China / Hong Kong Company Focus
Chow Sang Sang
Bloomberg: 116 HK EQUITY | Reuters: 0116.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 11 March 2013
BUY HK$21.55 HSI : 23,092 A better 2013 (Initiate coverage) Price Target: 12-Month HK$ 27.47 • Chow Sang Sang is one of the leading jewellery retailers in Hong Potential Catalyst: Influx of more Mainland Chinese tourists into HK; Kong & China. Its 100% self-operated store model and long track faster expansion pace in China record reinforces strong confidence level on business quality. DBSV vs Consensus: Our FY12/FY13/FY14 net profit estimates are The company’s mid- to higher-end positioning benefits from rising 1%/2%/2% below Bloomberg consensus • middle class affluence and sound jewellery demand in the PRC.
Analysts • Coupled with gentler performance base from 2012, we project Mavis HUI +852 2863 8879 respectable earnings CAGR of 23% for 2012-14F. Trading at [email protected]
merely 10.4x 12-mth rolling PE, <0.5x PEG and c.30% below its Mark LI +852 2971 1935 2-year peak, we initiate coverage with BUY. [email protected] THE BUSINESS Chow Sang Sang (“CSS”) is among the leading jewellery retailers in Price Relative the Greater China Region that first got listed on the Hong Kong HK$ Relative Index Stock Exchange in 1973. The company currently operates over 350 33.7 477 points of sales, all being self-managed in nature to ensure sound 28.7 427 377 store-level management and excellent service offered. 23.7 327 18.7 277 THE STOCK 227 13.7 177 CSS should announce its FY12 results on Mar 22. We anticipate an 8.7 127 11.7% y-o-y top-line growth to HK$19bn but 11.6% decline in net 3.7 77 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 profit to HK$967m, attributable to higher demand for low-margin gold jewelleries during the Chinese Dragon Year of 2012. As we Chow Sang Sang (LHS) Relative HSI INDEX (RHS) estimate the company to have seen c.10% same-store sales growth Forecasts and Valuation (SSSG) in HK and a mid single-digit SSSG in China for 2012, against robust overall SSSG of 37% for 2011, such relatively more FY Dec (HK$ m) 2011A 2012E 2013F 2014F Turnover 17,158 19,162 22,137 25,051 moderate base-effect should provide easier comparables for better EBITDA 1,515 1,431 1,804 2,110 performance this year. Besides, the gradual recovery of demand for Pre-tax Profit 1,419 1,255 1,609 1,902 higher-margin gem-sets versus gold jewelleries should also help to Net Profit 1,094 967 1,240 1,465 revive 2013 profitability to some extent. Net Pft (Pre Ex.) 1,050 967 1,240 1,465 EPS (HK$) 1.62 1.43 1.83 2.16 The market seems to be worried about gifting sales following recent EPS Gth (%) 39.0 (11.6) 28.2 18.2 government campaign to crackdown on corruption. Year-to-date, DPS (HK$) 0.46 0.43 0.55 0.65 BV Per Share (HK$) 9.36 10.36 11.65 13.16 we have seen more slowdown in wine & dine than luxury sales. PE (X) 13.3 15.1 11.8 10.0 Afterall, gem-set jewellery consumption should generally be more P/Cash Flow (X) 444.7 87.6 34.1 20.3 personalized than standardized luxury merchandises. CSS’ focus on P/Free CF (X) nm nm 66.9 29.3 the mid- to higher-end jewellery segment also means relatively more EV/EBITDA (X) 10.4 11.5 9.2 7.9 Net Div Yield (%) 2.1 2.0 2.5 3.0 resilient demand vs. premium / global jewellery retailers. P/Book Value (X) 2.3 2.1 1.9 1.6 Overall, we project 14% revenue CAGR and 23% earnings CAGR Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 18.2 14.5 16.6 17.4 for 2012-14F on improving consumer sentiment and strengthening demand for hard luxuries as household affluence Earnings Rev (%): New New New ascends. Our target price of HK$27.47 benchmarks 15x 2013 PE, Consensus EPS (HK$) 1.48 1.90 2.26 offering 34% upside from the current price level. BUY Other Broker Recs: B: 10 S: 1 H: 4
ICB Industry: Consumer Services At A Glance General Retailers Issued Capital (m shrs) 677 ICB Sector: Mkt. Cap (HK$m/US$m) 14,588 / 1,881 Principal Business: Chow Sang Sang is among the leading jewellery retailers in Greater China. Major Shareholders Chow family (%) 56.0 Source of all data: Company, DBSV, Bloomberg, HKEX Capital Group Companies (%) 9.0 Free Float (%) 35.0
Avg. Daily Vol.(‘000) 896
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Company Focus Chow Sang Sang
Table of Contents
Investment Summary 3 SWOT Analysis 4 Company Background 5 Business Development 7 Growth Prospects 12 Valuation 15 Risk Assessment 15 Key Risks & Concerns 17 Management Profile 19 Appendix 26
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Company Focus Chow Sang Sang
Investment Summary
Prospering China fuels growth. CSS is among the leading Vertical integration enhances quality control. CSS is jewellery retailers in the Greater China Region with a long expanding its jewellery production plant in Shunde of China, track record of nearly 80 years. Building on its well-established with the new factory to triple production capacity in due sales network and branding, coupled with a growing appetite course to better support on-going retail expansion. The for jewelleries amid rising affluence in China and further RMB company also strengthens its research and development appreciation to strengthen their purchasing power, the capacity (R&D) recently to develop more in-house brands company should be well-poised to benefit substantially from and gold gifts. Product collections include La Pelle Pearl, Yú growing jewellery consumption in the region over the Yú signature diamond product lines and fine medium-term. jewellery development of jade, semi-precious stones and carat plus diamonds. 100% self-operated network raises overall quality. Unlike major peers in the region that normally expand in the PRC Low base for 2013. We estimate that CSS should be market via a combination of self-managed and franchised / registering y-o-y same-store sales growth (SSSG) of c.10% licensed stores, CSS consistently focuses on self-operation of in Hong Kong and a mid-single digit rate in China for 2012, all its stores. Despite relatively slower expansion pace as compared to an overall 37% SSSG in 2011. Riding on the against a franchising model that requires minimal much slower growth pace last year, and coupled with a investments, CSS could then ensure better store good start to see c.20% SSSG during Chinese New Year management to safeguard itself from risks of thefts or holidays (CNY) in 2013 against last CNY, we believe the damages of its brand by any misbehaved franchisees. company could achieve better sales momentum of an overall mid-teens SSSG in 2013. More importantly, a Successful dual-brand business model. CSS stands as one of gradual shift in growth towards higher margin gem set the few jewellery retailers that has successfully established a jewelleries should favour its earnings trend. strong second brand “Emphasis Jewellery” along with its core brand “Chow Sang Sang” , effectively enlarging its Value emerges along with gradual recovery. CSS’ share overall customer spectrum. At present, it operates a total of price dipped >30% from its 2-year peak, attributable to the over 350 stores across Mainland China, Hong Kong, Macau volatile consumer sentiment on global economic concerns and Taiwan, comprising over 320 “Chow Sang Sang” stores and a high base impact across the jewellery sector. Looking and about 30 “Emphasis Jewellery” stores. Such strategy ahead, we believe CSS’ growth prospects should stay has also helped increasing proportionate sales of branded attractive over the medium-term, with our projection of products that offer higher margins. 