingdom United Chile 6% 33% States 32% Spain 3% 9% Australia Korea France 10% 9% 31% Argentina France Spain 16% 18% 10%
Source: Euromonitor, CLSA Asia-Pacific Markets
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Pernod-Ricard holds These fast-expanding segments together with their growing imports a number of high- component are driving up sales at global producers. Pernod-Ricard reported ranking brands 1Q (ended September 2010) sales growth that beat consensus estimates. The company recorded more than 30% YoY growth in China on the back of wholesalers’ restocking on Martell. Its Chivas Regal holds a dominant 33% brand share in the whiskey segment. Absolut is the leader in white spirits and Martell is No.3 among brandy and cognac brands in China.
Diageo is also upbeat about China’s market outlook and sees consumers trading up in general. Its Johnnie Walker brand holds 23% share in the whiskey segment while the Smirnoff brand has 22.5% of the white spirits share in China.
Barcardi & Co’s Barcardi rum significantly dominates this segment with a whopping 72% share.
Catering to locals The surging whiskey demand in China inspired the Royal Salute Whisky group to launch the 62 Gun Salute in the Chinese market. The company said the whiskey tastes rich and complex and it is exactly what Chinese consumers like. Bottled in a hand-crafted decanter made by Dartington Crystal, the whiskey features a Royal Salute crest painted in liquid 24-carat gold, along with a 24-carat gold-plated collar and a crystal stopper set with a 24-carat gold-plated crown. Each bottle sells for Rmb18,000.
Prices jumped 17% with Meanwhile, to endear itself to Chinese consumers, Château Lafite-Rothschild an embossed red eight also decided to feature an embossed red character for the lucky “eight” on every bottle of its 2008 vintage. According to the online fine-wine exchange LivEx, the price of a case of 2008 Lafite jumped 17% in just 48 hours after the announcement. Similarly, Château Mouton Rothschild also features art work by famous Chinese artists while vodka brand Absolut puts Chinese literary figures on its labels to attract Chinese consumers.
62 Gun Salute at Rmb18,000 Chateau Lafite Rothschild 2008
Source: Company
LVMH setting up luxury LVMH has a very strong market presence in the sparkling-wine segment with white spirits brand its Moët & Chandon brand. Its market share is tied with Yantai Changyu Group’s Changyu brand at 19% as the top two players in sparkling wine. Seeing such a strong presence that premium local spirits have in China, LVMH has also started building an Asian luxury spirits brand, Wenjun. The pricing is very much in line with top players Moutai and Wu Liang Ye.
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LVMH’s Asian Wenjun by LVMH at Rmb600 Special collection at Rmb1,600
luxury spirits
Source: Company website, Taobao.com
Figure 40 Top alcoholic drinks brands in China Brand Company Share (%) Premium local spirits Jian Nan Chun Sichuan Jian Nan Chun (Group) 10.6 Moutai Kweichow Moutai 9.9 Wu Liang Ye Sichuan Yibin Wuliangye Distillery 6.9 Luzhou Lao Jiao Luzhou Lao Jiao 2.5 Xiao Hu Tu Xian Guangzhou Pearl River Yunfeng Winery 1.9 Grape wine Great Wall China National Cereals, Oils & Foodstuffs Imp & Exp 10.6 Changyu Yantai Changyu Group 8.8 Weilong Yantai Weilong Grape Wine 4.6 Dynasty Dynasty Winery 4.0 Suntime Vinisuntime International 3.3 Sparkling wine Changyu Yantai Changyu Group 18.9 Moët & Chandon LVMH Moët Hennessy Louis Vuitton 18.9 Dynasty Dynasty Winery 8.6 Piper Heidsieck Rémy Cointreau Group 8.1 Weilong Yantai Weilong Grape Wine 7.0 Whiskey Chivas Regal Pernod-Ricard Groupe 33.1 Johnnie Walker Diageo 23.1 Jack Daniel's Brown-Forman Corp 6.1 Jim Beam Fortune Brands 3.3 Ballantine's Pernod Ricard Groupe 2.0 Brandy/Cognac Changyu Yantai Changyu Group 57.1 Hennessy LVMH Moët Hennessy Louis Vuitton 14.1 Martell Pernod-Ricard Groupe 7.5 Rémy Martin Rémy Cointreau Group 6.1 Courvoisier Fortune Brands 1.0 White Spirits Absolut Pernod-Ricard Groupe 28.1 Smirnoff Diageo 22.5 Gordon's Diageo 10.6 Eristoff Bacardi & Co 5.4 Skyy Campari Milano SpA, Davide 4.4 Rum Bacardi Bacardi & Co 72.4 Havana Club Pernod-Ricard Groupe 6.4 Captain Morgan Diageo 3.8 Source: Euromonitor
