Target price: HK$3.51 Hosa (2200 HK) Previous TP: N/A Core Pacific - Yamaichi 26 April 2013 Last price: HK$3.05

China / / Initiation Report Potential Return: +15%

Beneficiary of sportswear professionalization  Swimwear fashion driving not only volume but also price Initiate with BUY  ‘‘Water Cube’’ enhancing consumer coverage to bring 26 April 2013

long-term benefits Felix Kwok 郭亮  The rise of chained fitness and yoga centers speeds up the Tel: 852 2826 0006 progress of sportswear professionalization [email protected]  The rise of chained fitness and yoga centers

 Catalyst Forecast revision (%)  Swimwear fashion driving not only volume but also price. Beach Year to 31 Dec 13F 14F 15F culture and water sports are sweeping across China, leading Revenue change NA NA NA swimwear to become a fashion product rather than just for Net profit change NA NA NA functionality. This drives the demand for branded swimwear. Besides, EPS change NA NA NA Spas and hot springs spawn a new demand for swimwear in winter. Key Share Data  ‘‘Water Cube’’ enhancing consumer coverage to bring long-term

52-week High / Low HK$3.06/1.60 benefits. A new swimwear brand ‘‘Water Cube’’ will be launched in 2H13, targeting the young generation and mass market. It is expected 30D avg volume 3.06m to drive swimwear revenue up with 21.9% CAGR (FY12-FY15F). Issued share 1,602m  Beneficiary of sportswear professionalization. With increasing Market cap 4,887m living standard in China, there is a rising demand of consumers for Major Shareholder Shi Hongliu & Asso. (61.49%) products portraying professionalism. This lifts the demand for fitness Share Price Performance wear and sports underwear. The rise of chained fitness and yoga 195 Stock HSI INDEX centers speeds up the progress of sportswear professionalization.

175  Valuation 155  TP HK$3.51, initiate with BUY . Hosa is currently trading at FY13F 135 PER of 11.8x with 1.10x two-year PEG (FY12 to FY14F), excluding 115 the impact of the one-off government grants in FY12. Considering the 95 swimwear and indoor sportswear being in the up-cycle, we set our 75 target FY13F PER at 13.5x based three-year sportswear sector

55 average forward PER for the up-cycle period of 2009 to 2011. We, therefore, devise the target price to HK$3.51, implying 1.27x two-year

04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 12/12 01/13 02/13 03/13 PEG (FY12 to FY14F). We initiate with BUY recommendation on the counter with 15% upside potential.

Key Financials  Our View Year to 31 Dec FY12 FY13F FY14F FY15F  Moderate competition in the market. We like Hosa as the indoor Revenue (RMB mn) 848 1,004 1,198 1,375 sportswear market is still at its early stage in China. It has the leading Growth (%) 22 18 19 15 market position and does not need to face significant competition from Net profit (RMB mn) 331 330 390 445 international players. Along with the growth of swimwear and fitness Growth (%) 21 0 18 14 wear markets, we expect the revenue to growth with 17.5% CAGR in EPS (RMB) 0.21 0.21 0.24 0.28 revenue to RMB1,375mn in FY15F, mainly driven by the sales Growth (%) -8 0 18 14 volume. GPM is expected to fall due to the new brand, but we P/E (x) 11.7 11.8 9.9 8.7 anticipate it to be stay above 59.0%. Due to the tightening controls on P/B (x) 3.7 3.3 2.7 2.4 OPEX, bottom-line is expected to achieve 12.2% CAGR EV/ EBITDA (x) 8.7 7.5 6.3 5.5 (FY12-FY15F), excluding the one-off government grants in FY12. Yield (%) 3.4 3.4 4.0 4.6 Source: Company data and Core Pacific-Yamaichi

Disclaimer: This report is for information only and is not to be construed as an offer to buy or sell securities. While the report is compiled using sources believed to be reliable, Core Pacific - Yamaichi International (H.K.) Limited (“CPYI”) does not guarantee its accuracy or completeness. CPYI may update or change any information contained in this report without any notice. Neither CPYI nor any of the companies of Core Pacific Group nor any individuals connected with the Group shall accept any legal responsibility arising from the use of or reliance upon the report. The copyright of this report belongs to CPYI and no person may reproduce or publish any part of this report for any purpose without CPYI’s written consent. The authors of this report are Licensed Representative of Securities and Futures Commission and they guarantee that all the views expressed in this report accurately reflect their personal views. CPYI, any of the companies of Core Pacific Group, its directors and/or its employees may have positions in, and may effect transactions in securities mentioned herein which may be opposite to the position you take. 1 Core Pacific - Yamaichi 26 April 2013

Swimwear becomes a fashion

Swimwear becoming a fashion… With the development of Hainan tourism, the beach culture and water sports are sweeping across China. With growing popularity of beaches and water sports activities in China, people put more emphasis on swimwear’s outlook and design, leading swimwear to become a fashion product rather than just for functionality. According to government data, most of the domestic consumers generally replace their every one to two years. Besides, by our observation, the ladies tend to have more sets of currently. Both factors lead to a higher demand for swimwear. Based on the industry figures reported by Xinhuanet in Aug2012, approximately 200mn sets of swimwear were sold in the PRC in 2011, about 20% of overall global sales. Based on the report of Frost and Sullivan, the domestic ex-factory revenue of swimwear is expected to grow with 19.4% CAGR for 2010 to 2015F.

… driving the demand for branded… As swimwear is becoming a fashion and there is a sustainable growth in per capita income, the demand for branded swimwear is strong. Frost and Sullivan also expects the growth of domestic ex-factory revenue for mid-to-high end swimwear to outperform the market with 25.6% CAGR for 2010 to 2015F. Although some international brands, such as and , play actively in the PRC market, the domestic brands, including Hosa and Zoke, continue to play a leading role. Another point is that, due to the Chinese culture, domestic female consumers favor non-bikini two pieces swimwear more than bikini, which also restricts the expansion of foreign swimwear fashion brands in the PRC market.