23% earnings CAGR for FY12-14F and our target price of HK$27.47 on 15x 2013 PE. Trading at merely 10.4x 12- Low jewellery penetration implies vast potentials. According month rolling PE, the lower end of its 2-year PE range of 10- to Hejun Consulting, China’s jewellery sector currently 20x, we anticipate the counter to be re-rated on its remains in the growth phase in which jewellery players gradually recovering performance this year. continue to introduce new products and broaden their market segments. Competition is seen while distribution Key risks and concerns. Apart from any possible economic channels are still decentralized across the country and downturns that could affect consumer sentiment, CSS’ operators should see room to advance further. As such, we operations could also be affected by price volatility of raw believe that the jewellery brand retailers, particularly key materials. Any major and prolonged fluctuation in gold players that already secured good customer loyalty and prices could impact its sales volume of gold jewelleries. operating scale across the region, should stay in sound Besides, rising rental costs especially for prime locations in position to sustain decent growth over the medium-term. Hong Kong, as well as intensifying competition among industry players could also affect performance.
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Company Focus Chow Sang Sang
SWOT Analysis
Strengths Weakness
• Among leading jewellery retailers in Greater China • Significant cash outlay on investment of inventories, including gold and gem-set jewelleries • 100% self-operated store model could help operational management and risk control • Rental pressure amid fierce competition for prime retail locations • Dual-brand strategy broadens consumer range
• Addition of flagship stores enhances brand visibility • Vertical integration for better control on product quality
Opportunities Threats
• Rising demand for jewellery in Greater China along with • Intensifying competition from local and international improving disposable income of Mainland Chinese peers
• Further RMB appreciation strengthens purchasing power of • Gold price volatility might affect revenue and outbound Mainland tourists to Hong Kong, Macau and profitability Taiwan • Potential macroeconomic slowdown on global • Vast medium-term market potentials in China given low uncertainties could affect demand for jewelleries, jewellery penetration especially for high-ticket items
• Sales of value-preserving jewellery products should benefit from an inflationary environment, particularly on potential enhancement of sales volume, gross margin and overall operating leverage
• Expansion of research and production facilities lifts growth prospects
Source: DBS Vickers
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Company Focus Chow Sang Sang
Company Background
Long-established jewellery play in Greater China. Chow Successful dual-brand strategy & prudent model. CSS stands Sang Sang (CSS) is among the leading jewellery retailers and as one of the few jewellery retailers that successfully manufacturers in the Greater China Region that has marked establish a strong second brand “Emphasis Jewellery” along its presence as a goldsmith in Guangdong since the 1930’s. with its core brand “Chow Sang Sang” , effectively The company started to set up stores in Hong Kong & enlarging its overall customer spectrum. At present, it Macau in 1948, and became the first jewellery retailer listed operates a total of over 350 stores, of which over 280 are in on the Hong Kong Stock Exchange in 1973. During 1995, Mainland China, >55 in Hong Kong & Macau, and 20 in CSS also rolled out its retail chain into Taiwan. Taiwan. These comprise >320 “Chow Sang Sang” stores and about 30 “Emphasis Jewellery” stores, all of which Over the years, CSS’ factory base in Guangdong has being self-operated in nature to minimize overall risk supported its in-house jewellery design and production, exposure. aiming to uphold sound quality standards. The company’s precious metal laboratory also specializes in quality testing Other non-core businesses. CSS also wholesales precious of gold and platinum, and has been providing accredited metals including bullion trading, and runs boutique house services to the precious metal industry for >20 years. on futures & securities broking. These high volume businesses operate on commission basis and no proprietary trading will be offe.red on their platforms.
Jewellery retail: revenue breakdown by region (1H12) Revenue breakdown by segments (1H12)
Others * 1% Wholesale of China precious 39% metals 19%
Jewellery Securities & Overall HK & retail futures PRC Macau broking HK & 80% customer 29% 0.2% sales = 70% Macau (PRC customers) 31% Other businesses * 1%
* Mainly include sales in Taiwan. * Mainly include rental income and other jewellery-related businesses.
Source: Company, DBS Vickers Source: Company, DBS Vickers
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Company Focus Chow Sang Sang
Historical developments
Launched brand Re-enter into the revamp campaign Chow Sang Became the first Mainland Sep: Placed 62m and introduced Sang jewellery Chinese market; shares (12% international Goldsmith was retailer listed received ISO stake) at jewellery brands established in on Hong Kong 9002 in retail HK$2.28ps to (eg. Forevermark & Guangdong. Stock Exchange. management. raise HK$138m. Hodel).
1934 1948 1973 1994 1998 2001 2003 2005 2006 2010
Started Introduced Started to Feb: Became Apr: Placed operations in "Emphasis operate online sightholder of 75m shares Hong Kong Jewellery". sales platform Diamond Trading (11% stake) at and Macau. eshop.chowsan Company (DTC) under HK$13.30 ps gsang.com. DeBeers; to raise Nov: Opened flagship HK$971m. store in Tsim Sha Tsui, HK.