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Chinese millionaires’ favourite drinks
2008 2009 2010 Best Luxury Imported Drinks Brand Royal Salute Royal Salute Louis XIII Hennessy Hennessy Hennessy Johnnie Walker Louis XIII Royal Salute Rémy Martin Rémy Martin Ballantine Chivas Chivas Rémy Martin Best Super Luxury Whiskey Royal Salute 21 Years Old Royal Salute 21 Years Old Royal Salute 21 Years Old Johnnie Walker Blue Label Johnnie Walker Blue Label Johnnie Walker Blue Label Macallan 40 Years Old Ballantine's 30 Years Old Ballantine's 30 Years Old Royal Salute 38 Years Old Macallan 40 Years Old Best Ultra Luxury Cognac Louis XIII Louis XIII Louis XIII L'Age d'Or de Rémy Martin Richard Hennessy Richard Hennessy Richard Hennessy Best Premium Cognac Hennessy XO Hennessy XO Hennessy X.O Martell XO Rémy Martin XO Martell Cordon Bleu Rémy Martin XO Martell XO Rémy Martin X.O Best Chinese Spirits Moutai Moutai Moutai Wuliangye Wuliangye Wuliangye Luzhou Laojiao Luzhou Laojiao Luzhou Laojiao Best Premium Champagne Veuve Clicquot La Grande Dame Veuve Clicquot La Grande Dame Moět & Chandon Dom Pérignon Moět & Chandon Brut Imperial Vintage Dom Pérignon Moět & Chandon Brut Imperial Vintage Dom Pérignon Veuve Clicquot Piper- Heidsieck Brut Cuvée Rare Piper-Heidsieck Brut Cuvée Rare Source: Hurun Research Institute
Prestige cosmetics Rising demand from We believe China will have the fastest-growing premium cosmetics market in emerging economies the world over the next four years - we expect a 14% Cagr compared with the global average of 5%. Slowing/declining growth in the cosmetics market in Western economies will largely be offset by expansion in emerging markets, particularly Russia, India, China of what we estimate will be 14-17% per annum. The USA and Japan remain the largest premium cosmetics markets in the world, and sales in these countries are expected to remain flat/slightly decline in 2010-14. We estimate that the Chinese premium cosmetics market will grow from US$3.5bn to US$6bn in 14CL.
Cosmetics and toiletries market 2009-14 Cagr
Russia India China Brazil World Canada Spain United Kingdom Italy France USA Japan (%)
(5) 0 5 10 15 20
Source: Euromonitor, CLSA Asia-Pacific markets
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Brics market size and growth
(US$m) 2010 % of global 2014 % of global Cagr (%) 10-14 China 3,514 4 5,992 6 14 India 521 1 979 1 17 Russia 1,266 2 2,409 3 17 Brazil 430 1 624 1 10 Total 5,730 7 10,004 10 15 Source: Euromonitor, CLSA Asia-Pacific Markets
Key trends In China, pale skin In China, pale skin traditionally represents feminine beauty, which explains traditionally represents the large sums of money spent on whitening as well as sunscreen products. feminine beauty As people get richer, they are moving from “needs” to “wants”, and women want clean, white skin. As such, cosmetics sales are outstripping GDP growth.
About 58% of market Skincare accounts for 58% of the premium cosmetics market in China, only is skincare slightly lower than Japan, where pale skin is also highly valued. Unlike other Western markets, fragrances are not a major segment in China. Fragrances, however, make up 62-76% of the Brazil and Russia markets.
Fragrances is a relatively China’s premium cosmetics market breakdown (2010) small segment in China Baby care 1% Sun care 3% Bath and shower 4%
Hair care 5%
Sets/Kits 8%
Colour cosmetics Skin care 10% 58%
Fragrances 11%
Skincare as % of premium cosmetics Fragrance as % of premium cosmetics
Japan Brazil China Russia Italy Spain France France World UK Spain Italy Canada USA UK World USA Canada Russia India India China Brazil (%) Japan (%)
0 20406080 0 20406080
Source: Euromonitor, CLSA Asia-Pacific Markets
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US$2bn premium China’s premium cosmetics market enjoyed a strong 24% Cagr over 2000-10, skincare market especially in premium skincare, as consumers’ discretionary income rises. But it remains highly fragmented and the lack of premium local Chinese brands creates a tremendous opportunity for foreign companies. China’s premium skincare market is valued at US$2bn, still a fraction of Japan’s US$9bn market but growing very rapidly.
