Luxury goods
Aaron Fischer, CFA Contents Regional Head of Consumer and Gaming Research Executive summary ...... 3 [email protected] (852) 26008256 The Red Eight and the Chinese customer...... 4 Mariana Kou (852) 26008190 From head to toe ...... 36
European brands dominate ...... 71
Getting exposed ...... 79
Company profiles
Belle ...... 85 Lifestyle ...... 101 Chow Sang Sang ...... 87 L’Occitane ...... 103 Emperor Watch & Jewellery ...... 89 Luk Fook ...... 105
Evergreen ...... 91 Oriental Watch ...... 107 Golden Eagle Retail ...... 93 Parkson Retail ...... 109 Hengdeli ...... 95 Ports Design ...... 111
HK Resources ...... 97 Sa Sa International ...... 127 I.T...... 99 Trinity ...... 129
Appendix: International peer group ...... 131
All prices quoted herein are as at close of business 13 January 2011, unless otherwise stated
Related consumer research
2 [email protected] 19 January 2011
Executive summary Luxury goods
Dipped in gold Fastest-growing segment Luxury goods look set to be the fastest-growing consumer category in China over the next five years, with a 25% Cagr against general consumption at 11%. Luxury sales in Greater China represent 10% of the global market. If we include sales to Chinese tourists abroad, we estimate Greater Chinese consumers to account for 15% of global sales. But we are only at the start of this golden opportunity. Given rising incomes and supportive social factors, we expect Greater Chinese customers to account for 44% of global luxury sales by 2020. Our top picks are Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli.
Eight key differences The Chinese luxury customer is unique in many ways and, in this report, we identify eight differences between the wealthy Chinese and their overseas counterparts. Not surprisingly, they largely have the same tastes in brands as the rest of the world with Louis Vuitton, Hermes, Chanel, Gucci, Rolex, Prada and Cartier being the most desirable. Men’s brands such as Zegna and Dunhill also score well in our China Reality Research proprietary luxury-goods survey.
China to account for Luxury-goods companies are expanding rapidly in the Middle Kingdom as China half of global luxury- will account for half of global growth over the next 10 years. We expect goods growth handbags, leather goods, watches and jewellery to see the fastest growth. Strong demand is already reflected in higher prices with fine wines increasing by 40% in 2010 and waiting lists are growing for many exclusive items.
Chinese luxury brands It is only a matter of time before Chinese luxury brands are established at to come home. However, we expect this to happen in product categories where China has a perceived fundamental advantage, primarily in the use of materials such as jade, porcelain or precious woods that can be used in jewellery, homeware and furniture. In the meantime, we expect Asian companies to look to acquire European brands and build up manufacturing expertise.
Asian pure plays Exposure can be gained via the brand owners listed in Europe and the USA. However, these companies only generate about 10-30% of sales to Chinese customers. We therefore recommend obtaining 100% pure-play exposure to Chinese luxury demand via the Asian-listed high-end companies. These stocks have rerated by 57% during 2010 but we believe valuation is still attractive at an average PE of 22x and PE/G of 1x. Of the stocks we cover, our top picks are Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli. We also like Trinity, Lifestyle, I.T, Emperor Watch & Jewellery and Sa Sa International. Strong sales over the December period will be the necessary catalyst for earnings upgrades and share-price outperformance.
China should be world’s Luxury market size largest luxury-goods 450 (€bn) % of total market by 20CL % of total 400 350 300 Others 250 56% 200 150 Others 100 Greater 85% Chinese 50 44% Greater Chinese 0 15% 10CL 11CL 12CL 13CL 14CL 15CL 16CL 17CL 18CL 19CL 20CL
Source: CLSA Asia-Pacific Markets
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Section 1: The Red Eight and the Chinese customer Luxury goods
The Red Eight and the Chinese customer Wealthy Chinese Before we get into the detail of the report, we identify eight differences differ from overseas between wealthy Chinese and their counterparts overseas. Generally, the counterparts affluent Chinese are younger with a greater desire to display their wealth and success. They enjoy being given special treatment and have no hesitation in paying a bit more for that privilege. They love to travel overseas and are willing to splash out for their friends and family, with watches and jewellery being the most popular purchases.
1. Younger and richer customers Hurun Research shows that mainland Chinese millionaires are 15 years younger than their overseas peers. As expected, the vast majority live in the coastal regions and top-tier cities. Beijing, Guangdong and Shanghai are home to 48% of China’s millionaires. The number of individuals with more than Rmb1,000m has increased at a 50% annual rate from 24 in 2000 to 1,363 in 2010.
Figure 1 The rich Chinese are Profile of millionaires in China younger and many live Average age 39 in top-tier cities Male-female ratio 7:3 Industry Service, property, manufacturing Collections 3 cars and 4.4 luxury watches Geographic distribution Beijing (17%), Guangdong (17%), Shanghai (14%), Zhejiang (13%), Jiangsu (7%), Others (32%) Favourite brands Fashion: Giorgio Armani, Gucci, Boss Jewellery: Cartier, Bulgari, Montblanc Overall luxury: Louis Vuitton, Chanel, Hermes, Cartier, Gucci Hobbies Travel, golf, swimming Favourite destinations International: US, France, Canada Domestic: Hong Kong, Yunnan, Sanya Number of holidays 16 days a year Drinking and smoking 1/3 don’t drink, about 1/2 don't smoke Source: Hurun Research Institute
Our CLSA proprietary luxury-goods survey shows that people in the 30-40 age group are the drivers of accessories and skincare demand. While for luxury cars, consumers in the 40-50 age group are more dominant.
Figure 2 The 30-50-year-olds drive Luxury customers by age luxury demand Above 50 75 40-50 Luxury car 38 30-40 20-30 Luxury handbag, 7 14 clothing, watch & 86 jewellery 14
Luxury skincare & 44 makeup 100 22
0 20406080100 (% of stores)
Source: China Reality Research
4 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
2. Display of success and being a VIP Living it up to show off Success is highly regarded, so is being rich and famous. It is important that and gain respect the luxury goods they buy convey that message and show that they are sophisticated and have good taste. Driving a Mercedes Benz and carrying a large Louis Vuitton monogram bag can be one way while wearing a four-carat diamond ring and ordering Rmb10,000 bottles of wine is another. Unlike in the USA and Europe, people in Asia do not show off their houses, which tend to be relatively small on a global basis. It is a lot more important to dress well and enjoy a luxurious life when you are out in public. Watches, jewellery, apparel, cars and wine are good ways to show off and gain respect. Some 24% of people we surveyed that earn around Rmb41,976 per year said they would be willing to spend more than Rmb50,000 on a watch.
Make Chinese consumers It is not enough to be rich. Being a VIP and having the owner of the most feel special expensive restaurant in town serving you personally is just as valuable. Chinese customers like to receive gifts from luxury boutiques. It is not about the gift, but about how important you are, even to luxury companies that are already serving the most elite. Receiving birthday gifts and hand-written cards, attending invitation-only events, and being recognised by the sales staff in luxury stores are especially appreciated. More effort is required by luxury stores in China but the payoff can also be worth it.
3. Luxury “more” for him . . . Luxury market in China is The luxury market in mainland China is still largely male-dominated given the male-dominated gifting culture and workforce demographics. Menswear, suitcases, watches and cars are key segments in China. As Leo Lui, president of Hermes China, has said: “Men’s ready-to-wear is […] a top seller, which is quite unusual. In most other markets, it’s women’s ready-to-wear that sells. China is still a men’s market, and more traditional.” However, he sees a shift towards a more balanced demographic combination as successful career women increasingly shop at Hermes to show that they have good taste. Big brands in China include Zegna and Dunhill.
4. . . . and more for others Some luxury brands have also opened more stores in Beijing than other first- tier cities, primarily to cater for the huge demand for gifting and relationship building. For example, Emperor Watch & Jewellery has 15 stores in Beijing compared with five in Shanghai and five in Guangzhou.
Our CRR survey estimates that 16-17% of Chinese consumers bought luxury goods as gifts. Luxury handbags, clothing, watches and jewellery are the most popular gift items. Within the accessories segment, 37% of purchases was for gifting. However, we expect this percentage to come down as the personal-use segment grows.
Figure 3 Figure 4
Consumers said they shopped for . . . Store managers said their customers shopped for . . .
Own-use by buyers Gifts Investment purpose Yourself 93 (Average composition %) 100 1 1 5 2 24 Friends & family 17 80 37 60 Gifts for business 98 16 40 75 59 contacts 20 (% of consumers who bought 0 Investment/collection 6 luxury goods in the past 12 months) Luxury car Luxury skincare & Luxury handbag, makeup clothing, watch & 0 20406080100 jewellery
Source: China Reality Research
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Section 1: The Red Eight and the Chinese customer Luxury goods
5. Watches and jewellery top luxury wish list Watches and jewellery Chinese consumers love watches and jewellery for their intrinsic value and are great for displaying accessories are great vehicles to display wealth and success. Gold and jade are wealth, gifting, the most popular jewellery items. Brand-name watches are also a Chinese and collection favourite for personal use, gifting and collection. Hong Kong is the largest Swiss watch export market in the world. China and Hong Kong together account for 26% for Swiss watch exports in January-November 2010, according to the Federation of the Swiss Watch Industry. There is a robust second-hand market for brand-name watches, especially Rolex, thus some aspirational shoppers also view watches as an inflation hedge/investment. With “girl power” also growing, luxury handbags are rapidly catching up. This is a big positive for top players including watch and jewellery retailers from Hong Kong as well as global brand names such as Hermes, Louis Vuitton, Prada and Gucci.
Figure 5 Hong Kong is the World distribution of Swiss watch exports (January-November 2010) world’s largest Swiss watch market Hong Kong 19% Hong Kong/ China togeter is 26%
Others United Kingdom 31% China 4% 7%
Germany USA 5% 10%
Japan France 5% 7% Singapore Italy 6% 6% Source: Federation of the Swiss Watch Industry (Nov 2010), CLSA Asia-Pacific Markets
6. Overseas purchases Travel and shop Shopping overseas can be cheaper because of the higher import duties and other taxes in China (see Section 2 for more). It also comes with the luxurious feeling of travelling to shop. It is well-appreciated and will strengthen relationships if you bring home luxury goods for your friends and professional contacts. There may be wider offerings in the country of origin and sometimes there may be limited editions overseas for special occasions. Hermes in China, for example, does not have a central buyer, so the product offering is different for each store. While for cosmetics, because of the time it takes to get import approvals, mainlanders can always buy the newer collections in Hong Kong.
Figure 6 Chinese luxury sales: Domestic versus overseas spend
Overseas Domestic 56% 44%
Source: CLSA Asia-Pacific Markets
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Section 1: The Red Eight and the Chinese customer Luxury goods
7. Willingness to pay a big premium Money is not always Chinese consumers are willing to pay extra for luxury. As one businessman a key factor said, “A price tag of more than one million yuan a bottle - that does more than show off your wealth, it shows you have good taste.” Not everyone may agree with this. The businessman often pays more than Rmb30,000 for a bottle of wine to entertain guests. In October 2010, three bottles of Chateau Lafite’s 1869 vintage sold for a record US$230,000 each in Hong Kong, at 28x Sotheby’s top estimate. Fine wine prices increased 40% during 2010.
Figure 7 Fine wine prices Liv-ex Fine Wine 100 Index keep rising 400
360
320
280
240
200
160
120
80 Dec 05 Oct 06 Aug 07 May 08 Mar 09 Jan 10 Nov 10
Note: the index is production and supply weighted. Based at 100 in January 2004. Source: Liv-ex.com
8. Local tastes Bigger brands, large logos, Chinese affluent like famous brands. Expensive brand-name products are hand-made products oftentimes perceived as of higher quality. Signature collections and large logos that can be easily recognised are also popular. Chinese consumers also love craftsmanship. This is a tradition that the Chinese highly value and at the same time it also says how unique you are. Leather goods, watches, jewellery, porcelain and glassware are a lot more popular and precious if they are hand-made and Chinese consumers are happy to pay a large premium.
Unique product categories There are some luxury products that Chinese customers are very interested in like tea and furniture and that are not as popular among the rich in other countries. For example, a pack of premium puerh tea from the 1980s sold for Rmb13,440 in an 2009 auction, which is almost Rmb40 per gram. Another pack that was ultra premium and believed to be more than 80 years old sold for Rmb504,000, or Rmb1800 per gram. Antique furniture is also popular among the Chinese rich. Hainan rosewood, in particular, is very prestigious and a set of four chairs recently sold for Rmb17.7m and a six-column bed frame fetched a record Rmb43.1m.
Figure 8 Figure 9
A set of four Hainan rosewood chairs Hainan rosewood bed frame
Source: China Guardian Auctions website
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Section 1: The Red Eight and the Chinese customer Luxury goods
Luxury boom Fastest growing segment Growth rates within the consumer sector in mainland China vary across in China product categories. We expect luxury goods to lead with a 25% Cagr over 09- 14CL, ahead of gaming at 20% followed by 17% for communications and 16% for education. Staple products, including alcohol, tobacco, food and beverages lag behind - although at 5-6% growth - this is significantly higher than rate in developed markets, which is in the very low single digits.
Figure 10 Gambling and shopping China consumer expenditure Cagr growth (2010-15CL) lead the way Luxury goods Gaming Communications Education Healthcare Transport Cosmetics Hotels and catering Housing Total consumer expenditure Leisure and recreation Household care Clothing and footwear Food and beverages (%) Alcohol and tobacco
0 5 10 15 20 25 30
Source: Euromonitor, CLSA Asia-Pacific Markets
Luxury goods in China: €9bn market Dissecting the market The global luxury-goods market includes items such as apparel (about 25% of the total), prestige cosmetics (about 25%), “hard luxury” items which includes watches and jewellery (about 25%), with accessories, leather goods and others making up the remaining 25%. Consulting firm Bain estimates that China’s domestic luxury market in 2009 was at Rmb68bn, or €9.2bn, which is about 5% of the global market. However, if we add Hong Kong, Macau and Taiwan, the Greater China market is estimated to be about €18bn, which is about 10% of the total global market. Europe makes up 37% of the market, Americas 30%, Japan 11%, Asia Pacific ex-Japan and China 17% and Rest of the World at 5%. If we include travel, Greater Chinese customers should account for about 15% of the global market. Louis Vuitton’s biggest customers are already Chinese buyers.
Figure 11 Figure 12
Geographic breakdown Category breakdown - global
Japan Mainland USA 11.0% China 27.4% 5.5% Others Apparel 25% 25% HK Greater 2.6% China Rest of World 10% 5.0% Taiwan 1.9% Macau Europe 0.4% Rest of Asia 37% 6.6% Prestige Rest of cosmetics Hard luxury Americas 25% 25% 2.6%
Source: CLSA Asia-Pacific Markets
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Section 1: The Red Eight and the Chinese customer Luxury goods
Greater China represents 28% of sales for Swatch, 22% for Richemont, 18% for Gucci, 14% for Bulgari and 11% for Hermes.
Figure 13 Sales exposure to Greater China
Swatch Group
Richemont
Gucci brand
Bulgari
Hermes
Tod's (%)
0 5 10 15 20 25 30
Source: Cheuvreux, CLSA Asia-Pacific Markets
China to be world’s The luxury-goods sector will focus on China. We estimate that the Chinese luxury largest luxury goods market can continue to grow at about 25% per annum for the next five years, market by 20CL followed by about 22% thereafter. This implies a market size of €74bn by 2020, making China the largest domestic market in the world. Including travel spend, we expect Greater Chinese demand will account for 44% of the global luxury- goods market. Underpinning our forecasts for other markets, our economics team expects real GDP growth in the EU to largely stay flat in the next two years, while the USA and Japan should grow at 1.1-1.8% per year.
Figure 14 Luxury market size and growth – by domestic spend
450 (€bn) 2010-20 Cagr 400
350 Rest of World 11% 300 250 Europe 7% 200
150 Americas 5%
100 Japan 3%
50 China 23% 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: CLSA Asia-Pacific Markets
We believe the size of Greater Chinese luxury-goods demand in 2020 will be around the same size of the existing global luxury-goods market.
19 January 2011 [email protected] 9
Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 15 Figure 16
China leading the game Luxury market comparison Real GDP growth
450 (€bn) 12 (%) 10CL 11CL 12CL 400 10 350 Others 300 Greater Chinese demand 8 250 6 200 150 4 100 2 50 0 0 2010 2020 US EU Japan China
Source: CLSA Asia-Pacific Markets, Bain
We believe that the domestic mainland China market is well on track to surpass Japan’s luxury market by 2014. Japan’s economy has been stagnant since the early 1990s with YoY GDP growth eventually turning negative in 1998. This contrasts with China’s hyper GDP per capita growth.
Figure 17 Figure 18
Japan falling behind Japan’s stagnant economy GDP per capita growth
700,000 (¥bn) GDP (%) 12 40 (%) Japan China 10 600,000 YoY growth (RHS) 8 30 500,000 6 20 400,000 4 2 10 300,000 0 0 200,000 (2) (4) (10) 100,000 (6) 0 (8) (20) 1980 1984 1988 1992 1996 2000 2004 2008 1990 1996 2002 2008
Source: CEIC, CLSA Asia-Pacific Markets
To confirm that the forecasts are reasonable, we also performed a luxury market/GDP comparison for the key countries and regions. Based on our forecast of €74bn in 2020, China’s luxury market should be about 0.6% the size of the country’s total GDP, roughly in line with Japan’s.
Figure 19 Sanity check (€bn) GDP 2009 GDP 2020 Luxury market Luxury market Luxury/GDP 2009 Luxury/GDP 2020 2009 2020 (%) (%) China 3,533 12,340 9 74 0.26 0.60 Japan 3,649 4,529 18 26 0.51 0.58 Europe 14,002 23,425 62 121 0.44 0.52 Americas 14,110 28,123 50 82 0.36 0.29 Source: Euromonitor, CLSA Asia-Pacific Markets
We made forecasts for each domestic market based on growth for locals, mainland tourists, and others. We expect to see very strong demand from Greater Chinese in the next 10 years.