Source: Company, DBS Vickers
Shareholding structure
Everwin Top Fit Gerald Winston CHAN Capital Happy Happy & Golden Invest- CHOW CHOW Bing Group Public Inc. Family Court ments King Sing Wun Sing Fun Companies 20.13% 9.75% 7.96%6.20% 6.02%5.96% 0.20% 9.01% 34.77%
Chow Sang Sang (116 HK)
Note: Everwin & Golden Court are owned by a discretionary trust of which Dr. CHOW Kwen Lim and Mr. Vincent CHOW Wing Shing are beneficiaries; Happy Inc. is 70% owned by family members of Mr. CHOW Kwen Ling; Happy Family is 40% owned by Mr. CHOW Kwen Ling and his spouse; Top Fit Investments is owned by a discretionary trust of which Dr. Gerald CHOW King Sing and Mr. Winston CHOW Wun Sing are beneficiaries.
Source: Company, DBS Vickers
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Company Focus Chow Sang Sang
Business Development
A) Jewellery retail division Dual-brand format expands customer profile. CSS has introduced its second brand “Emphasis Jewellery” to the CSS has been a long-standing player in the jewellery market since 1994 and continues to fine-tune the operation. industry, with nearly 80 years of history and sound presence Currently, the company successfully runs 2 branded chain in the Greater China Region. The company currently runs stores, with the core “Chow Sang Sang” retail chain over 350 stores in China, HK, Macau and Taiwan, sourcing offering mainstream products while “Emphasis Jewellery” c.50% of its diamond supplies from renowned groups stores providing fashionable and trendy designs at a including DeBeers, with the Diamond Trading Company’s different market positioning. (DTC) granting of sightholder status in 2005. Besides, CSS has placed strong efforts to bring in selected Mainland tourists’ sales ramped up in HK/Macau. Like most foreign brands such as Gucci, Hodel, Kashikey, etc. to its peer operators in the region, CSS has increasingly captured stores since 2006. This has helped to beef up its jewellery more jewellery demand from Mainland visitors. Specifically, portfolio further with innovative designs and distinctive HK/Macau offers tax free shopping, while RMB also workmanship, thus strengthening brand images of the continues to strengthen over the years to translate into even company’s retail operations. better prices for Mainland tourists. Coupled with the fact that products sold in HK/Macau are normally genuine in nature, CSS has seen a significant surge in PRC visitor Comparison between “Chow Sang Sang” & “Emphasis Jewellery” contributions, taking up 31% of its HK/Macau jewellery sales in 2008 to >50% in 2012 with further room to Chow Sang Sang Emphasis Jewellery expand.
Proportion of HK/Macau revenue contributed by PRC customers
2008-11 CAGR = 49% - Affordable luxury for - Creative jewelleries 60% mid-to-high-end markets focused on market trend, 52% design and taste 48% - Good balance between - Focused on gemsets 50% gold and gemsets 42% 40% 37% - 294 stores in HK, Macau - 33 stores in HK, Macau & & China as of Jun 2012 Taiwan as of Jun 2012 31% 30% Source: Company, DBS Vickers 20% Flagship stores improve brand visibility. In recent years, CSS 10% has added some flagship stores in prime shopping districts to enhance its brand building strategy and to cater to rising 0% demand of product variety and quality services. Specifically, the company’s Hong Kong flagship stores could provide a 2008 2009 2010 2011 1H12 convenient and effective showcase to Mainland tourists and Source: Company, DBS Vickers reinforce its PRC operations. Aside from bigger store size, CSS also increases fine jewellery segments and upgrades shop design & service support, so that each flagship store offers better customer experience and provides a suitable venue for VIP events to strengthen relationship with customers.
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Company Focus Chow Sang Sang
Details of selected flagship stores
Hong Kong: Beijing: Central Flagship Store Sanlitun Flagship Store
Area (sq.ft.): 5,000 Area (sq.ft.): c.7,000 Commence Commence date: Apr 2009 date: Feb 2009
Hong Kong: Park Lane Mega Store Shanghai Mega Store
Area (sq.ft.): >5,000 Commence Commence date: Sep 2009 date: Dec 2008
Hong Kong: "Emphasis Jewellery" Mongkok Mega Store Taipei Flagship Store
Area (sq.ft.): >5,000 Area (sq.ft.): c.1,000 Commence Commence date: Dec 2008 date: Nov 2011
Source: Company, DBS Vickers
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Company Focus Chow Sang Sang
100% self-operated stores. Over the past 3 years, CSS has Marketing initiatives adopted by Chow Sang Sang altogether added >150 stores across Greater China, with c.95% of these new additions happening in China to Comprehensive marketing initiatives capture strong demand from Mainlanders. Unlike major peers in the region that normally expand in the PRC market International Greater China Regional via a combination of self-managed and franchised / licensed Initiatives Initiatives Initiatives stores, CSS consistently focuses on self-operation of all its stores. Despite relatively slower expansion pace against a - Leverage on - Continue to - Sponsorship of partnership market the cultural events franchising model that requires minimal investments, CSS with Antwerp international could then ensure better store management to safeguard Diamond perspective via - Customized itself from risks of thefts or damages of its brand by any Museum (the print and TV consumer misbehaved franchisees. largest commercials events to raise diamond awareness museum in the -Target world) Mainland - Utilize local Store breakdown by numbers (1H12) Chinese visiting marketing HK & Macau expertise to support China, Taiwan, regional centers 249, 21, 76% 6% Source: Company, DBS Vickers
Vertical integration enhances R&D and efficiency. CSS is expanding its jewellery production plant in Shunde of China, with the new factory to triple production capacity in due course to better support on-going retail expansion. The HK & company also strengthens its research and development Macau, 57, capacity (R&D) recently to develop more in-house brands 17% and gold gifts. Product collections include La Pelle Pearl, Yú Yú signature diamond product lines and fine jewellery development of jade, semi-precious stones and carat plus diamonds. Source: Company, DBS Vickers B) Precious metal wholesaling
Online sales platform. CSS has operated its own B2C Economies of scale. The precious metal wholesale division platform, eshop.chowsangsang.com, since 2001, which mainly sells gold and platinum bullions to small players in mainly caters for demand of younger customers in the the industry. Given that such business leverages on CSS’ Greater China Region. Over the years, the company has scalability, it involves minimal addition costs. Gross margin is continued to improve logistics efficiency to support such normally <1% but the operation helps provide valuable online development. Its internet expansion plans also knowledge about outlook of the industry. Besides, without include strategic alliance with influential internet portals engaging in any proprietary trading while payments are including Taobao – Tmall, 360buy.com and amazon.com. based on cash on delivery terms (COD), working capital and operational risks could be minimized. Emphasis on customer relationship. CSS has increasingly targeted to further enhance customer services and brand C) Securities brokerage loyalty. Comprehensive marketing initiatives, VIP membership program enhancement with special focus on Peripheral business with limited risk entailed. CSS runs 8 fine jewellery marketing could help reinforcing good offices in HK in addition to an internet platform for its non- bonding with key customers. Its recent offerings of less core brokerage division. With a commission based business common semi-precious stones and jadeites that offer lower model and no proprietary trading offered, any potential risks ticket sizes and more trendy designs also help expanding related to this business should be minimized. customer base, including new and younger shoppers.