… not only being used in summer. Spas and hot springs become more popular in the PRC. Unlike those in Japan, people are required to wear swimwear in hot springs, which spawns a new demand for swimwear in winter. Although some people anticipate this to give birth to a new swimwear segment, which is called hot water bathing suits, we believe the mainstream tends to go to general swimwear rather than that functional swimwear. The hot water culture definitively benefits Hosa and lowers the seasonality risks of its swimwear segment. In addition, the increasing numbers of indoor heated pool also drive the swimwear demand in winter. Therefore, we stay positive to the sustainable growth in China’s swimwear market.

Figure 1: Outdoor Hot spring Resort in China Figure 2: Indoor Hot spring Resort in China

Source: Fengshan Hotspring Resort Source: Valley View Hotspring Resort

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Capturing mass swimwear market

Launching a new swimwear brand, ‘‘Water Cube’’, in 2H13. Hosa is positioning itself as a mid-to-high end brand. This leaves a loophole on its clienteles for those in the mass market segment. To cater this group of customers, Hosa joins hands with National Aquatics Center to launch Water Cube Brand swimwear and accessories. According to the corporation agreement, Hosa will owned the Water Cube swimwear brand for the next 20 years and it plans to launch new products in 2H13 targeting the teenagers and mid-to-low-end market.

Expecting 21.9% CAGR in swimwear revenue for FY12-FY15F. Due to the expectation of lower ASP for the new brand, the pressure on swimwear GPM cannot be avoided. However, we believe it is positive for Hosa to enhance its consumer coverage without direct impact to its original mid-to-high end Hosa brand. Meanwhile, Hosa is looking for acquisitions in high-end international professional swimwear brand to strengthen its high-end market position, especially enhancing the bargaining power with department stores due to more comprehensive product mix. Excluding potential acquisitions, we expect the revenue of swimwear business to growth with 21.9% CAGR to RMB551mn in FY15F with GPM keeping above 59%.

Figure 3: Swimwear under Water Cube brand

Source: Company data

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Beneficiary of sportswear professionalization

Rapid growth in the indoor sportswear sector. With continuous improvement in living standards, people in China have stronger awareness of both healthcare and fitness. With the construction of more indoor stadiums, urbanites are moving towards the indoors, such as fitness and yoga. Comparing with those outdoors, the amount of exercise for indoor sports is generally more controllable and they are more personalized, especially matching the white-collar professionals’ favors. Meanwhile, fitness and yoga players have a relatively stronger sense of superiority in China, which is also an incentive for white-collar professionals to join those activities. Furthermore, the serious air pollution in China is another motivator to shift people from outdoor sports towards indoor sports. All these bring up the demand for both fitness and yoga centers.

The rise of professional chained fitness and yoga centers speeding up the progress of sportswear professionalization. Chained fitness and yoga centers have been growing rapidly in the past decade in the first-tier cities, especially in Beijing and Shanghai, and the big names, such as Kingsport, Will’s, Tera and Hosa Fitness (Hosa Fitness is held by the Hosa’s major shareholders but is not under the listed company.), have hundreds of thousands members in the PRC. Meanwhile, yoga sports have attracted a large group of office ladies to be their fans. The centers are generally targeting on the mid-to-high-end consumers, who are more affordable and willing to buy relevant branded sportswear portraying professionalism, such as fitness wear and sports underwear. This provides golden business opportunities to Hosa. The company has a good start in capturing this target customer group through its distribution channel in related professional fitness centers. Further sales cooperation with other professional yoga fitness gyms is one of its major direction. Along with the market growth, we anticipate the revenue in fitness wear segment to increase with 19.0% CAGR to RMB350mn in FY15F.

Figure 4: Hosa Fitness Center (Longde) Figure 5: Yoga room (Longde)

Source: Company data and Hosa Fitness Center Source: Company data and Hosa Fitness Center

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Stepping into casual sports underwear market

Casual sports underwear business helping to diversify the seasonality risks. Although the professional sports underwear market is growing very fast, it is still very niche comparing with the thermal and casual sports underwear market. Therefore, Hosa has stepped into this market already. This market segment should account for approximately 50% of sports underwear revenue in FY12, based on our estimation. As Hosa’s thermal and casual sports underwear is targeting mid-to-high end market, the ASP only dropped by 3.1% yoy for the overall sports underwear segment. However, because of the relatively higher raw materials cost, it dragged down the segment’s GPM by 6.8pts to 50.2% in FY12, which was still reasonably high. Based on our observation, Hosa’s thermal underwear is very popular in winter while the casual sports underwear is suitable throughout the whole year. We believe this is an enormous opportunity and can help to diversify the seasonality risks of the Company. As a whole, we estimate the revenue in sports underwear to grow with 12.4% CAGR to RMB428mn in FY15F.

Table 1: Hosa’s thermal and casual sports underwear

Products Thermal underwear Female casual sports underwear Male casual sports underwear Marked Price RMB399 per set RMB159 (Top only) RMB159 (Top only) Discounted Price RMB279.3 per set RMB111.3 (Top only) RMB111.3 (Top only) 60% cotton 48% regenerated cellulose fiber 48% regenerated cellulose fiber Materials 35% viscose fiber 47% Cotton 47% Cotton 5% Spandex 5% Spandex 5% Spandex

Source: Company data, Tmall and Core Pacific-Yamaichi

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Retail networks expansion

Store network expanding to 1,330 POS in 2012. As the Group now adopts a distributorship model (as of FY12, Hosa sold its products through 31 distributors), Hosa product line is able to expand at a faster pace throughout China. The Group currently has 1,330 stores across China, operated by distributors with approximately 70% of the stores located in tier 1 cities and 30% of the stores located in tier 2 and 3 cities. Department stores are the key retail channels and Hosa is likely to keep that strategy for the sales of swimwear.