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Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 20
Luxury-goods market estimates (€bn) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cagr10-20 (%) China 9 12 14 18 22 28 34 41 50 61 74 23 % of total 5 6 7 9 10 12 13 14 16 18 19 Japan 18 19 20 20 21 22 22 23 24 25 26 3 % of total 11 11 10 10 9 9 8 8 8 7 7 Japanese 16 17 17 17 17 17 17 18 18 18 18 1 Mainland tourists 1 1 1 2 2 2 3 3 3 4 5 16 Others 1 1 1 2 2 2 2 2 3 3 3 12 Americas 50 53 55 57 60 63 66 70 73 78 82 5 % of total 30 29 28 28 27 26 25 24 23 22 21 Americans 44 45 47 48 50 51 53 54 56 58 59 3 Mainland tourists 1 2 2 3 4 5 6 7 8 10 12 25 Others 5 5 6 6 7 7 8 9 9 10 11 8 Europe 62 66 69 74 78 84 89 96 103 112 121 7 % of total 37 36 36 36 35 34 34 33 33 32 31 Europeans 47 48 50 51 53 54 56 57 59 61 63 3 Mainland tourists 6 7 8 10 12 15 18 21 26 31 37 21 Others 10 11 12 13 14 15 16 17 19 20 22 8 Hong Kong 4 5 6 7 8 10 12 14 16 19 23 18 % of total 3 3 3 3 4 4 4 5 5 6 6 HK locals 2 2 2 3 3 3 3 3 4 4 4 8 Mainland tourists 2 3 3 4 5 7 8 10 12 15 18 23 Others 0 0 0 0 0 0 0 0 0 0 0 7 Taiwan 3 3 4 4 4 4 5 5 5 5 6 6 % of total 2 2 2 2 2 2 2 2 2 2 2 Taiwan locals 3 3 3 3 4 4 4 4 4 4 5 5 Mainland tourists 0 0 0 0 1 1 1 1 1 1 1 13 Others ------Macau 1 1 1 1 2 2 3 4 5 6 7 27 % of total 0 0 1 1 1 1 1 1 1 2 2 Macau locals 0 0 0 0 0 0 0 0 0 0 0 5 Mainland tourists 1 1 1 1 2 2 3 4 5 6 7 27 Others ------South Korea 6 6 7 7 8 9 9 10 11 12 13 8 % of total 3 3 4 4 4 4 4 4 3 3 3 Korea locals 5 6 6 6 7 7 8 8 9 10 10 7 Mainland tourists 1 1 1 1 1 1 1 2 2 2 3 17 Others 0 0 0 0 0 0 0 0 0 0 0 10 Singapore 3 3 4 4 5 6 6 7 8 9 10 13 % of total 2 2 2 2 2 2 2 2 3 3 3 Singapore locals 3 3 3 4 4 4 5 6 6 7 8 12 Mainland tourists 0 0 0 1 1 1 1 1 2 2 2 22 Others 0 0 0 0 0 0 0 0 0 0 0 8 Thailand 1 1 1 1 1 2 2 2 2 2 3 11 % of total 1 1 1 1 1 1 1 1 1 1 1 Thailand locals 1 1 1 1 1 1 1 1 1 2 2 8 Mainland tourists 0 0 0 0 0 0 0 0 1 1 1 22 Others 0 0 0 0 0 0 0 0 0 0 0 10 India 1 1 1 1 1 2 2 2 2 3 3 15 % of total 0 1 1 1 1 1 1 1 1 1 1 India locals 1 1 1 1 1 2 2 2 2 3 3 15 Mainland tourists ------Others ------Others 10 10 11 11 12 13 13 14 15 15 16 5 % of total 6 6 6 6 5 5 5 5 5 4 4 Global luxury market 168 180 193 207 224 243 264 288 316 348 385 9 Source: CLSA Asia-Pacific Markets
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Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 21
Greater Chinese demand (€bn) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cagr10-20 (%) Domestic market 9 12 14 18 22 28 34 41 50 61 74 23 Mainland tourists 12 15 18 22 28 34 41 49 59 71 86 22 Mainland Chinese demand 21 26 32 40 50 62 75 91 110 132 160 22 % of global luxury market 13 15 17 19 22 26 28 31 35 38 42 China 9 12 14 18 22 28 34 41 50 61 74 23 Hong Kong 4 5 6 7 8 10 12 14 16 19 23 18 Taiwan 3 3 4 4 4 4 5 5 5 5 6 6 Macau 1 1 1 1 2 2 3 4 5 6 7 27 Greater China domestic markets 18 21 25 30 37 45 53 64 76 92 110 20 % of global luxury market 10 12 13 15 16 18 20 22 24 26 29 Domestic market 9 12 14 18 22 28 34 41 50 61 74 23 Mainland tourists 12 15 18 22 28 34 41 49 59 71 86 22 HK locals 2 2 2 3 3 3 3 3 4 4 4 8 Taiwan locals 3 3 3 3 4 4 4 4 4 4 5 5 Macau locals 0 0 0 0 0 0 0 0 0 0 0 5 Greater Chinese demand 26 31 38 46 56 69 82 98 118 141 169 21 % of global luxury market 15 17 20 22 25 28 31 34 37 41 44 Source: CLSA Asia-Pacific Markets
China is the world’s growth driver Growing from 5% to 19% We estimate that mainland Chinese will represent half of the growth in the of the global market global luxury-goods market over the next 10 years. The mainland China market is only about 5% of the total and we expect that to increase to 19%. As the mainland market expands, its superior growth has an increasing impact on total growth of the luxury-goods sector.
The drivers We discuss the drivers in three segments: a) economic, b) social, and c). supply factors.
a) Economic drivers The rich are getting richer Mainland China has seen a booming population of high net worth individuals. The Hurun Research Institute estimates that the number of individuals with personal wealth of more than Rmb10m in China has increased 6.1% YoY in 2010 to 875,000 and the “super-rich” group with more than Rmb100m was up 7.8% to 55,000 individuals. Average wealth of the top 1,000 rich individuals in China grew 64% over the past two years and 26% in the past year.
Figure 22 Figure 23
China’s pyramid of wealth (2010) Much wealth is “hidden” in China
97 with Rmb10,000m
200 with Rmb10,000m "Known" wealth 281 with Rmb5,000m 700 with Rmb5,000m 4,000 with Rmb1,000m
1,363 with Rmb1,000mn
55,000 with Rmb100m 2,600 with Rmb1,000mn
“Hidden" wealth
875,000 with Rmb10m
420 with Rmb5,000m
100 with Rmb10,000m
Source: Hurun Research Institute
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Section 1: The Red Eight and the Chinese customer Luxury goods
Very significant growth in In the past 10 years, the population of ultra affluent individuals with more past ten years than Rmb1,000m of wealth in mainland China has skyrocketed, at an annual rate of 50-58%, and so has their wealth. The 50th richest person in China in 1999 had wealth of Rmb50m while the 50th richest in 2010 has Rmb15,500m.
Figure 24 Figure 25
Individuals with Rmb1,000m Individuals with Rmb10,000m
1,600 120
1,363 1,400 97 100 1,200 80 1,000 50% Cagr 58% Cagr 800 60
600 40 400 20 200 24 1 0 0 2000 2010 2000 2010
Source: Hurun Research Institute
The average Mr Chan is Meanwhile, the middle class in China is enjoying increasing salaries and a also going well higher standard of living, especially in the coastal cities. Average remuneration has been growing at 12-19% YoY each quarter for the past 10 years.
Figure 26 Strong GDP and income growth
30 (%) GDP YoY Avg remuneration YoY
25
20
15
10
5
0 Mar 01 Oct 02 Apr 04 Nov 05 May 07 Dec 08 Jun 10
Source: CEIC, CLSA Asia-Pacific Markets
The future remains rosy Income growth of 11% Mainland China’s per-capita disposable income will grow 11% annually in the in China next five years, according to Euromonitor estimates. This compares to the world average of 5% and Asia Pacific average of 7%.
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Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 27
Outperforming the crowd Per capita disposable income growth 09-14CL
India 14 China 11 Indonesia 11 Asia Pacific 7 South Korea 7 Taiwan 7 Malaysia 6 Thailand 6 Hong Kong 6 Singapore 6 World 5 USA 4 United Kingdom 3 France 3 Germany 3 Japan 1 (%)
0246810121416
Source: Euromonitor, CLSA Asia-Pacific Markets
Fourfold jump in The percentage of households with income of more than US$10,000 has households earning over increased from 3.1% in 2000 to 17.2% in 2009, or a 21% Cagr, which is US$10,000 per annum much faster than the lower-income categories. We expect the wealthy group with household income of more than US$10,000 to continue to grow at double-digits in the next eight years, representing 51% of the total in 2020.
Figure 28 Chinese people Mainland China income distribution getting wealthier > US$10,000 US$7,500-10,000 US$5,000-7,500 (%) US$2,500-5,000 US$500-2,500 < US$500 100 90 80 70 60 50 40 30 20 10 0 14Cl 10CL 11CL 12CL 13CL 15CL 16CL 17CL 18CL 19CL 20CL 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Euromonitor, CLSA Asia-Pacific Markets
The rapid urbanisation in China also gives another boost to the luxury-goods market. A larger workforce with growing income will benefit the many high- end brands that are expanding their presence in first and second-tier cities.
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Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 29 Figure 30
Urbanisation in China Average household income growth (2000-09)
Urban Population Rural Population (%) 14 (%) 100 12 80 10
60 8
6 40 4 20 2
0 0 1990 1995 2000 2005 2010 2015 2020 Urban Rural
Source: CEIC, CLSA Asia-Pacific Markets
CLSA proprietary survey We also conducted a detailed proprietary luxury study in the mainland, surveying more than 340 consumers in 65 Tier 1-3 cities and 31 luxury store managers. We found that 53% of consumers surveyed in Tier 1-2 cities spent Rmb10,000 or more on luxury goods in the past 12 months, compared with 39% in Tier-3 cities. On average, among all the consumers we surveyed who have made luxury purchases in the past 12 months, each spent Rmb16,674. On average, they spent an average of 10-12% of their total household income on these items. This underlines the high propensity to spend on luxury goods in China.
While the shoppers in Tier 1-2 cities tame their budgets on luxury purchases, Tier-3 city consumers plan to keep their luxury spending budget at about the same level. We are not concerned about respondents’ desire to spend less on luxury goods next year as we believe that most respondents would typically end up spending more on luxury goods than is planned each year, given the somewhat impulsive nature of this type of purchases.
Figure 31 Figure 32
To those who made luxury purchases: How much did How much do you plan to spend on luxury goods in the you spend on luxury goods (excluding autos)? next 12 months? (excluding autos)
Below Rmb1,000 Rmb1,000-4,999 20,000 (Rmb/per person) Spending in the past 12 months (% of consumers) Rmb5,000-10,000 Above Rmb10,000 Budget for the next 12 months 100 19,000 18,543 90 80 39 18,000 53 70 60 17,000 16,674 50 16,196 15,975 36 15,879 40 16,000 15,788 30 28 20 15,000 22 10 19 0 3 14,000 Tier 1-2 cities Tier-3 cities Overall Tier 1-2 cities Tier-3 cities
Source: China Reality Research
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Section 1: The Red Eight and the Chinese customer Luxury goods
The 31 store managers that we surveyed remain very upbeat and expect overall sales to enjoy a 20% Cagr in the next three years. Luxury auto managers see growth in 2010 as extraordinary and expect a more normalised, yet still very high growth rate of 26%.
Figure 33 Store managers Estimated sales growth at luxury stores surveyed are bullish 50 (%) 48 YoY growth in 2010 45 Annual average in the next three years 40 35 33
30 26 25 20 20 20 14 14 15 12 10 5 0 Overall Luxury car Luxury handbag, Luxury skincare & clothing, watch & makeup jewellery
Source: China Reality Research
Falling savings rate Government encouraging In 2009, mainland Chinese people saved 37% of their disposable income, spending almost doubled the Asia Pacific average of 20% and more than tripled the world average of 9.8%, according to Euromonitor. Although savings rates remained high in the past five years, we believe that it may have already peaked. Government policies in China actively encourage household consumption to create sustainable growth in the country.
Figure 34 Figure 35
Savings as % of disposable income China’s savings ratio
China 40 (%) Singapore Hong Kong 35 India Asia Pacific 30 South Korea Thailand 25 France 20 Malaysia Germany 15 World Japan 10 Indonesia USA 5 UK (%) Taiwan 0
(20)(10)010203040 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Euromonitor, CLSA Asia-Pacific Markets
Consumer confidence has made a solid comeback after the financial crisis. Retail sales growth has picked up, particularly robust at 32% in February 2010 and stabilised at 22-24% in March-November 2010.
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Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 36
Chinese out shopping China consumer confidence and retail sales growth
125 Consumer Confidence Index Retail sales YoY (RHS) (%) 35
120 30 25 115 20 110 15 105 10
100 5
95 0 Jan 00 Oct 01 Aug 03 May 05 Mar 07 Jan 09 Oct 10
Source: CEIC, CLSA Asia-Pacific Markets
More consumer credit Credit cards stimulate Another driving force in consumer expenditure is the growing credit in the luxury sales market. Penetration of credit cards in the cities has increased fourfold since 2005 to 5.4% in 2009, with the number of credit cards in circulation in China skyrocketing to 221 million as of September 2010. MasterCard estimates that there may be about 800-900 million credit cards in circulation in 2020, surpassing the United States, which currently has 700 million. Compared with other Asian countries, China still has a relatively low consumer credit/GDP ratio. We expect further easing of consumer credit as the recovery grows more robust and as more Chinese consumers adopt credit cards.
Figure 37 Figure 38
Number of credit cards issued Credit card/urban population
250 (m) 6 (%) 5.4 5 200 4.2 4 150 2.7 3 100 1.5 2 1.3 50 1
0 0 2005 2006 2007 2008 2009 Mar10 Jun10 Sep10 2005 2006 2007 2008 2009
Figure 39 A long way to catch up Consumer credit/GDP Australia Malaysia Hong Kong Taiwan Singapore Korea Japan Thailand China India Indonesia (%) Philippines
0 102030405060708090
Source: CEIC, CLSA Asia-Pacific Markets
19 January 2011 [email protected] 17
Section 1: The Red Eight and the Chinese customer Luxury goods
More aspirational shoppers Growing more Growing consumer credit also encourages the middle-income class to make comfortable with debt luxury purchases more often than they can afford. Banks in China have been raising credit limits, but payable credit in the country grew even faster. Part of the reason could be consumers getting more comfortable carrying a larger balance on their cards. However, credit card balance outstanding for over six months almost quadrupled since March 2008 to Rmb7.9bn in September 2010, which translates into an average of Rmb36,000 for each issued card. We believe that some Chinese aspirational shoppers are trying hard to match the lifestyles of the newly rich.
Figure 40 Figure 41
Average credit limit per card Credit limit and payable credit YoY gwth
9,000 (Rmb) 120 (%) Credit limit Payable credit 8,500 100 8,000 7,500 80 7,000 60 6,500 6,000 40 5,500 20 5,000 4,500 0 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10
Source: CEIC, CLSA Asia-Pacific Markets
Figure 42 Average balance outstanding for six months and over
45,000 (Rmb)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10
Source: CEIC, Wind, CLSA Asia-Pacific Markets
b) Social drivers Love for luxury Some 75% are interested With growing disposable income, Chinese consumers have developed a in luxury goods . . . growing appetite for brands. Some 75% of Chinese consumers we surveyed are interested in luxury goods. Although 22% are not able to afford them yet, rising income in China should continue to move consumers into the luxury shopper category. As a proxy to get a sense of how much Chinese love luxury goods, we asked how much they would be willing to spend on a luxury watch. Of our respondents, 12% said they are willing to pay Rmb50,000 and 12%
18 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
said Rmb100,000 and above, ie 24% of the people surveyed earning an average of RMB41,976 per year said they would spend more than Rmb50,000 on a watch.
Figure 43 Figure 44
. . . and willing to spend Which category do you fall into? What's the most you will pay for a watch?
% of CRR Consumer Panel % of CRR Consumer Panel More than No upper Zero Rmb200K limit 7% I don't want to 1% 6% I have bought/ buy luxury goods plan to buy Rmb200K 25% luxury goods 1% 53% Rmb100K 4% Rmb1K I want to buy 39% luxury goods Rmb10K Rmb50K but can't 30% 12% afford them 22%
Source: China Reality Research
Reasons why Chinese buy About 77% of Chinese luxury shoppers believe that high-end goods are of luxury goods superior quality. Luxury goods are a symbol of success and status. Some 64% of consumers see these purchases as a way to reward themselves, while only 48% confess that they take this as a way to show off to friends and family.
Figure 45 To those that have bought/plan to buy luxury goods: Do you agree with the following?
Yes No
I buy luxury brands because they are 77 23 superior in quality
Owning luxury goods is a symbol of 64 36 success and status
I buy luxury goods to reward myself 64 36
I buy luxury goods because they are 60 40 superior in design
I buy luxury goods because they are fashionable 58 42
I buy luxury goods because people in 49 51 my social and work circle own them
I buy luxury goods to give as gifts 48 52
0 20406080100 (% of consumers who have bought or plan to buy luxury goods)
Source: China Reality Research
Chinese love brands Whether it is just to reward themselves or dressing up for friends, luxury store managers confirm that their customers highly value their brands and enjoy the social status their goods convey.
19 January 2011 [email protected] 19
Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 46
Brands drive purchases To store managers: What are the reasons why consumers buy your brand?
High acceptence among customers High price Best design Best quality Fashion Shop environment & service Social status & high profile High brand name
100 33 33 Luxury skincare 33 & makeup 22 22 22 11
86 93 Luxury handbag, 7 57 clothing, watch & 7 jewellery 21 0 0
88 88 25 13 Luxury car 0 25 0 0 (% of stores)
0 20406080100
Source: China Reality Research
Some people are practical For those who can afford but decide that luxury goods are not for them, a whopping 97% say they are just being practical. We wonder if these are the same people that spend all their money at Macau’s gaming tables.
Figure 47 To consumers that do not buy luxury goods: Do you agree with the following?
I don't buy luxury goods because there are too many fakes for luxury brands in the 34 66 Chinese market Yes No Luxury goods are superficial, so I don't want 52 48 to buy them
I'm practical and don't want to pay the high 97 3 price for luxury goods
0 20406080100 (% of consumers who will not buy luxury goods)
Source: China Reality Research
20 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
Dressed for success Wealth and status are highly valued in Asian culture. Success is often times measured by net worth and social status, and therefore it is important to polish your image - dress well for your social status and better yet dress up to the next level.
Girl power About 75% of Chinese The role of women in China is an increasingly important driver to the luxury- women take care of goods market. According to a 2010 MasterCard report, 75% of Chinese household finance women say that they are the ones who control the family purse strings, compared with the Asia-Pacific average of 65%. Meanwhile, women’s labour force participation rate is at 67% in 2010, compared to the Asia-Pacific average of 51%, and 32% of these Chinese working women plan to spend more in the next six months.
Shopping for nice clothes Clothing and cosmetics are likely to be the major growth areas. The Women and cosmetics of China magazine’s 2009-10 survey reveals that the top three categories where urban women plan to spend in 2010 are: Clothing and accessories (62.7%) Cosmetics (40.7%) Cell phone (22.0%)
Our survey found that 50% of store managers in the luxury handbag, clothing, watches and jewellery segment said their customers are female and 43% said it was an even mix. Meanwhile, luxury cars are still male-dominated.
Figure 48 Women dominate Luxury customers by gender accessories and cosmetics segments Luxury car 88 13
Male Female 50-50 Luxury handbag, clothing, watch & 7 50 43 jewellery
Luxury skincare & 100 makeup
0 20406080100 (% of stores)
Source: China Reality Research
c) Supply We argue that store expansion by luxury-goods companies will also drive demand. As one top executive of a Hong Kong-based luxury retailer said, demand from mainland consumers is only capped by supply. As of now, most luxury stores are still concentrated in Tier-1 and Tier-2 cities in China, based on our review of 24 luxury brands network. We expect the market to continue expanding, not only due to the demand drivers we discussed above, but also from further penetration of luxury brands into Tier-3 cities in China. As mentioned above, we expect mainland Chinese to represent half of global luxury-goods growth over the next 10 years.
19 January 2011 [email protected] 21
Section 1: The Red Eight and the Chinese customer Luxury goods
Further penetration As shown in Figure 49, there are still some cities with disposable income per capita above Rmb20,000, but only a handful of luxury brand stores, presenting huge potential for penetration. We expect the data set to move towards the upper right as consumers get richer and luxury brands open more outlets.
Figure 49 Figure 50
Luxury store locations Store counts vs disposable income (ex Beijing, Shanghai)
Beijing 131 45 (Store count) Shanghai 125 Shenzhen 41 Chengdu 41 40 Shenyang 39 Hangzhou 39 35 Guangzhou 32 Dalian 30 30 Qingdao 28 Tianjin 26 Harbin 25 25 Suzhou 23 Kunming 23 20 Nanjing 22 Xian 21 15 Changsha 21 Wuhan 20 Wuxi 19 10 Wenzhou 18 Zhengzhou 17 5 Disposable income Ningbo 17 per capita (Rmb) Chongqing 17 0 0 20406080100120140 0 10,000 20,000 30,000 40,000
Source: Company websites, CLSA Asia-Pacific Markets. Brands include Cartier, Alfred Dunhill, Hugo Boss, Cerruti, Ermenegildo Zegna, Salvatore Ferragamo, Canali, Giorgio Armani, Burberry, Coach, Louis Vuitton, Escada, Gucci, Tod’s, Hermes, Bulgari, Versace, Givenchy, Celine, Fendi, Prada, Tiffany, Chanel, and Lanvin.
Department stores Unlike most other markets, luxury stores in China are primarily located in dominate in China department stores, since it is still the preferred method of shopping in the country. For example, we estimate that only about 20% of Ports Design’s more than 300 stores are standalone stores. As such, investors can also get exposure to the luxury-goods sector via mainland department stores such as PCD Stores (331 HK - HK$2.44 - U-PF) and Golden Eagle Retail (3308 HK - HK$21.75 - O-PF) as well as commercial landlords such as Hang Lung Prop (101 HK - HK$36.00 - U-PF) and Kerry Properties (683 HK - HK$43.25 - O-PF).
Domestic versus total demand Luxury goods feature high on the shopping list for Chinese travellers. and total demand is highly geared to tourism. The World Travel & Tourism Council estimates that mainland China’s travel demand in 2010 is the second largest in the world at US$587bn. The council expects demand to increase rapidly at a 9% Cagr in the next 10 years to US$2,304bn in 2020, catching up with the US.
