Luxury "red bull" - French Chamber of Commerce and Industry in ...

Consumer Brands & Retail – Equity 

September 2012 

Luxury “red bull”: a sequel 

Chinese shoppers: more excitement, extra headaches 

In the three years since our first Red bull report, China’s consumers have become a far more 

important part of the story than the luxury brands ever imagined – perhaps too important 

Two other things have changed. These shoppers have become more sophisticated and 

discriminating, which means some established brands may lose market share (we call this 

“first-mover disadvantage”). They now also make more than half of their luxury purchases 

abroad, putting pressure on the brands’ Chinese operations 

We remain in a stock picking mode and prefer Coach, PPR, Prada, Swatch, and Ferragamo. 

We downgrade LVMH to N (from OW) and upgrade Hermès to N (from UW). We remain OW(V) 

on Hengdeli despite lowering our target price significantly 

By Erwan Rambourg, Antoine Belge and Sophie Dargnies 

Disclosures and Disclaimer This report must be read with the disclosures and analyst 

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Consumer Brands & Retail 

Global luxury goods 


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Contents 

Summary 1 

Calendar of events 4 

Valuation and ratings 5 

China to remain the dominant 

influence 11 

Sophistication, travel and 

overdependence 18 

Company profiles 33 

Burberry 34 

Christian Dior 38 

Coach 42 

Ferragamo 46 

Hengdeli Holdings 50 

Hermès 54 

Hugo Boss 58 

Luxottica 62 

LVMH 66 

PPR 70 

Prada 74 

Richemont 78 

Swatch 82 

Tiffany 86 

Tod’s 90 

Disclosure appendix 97 

Disclaimer 100 

Key data - Luxury goods stocks ratings and target prices 

Stock Ticker New rating Old rating Curr Sh price 

(at 27/08/12) 

New target 

price 

Old target 

price 

Potential 

return 

PE 2011 PE 2012e PE 2013e 

Hengdeli 3389.HK OW(V) unchanged HKD 2.17 3.20 4.10 47.5% 10.7 10.2 11.0 

Coach* COH.N OW(V) OW USD 55.92 79.00 88.00 41.3% 17.3 15.3 13.7 

The Swatch Group UHR.VX OW unchanged CHF 401.80 500.00 500.00 24.4% 17.1 14.1 12.7 

PPR PRTP.PA OW unchanged EUR 126.35 156.00 150.00 23.5% 15.1 12.8 10.8 

Ferragamo SFER.MI OW(V) unchanged EUR 17.38 21.00 18.00 20.8% 36.0 26.3 17.6 

Prada 1913.HK OW(V) unchanged HKD 59.15 71.00 62.00 20.0% 35.7 23.4 18.6 

Christian Dior DIOR.PA OW unchanged EUR 117.00 140.00 139.00 19.7% 15.4 12.2 10.8 

Hugo Boss BOSSn.DE Neutral (V) unchanged EUR 74.99 84.00 88.00 12.0% 18.2 15.8 13.8 

Richemont (*) CFR.VX Neutral unchanged CHF 59.95 67.00 62.00 11.8% 20.7 15.4 14.0 

Hermès HRMS.PA Neutral UW EUR 220.65 245.00 272.00 11.0% 39.0 33.0 29.5 

Burberry* BRBY.L Neutral (V) Neutral GBP(p) 1360.00 1500.00 1550.00 10.3% 23.3 19.5 16.9 

Tiffany TIF.N Neutral (V) Neutral USD 62.71 69.00 69.00 10.0% 17.4 17.4 14.7 

LVMH LVMH.PA Neutral OW EUR 133.50 145.00 145.00 8.6% 21.4 17.7 15.8 

Tod's TOD.MI Neutral unchanged EUR 84.50 90.00 81.00 6.5% 19.2 17.0 15.3 

Luxottica LUX.MI Neutral unchanged EUR 28.91 30.50 28.50 5.5% 26.6 21.9 18.2 

Average 21.0 17.1 14.6 

Source: HSBC estimates, Company data *based on calendar data Potential returns equal the difference between the current share price and the target price, including the forecast dividend yield when indicated




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Summary 

Luxury brands have enjoyed great success in China over recent years, 

but the way in which Chinese consumers are evolving suggests the 

ride may not be as smooth going forward. Chinese consumers’ 

increasing sophistication and overseas shopping sprees pose 

challenges to megabrands, while the sector’s dependence on the 

Chinese raises questions on concentration risk and valuations. 

China, China, China. Before you start rolling your eyes, this is not another report extolling the growth 

prospects for Chinese luxury consumption, but one that highlights the fact that the dynamics driving this 

space have well and truly changed. What we thought was set in stone three years ago – the dominance of 

mainstream megabrands and their tireless store expansion – can no longer be taken for granted. Chinese 

consumer behaviour has evolved at a surprisingly rapid pace and this poses challenges to the megabrands. 

China set to continue dominating for years to come … 

China: from dream to reality. How things have changed. In the late 1990s, the luxury industry (and 

we were part of it back then) coveted China but had barely scratched the surface of its potential. 

Today, Chinese consumption dominates the sector’s global sales. In the three years since we 

published the first Red bull report, sales to Chinese consumers domestically and abroad have 

expanded from 10% to fully 25% of the sector’s total revenues, exceeding what most luxury goods 

CEOs had dared hope for. In our opinion, the real debate now is not so much about China as the 

Chinese, especially as they now do most of their luxury shopping abroad. 

Positive long-term social / cultural drivers. Although we have already seen strong multi-year 

growth, we think there is more to come from China, supported by social trends, “the urge to splurge”, 

brand obsession, and the trading-up phenomenon. Luxury goods are often considered by Western 

investors as purely discretionary; we believe this viewpoint underplays the powerful social / cultural 

forces driving luxury consumption in China. 

Penetration remains limited. Is China the next Japan? Is the mainland luxury sector approaching 

maturity? These are frequently voiced concerns and we reiterate in this report that we do not think China’s 

luxury sector is even close to being mature. With a diversified consumer base, a still limited retail footprint 

and wage inflation driving a gradual expansion of the middle class, China remains above all a market 

where brands are recruiting customers rather than serving repeat ones. 

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…but sophistication, travel and China dependence are risks 

Rapidly changing consumer behaviour. Long gone are the days of one-brand-suits-all fashion in China. 

As Chinese consumers become better informed and more demanding, they are moving away from logo 

products, and looking for more differentiated designs that show they are “in the know”. Of course, firstmovers 

– like Louis Vuitton and Omega – are still recruiting customers, but in our view they now carry a 

first-mover disadvantage as Chinese consumers tire of logo fashion and seek more differentiated looks. 

Indeed, the pace at which Chinese consumer behaviour is evolving has been faster than we expected and is 

the reason why we now think the megabrands could lose market share. 

Social / political risks. Corporate gifting has been a key driver of luxury demand in China and is the 

primary reason why the luxury market in China is the only male-driven one in the world. With challenging 

economic conditions, high profile graft cases and rising social tension driven by China’s growing wealth 

divide, there is a risk that corporate gifting may suffer as the Chinese government clamps down on 

conspicuous consumption and gets tough on corruption. Changing cultural values may also pose a risk, as 

social practices of wealthy men taking mistresses appear to be on the wane. Moreover, the Chinese 

authorities have not made it easy for consumers to purchase imported luxury brands (import duties, 

consumption tax) and it is uncertain whether this will change any time soon. 

Why overseas shopping sprees will continue and why this could become an issue. There are many 

good reasons why Chinese nationals are purchasing more luxury items abroad. It is not just that goods are 

cheaper overseas, travelling has become easier for Chinese nationals, service increasingly matters to them, 

and there is a cachet to purchasing items abroad. In one section of this report, we focus on how 

theoretically Taiwan could become the next Hong Kong for the luxury industry, opening up sizeable 

opportunities for brands. But there are risks associated with this trend of overseas shopping sprees, not 

least that the brand’s retail footprint in the mainland could become a series of showrooms for local 

consumers that will ultimately make their purchases elsewhere. In addition, if brands close the China- 

Europe price gap, then this could alienate European consumers and squeeze gross margins. 

The threat of overdependence. You can have too much of a good thing. As the luxury sector has become 

highly dependent on the Chinese consumer, this poses a problem for brand managers and valuations: how 

much should you pay for companies that are placing most of their eggs in one basket? 

Key changes 

Changes in ratings. The key rating change is for LVMH, which we downgrade from OW to N with an 

unchanged target price of EUR145 after a strong run. This downgrade is consistent with our view that as 

Chinese consumers become more sophisticated, leading brands like Louis Vuitton will lose share (three 

years back we thought exactly the reverse). That said, we have retained an OW rating on Christian Dior 

as we believe the discount to RNAV remains attractive (28%) and we have upgraded Hermès (from UW to 

N) following the stock’s steep de-rating over the past few months. 

Conviction stocks. We see limited upside in most luxury stocks but retain conviction OW ratings on 

Coach (TP USD79), PPR (TP EUR146), Prada (TP HKD70), Swatch (TP CHF500), and Ferragamo 

(TP EUR21). While we remain OW (V) on Hengdeli, we have cut its target price from HKD4.10 to 

HKD3.20 to reflect the increasing level of Chinese luxury consumption taking place outside of China. 

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Summary of HSBC sales estimate changes and comparison with Bloomberg consensus 