China premium cosmetics segment growth rates (10-14CL)
Colour cosmetics
Baby care
Sun care
Sets/Kits
Skin care
Fragrances
Hair care
Bath and shower (%)
05101520
Source: Euromonitor, CLSA Asia-Pacific Markets
Foreign brands are doing well in cosmetics. For example, our US analyst Caroline Levy projects that China would grow to 10% of total Ebit for Estée Lauder by 2020 from 4.5% today. This translates to US$1.6bn of sales and US$273m of Ebit. As we should expect in this fast-growing market, investment levels are high, channels are segmenting, brands are innovating, and distribution is evolving fast. Geographical differences play a role: for example, the drier northern region has a stronger bias towards moisturising products.
Still a foreign Global cosmetics giant Amway Corp holds a dominant share in China with its brands’ market direct selling and retailing strategy in the country. However, in terms of brand recognition, ultra-premium brands Chanel, Dior, Shiseido, L’Oreal, and Hugo Boss are still the top five that mainland millionaires like. Although domestic firms, like Shanghai Jahwa, are trying to break into the premium segment, their success so far is still primarily coming from the mid-market.
Premium cosmetics brand shares in China Brand (%) Company 2005 2006 2007 2008 2009 Amway Amway Corp 28.9 23.8 22.7 24.9 23.0 Shiseido Shiseido 2.9 4.1 4.4 5.1 7.3 Lancôme L'Oréal 4.5 5.4 5.5 6.0 6.9 Estée Lauder Estée Lauder 2.9 3.8 4.4 4.7 5.0 Fancl Fancl Corp 0.3 1.0 2.0 2.9 3.3 Clinique Estée Lauder 1.8 2.2 2.3 2.4 2.5 Kosé Kosé Corp 2.3 2.6 2.4 2.3 2.3 Chanel Chanel SA 1.3 1.7 2.0 2.1 2.2 Christian Dior LVMH Moët Hennessy Louis Vuitton 1.6 1.8 1.9 2.0 2.0 Biotherm L'Oréal 1.3 1.5 1.6 1.6 1.7 Guerlain LVMH Moët Hennessy Louis Vuitton 1.0 1.1 1.3 1.4 1.5 SK-II Procter & Gamble 4.2 2.2 1.4 1.1 0.9 Others Others 47.1 48.9 48.3 43.6 41.4 Total Total 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor
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Chinese millionaires’ favourite skincare brands
2008 2009 2010 Shiseido Shiseido Chanel HUGO BOSS Lancome Dior Lancôme HUGO BOSS Shiseido Biotherm Chanel L' Oréal Chanel Biotherm HUGO BOSS Shu Uemura L' Oréal La Mer La Mer Shu Uemura L' Oréal La Mer Source: Hurun Research Institute
Foreign brands Our proprietary survey’s results also confirm that global foreign brands well-recognised dominate the prestigious cosmetics market in the mainland.
Everyone likes Which luxury brands would you like to own? Which luxury brands did you buy? foreign names
Skincare & Cosmetics Skincare & Cosmetics
Estee Lauder 15 Estee Lauder 14 Lancome 8 Shiseido 11 Chanel 6 Lancome 6 Shiseido 5 Dior 4 Dior 5 Clinique 4 L'Oreal 1 Olay 3 Olay 1 L'Oreal 3 Clinique 1 Sisley 2 VICHY 1 Nivea 2 (% of consumers) (No. of mentions) Marubi 1 Biotherm 2
0 5 10 15 20 0 5 10 15
Perfume Perfume
Estee Lauder 16 Chanel 12 Chanel 15 Lancome 4 Dior 7 Dior 4 Lancome 3 Estee Lauder 2 Calvin Klein 2 Calvin Klein 2 Guerlain 1 Burberry 2 AnnaSui 1 Adidas 2 Prairie 1 Issey Miyake 1 Davidoff 0 Kenzo 1 (% of consumers) (No. of mentions) Hermes 0 Hermes 1
0 5 10 15 20 0 5 10 15
Source: CLSA Asia-Pacific Markets
Cosmetics are characterised by high brand loyalty, as our recent China Brands Index report confirms.
Men’s grooming market Another trend in the cosmetics space in China is the rapid growth of the may be the next men’s grooming market. Euromonitor expects the market Cagr for male- luxury segment grooming products in 2010-14 to be more than double that of the overall beauty and personal care market at 22%, compared with 10%. Unilever and L’Oreal have both invested heavily in this segment in the past four years and built a 32% and 11% market share in men’s toiletries. As the men’s market continues to develop, we expect high-end brands to tap into this fast-growing segment as well.