Further expansion of 100 POS in 2013. In 2013, the Company plans to further develop its professional retail outlet network (in fitness centers or aquatic facilities including club houses), but this takes a relatively longer time to negotiate with different parties. Therefore, the new separated feature retail outlets for fitness wear in the shopping malls will be the Company’s focus this year for the purpose of strengthening its brand image. Management tends to enhance the quality of its retail outlets rather than taking an aggressive expansion plan. It targets to have a net increase of 100 POS by the end of 2013. We believe Hosa will maintain this expansion progress in coming few years with increasing exposures in tier 2 and 3 cities.

Table 2: Retail stores distribution – A net increase of 118 POS in FY12 mainly in department stores Year end 31 Dec FY08 FY09 FY10 FY11 FY12 Department stores 499 516 562 906 1,012 Professional retail outlets 1 1 62 68 68 Hosa Specialty stores 5 5 42 238 250 Total 505 522 666 1,212 1,330 Source: Company data and Core Pacific-Yamaichi

Figure 6: Hosa Shop of Glory mall Figure 7: Hosa Shop of Glory mall

Source: Company data and Hosa Fitness Center Source: Company data and Hosa Fitness Center

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Figure 8: Distributor Network Management

Source: Company data

Figure 9: Retail stores distribution in 2012 by region

Source: Company data and Core Pacific-Yamaichi

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Moderate competition in the market

Unaffected by current sportswear woes. Unlike the current general China sportswear market, the swimwear and indoor sportswear markets are still at their early stages in China. Hosa does not have to face the problems of high inventory level and product homogeneity, which lead to significant pressure on ASP in general sportswear market. Besides, currently, major international swimsuit brands such as Speedo and Arena or Fitness/sports underwear brands such as Lulu Lemon and Under Armor have yet to fully penetrate and establish a solid foothold in China market. Hence, it gives Hosa a chance and valuable time to capture strong growth as well as prepare for the future competition from overseas by solidifying its current brand and establishing an extensive retail network.

Table 3: Peer comparison of major competitors Under Brand Hosa Nike LuluLemon Speedo Arena Zoke Armour Stock Code 2200 HK NKE US ADS GR LULU US UA US N/A N/A N/A Brand Origin China USA Germany Canada USA USA France China Swimwear, Swimwear, Fitness wear Fitness wear Footwear & Footwear & Fitness wear Swimwear & Core Products & Sports Swimwear Swimwear & Sports Apparel Apparel & Sports Fitness wear underwear underwear underwear POS in China* 1,330 126 111 0 4 268 132 260 Major Market Segment Mid-to-high Mid-to-high Mid-to-high High Mid-to-high High High Mid-to-low

Approximate Price Range (RMB)

Swimwear (per set) 398 N/A 369 924 N/A 579 499 219 Fitness wear (top only) 258 299 329 494 349 N/A N/A 238 Sports underwear (top only) 158 249 269 414 330 N/A N/A 168

Market Share (2010) #

Swimwear 6.1% N/A N/A N/A N/A 2.3% 2.6% 2.4% Fitness wear 4.6% N/A N/A N/A N/A N/A N/A 2.1% Sports underwear 31.1% 3.2% 4.9% N/A N/A N/A N/A N/A

* The POS figures are based on company data and official websites information and the figures exclude Taiwan, Hong Kong and Macau. For Nike, it only includes Nike Womens and Women's Training. For Adidas, it only includes outlet stores, originals stores and brand centers. For LuluLemon, it currently only has footprint in Hong Kong for the Greater China Region # The market share figure was based on the domestic ex-factory revenue in 2010. (Source: Frost and Sullivan) Source: Company data, Frost and Sullivan, Tmall and Core Pacific-Yamaichi

Figure 10: Products of Hosa

Source: Company data and Frost and Sullivan

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Earnings forecasts

17.5% CAGR in revenue for FY12 to FY15F. Although the new products of Water Cube will be launched in 2H13, we expect they will not make material contributions in FY13F but they will fuel the growth in FY14F. With the market expansion and retail network forecast of 1,430/1,560/1,660 for FY13F/14F/15F respectively, we expect the revenue to growth with 17.5% CAGR in revenue to RMB1,375mn in FY15F. The growth will be mainly driven by the sales volume growth.

Figure 11: Retail stores distribution in 2012 by region

RMB Mn Swimwear [LHS] Fitness wear [LHS] Sports underwear [LHS] Total Revenue [LHS] % Change YoY [RHS] 1,500 1,375 120% 99.9% 1,198 1,004 100% 1,000 848 80% 695 60% 500 22.0% 40% 18.4% 19.3% 14.8% 20% 0 0% FY11 FY12 FY13F FY14F FY15F

Source: Company data and Core Pacific-Yamaichi estimates

Table 4: Key assumptions on revenue Unit FY11 FY12 FY13F FY14F FY15F Swimwear (ASP) RMB 64. 4 92.2 91.1 88.0 88.5 YoY growth % 79.6% 43.2% -1.2% -3.4% 0.5% Swimwear (Volume) Mn 3.7 3.3 4.0 5.3 6.2 YoY growth % -7.9% -10.5% 21.7% 31.7% 17.7% Swimwear (Revenue) RMB Mn 237.2 304.0 365.6 465.3 550.5 YoY growth % 65.4% 28.1% 20.3% 27.3% 18.3%

Fitness wear (ASP) RMB 73.8 74.8 75.8 76.8 77.8 YoY growth % 42.8% 1.3% 1.3% 1.3% 1.3% Fitness wear (Volume) Mn 2.1 2.8 3.3 3.9 4.5 YoY growth % 47.3% 32.0% 20.0% 17.5% 15.0% Fitness wear (Revenue) RMB Mn 155.3 207.6 252.5 300.5 350.2 YoY growth % 110.4% 33.7% 21.6% 19.0% 16.5%