_______________ 2012e Sales______________ ______________ 2013e Sales __________________ 

______ HSBC _______ HSBC vs _____ HSBC ______ HSBC vs 

(m) Curr. New Old Chg. Cons. consensus New Old Chg. Cons. consensus 

Burberry* GBP 2,110 2,100 0% 2,088 1% 2,366 2,335 1% 2,355 0% 

Christian Dior EUR 29,604 29,168 1% 28,569 4% 32,604 31,785 3% 31,048 5% 

Coach** USD 5,215 5,500 -5% 5,308 -2% 5,829 6,150 -5% 5,854 0% 

Ferragamo EUR 1,200 1,170 3% 1,149 4% 1,380 1,300 6% 1,265 9% 

Hengdeli CNY 11,990 12,969 -8% 12,473 -4% 13,007 15,141 -14% 14,293 -9% 

Hermès EUR 3,373 3,300 2% 3,323 2% 3,750 3,628 3% 3,671 2% 

Hugo Boss EUR 2,330 2,300 1% 2,303 1% 2,520 2,500 1% 2,504 1% 

Luxottica EUR 7,180 7,084 1% 7,074 1% 7,843 7,689 2% 7,600 3% 

LVMH EUR 28,370 28,000 1% 28,087 1% 31,210 30,500 2% 30,453 2% 

PPR EUR 13,807 13,525 2% 13,694 1% 14,822 14,410 3% 14,624 1% 

Prada EUR 3,351 3,256 3% 3,167 6% 3,865 3,656 6% 3,731 4% 

Richemont* EUR 10,250 9,600 7% 10,248 0% 10,925 10,275 6% 11,097 -2% 

The Swatch Group CHF 7,770 7,700 1% 7,706 1% 8,420 8,350 1% 8,390 0% 

Tiffany USD 3,800 3,760 1% 3,867 -2% 4,100 4,120 0% 4,201 -2% 

Tod's EUR 975 953 2% 966 1% 1,060 1,020 4% 1,052 1% 

* FY March n+1; ** FY June n+1 Source: HSBC estimates, Bloomberg consensus 

Summary of HSBC EBIT estimate changes and comparison with Bloomberg consensus 

________________ 2012e EBIT _____________ 

_______________ 2013e EBIT __________________ 

______ HSBC _______ HSBC vs _____ HSBC_______ HSBC vs 


Burberry* GBP 435 436 0% 428 2% 496 495 0% 495 0% 

Christian Dior EUR 6,381 6,493 -2% 6,134 4% 7,301 7,291 0% 7,080 3% 

Coach** USD 1,633 1,853 -12% 1,662 -2% 1,865 2,144 -13% 1,876 -1% 

Ferragamo EUR 207 200 4% 195 6% 260 235 11% 236 10% 

Hengdeli CNY 1,203 1,403 -14% 1,320 -9% 1,268 1,614 -21% 1,510 -16% 

Hermès EUR 1,050 1,023 3% 1,014 4% 1,173 1,143 3% 1,140 3% 

Hugo Boss EUR 451 466 -3% 444 2% 504 524 -4% 499 1% 

Luxottica EUR 990 990 0% 973 2% 1,170 1,120 4% 1,108 6% 

LVMH EUR 6,245 6,370 -2% 6,027 4% 7,127 7,137 0% 6,621 8% 

PPR EUR 1,870 1,880 -1% 1,824 3% 2,193 2,160 2% 2,079 5% 

Prada EUR 918 900 2% 813 13% 1,137 1,068 6% 990 15% 

Richemont* EUR 2,296 1,977 16% 2,330 -1% 2,389 2,176 10% 2,454 -3% 

The Swatch Group CHF 1,936 1,900 2% 1,877 3% 2,151 2,115 2% 2,103 2% 

Tiffany USD 755 748 1% 762 -1% 854 855 0% 858 -1% 

Tod's EUR 215 208 3% 209 3% 237 225 5% 231 3% 

* FY March n+1; ** FY June n+1 Source: HSBC estimates, Bloomberg consensus 

Summary of HSBC EPS estimate changes and comparison with Bloomberg consensus 

_______________ 2012e EPS ______________ 

________________2013e EPS __________________ 

______ HSBC _______ HSBC vs _____ HSBC ______ HSBC vs 


Burberry* GBP 72.30 72.46 0% 71.40 1% 83.14 82.98 0% 82.00 1% 

Christian Dior EUR 9.58 9.65 -1% 8.21 17% 10.82 10.88 -1% 9.42 15% 

Coach** USD 3.78 4.29 -12% 3.85 -2% 4.36 5.00 -13% 4.45 -2% 

Ferragamo EUR 0.66 0.67 -1% 0.62 6% 0.99 0.95 4% 0.84 17% 

Hengdeli CNY 0.17 0.18 -3% 0.19 -6% 0.16 0.21 -23% 0.21 -23% 

Hermès EUR 6.69 6.62 1% 6.33 6% 7.48 7.41 1% 7.17 4% 

Hugo Boss EUR 4.74 4.93 -4% 4.65 2% 5.42 5.63 -4% 5.25 3% 

Luxottica**** EUR 1.32 1.35 -2% 1.25 6% 1.59 1.55 3% 1.43 11% 

LVMH EUR 7.56 7.71 -2% 7.31 3% 8.43 8.61 -2% 8.17 3% 

PPR*** EUR 9.84 10.33 -5% 9.48 4% 11.72 12.20 -4% 11.07 6% 

Prada EUR 0.26 0.25 4% 0.23 13% 0.33 0.31 5% 0.28 17% 

Richemont* EUR 3.45 2.94 17% 3.31 4% 3.60 3.24 11% 3.73 -4% 

The Swatch Group CHF 28.47 27.95 2% 27.36 4% 31.74 31.21 2% 30.34 5% 

Tiffany USD 3.61 3.74 -4% 3.67 -2% 4.28 4.39 -3% 4.19 2% 

Tod's EUR 4.97 4.63 7% 4.84 3% 5.53 5.03 10% 5.40 2% 

* FY March n+1; ** FY June n+1; *** HSBC EPS for PPR include discontinued business **** HSBC EPS for Luxottica is before trade-mark amortisation Source: HSBC estimates, Bloomberg consensus 

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Calendar of events 

Luxury goods calendar of events 

Company Type of Event Date 

Burberry H1 2012/2013 sales 11-Oct-12 

Burberry H1 2012/2013 results 07-Nov-12 

Christian Dior Q3 2012 sales No specific date forecasted 

Coach Q1 2013 results 30-Oct-12 

Ferragamo Q3 2012 results 13-Nov-12 

Hermès Q3 2012 sales No specific date forecasted 

Hugo Boss Q3 2012 results 30-Oct-12 

Luxottica Q3 2012 results 25-Oct-12 

LVMH Q3 2012 sales No specific date forecasted 

PPR Q3 2012 sales 25-Oct-12 

Prada Q2 H1 2012 results 24-Sep-12 

Prada Q3 2012 results 06-Dec-12 

Richemont 5 month sales /AGM 05-Sep-12 

Richemont H1 2012/2013 results 09-Nov-12 

Tiffany Q3 2012 results 29-Nov-12 

Tod's Q3 2012 results 13-Nov-12 

FHS Data August 2012 period 20-Sep-12 

FHS Data September / 9M 2012 period 18-Oct-12 

FHS Data October 2012 period 20-Nov-12 

FHS Data November 2012 period 20-Dec-12 

FHS Data December / FY 2012 period 04-Feb-13 

Source: Company data 

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Valuation and ratings 

We downgrade LVMH to N (from OW) following its strong run and 

upgrade Hermès to N (from UW) 

We retain OW ratings on Coach, PPR, Prada, Swatch, 

Ferragamo, Dior, and Hengdeli 

We remain focused on stock picking and highlight four themes to 

monitor over the next 12 months 

Ratings changes 

The most important rating change in this report is for 

LVMH, which we have downgraded from OW to N 

with no change in the EUR145 target price, after a 

strong run. 

We have been OW on LVMH since June 2012, 

despite evidence that Louis Vuitton (the core EBIT 

contributor for the group) would structurally lose 

market share to competition, if only for scale 

reasons, as we thought the shares were undervalued 

after losing 18% from its 2012 peak. Louis 

Vuitton’s first-mover disadvantage became more 

visible in 2Q, as growth remained decent but slower 

than for its peers and investments in the brand 

started to weigh on the group’s profitability. Whist 

lower estimates in fashion and leather have been 

broadly compensated for by positive forex effects 

(i.e. a weaker EUR), our target price does not imply 

a sufficient potential return to maintain an 

OW rating. 

In addition, we have upgraded our rating for 

Hermès from UW to N following the stock’s poor 

run; though we remind investors that the stock does 

not trade on fundamentals. 

Other luxury ratings 

Overweight ratings 

Our highest conviction calls are: 

Prada (OW V): the strongest fundamental story 

in the space, in our view, but valuation limits the 

potential return after a strong run 

Coach (OW V): we believe the market 

overreacted to 4Q results. Much of the damage 

was self-inflicted and as such should be 

temporary. In addition, we think the men’s and 

Asia opportunities are strong drivers. 

PPR (OW): while the story of asset reallocation 

is starting to unfold short term, we think it is still 

more the luxury portfolio performance that is 

being undervalued by the market. 

Ferragamo (OW V): despite a strong run, the 

company should continue to generate sales and 

margin improvement-backed upgrades, and 

remains the best small cap story in the space, in 

our view. 

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We also have OW ratings on: 

Christian Dior (OW): the holding company of 

LVMH has underperformed and now appears 

again to be a value play on LVMH’s robust 

fundamentals given the 28% discount to RNAV. 

Swatch (OW): relative to Richemont, the higher 

dependency on watches and wholesale makes its 

positioning theoretically more exposed to a 

macro downturn. However, we don’t see a sharp 

downturn as imminent and its lower price points 

should make its sales more resilient. 

Hengdeli (OW V): a pure play on watches and 

on China, a bit like Swatch but for the less riskaverse. 

Given where the stock is trading, we see 

a potentially large reward but have significantly 

reduced the target price on the view that Chinese 

consumption of watches has gradually shifted to 

markets where Hengdeli does not operate. 

Neutral ratings 

Richemont (N): its capacity to surprise on the 

upside may have been used up by the positive 

alert in early August and whilst 1H results 

should be robust as guided, underlying sales 

growth may well decelerate from here and this 

could be unsupportive. 

Tod’s (N): the eponymous brand is having 

great success in becoming global but it looks 

like Hogan may continue to weigh in the short 

term (with performance dragged by Italian 

consumers and ongoing distribution 

streamlining). Also, the stock benefits less than 

other European names from recent FX moves. 

Luxottica (N): captain of the industry with a 

lot of self-help (Coach and Armani licenses, 

M&A, retail margin recovery and FX), but 

valuation is unattractive, in our view. 

Hugo Boss (N V): slower growth in Asia, more 

limited operating leverage and high exposure to 

wholesale and Europe make this stock fairly 

valued at current levels, we believe. 

Tiffany (N V): 4Q represents a huge swing factor 

(40-45% of annual profits). Comps should be 

favourable, but this may not be enough for the 

company to achieve its new FY12 guidance 

(already revised twice) as trading-down by 

consumers may not be over in the US, its FX 

exposure is unfavourable, and its Asian 

developments are not as quick as for peers. 

Sentiment and valuation 

Still in stock picking mode 

Whilst the sector has tended to move together in the 

past 18 months with a de-rating in the fall of 2011 on 

the back of fears of a hard landing for China, a rerating 

early in 2012 on greater confidence, a pullback 

in 2Q, and then another leg up during this summer, 

we believe there are reasons for stocks to behave 

differently short term. Indeed we feel that as growth 

stabilises, there will be market share gainers and 

losers, companies better positioned to capture tourism 

trends, and winners and losers on currency impacts. 

The outperformers YTD are Ferragamo (+71%), 

Prada (+71%) and Tod’s (+34%); the 

underperformers are Hengdeli (-14%), Coach 

(-9%) and Tiffany (-7%). 

Burberry (N V): the lack of operating leverage 

despite strong sales growth may now become an 

issue especially since Prada and Ferragamo have 

been listed and display both. Some clarity is 

needed on ways to operate in perfumes and 

cosmetics and to terminate the Japanese license, 

we believe. 

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Valuation 

Luxury goods sector performance vs FTSE Eurofirst 300 

While the sector’s valuation (at a high teens forward 

PE) is not that demanding from a historical standpoint, 

we believe there would need to be strong visibility on 

growth outside of Chinese consumers to justify 

280 

240 

200 

160 

120 

significant multiple expansion from here. 

80 

We continue to value all stocks on a DCF basis 

(except for PPR which we value by sum-of-the-parts) 

and use a sector beta of 1.2 to reflect the fact that 

Lux ury Goods Index 

40 

Jan- 

02 

Jan- 

03 

Jan- Jan- Jan- Jan- 

04 05 06 07 

Jan- 

08 

Jan- Jan- Jan- Jan- 

09 10 11 12 

FTSE 300 Price index 

luxury stocks historically have tended to trade at a 

Source: Thomson Reuters Datastream 

discount to their long-term fundamental valuation 

when earnings momentum is slowing, which will 

happen shortly, in our view. 