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Brand loyalty across sectors Our China Brands Index shows high loyalty for cosmetics and skincare Mobile service Supermarket Cosmetics Insurance Dept store Skin care Camera Aircon Wine Washing machine Online travel PC Instant messaging Instant noodles Juice Refrigerator Dairy Mobile handset Tea beverages Shampoo CSD drinks Beer Bottled water TV Car Banking Search engine Sportswear Shoes (non-sports) (%) Clothing (non-sports)
020406080100
Source: CLSA Asia-Pacific Markets
Growing at double-digits Men’s grooming market growth vs overall beauty and personal-care market
45 (%) Men's grooming market 40 38 Beauty and personal care market
35
30 27 27 26 24 25 22 20 20 18
14 15 12 11 10 10 10 9 10 9
5
0 2007 2008 2009 2010 2011 2012 2013 2014
Source: Euromonitor, CLSA Asia-Pacific Markets
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Luxury services As the Chinese saying goes, daily life is all about clothes, food, accommodation and travel. Luxury goods, therefore, are only part of the equation. Chinese affluent are also willing to pay to get the best out of other elements of life, including eating, sleeping, and even match-making.
Restaurants Mainland Chinese enjoy high-end services, ranging from gourmet restaurants to match-making services. In Hong Kong, overnight visitors from China spent HK$561 per capita on meals outside hotel, or 8% of their total spending in Hong Kong. However, affluent mainland tourists are spending much more than this average during their trips to Hong Kong.
Abalone and shark’s Miramar group in Hong Kong said they often see travellers walk in to their fin soup upmarket Cantonese restaurant with their shopping bags and walk out with a HK$100,000 bill for dinner. A classic lunch party would be a table of 10 mainland travellers washing down a menu of abalone and shark’s fin soup with half a dozen bottles of Chateau Lafite Rothschild. The restaurant’s dinner sets range from HK$8,880-13,880.
Rmb1,200 per head With strong brand recognition, Miramar is planning to expand into China. It is aiming to open 20 restaurants by 2017 at a total cost of HK$400m. The company estimates that in Beijing, where its first outlet will open by mid- 2011, wealthy Chinese would spend about Rmb1,200 per head. It aims to recover the HK$30m investment cost in two years.
The imperial four In China, the four most prestigious food ingredients are now frequently visit luxury restaurants and order these abalone, sea cucumber, shark’s fin, and fish maw. These items for dining along with other delicacies such as bird’s items are believed to be imperial food ingredients only nest, snake soup and hairy crabs. In recent years, served at the emperor’s table. Time has changed, Western favourites such as lobsters and truffle are also however, and the affluent individuals in the mainland appearing more often on Chinese menus.
Sample full dinner menus Chinese French
Roasted whole crispy suckling pig Fresh and smoked salmon tartare
Stir-fried prawns braised with crab roe sauce Chestnut soup with praline cream and chicken mousse dumpling
Braised seasonal green with bamboo fungus and Yunnan ham Seared sea bass with steamed zucchini, tomato, basil and truffle
Braised whole conpoy stuffed in turnip ring Duck breast fillet with caramelized autumn fruit and fig reduction
Braised superior shark’s fin with Chinese cabbage in brown sauce Dessert
Steamed fresh spotted garoupa Coffee or tea
Braised abalone and sea cucumber with premium oyster cause
Deep-fried crispy chicken with osmanthus sauce
Fried rice with dried conpoy, dried fish and roasted duck
Braised e-fu noodles with wild mushrooms
Double-boiled sweetened lotus seed with red dates and dried longans
Chinese petits four Source: Cuisine Cuisine, Le Jardin de Joel Robuchon
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Appendix Wealthy Asia
Shark’s fin and imperial bird’s nest (HK$720 per bowl) Braised assorted snake soup (HK$880 per bowl)
Source: Company website
High-end dining taking off With more than 50 outlets nationwide, mainland restaurant chain South in the mainland Beauty Group has also introduced the Lan Club in Beijing and Shanghai to target affluent individuals in the mainland. Bringing in world-class professionals who have designed New York’s Buddakan and the W Hotel Pudong in Shanghai, South Beauty Group feels that the Chinese elite demands sophistication and taste in their dining experience. Meanwhile, one of the world’s most famous chefs Jean-Georges Vongerichten also opened a restaurant in Shanghai featuring appetizers starting from Rmb118-198 and dinner entrees from Rmb248-348.