Sports underwear (ASP) RMB 80.9 78.3 80.2 82.2 84.3 YoY growth % 46.1% -3.1% 2.4% 2.5% 2.5% Sports underwear (Volume) Mn 3.3 3.9 4.3 4.8 5.1 YoY growth % 65.8% 15.2% 12.7% 9.5% 7.0% Sports underwear (Revenue) RMB Mn 270.3 301.6 347.9 390.5 428.4 YoY growth % 142.2% 11.6% 15.4% 12.2% 9.7%

Accessories (ASP) RMB 34.2 37.3 40.3 43.5 47.0 YoY growth % 27.1% 9.0% 8.0% 8.0% 8.0% Accessories (Volume) Mn 0.9 0.9 0.9 1.0 1.0 YoY growth % 34.6% -1.4% 1.5% 1.5% 1.5% Accessories (Revenue) RMB Mn 32.4 34.8 38.2 41.8 45.9 YoY growth % 71.1% 7.5% 9.6% 9.6% 9.6%

Total Revenue RMB Mn 695.2 848.1 1, 004.1 1,198.1 1,374.9 YoY growth % 99.9% 22.0% 18.4% 19.3% 14.8%

Source: Company data and Core Pacific-Yamaichi estimates

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Figure 12: Swimwear revenue forecast Figure 13: Fitness wear revenue forecast RMB Mn Fitness wear [LHS] GPM [RHS] RMB Mn Water Cube Brand [LHS] Hosa Brand [LHS] GPM [RHS] 600 67.6% 67.4% 67.3% 70% 800 70% 66.9% 67.2% 65.5% 64.7% 63.8% 62.0% 600 551 465 60% 400 350 60% 60.8% 301 366 400 252 304 208 49.2% 237 48.5% 50% 200 155 50% 200 143 74

0 40% 0 40% FY10 FY11 FY12 FY13F FY14F FY15F FY10 FY11 FY12 FY13F FY14F FY15F

Source: Company data and Core Pacific-Yamaichi estimates Source: Company data and Core Pacific-Yamaichi estimates

Figure 14: Sports underwear revenue forecast Figure 15: Accessories revenue forecast

RMB Mn Pro Sports underwear [LHS] RMB Mn Accessories [LHS] GPM [RHS] Thermal & casual underwear [LHS] 600 60% 80 66.7% 70% 57.0% GPM [RHS] 65.4% 66.0% 66.4% 66.2% 65% 428 390 55% 60 400 348 46 60% 302 55.4% 42 270 38 50% 40 32 35 55% 47.1% 50.2% 49.8% 49.4% 49.1% 200 19 50% 112 45% 20 45%

0 40% 0 40% FY10 FY11 FY12 FY13F FY14F FY15F FY10 FY11 FY12 FY13F FY14F FY15F

Source: Company data and Core Pacific-Yamaichi estimates Source: Company data and Core Pacific-Yamaichi estimates

Table 5: Profit & loss forecast Year to Dec (RMB mn) FY13F FY14F FY15F Revenue 1,004 1,198 1,375 Swimwear 366 465 551 Fitness wear 252 301 350 Sports underwear 348 390 428 Accessories 38 42 46 COGS (403) (486) (563) Gross profit 601 712 812 Other Income (net) 11 12 14 SG&A (172) (203) (231) EBITDA 447 532 610 EBIT 440 521 595 Net Financial Income (Cost) (1) (1) (1) Contribution from subsidiary 0 0 0 Profit before tax 440 520 594 Income tax (110) (130) (148) Minority interests 0 0 0 Net Income 330 390 445 EPS (RMB) 0.2 1 0.24 0.28

Margin Gross profit 59.9% 59.4% 59.0% EBITDA 44.5% 44.4% 44.4% EBIT 43.9% 43.5% 43.3% Net profit 32.8% 32.6% 32.4%

Source: Company data and Core Pacific-Yamaichi estimates

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Slight pressure on GPM. Raw material costs accounted for 76.7% of COGS in FY12. We estimate that fabrics (made of yarn or fibers) should take a key portion of the raw material cost, which was highly related to the cotton and crude oil prices. With the increasing proportion of casual sports underwear, especially the thermal underwear, more raw materials will be consumed relatively. Together with the factor of lower ASP for the new swimwear brand, we see some pressure on the overall GPM, but we expect this will be partly offset by the change on product mix, i.e. increasing proportion of fitness wear.

Tightening controls on OPEX. In FY12, Hosa offered more incentives and subsidies to its distributors and the one-off establishment cost of a R&D center in Beijing lifted FY12 R&D expenses to RMB34.5mn. These two drove the ratio of OPEX/revenue up to 19.1%. Starting from 2013, management tends to have a better control on the OPEX by tightening the distributors’ incentives and subsidies. We anticipate the OPEX ratio to fall to 17.1% in FY13F.

Potential tax rate increase FY13F onwards. Income tax rate for the Group is expected to increase from 12.5% to 25% from FY13F onwards due to the expiration of tax benefit policy in China. According to the 2+3 tax holiday, Hosa was exempted from income tax from FY08-FY09 and will be subjected to 12.5% income tax rate from FY10-FY12, after which income tax will return to 25% from FY13 onwards which may add pressure to profit margins. Excluding the impact of the one-off government grants in FY12, we expect the EPS to growth with 12.2% CAGR (FY12-FY15F).