Sector valuation history (forward PE) 

40.0 x 

2000 bubble 

35.0 x 

30.0 x 

25.0 x 

20.0 x 

SRAS 

epidemic 

China starts 

to matter 

2007 market 

peak 

15.0 x 

10.0 x 

5.0 x 

Asian financial 

crisis 

09/11 attacks 

Post-Lehman collapse 

0.0 x 

Jun-97 Aug-98 Oct-99 Dec-00 Feb-02 Apr-03 Jun-04 Aug-05 Oct-06 Dec-07 Feb-09 Apr-10 Jun-11 Aug-12 

Source: FactSet, HSBC 

Share price performances - Luxury goods stocks 

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Q1 11 Q2 11 Q3 11 Q4 11 FY11 Q1 12 Q2 12 Q3 TD* FY12TD* 

LVMH -35 -14 47 -2 33 7 3 -42 64 57 -9 11 -20 10 -11 18 -7 11 22 

Hermes 15 -24 17 -4 44 35 -9 16 -7 68 -1 32 11 2 47 10 -4 -9 -4 

Richemont -29 -16 15 27 52 24 10 -74 71 58 -3 4 -26 15 -14 20 45 -27 27 

The Swatch Group -26 -23 29 12 17 37 27 -57 80 59 -3 4 -29 15 -17 19 -10 8 16 

Christian Dior -32 -7 50 4 50 8 11 -55 78 49 -7 9 -22 8 -14 26 -6 8 28 

Burberry nm -2 63 10 5 54 -12 -61 170 88 4 24 -19 1 6 26 -11 3 15 

Tod's 6 -34 13 1 63 7 -22 -37 72 42 13 11 -31 -1 -15 34 -6 7 34 

PPR -37 -52 9 -4 29 19 -3 -58 81 41 -9 13 -21 14 -7 17 -13 13 14 

Luxottica 20 -32 9 9 43 9 -7 -42 42 26 1 -4 -13 13 -5 25 6 5 33 

Hugo Boss 90 -58 59 54 21 31 0 -58 70 130 4 19 -14 -6 1 52 -10 -4 32 

Ferragamo** nm nm nm nm nm nm nm nm nm nm nm 14 -3 2 13 53 6 6 71 

Average -6 -28 34 12 33 22 -1 -47 68 60 4 12 -17 7 -1 27 -1 2 26 

Eurotop 300 -18 -32 12 9 22 16 2 -45 26 7 0 -1 -17 8 -11 9 -4 7 9 

Prada** nm nm nm nm nm nm nm nm nm nm nm 19 -30 5 -12 46 2 15 71 

Hengdeli nm nm nm nm nm 220 37 -73 268 57 -11 0 -34 -7 -46 31 -26 -11 -14 

Hang Seng Index -24 -18 35 13 5 34 39 -48 52 5 2 -5 -21 5 -20 12 -5 2 7 

Tiffany -1 -24 89 -29 20 2 17 -42 61 45 -1 28 -23 11 8 3 -23 18 -7 

Coach 36 69 129 49 18 29 -29 -32 76 52 -6 23 -19 19 11 -9 -24 -4 -9 

S&P 500 -13 -23 26 9 3 14 4 -38 23 13 5 0 -14 11 0 12 -3 4 12 

*Share prices at 27 August 2012 ** Prada's IPO on 23 June 2011, **Ferragamo's IPO on 18 June 2011 Source: Thomson Reuters Datastream 

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Raising global estimates 

slightly for 2012 with regional 

rebalancing 

As Chinese consumers make incrementally more 

luxury purchases abroad and this phenomenon has 

accelerated in Europe with the sharp weakening of 

the EUR, we have seen lower-than-expected growth 

in China and have reflected this in our estimates. 

Conversely, European markets are supported by 

these tourism flows and the US did much better than 

we expected six months ago. Apart from a few 

exceptions (Burberry US distribution streamlining, 

Coach outlet issue and Tiffany profit warnings), 

trends have generally been very solid. Japan remains 

the cash cow of the sector, with prospects for luxury 

demand in that country looking better than 18 

months ago. Finally Asia ex-Japan and ex-China has 

held up in line with our estimates. 

Trimming estimates for mainland China… 

In March 2012, we factored in organic sales growth 

of 33% for the year in mainland China. Note this is 

an aggregate of all stocks we cover with no 

weighting. Following evidence of a transfer of 

growth from China to Europe but also to a lesser 

extent of lower growth in sales to Chinese nationals, 

we have lowered our estimate for growth in 

mainland China to 19%. 

…but increasing estimates for the West 

In Europe, despite the economic uncertainties, 

business has been stronger than expected, as 

tourism flows (mostly, but not only, Chinese 

visitors) have been very supportive; all the more so 

as the EUR has weakened significantly against 

most currencies over 1H12. We now believe that 

for the sector as a whole, more than half of the 

demand for luxury products in Europe is bought by 

non-locals. We have increased estimates for 

organic growth from 5% last March to 7%. 

In the US so far, we have not seen a psychological 

shock of the magnitude of that which accompanied 

the collapse of Lehman in September 2008, which 

explains why trends in luxury consumption in the 

US have continued to outperform overall consumer 

trends. Whilst it is difficult to assess the impact of 

the fiscal cliff that the US faces, as well as the 

upcoming elections on luxury demand, what we 

Luxury goods: contribution of each geographic region to organic sales growth 

2007 2008 2009 2010 2011 1H12 2H12e 2012e 2013e 

Geographic breakdown 

Europe 42% 42% 39% 36% 34% 33% 33% 33% 31% 

Japan 12% 12% 11% 9% 8% 8% 8% 8% 7% 

US 20% 19% 18% 18% 18% 18% 18% 18% 18% 

China 3% 5% 6% 8% 10% 10% 10% 10% 11% 

Rest of Asia & other 22% 23% 25% 28% 29% 31% 31% 31% 32% 

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 

Organic sales growth rate 

Europe 13% 5% -7% 9% 12% 9% 5% 7% 4% 

Japan 6% -9% -15% -4% 4% 5% 2% 4% 3% 

US 16% 2% -14% 14% 24% 17% 9% 13% 9% 

China 40% 45% 30% 45% 47% 28% 10% 19% 20% 

Rest of Asia & other 22% 13% 8% 23% 27% 17% 10% 13% 12% 

Total 15% 6% -4% 15% 20% 14% 7% 11% 9% 

Contribution to growth 

Europe 5.1% 1.9% -2.8% 3.1% 4.4% 3.1% 1.6% 2.4% 1.3% 

Japan 0.9% -1.1% -1.8% -0.5% 0.4% 0.4% 0.2% 0.3% 0.2% 

US 3.5% 0.3% -2.7% 2.4% 4.3% 3.1% 1.6% 2.3% 1.6% 

China 1.2% 1.5% 1.4% 3.4% 3.6% 2.7% 1.0% 1.9% 2.1% 

Rest of Asia & other 4.7% 2.9% 1.8% 6.4% 7.8% 5.0% 3.0% 3.9% 3.8% 

Total 15% 6% -4% 15% 20% 14% 7% 11% 9% 

Source: HSBC estimates 

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have seen is a discrepancy of trends between value 

positioning (see Coach outlets disappointment) and 

demand on higher price points. 

All in, we have increased our sales growth estimates 

from 4% in March to 13% now not so much on 

tourism flows increasing but more on greater 

growth coming from a buoyant high end local 

consumer demand in the US. 

Asia ex-Japan ex-China sales solid as ever… 

Whilst some markets (Taiwan, Korea, Singapore 

and Hong Kong) are seeing growth rates 

decelerating, they are still at hefty levels for some 

players. 

As we explain later in this report, Taiwan can 

theoretically become a rival to Hong Kong in luring 

mainland Chinese with notably better service. 

Korea, as we described in our recent report Korea 

Luxury - Still booming or lost its ‘Seoul’?, is 

suffering from polarisation but the high end is still 

doing well. Hong Kong is suffering from slowing 

tourism inflows, driven by shifting Chinese 

consumption patterns, insufficient accommodation 

capacity and a gradual decline in the city’s status as 

an upmarket shopping destination in the eyes of 

Chinese consumers. Whilst they are not big 

contributors yet, countries like Vietnam and 

Indonesia are beginning to appear on the radar 

screen, supporting growth for the region as a whole. 

… and even Japan sales are not that bad really 

Despite the devastation caused by the March 

2011 tsunami, Japanese sales trends were 

slightly positive for most players in our 

coverage in 2011. While we expected this 

stabilisation to continue in 2012 with 2% 

average organic sales growth factored in for 

the year, we now believe that Japan should 

show better growth still at 4%. 

No doubt Japan appears to be the sector’s cash 

cow, enabling many groups to finance growth 

elsewhere, but the recent trends have been 

surprisingly resilient with brands adapting their 

distribution strategy (more freestanding 

locations, less department store reliance). 

Strong FX tailwinds 

Who said FX was irrelevant? When Richemont put 

out a positive alert in early August, the group 

mentioned that 1H EBIT would increase 20-40% 

with an important impact of currency. The stock 

since that announcement has had a 7% run. 

Currency remains key for this sector with European 

listed companies benefiting from the current EUR 

weakness, Tiffany suffering from the same and 

Prada not being much influenced (P&L benefits but 

shares don’t as they are HKD-denominated). 

Looking at the chart below, the EUR/USD shift has 

been quite sudden and seems to have broadly 

stabilised over the past two months. This has 

several implications: one is that management teams 

will probably look at this stability and address price 

discrepancies between Europe and China by raising 

prices in Europe; the other, financial, is that 

operating profit for the European listed companies 

will be boosted by higher profits from their non- 

EUR denominated subsidiaries. 

We take into account recent average spot rates for 

our models. We are thus using EUR/USD of 1.25, 

EUR/CHF of 1.20, EUR/JPY of 100 and GBP/EUR 

of 1.25. 

EUR/USD since 1 January 2005 

1.65 

1.55 

1.45 

1.35 

1.25 

1.15 

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 


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Themes for the next 12 months 

In our October 2011 Around the world, around the 

world and our March 2012 Stop, look, listen reports we 

identified broad themes for the sector. Some of these 

are still quite relevant today, in particular (and in order 

of importance): 

Travel 

Since October 2011, we have argued that it is more 

relevant to look at the luxury sector in terms of sales 

by nationality instead of sales by region as the luxury 

consumer and notably the Chinese, Russian, Indian, 

Brazilian, Middle Eastern consumers purchase more 

abroad than at home. 

Obviously this is not the way the companies report 

their numbers but it does appear in our view to be the 

most relevant way to think about the sector. The 

importance of this theme has led to a few negative 

surprises (e.g. Louis Vuitton increasing sales by 

“only” a single digit in mainland China as Chinese 

purchase goods abroad; Hengdeli sales growth 

decelerating more than we expected). 

As explained later on in this report, we expect travel to 

become even more important in the future, as beyond 

the current FX incentive, there are increasingly more 

reasons for consumers to purchase luxury 

products abroad. 

Polarisation or first-mover disadvantage 

We do not see trading-down in luxury spending 

(consumers that want to buy a Patek would not 

settle for a Swatch) but we do believe that the core 

brands with accessible price points (Louis Vuitton, 

Gucci and Omega) will lose share. 

M&A / use of cash 

Despite stepping up capex, most companies in the 

sector will be faced with cash piles sooner or later. 

Richemont and Swatch already are in substantial net 

cash positions, and other groups should get there 

quickly. We doubt, however, that any sizeable deal 

is imminent and we believe investors should 

remember that synergies are scarce in the luxury 

industry, thus limiting the potential for value 

creation via M&A. Dividend hikes or buy-backs are 

likely occurrences. 

Currency 

This is a recurring macro theme in luxury and 

depending on one’s house view a potential 

differentiator between the continental European 

stocks (which should gain from a weak EUR if spot 

rates remain at current levels), Burberry (which 

should gain slightly from a weak GBP) and the US 

stocks (which should suffer from a strong USD), 

Tiffany, in our coverage, as Coach is barely 

exposed to EUR-denominated sales. 