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Company Focus Chow Sang Sang
Retail network in China (1H12)
Source: Company, DBS Vickers
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Company Focus Chow Sang Sang
Brand portfolio of Chow Sang Sang
Source: Company
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Company Focus Chow Sang Sang
Growth Prospects
Low base for 2013. We estimate that CSS should be registering y-o-y same-store sales growth (SSSG) of c.10% Projected sales CAGR of consumer categories in China (2010-15F) in Hong Kong and a mid-single digit rate in China for 2012, as compared to an overall 37% SSSG in 2011. Riding on the much slower growth pace last year, and coupled with a Luxuries 19.0% good start to see c.20% SSSG during Chinese New Year holidays (CNY) in 2013 against last CNY, we believe the Casualwear & footwear 16.6% company could achieve better sales momentum in 2013, likely at an overall mid-teens SSSG. Cosmetics 15.3%
Robust jewellery demand fuelled by rising affluence. China’s Furnitures 13.8% middle class population is set to reach 40% of the total by 2020 from c.10% in 2009 (source: Wolfensohn Center of Department stores 13.6% Development). PRC per capita disposable income is also expected to grow at 12.2% CAGR for 2010-15F to stand as Food retail 13.0% the fastest income growth country across Asia. Together with improving urbanization & favourable government Home appliances 13.0% policies to encourage domestic consumption, as well as Mainlanders’ aspiration for luxuries in which Euromonitor 0% 5% 10% 15% 20% forecasts a 19% CAGR on PRC demand of luxury Source: Euromonitor merchandise for 2010-15F , CSS should be well-poised to benefit from strong sector growth. Low jewellery penetration implies vast potentials. According to Hejun Consulting which endeavours to highlight the life Per capita disposable income CAGR, 2010-15F cycle for the PRC jewellery sector, China currently remains in the growth phase in which jewellery players continue to introduce new products and broaden their market % 14 segments. Competition is seen while distribution channels 12.2 are still decentralized across the country and operators 12 10.0 should see room to advance further. As such, we believe 10 8.0 that the jewellery brand retailers, particularly key players 8 6.7 that already secured good customer loyalty and operating 5.5 6 5.0 scale across the region, should stay in sound position to 4.1 4.1 4.0 sustain decent growth over the medium-term. 4 3.0 2 0 India Kong Hong China Korea Taiwan Malaysia Thailand Indonesia Singapore Philippines Source: World Bank, Euromonitor
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Company Focus Chow Sang Sang
Development of jewellery market in China
Current stage for domestic Winning jewellery market Survival
Challenge
Opportunity
Market stage Emergence Growth Elimination Maturity Characteristics - Create demand - Robust market growth - Stable market growth - Stable growth with GDP - Single product line - Intensified competition - Integration of suppliers - Diverse product lines - Narrow market - Introduce new products - Greater focus on product - Competition in distribution, positioning - Expand to broader development value-added services & - Dispersed market segments - Competition in quality & product development distribution channels - Customer demand driven value-added services in - Centralised distribution by price addition to prices channels - Price wars - Centralised management on - Competitive landscape is - Distribution channels still distribution channels established, each player has decentralised - Customer demand driven by specific customer group value - Most suppliers are profitable - Focus on specific market segment - Earnings stablised as market consolidation proceeds
Source: Hejun Consulting, companies, DBS Vickers
Flourishing tourist spending in Hong Kong. As a tax-free shopping paradise, Hong Kong continues to stand as an ideal shopping destination amid its wide merchandise range, sound product quality and good customer services. According to recent consultant reports, a majority of 59% of Chinese luxury spending would be made abroad by 2015F, and Hong Kong should benefit the most due to its close proximity to Mainland China. As tourist spending rises in tandem with the number of inbound visitors, major jewellery retail chains like CSS that possess strong retail networks in Hong Kong & Macau should see plenty of opportunities to expand along with a growing pie.
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Company Focus Chow Sang Sang
Total luxury spending of Mainland Chinese RMB exchange rate
RMB bn USD per RMB 500 0.165 0.160 400 0.155 300 59% 0.150 0.145 200 0.140 57% 0.135 100 57% 56% 41% 0.130 43% 44% 43% 0 0.125 2008A 2009A 2010A 2015F Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Domestic consumption Overseas consumption Feb-13
Source: Bain & Co., McKinsey & Co., Ministry of Commerce, DBS Source: Bloomberg Vickers Inflationary environment benefits luxury retailers. With gold and diamond merchandises being regarded as media for Tourist arrivals & spending per capita in Hong Kong storages of value; especially in the eyes of Chinese customers, strong demand for such jewellery items could be m HK$ seen particularly during inflation times. At present, DBS 60 8,000 economics team forecasts a 3.5% CPI inflation for both 50 China and Hong Kong, suggesting potentially a firm support 6,000 for jewellery demand this year. 40
30 4,000 Inflation versus discretionary sales in Hong Kong 20 2,000 10 %% 10 60 0 0 8 50 40 6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 30 4 Tourist arrivals to HK (LHS) 20 2 10 Overnight visitor spending per capita (RHS) 0 0 (10) Note: Overnight visitor spending data for 2012 is not available. (2) (20) (4) Source: HK Tourism Board, CEIC, DBS Vickers (30) (6) (40)
RMB appreciation lifts Mainlanders’ purchase power. Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Reminbi has appreciated substantially by c.30% over the last Dec-12 6 years to currently stand at USD0.16 per RMB. The market CPI (LHS) expects such an upward trend to sustain over the medium- Discretionary sales growth (RHS) term. Our economist currently projects the exchange rate to Source: CEIC strengthen by another 2% in the coming months, reaching USD0.163 per RMB by 3Q13 and rising gradually further ahead. The strengthening RMB will continue to help lifting purchasing power of Mainland tourists in Hong Kong, Macau and Taiwan. Such a trend should continue to help supporting jewellery sales of CSS’ respective store operations.