Figure 16: FY12 COGS breakdown Figure 17: Margins forecast

Procurement % GPM EBITDAM NPM Manufacturing costs of finished 80 overhead products 62.2 60.6 3.3% 9.0% 59.9 59.4 59.0 60 48.7 46.5 45.5 44.5 44.4 44.4 Labor 34.2 11.0% 40 39.4 39.0 32.8 32.6 32.4 20 27.1

Raw materials 0 76.7% FY10 FY11 FY12 FY13F FY14F FY15F

Source: Company data and Core Pacific-Yamaichi Source: Company data and Core Pacific-Yamaichi estimates

Table 6: Key assumptions on GPM, OPEX and tax rate Unit FY11 FY12 FY13F FY14F FY15F

Swimwear (Segment GPM) % 64.7% 65.5% 63.8% 62.0% 60.8% Fitness wear (Segment GPM) % 66.9% 67.6% 67.2% 67.4% 67.3% Sports underwear (Segment GPM) % 57.0% 50.2% 49.8% 49.4% 49.1% Accessories (Segment GPM) % 65.4% 66.7% 66.0% 66.4% 66.2% Overall GPM % 62.2% 60.6% 59.9% 59.4% 59.0%

Selling & distribution expenses as % of revenue % 9.4% 10.8% 10.0% 10.0% 10.0% Administration expenses as % of revenue % 7.9% 8.3% 7.1% 6.9% 6.8% Total OPEX as % of revenue % 17.3% 19.1% 17.1% 16.9% 16.8%

Effective tax rate % 13.3% 12.6% 25.0% 25.0% 25.0%

Source: Company data and Core Pacific-Yamaichi estimates

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Expansion in production base. Besides, the Group plans to increase the ratio of in-house production, which was about 60% in FY12, for the purpose of enhancing production flexibility and quality control. A new plant is expected to be built in Jinjiang, next to the current production base, doubling current production capacity if it is fully utilized. We expect that Hosa will not acquire the land and the total estimated CAPEX is approximately RMB90mn. Given the current net cash position and strong operating cash flows, even though the trade and bills payable days may fall, Hosa’s financial position is still healthy.

Figure 18: In-house production process

Sales fair Research, design & - Presentation of Materials Procurement of raw development of sample products inspection, preparatio materials products - Placing of orders by n and fabric layout distributors

Final product Ironing Fabric cutting, sewing Delivery to customers inspection and and stitching packaging (if needed)

Source: Company data

Figure 19: Working capital cycle

Days FY10 FY11 FY12 FY13F FY14F FY15F 140 123 116 116 120 111 111 113 120 105 105 99 104 100 100 101 100 86 75 80 67 62 60 40 20 0 Average inventory Average trade and bills receivables Average trade and bills payable turnover days turnover days turnover days

Source: Company data and Core Pacific-Yamaichi estimates

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FY12 results summary

FY12 net profit increased 21.2% yoy, in line with market expectation. Hosa announced FY12 results on 28Feb2013 with 22.0% and 21.2% increase in top-line and bottom-line respectively. Excluding the RMB17.8mn government grants, the results were in line with Bloomberg consensus. The top-line growth was mainly driven by the increase in sales volume of fitness wear and ASP of swimwear at 32.0% and 43.2% yoy respectively. However, the increase in the proportion of thermal and casual underwear lifted the raw material costs up 40% yoy. It dragged down the GPM by 1.6pts to 60.6%. Although there will be some margin pressure on the underwear segment, we believe this can smooth out the seasonality impacts from swimwear and benefit Hosa in the long run. Besides, operating expenses also grew significantly in FY12. With the completion of the R&D center in Beijing and the tightening cost control on the incentives and subsidies to the distributors, we expect the ratio of operating expenses to revenue to drop in FY13.

Table 7: FY12 results review YoY Year to 31st Dec (RMB mn) FY12 FY11 Comments Chg Turnover 848.1 695.2 22.0%

ASP increased 43.2% but sales volume - Swimwear 304.0 237.2 28.1% dropped 10.5% yoy ASP increased 1.4% while sales volume - Fitness Wear 207.6 155.3 33.7% gained 32.0% yoy Including thermal and casual underwear; ASP - Sports Underwear 301.6 270.3 11.6% declined 3.2% but sales volume increased 15.2% yoy ASP increased 9.1% but sales volume - Accessories 34.8 32.4 7.5% dropped 1.4% yoy Increase in COGS mainly due to the increasing proportion of thermal and casual underwear, Cost of sales -333.9 -262.6 27.2% which requires more materials in the production process Gross profit 514.2 432.6 18.9% GPM fell 1.6pts to 60.6% Including RMB17.8mn government grants (FY11: Other revenue 27.6 4.7 491.2% RMB3.4mn) Other net (loss)/income -0.3 0.3 N/A

Selling and distribution Increase in the incentives and subsidies to the -91.5 -65.3 40.1% expenses distributors in FY12 The increase was mainly due to the R&D Administrative and other -70.4 -55.1 27.8% expenses on setup a R&D center in Beijing which operating expenses lifted FY12 R&D expenses to RMB34.5mn Profit from operations 379.6 317.2 19.7% EBITM reduced 0.9pts to 44.8% Finance costs -0.6 -1.5 -63.2%

Profit before taxation 379.0 315.7 20.1%

FY12 was the last year to enjoy 2+3 tax holiday Income tax -47.9 -41.9 14.2% with income tax at 12.5% Profit for the year 331.1 273.7 21.0%

Earnings per share (RMB)

— Basic 0.21 0.22 -4.5% Because of the dilution effect in IPO in 2011

— Diluted 0.21 0.22 -4.5%

Source: Company data and Core Pacific-Yamaichi

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Justified for a premium valuation

TP HK$3.51, initiate with BUY recommendation. Hosa is currently trading at a FY13F PER of 11.8x with 1.10x two-year PEG (FY12 to FY14F), excluding the impact of one-off government grants in FY12. Considering the swimwear and indoor sportswear being in the up-cycle, we set our target FY13F PER at 13.5x based on three-year sportswear sector average forward PER for the up-cycle period of 2009 to 2011, where those six major domestic sportswear players, listed in Table 10, recorded approximately 23% CAGR for the total revenue during that period. It is also equivalent to the sector average forward PER for the past three year plus one standard deviation or the three-year average forward PER for Anta (2200 HK). We, therefore, revise the target price to HK$3.51 implying 1.27x two-year PEG (FY12 to FY14F). We initiate with BUY recommendation on the counter with 15% upside potential.