Sales growth at constant forex and perimeter 

% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 1Q11 2Q11 3Q11 4Q11e FY11 1Q12 2Q12e FY12e FY13e FY14e 

Hermès 14 8 6 8 12 7 8 11 9 4 19 21 22 18 14 18 18 13 13 11 9 

LVMH 8 4 4 4 11 11 12 13 7 -3 14 14 15 15 12 14 14 10 9 8 8 

of which Louis Vuitton 20 12 7 14 13 12 11 14 12 7 15 12 14 17 15 15 12 6 7 7 7 

Richemont** 13 0 0 0 13 17 16 16 2 -5 19 13 35 37 24 30 25 na 8 6 7 

Swatch Group 12 1 1 1 6 8 12 17 4 -8 22 23 25 21 19 22 16 12 11 8 7 

Burberry** 40 14 12 15 10 3 15 19 7 1 15 10 24 26 21 21 15 11 13 12 11 

PPR Luxury na na na 5 13 16 18 15 8 -4 12 22 24 25 19 22 18 17 14 11 9 

Gucci brand 24 1 -8 4 13 18 17 11 4 -1 11 20 23 21 12 19 12 10 9 8 8 

Hengdeli na na na na na na na na 20 7 39 na 46 na 30 38 na 6 5 8 13 

Prada na na na na na na na na na -6 24 na 24 na 26 25 41 19 28 14 12 

Tod's 15 27 13 8 15 20 14 17 9 0 9 16 17 14 8 14 7 8 6 8 7 

Luxottica na na 3 -2 11 11 14 10 -1 -4 7 9 10 10 11 9 9 5 9 8 8 

Tiffany 13 0 4 14 8 9 11 13 -4 -5 12 16 24 17 7 15 8 2 5 8 8 

Coach*** 12 21 32 37 29 26 29 20 -1 9 14 14 19 13 13 13 16 9 9 11 12 

Hugo Boss na na na na 13 12 14 12 6 -8 5 19 29 16 17 19 10 14 9 8 8 

Ferragamo na na na na na na na na na -10 17 26 34 19 20 24 19 17 16 13 11 

*half-year **year ending March n+1 ***year ending June n+1 

Source : Company data, HSBC estimates 

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China to remain the 

dominant influence 

The Chinese consumer has been more influential than expected for 

the luxury sector 

Social / cultural trends are supportive to the point where we wonder if 

Chinese luxury consumption can really be regarded as discretionary 

Market penetration remains low 

China: from dream to reality 

Faster, higher, stronger 

It’s like Groundhog Day: every day for the past 15 

years, the luxury goods sector has been waking up 

and talking about China. In the late 1990s, the 

industry (and some of us were part of it then) was 

talking obsessively about China though it was a 

mere dream, i.e. irrelevant to the companies’ figures. 

Over only the past three years since we published the 

first Red bull report, China has gone from being a 

tangible to a dominant reality for the sector. We 

believe sales contributions from China are greater 

than what most luxury CEOs had hoped for three 

years ago. And whilst some investors are probably 

fed up of listening to how the Chinese consumer is 

influencing the future of the industry, we would 

argue that it is really worth paying attention now. 

Luxury goods companies - 2011 geographical sales breakdown 

Europe Americas Japan Asia & others Mainland China HK + Taiwan + Macau Rest of Asia & others 

Hermès 37% 16% 17% 30% 7% 13% 10% 

Richemont* 35% 14% 10% 41% 12% 17% 12% 

LVMH 33% 22% 8% 37% 10% 9% 18% 

of which Louis Vuitton 25% 19% 16% 40% 11% 13% 16% 

PPR 32% 19% 12% 36% 7% 7% 22% 

of which Gucci Brand 25% 21% 14% 40% 12% 11% 17% 

Burberry* 34% 25% 4% 37% 10% 9% 18% 

Tod's 70% 7% 4% 19% 5% 7% 7% 

The Swatch Group 34% 8% 2% 56% 19% 19% 18% 

Luxottica 23% 61% 2% 14% 2% 1% 11% 

Ferragamo 24% 27% 13% 36% 10% 10% 16% 

Hugo Boss 60% 22% 2% 16% 9% 2% 5% 

European average 38% 22% 7% 32% 9% 9% 14% 

Coach** 1% 72% 17% 10% 3% 3% 4% 

Tiffany*** 11% 49% 17% 22% 5% 8% 9% 

Hengdeli 0% 0% 0% 100% 69% 31% 0% 

Prada*** 37% 14% 10% 39% 11% 11% 17% 

Total average 31% 25% 8% 35% 12% 11% 12% 

Note: this average including PPR (rather than the Gucci Group) *FY March 12 **FY June 12 ***FY Jan 2012 

Source: Company data, HSBC 

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Ten years ago, Japan exposure was the talk of the 

town in the luxury world. Today, questions 

regarding spending by Chinese nationals as a 

percentage of global sales, the definition of Greater 

China as a market, China outbound travel, and capex 

in the mainland, Hong Kong and Macau have 

become standard even for companies like Coach, 

Luxottica and Ralph Lauren for which China is not 

yet that significant relative to other markets. 

Prior to 2007, less than 3% of luxury sales took 

place in mainland China and probably less than 5% 

were driven by Chinese nationals all in. The 

mainland’s contribution pretty much tripled in four 

years (to 9% of European luxury sales in 2011) and 

more importantly mainland Chinese contribution 

(i.e. sales to Chinese irrespective of the place of 

purchase) is now in excess of 25% for most 

companies we cover. For some – think the Swatch 

Group, Richemont, Prada – Chinese consumers 

should account for much more than one-third of 

sales, clearly not something that can be disregarded 

in their investment case. 

Whilst one can only hope that the debate, having 

moved from Japan to China, will move again from 

China to say, Brazil or Indonesia, we doubt that will 

happen soon. Sales to the Chinese should remain 

dominant in the space for the foreseeable future, 

although luxury consumption in China is slowing for 

reasons we will explain in this report. 

The real debate is how the sector’s substantial 

exposure to China and the growth linked to this 

exposure trade off against the need to maintain 

geographical diversity. The pricing power of luxury 

brands is derived from the perception that they are 

universal. If they become perceived as being “too 

Chinese” like what was seen in Japan years ago, this 

may be an issue. But we’ll come to that later. 

Not a bad investment 

Unlike many industries, a luxury goods business in 

China can prove to be profitable very quickly, at 

least on a four walls basis (i.e. excluding regional 

HQ costs). We believe the advantages of doing 

business in China include: 

Prices higher than in the Western world, in most 

cases more than covering extra costs of shipping 

and duties. The gross margin in China should, 

therefore, be higher than the global average for a 

luxury brand. 

In terms of SG&A expenses, Chinese operations 

can benefit from local sourcing of fixtures and 

fittings for stores, more attractive rents than in 

the Western world and lower personnel costs 

(mostly store staff), representing less as a 

percentage of sales than the global average. In 

addition, stores are open longer hours and staff 

regulations are more flexible than in Europe. 

In recent years, rents have exploded in Hong Kong 

and New York to levels that make it difficult for 

small brands to operate in a profitable manner; this is 

not the case in mainland China yet. Besides this, 

unlike in some European cities, there is no “key 

money” to be paid in China for a new lease. Looking 

at the rents below, Guangzhou is the second priciest 

city after Beijing (at USD590 per sq ft) and ahead of 

Shanghai, very much lower though than many of the 

world’s capital cities. 

Top 10 highest retail store rental prices in the world: 1Q12 

City 

Annual rent per square foot (USD) 

Hong Kong 3,864 

New York 2,475 

Sydney 1,112 

Tokyo 1,025 

London 956 

Zurich 853 

Melbourne 837 

Paris 779 

Moscow 739 

Beijing 655 

Source: CBRE 

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On the downside, however: 

Advertising spend as a percentage of sales, at 

least in the initial phase, will likely be greater 

than the global average as brands endeavour to 

build consumer awareness. 

Central costs (including subsidiary HQ and 

potential senior staff expat packages) are 

difficult to leverage unless the brand achieves a 

significant footprint in the country. 

The larger brands are bound to be more profitable as 

their greater footprint enables them to leverage many 

of the central costs of doing business in China. 

Moreover, as hotels, department stores and mall 

developers understand the power of attraction held 

by luxury brands with up-and-coming consumers, 

usually landlords tend to give leading brands 

preferential rents (or lower concessionaire rates) or 

even in some instances offer a free year or two to 

ensure the brand actually is part of their future 

development project. 

As shown in the theoretical P&L, while smaller 

brands can find China development costly and 

hazardous, the larger brands enjoy profitability on a 

par with the rest of the world, if not greater. 

Although theoretically gross margin levels may be 

higher, the lack of operating leverage on costs can be 

quite damaging for a small brand or one in the initial 

stages of development in China. 

Global luxury brand standard cost structure and how large and small 

brands can experience China differently 

Global 

P&L Fixed Variable 

Big in 

China 

Looking beyond the Middle Kingdom 

Small in 


Net sales 100 100 100 

Cost of goods 30 * * 25 25 

Gross profit 70 75 75 

Gross margin 70.0% 75.0% 75.0% 

Store expenses 

o/w personnel 7.00 75% 25% 3.00 4.00 

o/w rents 10.00 50% 50% 4.00 6.00 

o/w D&A. 3.00 100% 3.00 3.00 

o/w other 3.00 60% 40% 3.00 3.00 

Sub-total 23.00 65% 35% 13.00 16.00 

G & A 14.00 80% 20% 19.00 25.00 

Communication 7.00 70% 30% 14.00 22.00 

Selling 3.00 50% 50% 3.00 3.00 

Total operating 

expenses 

47.00 69.5% 30.5% 49.00 66.00 

EBIT 23.00 26.00 9.00 

EBIT margin 23.0% 26.0% 9.0% 

* highly dependent on level of in-house production 


It’s more about the Chinese now than China itself. 

We estimate more than 50% of sales of luxury 

goods in Western Europe are generated by 

foreigners. This figure would be lower in North 

America (20%) but comparable in Hong Kong 

(well north of 50%). As far as the Chinese are 

concerned, according to Bain & Co, 59% of their 

luxury purchases were made abroad in 2011, of 

which 34% were in Hong Kong and Macau and 

25% overseas (Taiwan included). 

Put differently, mainland China may have 

represented c10% of sales for the luxury sector in 

2011 but the Chinese probably account for more 

than 25% of sales already. 

Sales by nationality of consumer: 2011 

Louis Vuitton brand Gucci Group Burberry* Richemont Swatch Prada 

Western Europe 10% 14% 10% 10% 13% 14% 

East Europe 4% 3% 4% 4% 3% 2% 

Middle East 7% 5% 6% 10% 9% 3% 

Japan 19% 15% 24% 12% 4% 12% 

Asia ex Japan 43% 44% 35% 52% 63% 57% 

North America 14% 17% 18% 9% 4% 10% 

Latam 4% 3% 3% 4% 3% 2% 

Total 100% 100% 100% 100% 100% 100% 

*For Burberry, figures are based on sales at retail equivalent 

Source: Company data, HSBC 

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Supportive long-term social / 

cultural drivers 

“Buying social place and feeling good about it may 

seem helplessly vulgar, but that is precisely what 

characterises the new luxury” writes advertising and 

marketing expert James B Twitchell in his book 

Living it up. Luxury consumption is often considered 

by investors as discretionary or good to have, but we 

believe that for Chinese consumers, this is not the 

case as social trends, “the urge to splurge’, brand 

obsession, and the trading-up phenomenon make it 

compulsory. 

“New money” minority loves luxury 

While awareness levels are still low for some brands 

and penetration in second-tier cities limited, the 

ultra-rich of China are already spending more on 

luxury items than their Western counterparts. The 

562,000 high net worth individuals (HNWIs, net 

financial assets in excess of USD1m) of 2011 

(source: World Wealth reports) are not really 

representative of the masses of affluent or middle 

class Chinese who are willing to indulge themselves 

and display social status. 

China ranked No 4 in terms of number of HNWIs in 

2011 (562,000), still far behind the US (3,068,000), 

Japan (1,822,000) and Germany (951,000) but now 

comfortably ahead of both the UK (441,000) and 

France (404,000). While the Western world is 

dominated by “old money”, China’s super-rich are 

often first generation entrepreneurs. When Hurun 

published the country’s first rich list in 1999, it 

required a personal fortune of just USD6m to make 

it into the top 50. Ten years later, it included 1,000 

individuals and the minimum requirement was 

USD150m.This is a reflection of the new category of 

nouveau-riche that has been created. Less than 1% 

of the list made their money through inheritance (vs 

25% in the UK and 35% in the US). 

To a certain extent, the HNWIs of China are also 

likely to be citizens of the world in their behaviours, 

investments, and spending patterns and in that regard 

more comparable to New Yorkers or Tokyoites than 

to many of their own countrymen. 

