stock code:3368 Parkson Retail Group Limited Parkson Retail Group Limited ϛଞਆพඑ྆τࠉʔ̇ $118$/5(3257ααం 22006006 ANNUAL REPORT CContentsontents CCorporateorporate PProfirofi llee 0011 Corporate Information 03 Milestones For The Year 04 CChairman’shairman’s StatementStatement 0055 MManaginganaging DDirector’sirector’s SStatementtatement 0077 Financial Highlights 11 Management Discussion And Analysis 13 Biographies Of Directors And Senior Management 27 CCorporateorporate GGovernanceovernance RReporteport 3322 Directors’ Report 37 Independent Auditors’ Report 61 Parkson Annual Report 2006 02 CCorporateorporate Profi le Parkson Retail Group Limited, one of the premier foreign-owned retailers in the People’s Republic of China ( the “PRC” ). The Company and its subsidiaries, jointly-controlled entities and associate ( hereinafter collectively refer to as the “Group” ) owns and manages 36 “Parkson” branded department stores and 2 “Xtra” branded supercentres in prime locations in 26 major cities in the PRC including Beijing and Shanghai. 01 Parkson Annual Report 2006 The Group positioned itself at the middle to middle-upper end of the department store sector, offers a wide range of internationally renowned brands of consumer merchandise which can be broadly categorised into 4 categories, namely “fashion and apparel”, “cosmetics and accessories”, “household, electrical goods and others” and “groceries and perishables”. The Group’s main focus is on fashion and lifestyle products, in particular the ladies’ fashion and cosmetics targeting the young and contemporary markets. Parkson Annual Report 2006 02 Corporate Information BOARD OF DIRECTORS EXECUTIVE DIRECTORS REGISTERED OFFICE REMUNERATION COMMITTEE CHENG YOONG CHOONG C/O M&C CORPORATE SERVICES LIMITED CHENG YOONG CHOONG ( CHAIRMAN ) MANAGING DIRECTOR PO BOX 309GT KO TAK FAI, DESMOND YAU MING KIM, ROBERT CHEW FOOK SENG UGLAND HOUSE CHIEF EXECUTIVE OFFICER SOUTH CHURCH STREET GEORGE TOWN GRAND CAYMAN CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND NON-EXECUTIVE DIRECTOR TRANSFER OFFICE TAN SRI CHENG HENG JEM BUTTERFIELD FUND SERVICES ( CAYMAN ) LIMITED CHAIRMAN HEAD OFFICE AND BUTTERFIELD HOUSE PRINCIPAL PLACE OF BUSINESS 68 FORT STREET P.O. BOX 705, GEORGE TOWN INDEPENDENT 9TH FLOOR PARKSON PLAZA GRAND CAYMAN, CAYMAN ISLANDS No.101 FUXINGMENNEI AVENUE BRITISH WEST INDIES NON-EXECUTIVE DIRETORS XICHENG DISTRICT STUDER, WERNER JOSEF BEIJING 100031 KO TAK FAI, DESMOND PRC YAU MING KIM, ROBERT HONG KONG BRANCH SHARE REGISTRAR AND PRINCIPAL PLACE OF BUSINESS IN TRANSFER OFFICE HONG KONG TRICOR INVESTOR SERVICES LIMITED 26TH FLOOR TESBURY CENTRE SUITE 1316 PRINCE’S BUILDING 28 QUEEN’S ROAD EAST 10 CHATER ROAD WANCHAI CENTRAL HONG KONG HONG KONG COMPANY SECRETARY PRINCIPAL BANKERS IN THE PRC BANK OF CHINA SENG SZE KA MEE, NATALIA AGRICULTURAL BANK OF CHINA FCIS, FCS, FHKIoD, EMBA INDUSTRIAL AND COMMERCIAL BANK OF CHINA CHINA MERCHANTS BANK JPMORGAN CHASE BANK SHANGHAI BRANCH QUALIFIED ACCOUNTANT WONG KANG YEAN, CLARENCE ACCA, CA ( MIA ) PRINCIPAL BANKERS IN HONG KONG BNP PARIBAS HONG KONG BRANCH STANDARD CHARTERED BANK AUTHORISED REPRESENTATIVES ( HONG KONG ) LIMITED THE HONG KONG AND SHANGHAI CHENG YOONG CHOONG BANKING CORPORATION LIMITED CHEW FOOK SENG UNITED COMMERCIAL BANK COMPLIANCE ADVISER AUDITORS BNP PARIBAS PEREGRINE CAPITAL LIMITED ERNST & YOUNG CERTIFIED PUBLIC ACCOUNTANTS AUDIT COMMITTEE KO TAK FAI, DESMOND ( CHAIRMAN ) LEGAL ADVISORS STUDER WERNER JOSEF SIMMONS & SIMMONS YAU MING KIM, ROBERT WEBSITE ADDRESS www.parkson.com.cn 03 Parkson Annual Report 2006 Milestones For The Year Completed the acquisition of the minority interest in 6 Parkson branded department stores. Completed the acquisition of the 100% ownership of two Parkson branded managed stores in Kunming . Completed the issuance of 5-years US$200 million high yield bond. Voted the Best Asian Bond by Euroweek. Voted the Best Asian Corporate Bond by Euroweek. Signed 5 new lease agreements for a total additional floor space of approximately 120,000 square meters. Parkson Annual Report 2006 04 CChairman’shairman’s SStatementtatement Introduction The year 2006 was another very successful year for the Group. We reported an impressive set of result with the total operating revenues increased by 79.8% to Renminbi ( the “RMB” ) 2,184.0 million and the profi t attributable to our shareholders increased by 85.8% to RMB460.8 million. Earning per share rose 50.9% to RMB0.83. On the back of this successful result, the Board of Directors recommended payment of a fi nal dividend per share of RMB0.27. Together with the interim dividend per share of RMB0.15 declared and paid in the month of August 2006, the full year dividend would amount to RMB0.42 per share or a dividend distribution ratio of 50.3%. Market Overview The People’s Republic of China ( the “PRC” ) economy surged to become the world’s fourth-largest economy on the back of decades of solid growth. The economy continued its remarkable growth for the year 2006. As reported by the National Bureau of Statistic of China the Gross Domestic Product ( the “GDP” ) expanded by approximately 10.7% to reach RMB20.9 trillion, led by the strong growth in export, fi xed asset investment and domestic consumption. Decades of solid economic growth has led to strong emergence of middle class, rising disposable income of the PRC consumers and the booming domestic consumption market. Supported by these positive factors, the retail industry expanded solidly by 13.7% in the year 2006 to top RMB7.6 trillion, making the TAN SRI CHENG HENG JEM PRC one of the biggest and fastest growing retail CHAIRMAN markets in the world. The department store sector is believed to have approximately 10% share of the total retail industry, giving us a staggering market size of approximately RMB760 billion. 