Hotels Shangri-La is the Chinese affluent like to maintain their luxurious lifestyle when they are on the top brand road. According to Hurun’s Best of the Best survey, Shangri-La is the top hotel brand among Chinese millionaires. Grand Hyatt, Hyatt Regency and Hilton have also consistently been ranked among the top five.
Chinese millionaires’ favourite hotels
2006 2007 2008 2009 2010
Shangri-La Shangri-La Shangri-La Shangri-La Shangri-La
Grand Hyatt Grand Hyatt Hyatt Regency Grand Hyatt Grand Hyatt
Hyatt Regency Hyatt Regency Grand Hyatt Hyatt Regency Hilton
Hilton Hilton Kempinski Hilton Sheraton
Sheraton Sheraton Sheraton Kempinski Hyatt Regency
JW Marriott Marriott
Kempinski Kempinski Source: Hurun Research Institute
High-end hotel chains have ramped up their expansion plans in China to capture opportunities in this luxury segment. Starwood expects to add 86 hotels to its current network of 62 in China.
Meanwhile, InterContinental aims to double its number of rooms in the Greater China region in the next five years. The company expects China to overtake the US as the world’s largest hotel market by 2025 and become twice the size of the current US market by 2039.
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Hotel growth rate in mainland China (number of hotels) Luxury five-star hotels booming 60 (%) Total hotels 5-star hotels 50 40 30 20 10 0 (10) (20) (30) (40) 1995 1997 1999 2001 2003 2005 2007 2009
Source: CEIC, CLSA Asia-Pacific Markets
Hotel prices catching up Some luxury hotels in Shanghai are already at a price range comparable with with global peers . . . those in financial hubs such as New York and London.
. . . primarily in Luxury hotel price comparison Tier-1 cities Ritz-Carlton New York, Central Park The Ritz London Mandarin Oriental Hyde Park, London The Peninsula Shanghai The Ritz-Carlton Shanghai, Pudong The New York Palace Trump Soho New York Pudong Shangri-La Shanghai Four Seasons Shanghai Four Seasons London Canary Wharf JW Marriott Hotel Beijing Shangri-La China World Hotel, Beijing Grand Hyatt Beijing Grand Hyatt Shanghai Sheraton Shenzhen Futian Hotel Grand Hyatt Shenzhen Hilton New York The Peninsula Beijing The Westin Beijing Chaoyang Westin, Bund Center Shanghai St. Regis Shanghai Intercontinental Beijing Beichen Hotel (US$)
0 100 200 300 400 500 600 700
Source: Expedia, CLSA Asia-Pacific Markets
Not only are these hotel chains aggressively building up in major cities, they are also targeting popular tourist spots in China. In November 2010, St. Regis opened the first international luxury hotels in Lhasa, the capital of Tibet. Shangri-La Asia is also targeting to develop one there in 2012 and InterContinental is planning a 2,000-room hotel within three years.
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Match-making VIP match-making service The rapid rise of these Chinese affluent has created a new challenge for themselves and a business opportunity for some. The Chinese Academy of Social Sciences forecasts that by 2020, 24 million Chinese men of marrying age could see a shortage of brides, partly because of the one-child policy.
Hard time finding a bride Mainland population aged 18-34
170 (m) Male aged 18-34 Female aged 18-34
165
160
155
150
145 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Euromonitor, CLSA Asia-Pacific Markets
Claiming an 80% Coupled with this macro trend, wealthy Chinese are moving into circles that success rate make it hard for them to find partners, said the founder of a match-making company in China, Diamond Bachelor. Diamond Bachelor, which claims that it has five million clients and a success rate, defined as clients falling in love with their recommendations, of at least 80%, sends “love hunters” out to restaurants and malls to scour for the right women. The company then categorises women based on age, education, height, and looks. According to its website (915915.com, which is a homonym for “just want me, just want me”), the company’s definition for a “diamond bachelor” is an individual with net worth of more than Rmb2m or with “extremely outstanding” profiles.
Rmb100,000 for a In 2009, a group of 21 single billionaires and 22 single women attended a match-making ball ticket match-making ball in Beijing with tickets costing Rmb100,000 a head. In June 2010, jiayuan.com, a large online-dating agency, even held a competition to find the perfect match for 18 of its millionaire members. It was reported that the competition drew 50,000 Chinese applicants including girls from Vancouver, Singapore, New York and Paris.
Diamond Bachelor website featuring its “love hunters”
Source: 915915.com.cn
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Notes
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Notes
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© 2011 CLSA Asia-Pacific Markets ("CLSA"). Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends). 01/01/2011