High net worth individuals (m) 

Number of HNWIs worldwide 

12 

10 

8 

6 

4 

2 

0 

0.6 

2.2 

0.6 

0.7 

2.5 2.7 

2.5 2.5 2.6 

0. 7 

2. 9 

2. 8 

0.8 

3.2 

0.9 

3.3 

2.9 3.1 

0.9 

2.7 

2.6 

1.9 2.1 2.2 2. 4 2.6 2.8 2.4 

1.0 

3.1 

3.0 

1.0 1.1 

3.4 3.4 

3.1 3.2 

3.0 3.3 3.4 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Asia-Pacific 

North America 

Source: World Wealth reports, Cap Gemini 

Europe 

Other (Latam, Middle East, Africa) 

On average, Asian HNWIs (including the Chinese) 

allocate more of their “passion dollars” to luxury 

products than the Western wealthy do. 

Looking beyond the mega-rich, the 2009 Hurun 

report notes there are 825,000 individuals (1 in every 

1,700) with assets north of RMB10m (or USD1.5m) 

with c50% of them in Beijing, Guangdong and 

Shanghai. The average age of these individuals is 43. 

Economic growth should eventually lift millions of 

households out of poverty. According to a 

McKinsey survey, the upper middle class will 

represent an estimated c60% of urban Chinese 

households (with annual income between USD5,848 

and USD14,620) in 2025 vs 9% in 2005. 

Share of total urban disposable income 

100% 

10.2 

2.6 

9.9 

80% 

50.5 

38.6 

60% 

78.4 

51.1 

95.2 

40% 

15.4 

27.6 

17.0 

20% 

24.2 

13.6 

16.7 

2.4 

19.4 

0% 

1.8 

7.4 6.9 

1985 1995 2005 2015 2025 

Global affluent (> RMB200,001) 

Mass affluent 

(RMB100,001 - 200,000) 

Upper middle class 

(RMB40,001 - 100,000) 

Poor (< RMB25,000) 

Lower middle class 

(RMB25,001 - 40,000) 

Source: The value of China’s emerging middle class, The McKinsey & Co Institute 

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China’s urge to splurge 

We have observed that the super-rich and middle 

class like to show off their status. In communist 

China, individual property was not allowed and 

private wealth was traditionally suspicious. With the 

liberalization of the economy, a new class system 

was created whereby your place on the ladder 

depended on how much money you earned, and 

luxury goods are an easy way to display the level of 

one’s wealth. 

In The Cult of the Luxury Brand, Inside Asia’s 

Love Affair with Luxury, authors Radha Chadha 

and Paul Husband argue that the development of 

the luxury market follows a five-stage process. The 

first is subjugation. Deprivation builds a hunger for 

luxury however distant its satisfaction might be. 

Asian countries have gone through some form of 

this. Stage two coincides with the advent of 

disposable income. The economy grows and people 

have cash to spend for the first time. The emerging 

middle class buys washing machines, TV sets, 

while a smaller number, within the upper end, are 

already buying Hermès or Louis Vuitton bags. 

Stage three is when consumers start “tripping over 

each other trying to acquire symbols of wealth and 

displaying them in a conspicuous manner”. The 

bulk of the population carries status markers from 

so-called compulsory brands. This leads to stage 

four, in which consumers conform to a new set of 

rules: to fit in. In stage five, luxury brands become 

a way of life. We argue that Japan may have even 

moved beyond that to a stage in which luxury has 

lost its relevance. 

Global trends may influence Chinese 

Looking at the growth rates for luxury in China vs. 

GDP growth, bipolarisation of consumption is likely 

to explain the bulk of the difference. This 

“disharmony” of consumption results in habits not 

always corresponding to income levels. Chinese 

luxury consumers may be influenced by social 

trends that are taking place on a global basis. People 

are marrying later (there are more single people with 

more money to spend on themselves). Divorce rates 

are rising, and new singles tend to spend more on 

themselves. Moreover, women’s financial autonomy 

is increasing. Younger generations of women are 

more knowledgeable about brands, and eager to 

reward themselves. 

China specifics: young population, only 

child 

An estimate by the UN suggests that China’s young 

adult population (age 20-34) is growing after a 

decade of contraction. Young adults born after the 

1970s and 1980s save less and consume more than 

older generations do. A media survey suggests that 

the average age of China’s automobile owners’ is 35, 

10 years younger than the world average of 45-47. 

Single child consumers have the benefit of being 

able to tap two generations of wealth (though the 

policy is being phased out gradually) and this in turn 

benefits luxury demand. As we will see later on, 

corporate gifting and mistresses have also been 

supportive to the luxury sector in China. 

Asian countries’ stages of luxe evolution: China’s show off phase should evolve quickly as sophistication kicks in 

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 

Subjugation 

Start of 

money 

INDIA 

Source: The Cult of the Luxury Brand, Inside Asia’s Love Affair with Luxury, Radha Chadha and Paul Husband 

Show off Fit in Way of life 

JAPAN 

HONG KONG / SINGAPORE 

TAIWAN / S. KOREA 

CHINA 

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Penetration remains limited 

Huge, young (but ageing) population 

China’s population was one-fifth of the global total 

in 2009. Although by 2050, India is expected to have 

outgrown China to become the world’s most 

populous country with about 1.8bn people, this is not 

negative for Chinese consumer demand; it just 

means that China’s population will be growing at a 

slower pace as it ages. It would appear that not only 

are there more potential luxury consumers in China 

but the demand is skewed towards a younger 

generation than in other regions. 

Top 10 most populous countries (m) 

1950 2012 2050 Pop by 2050 Increase 

2050/2012 

China China India 1657 37% 

India India China 1304 -3% 

USA USA USA 423 35% 

Russia Indonesia Nigeria 402 137% 

Japan Brazil Indonesia 300 21% 

Indonesia Pakistan Pakistan 291 53% 

Germany Nigeria Bangladesh 250 55% 

Brazil Bangladesh Brazil 232 17% 

UK Russia Ethiopia 228 150% 

Italy Japan Philippines 172 66% 

Less developed countries / More developed countries 

Source: US Census Bureau, International Programs Center 

Chinese “space invaders” 

With the economic boom and liberalisation of the 

market, international companies and local industries 

and services have developed in tier 2-3 cities. As a 

result, spending power has increased and rural 

populations have infiltrated urban cities to benefit 

from better incomes and better standards of living. 

Pockets of wealth are emerging across the country. 

In 2008, Louis Vuitton had only 300,000 customers 

(less than 0.03% of the population). However, when 

opening a store, the brand on average increases its 

sales tenfold to the city’s existing clientele. 

The move into different tiers of distribution: world 

1st tier: windows to luxury 

2nd tier: tourist destinations 

3rd tier: extensions 

4th tier: “the unexpected” 

Key cities 

Paris, London, Milan, Tokyo, New York 

City, Los Angeles Moscow 

Cannes, Capri, Rome, Geneva, Dubai, 

Las Vegas 

Lyons, Bari, Osaka, Boston 

Aruba (Caribbean), Almaty 

(Kazakhstan), Scottsdale (Arizona) 

The move into different tiers of distribution: China 

1st tier: windows to luxury 

2nd tier: tourist destinations 

3rd tier: extensions 

4th tier: “the unexpected” 

Source: HSBC 

Key cities 

Beijing, Shanghai, Guangzhou 

Suzhou, Hangzhou 

Xian, Harbin, Chengdu 

Kunming, Urumqi, Taiyuan 

In 2010, Paris had the same population as Hefei, the 

40th largest city in China. Yet while Paris had five 

Louis Vuitton stores, Hefei had none. Judging by 

urbanisation trends in China, it is likely that the 

number of cities with over 1m inhabitants will 

continue to increase. 

As has happened worldwide, brands in China are 

expanding their distribution footprint from first 

tier cities (windows to luxury) and second tier 

cities (tourist destinations) to cities considered as 

extensions (regional hubs) and a few 

unexpected locations. 

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Number of stores by city in mainland China: end 1H12 

City Louis Vuitton Gucci Prada Hermes Ferragamo Burberry Coach Tod's Tiffany 

Anshan 0 0 0 0 0 0 1 0 0 

Baoding 0 0 0 0 0 0 1 2 0 

Beijing 3 7 3 4 7 9 11 0 2 

Changchun 1 1 0 0 1 1 0 0 

Changsha 1 1 0 0 1 2 1 1 0 

Changzhou 0 1 0 0 1 1 1 0 0 

Chengdu 1 1 1 1 1 4 6 1 0 

Chongqing 1 2 0 0 1 1 1 1 1 

Dalian 1 1 1 1 1 2 1 1 0 

Fuzhou 1 1 0 0 0 1 1 1 0 

Guangzhou 2 2 1 2 2 2 2 0 1 

Guiyang 0 1 0 0 1 1 1 0 0 

Hangzhou 1 2 2 2 2 3 3 3 1 

Harbin 2 2 1 1 2 2 2 1 0 

Hefei 1 1 0 0 1 1 1 1 0 

Hohhot 1 1 0 0 1 1 1 0 0 

Jiangyin 0 0 0 0 0 0 0 0 

Jinan 0 1 0 0 0 1 1 0 0 

Jinhua Intime 0 0 0 0 0 0 0 0 

Kunming 1 2 0 1 2 2 2 1 1 

Lanzhou 0 0 0 0 0 1 1 0 0 

Nanchang 0 0 0 0 0 0 0 0 

Nanjing 1 1 0 1 1 2 2 1 1 

Nanning 1 0 0 0 1 1 1 1 0 

Nantong 0 0 0 0 0 0 0 0 

Ningbo 1 1 0 0 1 1 2 0 0 

Qingdao 1 1 1 1 1 1 1 1 0 

Sanya 1 0 0 0 1 0 1 0 

Shanghai 3 8 3 3 6 6 8 2 5 

Shangyu 0 0 0 0 0 0 0 0 

Shenyang 3 3 2 1 1 3 3 3 1 

Shenzhen 1 1 1 1 1 2 3 2 2 

Shijiazhuang 0 1 0 0 1 1 2 0 0 

Suzhou 1 1 0 1 2 2 2 1 0 

Taiyuan 1 1 1 0 1 1 1 0 0 

Taizhou 0 0 0 0 0 0 0 0 

Tianjin 1 2 1 0 2 2 5 2 1 

Urumqi 1 0 0 0 1 1 0 0 

Wenzhou 1 1 1 0 1 2 2 0 

Wuhan 1 1 0 0 2 2 2 2 1 

Wuqing 0 0 0 0 0 0 0 0 

Wuxi 1 1 0 1 1 1 2 1 0 

Xiamen 1 1 0 0 1 1 2 0 0 

Xian 1 2 1 0 0 1 2 1 0 

Xuzhou 0 0 0 0 0 0 1 0 0 

Yangzhou 1 

Zhangjiagang 0 0 0 0 0 0 0 0 

Zhengzhou 1 1 0 0 1 1 1 1 0 

Zhenjiang 0 0 0 0 0 0 0 0 

Others 0 0 0 0 0 0 0 0 

TOTAL 39 54 20 21 50 66 79 34 17 

Source: Company data, HSBC estimates 

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Sophistication, travel and 

overdependence 

Path to growth for luxury brands in mainland China is not 

straightforward, amid rapidly evolving patterns of consumer 

behaviour and social / political risks 

Overseas shopping trips by Chinese consumers are a structural 

trend, not just a function of currency movements 

Overdependence on the Chinese consumer threatens brand 

equity and may affect valuation as investors end up with too many 

eggs in the China basket 

More demanding consumers 

Less flash, more sophistication 

A few years ago, it was common for Chinese men to 

leave the label sown to the sleeve of their suits so 

that people knew what brands they were wearing. 

We’re not saying this doesn’t happen anymore but it 

has become a rarer sight. Chinese consumers have 

become more sophisticated and are increasingly 

seeking out more subtly designed luxury goods. 

In our view, luxury consumption in China is 

becoming increasingly lifestyle-focused, with 

consumer preferences moving away from logodriven 

designs and beginning to favour leather over 

canvas. Speaking to the companies we cover last 

May in Paris (see our 4 June Global luxury update), 

most management teams confirmed this and judging 

by the success of Prada (which has more leather 

driven offerings) and the changing focus of the 

companies (e.g. Coach’s Legacy launch), this is 

probably not just a Chinese phenomenon. 