Figure 51 Figure 52
Total travel and tourism demand 2010 Total travel and tourism demand 2020
United States United States China China Japan Japan Germany Germany France United Kingdom United Kingdom France Italy Spain Spain India Canada Italy (US$bn) Australia Russian Federation (US$bn)
0 500 1,000 1,500 2,000 0 1,000 2,000 3,000 4,000
Source: World Travel & Tourism Council, CLSA Asia-Pacific Markets
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Section 1: The Red Eight and the Chinese customer Luxury goods
Mainlanders on vacations Total departures from the mainland for private purpose have been enjoying a Cagr 25% since 2000. We expect outbound travel growth to remain very robust over the coming decade. The government expects that 100 million people will travel abroad by 2015, up from 47 million in 2009.
Figure 53 Let’s go abroad Chinese outbound travel
60 (m person-time m) Departure for private purpose Total departures
50
40 Private trips at a 25% Cagr
30
20
10
0 1994 1996 1998 2000 2002 2004 2006 2008
Source: CEIC, CLSA Asia-Pacific Markets
The huge travel demand led Airbus to raise its forecast for aircraft sales over the next 20 years. The jet maker’s COO John Leahy said that demand for travel is doubling every 15 years, but in places like India and China, they expect to double in the next six years.
More planning to travel Shorter term, we see growing travelling appetite as 24% of our CRR consumer panel is planning to take a trip in the next 12 months, up from the 16% who travelled in the past year.
Figure 54 Overseas travel aspirations
(% of CRR Consumer Panel) Yes No No reply 1 1 1 100 90 80 50 70 74 60 83 50
40 +96% 30 +52% 48 20 24 10 16 0 Past 12 months Plan to in next 12 months Plan to in next three years
Source: China Reality Research
19 January 2011 [email protected] 23
Section 1: The Red Eight and the Chinese customer Luxury goods
Travel is key threat The 31 store managers we surveyed also named overseas demand as the top for retailers competitive force in luxury skincare and accessories. The strong demand intensifies competition in the luxury space more than domestic expansion of competitive brands.
Figure 55 Competing against Score the following competition your store faces: 0 = not at all, 5 = highly competitive shops overseas Consumers shopping online Counterfeits Consumers shopping abroad Store opening of other luxury brands
3.2 Luxury skincare & 3.6 makeup 0.8 2.2
Luxury handbag, 2.6 3.7 clothing, watch & 1.4 jewellery 2.1
3.1 2.0 Luxury car 0.6 0.5 (Average score)
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Source: China Reality Research
Big spenders when Some 65% of the Chinese customers surveyed bought luxury goods during travelling their last trips abroad. On average, these consumers spent Rmb8,338 during their last trip. This is 50% of the total Rmb16,674 that those who shopped for luxury goods have spent in the past 12 months.
Figure 56 Overseas luxury spending during last trip abroad
Rmb20,000 and more
Rmb10,000-19,999
Rmb5,000-9,999
Less than Rmb5,000
02468101214 (% of consumers who travelled abroad)
Source: China Reality Research
Overseas luxury-goods market size On the cusp of a Mainland Chinese demand for luxury goods overseas is nowhere close to sustained Chinese peak. China travel is still very low compared with neighbouring North Asian travel boom countries. While the Chinese government puts greater emphasis on developing tourism and relaxing travel policies, foreign countries are also giving warm welcomes to these affluent Chinese travellers. The level of Chinese departures as a percentage of the population is the same as Japan and Taiwan in 1984 and Korea in 1991.
24 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 57
Ready to boom Departures as a percentage of total population
45 (%) Japan Taiwan Korea China 40
35
30
25
20
15
10
5
0 1964 1972 1979 1987 1995 2002 2010
Source: CEIC, CLSA Asia-Pacific Markets
China’s GDP per capita is comparable to Japan’s in the 1960s and one could argue that the potential of Chinese consumer’s spending power and their tourism demand can be huge.
Figure 58 China’s GDP per capita in Comparison of GDP per capita of Japan 1964-2000 and China 2000-2009 2009 is comparable to Japan’s in 1973 45,000 (US$) Japan (1964-2000) China (2000-2009)
40,000
35,000
30,000
25,000
20,000 China in 2009 15,000
10,000
5,000
0 1964 1969 1975 1981 1987 1993 1999
Source: CEIC, CLSA Asia-Pacific Markets. Assume 1971 JPY:USD exchange rate of 315:1 for 1964-1970.
Mandarin speakers Bain estimates the Chinese overseas luxury market at Rmb87bn, which is in demand 27% larger than the Rmb68bn spend domestically. Many large department stores in Japan, Europe and the US have hired Mandarin speakers to ride on this trend. Estee Lauder said airport-related sales rose about 24% in the first nine months of 2010. While Salvatore Ferragamo saw sales doubling forecasts at its new store at Beijing airport.
Hong Kong and Europe are the core luxury overseas market for mainland Chinese.
19 January 2011 [email protected] 25
Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 59
Total Chinese luxury demand breakdown by purchase location
Taiwan Others 1% 4%
Macau 3% HK 10%
Domestic 45% Europe 26%
US Japan 6% 5%
Source: CLSA Asia-Pacific Markets
Reasons for luxury shopping overseas High taxes/duties We believe the core reason that drives mainland tourists to purchase luxury in China goods while travelling is taxes. Import duties are relatively high in China and the government also imposes a consumption tax and the typical VAT.
Figure 60 Taxes on imported luxury goods Customs duty (Most favoured nation rate) (%) Perfume and cosmetics 10-18 Jewellery 20-35 Handbags, briefcases, purses, wallets 10-20 Watches 11-23 Whiskey, tequila, vodka, liqueur, rum 10 Consumption tax Cigars 25-45 Alcohol 5-20 Cosmetics 30 Valuable jewellery and ornaments 5-10 Golf and golfing equipment 10 Yachts 10 High-end watches 20 Standard VAT 17 Source: CMS Legal Services (October 2009)
We have reviewed 10 luxury watches and found the price difference between Hong Kong and mainland China ranges from 12-33%.
26 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 61
Price comparison between Hong Kong and China HK$ RMB % difference in HK Patek Philippe Nautilus Stainless Steel Watch model#: 5712/1A 233,000 280,700 (29)
Panerai Men's Radiomir Black Seal Ceramic 45mm 58,400 57,200 (12) Watch model#: PAM 292
Audemars Piguet Men's Royal Oak Offshore Chronograph Steel 163,000 171,000 (18) Watch model#: 26020ST.OO.D001IN.01.A
Lange & Söhne Men's Zerwierk White Gold Watch model#: 140.029 415,400 475,000 (25)
Patek Philippe Men's Calatrava World Timer White Gold 294,000 354,800 (29) Watch model#: 5130G
Patek Philippe Gondolo Serata White Gold Watch model#: 4972G 243,500 293,700 (29)
Cartier Tank Francaise Stainless Steel Watch model#: W51008Q3 28,000 29,800 (19)
Audemars Piguet Women's Dream Watch model#: 309,000 323,000 (18) 67496BC.ZZ.A066SU.01
Rolex Datejust 36mm Diamonds & White Gold Watch model#: 87,000 112,200 (33) 116244-63600
Cartier Ballon Bleu Medium Rose Gold Watch model#: WE9005Z3 285,000 305,000 (20)
Source: Companies, Emperor Watch & Jewellery, CLSA Asia-Pacific Markets
19 January 2011 [email protected] 27
Section 1: The Red Eight and the Chinese customer Luxury goods
According to LVMH, prices in Shanghai are 35% higher than in Paris. Figure 62 Substantial price Price index for Louis Vuitton difference 160 (Price Index)
140
120
100
80
60
40
20
0 Paris NYC Hong Kong Shanghai Tokyo
Source: LVMH
Re-sale market and The secondary effect of this is the re-sale market and gifting culture. Some gifting culture mainland tourists would shop for luxury items overseas and resell when they return to China at a slight mark-up to subsidise their trips. Getting small gifts for family and friends from foreign countries has also become part of the Asian culture. Accessories like handbags, briefcases and watches and cosmetics are popular items on “friend’s shopping list”. They are easily identifiable by model numbers and colour codes and hence it is also common to ask friends who are going to travel to shop for you. Lastly, consumers just generally have higher propensity to spend while travelling on vacation and during holiday seasons.
Shopping destinations Our proprietary survey found that Hong Kong, Macau, and Taiwan dominate the overseas luxury-goods market.
Figure 63 Hong Kong, Macau and For those who shopped overseas: where did you make the luxury purchases? Taiwan are the popular destinations HK/Macau/Taiwan 67
Europe 12
Japan/Korea 11
Elsewhere in Asia 8
U.S./Canada 1
0 1020304050607080 (% of consumers who bought luxury goods overseas in the past 12 months)
Source: China Reality Research
28 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
Hong Kong Macau is growing fast, Hong Kong and Macau are the top destinations for Chinese tourists. In 2009, but Hong Kong is still the 39% of all departures went to Hong Kong while 32% went to Macau, top overseas luxury according to tourism statistics. market for Chinese
Figure 64 Some 71% of tourists Mainland Chinese travelling destinations (2009) went to Hong Kong and Macau Thailand Singapore 1% 1% Russia Malaysia 1% USA 1% 2% Korea 3% Japan Hong Kong 3% 39% Others 14% Macau 32% Taiwan 2%
Source: CEIC, CLSA Asia-Pacific Markets
While Macau continues to be mainlanders’ most favourite destination for gaming, its luxury market is growing rapidly from a small base. As Jimmy Mak, vice- president of Omega for Hong Kong, Macau, and Taiwan pointed out, incremental sales growth is greater in Macau despite Hong Kong being the leading Swiss watch exports market. At about HK1.9bn’s worth in 3Q10, or 25% of total retail sales, watches and jewellery now dominate the retail market in Macau, even greater than clothing (8%), supermarket goods (8%), and motor vehicles (8%) combined. Rolex (Hong Kong) is the second-largest supplier to high-end casino operator Wynn Macau, only after its construction contractor.
However, according to Bain estimates, Hong Kong’s luxury market size is still more than 6x that of Macau. Although the proportion of mainland tourists should be lower in Hong Kong, we estimate that mainlanders still spend 4-5x more in Hong Kong than Macau.
Luxury shopping heaven Chinese consumers prefer European brands when it lists for purchases of luxury cosmetics, jewellery comes to luxury goods. Given the close proximity and watches and fashion and accessories, with and its fame as a shopping heaven, Hong Kong still Japan and Europe as the much weaker competitors attracts many luxury shoppers. Hong Kong tops the on these fronts.
Where to buy luxury cosmetics ...... jewellery and watches ...... fashion and accessories
Hong Kong Hong Kong Hong Kong Japan Europe Shanghai Europe Beijing Europe S. Korea Shanghai Beijing USA Japan Japan Shanghai USA USA Beijing Macau Guangzhou T-2 cities Guangzhou Tier-2 cities Singapore Singapore South Korea Guangzhou Tier-2 cities Singapore (%) (%) Macau South Korea (%) Macau
0 102030405060 0 102030405060 0 102030405060
Source: Albatross/Ruder Finn Asia
19 January 2011 [email protected] 29
Section 1: The Red Eight and the Chinese customer Luxury goods
Mainlanders account for Oriental Watch, a large dealer of Rolex and Tudor in Hong Kong, believes that 50-85% of revenue at Chinese customers accounted for about 50% of its FY10 HK$3bn group Hong Kong watch and turnover. At Emperor Watch & Jewellery’ flagship store in Tsim Sha Tsui, more jewellery shops than 85% of customers are from mainland China and even in the Central business district, the company estimates 70% of customers are mainlanders. Luk Fook believes 50-60% of its business in Hong Kong comes from Chinese tourists and the jeweller plans to open new shops in Hong Kong in early 2011.
Trinity, which operates luxury menswear brands including Cerruti 1881 and Gieves & Hawkes, also finds 60% of its customers in Hong Kong coming from China.
Figure 65 Significant contribution Revenue contribution by mainlanders for Hong Kong stores from mainlanders at stores in tourist areas Emperor W&J TST
Emperor W&J Central
Trinity (Hong Kong)
Luk Fook (Hong Kong)
Oriental Watch group (%)
0 102030405060708090
Source: Company estimates, CLSA Asia-Pacific Markets
In 2009, overnight mainland visitors spent HK$2,417 on shopping per capita in Macau, compared with HK$5,051 in Hong Kong. In Hong Kong, mainland tourists spend 76% of their total spending for the trip on shopping, up from 60% in 2002. They spend HK$6,620 per capita in total during their visit, or 15% above average of HK$5,770 and a 66% more than Japanese.
Figure 66 Figure 67
Chinese overnight visitor spending in Hong Kong Total spend per overnight visitor in Hong Kong
(%) Shopping Hotel bills Meals outside hotel Others Mainland China 6,620 100 Average 5,770 7 7 7 7 12 9 10 9 Australia 5,533 90 10 10 8 Taiwan 5,117 12 12 12 13 14 9 Singapore 5,090 80 11 12 4,902 12 11 12 United Kingdom 11 70 Thailand 4,875 14 60 USA 4,872 France 4,620 50 Germany 4,592 Indonesia 4,350 40 76 73 71 Philippines 4,211 68 68 65 68 30 60 Malaysia 4,040 Japan 3,976 20 India 3,923 10 South Korea 3,733 (HK$) Macau 3,069 0 2002 2003 2004 2005 2006 2007 2008 2009 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
Source: CEIC, CLSA Asia-Pacific Markets
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Section 1: The Red Eight and the Chinese customer Luxury goods
Mainland tourists allocate a large portion of their spending on shopping, much higher than other tourists in Hong Kong. Interestingly, they only allocate 9% of their spending on hotels, compared to an average of 17% in Hong Kong.
Figure 68 Mainlanders don’t spend Spending allocation patterns much on hotels Shopping Hotel bills Meals outside hotels Others Mainland China Average Taiwan Thailand Indonesia Macau Philippines Malaysia South Korea Singapore Australia Japan India Germany France USA United Kingdom (%) 0%0 20%20 40%40 60%60 80%80 100%100
Source: CEIC, CLSA Asia-Pacific Markets
An average mainland tourist spends HK$5,051 on shopping, 73% more than the average Taiwan visitor, in second place.
Figure 69 Chinese tourists like Average spend on shopping by country shopping in Hong Kong much more than other Mainland China 5,051 tourists Average 3,667 Taiwan 2,923 Thailand 2,758 Indonesia 2,232 Singapore 2,161 Australia 2,149 Philippines 1,968 Malaysia 1,856 South Korea 1,634 Macau 1,569 Japan 1,529 India 1,296 Germany 1,254 France 1,240 USA 1,121 (HK$) United Kingdom 903
0 1,000 2,000 3,000 4,000 5,000 6,000
Source: CEIC, CLSA Asia-Pacific Markets
Japan Japan welcomes Some 1.4 million mainland tourists visited Japan in November YTD 2010, Chinese tourists accounting for 17% of total tourist arrivals, after South Korea’s 28%. The Japanese government relaxed tourist visa rules for Chinese nationals in July 2010, lowering the income requirement from Rmb250,000 per year to Rmb60,000 per year, in an effort to attract tourists who would prefer not to join a tourist group.
19 January 2011 [email protected] 31
Section 1: The Red Eight and the Chinese customer Luxury goods
Figure 70
South Korea was the Breakdown of tourist arrivals in Japan 2009 largest tourist source . . . Oceania & others 4% South Korea North America 23% 13%
Europe 12%
Rest of Asia 6% China Singapore 15% 2%
Thailand Taiwan 3% Hong Kong 15% 7%
Source: CEIC, CLSA Asia-Pacific Markets
. . . but that may Japan Tourism Agency (JTA) expects 1.5 million mainland tourists for this change soon year and aims to more than triple the number of Chinese tourists to 3.9 million by 2013 from 1.01 million in 2009, overtaking South Koreans as the top nationality of tourists to Japan.
Figure 71 Mainland tourist flows to Japan
4.5 (m) Number of mainland Chinese tourists (%) 30 Mainland tourists as % of total (RHS) 3.9 4.0 26.0 25 3.5
3.0 20
2.5 14.8 15.0 15 2.0 1.5 1.5 10 1.0 1.0 5 0.5
0.0 0 2009 2010F 2013F
Source: JTA, CLSA Asia-Pacific Markets
According to JTA, 93% of mainland Chinese tourists shopped in Japan in April- June 2010. About 70% of them purchased cosmetics, medicine and toiletries, spending an average of ¥37,995 per capita (HK$3,591). And 33% of them bought Western clothing, bags and shoes, spending an average of ¥46,978 per capita (HK$4,440). Japan National Tourism Organization found in 2008 that 50.9% of Chinese tourists went to Japan with shopping in mind.
Chinese tourists spent Union Pay, a Chinese debt care payment service, has seen transactions in 5x more than locals Japan rise by nearly 90% YoY to ¥20bn in 2009. According to electronic retailer at Bic Camera Bic Camera, the average spending of Chinese tourists is ¥50,000, five times larger than Japanese customers. The overall average spending per tourist at
32 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
department stores is nearly ¥60,000 and Chinese tourists top the ranking. The department store association reported that women’s accessories/apparel, luxury brands, and cosmetics top the ranking of popular items.
Figure 72 Popular items among tourists at department stores Popular categories Items 1 Women’s accessories Handkerchief, accessories, Agnes b, Burberry Blue Label, boots 2 Luxury brands Bulgari, Armani, Prada, Gucci, Louis Vuitton, Hermes 3 Women’s apparel Burberry Blue Label, dress, jacket, sleepwear 4 Cosmetics Shiseido, SK-II, Albion, Fancl 5 Fine arts and jewellery Jewellery, watches, painting Source: Department store association, CLSA Asia-Pacific Markets
The West Fly to the country The richer Chinese consumers become, the more likely they are to fly to of origin Europe for luxury shopping, especially for clothing, jewellery and watches. Luxury brand Burberry estimates that 30% of its business in the United Kingdom is to a Chinese consumer. At Gucci, in the first nine months of 2010, the number of Chinese customers nearly doubled from a year earlier to almost 22% of sales in Europe. French luxury store chain Galeries Lafayette also received a lot of Chinese customers at its store in Paris, accounting for about one in seven of its visitors with a per-capita spending of about €800. Tax-free shopping specialist Global Blue estimates Chinese tourists spent 99% more in Europe in the first 10 months of 2010, compared to a year ago. The average transaction is €718 at high-end stores that provide tax-refund facilities.
The UK, however, is facing challenges attracting mainland tourists. The country is not part of the Schengen visa system, which gives Chinese tourists access to 25 European countries on one visa including France, Germany, Italy and Spain. As such, the number of Chinese tourists to the UK has only increased by a 3% Cagr since 2003 and is 28% off the peak in 2007.
Figure 73 Figure 74
Asia ex Japan tourist inflow to France Chinese tourists visiting UK
3,500 ('000) 200 ('000) 3,000 2,500 150 2,000 100 1,500
1,000 50 500 0 0 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, CLSA Asia-Pacific Markets
Resilient tourist flow Tourist flows to the US saw negative YoY growth in February-July 2009, but has since then been growing at 10-82% YoY each month. The last cycle was similar. There were nine consecutive months of negative tourist inflow growth
19 January 2011 [email protected] 33
Section 1: The Red Eight and the Chinese customer Luxury goods
from China and Hong Kong in 2003 and the flow strongly rebounded soon after. The tourism office in the US only started breaking out mainland tourists this year. For the first three quarters of 2010, 619,865 tourists from China visited the US, or 3% of total overseas tourist arrivals.
Figure 75 Sars and financial crisis US visitor arrivals from China and Hong Kong
150 (%)
100
50
0
(50)
(100) Jan 00 Sep 01 Jun 03 Mar 05 Dec 06 Sep 08 Jun 10
Source: CEIC, CLSA Asia-Pacific Markets
Very volatile demand component More risk-averse We estimate that 56% of Chinese total demand comes from overseas – this than average creates great volatility in spending. Specifically, back in the early 2000s, there was as a series of attacks, civil unrest, disease and natural disasters that negatively affected tourism. Sars in 2003, tsunami in 2004, terrorist attack in the UK in 2005 and civil unrest in France in the same year all had an impact on Chinese outbound travel. As an example, we saw a significant decrease and subsequent volatility in mainland tourist flows after the tsunami in 2004 in Thailand and the military recoup there in 2006. Chinese people seem to be more averse to negative events, with tourist flows from the mainland dropping significantly more than average.