Major risks. 1) Hosa is unable to solidify its leading market position and maintain its brand loyalty given increasing competition from international brands in the near future. 2) Significant slowdown in economy which affects consumer demand.

Table 8: 3-year average forward PER (2009-11) Table 9: 3-year average forward PER (2009-2011) Median Average Std Median Average Std

ANTA 16.2 15.7 4.8 ANTA 12.4 13.5 4.9 11.1 10.5 3.5 XTEP 7.3 8.8 3.6 8.3 9.2 4.3 361 DEGREES 6.3 7.4 3.2 LI NING 21.2 21.5 6.7 PEAK 10.2 9.5 3.2 PEAK 11.4 10.7 5.3 Average 13.6 13.5 4.9 Average 9.0 9.8 3.7 Source: Bloomberg and Core Pacific-Yamaichi Source: Bloomberg and Core Pacific-Yamaichi

Table 10: Peer valuation Fiscal Market 2 years EPS PEG EV/ Yield Company Bloomberg Year- Price Cap PER(x) CAGR (%) (x) EBITDA (%) Net margin (%) ROE (%) Name code end CUR (Local) (HKDm) 12 13F 14F 12 -14F 12 -14F 13F 13F 12 13F 13F HOSA* 2200 HK 12 HKD 3.05 4,887 11.7 11.8 9.9 8.5 1.4 7.5 3.4 39.0 32.8 27.7

Chinese Sportswear ANTA 2020 HK 12 HKD 6.60 16,461 9.9 13.0 12.8 NA NA 6.8 5.5 17.8 15.7 14.5 DONGXIANG 3818 HK 12 HKD 1.28 7,087 32.6 25.1 22.9 19.5 1.7 6.0 2.5 10.0 12.9 3.0 XTEP* 1368 HK 12 HKD 3.28 7,138 7.0 9.9 9.0 NA NA 4.1 5.0 14.6 12.6 10.9 361 DEGREES 1361 HK 12 HKD 2.09 4,321 5.0 7.1 6.1 NA NA 2.0 7.8 14.3 11.8 10.3 LI NING 2331 HK 12 HKD 3.91 4,129 NA NA 43.9 NA NA 34.6 0.4 (29.4) (4.4) (12.3) PEAK 1968 HK 12 HKD 1.39 2,916 7.6 9.2 8.7 NA NA 1.4 5.3 10.7 8.9 6.2 Average 7,009 12.4 12.9 17.2 19.5 1.7 9.1 4.4 6.3 9.6 5.4

International Sportswear NIKE NKE US 05 USD 62.23 431,773 3.3 3.0 2.6 12.4 0.3 14.2 1.3 9.2 9.6 22.8 ADIDAS ADS GR 12 EUR 79.71 168,445 3.2 1.8 1.5 47.2 0.1 9.6 2.0 3.5 6.1 16.3 LULULEMON LULU US 01 USD 75.80 86,472 7.5 5.2 4.9 24.3 0.3 25.3 - 18.4 19.7 36.8 UA US 12 USD 56.84 46,238 6.0 5.0 4.0 22.4 0.3 18.1 - 7.0 7.0 17.0 PUM GR 12 EUR 231.22 35,225 4.9 1.6 1.5 84.4 0.1 8.3 0.9 2.1 6.3 12.2 QUIKSILVER ZQK US 10 USD 6.49 8,430 NA 7.0 2.6 NA NA 10.3 NA (0.5) 1.0 3.1 BBG AU 06 AUD 0.48 1,839 NA 1.9 0.9 NA NA 4.9 - (19.2) 1.3 2.0 Average 111,203 5.0 3.6 2.6 38.1 0.2 12.9 0.7 2.9 7.3 15.7

Source: Bloomberg and Core Pacific-Yamaichi estimates (*Hosa and Xtep only)

14 Core Pacific - Yamaichi 26 April 2013

Sector overview – early stage growth

China indoor sportswear sector still at its early growth stage. The indoor sportswear market in China is still at a relatively early stage in growth relative to other sportswear categories. Hosa is a leader in indoor sportswear which includes swimwear (swimwear and beachwear for woman, men and children), fitness wear (yoga, gym and dance, track suits, general training suits, performance shirts and jackets, leggings and dance apparel). Sports underwear are professional sports underwear for men and women. According to Hosa’s IPO prospectus, research done by Frost and Sullivan, China’s indoor sportswear sector has grown by a CAGR of 30.5% from 2007-2010 and it is expected that the sector in terms of ex-factory price will continue to grow at a CAGR of 24% from 2010-2015. As China’s leading indoor sportswear brand, we believe that if the Management can formulate a sound strategic plan in capturing market share, brand recognition and promotion, Hosa will be able to benefit with the growing demand of indoor sports apparel. In 2010, the Group has the largest market share in indoor sportswear, which includes swimwear (6.1%), fitness wear (4.6%) and sports underwear (31.1%). However, if we only consider the mid-high end indoor sportswear universe in which the Hosa operates, the leadership of Hosa can be much more evident at 23.5%, 19.4% and 42.7% for swimwear, fitness wear and sports underwear respectively.