We believe Chinese consumption is gradually 

entering what we call the “French Paradox”, i.e. how 

to create the illusion of scarcity to sell more of what 

is supposed to be exclusive, and appeal to consumers 

who want to move beyond mainstream labels and 

aspire to be “in the know”. 

Seeking value for money 

Alongside becoming more sophisticated, Chinese 

consumers have also become increasingly 

demanding in terms of seeking value for money. 

As a result, today’s younger, better informed 

Chinese luxury consumers have less of an 

obsession with where products (except for 

watches) are made. Coach, for instance, has had 

notable success with its Chinese-made product 

range; for it “made in China” has become a 

unique selling point rather than a hindrance. It is 

worth noting that Sitoy (1023 HK, Not rated), a 

big producer for Coach, makes Prada items. 

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Whilst European consumers seem less open to 

luxury products that are made in China, European 

brands that do not produce in China may also suffer 

from Chinese consumers thinking their products are 

too expensive. 

The “first-mover disadvantage” 

In handbags and accessories, we credit Louis 

Vuitton with effectively creating the market in 

China. The brand helped develop the market to the 

point where up until recently the combined share of 

LV and Gucci in mainland China was above 50%. In 

our first Red bull report, we argued low awareness 

and footprint meant bigger brands, notably LV, 

Gucci, and Omega would continue to increase sales 

at a very fast pace and for a long time. Yet more 

recent trends are leading us to change our view. 

In April 2007, we published a report called Never 

too much? How luxury goods companies manage 

exclusivity and mass distribution, in which we 

looked at the risk of market saturation and the 

consumer’s loss of interest in some luxury brands. 

Our view back then was that, although the risk 

existed in theory, megabrands were in practice 

finding ways to push back the ceiling of growth. Our 

view has since changed: their sales continue to grow, 

but we now believe the brand is at risk of losing 

share, as its scale and awareness have already 

reached extremely high levels. 

In Abraham Maslow’s hierarchy of needs described 

in his 1943 paper A Theory of Human Motivation, 

most luxury purchases would today correspond to 

“esteem needs” that include the search for selfesteem, 

confidence, achievement, and respect by 

others, in other words “social status”. 

In 2007, we defined a pyramid of “mass-lux” (see 

page 20) where luxury products are ranked by 

accessibility (price and distribution) and we argued 

consumers who become aware of the principle of 

luxury have only one way to go: up. 

Maslow's hierarchy of needs 

Morality, 

creativity, 

spontaneity, 

problem solving, 

lack of prejudice, 

acceptance of facts 

Self-actualization 

Self esteem, 

Confidence, achievement, 

Esteem 

Respect of others, respect by others 

Friendship, family, sexual intimacy 

Love/Belonging 

Security of body, of employment, of resources, 

Safety 

of morality, of the family, of health, of property 

Breathing, food, water, sex, sleep, homeostasis, excretion 

Physiological 

Source: Maslow 

Michael Silverstein (BCG) has shown that there is a 

common element between Starbuck’s and luxury 

brands: they all benefit from trading-up. Why buy a 

coffee three times the normal price? Essentially, 

because consumers value the moment, the 

experience, the brand and the way it acts in terms of 

social recognition. As luxury goods enable 

consumers to display social status, first comers will 

purchase the lower-priced items from the most 

established brands that is, those that are immediately 

recognisable. Yet, as a consumer becomes more 

educated, he / she will want to purchase less “massappealing” 

products. There are then two 

opportunities: trading-up within a brand or moving 

towards a more “selective” brand. 

Some investors may start perceiving the luxury 

goods market as mature with star brands’ growth 

potential therefore limited. We argue this is not 

necessarily the case as there are ways to recruit and 

retain consumers, but we believe that more than any 

other brand, megabrands may start to show signs of 

suffering brand weariness owing to their early entry 

into several markets – we term this the “first-mover 

disadvantage”. 

Similarly, we would argue Coach is a victim of a 

first-mover disadvantage in the US but a beneficiary 

in China. Omega is a victim in China and a 

beneficiary in the US. Prada, oddly, seems to be a 

beneficiary on a global basis, and that’s a strong 

reason for us recommending the stock. 

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Brand recognition level for middle-class Chinese (aided recall) 

Number of brands in 

list (2006) 

Average number 

recognized (2006) 

Number of brands in 

list (2011) 

Average number 

recognized (2011) 

Source: KPMG-TNS 

Clothes 

Bags & 

Shoes 

Watches Jewellery 

36 15 25 9 

9.3 4.7 7.6 2.5 

39 40 26 13 

13.5 15.9 8.8 5.6 

It is interesting to see in the above KPMG survey 

that in a period of five years, the number of 

brands recognised in “bags and shoes” by 

consumers tripled and in jewellery doubled. 

Wake up to China’s tech generation 

In our view, the pattern of luxury consumption in 

China is unlikely to follow the typical progression 

up the luxury pyramid from affordable luxury 

brands up to ultra-high end brands. Instead, we 

expect to see a polarisation of demand, in which 

some consumers would feed the entry-level 

luxury segment (e.g. Coach) and other consumers 

the very high-end premium segment (e.g. Bottega 

Venetta), while mainstream brands in the core 

mid-market (e.g. LV or Gucci) suffer from firstmover 

disadvantage as consumers seek substitutes 

(e.g. Prada). 

The luxury consumer in China is both young and 

well informed. A number of Chinese Web site 

operators are trying to take advantage of this: in 

August 2011, Sina, the largest infotainment Web 

portal in China, launched a designer brandoriented 

B2C site, Sina Luxury. 360 Buy, in the 

news recently for having sparked a price war with 

Gome and Suning in the consumer electronics 

space, also launched a B2C platform (toplife.com) 

catering to the needs of the luxury segment. 

The mass-luxury pyramid: China may not see the natural progression and Louis Vuitton is not alone, Prada may be a substitute 

Bespoke 

Very few 

Price Points 

in USD 

50,000 > 

Ultra High End 

Leviev 

Graff 

Harry Winston 

Number of 

points of sale 

Patek Philippe 

Bréguet 

Superpremium 

Bottega Veneta 

Van Cleef & Arpels 

5,000 > 

Panerai 

Hermes 

Chopard 

Rolex 

Cartier 

Berluti 

Tiffany excl. silver 

1,000 > 

Louis Vuitton 

Designer accessories 

Gucci 

& apparel 

Tod’s 

300 > 

Montblanc 

IWC 

Bulgari 

Omega 

Premium core 

Tag Heuer 

David Yurman 

Accessible core 

Tissot 

Designer eyewear 

Coach 

Tiffany silver jewellery 

Affordable luxury 

Geox 

100 > 

Restaurant/Entertainment 

Spirits 

Everyday 

Designer fragrances 

Swatch 

Champagne 

luxury 

Starbucks 

Imported beer/wine 

Many 

Source: HSBC 

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Whilst the market is geographically wide, brands 

are discussed via blogs and forums. There were 

356m mobile phone internet users in China as of 

late 2011 (more than the US population) and more 

than half a billion internet users: 10-19 year olds 

account for 26.7% of those, 20-29 year olds for 

29.8% and 30-39 year olds for another 25.7%. 

China is connected: what a difference four years make 

_______ 2007 ________ _______2011 ________ 

Internet 

users (m) 

% of total Internet 

users (m) 

% of total 

National 210 15.9% 513 38.3% 

Beijing 7.4 46.6% 13.8 70.3% 

Shanghai 8.3 45.8% 15.2 66.2% 

Guangdong 33.4 35.9% 63.0 60.4% 

Source: CNNIC 2011 

Socio-political risks 

Guangxi 

Following Deng Xiaoping’s creed that “getting 

rich is glorious”, Chinese consumers have 

embraced conspicuous consumption over the past 

two decades. However, socio-political risks may 

see this change at least in the near term. While we 

think there are strong deep-seated cultural factors 

driving long-term luxury consumption in China 

that go beyond purely discretionary motives, 

social and political risks have emerged in the 

short term – not least driven by the growing 

wealth divide – which could curb the Chinese 

consumer’s enthusiasm for ostentatious wealth. 

Traditionally, displaying wealth in China was 

driven by more than just status seeking for the 

sake of it, but was regarded as an important tool 

for achieving financial or career success. 

According to The Cult of the Luxury Brand: 

Inside Asia's Love Affair With Luxury, showing 

off wealth in China can trigger a virtuous circle in 

which “if you are seen to be rich and successful, 

you can attract more business deals, and you win 

approvals faster from officials who know you 

have the means to make appropriate gifts and 

donations”; the book estimates 50% of luxury 

sales (and as much as 75% of sales in the watch 

category) are driven by gift-giving, both corporate 

driven and otherwise. 

In Chinese society, guanxi or relationships are 

widely recognized as being the key determinant of 

business performance and are often linked to 

giving gifts or favours. Hard cash was used in the 

early days; this has now been replaced by luxury 

brand gifts. Such corporate gifting is accepted as 

necessary for building relationships. 

In the 1990s, the cognac market in Japan went 

from boom to bust, forcing brands like Hennessy 

to rapidly expand in other markets to make up for 

the sudden slump. What happened was quite 

simple; cognac consumption was boosted by 

corporate expenses: companies would take their 

clients out to upscale restaurants and karaoke bars 

and treat them to the finest. Years later, business 

rules tightened and the market for cognac fell off 

a cliff. 

Could this happen to luxury consumption in China? 

In our view, it is unlikely, but if there is any truth in 

the idea that the majority of transactions are 

business-led (rewarding a colleague, gifting a 

business partner or a prospect) and if the 

government adopts tougher anti-corruption 

governance practices and policies, there is the 

potential for luxury demand to lose steam. 

Slower GDP growth and recent corruption 

scandals have also undermined the practice of 

corporate curb gifting. In a country which is still 

struggling with relatively low average GDP per 

capita, social tension is rising between the have 

and have-nots. Social unrest has become a 

possibility and people making ostentatious 

displays of their wealth and social status risk 

angering those less well-off. 

Similar to Russia’s government, which has passed 

a message of containment to local authorities, the 

Chinese ruling body seemingly wants to prevent 

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the wealth gap from becoming too visible. Over 

the past few months, anti-corruption messages 

have multiplied in the press, bans on officials 

accepting gifts like alcohol and tobacco made 

public, and the general environment for gifting 

seems to be “wait and see”. 

Ironically, whilst several industry operators 

(notably in watches where gifting has historically 

been high versus other product categories) have 

been vocal that there would be a revival of gifting 

during the October leadership transition, it now 

appears that a rebound is not a given. Our view is 

that gift-giving is part of the way people do 

business and that it should resume eventually. 

The recent set of results from Hengdeli is quite 

telling in this respect, we think. Although there were 

no mentions of gifting related issues, we find it 

striking that entry-level watches saw sales increasing 

24% in mainland China in 1H12 while sales of 

products at higher price points were down 8%. By 

contrast, Hong Kong sales (which are driven 

exclusively by Hengdeli’s high-end Elegant concept 

stores) were stable, thus outperforming high-end 

watch sales on the mainland. 

The divergence in performance of high-end watch 

sales in the two markets may be a reflection of Hong 

Kong’s tax advantage, especially as Chinese 

consumers may be becoming more cost-conscious 

amid softer economic conditions, but it may also 

indicate that Chinese corporate gifting is shifting 

abroad because ostentatious wealth has become 

frowned upon at home. 

Exit the “junior wives”? 

Although the practice may be on the wane as cultural 

values in China change, it is not uncommon for 

married wealthy Chinese men to have second wives 

or girlfriends (xiao san – literally “little three”, 

meaning the third person in a relationship). The 

influence of xiao san on luxury demand in China is 

difficult to assess, but there are scores of anecdotal 

press articles reporting how wealthy Chinese men 

tend to purchase flashier, more logo-driven luxury 

goods for second wives or girlfriends. 

The threat of nationalism 

In Korea, which is a large market for luxury goods, 

consumers have fought a government prescription of 

frugality (many consumers having maxed-out their 

credit cards) and continued to purchase imported 

luxury products. 