Figure 76 Figure 77
Thailand visitor arrivals from China during 2004 tsunami Thailand visitor arrivals from China during 2006 coup
40 (%) Mainland Chinese Total 50 (%) Mainland Chinese Total 40 20 30
0 20
10 (20) 0
(40) (10) (20) (60) (30)
(80) (40) Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Jul 06 Oct 06 Jan 07 May 07 Aug 07 Nov 07
Source: CEIC, CLSA Asia-Pacific Markets
34 [email protected] 19 January 2011
Section 1: The Red Eight and the Chinese customer Luxury goods
These events had a significant impact on luxury-goods sales and stocks. September 11 in 2001, in particular, weighed on leisure travel and overseas luxury demand.
Figure 78 Sensitive to LVMH stock price negative events 140 (€)
120 Global financial crisis 100
80 Sep 11 SARS 60
40
20
0 Jan 01 Sep 02 May 04 Dec 05 Aug 07 Apr 09 Dec 10
Source: Bloomberg, CLSA Asia-Pacific Markets
19 January 2011 [email protected] 35
Section 2: From head to toe Luxury goods
From head to toe More hard luxury and The global luxury-goods market is evenly split among apparel, prestige accessories for Chinese cosmetics, “hard luxury” items which includes watches and jewellery, and others including accessories and leather goods. China’s market, however, leans more towards hard luxury and accessories, at the expense of apparel. As we previously discussed, watches and jewellery top China’s luxury shopping list and accessories are great for displaying success and wealth.
Figure 79 Luxury market category breakdown
Others, incl. accessories and leather goods Hard luxury 100 (%) Prestige cosmetics 90 25 32 Apparel 80 70 60 25 29 50
40 25
30 25 20 25 10 14 0 China World
Source: Bain, CLSA Asia-Pacific Markets
Hard luxury and We believe hard luxury should continue to lead growth of the luxury-goods accessories continue to market for cultural reasons, although apparel and prestige cosmetics would lead growth still expand at very impressive rates.
Figure 80 Luxury segment growth
80 (€bn) 2010-20 Cagr 20% 70 Apparel 14% 60 Prestige cosmetics Hard luxury 50 Others (incl. accessories and leather goods) 27% 40
30
20
25% 10
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: CLSA Asia-Pacific Markets
Jewellery Strong momentum Jewellery retail sales in China reached Rmb113.6bn in the first 11 months of 2010, up 56% YoY, according to the National Bureau of Statistics of China. Momentum has been very strong with YoY growth accelerating to 23-82%. Gold prices have increased in the past 10 years, jumping from US$272/oz in 2000 to more than US$1,421/oz in December 2010. Jewellery sales, however, have outpaced the gold price increase.
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Figure 81
Accelerating growth China jewellery sales (retail value)
140 (Rmbbn)
120
100
80
60
40
20
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized 10CL
Source: Wind, CLSA Asia-Pacific Markets
Figure 82 Jewellery sales growing Jewellery sales versus gold prices faster than gold prices 60 (%) Jewellery sales YoY Gold prices
50
40
30
20
10
0
(10) 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized 10CL
Source: Wind, Bloomberg, CLSA Asia-Pacific Markets
Shining gold Gold is popular among Chinese consumers for its intrinsic value and as a symbol of wealth and social status. Gold accessories are often purchased as gifts for special occasions, especially weddings, baby showers and birthdays. The World Gold Council reports that mainland Chinese demand for gold in the 12 months ended 3Q10 reached 526.8 tonnes, up 21% YoY, compared with the global average of 8% YoY. The increase was driven by 70% YoY growth in net retail investment and an 8% YoY rise in jewellery demand. In Hong Kong, demand for gold jewellery supported by mainland tourists jumped by 17% in the same period.
Gold demand may double The council estimates in the past five years about 60% of gold demand from within a decade China was bought for jewellery. In the past 12 months, 71% of the demand was for jewellery. Nevertheless, our CRR middle-class panel still believes that gold is a good investment option, only after property and domestic stocks. The council expects gold demand in China may double within a decade.
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Indian demand for gold is India continues to dominate world demand for gold. Although India is not a very strong key luxury-goods market, gold demand is very strong so this segment could be one way to play the rising income and consumption story there.
Japan, on the other hand, sees dishoarding gathering pace. As gold prices skyrocket, Japanese investors sold back 68 tonnes of gold in the past 12 months, offsetting the 21 tonnes demanded for jewellery consumption.
Figure 83 Gold consumption demand in value (3Q09-10), including jewellery & retail investment
India 31,807 China 19,616 USA 9,553 Middle East 9,168 Turkey 4,197 Germany 4,127 Thailand 2,934 Switzerland 2,801 Vietnam 2,776 Russia 2,543 Other Europe 1,631 Italy 1,381 Indonesia 1,287 UK 1,118 Hong Kong 770 South Korea 591 Taiwan 67 France 18 (US$m) Japan (1,711)
(5,000) 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Figure 84 Some 71% of Chinese Breakdown of consumption demand gold demand for jewellery (%) Jewellery Net retail investment 100 5 9 90 23 29 31 33 80 44 70 60 80 92 50 95 91 40 77 71 69 67 30 56 20 10 20 8 0 Hong Middle India China World Turkey USA Vietnam Thailand Kong East
Source: World Gold Council, CLSA Asia-Pacific Markets
Rose gold is the According to discussions with management of a few large players, rose gold is new favourite the new favourite among Chinese consumers. The growing popularity of gemstones and diamond rings in a country that was traditionally more interested in gold and jade also adds to the strong jewellery sales. According to the Ministry of Civil Affairs, more than 11 million couples tied the knot in the mainland in 2009. Industry leader De Beers estimates that nearly half of the couples getting married in Beijing, Shanghai, and Guangzhou are now
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buying diamond engagement rings. With the 20-34 age group expected to stay at around 30% of total Chinese population in the next decade, demand for valuable jewellery should continue to be robust.
Jewellery also good The jewellery companies we surveyed also said mainland tourists are for investment increasingly looking for larger diamonds. One company said they just recently had a customer asking for a HK$4m pure jade bangle and another one buying a HK$10m diamond. Another large retailer also said mainlanders like to buy two to three-carat diamonds for investment. In 2009, the US accounted for about 40% of global consumer diamond demand.
Figure 85 Diamond demand based on polished wholesale price (2008)
Rest of world 19% Italy 4%
Hong Kong USA 2% 41% Taiwan 2%
India 8% Japan 11% China Gulf 5% 8%
Source: De Beers, CLSA Asia-Pacific Markets
Chinese diamond demand As the world’s largest diamond producer, De Beers forecasts China’s diamond to rise rapidly demand to grow from 6-7% of global demand to 16% by 2016 (15% cagr).
Figure 86 Chinese diamond demand as percentage of global demand
18 (%) 16 16
14
12
10
8 6 6
4
2
0 2009 2016
Source: De Beers, CLSA Asia-Pacific Markets
According to Euromonitor data, Chinese consumers have a strong preference for rings, contributing to almost 50% of jewellery sales.
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Figure 87
Chinese love rings Sale of jewellery in China by type (2009)
Wristwear 8%
Earrings 23%
Rings Neckwear 50% 19%
Source: De Beers, CLSA Asia-Pacific Markets
Few dominant players There are a handful of big players in the jewellery industry in China, with the big three taking up 32% of real jewellery shares. A number of the top players are listed in Hong Kong, including Luk Fook (590 HK), Chow Sang Sang (116 HK), TSL Jewellery (417 HK) and 3D-Gold (870 HK). Euromonitor estimates that 99.5% of jewellery sales in China were made in retail stores.
Figure 88 Figure 89
3D-Gold’s corporate gift collection Jewellery and decor designed to cater to Chinese
Source: Company website Source: Chow Tai Fook’s online product catalogue
Aggressive expansion This strong demand is driving retailers to expand aggressively. Privately-held to capture segment Chow Tai Fook, for example, is looking to open 1,000 additional outlets on the growth potential mainland, doubling its existing network by 2020. It will also add more production lines to its two jewellery processing plants in Guangdong and Shenzhen. Half of the investment planned for the next decade will go to third and fourth-tier cities in rural areas, where management sees enormous potential. Kent Wong, managing director at Chow Tai Fook, said in an interview with a Hong Kong journal, “Consumers in big cities like Beijing and Shanghai now buy jewellery casually when they do their weekend shopping. We expect that will be happening in smaller cities as well in 10 years’ time.”
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Jewellery market more The jewellery market is considerably more consolidated than other segments consolidated than like clothing and drinks. We believe this is partially due to the high inventory other sectors that needs to be held on hand, thus creating a high barrier to entry for smaller players. More importantly, Chinese consumers highly value jewellery brands and retailer reputation. News of low-quality gold being sold in the market often encourages consumers to shop at big brand-name stores, which they believe should have a better-developed quality control system. The Chinese Gold & Silver Exchange Society recently said that at least 200 ounces of fake gold was discovered on the Hong Kong gold market and president Haywood Cheung estimates 10x that amount might have infiltrated the retail market.
Figure 90 Real jewellery company shares in China % retail value (retail selling price) 2005 2006 2007 2008 2009 Company Chow Tai Fook Jewellery 10.5 10.7 10.9 11.3 11.6 Luk Fook Holdings (International) 9.5 9.6 9.7 9.9 10.1 Chow Sang Sang Holdings International 9.8 9.8 9.8 9.9 10.0 Gallop Jewellery 9.3 9.2 9.2 9.1 8.9 Shanghai Laofengxiang 7.6 7.6 7.7 7.8 7.9 TSL Jewellery (Macau) 5.8 5.8 5.9 6.0 6.2 Chow Tai Seng Jewellery 5.1 5.3 5.5 5.7 6.0 Fujian Fuhui Jewelry 4.3 4.3 4.4 4.5 4.5 3D-Gold Jewellery Holdings 3.6 3.7 3.9 4.1 4.3 Zhejiang Yuewang Jewellery 4.0 4.1 4.1 4.1 4.1 Others 30.6 29.9 29.0 27.5 26.4 Total 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor
Our CRR survey shows that Chow Tai Fook is a brand leader in the jewellery segment in China.
Figure 91 Leading by a wide margin CRR survey: Which jewellery brand did you buy?
Chow Tai Fook 14
Swarovski 4
Chow Sang Sang 3
King Liu Fook 3
Jinboli 2
Laofengxiang 2
Tiffany 1
Hermes 1 (No. of mentions) Cartier 1
0 2 4 6 8 10 12 14 16
Source: China Reality Research
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Figure 92
Cartier is the beloved Chinese millionaires’ favourite jewellery brands jewellery brand 2006 2007 2008 2009 2010 Cartier Cartier Cartier Cartier Cartier Chanel Bulgari Chanel Van Cleef & Bvlgari Arpels Piaget Piaget Tiffany Tiffany Montblanc Tiffany Dior Van Cleef & Bvlgari Tiffany Arpels Bulgari Chanel Piaget Chanel Chanel Dior Tiffany Bvlgari Piaget Piaget Van Cleef & Adler Mikimoto Mikimoto Van Cleef & Arpels Arpels Adler Van Cleef & Harry Winston Harry Winston Mikimoto Arpels na Mikimoto Adler Adler Adler na na Dior Chaumet Chaumet Source: Hurun Research Institute
Watches The Swiss watch industry is worth SFr15.7bn (US$14.9bn). The industry did contract in 2009 due to the global financial crisis, by 22.8%, the first contraction after five consecutive years of growth. This year so far has been one of growth, up 21.8% to November. The largest buyer of Swiss watches in the world is Hong Kong, accounting for 19% of total Swiss watch exports by value. Hong Kong superseded the US as the largest Swiss watch importer from mid-2007, spurred on by a combination of a healthy financial and property markets (prior to the crisis) and the influx of mainland Chinese tourists. It is also well accepted (without official estimates though) that Hong Kong does serve as a re-export hub, hence some of the direct intake into Hong Kong does find its way to other parts of Asia, including China. As of November 2010, China is currently ranked the fourth-biggest buyer of Swiss watches, up from 10th place in November 2006.
Figure 93 China is currently the Largest buyers of Swiss watches fourth-largest imported Swiss watches 3,500 (CHF) 2006 2010 3,000 2,500 2,000 1,500 1,000 500 0 UK UAE USA Italy Spain China Japan Russia France Taiwan Thailand Germany Singapore Hong Kong Saudi Arabia Saudi
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers. Data is annualised to November 2010
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Figure 94 Figure 95
Swiss watch exports Jan-Nov 2010 Jan-Nov 2010 YoY growth of top-10 export markets
China
Hong Kong/ Hong Kong China together Singapore United Hong Kong is 26% Kingdom United Arab Emirates Others 19% 4% 31% China France 7% Germany USA 5% USA United Kingdom 10% Japan Japan Italy 5% France 7% Germany (%) Singapore Italy 6% 6% (10)0102030405060
Source: CLSA Asia-Pacific Markets, Federation of the Swiss Watch Industry (November 2010)
We believe a per-capita comparison is the ideal way to illustrate the significant growth potential of Swiss-watch consumption in China. In doing so, a number of adjustments were needed. Firstly, we assume that 50% of what goes to Hong Kong finds its way to China. As mentioned, there are no official estimates to support this, but an adjustment of size is a reasonable place to start. It is a meaningful adjustment as Hong Kong is the largest Swiss watch importer in the world. Secondly, we assume only the urban population of China are “realistic” consumers. Hence, we assume a population of 594 million.
Figure 96 China’s consumption per Global comparison of Swiss watch imports per capita capita is low, at only a third of Europe or Taiwan Hong Kong (unadjusted) 403.0 Hong Kong 201.5 Singapore 183.2 UAE 103.0 France 16.8 Italy 14.3 Taiwan 12.2 12 mths to 11/2010 Germany 8.7 UK 8.9 See footnote below for adjustments Saudi Arabia 8.7 made to China and Hong Kong Spain 6.9 Japan 5.8 South Korea 5.8 USA 5.0 China 4.0
Thailand 2.7 China (unadjusted) 1.6 Consumption per capita (US$) Russia 1.4
0 50 100 150 200 250 300 350 400 450
Note: Assuming 50% of exports to HK are re-exported to China. This is a meaningful adjustment for the purpose of achieving as conservative a result as possible, as Hong Kong is the largest importer of Swiss made watches in the world (imports are 3x larger than China). We also base our China per capita calculation on an urban population of 594m (not 1.3bn). The data is based on annual data, collected monthly. Source: CLSA Asia-Pacific Markets
China should close much Hong Kong (despite the adjustment), Singapore and the UAE significantly of the gap lead on a consumption per capita basis, reflecting the “trading hub” nature of these economies, the former two at a staggering US$180 and above. “Old world” economies such as France, Italy, Germany and the UK are between
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US$8.90 and US$17. With the exception of France, the consumption in these economies has been stable for the past five years. The major decline is seen in the US, unsurprisingly, now consuming US$5.0 per capita, compared to US$6.2 five years ago. On the flipside, China is accelerating. Its per-capita consumption of Swiss watches increased by 117% between 2005 and 2010. However, at US$4.0 currently, China still significantly lags more developed (and higher GDP) economies. We believe China should close much of the gap in Swiss watch consumption per capita over the medium to longer term.
Figure 97 China’s share of Swiss China accounts for a 7% share of Swiss watch exports, up from 3% in 2005 watch exports has doubled in past five years 9 (%) China's share of Top 15 export destinations 16,000
8 Top 15 export value, CHFm (RHS) 14,000
7 12,000 6 10,000 5 8,000 4 6,000 3 2 4,000 1 2,000 0 0 2004 2005 2006 2007 2008 2009 2010
Figure 98 China was the quickest Asia ex-Japan leading the recovery in Swiss watch exports (YoY growth, quarterly) to recover from the financial crisis 120 (%) China Asia ex-J Europe USA 100
80
60
40
20
0
(20)
(40)
(60) Jun 05 Apr 06 Mar 07 Feb 08 Jan 09 Dec 09 Oct 10
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers (November 2010)
Rolex, Rolex, Rolex In terms of preferences, Chinese consumers like mechanical watches and also unique watches that require specific craftsmanship, such as enamel, mother- of-pearl engraving. Rolex is almost synonymous with luxury watches in China. When asked what brands come to mind when thinking about luxury watches, 48% of those surveyed in China said Rolex. That is far greater than the second brand Omega at 14%, followed by Vacheron, Cartier, and Longines.
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Figure 99 Figure 100
Which luxury brand would you like to own? Which luxury brands did you buy?
Watch Watch Rolex 21 Omega 9 Omega 10 Tissot 7 Vacheron 5 Longines 6 Rolex 5 Cartier 4 Rado 3 Longines 4 Cartier 3 Patek Philippe 4 Tudor 2 Tissot 1 Citizen 2 Piaget 1 Enigma 1 Swatch 1 Calvin Klein 1 (% of consumers) (No. of mentions) Rado 1 Casio 1
0 5 10 15 20 25 0246810
Source: China Reality Research
Executives from top luxury watch retailers told us that part of the reason Rolex is so popular is because Chinese consumers view it as almost hard cash given the liquid second-hand market. Its signature crown logo and easy to pronounce name have helped the brand gain recognition in the early days in China.
A lot of mainland customers also pay high regards to the Omega brand thanks to its association with the first moon landing. Trendy designs also help to attract younger customers. Longines is popular for its more affordable price points and it sells very well on the mainland.
Limited editions are even The limited supply for some models generates much excitement among the more popular wealthy and it serves as an effective way to display success and power. For example, the market price for the Rolex Daytona watch can reach HK$85,000-90,000, despite a list price at HK$75,000, due to limited supply. Getting one of these limited models is a way to show your influence and connections. “It is about face, not the money (the premium you are paying),” the executive said.
Retailer reputation is also When it comes to picking watch retailers, Chinese consumers are looking for a a key factor good selection and a reputable store.
Long waitlist Apply to spend more than HK$1m on a watch Patek Philippe minute repeater We asked management at Emperor Watch & Jewellery, one of the world’s largest buyers at the annual industry fair Baselworld, where we can buy a Patek Philippe minute repeater, one of the hottest collections that is in limited supply. Demand is so strong and the collection is so rare that we learnt each interested buyer would have to file an application form listing his personal information and occupation. To be considered, chances are you would have to be a frequent shopper (ie, have bought more than 10 Patek Philippe watches). Being a professional with a number of certificates may help push your application to the top of the pile as well. Source: Company website
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Figure 101
How do you decide which watch retailer to purchase from?
Model selection
Store reputation/image
After sales service
Staff friendliness
Brand selections
Staff knowledge
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
5 is very important
Source: Hengdeli
Clothing Spend more on clothing Based on Bain’s estimate, the luxury apparel market in the mainland is worth as income rises Rmb9.8bn. The potential is huge given that wealthy consumers spend more on clothing as income rises. As consumers get wealthier in China, we expect to see more trading up.
Figure 102 Clothing and footwear spending as percentage of total expenditure
9 (%) 8.5 8.0 8 7.6 7.3 7.0 7 6.6 6.2 6 5.7
5.1 5
4 3.7
3 12345678910
(income by decile)
Source: Euromonitor, CLSA Asia-Pacific Markets
Menswear is a key Menswear is the key component of this market segment. As the luxury component market booms, leaders in luxury menswear are aggressively expanding. Trinity, which manages Altea, Cerruti 1881, D'urban, Gieves & Hawkes, Intermezzo and Kent & Curmen, said in April 2010 that it would add 50 or more stores in smaller Chinese cities to its 272-store network on the mainland. Evergreen, which owns V.E. DELURE and TESTANTIN and which went public recently, planned to add 63 new retail stores in China in 2010 and 172 in 2011 to bring total mainland store count to 491.
Players trying different To accelerate expansion in China, global brands have come up with a variety strategies of strategies. Hugo Boss started a joint venture with local fashion retailer Rainbow Group in July 2010 and planned to open as many as 20 stores in
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China during the remainder of 2010, compared with a worldwide total of 50 additional outlets for the year. Meanwhile, Polo Ralph Lauren took back its Asian distribution rights and Burberry bought back its 50 franchise stores in China. In November 2010, Emporio Armani became the first Western fashion brand to debut on the online China market.
