Chow Sang Sang

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 In Singapore, this research report or research analyses may only be distributed to Institutional “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, (“DBSVR”), are to contact DBSVR at +65 6535 9688 in respect of any matters arising from Chapter 289 of Singapore. or in connection with this report.” www.dbsvickers.com sa- DL 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 Page 2 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.

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