In April 2008, some Chinese supported a symbolic 

boycott of French goods (citing LV as one to avoid) 

over the treatment of the Olympic torch in Paris. 

Although we believe the impact on sales was 

negligible, we cannot rule out other patriotic 

boycotts in the future. 

Threat of counterfeiting still real 

Counterfeiting continues to plague the industry. 

The World Customs Organization estimates that 

the annual sales of counterfeit goods amount to 

cUSD600bn a year and luxury goods constitute 

5% of that. This means lost sales and jobs for 

the industry. 

Companies now maintain large professional teams 

of investigators to combat the grey market and track 

down ecommerce sites selling counterfeit goods. 

While many observers assume the target markets for 

fake and authentic luxury goods are different, given 

luxury goods consumers would not want to risk 

losing social status as a result of being discovered to 

be using a counterfeit product, the reality is not so 

straightforward. 

When we dig a bit deeper, however, there is 

evidence that the frontiers between the genuine 

luxury and counterfeit markets are more blurred than 

the brands would hope for. Chinese consumers, as 

we have already noted, are very price conscious, 

particularly the younger generation. It is not 

uncommon for them to use a mix of fake and 

genuine products. Surprisingly, there are signs that 

even Chinese consumers who can afford genuine 

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luxury products, prefer buying counterfeit items 

owing to the price. 

This has been partly driven by the fact that 

counterfeiters have, over the years, found ways to 

develop in some cases near-perfect clones. Indeed, 

this why new products launched by brands have 

become increasingly difficult to imitate prints 

(leather goods) or complex movements (watches). 

In mainland China, counterfeit activities remain 

buoyant in dedicated shopping areas, such as 

Shenzhen’s Lowu Commercial Centre and 

Shanghai’s Qipu Lu market. 

Why travel will be supportive 

and what the issues are 

Why you’ll be seeing more Chinese 

coming to your town soon 

Fast-growing emerging economies are changing the 

global travel industry through an increasing number 

of outbound newly affluent travellers and by 

providing destinations for inbound travellers. Over 

the past 20 years, receipts from international tourism 

have grown faster than volumes of tourists (at a 

6.5% CAGR vs. 3.9% for tourists’ flows). We see 

this trend continuing as disposable income grows in 

emerging countries and leisure spending outpaces 

GDP growth. In this section, we detail some of the 

key reasons why we believe Chinese travel is 

soaring in terms of the number of travellers, 

frequency of travel and spending. 

China loosens outbound controls… 

Before 1983, outbound tourism was extremely 

restricted in China. The authorities then made it 

easier travel to Hong Kong and Macau on a 

family or friend sponsored basis. In 1990, the 

Chinese National Tourism Administration 

(CNTA) started authorising travel to a few Asian 

countries (initially Thailand, Singapore and 

Malaysia) still on a family or friend sponsored 

basis before opening up to more Asian 

destinations and Russia. 

Later in the 1990s, non-Asian countries started to 

get the Approved Destination Status (ADS) and 

whilst there are many restrictions still, that is 

when outbound travel started booming. In 1994, 

there were 3.7m outbound trips. In 2000, that 

figure had tripled to 10.4m. For 2012, the China 

Tourism Academy predicts close to 78m trips will 

made abroad by Chinese nationals. 

Luxury counterfeit market and luxury consumer market 

Counterfeit Buyers 

Luxury Consumers 

Rebel 

Rational 

Imitator 

Show-off 

Conformist 

Hedonist 

Tourist 

Fooled 

Lovers 

Intellectuals 

Followers 

Laggards 

Non Luxury 

Consumers 

Potential 

Luxury Consumers 

Potential Counterfeit 

Consumers 

Luxury 

Consumers 

Source: Pierre Xiao Lu in Elite China 

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…and the rest of the world opens its doors 

Relatively softer regulations in China have gone hand 

in hand with numerous bilateral agreements on visas 

that have contributed to lifting some of the barriers that 

weigh on travel. The US is one of many examples and 

is finally on the map for Chinese tourists. 

A memorandum of understanding (MOU) was 

signed in 2008 between China and the US to 

facilitate group leisure travel. Leisure arrivals 

quadrupled from 2007 to 2011 to reach 587,000. The 

total number of Chinese arrivals last year reached 

1.1m, double the figure for 2009 (Euromonitor). In 

January 2012, US President Obama passed an 

executive order to increase visa processing capacity, 

make sure interviews with non immigrant applicants 

would be dealt with within 3 weeks of the application 

and launch a pilot programme to obtain or renew 

visas without interviews for low-risk applicants. 

Speaking at Disney World in February 2012, 

President Obama announced his vision to expand 

international tourism as a means of spurring a US 

economic recovery. “Every year, tens of millions of 

tourists from all over the world come and visit 

America,” Obama said. “And the more folks who 

visit America, the more Americans we get back to 

work.” Obviously, there is a huge economic incentive 

in making the Chinese traveller welcome. For that 

traveller, there is also a huge economic incentive 

to travel. 

Why it’s a “no brainer” to buy abroad 

Motivations for travel have changed. Mass 

tourism in the 1960s was driven by increasing 

disposable income, a thirst for novelty and the 

emergence of commercial airlines. Today, as well 

as cultural / entertainment considerations, tourists 

also take economics into account. Buying an iPad 

in the US to benefit from a weaker USD, or 

buying a Swiss-made watch in Hong Kong rather 

than in mainland China to benefit from lower 

VAT and to avoid consumption and import tax, is 

more common than before. 

We estimate that more than 50% of handbags and 

75% of watches sold in Hong Kong are purchased 

by mainland Chinese. Indeed, the price for a return 

flight to Hong Kong from the mainland is more than 

offset by more favourable tax and duties on highend 

watches. 

Outgoing Chinese tourists expenditure, 2009 

Accomodation 

Other outgoing 

11% 

tourist expenditure 

Entertainment and 

30% 

excursion 

11% 

Food 

Travel within 

12% 

country 

4% 

Shopping 

32% 

Source: Euromonitor International, July 2010 

International tourists arrivals and the world population, 1995-2011 

1100 

1000 

900 

800 

700 

600 

500 

400 

5.7 5.8 5.9 5.9 6.0 6.1 6.2 6.2 6.3 6.4 6.5 6.5 6.6 6.7 6. 8 6.9 7.0 

982 

913 

935 

839 894 

877 

795 

755 

675 

695 684 

626 

675 

586 602 

528 

561 

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

8.0 

7.0 

6.0 

5.0 

4.0 

3.0 

2.0 

1.0 

0.0 

International tourists arriv als (m, left scale) 

World population (bn, right scale) 

Source: US Census Bureau, World Tourism Organization 

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According to the CEIC, 67% of total visitors in 

Hong Kong came from mainland China in 2011, 

compared to 21% in 1997 at the time of the Hong 

Kong handover to China with the faster increase 

coming from day travellers to Hong Kong. 

In 2011, a survey conducted by the Ministry of 

Commerce (MOFCOM) also revealed that the 

prices of 20 luxury brands over five categories, 

(watches, leather goods, apparel, liquor and 

electronic products) were found to be about 45%, 

51% and 72% higher than those sold in Hong 

Kong, the US and France, respectively. With the 

recent weakening in the EUR and the possibility 

to claim back tax (with the likes of Global Blue or 

others), purchasing goods in Europe when you are 

a Chinese national makes sense. 

Chinese consumers do not even need to travel as 

far as Europe for a good deal, given Hong Kong’s 

tax-free prices. Should a consumer choose to buy 

a watch or jewellery item in China versus Hong 

Kong, the price will be marked up by three layers 

of taxes: 1) import taxes: 20-35% for jewellery 

and 11% for watches; 2) consumption taxes: 5% 

for gold, silver, platinum and diamond jewellery, 

10% on gem-sets and 20% for high end watches; 

and 3) value-added tax (VAT): 17.5%. 

In accordance with China’s commitments to the 

World Trade Organization, tariffs on imported 

luxury goods have been reduced since 2005 but 

they still exist. For instance, the 28-40% tariff that 

was levied on imported watches until the end of 

2004 was cut to 12.5% and then further reduced to 

11% as of end 2006. 

However, all things being equal, a Cartier watch 

is still 11% more expensive in Beijing than in 

Hong Kong. Although eventually import tariffs 

should theoretically disappear and should thus 

constitute a positive risk for the sector, for the 

time being, mainland China is still a tougher place 

to do business than some others. 

Retail price breakdown of an imported luxury watch (HKD) 

150 

100 

50 

0 

M ainland China 

Wholesale 

price 

Hong Kong 

Import price VAT (17.5%*) 

Consump. tax (20%)* Import duty (11%)* 

Wholes ale price 

Distributor's gross margin 

Source: HSBC estimates- *: calculated on import price 

China outbound tourism 

160 

140 

120 

100 

80 

60 

40 

20 

0 

3 3 5 7 7 9 10 11 

15 17 

22 

28 31 

35 

41 

46 48 

57 

70 

80 

88 

97 

105 

113 

122 130 140 

148 155 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

2011 

2012 

2013 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

Source: China National Tourism Administration, WTO projected tourism figures 

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Other reasons why the Chinese prefer 

shopping abroad 

Holiday indulgence: Most people will be 

keener to spend during holidays, whether on a 

restaurant meal or a handbag, all the more as 

low cost airlines increasingly allow savings 

on travel costs. 

Gift-giving: Gift-giving is an important 

tradition in some Asian countries, like Japan 

and China. In China, reciprocity underlies 

gift-giving, and holidays are one of the many 

occasions that trigger the offering of gifts. 

Better shopping experience: The product 

range can be different from one region to 

another: it is not uncommon to find in Hong 

Kong the rarer designs of Swiss watches or 

LV handbags that cannot necessarily be found 

on the mainland. Product collections can be 

wider abroad. The product assortment and the 

service that goes with it (i.e. knowledgeable 

staff) are other reasons to shop in Europe or 

Hong Kong versus the mainland. 

Snobbery: Overseas purchases reinforce 

status. Beyond the shopping experience, 

purchasing luxury goods abroad can enhance 

a traveller’s apparent status. It also shows that 

one does not buy counterfeit items. This gives 

the Chinese customer a sense of belonging to 

an international, yet more exclusive and 

sophisticated group of customers. There is an 

extra feel-good factor to purchasing a Chanel 

bag at the historic Chanel store on rue 

Cambon in Paris rather than at home in, say, 

Shanghai. 

Quality assurance: Another reason mainland 

tourists prefer to shop abroad is for the 

assurance that they are buying authentic, high 

quality products. With the prevalence of 

counterfeit goods in China, we believe 

Chinese consumers can feel more assured that 

the products they purchase are what they 

claim to be when they purchase those items 

in, say, Hong Kong. For jewellery in 

particular, measures can be taken to provide 

quality assurance to customers. 

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Chinese tourist figures: many more 

big spenders 

The ease of travel, wealth expansion and other 

factors supportive of travel described above are 

expected to drive c12% growth pa in outbound travel 

over the next five years. The Boston Consulting 

Group estimates that “fewer than 200m urban 

Chinese consumers have taken an overnight leisure 

trip. With an average of 25m people taking their 

first-ever such trip every year, however, that number 

will more than double by 2020”. Eight out of the top 

10 destinations for Chinese travellers are in Asia, 

with France now in the top 10 and the US rising up 

the rankings. 

According to figures released by the Ministry of 

Public Security, 38.6m mainland Chinese citizens 

ventured outside the country’s borders in 1H12, a 

nearly 20% rise over the same period last year. 

With this year’s surge, Chinese tourists are on track 

to take almost 80m overseas trips over the course 

of 2012. In an article published two years ago in 

the Financial Times, Shao Qiwei, Chairman of the 

China National Tourism Association predicted 

Chinese tourists would make 100m overseas trips 

pa by 2015; given current growth rates, this number 

could come sooner than he thought. 