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Company Focus Chow Sang Sang
Valuation Risk Assessment
Value emerges along with a gradual recovery. CSS’ share Visibility of earnings. Riding on the burgeoning regional price dipped >30% from its 2-year peak, attributable to the jewellery market in the medium-term and CSS’ extensive volatile consumer sentiment on global economic concerns as and scalable sales network, the company is well-poised to well as a high base impact on the jewellery sector. Looking sustain decent earnings growth momentum. Key risks ahead, with (i) strong growth expected for Mainland visitors’ include a possible prolong downward trend in gold prices. spending in Hong Kong and Macau along with their Rising cost pressure such as rental hikes in Hong Kong could growing affluence and RMB appreciation, (ii) rising demand also affect its performance, although CSS has a good for jewellery merchandises in the region, and (iii) an easier exposure in key local shopping malls that mainly collect base for comparison amid a significantly slower growth pace turnover based rents. in 2012, we believe CSS’ growth prospects should stay attractive over the medium-term. We project the company Financials. CSS maintains positive operating cash inflows to achieve 23% earnings CAGR for FY12-14F to reach a net and c.20% net gearing. Its gold holdings account for >30% profit of HK$1.47bn by FY14F. of inventory that is easy to liquidate should there be funding needs. Riding on better operating efficiency as its business In terms of valuation, our target price of HK$27.47 scale continues to expand, margins could also see room for benchmarks 15x 2013 PE. Considering expectations of 28% enhancement over the medium-term that in turn helps y-o-y net profit growth for 2013 subsequent to an estimate strengthening its financial position. of 11% earnings dip last year, our valuation basis translates into 0.5x PEG, which we believe to be reasonable even Shareholdings. CSS is the first jewellery retail listed in Hong without fully normalized global market conditions. Trading Kong during 1973 and possesses a long track record of at merely 10.4x 12-month rolling PE, the lower end of its 2- prudently running its business. Aside from the founding year PE range of 10-20x, with a solid 2% yield, we family that holds 56% stake, the Capital Group has also anticipate the counter to be re-rated on its gradually recently raised its CSS shareholding to reach 9% stake. We recovering performance this year. We recommend BUY. believe that the Chow family should continue to maintain as the major shareholder of CSS.
Qualitative Risk Assessment: Low
Category Risk Rating Weight Weighted Score
1 (Low) - 3 (High)
Earnings 1 40% 0.4
Financials 1 20% 0.2
Shareholdings 2 40% 0.8
Overall 1.4
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Company Focus Chow Sang Sang
PE band chart PB band chart
Share Price (HK$) Share Price (HK$) 80 35x 45 3.1x 70 40 60 35 27x 30 2.4x 50 25 40 19x 1.7x 20 30 11x 15 1.0x 20 10 10 5 3x 0.3x 0 0
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
Peers valuation
Mkt 12F 13F Price Cap Fiscal PE P/Sales Yield P/Bk ROE PE P/Sales Yield P/Bk ROE Company Name Code HK$ HK$m Yr x x % x % x x % x % Chow Sang Sang* 116 HK 21.55 14,588 Dec 15.1 0.8 2.0 2.1 14.5 11.8 0.7 2.5 1.9 16.6 Emperor Watch 887 HK 0.89 6,125 Dec 12.7 0.9 2.2 1.4 13.0 11.1 0.8 3.4 1.3 14.6 Hengdeli Holdings*~ 3389 HK 2.36 10,322 Dec 11.7 0.7 3.8 1.4 17.0 9.8 0.6 3.8 1.2 14.6 Luk Fook Hdg*# 590 HK 24.6 14,492 Mar 11.3 1.1 3.5 2.3 21.4 10.1 0.9 4.0 2.0 21.1 Oriental Watch*^# 398 HK 2.86 1,632 Mar 11.3 0.4 3.4 0.7 10.2 9.7 0.4 2.6 0.7 7.3 Chow Tai Fook# 1929 HK 11.14 111,400 Mar 19.2 1.8 1.3 3.3 20.1 15.1 1.5 1.7 2.8 20.6 13.6 1.0 2.7 1.9 16.0 11.2 0.8 3.0 1.6 15.8 ^ Core EPS
~ Fully diluted core EPS
# FY12: FY13; FY13: FY14
Source: Thomson Reuters, *DBS Vickers
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Company Focus Chow Sang Sang
Key Risks & Concerns
Intensified local competition. In view of rising jewellery demand from Mainland tourists, the local jewellery retail Hong Kong private retail rental index industry has attracted operators to add increasingly more Jan 1999 = 100 stores in Hong Kong, especially along the tourist areas and 160 prime shopping locations. Intense competition will not only affect sales performance of individual outlets, but could also 150 result in rising costs such as marketing and rental expenses. 140
130 Number of outlets of major jewellery retailers in Hong Kong 120
Company Outlet Remarks 110 No. Chow Tai Fook 65 Chow Tai Fook Jewellery only 100
Chow Sang Sang 51 42 Chow Sang Sang outlets & Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 9 Emphasis Jewellery outlets Dec-12 Luk Fook 36 Source: Rating & Valuation Dept. of HKSAR Government TSL Jewellery 23 19 TSL & 4 Saxx Prince Jewellery 14 Excluded watch outlets & Watch Gold price volatility could affect margins. Gold takes up Emperor Watch 13 Excluded watch outlets about 55% of CSS’ COGS and stands among an important & Jewellery raw material cost for the company. Despite hedging c.40% King Fook 12 of its gold inventory, CSS could still see margin fluctuation Tiffany & Co. 9 should gold price swings significantly. Based on our 3D Gold 8 estimates, a 10% annualized decline in the price of gold DeBeers 2 could potentially lower the company’s gross margin by Graff Diamonds 2 0.7ppt. Current market expectations of supportive gold Harry Winston 1 prices and an inflationary Asian environment over the Source: Companies, DBS Vickers medium-term could probably help to alleviate concerns on such respect. Rising rental expenses. CSS’ rental expenses in Hong Kong account for c.4% of its local revenue. Any increase in rents Macroeconomic conditions. Like its close peers, CSS mainly could affect profit margins. With most of its outlets located sells hard luxury items that could normally be influenced in the prime shopping areas, CSS could be prone to future more by changes in global economic environment and rental hikes, unless its top-line growth could sustain at a consumer sentiment than day-to-day merchandises. Given sound level and offset the impact. Its strong exposure in its relatively more cyclical business nature, any slow down shopping malls that usually charge a turnover based rental across the Chinese economy to weaken desire for should also help mitigating any rental hike impacts to some consumption could affect CSS’ performance in the Greater extent. Our sensitivity analysis suggests that any 0.1% China region. increase in rentals (as % of revenue) could reduce group earnings by <1.5%.