Figure 103 Figure 104
Emporio Armani Online Store, China Ports Design overcoat selling at Rmb8,999
Source: Company website
Being one of the early entrants into the luxury market in China, Ports Design is well-regarded in China as a top female luxury clothing brand. Many surveys in the past have named Ports as a top-five luxury apparel brand in China alongside names such as Chanel, Louis Vuitton, and Christian Dior. Our recent CRR survey found that Ports holds a strong brand presence on the mainland. However, note that there are numerous other strong brands that are not mentioned here - that include Prada, Bottega Veneta, Fendi etc.
Luxury shoe brands are With a pair of over-the-knee boots selling at about US$2,500, French also expanding presence shoemaker Christian Louboutin is also eyeing the luxury market in China and plans to operate as many as five stores in China in the next three years. Meanwhile, Salvatore Ferragamo expected its store count in China to reach 44 by the end of 2010, up from nine in 2008. The Italian shoemaker may open as many as eight new stores this year in the country.
Figure 105 Chinese millionaires’ favourite fashion labels 2006 2007 2008 2009 2010 Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Louis Vuitton Louis Vuitton Dunhill Louis Vuitton BOSS Boss Dunhill Valentino Dunhill Versace Dunhill Versace Burberry Zegna Burberry Hermes Hermes Chanel Hermès Zegna Prada Ports Versace Versace Dior Zegna Hugo Boss Louis Vuitton Dior Louis Vuitton Chanel Montblanc Hermès Givenchy Chanel Gucci Givenchy Burberry Ports Prada Ports Gucci Givenchy Ermenegildo Zegna Zegna Prada Gucci Chanel Dior Ports Source: Hurun Research Institute
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Menswear We see strong growth According to research firm Frost & Sullivan, retail sales of menswear in China in the menswear increased at a 13.4% Cagr between 2006 and 2009 with sales reaching market in China Rmb300bn (or US$44.2bn) in 2009. Frost & Sullivan expects sales to achieve a 15.8% Cagr over 2009-13.
Figure 106 Retail sales of menswear in China
600 (Rmbbn) Retail value Growth rate (RHS) (%) 20 539.9 18 16.3 500 15.6 14.7 15.0 14.4 16.2 16 399.3 464.5 14 400 11.3 345.4 12 300.3 300 262.6 10 228.9 205.7 8 200 6 4 100 2 0 0 2006 2007 2008 2009 10F 11F 12F 13F
Source: Frost & Sullivan
Urbanisation and rising We believe that the increase in disposable income, accelerated urbanisation, a incomes are key drivers demographic shift in the male population towards the young and middle- aged, rising brand awareness as well as improved product design and quality have and will continue to underpin industry growth.
Low menswear More importantly, China menswear consumption per capita in urban areas is consumption per only about 25% of that in the USA and 20% of European countries. capita in China
Figure 107 Figure 108
Menswear consumption per capita in urban areas, 2008 Menswear consumption per capita, 2008
1,600 (US$) 1,489 500 (US$) First-tier cities US$378 Second-tier cities 1,400 Third-tier cities 1,175 US$318 400 US$5.4bn 1,200 Fourth-tier cities 14.3% US$10.3bn 1,000 27.3% 300 PRC average 800 US$15.4bn 600 40.7% 200
400 291 US$240
200 100 US$6.7 bn 17.7% 0 US$77 (US$bn) China USA European 0 countries 012345
Note: “European countries” refers to 15 countries within European Union as of 1 May 2004. Source: Frost & Sullivan
Menswear has different The consumption behaviour of male consumers in China differs significantly operating metrics from from that of their female counterparts. This results in substantially different ladieswear operating metrics for menswear versus ladieswear.
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Figure 109
Comparison of China’s menswear versus ladieswear markets Menswear business Ladieswear business Brand loyalty High Low Consumers’ price sensitiveness Low High Product ASPs for similar market positioning High Relatively low Average ticket size per purchase High Relatively Low Stay-and-buy ratio High Low Consumers’ purchase frequency Low High Potential for ASP increase High Limited Purchase target More intentional purchases with clear More impulse purchases with no clear brand targets in most circumstances brand targets in most circumstances Purchase intention Less show-off factor More show-off factor Retail inventory risk Relatively low Relatively high Fashion risk Low High Product cycle Relatively long Short Market segmentation Relatively broad More defined Consumers’ product focus Product quality, fabrics and functionality Design, colour and trendiness Requirement for raw material procurement High Relatively low Requirements for accessories Low High Number of product SKUs Relatively low High Number of product collections Relatively low High Corporate sales More corporate sales Minimum corporate sales Source: CLSA Asia-Pacific Markets
Menswear brands should As shown in our analysis in Figure 109, menswear brands should enjoy more enjoy more resilient gross resilient gross margins and more sustainable same-store sales (SSS) growth margins and SSS growth compared with ladieswear brands.
Business and smart According to Frost & Sullivan, the business formal (including business suits, casual represent 61% of shirts and trousers) and smart casual (including casual suits, shirts, jackets total menswear market and trousers) market accounts for 60.6% of the overall menswear apparel market in China.
Figure 110 China’s menswear market by product, 2009
Accessories 4.3%
Fashion Business formal casual and smart casual 35.1% 60.6%
Source: Frost & Sullivan
High-end segment Within the business-formal and smart-casual menswear market, Frost & expected to outgrow Sullivan expects the high-end segment (which is defined as a suit retailing for other segments Rmb5,000-15,000) to enjoy slightly higher growth rates (ie, a 17.5% 2009- 13F Cagr) than other segments.
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Figure 111
Breakdown and growth of business-formal and smart-casual menswear segment
(Rmbbn) 2006 2007 2008 2009 10F 11F 12F 13F Cagr Cagr 06-09 09-13F
Luxury-end 13 14 17 19 22 26 31 36
Growth (%) 12.6 15.4 15.8 16.2 17.1 17.7 17.3 14.7 17.1
High-end 9 10 11 13 15 18 21 25
Growth (%) 12.4 15.9 16.0 16.7 17.3 18.0 18.1 14.7 17.5
Mid-to-low-end 100 112 130 150 174 203 238 280
Growth (%) 12.4 15.8 15.4 16.2 16.7 17.4 17.3 14.6 16.9
Total 121 136 158 182 211 247 290 340
Growth (%) 12.5 15.7 15.5 16.2 16.7 17.5 17.3 14.6 17.0 Note: Market segmentation is defined by ASP of a suit: luxury=above Rmb15,000; high-end=Rmb5,000- 15,000; low-end=below Rmb5,000. Source: Frost & Sullivan
Highly fragmented high- It should be noted that China’s high-end business-formal and smart-casual end formal business and menswear market is extremely fragmented, with the top-five brands smart-casual menswear commanding only a 22% market share (versus 45% for the sportswear sector). As such, we see huge potential for market consolidation in favour of companies with strong brand equity and well-established retail networks such as Evergreen. See our 8 December 2010 report Tailored for success.
Figure 112 Lowest concentration in Market share of top-five players in China consumer space, 2009 high-end formal business and smart-casual menswear segment Carbonated drinks 95
Ready-to-drink (RTD) tea 75
Instant noodles 67
RTD coffee 66
Hair care 65
Beer 58
Milk 57
Bottled water 50
Down apparel 49
Sportswear 45
Bath and shower products 45
Fruit/vegetable juice 37
High-end business formal & casual menswear 22 (%)
0 20406080100
Note: Market share by retail sales value for carbonated drinks, RTD tea, instant noodles, hair care, RTD coffee, milk, bottled water, down apparel, fruit/vegetable juice, bath and shower products and bedding products; by total sales volume for beer, wine and spirits; by wholesale value for sportswear. Source: CLSA Asia-Pacific Markets (milk, down apparel and sportswear), Euromonitor (all others)
Only Satchi and VASTO have 5% or more of the high-end business-formal and smart-casual menswear market. However, Satchi has almost 2x as many stores in the mainland.
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Figure 113 Figure 114
Market share in terms of retail sales, 1H10 China store networks, 1H10
Satchi VASTO V.E. DELURE Satchi 332 6% 5% 4% S.D. Spontini V.E. DELURE 201 4% BONI 180 BONI 3% DIDIBOY 178 Lampo VASTO 170 3% Lampo 168 Didiboy Aquascutum 131 3% Other brands VSKONNE S.D. Spontini 100 67% 2% VSKONNE 100
Auta Son Auta Son 82 (No. of outlets) Aquascutum 2% 1% 0 50 100 150 200 250 300 350
Source: Frost & Sullivan
Market concentration The degree of concentration in the high-end business-formal and smart- below that of China casual menswear market segment is substantially below that of the China sportswear market sportswear market.
Figure 115 Market share China high-end business-formal and smart-casual menswear vs sportswear, 2009
70 (%) High-end business formal & smart casual menswear 62 60 Sportswear
50 45
40 33 33 30 22
20 15 13 10 6
0 Top 1 Top 3 Top 5 Top 10
Source: Frost & Sullivan (menswear), CLSA Asia-Pacific Markets (sportswear)
Middle-upper segment Within the casual fashion menswear market, the middle-upper segment (ie, a outgrows others in casual jacket together with a pair of trousers retailing for Rmb2,000-5,000) is expected fashion menswear to enjoy a higher growth rate (ie, 16.5% 2009-13F Cagr) than other segments.
Figure 116 Breakdown and growth of casual fashion menswear segment (Rmbbn) 2006 2007 2008 2009 2010F 2011F 2012F 2013FCagr Cagr 06-09 09-13F High to luxury end 6 7 8 9 10 12 13 15 Growth (%) 11.1 14.3 12.5 14.4 13.6 14.5 14.9 12.5 14.3 Middle upper end 6 7 8 9 10 12 14 16 Growth (%) 12.1 15.6 15.2 15.8 16.2 17.0 16.9 14.3 16.5 Mid to low end 64 70 78 88 99 112 127 144 Growth (%) 9.1 12.4 12.0 12.7 13.0 13.8 13.7 11.2 13.3 Total 76 83 94 105 119 135 154 176 Growth (%) 9.6 12.7 12.3 13.1 13.4 14.1 14.1 11.5 13.7 Note: Market segmentation is defined by ASP of a jacket and a pair of trousers: High to luxury- end=Above Rmb5,000; Middle-upper end=Rmb2,000 to Rmb5,000; Mid to low-end=Below Rmb2,000. Source: Frost & Sullivan
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Handbags and briefcases Not as male-dominant According to Hurun’s Best of the Best survey, men’s luxury brands dominated the accessory segment in 2008, but the same survey in 2010 shows that there is a shift towards a more balanced list.
Figure 117 Chinese millionaires’ favourite accessory brands 2008 2010 Dior Hermès Emporio Armani Armani BOSS Chanel Montblanc Louis Vuitton Louis Vuitton Dior Chanel Cartier Bally Gucci Dunhill na Source: Hurun Research Institute
Figure 118 Figure 119
Louis Vuitton’s world-class craftsmanship Dunhill’s leather collection
Source: Company website
As we mentioned before, girl power should be growing in China and we expect global premium luxury brands like Prada, Fendi and Tod’s to catch up very quickly. Burberry recently bought back 50 franchise stores in China to take control of its positioning in this key luxury market. Meanwhile, Coach recently made a number of senior appointments and expects its business in China to reach US$250m by FY12 and double by FY15.
Figure 120 Mens’ brands have a Points of sale in China wider store network Ports Cartier Alfred Dunhill Hugo Boss Cerruti Ermenegildo Zegna Salvatore Ferragamo Canali Giorgio Armani Burberry Coach Louis Vuitton Escada Gucci Tod's Hermes Bulgari Versace Givenchy Celine Fendi Prada Tiffany Chanel¹ Lanvin
0 50 100 150 200 250 300 350
¹ Only fashion/accessories. Source: Company websites, CLSA Asia-Pacific Markets
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Luxury cars Not discouraged at all by Dressed up in luxury clothing with a gold watch and a huge diamond ring, the high taxes and duties wealthy Chinese consumers are ready to hop into a vehicle to go out - a luxury car with a starting price of about Rmb850,000. Luxury car sales in China are on fire. The Big 3 in China have all recorded impressive growth rates this year, despite high mainland taxes. Sparkle Roll Group (970 HK), which operates Bentley, Rolls-Royce and Lamborghini showrooms in Beijing, estimates that for a car with an engine bigger than four litres, the combined import duties, value-added taxes and consumption taxes add up to more than 140%, compared with about 105% in Hong Kong and 60% in Macau.
Figure 121 Luxury car sales in China Top brands 2010 YoY (%) Volkswagen's Audi 227,938 43 BMW 168,998 87 Mercedes-Benz 147,670 115 Source: Company data
Figure 122 More expensive cars Mercedes-Benz is the fastest-growing major luxury brand enjoying higher growth 940,000 (Rmb) Starting price YoY growth (RHS) (%) 140
920,000 120 115 100 900,000
87 80 880,000 60 S-Class 860,000 7 Series 40 43 840,000 A8L 20
820,000 0 Audi BMW Mercedes-Benz
Source: Company data, CLSA Asia-Pacific Markets
Audi is the largest The Volkswagen China Group sold 1.92 million cars in 2010, up 37% YoY. Audi supplier of official cars sold 227,938 cars in 2010, more than the 200,000 units previously forecasted and up 43% YoY. The company plans to sell another one million vehicles there within the next three years. Audi has sold more than one million vehicles in China to date, thanks to an early entry of its parent firm Volkswagen in the 1980s. Audi is also the biggest supplier of official cars in China.
BMW and Mercedes-Benz However, BMW and Daimler’s Mercedes-Benz are quickly catching up as are catching up Chinese consumers’ appetite for luxury cars continues to grow. BMW’s sales in China almost doubled to September YTD and China is now the BMW Group’s third-largest market.
Meanwhile, Mercedes-Benz is the fastest-growing major luxury auto brand, with sales up 115% yoy in 2010 at 147,670 units, exceeding expectations of 120,000 units. Its parent Daimler expects China to become Mercedes-Benz’ largest market by 2014-16, aiming to sell 300,000 vehicles in China in 2015.
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As mentioned before, high-end market leader Audi sold one million units in China to date. We estimate that about 20% of Audi sales in China were from the government. Taking this into account and the Hurun Research Institute’s study which says Chinese millionaires on average own three cars, we believe China’s luxury car market has huge potential.
Bentley, Rolls-Royce and The super-luxury segment, where executive limousines generally retail at Maybach are the top three Rmb3,000,000-9,000,000 after taxes, shows strong demand. Volkswagen’s for super luxury Bentley, BMW’s Rolls-Royce and Daimler’s Maybach are the top choices for these ultra-wealthy individuals.
Bentley China chairman Peter Mak is amazed by the huge demand and rapid income growth on the mainland, since some of these buyers might not even have a car 15 years ago. Unlike buyers in the early days who would have bodyguards bringing in large travel bags filled with cash, buyers today usually pay a 10% deposit with a debit card and settle the balance with a bank transfer.
Figure 123 Super-luxury car sales in China Top brands October YTD YoY (%) Bentley 569 71 Rolls-Royce 156 438 Source: SCMP
Our CRR survey shows strong brand preference for BMW and Mercedes-Benz, which we believe explains the impressive September YTD growth of 89% and 98% the carmakers enjoyed.
Figure 124 BMW is the winning brand Which luxury car brands would you like to own?
BMW 13
Mercedes-Benz 12
Ferrari 10
Rolls-Royce 8
Porche 6
Audi 6
Bentley 4
Hummer 3
Maybach 2 (% of consumers) Land Rover 2
0246810121416
Source: China Reality Research
Chinese wealthy like Rich individuals from China also prefer longer cars that appear more longer cars extravagant and easier for those who would like to be chauffeured. This demand drove Audi to introduce an extended A6 sedan (13cm longer) in China back in 2000 and an extended A4 last year. BMW and Mercedes-Benz also introduced extended versions, adding 14cm to the BMW 5-Series and Mercedes E-Class sedans.
Gold-plated Volvo, which was purchased by China’s Geely Holding Group last year, plans Spirit of Ecstasy to hire a team of Chinese designers to cater to local tastes. Rolls-Royce has also outfitted vehicles with options such as gold-plated Spirit of Ecstasy hood
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ornaments and starlight roofliners that depict astrological signs. Some customers choose red, which is considered to be the lucky colour, and many like to get vehicle identification numbers that contain lucky numbers, with the most popular being “8”. BMW has also offered a Chinese version of its M3 sports car called the Tiger M3, for the year of Tiger (2010), with each of the headrests embroidered with an orange tiger’s head.
Figure 125 Figure 126
Extended A6 exclusively for Chinese consumers Rolls-Royce’s Spirit of Ecstasy
Source: Company website
Premium drinks Beer is the dominant Euromonitor estimates that the Chinese alcohol market is at 53 billion litres in alcohol, but the slow 2010, compared with 30 billion litres in the US, and expects the overall growth segment alcohol market to enjoy a 7% Cagr to 70bn litres by 2014. Consumption of alcoholic drinks per capita (at legal drinking age) has increased by 64% in 2000-10 in China. Beer remains the preferred drink, with each person consuming 38.7 litres in 2009 while the total alcohol consumption per capita in China was 45 litres.
Figure 127 Figure 128
Chinese alcohol market size and growth Consumption per capita (2009)
80,000 (m litres) Alcoholic drinks (%) 16 45 (litres) 70,000 YoY growth (RHS) 14 40 60,000 12 35 38.7 30 50,000 10 25 40,000 8 20 30,000 6 15 20,000 4 10 3.6 10,000 2 5 2.7 0 0 0 1998 2002 2006 2010 2014 Beer Wine Spirits
Source: Euromonitor, CLSA Asia-Pacific Markets
Whiskey and grape wine We expect whiskey to lead growth in the drinks segment at 17% annual should lead growth at growth, followed by grape wine at 12% in 2009-14. Sparkling wine is also double digits expanding quickly, but so far China is still a relatively small market for champagne. Despite being the dominant alcohol in the market, beer has been growing only moderately at a 6% Cagr in the past 10 years and we expect this level of growth to continue.
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Figure 129
Alcohol market growth 09-14CL
Whiskey 17 Grape wine 12 Sparkling wine 10 White Spirits 10 Rum 9 Beer 7 Average 7 Non-grape wine 5 Brandy and Cognac 4 (%)
0 2 4 6 8 1012141618
Source: Euromonitor, CLSA Asia-Pacific Markets
Figure 130 About 50% of the EU15’s Champagne market breakdown share is from France Other emerging Mainland China markets 0% 5% Other mature US markets 6% 4% Japan 2%
EU15 83%
Source: Cheuvreux
Chinese alcohol Chinese alcohol consumption is still relatively low compared with the rest of consumption still low the world and therefore we expect much potential in the drinks segment. As expected, Chinese wine consumption per capita ranks much lower than European counterparts, and spirit consumption per capita much lower than Japanese and Koreans who are big fans of shochu/soju (a very popular distilled beverage in the region).
Figure 131 Still a moderate drinker Beer consumption per capita (2009)
Germany USA United Kingdom Canada Japan South Korea China France Italy Taiwan Singapore
0 20 40 60 80 100 120 140
Source: Euromonitor, CLSA Asia-Pacific Markets
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Figure 132 Figure 133
Just the beginning Wine consumption per capita (2009) Spirits consumption per capita (2009)
Italy South Korea France Japan Germany France United Kingdom USA Canada Germany USA United Kingdom South Korea Canada Japan China Taiwan Italy China Taiwan Singapore (litres) Singapore (litres)
0 102030405060 0 10203040
Source: Euromonitor, CLSA Asia-Pacific Markets
In terms of channels, restaurants are more important in southern China and bars in the north. Because of the cold weather in the north, Chinese consumers there in general prefer stronger alcohol.
More trading up As income rises, we expect consumers to trade up to premium alcohol and this should drive growth in the prestige local spirits and the more expensive wine and spirit segments in general. Also, as economic activities continue to grow in the mainland, local spirits popular among businessmen and government officials should see strong growth. Gifting accounts for about 65% of the market, according to an executive from a premium alcohol company.
We believe this is also a segment where local brands can potentially develop into premium players. According to the executive, China is already in the top 10 globally in terms of wineries and plantation.