Figure 20: China indoor sports market ex-factory revenue (2010-2015) RMB Bn 12 10.16 10 CAGR (2007-2010): 30.5% CAGR (2010-2015F): 24.0% 8.42 8 6.88 5.55 6 4.42 4 3.46 2.64 2.06 1.56 2

0 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Source: Company data and Frost and Sullivan

15 Core Pacific - Yamaichi 26 April 2013

Figure 21: China’s swimwear segmentation Figure 22: Swimwear market share (2010) Ex-factory revenue (RMBmn) Mid -to -high end Low -to -mid end China’s Swimwear Marker: China’s Swimwear Marker: 3,000 Segmentation Share by Top Mid-to-high End Brands’ Market Shares 2,627 Domestic Ex-factory Revenue, 2010 by Domestic Ex-factory Revenue, 2010 CAGR (2010-2015F): 2,353 2,500 Mid-to-high end: 25.6% Low-to-mid end: 17.0% 2,056 Hosa 23.5% 2,000 1,756

1,467 Others Arena 1,500 1,303 1,201 41.5% 10.3% 1,016 1,042 1,000 834 832 Mid-to-high 668 663 527 end Zoke 417 9.5% 500 283 25.8% 182 226 Low-to-mid end Speedo 0 74.2% Heatwave 8.8% 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 6.4%

Source: Company data and Frost and Sullivan Source: Company data and Frost and Sullivan

Figure 23: China’s fitness wear segmentation Figure 24: Fitness wear market share (2010)

Ex-factory revenue (RMBmn) Mid -to -high end Low -to -mid end 3,926 China’s Fitness Wear Marker: China’s Fitness Wear Marker: 4,000 Segmentation Share by Top Mid-to-high End Brands’ Market Shares Domestic Ex-factory Revenue, 2010 by Domestic Ex-factory Revenue, 2010 3,500 3,157 CAGR (2010-2015F): 3,000 Mid-to-high end: 25.9% Low-to-mid end: 28.2% 2,501 2,500 Hosa 19.4% 1,952 Others 2,000 54.7% 1,499 1,500 1,132 1,118 Mid-to-high 841 903 1,000 725 end Zoke 593 576 9.0% 415 454 23.8% 276 353 500 161 208 Low-to-mid Sunyoga 0 end 8.8% 76.2% Pieryoga 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 8.1%

Source: Company data and Frost and Sullivan Source: Company data and Frost and Sullivan

Figure 25: China’s sports underwear segmentation Figure 26: Sports underwear market share (2010) Ex-factory revenue (RMBmn) Mid-to-high end Low-to-mid end China’s Sports Underwear Marker: 1,000 China’s Sports Underwear Marker: 902 Segmentation Share by Top Mid-to-high End Brands’ Market Shares 900 Domestic Ex-factory Revenue, 2010 by Domestic Ex-factory Revenue, 2010 CAGR (2010-2015F): 800 726 Mid-to-high end: 28.1% 700 Low-to-mid end: 24.0% Hosa 576 42.7% 600 500 451 Others 41.0% 400 346 261 286 300 236 193 Low-to-mid 166 155 Mid-to-high 200 142 124 end 94 98 end 69 27.2% 100 39 54 72.8% Adidas 6.8% 0 Nike Aimer 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F LYY 4.5% 2.1% 2.9%

Source: Company data and Frost and Sullivan Source: Company data and Frost and Sullivan

16 Core Pacific - Yamaichi 26 April 2013

FY12 net profit increased 21.2% yoy

Company Background. China’s leading indoor sportswear brand. Hosa Int’l Ltd. (Hosa) is China’s leading indoor sportswear brand in China. The Group designs and manufactures a wide range of indoor sportswear products at the mid-high end under the brand name Hosa. In 2010, the Group had the largest market share in indoor sportswear, which includes swimwear (6.1%), fitness wear (4.6%) and sports underwear (31.1%). However, if only the mid-high end indoor sportswear universe is considered, the leadership of Hosa can be much more evident with market share of 23.5%, 19.4% and 42.7% for swimwear, fitness wear and sports underwear respectively.

Figure 27: Shareholding Structure (As of 25Apr2013)

Yixin Ho Born Well Born Zehui Investment Public Investment* Industrial* Investment (BVI) & Shareholders (BVI) (BVI) (BVI) Mr. Zeng Shaoxiong

53.9% 7.5% 7.5% 6.1% 25.0%

Hosa International (2200 HK)

* Mr. Shi Hongliu, Chairman of Hosa, and Mr. Shi Hongyan, Vice Chairman & CEO of Hosa, are the beneficial owners of Ho Born Investment and Well Born Industrial with majority shareholding. Source: Company data, HKEX and Core Pacific-Yamaichi

Table 11: Directors and senior management Name & Title Profile Mr. Shi Hongliu Aged 47, is the founder of the Hosa brand. He was appointed as the chairman and executive Chairman and Director of the Company on 2 September 2010. Mr. Shi has over 27 years of experience in the Executive Director apparel industry and is primarily responsible for the corporate strategic planning and overall business development of the Group. Mr. Shi Hongyan Aged 44, was appointed as the Vice Chairman, CEO and Executive Director of the Company on Vice chairman, CEO and 2 September 2010. Mr. Shi Hongyan has over 20 years of experience in the apparel industry Executive Director and is primarily responsible for developing and implementing operation plans, and monitoring the overall manufacturing activities of the Group. Mr. Zeng Shaoxiong Aged 46, was appointed as an executive Director on 2 September 2010. Mr. Zeng has over 14 Executive Director years of experience in investment and finance and is primarily responsible for corporate investment and financing activities of the Group. Mr. Zhao Yan Aged 44, was appointed as an Executive Director on 2 September 2010. He has over 20 years of Executive Director experience in corporate management and is primarily responsible for implementing and overseeing development plans, administration, human resources, management and information systems of the Group. Mr. Lai Ho Man, Dickson Aged 39, was appointed as the CFO and Company Secretary of the Company on 14 February CFO and Company 2011. Mr. Lai has over 15 years of experience in finance and accounting business and is Secretary primarily responsible for the overall financial affairs of the Group.