Page 17
Company Focus Chow Sang Sang
Scenario analysis of revenue revision (2013F)
Revenue revision (2012F) -20% -10% -5% 0 5% 10% 20%
Implied revenue growth y-o-y -8% 4% 10% 16% 21% 27% 39% EPS (HKD) 1.41 1.59 1.68 1.83 1.97 2.07 2.26 Implied EPS revision -22.9% -13.2% -8.4% - 7.8% 12.9% 23.2%
Base case assumptions: Net margin 5.6% Store numbers 407 Gold price change y-o-y - Source: DBS Vickers
Scenario analysis of cost ratio’s impact on EPS (2013F) *
HKD Selling & distribution costs 8.4% 8.9% 9.4% 9.9% 10.4%
2.6% 1.98 1.86 1.73 1.60 1.47 2.4% 2.04 1.91 1.78 1.65 1.52 2.2% 2.09 1.96 1.83 1.70 1.57 2.0% 2.14 2.01 1.88 1.75 1.63
Admin expenses Admin 1.8% 2.19 2.06 1.93 1.81 1.68 * Cost ratio defined as expense as percentage of revenue.
Source: DBS Vickers
Sensitivity test of gold price volatility (2013F)
Annualised gold price change -30% -20% -10% 0 10% 20% 30%
Gross margin 16.4% 17.3% 18.1% 18.8% 19.4% 20.0% 20.5% Net margin 3.8% 4.4% 5.0% 5.6% 6.1% 6.6% 7.0%
Assumptions: Gold as % of COGS 55% Gold inventory turnover days 3mths % of gold inventory hedged 40% Source: DBS Vickers
Page 18
Company Focus Chow Sang Sang
Management Profile
brand “Chow Sang Sang” to broaden customer base Experienced management with proven track record. At reinstates management competence in the industry. present, CSS’ management team possesses an average of Performance-based bonuses have been used to incentivize over 25 years of experience in jewellery retailing business management and sales force. The company has also across Hong Kong and China. Its success of being one of adopted a share option scheme in Dec 2010 while no the few jewellery retailers that could establish a strong options have yet to be granted. second brand “Emphasis Jewellery” along with its core
Key management team
Name Age Current Previous Experience Education / Honours Appointment Mr. CHOW 88 Non-executive Founder of the Group; was Group Elected as the Honorary Chairman upon Kwen Ling Director and General Manager from 1973 to 1986, retiring as Chairman. Honorary and Group Chairman from 1973 to Chairman of the 1990. Group Dr. CHOW 85 Executive Director Founder of the Group; was Group Awarded Doctor of Social Science, Kwen Lim and Group General Manager from 1986 to 1997; Honoris Causa by the Chinese University Chairman over 60 years of experience in the of Hong Kong. jewellery business. Dr. CHAN 78 Independent Non- Medical doctor in private practice; has n.a. Bing Fun executive Director been with the Group for over 35 years. Mr. Vincent 65 Executive Director Has been with the Group for over 25 Member of the Shunde People's Political CHOW Wing and Group years. Consultative Committee. Shing General Manager
Dr. Gerald 55 Executive Director Has been with the Group for over 25 A former member of the Central Policy CHOW King years. Unit of the Hong Kong Government (2009- Sing 2011). Mr. Stephen 58 Non-executive Managing Partner of Ting Ho Kwan & Member of the 9th & 10th Chinese TING Leung Director Chan, Certified Public Accountants; over People's Political Consultative Conference, Huel 30 years of experience in Accounting. Fujian.
Mr. CHUNG 71 Non-executive Has been a solicitor in practice. Currently a member on several advisory Pui Lam Director committees of the Hong Kong Government. Mr. Winston 54 Executive Director Has been with the Group for over 20 Member of the Guangzhou Municipal CHOW Wun and Group years; key responsibilities include Tianhe District People's Political Sing Deputy General marketing of the Group's jewellery Consultative Committee. Manager business in Greater China. Source: Company, DBS Vickers
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Company Focus Chow Sang Sang
Key management team (continued)
Name Age Current Previous Experience Education / Honours Appointment Mr. LEE Ka 57 Independent Non- Has been an accountant and has over n.a. Lun executive Director 25 years of experience in banking and auditing. Mr. LO King 74 Independent Non- Appointed as Director of the Hong Was Vice Chairman of the former Urban Man executive Director Kong Academy for Performing Arts Council and member of the Hong Kong from 1993 to 2004. Special Administrative Region Basic Law Consultative Committee. Mr. 53 Company Joined the Group in 2009 and has over Holds a Master Degree in Business Theodore Secretary and 25 years of experience in Finance, Administration from the Melbourne TAM Shing Chief Financial Accounting and Management. University, Australia. Chi Officer Ms. Susan 55 General Manager Joined the Group in 2001 and has over Member of the Hong Kong Institute of MAK Wei of Chow Sang 30 years of experience in accounting, Certified Public Accountants and the Yee Sang Securities banking and finance. Association of Chartered Certified Ltd. Accountants. Mr. LAU Hak 59 Director of Sales Has been with the Group for over 40 Serves as the Group's representative in the Bun Operations years; responsible for managing the executive committees of several trade sales operations in Hong Kong, Macau associations. and Mainland China. Ms. Emily LI 52 Brand General Joined the Company in 2005; Awarded the "China 100 Outstanding Yin Ming Manager for responsible for development of Women Entrepreneur" in 2007. "Chow Sang branding, new business and marketing. Sang" Ms. Carol 48 Brand Director for Joined the Group in 2004; responsible n.a. WONG May "Emphasis for total branding including product Chun Jewellery" development, marketing, channel development and management. Source: Company, DBS Vickers