Figure 134 Wine consumption should Wine consumption and income per capita (2010) rise as income grows 70 Wine consumption (litre per capita) Luxembourg 60
50 Portugal
Italy France 40 Austria Denmark Switzerland Correlation = 0.69 Greece 30 Germany Belgium UK 20 Spain Netherlands Belgium Ireland Norway Russia Canada Finland 10 Sourth Korea China USA (US$ per capita) Taiwan Japan 0 Turkey Hong Kong Singapore Phils Malaysia (10)
(20) 0 20,000 40,000 60,000 80,000 100,000 120,000
Source: CLSA Asia-Pacific Markets
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Figure 135
Many premium options Average retail selling price in China 2009 Rmb per litre Taobao Beer 7 Non-grape wine 40 Grape wine 57 Premium local spirits 295 Kweichow Moutai 500ml
Rmb115 (US$17)
Rum 402 Bacardi black rum 750ml
Rmb97 (US$15)
White Spirits 405 Grey Goose 700ml
Rmb370 (US$56)
Brandy and Cognac 464 Hennessy VSOP 750ml
Rmb293 (US$44)
Sparkling wine 538 Moet & Chandon NV 750ml
Rmb340 (US$52)
Whiskey 727 Chivas Regal 700ml 18 years old
Rmb425 (US$64)
Source: Euromonitor, Taobao.com, CLSA Asia-Pacific Markets
Premium local spirits Premium local spirits Unlike other luxury segments, premium local spirits brands have a significant are popular presence in China, accounting for 6% of the total spirits market in China. Brands like Jian Nan Chun, Moutai and Wu Liang Ye are very popular nationwide. Together these three brands account for more than 27% of the premium local spirits segment. Average unit price in this segment is almost Rmb300 per litre, with the ultra premium ones priced much higher than top whiskey.
Figure 136 Figure 137
Moutai (500ml) gift set selling at Rmb1,588 on Taobao 500ml of Wu Liang Ye’s 68% selling at Rmb888
Source: Company website, Taobao.com Source: Taobao.com
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Figure 138
Steadily growing Premium local spirits market in China
250 (m litres) Volume YoY (RHS) (%) 10 230 8 210 6 190 4 170 2 150 0 130 (2) 110 90 (4) 70 (6) 50 (8) 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Euromonitor, CLSA Asia-Pacific Markets
Imports and global players While beer consumed in China is mostly produced locally with only 28 million litres imported out of the 40.7 billion litres consumed in 2008, imported wine and spirits are common. About 6% of wine and 1.4% of spirits was imported from overseas in 2008. The import share of wine has been growing rapidly. In total, 18% of the wine and 31% of the spirits imported came from France.
Figure 139 Alcohol imports growing Imports as a percentage of total volume
7 (%) Wine Spirits
6
5
4
3
2
1
0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 140 Figure 141
France has a large share Wine imports in volume (2008) Spirits imports in volume (2008)
United Others Others Sweden States 5% 9% 2% Japan 5% United 2% Italy Kingdom United Chile 6% 33% States 32% Spain 3% 9% Australia Korea France 10% 9% 31% Argentina France Spain 16% 18% 10%
Source: Euromonitor, CLSA Asia-Pacific Markets
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Pernod-Ricard holds These fast-expanding segments together with their growing imports a number of high- component are driving up sales at global producers. Pernod-Ricard reported ranking brands 1Q (ended September 2010) sales growth that beat consensus estimates. The company recorded more than 30% YoY growth in China on the back of wholesalers’ restocking on Martell. Its Chivas Regal holds a dominant 33% brand share in the whiskey segment. Absolut is the leader in white spirits and Martell is No.3 among brandy and cognac brands in China.
Diageo is also upbeat about China’s market outlook and sees consumers trading up in general. Its Johnnie Walker brand holds 23% share in the whiskey segment while the Smirnoff brand has 22.5% of the white spirits share in China.
Barcardi & Co’s Barcardi rum significantly dominates this segment with a whopping 72% share.
Catering to locals The surging whiskey demand in China inspired the Royal Salute Whisky group to launch the 62 Gun Salute in the Chinese market. The company said the whiskey tastes rich and complex and it is exactly what Chinese consumers like. Bottled in a hand-crafted decanter made by Dartington Crystal, the whiskey features a Royal Salute crest painted in liquid 24-carat gold, along with a 24-carat gold-plated collar and a crystal stopper set with a 24-carat gold-plated crown. Each bottle sells for Rmb18,000.
Prices jumped 17% with Meanwhile, to endear itself to Chinese consumers, Château Lafite-Rothschild an embossed red eight also decided to feature an embossed red character for the lucky “eight” on every bottle of its 2008 vintage. According to the online fine-wine exchange LivEx, the price of a case of 2008 Lafite jumped 17% in just 48 hours after the announcement. Similarly, Château Mouton Rothschild also features art work by famous Chinese artists while vodka brand Absolut puts Chinese literary figures on its labels to attract Chinese consumers.
Figure 142 Figure 143
62 Gun Salute at Rmb18,000 Chateau Lafite Rothschild 2008
Source: Company
LVMH setting up luxury LVMH has a very strong market presence in the sparkling-wine segment with white spirits brand its Moët & Chandon brand. Its market share is tied with Yantai Changyu Group’s Changyu brand at 19% as the top two players in sparkling wine. Seeing such a strong presence that premium local spirits have in China, LVMH has also started building an Asian luxury spirits brand, Wenjun. The pricing is very much in line with top players Moutai and Wu Liang Ye.
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Figure 144 Figure 145
LVMH’s Asian Wenjun by LVMH at Rmb600 Special collection at Rmb1,600 luxury spirits
Source: Company website, Taobao.com
Figure 146 Top alcoholic drinks brands in China Brand Company Share (%) Premium local spirits Jian Nan Chun Sichuan Jian Nan Chun (Group) 10.6 Moutai Kweichow Moutai 9.9 Wu Liang Ye Sichuan Yibin Wuliangye Distillery 6.9 Luzhou Lao Jiao Luzhou Lao Jiao 2.5 Xiao Hu Tu Xian Guangzhou Pearl River Yunfeng Winery 1.9 Grape wine Great Wall China National Cereals, Oils & Foodstuffs Imp & Exp 10.6 Changyu Yantai Changyu Group 8.8 Weilong Yantai Weilong Grape Wine 4.6 Dynasty Dynasty Winery 4.0 Suntime Vinisuntime International 3.3 Sparkling wine Changyu Yantai Changyu Group 18.9 Moët & Chandon LVMH Moët Hennessy Louis Vuitton 18.9 Dynasty Dynasty Winery 8.6 Piper Heidsieck Rémy Cointreau Group 8.1 Weilong Yantai Weilong Grape Wine 7.0 Whiskey Chivas Regal Pernod-Ricard Groupe 33.1 Johnnie Walker Diageo 23.1 Jack Daniel's Brown-Forman Corp 6.1 Jim Beam Fortune Brands 3.3 Ballantine's Pernod Ricard Groupe 2.0 Brandy/Cognac Changyu Yantai Changyu Group 57.1 Hennessy LVMH Moët Hennessy Louis Vuitton 14.1 Martell Pernod-Ricard Groupe 7.5 Rémy Martin Rémy Cointreau Group 6.1 Courvoisier Fortune Brands 1.0 White Spirits Absolut Pernod-Ricard Groupe 28.1 Smirnoff Diageo 22.5 Gordon's Diageo 10.6 Eristoff Bacardi & Co 5.4 Skyy Campari Milano SpA, Davide 4.4 Rum Bacardi Bacardi & Co 72.4 Havana Club Pernod-Ricard Groupe 6.4 Captain Morgan Diageo 3.8 Source: Euromonitor
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Figure 147
Chinese millionaires’ favourite drinks 2008 2009 2010 Best Luxury Imported Drinks Brand Royal Salute Royal Salute Louis XIII Hennessy Hennessy Hennessy Johnnie Walker Louis XIII Royal Salute Rémy Martin Rémy Martin Ballantine Chivas Chivas Rémy Martin Best Super Luxury Whiskey Royal Salute 21 Years Old Royal Salute 21 Years Old Royal Salute 21 Years Old Johnnie Walker Blue Label Johnnie Walker Blue Label Johnnie Walker Blue Label Macallan 40 Years Old Ballantine's 30 Years Old Ballantine's 30 Years Old Royal Salute 38 Years Old Macallan 40 Years Old Best Ultra Luxury Cognac Louis XIII Louis XIII Louis XIII L'Age d'Or de Rémy Martin Richard Hennessy Richard Hennessy Richard Hennessy Best Premium Cognac Hennessy XO Hennessy XO Hennessy X.O Martell XO Rémy Martin XO Martell Cordon Bleu Rémy Martin XO Martell XO Rémy Martin X.O Best Chinese Spirits Moutai Moutai Moutai Wuliangye Wuliangye Wuliangye Luzhou Laojiao Luzhou Laojiao Luzhou Laojiao Best Premium Champagne Veuve Clicquot La Grande Dame Veuve Clicquot La Grande Dame Moět & Chandon Dom Pérignon Moět & Chandon Brut Imperial Vintage Dom Pérignon Moět & Chandon Brut Imperial Vintage Dom Pérignon Veuve Clicquot Piper- Heidsieck Brut Cuvée Rare Piper-Heidsieck Brut Cuvée Rare Source: Hurun Research Institute
Prestige cosmetics Rising demand from We believe China will have the fastest-growing premium cosmetics market in emerging economies the world over the next four years - we expect a 14% Cagr compared with the global average of 5%. Slowing/declining growth in the cosmetics market in Western economies will largely be offset by expansion in emerging markets, particularly Russia, India, China of what we estimate will be 14-17% per annum. The USA and Japan remain the largest premium cosmetics markets in the world, and sales in these countries are expected to remain flat/slightly decline in 2010-14. We estimate that the Chinese premium cosmetics market will grow from US$3.5bn to US$6bn in 14CL.
Figure 148 Cosmetics and toiletries market 2009-14 Cagr
Russia India China Brazil World Canada Spain United Kingdom Italy France USA Japan (%)
(5) 0 5 10 15 20
Source: Euromonitor, CLSA Asia-Pacific markets
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Figure 149
Brics market size and growth (US$m) 2010 % of global 2014 % of global Cagr (%) 10-14 China 3,514 4 5,992 6 14 India 521 1 979 1 17 Russia 1,266 2 2,409 3 17 Brazil 430 1 624 1 10 Total 5,730 7 10,004 10 15 Source: Euromonitor, CLSA Asia-Pacific Markets
Key trends In China, pale skin In China, pale skin traditionally represents feminine beauty, which explains traditionally represents the large sums of money spent on whitening as well as sunscreen products. feminine beauty As people get richer, they are moving from “needs” to “wants”, and women want clean, white skin. As such, cosmetics sales are outstripping GDP growth.
About 58% of market Skincare accounts for 58% of the premium cosmetics market in China, only is skincare slightly lower than Japan, where pale skin is also highly valued. Unlike other Western markets, fragrances are not a major segment in China. Fragrances, however, make up 62-76% of the Brazil and Russia markets.
Figure 150 Fragrances is a relatively China’s premium cosmetics market breakdown (2010) small segment in China Baby care 1% Sun care 3%
Deodorants 0% Bath and shower 4%
Hair care 5%
Sets/Kits 8%
Colour cosmetics Skin care 58% 10%
Fragrances 11%
Figure 151 Figure 152
Skincare as % of premium cosmetics Fragrance as % of premium cosmetics
Japan Brazil China Russia Italy Spain France France World UK Spain Italy Canada USA UK World USA Canada Russia India India China Brazil (%) Japan (%)
0 20406080 0 20406080
Source: Euromonitor, CLSA Asia-Pacific Markets
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US$2bn premium China’s premium cosmetics market enjoyed a strong 24% Cagr over 2000-10, skincare market especially in premium skincare, as consumers’ discretionary income rises. But it remains highly fragmented and the lack of premium local Chinese brands creates a tremendous opportunity for foreign companies. China’s premium skincare market is valued at US$2bn, still a fraction of Japan’s US$9bn market but growing very rapidly.
Figure 153 China premium cosmetics segment growth rates (10-14CL)
Colour cosmetics
Baby care
Sun care
Sets/Kits
Skin care
Fragrances
Hair care
Bath and shower (%)
0 5 10 15 20
Source: Euromonitor, CLSA Asia-Pacific Markets
Foreign brands are doing well in cosmetics. For example, our US analyst Caroline Levy projects that China would grow to 10% of total Ebit for Estée Lauder by 2020 from 4.5% today. This translates to US$1.6bn of sales and US$273m of Ebit. As we should expect in this fast-growing market, investment levels are high, channels are segmenting, brands are innovating, and distribution is evolving fast. Geographical differences play a role: for example, the drier northern region has a stronger bias towards moisturising products.
Still a foreign Global cosmetics giant Amway Corp holds a dominant share in China with its brands’ market direct selling and retailing strategy in the country. However, in terms of brand recognition, ultra-premium brands Chanel, Dior, Shiseido, L’Oreal, and Hugo Boss are still the top five that mainland millionaires like. Although domestic firms, like Shanghai Jahwa, are trying to break into the premium segment, their success so far is still primarily coming from the mid-market.
Figure 154 Premium cosmetics brand shares in China Brand (%) Company 2005 2006 2007 2008 2009 Amway Amway Corp 28.9 23.8 22.7 24.9 23.0 Shiseido Shiseido 2.9 4.1 4.4 5.1 7.3 Lancôme L'Oréal 4.5 5.4 5.5 6.0 6.9 Estée Lauder Estée Lauder 2.9 3.8 4.4 4.7 5.0 Fancl Fancl Corp 0.3 1.0 2.0 2.9 3.3 Clinique Estée Lauder 1.8 2.2 2.3 2.4 2.5 Kosé Kosé Corp 2.3 2.6 2.4 2.3 2.3 Chanel Chanel SA 1.3 1.7 2.0 2.1 2.2 Christian Dior LVMH Moët Hennessy Louis Vuitton 1.6 1.8 1.9 2.0 2.0 Biotherm L'Oréal 1.3 1.5 1.6 1.6 1.7 Guerlain LVMH Moët Hennessy Louis Vuitton 1.0 1.1 1.3 1.4 1.5 SK-II Procter & Gamble 4.2 2.2 1.4 1.1 0.9 Others Others 47.1 48.9 48.3 43.6 41.4 Total Total 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor
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Figure 155
Chinese millionaires’ favourite skincare brands 2008 2009 2010 Shiseido Shiseido Chanel HUGO BOSS Lancome Dior Lancôme HUGO BOSS Shiseido Biotherm Chanel L' Oréal Chanel Biotherm HUGO BOSS Shu Uemura L' Oréal La Mer La Mer Shu Uemura L' Oréal La Mer Source: Hurun Research Institute
Foreign brands Our proprietary survey’s results also confirm that global foreign brands well-recognised dominate the prestigious cosmetics market in the mainland.
Figure 156 Figure 157
Everyone likes Which luxury brands would you like to own? Which luxury brands did you buy? foreign names
Skincare & Cosmetics Skincare & Cosmetics
Estee Lauder 15 Estee Lauder 14 Lancome 8 Shiseido 11 Chanel 6 Lancome 6 Shiseido 5 Dior 4 Dior 5 Clinique 4 L'Oreal 1 Olay 3 Olay 1 L'Oreal 3 Clinique 1 Sisley 2 VICHY 1 Nivea 2 (% of consumers) (No. of mentions) Marubi 1 Biotherm 2
0 5 10 15 20 0 5 10 15
Perfume Perfume
Estee Lauder 16 Chanel 12 Chanel 15 Lancome 4 Dior 7 Dior 4 Lancome 3 Estee Lauder 2 Calvin Klein 2 Calvin Klein 2 Guerlain 1 Burberry 2 AnnaSui 1 Adidas 2 Prairie 1 Issey Miyake 1 Davidoff 0 Kenzo 1 (% of consumers) (No. of mentions) Hermes 0 Hermes 1
0 5 10 15 20 0 5 10 15
Source: CLSA Asia-Pacific Markets
Cosmetics are characterised by high brand loyalty, as our recent China Brands Index report confirms.
Men’s grooming market Another trend in the cosmetics space in China is the rapid growth of the may be the next men’s grooming market. Euromonitor expects the market Cagr for male- luxury segment grooming products in 2010-14 to be more than double that of the overall beauty and personal care market at 22%, compared with 10%. Unilever and L’Oreal have both invested heavily in this segment in the past four years and built a 32% and 11% market share in men’s toiletries. As the men’s market continues to develop, we expect high-end brands to tap into this fast-growing segment as well.
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Figure 158
Our China Brands Index Brand loyalty across sectors shows high loyalty for cosmetics and skincare Mobile service Supermarket Cosmetics Insurance Dept store Skin care Camera Aircon Wine Washing machine Online travel PC Instant messaging Instant noodles Juice Refrigerator Dairy Mobile handset Tea beverages Shampoo CSD drinks Beer Bottled water TV Car Banking Search engine Sportswear Shoes (non-sports) (%) Clothing (non-sports)
020406080100
Source: CLSA Asia-Pacific Markets
Figure 159 Growing at double-digits Men’s grooming market growth vs overall beauty and personal-care market
45 (%) Men's grooming market 40 38 Beauty and personal care market
35
30 27 27 26 24 25 22 20 20 18
14 15 12 11 10 10 10 9 10 9
5
0 2007 2008 2009 2010 2011 2012 2013 2014
Source: Euromonitor, CLSA Asia-Pacific Markets
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Luxury services As the Chinese saying goes, daily life is all about clothes, food, accommodation and travel. Luxury goods, therefore, are only part of the equation. Chinese affluent are also willing to pay to get the best out of other elements of life, including eating, sleeping, and even match-making.
Restaurants Mainland Chinese enjoy high-end services, ranging from gourmet restaurants to match-making services. In Hong Kong, overnight visitors from China spent HK$561 per capita on meals outside hotel, or 8% of their total spending in Hong Kong. However, affluent mainland tourists are spending much more than this average during their trips to Hong Kong.
Abalone and shark’s Miramar group in Hong Kong said they often see travellers walk in to their fin soup upmarket Cantonese restaurant with their shopping bags and walk out with a HK$100,000 bill for dinner. A classic lunch party would be a table of 10 mainland travellers washing down a menu of abalone and shark’s fin soup with half a dozen bottles of Chateau Lafite Rothschild. The restaurant’s dinner sets range from HK$8,880-13,880.
Rmb1,200 per head With strong brand recognition, Miramar is planning to expand into China. It is aiming to open 20 restaurants by 2017 at a total cost of HK$400m. The company estimates that in Beijing, where its first outlet will open by mid- 2011, wealthy Chinese would spend about Rmb1,200 per head. It aims to recover the HK$30m investment cost in two years.
The imperial four In China, the four most prestigious food ingredients are now frequently visit luxury restaurants and order these abalone, sea cucumber, shark’s fin, and fish maw. These items for dining along with other delicacies such as bird’s items are believed to be imperial food ingredients only nest, snake soup and hairy crabs. In recent years, served at the emperor’s table. Time has changed, Western favourites such as lobsters and truffle are also however, and the affluent individuals in the mainland appearing more often on Chinese menus.
Sample full dinner menus Chinese French
Roasted whole crispy suckling pig Fresh and smoked salmon tartare
Stir-fried prawns braised with crab roe sauce Chestnut soup with praline cream and chicken mousse dumpling
Braised seasonal green with bamboo fungus and Yunnan ham Seared sea bass with steamed zucchini, tomato, basil and truffle
Braised whole conpoy stuffed in turnip ring Duck breast fillet with caramelized autumn fruit and fig reduction
Braised superior shark’s fin with Chinese cabbage in brown sauce Dessert
Steamed fresh spotted garoupa Coffee or tea
Braised abalone and sea cucumber with premium oyster cause
Deep-fried crispy chicken with osmanthus sauce
Fried rice with dried conpoy, dried fish and roasted duck
Braised e-fu noodles with wild mushrooms
Double-boiled sweetened lotus seed with red dates and dried longans
Chinese petits four Source: Cuisine Cuisine, Le Jardin de Joel Robuchon
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Figure 160 Figure 161
Shark’s fin and imperial bird’s nest (HK$720 per bowl) Braised assorted snake soup (HK$880 per bowl)
Source: Company website
High-end dining taking off With more than 50 outlets nationwide, mainland restaurant chain South in the mainland Beauty Group has also introduced the Lan Club in Beijing and Shanghai to target affluent individuals in the mainland. Bringing in world-class professionals who have designed New York’s Buddakan and the W Hotel Pudong in Shanghai, South Beauty Group feels that the Chinese elite demands sophistication and taste in their dining experience. Meanwhile, one of the world’s most famous chefs Jean-Georges Vongerichten also opened a restaurant in Shanghai featuring appetizers starting from Rmb118-198 and dinner entrees from Rmb248-348.