05 Parkson Annual Report 2006 Looking Forward Going forward, at macro level the PRC economy On behalf of the Board, I would like to express my will continue its strong and solid growth despite gratitude to our workforce for their hard work and uncertainties in the oil price and the world economy. dedication, my sincere appreciation to our valued Amid the central government’s continuing efforts to customers, shareholders and business associates for their rebalance the economic growth away from fi xed asset continuing supports. Last but not least, my sincere thanks investment and export towards domestic consumption, to the members of the Board of Directors and the senior the strengthening of the RMB and more importantly the management for their contribution and devotion to the accelerating growth of disposable income, the retail Group. industry is poised to be the main driving force of the TAN SRI CHENG HENG JEM future economic growth. CHAIRMAN 26 FEBRUARY 2007 The strong brand equity of Parkson among the middle to middle upper end consumers in the PRC market will ensure that the Group continues to capitalize on the expansion of the retail industry. The liberalization of the foreign ownership in the retail industry and the emergence of various retails formats have brought along increased competition in the retail market. However, the department store sector particularly the lifestyle and fashion orientated department store will continue to be the preferred format of shopping among the increasingly affl uent Chinese consumer. The Group will remain fi rmly focus in the department store sector and with our proven business model, dedicated workforce and healthy fi nancial position, we are confi dent that we will continue to enhance our leadership position in the market and diligently execute our carefully developed expansion plans. Parkson Annual Report 2006 06 Managing Director’s Statement The PRC economy continued its remarkable growth for the year 2006. In line with the strong economic growth and the booming domestic consumption market, the Group made further progresses during the year. The Group achieved a strong double digit Same Store Sales ( the “SSS” ) growth of approximately 17.1% for the year under review. The impressive SSS growth was made possible through attractive promotional activities to increase the traffi c fl ow and our philosophy of innovation by continuously varying our merchandise mix and brand mix to accurately target our intended customers. CHENG YOONG CHOONG MANAGING DIRECTOR 07 Parkson Annual Report 2006 As disposable income growth in the PRC is driving the consumption for more upscale branded merchandise, we see opportunities to bring distinctive fashion and affordable luxury brands to our customers. Last year we introduced the likes of ”Aquascutum”, “Armani Collezioni”, “Cartier”, “Dunhill”, “Hugo Boss” and “Lancel” brands to our Beijing and Shanghai fl agship stores. Besides maintaining a strong SSS growth, the Group continues to execute earning accretive and strategic acquisitions to further expand our business The Group further consolidated our position as one of and enhance the earning for our shareholders. The the leading department store operators in the PRC by Group acquired in the month of July last year, the signing fi ve new lease arrangements throughout the minority interest of six Parkson branded department year to add a total of approximately 120,000 square stores through the successful acquisition of the meters of retailing space to our existing portfolio. The remaining 44% equity interest not already owned Group targets to roll out all the fi ve new stores in the in Parkson Retail Development Co., Ltd ( the “44% year 2007. Beijing Parkson” ). The acquisition has immediately enhanced the profi tability of the Group and allowed the Group greater fl exibility in the implementation of In November 2006, the Group issued a 5-years Beijing Parkson’s business expansion plan. US$200 million High Yield Notes ( the “High Yield Notes” ) that carry an annual coupon of 7.875%. The gross proceeds from the High Yield Notes The Group acquired a 100% ownership of the was used to subscribe for a Credit Link Note ( the two Parkson branded managed stores in Kunming, “CLN” ) issued by JPMorgan Chase Bank N.A., ( the “Kunming Stores” ) in the month of November London Branch, and simultaneously JPMorgan Chase last year.