Page 20
Company Focus Chow Sang Sang
Key Assumptions – Number of stores Sensitivity Analysis FY Dec 2009A 2010A 2011A 2012E 2013F 2014F
Hong Kong and Macau 50 51 56 57 58 59 2013F China 143 181 232 282 327 367 Staff cost +/- 1% Net Profit -/+ 1% Taiwan 21 22 22 21 22 23 Rental cost +/- 1% Net Profit -/+ 0.5% Total 214 254 310 360 407 449
Segmental Breakdown (HK$ m) FY Dec 2009A 2010A 2011A 2012E 2013F 2014F Revenues (HK$ m) Manufacture & retail of 5,923 8,265 12,645 14,506 17,021 19,427 jewellery Wholesale of precious 3,410 3,313 4,341 4,471 4,918 5,410 metals Securities & futures 85 67 48 48 48 48 broking Other businesses 46 60 124 137 150 165 Total 9,463 11,705 17,158 19,162 22,137 25,051 Segmental profit (HK$ m) Manufacture & retail of 662 865 1,325 1,302 1,562 1,821 jewellery Wholesale of precious 28 17 28 20 22 24 metals Securities & futures 54 44 17 14 14 14 broking Other businesses 7 25 25 20 22 25 Total 752 951 1,395 1,357 1,621 1,885 Segmental profit Margins (%) Manufacture & retail of 11.2 10.5 10.5 9.0 9.2 9.4 jewellery Wholesale of precious 0.8 0.5 0.6 0.4 0.4 0.4 metals Securities & futures 63.2 66.2 35.0 30.0 30.0 30.0 broking Other businesses 15.4 41.7 20.0 15.0 15.0 15.0 Total 7.9 8.1 8.1 7.1 7.3 7.5
Page 21
Company Focus Chow Sang Sang
Income Statement (HK$ m) Margins Trend FY Dec 2009A 2010A 2011A 2012E 2013F 2014F 9.0% Revenue 9,463 11,705 17,158 19,162 22,137 25,051 8.5% Cost of Goods Sold (7,576) (9,403) (13,904 (15,604 (17,983 (20,324 8.0% Gross Profit 1,887 2,302 3,254) 3,558) 4,155) 4,726) 7.5% Other Opng (Exp)/Inc (1,136) (1,382) (1,872) (2,277) (2,515) (2,794) 7.0% 6.5% Operating Profit 751 920 1,383 1,281 1,639 1,932 6.0% Other Non Opg (Exp)/Inc 0 0 0000 5.5% Associates & JV Inc 1 3 2222 5.0% 4.5% Net Interest (Exp)/Inc (6) (4) (32) (51) (56) (56) 4.0% Exceptional Gain/(Loss) 6 35 43000 2010A 2011A 2012F 2013F 2014F Pre-tax Profit 771 973 1,419 1,255 1,609 1,902 Operating Margin % Net Income Margin % Tax (183) (206) (308) (272) (349) (412) Minority Interest (14) (10) (18) (16) (21) (25) Preference Dividend 0 0 0000 Net Profit 574 757 1,094 967 1,240 1,465 Net Profit before Except. 568 722 1,050 967 1,240 1,465 EBITDA 853 1,045 1,515 1,431 1,804 2,110 Growth
Revenue Gth (%) (4.2) 23.7 46.6 11.7 15.5 13.2 EBITDA Gth (%) 30.3 22.5 45.0 (5.5) 26.0 17.0 Opg Profit Gth (%) 34.2 22.5 50.4 (7.4) 28.0 17.9 Net Profit Gth (%) 22.2 31.9 44.4 (11.6) 28.2 18.2 Margins & Ratio
Gross Margins (%) 19.9 19.7 19.0 18.6 18.8 18.9 Opg Profit Margin (%) 7.9 7.9 8.1 6.7 7.4 7.7 Net Profit Margin (%) 6.1 6.5 6.4 5.0 5.6 5.8 ROAE (%) 16.1 15.8 18.2 14.5 16.6 17.4 ROA (%) 11.0 10.8 12.4 9.4 10.8 11.4 ROCE (%) 13.7 12.9 14.6 11.2 12.5 13.2 Div Payout Ratio (%) 31.5 30.4 28.5 30.0 30.0 30.0 Net Interest Cover (x) 126.2 232.1 43.2 25.1 29.2 34.3 Source: Company, DBS Vickers
Page 22
Company Focus Chow Sang Sang
Interim Income Statement (HK$ m) FY Dec 2H2009 1H2010 2H2010 1H2011 2H2011 1H2012
Revenue 4,854 5,244 6,462 8,280 8,878 9,096 Cost of Goods Sold (3,800) (4,154) (5,249) (6,755) (7,149) (7,498) Gross Profit 1,053 1,089 1,213 1,525 1,729 1,597 Other Oper. (Exp)/Inc (598) (656) (706) (842) (962) (1,043) Operating Profit 456 433 507 683 767 555 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 1 0 3 0 2 0 Net Interest (Exp)/Inc (2) (5) 2 (13) (19) (18) Exceptional Gain/(Loss) 8 (17) 52 (11) (32) 2 Pre-tax Profit 464 410 563 659 717 538 Tax (123) (108) (98) (163) (145) (94) Minority Interest (8) (5) (5) (11) (7) (3) Net Profit 333 298 460 485 565 441 Net profit bef Except. 325 315 407 496 597 439
Growth Revenue Gth (%) (4.6) 13.7 33.1 57.9 37.4 9.8 Opg Profit Gth (%) 140.0 38.1 11.1 57.6 51.3 (18.8) Net Profit Gth (%) 90.3 23.5 38.0 62.9 23.0 (9.0)
Margins Gross Margins (%) 21.7 20.8 18.8 18.4 19.5 17.6 Opg Profit Margins (%) 9.4 8.3 7.8 8.2 8.6 6.1 Net Profit Margins (%) 6.9 5.7 7.1 5.9 6.4 4.8
Source: Company, DBS Vickers
Page 23
Company Focus Chow Sang Sang
Balance Sheet (HK$ m) Asset Breakdown FY Dec 2009A 2010A 2011A 2012E 2013F 2014F