Hotels Shangri-La is the Chinese affluent like to maintain their luxurious lifestyle when they are on the top brand road. According to Hurun’s Best of the Best survey, Shangri-La is the top hotel brand among Chinese millionaires. Grand Hyatt, Hyatt Regency and Hilton have also consistently been ranked among the top five.
Figure 162 Chinese millionaires’ favourite hotels 2006 2007 2008 2009 2010
Shangri-La Shangri-La Shangri-La Shangri-La Shangri-La
Grand Hyatt Grand Hyatt Hyatt Regency Grand Hyatt Grand Hyatt
Hyatt Regency Hyatt Regency Grand Hyatt Hyatt Regency Hilton
Hilton Hilton Kempinski Hilton Sheraton
Sheraton Sheraton Sheraton Kempinski Hyatt Regency
JW Marriott Marriott
Kempinski Kempinski Source: Hurun Research Institute
High-end hotel chains have ramped up their expansion plans in China to capture opportunities in this luxury segment. Starwood expects to add 86 hotels to its current network of 62 in China.
Meanwhile, InterContinental aims to double its number of rooms in the Greater China region in the next five years. The company expects China to overtake the US as the world’s largest hotel market by 2025 and become twice the size of the current US market by 2039.
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Section 2: From head to toe Luxury goods
Figure 163
Luxury five-star Hotel growth rate in mainland China (number of hotels) hotels booming 60 (%) Total hotels 5-star hotels 50 40 30 20 10 0 (10) (20) (30) (40) 1995 1997 1999 2001 2003 2005 2007 2009
Source: CEIC, CLSA Asia-Pacific Markets
Hotel prices catching up Some luxury hotels in Shanghai are already at a price range comparable with with global peers . . . those in financial hubs such as New York and London.
Figure 164 .. . . primarily in Luxury hotel price comparison Tier-1 cities Ritz-Carlton New York, Central Park The Ritz London Mandarin Oriental Hyde Park, London The Peninsula Shanghai The Ritz-Carlton Shanghai, Pudong The New York Palace Trump Soho New York Pudong Shangri-La Shanghai Four Seasons Shanghai Four Seasons London Canary Wharf JW Marriott Hotel Beijing Shangri-La China World Hotel, Beijing Grand Hyatt Beijing Grand Hyatt Shanghai Sheraton Shenzhen Futian Hotel Grand Hyatt Shenzhen Hilton New York The Peninsula Beijing The Westin Beijing Chaoyang Westin, Bund Center Shanghai St. Regis Shanghai Intercontinental Beijing Beichen Hotel (US$)
0 100 200 300 400 500 600 700
Source: Expedia, CLSA Asia-Pacific Markets
Not only are these hotel chains aggressively building up in major cities, they are also targeting popular tourist spots in China. In November 2010, St. Regis opened the first international luxury hotels in Lhasa, the capital of Tibet. Shangri-La Asia is also targeting to develop one there in 2012 and InterContinental is planning a 2,000-room hotel within three years.
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Section 2: From head to toe Luxury goods
Match-making VIP match-making service The rapid rise of these Chinese affluent has created a new challenge for themselves and a business opportunity for some. The Chinese Academy of Social Sciences forecasts that by 2020, 24 million Chinese men of marrying age could see a shortage of brides, partly because of the one-child policy.
Figure 165 Hard time finding a bride Mainland population aged 18-34
170 (m) Male aged 18-34 Female aged 18-34
165
160
155
150
145 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Euromonitor, CLSA Asia-Pacific Markets
Claiming an 80% Coupled with this macro trend, wealthy Chinese are moving into circles that success rate make it hard for them to find partners, said the founder of a match-making company in China, Diamond Bachelor. Diamond Bachelor, which claims that it has five million clients and a success rate, defined as clients falling in love with their recommendations, of at least 80%, sends “love hunters” out to restaurants and malls to scour for the right women. The company then categorises women based on age, education, height, and looks. According to its website (915915.com, which is a homonym for “just want me, just want me”), the company’s definition for a “diamond bachelor” is an individual with net worth of more than Rmb2m or with “extremely outstanding” profiles.
Rmb100,000 for a In 2009, a group of 21 single billionaires and 22 single women attended a match-making ball ticket match-making ball in Beijing with tickets costing Rmb100,000 a head. In June 2010, jiayuan.com, a large online-dating agency, even held a competition to find the perfect match for 18 of its millionaire members. It was reported that the competition drew 50,000 Chinese applicants including girls from Vancouver, Singapore, New York and Paris.
Figure 166 Diamond Bachelor website featuring its “love hunters”
Source: 915915.com.cn
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Section 3 : European brands dominate Luxury goods
European brands dominate Luxury from the West The luxury-goods sector globally has long been dominated by European brands. They are names that have been popular among elites in the West and have for many years been favourites of royal families and tycoons. Over time we expect the emergence of Chinese luxury brands in the product categories, where China has fundamental advantage, primarily from expertise developed over a long period in some product materials such as jade, porcelain or cashmere.
Figure 167 Best of the best Chinese millionaires’ most favourite luxury brands for Chinese 2008 2009 2010 BMW Louis Vuitton Louis Vuitton Louis Vuitton BMW Cartier Mercedes-Benz Mercedes-Benz Chanel Cartier Rolls-Royce Hermès Chanel Rolex Gucci Rolex Ferrari BMW Ferrari Cartier Mercedes-Benz Giorgio Armani Chanel Patek Philippe Gucci Bentley Montblanc Vacheron Constantin Porsche Armani Source: Hurun Research Institute
Brands ready to We believe that these successful brands in China still have huge growth grab shares potential.
Figure 168 Luxury brands with huge potential in China Cosmetics Watches Estee Lauder Rolex Lancome Omega Chanel Cartier Dior Longines Shiseido Patek Philippe Handbags Shoes Louis Vuitton Gucci Gucci Louis Vuitton Hermes Tod's Chanel Prada Prada Belle Women's Apparel Men's Apparel Armani Zegna Prada Armani Chanel Dunhill Ports Design Hugo Boss Gucci Prada Source: CLSA Asia-Pacific Markets
Quality and brand image Chinese look for better product quality and brand image when selecting are key luxury-goods brands.
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Section 3 : European brands dominate Luxury goods
Figure 169
Reasons why people buy luxury goods
Quality & reliability
Brand image/design
Performance
Price/value
Convenience/location
Innovation
Customer service
Friends' recommendation (% of total votes cast)
0 5 10 15 20 25 30
Source: CLSA Asia-Pacific Markets
Product quality Made in Europe is still The “Made in China” stigma still sticks in some Chinese consumers’ mind. more desirable They still remember the days when most operations were state-owned and quality was not well-controlled. Even now, the country is still fine-tuning its quality control systems in categories from food to cosmetics to toys.
In contrast, European products are known to be elegant and carefully hand- crafted. The royal families that are still in place in some countries in Europe also add some spice to the fairy tale. In reality, it does take a long time to finish luxury goods. It takes 18 hours to make a Hermes Birkin bag and four years to train a leather craftsman. Since the company only takes the best part of the crocodile, ie the belly, three different crocodiles are needed for one bag and it takes four years to raise one crocodile.
Brand image The CRR brand survey we conducted in 2009 shows that quality and image determine brand decision making in China. This is what European luxury brands offer - brand image and world-class designers that translate into supreme quality and fashion.
The European luxury brands often come with similar stories and ingredients. A humble background in the 17-19th century in Europe Very high-quality products, some of which eventually turn into a signature collection Talented designers who are frequently publicised in the press The brand becomes a favourite among celebrities, royal families and other influential figures Wealthy individuals and aspirational shoppers flock to their boutiques
Brands such as Prada, Hermes, Louis Vuitton, Chanel and Cartier all fit into this storyline. At the end, heritage is a key part of what is so attractive about these luxury brands.
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Section 3 : European brands dominate Luxury goods
Catering to Asian tastes Global collections Most luxury-goods companies offer the same product range globally and there is not much tailoring to specific markets. This would affect the perceived authenticity of the product - as each product needs to reflect the heritage of that brand including the input of the designers to account for current fashion trends. The product range, however, should account for specific weather conditions in that market.
Some localisation but There are some product categories that need to be localised, for example, depends on product cars. Chinese affluent like to be chauffeured and therefore luxury brands category Audi, BMW and Mercedes have all introduced extended versions. However, while the products are not dramatically altered, marketing plans are. Early this year, fashion house Christian Dior introduced a limited blue collection in Shanghai. In celebration of the Shanghai Expo, Chanel created accessories with Chinese elements. This year, Ermenegildo Zegna celebrated its 100th anniversary in Shanghai. Anna Wintour, US Vogue editor, also made her first visit to China recently and the prominent fashion magazine featured eight Asian models in its December issue.
As the affluent Chinese may still be new to the world of luxury, brands have recruited celebrities to wear their products at events or simply show up to show support for the brands. A brand consultant estimates that it may cost as much as HK$1m plus gifts to attract an A-list star. Oftentimes, there may be dozens of celebrities from A-list to C-list at one event. The more traditional way of signing up celebrities as spokespersons, however, is still common.
Rise in Asian models Luxury brands are also increasingly featuring Asian models to build a connection with Chinese consumers. Asian models broke records this season, accounting for 7.1% of all models at New York Fashion Week, according to a seasonal survey by a Jezebel.com. Liu Wen, widely considered to be China’s top model and known as the first Asian model joining the Victoria’s Secret Fashion Show, is working with Estée Lauder to promote its exclusive product line in China.
Figure 170 Figure 171
Asian model Liu Wen US Vogue December issue featuring eight Asian models
Source: Estee Lauder Source: Vogue.com
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Section 3 : European brands dominate Luxury goods
Asian luxury brands Leveraging product The rise of Asian luxury-goods brands is inevitable but we believe the product material expertise category will need to be closely aligned to specific areas where there exists some fundamental advantage. We expect this would be traditional crafts, which are associated with the rural past.
This view is echoed by Matthew Crabbe, co-founder of consultancy Access Asia. He believes that local materials and local crafts have an appeal to Chinese consumers. “Chinese [consumers] are increasingly exploring their roots and crafts and bringing them up to date. [Middle and upper-class Chinese] have a romantic view of the rural past and rural culture, and crafts. There is a growing interest. For example, top-notch luxury tea. This fits in with that trend.”
Shortage of craftsman However, one of the challenges is that there is fast becoming a shortage of craftsmen that can produce these various products. According to a 2009 report by the China Arts and Crafts Association, 42% of the 1,865 officially recognised traditional crafts are struggling or in danger of dying out and 6% of those are already lost.
The suggested solution is to upgrade the role of craftsman in society to encourage people into these professions rather than work in less-skilful positions but initially higher-paid jobs. Switzerland faced a similar problem during the 1980s and 1990s when there was a sharp drop in the number of watchmakers and other personnel involved in the watch-making process.
Unique solution in India But India might have a solution. In India, Titan Industries, now one of the top-10 watchmakers in the world by volume, overcame the problem in the 1980s. The company recruited boys who had left school with top marks and it provided housing and meals along with “foster fathers” to teach these young men about life. It then provided training by master craftsmen, who also served as foremen once production began. No longer did this help develop the watch-making industry in India, but it also transformed the lives of these boys and helped their families.
Shang Xia by Hermes The first luxury In September 2010, Hermes launched a Chinese brand, Shang Xia, which Chinese brand means “up-down” in Mandarin. According to their website, Shang Xia offers Chinese and Asian heritage created for a contemporary lifestyle. The brand opened its first store in Shanghai in September.
Figure 172 Shang Xia store in Shanghai
Source: Company
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Section 3 : European brands dominate Luxury goods
Lifestyle product offering The initial product offering includes around 200 designs of furniture, tea and dishware, apparel, jewellery, accessories with price points ranging from Rmb180-50,000. Lynn Zhou, our consumer analyst based in Shanghai, visited the store. According to the salesperson, the best-selling products are jewellery and clothing. One piece of sterling silver bangle bracelet with the “Shang Xia” logo pattern, which costs Rmb3,000, was almost sold out of stock. Their products are not only Chinese. For example, cashmere products are made in Mongolia or Nepal. They try to promote the best craftsmanship of both China and other countries. We liked their eggshell porcelain bowls and cashmere coats. The brand is not doing much advertising in China for now and we do not see much comment in local media or internet communities. But because of its connections with Hermes, they have more media coverage in the West. As a result, a majority of the purchases in this store were made by foreign shoppers. As far as we could see, the people that visited the store were all impressed, by its decoration and delicateness, as well as price tags.
Figure 173 Figure 174
Impressive store A popular silver bangle bracelet Lynn’s favourite eggshell porcelain and products
Source: Shang Xia company website
Potential categories for Asian luxury brands Leveraging off Hermes seems to have recognised that the starting point to develop China’s best credibility is to leverage China’s perceived (and actual) expertise in a number of core materials and therefore it is offering five collections featuring the best of these materials.
Figure 175 Materials expertise drives product offerings
Felt Teaware Eggshell Zitan Wood Procelain Furniture Homeware
Jade & Agate Bamboo Apparel Jewellery
Cashmere
Source: CLSA Asia-Pacific Markets, Hermes
Opportunities for We believe that Asia has a long history and expertise in areas like porcelain, Eastern brands silk, embroidery and paper, while leather craftsmanship and watch-making skills are very refined in the West. It is the abundance of these materials in the region that has driven the development of expertise. For apparel, furniture, and cosmetics, we would argue that neither region has any fundamental advantage and they don’t require very advanced skills or technology.
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In terms of potential for Asia, we believe it is very challenging for China to develop the technology and catch up with automakers in the West and Swiss watch-making professionals. However, with handbags, jewellery and alcohol, China may have a better chance.
Figure 176 Expertise in the East and West
Porcelain
Silk Embroidery
Watches Paper Apparel Handbags
West Cars Furniture East
Alcohol Cosmetics Jewellery Jewellery Handbags
Alcohol (spirits)
Source: CLSA Asia-Pacific Markets
The following categories offer good prospects in China: Alcohol - premium local spirits such as Moutai and Wu Liang Ye are successful examples. The patriotic element makes these good corporate gifts.
Use of premium woods Furniture - rare materials coupled with craftsmanship can be a great and bamboo brand story. Premium wood, bamboo or even cane can link the brand to Chinese heritage. Porcelain - in China, Jingdezhen is known as the “porcelain capital” thanks to its high-quality porcelain. Shang Xia already has a collection that is affiliated with porcelain techniques from Jingdezhen. Silk and embroidery - silk was used to make robes for the upper class and sometimes even shoes and embroidery on garment used to show wealth and status. This can be used in both clothing and accessories. Hand- made products and display of success are top priorities for Chinese affluent. Long history with jade Jewellery - locals are at an advantage in terms of design preferences and product knowledge, especially with gold and jade. This category is currently dominated by Hong Kong jewellers. Paper - with a rich literary culture and being the origin of paper, China could possibly introduce a luxury brand in this category.
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Section 3 : European brands dominate Luxury goods
Chinese apparel Apparel in general - there is no fundamental reason why Chinese on the rise apparel cannot be luxury goods. Much of the apparel even for luxury brands is manufactured in China and manufacturing expertise is built up there. The question is how to transfer the design and create a brand. 3.1 Phillip Lim, for example, may be able to leverage its Asian heritage and introduce new collections catering to mainlanders.
Some examples A number of companies have already been trying to establish their brands as an Asian luxury brand. Shanghai Tang owned by Richemont is known as a niche luxury brand for silk apparel and Chinese-inspired accessories, as well as its made-to- measure service known as “imperial tailoring”.
Ports Design - a leading As an early entrant in the luxury market in China, Ports Design has luxury brand in China successfully established itself as a high-end womenswear brand in China. It has consistently been ranked along brands like Chanel and Louis Vuitton. Taiwan’s Shiatzy Chen is aiming to take Eastern aesthetic to a contemporary era by incorporating poetic design and Suzhou embroidery. Hong Kong’s Blanc de Chine also tries to redefine Chinese aesthetics: its Blanc de Chine collection focuses on the tranquil and spiritual characteristics in Chinese culture; while its bleu de chine collection is inspired by Chinese martial arts. Founded by a Hong Kong designer and a French entrepreneur, Qeelin was launched in Paris and the jeweller builds on a similar philosophy of merging East and West. With Maggie Cheung, a popular Chinese actress who has won the Cannes Best Actress and Berlin Best Actress awards, as its face, Qeelin has gained much publicity.
Figure 177 Figure 178
Chinese-inspired jackets by Shanghai Tang Qeelin’s Wulu¹ collection
Source: Company website ¹ A water container in China in the old days. Source: Company website
With communist leaders Mao Zedong, Deng Xiaoping, and Zhou Enlai reportedly having worn its watches, Shanghai Watch has built up brand recognition on the mainland. Management has been repositioning the company to target the luxury segment in the past few years. The company’s gold watches with alligator leather straps retail for about US$17,800 and unlike most luxury watches that are powered by Swiss movements, Shanghai Watches’ timepieces are made entirely in China.
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Section 3 : European brands dominate Luxury goods
Figure 179
Only 100 were produced for each of these five designs
Source: Company website
Acquiring luxury brands Times are changing and we expect Asian companies will continue to acquire international luxury brands as well as create their own brands. Trinity has acquired a number of overseas higher-end brands including Cerutti and Kent & Curwen. Megha Mittal of the Indian Mittal group of companies acquired Escada.
These Asian companies have developed the manufacturing or sourcing expertise for some of these items (not all) so it would seem natural to integrate or acquire brands. This has occurred in many lower or mid-priced segments where the OEM manufacturer transformed into the brand owner. Examples include Daphne and Belle in footwear and Anta in sporting goods. According to a BBC news report, Chinese factories are increasing their manufacturing presence in Italy - they estimate that there are up 5,000 Chinese factories in Prato, Italy. Chinese imported fabrics costs 10% of Italian, which is resulting in much lower sourcing costs for Italian brands. Products are still Made in Italy, but by Chinese factories.
Figure 180 The possible trend
Bought in China Made in China Owned in China
Source: CLSA Asia-Pacific Markets
Ownership doesn't impact We do not believe the corporate ownership of brands has any negative brand prestige implications for consumers. Most consumers recognise that large corporations own a range of brands and that only a few of the larger luxury brands are owned independently. Examples of multibrand groups include LVMH, Richemont, PPR and Swatch. For the mostly mono-brand companies, examples include Bulgari, Hermes, Tod’s, Burberry for the listed companies and then Prada, Rolex, Chanel, Armani and Dolce & Gabbana for the private companies.
More Asian listings We also believe it does not matter where companies are listed. In fact, we would argue there are strong commercial reasons for branded consumer goods to be listed where they generate a significant part of their business – as this will help improve the brand awareness. L’Occitane, which was recently listed in Hong Kong, saw a significant increase in sales in Hong Kong and in Asia around the time of their IPO. Sands China and Wynn Macau recently listed their Asian operations in Hong Kong. We expect a growing trend towards more global consumer companies listing in Asia all or part of their business.
78 [email protected] 19 January 2011
Section 4 : Getting exposed Luxury goods
Getting exposed Picking names to get In our ideal world, the perfect luxury-goods investment would be one of the exposure major European brands listing their Chinese business on the Hong Kong Stock Exchange - for example Chanel China or LVMH Asia. Back in the real world we need to trade off a number of factors when determining the best way to get exposure to rising luxury good demand by the Chinese.
Key factors include a) percentage of earnings derived by the Chinese (including overseas demand) - as this is the fastest-growth segment; b) brand owner versus distributor - which has an impact on long-term earnings sustainability; c) product mix - weighting to mid- to high-end price points, which will grow faster; d) valuation - determining whether all the good news is priced in; and e) investability - market cap and average trading volume.
Geographic mix: Exposure to Greater China customers European owned Nearly all the leading luxury brands mentioned in the previous section are and listed listed in Europe or the US or form part of private companies. However. most of these brands derive around 10-20% of their sales from Greater China. Swatch and Richemont have the greater China exposure of these names with 22-28% of sales.
The Asian-listed names derive close to 100% of earnings from Greater China, which enjoys the highest growth rates globally. L’Occitane is the exception as the company is currently deriving 17% of sales and about 20-25% of earnings from Greater China.
Product mix: Exposure to the high end Most of the European and US-listed brand owners generate the majority of their earnings (not necessarily sales) from the luxury segment. The larger conglomerates such as LVMH also sell premium drinks and cosmetics, which are exposed to the same drivers. PPR (owner of the Gucci brands) has a general retail business.