Source: Company data and Core Pacific-Yamaichi

17 Core Pacific - Yamaichi 26 April 2013

Income Statement Balance Sheet Year to Dec (RMB mn) FY11 FY12 FY13F FY14F FY15F Year to Dec (RMB mn) FY11 FY12 FY13F FY14F FY15F Revenue 69 5.2 848.1 1,004.1 1,198.1 1,374.9 Total Assets 1,043.8 1,268.1 1,383.9 1,648.0 1,861.9 Swimwear 237.2 304.0 365.6 465.3 550.5 Current Assets 975.5 1,203.2 1,283.6 1,506.3 1,718.9 Fitness wear 155.3 207.6 252.5 300.5 350.2 Cash & equivalents 635.6 730.5 773.0 862.5 1,096.1 Sports underwear 270.3 301.6 347.9 390.5 428.4 Inventory 100.1 102.2 143.6 166.4 192.9 Accessories 32.4 34.8 38.2 41.8 45.9 Accounts receivable 21 0.1 252.4 298.8 389.4 371.5 COGS (262.6) (333.9) (403.1) (486.0) (563.2) Others 29.8 118.1 68.1 87.9 58.4 Gross profit 432.6 514.2 601.0 712.2 811.7 Noncurrent Assets 68.3 64.9 100.3 141.7 143.0 Other Income (net) 5.0 27.3 11.0 12.2 13.8 PP&E 48.4 46.2 80.4 120.2 120.0 SG&A (120.4) (161.9) (171.5) (202.9) (230.8) Intangible assets 0.2 0.2 0.2 0.2 0.2 EBITDA 323.5 386.0 446.5 531.9 610.2 associates & JCEs 0.0 0.0 0.0 0.0 0.0 EBIT 317.2 379.6 440.4 521.5 594.7 Others 19.7 18.5 19.8 21.3 22.8 Net Financial Income (Cost) (1.5) (0.6) (0.8) (1.4) (0.8) Total Liabilities 166.6 216.0 194.8 221.2 219.1 Contribution from subsidiary 0.0 0.0 0.0 0.0 0.0 Current Liabilities 166.6 216.0 194.8 215.6 219.1 Profit before tax 315.7 379.0 439.6 520.1 593.9 Accounts payable 83.0 74.7 90.2 88.7 102.8 Income tax (41.9) (47.9) (109.9) (130.0) (148.5) Bank borrowings (ST) 0.0 86.9 40.4 49.6 26.9 Minority interests 0.0 0.0 0.0 0.0 0.0 Others 83.6 54.4 64.3 77.3 89.4 Net Income 273.7 331.1 329.7 390.1 445.4 Non Current Liabilities 0.0 0.0 0.0 5.5 0.0 EPS (RMB) 0.22 0.21 0.21 0.24 0.28 Bank borrowings (LT) 0.0 0.0 0.0 5.5 0.0 DPS (RMB) 0.21 0.08 0.08 0.10 0.11 Others 0.0 0.0 0.0 0.0 0.0 Total Equity 877.2 1,052.1 1,189.1 1,426.8 1,642.7

Shareholders' equity 877.2 1,052.1 1,189.1 1,426.8 1,642.7 Cash Flow Statement Minority interests 0.0 0.0 0.0 0.0 0.0 Year to Dec (RMB mn) FY11 FY12 FY13F FY14F FY15F Net cash / (debt) 635.6 643.6 732.6 807.3 1,069.1 Operating Cash Flow 309.3 256.1 238.7 257.6 432.4 Working capital 808.9 987.2 1,088.7 1,290.6 1,499.8 Pre-tax profit 315.7 379.0 439.6 520.1 593.9 Total invested capital 241.6 408.5 456.4 619.5 573.6 Depre & amort 6.3 6.4 6.1 10.5 15.5 Change in wc 9.2 (56.0) (67.1) (107.5) 12.9 Others (21.8) (73.4) (139.9) (165.4) (189.8) Key Ratios Investing Cash Flow 36.3 (85.9) (35.1) (45.0) (9.1) Year to Dec (%) FY11 FY12 FY13F FY14F FY15F Free Cash Flow 193.9 8.6 89.0 74.7 261.8 Momentum Financing Cash Flow 206.2 (75.2) (161.1) (123.2) (189.8) Revenue 99.9 22.0 18.4 19.3 14.8 Equity financing 488.6 0.0 0.0 0.0 0.0 EBITDA 172.3 19.3 15.7 19.1 14.7 Chg in bank loans (98.8) 86.3 (46.5) 14.7 (28.2) EBIT 175.5 19.7 16.0 18.4 14.0 Dividend (151.7) (161.5) (114.6) (137.9) (161.6) Net profit 190.0 21.0 (0.4) 18.3 14.2 Others (31.9) 0.0 0.0 0.0 0.0 EPS 185.9 (8.0) (0.4) 18.3 14.2 Net cash flow 551.8 94.9 42.5 89.4 233.6 Margin Ending cash 635.6 730.5 773.0 862.5 1,096.1 Gross profit 62.2 60.6 59.9 59.4 59.0 Time deposits & pledged cash 0.0 0.0 0.0 0.0 0.0 EBITDA 46.5 45.5 44.5 44.4 44.4 EBIT 45.6 44.8 43.9 43.5 43.3 Net profit 39.4 39.0 32.8 32.6 32.4 Return ROIC 113.8 81.2 72.4 63.1 77.8 ROE 31.2 31.5 27.7 27.3 27.1 ROA 26.2 26.1 23.8 23.7 23.9 Financial risk Net gearing Net Cash Net Cash Net Cash Net Cash Net Cash Interest coverage (x) 205.4 668.3 545.1 378.4 736.6 Liquidity Current ratio (X) 5.9 5.6 6.6 7.0 7.8 Quick ratio (X) 5.3 5.1 5.9 6.2 7.0 Others Effective tax rate 13.3 12.6 25.0 25.0 25.0 Payout ratio 95.2 40.1 40.0 40.0 40.0 Source: Company data and Core Pacific-Yamaichi estimates

I, Felix Kwok, the author of this research report and the license holder of Type 4 Regulated Activity registered with Hong Kong Securities and Futures Commission (“SFC”), hereby declare that all the views expressed in this research report accurately reflect my personal views and that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Besides, I confirm that (a) neither I nor my associates serve as an officer of any of the Hong Kong listed companies covered in this research report; and (b) neither I nor my associates have any financial in terests in the stock(s) covered in this research report. 18