Debtors - Net Fixed Net Fixed Assets 579 618 718 790 858 923 11.2% Assets - 8.2% Invts in Associates & JVs 12 14 15 15 15 15 Other LT Assets 787 1,013 803 817 832 848 Bank, Cash Cash & ST Invts 387 285 651 619 706 910 and Liquid Inventory 3,228 4,898 6,214 7,188 8,185 9,139 Assets - 6.2% Debtors 612 881 973 1,087 1,256 1,421 Assocs'/JVs - Other Current Assets 389 308 302 302 302 302 0.2% Total Assets 5,994 8,016 9,677 10,817 12,153 13,559 Inventory - 74.3% ST Debt 598 726 1,329 1,849 2,031 2,131 Other Current Liab 1,329 1,425 1,390 1,119 1,275 1,430 LT Debt 0 0 393 551 606 636 Other LT Liabilities 91 125 144 172 207 248 Shareholder’s Equity 3,929 5,681 6,339 7,016 7,884 8,909 Minority Interests 48 60 81 110 150 204 Mainly consist of AFS Total Cap. & Liab. 5,994 8,016 9,677 10,817 12,153 13,559 investment and deferred tax assets Non-Cash Wkg. Capital 2,901 4,662 6,099 7,458 8,467 9,432 Net Cash/(Debt) (211) (441) (1,071) (1,781) (1,931) (1,857) Debtors Turn (avg days) 19.9 23.3 19.7 19.6 19.3 19.5 Creditors Turn (avg days) 39.6 36.9 23.7 21.6 21.3 21.5 Inventory Turn (avg days) 140.2 159.4 147.0 158.0 157.2 156.7 Asset Turnover (x) 1.8 1.7 1.9 1.9 1.9 1.9 Current Ratio (x) 2.4 3.0 3.0 3.1 3.2 3.3 Quick Ratio (x) 0.5 0.5 0.6 0.6 0.6 0.7 Net Debt/Equity (X) 0.1 0.1 0.2 0.2 0.2 0.2 Net Debt/Equity ex MI (X) 0.1 0.1 0.2 0.0 0.2 0.2 Capex to Debt (%) 12.8 15.0 10.3 8.3 7.9 7.9 Z-Score (X) NA NA NA NA NA NA
Source: Company, DBS Vickers
Page 24
Company Focus Chow Sang Sang
Cash Flow Statement (HK$ m) Capital Expenditure FY Dec 2009A 2010A 2011A 2012E 2013F 2014F
250 Pre-Tax Profit 771 973 1,419 1,255 1,609 1,902 Dep. & Amort. 82 102 107 125 139 152 200
Tax Paid (144) (173) (236) (272) (349) (412) 150 Assoc. & JV Inc/(loss) (1) (3) (2) (2) (2) (2) 100 (Pft)/ Loss on disposal of FAs 33 146 102000 Chg in Wkg.Cap. (443) (1,918) (1,405) (982) (1,018) (975) 50
Other Operating CF 1 0 47 42 48 52 0 Net Operating CF 299 (873) 33 166 427 717 2010A 2011A 2012F 2013F 2014F Capital Exp.(net) (77) (109) (177) (199) (209) (219) Capital Expenditure (-) Other Invts.(net) 0 0 0000 Invts in Assoc. & JV 0 0 0000 Div from Assoc & JV 19 21 24 24 24 24 Other Investing CF (3) (31) (43) (14) (15) (17) Net Investing CF (60) (119) (195) (189) (201) (213) Div Paid (181) (230) (311) (290) (372) (440) Chg in Gross Debt 110 109 1,141 677 237 130 Capital Issues 0 971 0000 Other Financing CF (30) 11 (171) (226) 165 180 Net Financing CF (101) 861 659 161 30 (129) Currency Adjustments (1) 0 0000 Chg in Cash 136 (131) 496 139 257 376 Opg CFPS (HK$) 1.23 1.60 2.12 1.70 2.14 2.50 Free CFPS (HK$) 0.37 (1.51) (0.21) (0.05) 0.32 0.73
Source: Company, DBS Vickers
Page 25
Company Focus Chow Sang Sang
Appendix
Retail sales of jewelleries in China Retail sales of jewelleries & watches in HK
RMB bn HKD bn 56% 96 250 60% 100 50% 219 89 36% 200 183 50% 80 47% 40% 39% 46% 40% 61 150 60 30% 27% 126 30% 43 45 19% 38 100 81 40 20% 64 20% 46 50 20 5% 10% 10% 13% 8% 0 0% 0 0% 2007 2008 2009 2010 2011 2012E 2007 2008 2009 2010 2011 2012 Jewellery sales (LHS) Growth y-o-y (RHS) Retail sales (LHS) Growth y-o-y (RHS)
Source: CEIC, Tianto Info Consulting, DBS Vickers Source: CEIC, DBS Vickers
2010-15F CAGR of urban household numbers by annual The booming middle class in China income in China
50% 100% 42% 90% 40% 80% 70% 30% 60% 20% 50% 20% 40% 10% 30% S hare population of 20% 0% 10% -1% 0% -4% -10% Poor Middle clas s Rich >RMB200k RMB100- RMB55- Source: McKinsey & Co., DBS Vickers Source: Wolfensohn Center for Development Page 26 Company Focus Chow Sang Sang Consumption of overnight tourists in Hong Kong Prices of luxuries outperformed overall CPI (2008-11 CAGR) 40% 36% 1976 level = 100 35% 1,000 30% 900 30% 27% 27% 28% 24% 24% 800 25% 23% 21% 21% 700 19% 18% 20% 600 15% 500 400 10% 300 5% 200 0% 100 0 1976 1981 1986 1991 1996 2001 2006 2011 care goods & skin goods Overall Others * & watch Electrical Jewellery spending & leather Garments Cosmetics Forbes Cost of Living Extremely Well Index Chinese tourists Overall tourists US Overall CPI * ‘Others’ include food & beverages, personal care and non-shopping spending. Source: HK Tourism Board, DBS Vickers Source: Forbes, DBS Vickers Page 27 Company Focus Chow Sang Sang Hong Kong consumer confidence index China consumer confidence index 120 120 110 115 100 110 90 105 80 100 70 95 60 90 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-11 Dec-12 Dec-12 Sep-07 Sep-09 Sep-11 May-08 May-10 May-12 Source: CEIC Source: CEIC Gold spot price trend Polished diamond overall price index US$ per ounce 200 2,000 180 1,800 160 1,600 140 1,400 120 1,200 100 1,000 80 800 60 600 40 400 20 200 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Feb-13 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Feb-13 Source: Bloomberg Source: Bloomberg Page 28 Company Focus Chow Sang Sang DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (“DBSVUSA”) directly and not its affiliate. 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