Five key categories for The Asian-listed names can be split into a five broad categories: Asian-listed names Apparel brand owners - Ports Design, Trinity and Evergreen. The first two operate in the luxury segment while Evergreen has about 75% of sales in the high end.
Watch and jewellery retailers - Hengdeli, Luk Fook, Chow Sang Sang, Emperor Watch & Jewellery; Oriental Watch and HK Resources (3D Gold), Each of these operators are operating at mid to high price points.
Department stores and fashion retailing - Parkson, Golden Eagle, Lifestyle and I.T. More than half of the sales for these companies are derived from apparel, accessories and prestige cosmetics.
Cosmetics - Sa Sa and L’Occitane.
Footwear specialists - Belle and Daphne, although Daphne is not featured in this report as prices points are more mid end. Belle generates about 50% of sales in high end.
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Section 4 : Getting exposed Luxury goods
Business model: Brand owner versus distributor Brand owners offer better We typically have a preference for brand owners versus retailers as brand earnings visibility owners have better earnings sustainability over the longer run as it is difficult to establish new luxury brands given the brand heritage and positioning. Retailers are subject to greater competitive pressures from other retailers (pricing, store footprint) and may not be able to maintain relationships with key luxury suppliers. Note that the brand owners mostly operate a retail-intensive distribution model (average sales via retail is 60% depending on product category ie watches is more wholesale) so the capital intensity is similar - manufacturing does not always represent the complicated aspect of the value chain and is commonly outsourced.
There are two large listed brand owners - Ports Design and Trinity plus Evergreen which sells at slightly lower price points. I.T Limited is both a retailer and brand owner in the fashion segment.
Department stores are Luxury exposure via retailers is easier to attain in China as the majority of still popular in China for luxury brands are sold in department stores as against free-standing flagship luxury goods stores in other markets.
Earnings growth and valuation Asian plays are much The European/US luxury-goods names are trading on the same PE multiple as cheaper on a PEG basis the Asian listed names - about 22x 2011 earnings. Consensus expects around 22% EPS growth for the Asian names against 15% for the US/European names, which implies a lower PE multiple on 2012 earnings and a lower PE/G multiple of 1x for Asian names vs 1.6x for international names.
Invest-ability: Size and liquidity Clearly the European and US names are much larger in market-cap terms and also have greater liquidity. However, we note that the Asian listed names are growing quickly and since 2001 or their IPO, these stocks have shown an average annual share price appreciation of 35%
Figure 181 Average annual share price performance since 2001 or IPO
Trinity Hengdeli Luk Fook Golden Eagle Emperor Watch & Jewellery L'Occitane Chow Sang Sang Jewellery Average Parkson Sasa Lifestyle Ports Design Oriental Watch I.T Limited HK Resources (3D Gold) Belle (%) Evergreen
(20)020406080100
Source: China Reality Research
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Section 4 : Getting exposed Luxury goods
Snapshot of Asian-listed names We have written up 16 Asian-listed high-end companies in this report. Of which, CLSA covers and has price targets on seven of the names. We see the most upside for Ports Design, Evergreen, L’Occitane and Parkson. We currently rate Golden Eagle as O-PF. Hengdeli has increased 57% during 2010 and we currently see less upside to our price target. Nonetheless, we have a very positive medium-term view on organic growth and acquisition opportunities.
We also have a positive view on Trinity, Lifestyle, Emperor Watch and Jewellery, I.T Limited and Sa Sa International.
Figure 182 Asian-listed high-end companies Stock Bbg Rec Price Target Upside Jan13 (%) Ports Design 589 HK BUY 21.9 29.0 33 Evergreen 238 HK BUY 5.3 7.0 31 L'Occitane 973 HK BUY 20.5 26.0 27 Parkson 3368 HK BUY 13.0 15.9 22 Belle 1880 HK BUY 14.0 15.6 11 Hengdeli 3389 HK BUY 4.8 5.3 10 Golden Eagle 3308 HK O-PF 21.8 22.3 3 Source: Bloomberg, CLSA Asia-Pacific Markets
Quick summary of each of the names
Well-heeled Belle: Leading high-end footwear player in China and vertically integrated business model enables better inventory management and full priced sales.
Affordable jewellery Chow Sang Sang: Top-three jewellery retailer in China trading on only 12x 2011 consensus earnings.
Its time has come Emperor Watch & Jewellery: One of the biggest watch retailers in Hong Kong with strong relationships with Rolex, LVMH and Patek. Opportunities to grow in China and also in jewellery. Trading on 0.4x PEG.
Men’s business Evergreen: Targeting more mid-end men’s apparel, which will grow quickly especially in lower-tier cities. We see 31% upside to our price target.
Region al specialist Golden Eagle: Regional department store specialist in lower-tier cities. Good execution track record but valuation looking pricey.
Quality is timeless Hengdeli: Largest watch distributor in China with 30% market shares. Plans to more than double its store network to 800-1,000 from 302 now via acquisitions.
Golden grow HK Resources (3D Gold): Known as the gold boutique. The company is planning to aggressively grow from 300-odd stores to 500 by 2012.
Looking good I.T: The fashion specialist in Greater China with extensive experience with more than 300 international brands. Trading on 20x consensus earnings and suspect huge room for further upgrades.
Hong Kong icon Lifestyle: Operator of SOGO Causeway and five other department stores/malls in Greater China. We expect very strong December Hong Kong retail sales and believe the company will beat consensus estimates.
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A natural beauty L’Occitane: One of the few true high-end brands listed in Asia with a global presence. Store expansion globally should drive strong earnings growth. We see 27% upside to our price target.
Jewellery specialist Luk Fook: Leading jewellery retailer in China with a preference for third- party operators stores under license agreement. Consensus is expecting around 30% earnings growth over the coming years.
Time for a change Oriental Watch: Leading watch retailer in Hong Kong. Looking to acquire wholesale customers and trading on 11x 2011 earnings. Looks interesting.
Best of luxe Parkson: Largest listed department store operator in China with 83% of sales from high-priced products. We see 22% upside. BUY.
Ready to grow Ports Design: Leading luxury womenswear brand in China ready for a new phase of store growth. An upcoming younger product line may well be a strong catalyst. We see 33% upside. BUY.
Pretty in pink Sa Sa International: No.1 cosmetics retailer for Greater China, with more than 34% of the key Hong Kong market. Generates about 40% of sales from its house brands. A tad pricey at 26x.
Go your own way Trinity: Positive on product category (men’s); brand ownership (Kent & Curwen and Cerruti) and exclusive distributor for Gieves & Hawkes and D’URBAN and potential for more license deals and acquisitions
Figure 183 Luxury companies comparison Stock Bbg Country Industry Brand Greater High-end Rec Mkt PE 11 PE 12 EPS gr PE/G owner China % % sales cap (x) (x) 11-12 11 (x) sales (€m) (%) LVMH MC FP France Diversified Yes 15 100 N-R 58,637 19.7 17.4 13.5 1.5 Burberry BRBY LN UK Apparel Yes 10 100 N-R 5,704 25.4 20.7 22.3 1.1 Swatch UHR VX Switzerland Watches Yes 28 90 N-R 16,827 18.1 15.9 13.6 1.3 PPR PP FP France Diversified Yes 6 50% of OP N-R 15,135 13.3 11.9 11.9 1.1 Richemont CFR VX Switzerland Watches & jewellery Yes 22 100 N-R 25,688 22.1 19.0 16.5 1.3 Hermes RMS FP France Leather goods Yes 11 100 N-R 16,701 35.7 32.2 10.8 3.3 Bulgari BUL IM Italy Watches & jewellery Yes 14 100 N-R 2,411 27.4 21.5 27.4 1.0 Coach COH US US Leather goods Yes <5 100 N-R 12,217 18.7 16.6 12.6 1.5 Tiffany TIF US US Jewellery Yes <5 100 N-R 5,851 21.4 18.8 14.0 1.5 Tods TOD IM Italy Shoes & leather goods Yes 3 100 N-R 2,418 19.7 17.9 10.6 1.9 Average 22.1 19.2 15.3 1.6 Belle 1880 HK HK Footwear Yes 100 50 BUY 11,536 25.0 21.4 17.0 1.5 Golden Eagle 3308 HK HK Dept store No 100 75 O-PF 4,122 28.7 22.8 25.4 1.1 Parkson 3368 HK HK Dept store No 100 65 BUY 3,570 22.6 17.5 29.1 0.8 Lifestyle 1212 HK HK Dept store No 100 50 N-R 3,317 24.2 22.2 9.1 2.7 L'Occitane 973 HK HK Cosmetics Yes 17 100 BUY 2,954 27.8 20.8 33.8 0.8 Hengdeli 3389 HK HK Watches Exclusive 100 100 BUY 2,063 27.7 23.6 17.2 1.6 Luk Fook 590 HK HK Jewellery Yes 100 100 N-R 1,530 20.5 16.7 22.7 0.9 Sasa 178 HK HK Cosmetics 40% 100 80 N-R 1,270 26.6 21.1 25.7 1.0 Chow Sang Sang 116 HK HK Jewellery Yes 100 100 N-R 1,224 16.3 13.6 19.3 0.8 Trinity 891 HK HK Apparel 54% 100 90 N-R 1,137 26.8 20.5 30.3 0.9 Ports Design 589 HK HK Apparel Yes 93 100 BUY 1,211 18.0 15.2 18.6 1.0 I.T 999 HK HK Apparel 50% 100 100 N-R 725 21.3 17.3 22.6 0.9 Emperor W&J 887 HK HK Watches & jewellery 14% 100 100 N-R 640 15.3 10.6 43.4 0.4 Evergreen 238 HK HK Apparel Yes 100 75 BUY 512 20.3 15.1 34.4 0.6 Oriental Watch 398 HK HK Watches No 100 100 N-R 199 12.8 17.2 (25.6) (0.5) HK Resources (3D Gold) 2882 HK HK Jewellery Yes 100 100 N-R 182 na na na na Average 22.2 18.4 21.5 1.0 Notes LVMH to Greater Chinese customers 18% LV to Greater Chinese customers is 22% with 11% in China and 11% overseas Gucci brand 10% for mainland and 8% in HK etc so 18% for Greater China Richemont is 8% on mainland and 14% in HK etc for 22% in total for Greater China Bulgari is 8% for mainland plus 6% for HK for a total of 14% Source: Bloomberg, CLSA Asia-Pacific Markets
82 [email protected] 19 January 2011
Appendix Luxury goods
Appendix: International peer group LVMH 1H10 sales breakdown by geography and segment
Other Leading luxury-goods giant holding a portfolio of more markets France than 60 prestigious brands in wines and spirits, fashion 9% 14% and leather goods, cosmetics, watches and jewellery, and retailing. Rest of Brands include Moët & Chandon, Dom Pérignon, Rest of Asia Europe Hennessy, Louis Vuitton, Fendi, Donna Karan, Loewe, 26% Marc Jacobs, Céline, Kenzo, Givenchy, Christian Dior, 19% Guerlain, TAG Heuer, Hublot, Zenith, DFS, Sephora, and many others. We estimate that Louis Vuitton contributes to 55% of group Ebit. Japan United 9% Watches and jewellery is the fastest-growing segment at States 22% organic growth for 9MFY10, although the segment 23% currently only contributes to about 5% of group sales. Wines and This is followed by wines and spirits and fashion and Selective spirits leather goods at 17% and 14%, respectively. retailing 14% As at June 2010, LVMH had a network of 2,468 stores 27% worldwide. Europe and Asia each accounts for 33-35% of Watches and sales. We understand that the Chinese represent about jewellery 22% of sales for the Louis Vuitton brand, which is 11% 5% domestic with 35 stores in the mainland and 11% Fashion overseas. This is matching the Japanese for the first time Perfumes and leather this year as the co-No. 1 client base. and goods LVMH also holds 20.2% of Hermes, but the company said cosmetics 38% it is not seeking control or a seat on the Hermes board. 16%
Richemont 1H11 sales breakdown by geography and segment
Other France Richemont owns a number of luxury names including Americas 9% Switzerland Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, 4% 4% Jaeger-LeCoultre, IWC, Panerai and Montblanc. USA 11% Germany, Richemont is a direct luxury play, with watches and Italy and jewellery accounting for 74% of sales. Watches contribute Spain to more than half of sales. Other Asia 13% 9% Hong Kong is the largest single market worldwide for Other Europe Richemont. China and Hong Kong account for 22% of Japan 17% sales. We estimate that exposure to mainland China is at 11% 8%. China/ Hong Kong As at September 2010, Richemont had 855 directly 22% operated outlets. The company also runs the luxury online shop NET-A-PORTER.COM. Clothing & other Some 47% of revenue comes from retail. 13% Writing instruments 5% Watches Leather 51% goods 8%
Jewellery 23%
Source: Company data, Cheuvreux, CLSA Asia-Pacific Markets
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Hermes 1H10 sales breakdown by geography and segment
Other Hermes is known for its top-notch craftsmanship. Its Americas 2% France Birkin and Kelly bags and high-quality silk scarves, in 18% particular, are hot items for ladies around the world. 15% Asia accounts for 46% of the sales with Japan at 19%, while Europe is at 37%. We estimate that exposure to mainland China is at 6% and Greater China is at 11%. Rest of Rest of Europe More than 50% of revenue comes from its highly- Asia Pacific 19% regarded leather goods. 27% As of December 2009, the company had 325 retail outlets, of which 304 are exclusive Hermes stores. There are 16 Japan stores in China, eight in Hong Kong, seven in Taiwan and 19% four in Macau. Tableware Other LVMH holds 20.2% of Hermes, but the company said it is 2% 4% not seeking control or a seat on the Hermes board. Some Watches Hermes family members proposed setting up a holding 4% Silk and company to bolster defense. The proposed holding Perfumes textiles company should have 50.2% of Hermes share and at least 6% 11% as many voting rights, coupled with the first right of Other refusal on another 12.6% of shares. However, it was Hermes reported that some family members opted against this sectors proposal. 3% Ready-to- wear and Leather fashion goods and accessories saddlery 19% 51%
Source: Company data, Bloomberg, Cheuvreux, CLSA Asia-Pacific Markets
Bulgari 1H10 sales breakdown by geography and segment
Other Bulgari is an Italian luxury company focusing on watch, Middle East 2% Italy jewellery, and perfumes and cosmetics. Together, these 5% 11% three segments contribute to 89% of sales. Jewellery accounts for the largest portion at 46%.
Asia accounts for 45% of the sales for Bulgari with Japan Rest of Asia Rest of at 18%, while Europe is at 34%. We estimate that 27% Europe exposure to mainland China is at 8% and Greater China is 23% at 14%. As of December 2009, the company had 273 stores, of which 166 are company-owned. Japan America 18% 14%
Hotel and Royalties and catering other activities 1% 2%
Accessories 8% Jewellery 46% Perfumes and cosmetics Watches 23% 20%
Source: Company data, Cheuvreux, CLSA Asia-Pacific Markets
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Appendix Luxury goods
PPR 1H10 sales breakdown by geography and segment
Yves Saint Other brands PPR holds a portfolio of luxury brands but also a number Laurent 3% of retailers in home furnishings and computers and books. 1% Its core luxury brand Gucci accounts for 15% of group Bottega revenue. Gucci Group, which includes, Gucci, Bottega Veneta Veneta, Yves Saint Laurent, and other brands, contribute 3% Fnac to 22% of sales. 24% Gucci The other major businesses include sports brand Puma, Division PUMA diversified retailer Fnac and home-furnishing retailers 15% 16% Redcats Redcats and Conforma. 21% PPR generates 66% of sales from Western Europe, but for the luxury Gucci Group, the breakdown shifts towards Conforama Asia. 17%
For Gucci Group, Western Europe leads at 33%, followed Asia Pacific South by Asia ex-Japan at 31% and North America at 18%. (excl. Japan) America 3% Japan contributes to 13% of Gucci Group sales. We 9% estimate that Gucci brand’s exposure to mainland China is at 10% and Greater China is at 18%. EEMEA 4%
Gucci Group had 639 directly operated stores at June Japan 5% 2010, of which 190 are in Japan.
North Western America 14% Europe 65%
Tod’s 1H10 sales breakdown by geography and segment
Tod’s generates 52% of sales from its core Tod’s brand. The second key brand is Hogan, which sells premium shoes and bags. FAY generates 9.1% and the remaining Rest of world 2.5% comes from Roger Vivier. 18%
Some 75% of sales comes from shoes and 15% from North leather goods. America 7% Italy is the dominant revenue source, contributing to 54% Italy of sales. Europe 54% 21% As of June 2010, the company had a portfolio of 222 stores, of which 151 are directly owned. The company has 24 stores in China, 14 in Taiwan, nine in Hong Kong and two in Macau. We estimate that exposure to mainland China is at 2% and Greater China is at 3%.
Apparel 10% Leather goods 15%
Shoes 75%
Source: Company data, CLSA Asia-Pacific Markets
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Appendix Luxury goods
Burberry FY09/10 sales breakdown by geography and segment
Rest of World Renowned for its trench coats and British origin, Burberry 5% generates 35% of sales from Europe and 24% from Asia Pacific. Asia Pacific 24% The company generates a greater share of sales from Europe apparel at 64% compared with other luxury peers that 35% tend to focus more on leather goods or hard luxury items. The company amended its apparel license with Sanyo Shokai and Mitsui in Japan in October 2009. The license now ends in June 2015, which was previously at 2020. Spain With better controls on production, inventory and Americas 9% distribution, the company expects profits from licensing to 27% step up going forward. In China, the company recently acquired 50 franchise Childrens stores. 5% As at June 2010, Burberry had 207 stores in Asia Pacific and 420 globally (excluding Spain which is undergoing Womenswear restructuring). Non-apparel 35% 36%
Menswear 24%
Coach FY09/10 sales breakdown by geography and segment
Coach’s business primarily comes from the US and Japan. Other About 70% of Coach’s sales comes from the US and 20% international from Japan. 10% However, the company has made several senior appointments and aims to quickly expand in China. Japan Including Hong Kong and Macau, Coach has 41 stores in 20% China. United The company holds 342 retail stores and 121 factory States outlets in North America. 70% Coach also runs an indirect channel (13% of sales) with a network of about 940 wholesale locations in the US and 182 international outlets. All other Handbags are the key product line for Coach. products 9%
Accessories 28% Handbags 63%
Source: Company data, CLSA Asia-Pacific Markets
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Appendix Luxury goods
Tiffany FY09 sales breakdown by geography and segment
Other Tiffany is a US-based luxury company famous for its Europe 1% elegant jewellery design and its signature blue box. 12% The company generates 52% of sales from the US, with 9% coming from its New York flagship store. Its branch stores in the US contribute to 32% of revenue, with the Japan rest from Canada, Latin America, internet and catalogue, 19% Americas and B2B. 52% According to its 1H10 interim report, Tiffany has invested in and operates more than 20 stores in Hong Kong, Macau, and mainland China. Asia Pacific 16% Globally, the firm generates 31% of revenue from sterling silver jewellery, 27% from gemstone jewellery excluding engagement jewellery, and 21% from diamond Gemstone rings/wedding bands. jewellery and All other band rings, In Asia Pacific, the sales breakdown is tilted towards the 9% excl. Non- higher-priced gemstone jewellery, with 31% each in engagement gemstone, engagement and other gemstone jewellery. jewellery sterling silver 27% jewellery 31%
Non- Diamond gemstone, rings and gold or wedding platinum bands jewellery 21% 12%
Swatch 1H10 sales by segment and Swiss watch exports data
Electronic Swatch owns a number of watch brands with a wide range Systems of price points, including Breguet, Blancpain, Glashütte 6% Original, Jaquet Droz, Léon Hatot, Omega, Longines, Rado, Tissot and Swatch. Production Swatch has also formed a strategic alliance with luxury 22% jewellery brand Tiffany. In the mass market, the company is known for its fashionable design branded under the Swatch name. Watches & Jewellery The company is a key player in the watch industry. We 72% estimate that sales exposure to Greater China at 28% and mainland China at 15%, in line with the Swiss watch exports data. Hong Kong 19% Hong Kong/ China together is 26%
United Others Kingdom 31% China 4% 7%
Germany USA 5% 10% Japan France 5% 7% Singapore Italy 6% 6%
Source: Company data, CLSA Asia-Pacific Markets
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© 2011 CLSA Asia-Pacific Markets ("CLSA"). Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends). 01/01/2011