Top 10 destinations for Chinese and expected growth 

Destination 

Trips in 2011 (in 

thousands) 

Absolute 

growth by 2016 

Expected 

growth (%) 

Hong Kong 13,055 5,731 44% 

Macau 7,672 1,888 25% 

South Korea 2,183 2,113 x 2 

Taiwan 2,150 1,424 66% 

Thailand 1,680 1,458 87% 

Singapore 1,640 1,627 x 2 

Malaysia 1,225 477 39% 

USA 1,098 1,899 x 2.7 

Vietnam 1,027 830 81% 

France 984 648 66% 

Source: Euromonitor, 8 March 2012 

In terms of spending, the BCG expects China to 

surpass Japan as the second largest travel and 

tourism market in the world by 2013, representing 

8% of global tourism revenue in that year and 

growing to 14% by 2020. The US is expected to 

remain No 1, representing 27% of the global 

travel market in 2013 and 25% in 2020. 

Chinese travellers, as a group, are now ranked the 

third biggest spenders in the world, followed by 

German and American travellers, climbing from 

No 4 position in 2009 and No 5 in 2007, 

according to UNWTO. However, looking at per 

capita data, Chinese travellers are spending about 

only one-fifth of what the average Russian spends 

on holiday. There is therefore room for Chinese 

travellers to both travel more often, and to spend 

more on their holidays. 

China's travel and leisure market value (RMBbn) 2010-20e China's travel and leisure market, number of trips (m), 2010-20e 

6,000 

5,000 

3,911 

3,000 

2,500 

2,380 

4,000 

2,000 

3,000 

2,000 

1,000 

0 

1,163 

321 

1,544 

1,500 

1,000 

500 

0 

1 ,021 

37 101 

2010 2020e 

2010 2020e 

Outbound trips 

Domestic trips 

Outbound trips 

Do mestic trips 

Source: BCG 

Source: BCG 

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Mainland tourist spending, 2000-10 Breakdown of mainland visitor spending in Hong Kong, 2010 

HKD mn 

100,000 

80,000 

60,000 

40,000 

20,000 

0 

100% 

80% 

60% 

40% 

20% 

0% 

2000 2002 2004 2006 2008 2010 

Same day visitor spend 

Overnight visitor spend 

yoy growth (same day) 

yoy growth (overnight) 

Me als 

Outside Hotel 

9% 

Others 

Shopping 

7% 

73% 

Hotel Bills 

11% 

Source: HK Tourism Board, HSBC 

Source: CEIC, HSBC: edit 

Chinese tourists in Australia already spend an 

average of USD3,000 per trip versus USD1,000 

for an American or European visitor. 

On average, Chinese travellers spend more than onethird 

of their travel budget on shopping versus 11% 

on accommodation or food. This differs from 

Americans or Germans, who are likely to spend 

more on accommodation. Given the current low 

level of per capita spending on travel, the potential 

for shopping spending by Chinese travellers to 

increase further is substantial, in our view. When 

travelling to Hong Kong (see chart top right), this 

pattern of spending by Chinese consumers is even 

more extreme, with the purpose of the visit clearly 

being to shop. 

In France, we estimate Chinese consumers’ spending 

represented close to 30% of total luxury goods sales 

in the country last year. According to the Paris 

Tourism Board, 60% of Chinese travellers’ budget in 

Paris is dedicated to shopping. 

The issues of travel 

Hong Kong issues and why we believe in Taipei 

Looking at the table on page 12, it is striking to see 

that rents in Hong Kong can be six times higher than 

in Beijing per square foot. For now, sales density is 

also much higher so most brands are still making 

good four-wall profits but there are some limits: 

Quality of service: Chinese shoppers don’t 

seem to mind queuing outside Cartier on Canton 

Road, Tsim Sha Tsui (a major shopping district 

in Hong Kong). But as consumers become more 

sophisticated, they embrace the fact that the real 

luxury of shopping for high end items is time, 

space and dedicated sales staff. 

Breakdown of mainland overnight visitor spending in Hong Kong, 2008-10 

% of total M ai nland overnig ht visitor 

spen din g 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

Jew ellery and 

watch 

Garment/ Fabrics 

Leather/ Cosmetics & skin 

Sy nthetic Goods care/ Perfume 

2008 2009 2010 

Electrical/ 

Photographic 

Goods 

Foodstuff, alcohol 

and tobacco 

Personal care 

(sham poo, 

diapers etc) 

Other items 

Source: HK Tourism Board, HSBC 

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Where do rents stop: Abercrombie & Fitch 

just opened its first flagship this summer on 

Pedder Street in Hong Kong (where 

Richemont’s Shanghai Tang brand used to be) 

and is paying rent north of USD1m a month. 

Shopping malls are reducing space for food 

courts and expanding luxury stores. Some 

streets on Hong Kong Island (Russell Street 

for instance) have a huge number of watch 

stores. Out of 71 stores that were rented for 

more than HKD1m in Hong Kong during 

2011, 16 were rented by watch retailers. To 

counter the issue of a lack of space, some 

shopping mall operators are now using popup 

store concepts (e.g, Tiffany pop-up store in 

the Landmark). 

Tension between Hong Kong locals and 

mainland Chinese: with different dialects 

and social norms, there is growing tension 

between Hong Kong locals and mainland 

Chinese visitors (e.g., the Dolce & Gabbana 

incident in early January 2012). 

Hotel capacity in Hong Kong is now close to 

100% (89% in June 2012), car traffic (with 

incoming mainlanders) is becoming more 

severe and the lack of commercial space is 

becoming an issue. 

On a recent trip to Taiwan, we met brand 

operators at the newly refurbished Taipei 101 

luxury mall, telling us that Taipei is Hong 

Kong’s biggest rival for luxury. We think this 

makes a lot of sense given: 

China and Taiwan have lifted restrictions on 

visits from mainland Chinese to Taiwan. 

Direct flights have multiplied. The ban on 

solo Chinese travellers was lifted in June 

2011. Effective 28 April 2012, Taiwan 

doubled its quota of independent Chinese 

tourists to allow up to 1,000 visitors a day. 

While only people from Beijing, Shanghai 

and Xiamen were allowed to visit, under the 

new measures independent travellers from six 

more cities have been admitted, with another 

four cities to be added later in the year. In 

2011, more than 1.78m Chinese visited 

Taiwan (versus 28m in Hong Kong), making 

China the biggest source of visitors to the 

island (ahead of Japan), according to the 

Tourism Bureau. 

Taiwanese speak Putonghua (Mandarin), the 

flight time from Shanghai is just over an hour 

and there is no congestion in the shops. We 

estimate Chinese nationals represent 25% of 

sales in Taipei 101 Mall, and the stores are 

brand new and amongst the most impressive 

in the world (notably the Christian Dior 

flagship). Malls are also a standard stop for 

tour groups (which we regard as a captive 

audience). 

With Matsu residents voting to allow 

Taiwan’s first casino to be built open on their 

island, Taiwan could become the next Macau. 

Ironically, the casino business could help fill 

the void left in the economy by the decline in 

military personnel numbers in Taiwan (from 

50,000 during the Cold War to 3,000 today), 

which was reinforced by the détente between 

Beijing and Taipei in 2008. 

Chinese visitors spent about 60% of their 

budget in Taiwan on shopping and 98% were 

satisfied with their trip and said they would 

consider returning. A survey found that the 

three most popular tourist attractions in 

Taiwan are night markets, the Taipei 101 

skyscraper and the National Palace Museum. 

Tourists also said they were most impressed 

by the hospitality of Taiwanese, the country's 

gourmet food and the unique ambiance of the 

night markets. (Taiwan Tourism Association). 

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Running empty showrooms 

Many investors travelling to mainland China find 

that the luxury shopping malls look half empty. 

Indeed, while the average ticket is similar to the 

global average, traffic is much lower. 

With the acceleration in the transfer of Chinese 

luxury consumption to overseas markets (notably to 

Europe), these stores may continue to look half 

empty for a while. As we explained previously, there 

are good reasons for the retail operations of brands in 

China to be more profitable than the average for 

their other stores around the world. However, as 

rents and wages continue to increase, margins may 

come under pressure in local operations, especially if 

an increasing number of Chinese consumers treat 

local stores as showrooms for products that they can 

go and buy more cheaply elsewhere 

Running stores for some brands is akin to 

advertising. Chanel has very few stores in mainland 

China; they are there to facilitate product discovery. 

The larger brands, which carry goods at more 

accessible price points and have greater retail 

footprints, cannot afford to run unprofitable stores 

and would have to resize or relocate some stores. 

Alienating local Western consumers 

Wealthy Chinese tourists, who are hungry for 

brands, can get a good deal in Europe, especially 

after they claim back the VAT. The issue is that 

price points will have to converge at some stage. As 

it is unlikely that the brands will lower prices in 

China (for brand equity reasons), we think it is 

increasingly likely that brands will increase prices in 

Europe to try to minimise the gap. 

Losing out on gross margin 

Some management teams have said it is pretty much 

irrelevant to the P&L structure whether the sales 

were in Asia or Europe. 

We disagree. We believe that Asian sales, given the 

price points and despite the shipping costs, ensure 

much higher gross margins for the brands than if 

they were selling the same products in Europe. 

Whilst the proportion of fixed costs is greater in 

Europe (rents, staff costs), implying that Chinese 

tourists feed into the operating leverage of European 

operations, we are not convinced the EBIT 

contribution of European sales is as positive as if the 

brands were selling locally in Asia. 

The CO-J-A-C theory of brand evolution 

We believe that the global expansion of luxury 

players should follow certain steps, as some 

consumers may be early adopters (typically the 

Japanese) and others laggards (typically the 

Westerners and Chinese). This is linked to various 

cultural, social and economic factors. Looking at 

both brands that have successfully and not so 

successfully expanded, we have come to the 

conclusion that there is a logical path of expansion. 

CO-J-A-C: diffusion of a luxury brand globally 

Continent of Origin 

(up to now, Europe or America) 

Japan 

Prada increased prices by 4-5% in Europe in July 

2012 across the board. We believe this is a logical 

move from a financial point of view. The risk though 

is that brands will alienate local European consumers 

who might take the view that the prices of luxury 

products have become too expensive. 

Source: HSBC 

Atlantic alternative 

(America or Europe) 


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CO: it is logical that first adopters of a product 

should be situated in the Continent of Origin of 

the brand that produces it. The French and British 

used to drink cognac. The Italians were the ones 

who made Gucci’s and Prada’s success and are 

still the main driver behind Tod’s. Coach was 

virtually unknown outside the US during the 

brand’s first 50 years. 

J: we do not know if it is fascination with the 

Western lifestyle, eagerness to adopt new trends 

or wealth but Japan has often been a trendsetter in 

the premium consumer sector. Louis Vuitton and 

Hennessy cognac boomed in Japan in the early 

1990s, Hermès’ and Bulgari’s presence is still 

massive there because of early investments, 

Coach and Tiffany’s largest expansion after the 

US was there and Burberry’s Japanese license was 

signed decades ago making Japan its largest 

market still today (at retail). It is not surprising 

either that some of Louis Vuitton’s successes have 

been thought up in Japan, including the Takashi 

Murakami collaboration starting in 2003 and now 

the collaboration with artist Yasoi Kusama. 

A: when a brand succeeds at home and in Japan, 

the next logical step becomes to attack the 

“Atlantic alternative” (the US if the brand is 

European, and Western Europe if it is a US 

brand). Cartier and Louis Vuitton made it big in 

the US long after Japan while Tiffany for instance 

is still under-penetrated in Europe (c50% of 

European sales are still in London) and Coach is 

virtually nowhere. 

C: this is when the brand finally makes it to 

China. Of course there may be other markets, but 

sizeable markets other than China are difficult to 

forecast at this stage. All major luxury brands 

have started investing heavily in China. 

So what could go wrong? Here are a few 

examples of brands not having followed the path 

and thus, in our view, now facing some risks. 

Lancel: this French brand (part of Richemont) 

started off developing in Japan and made an 

unsuccessful attempt in the US before entering 

China with high ambitions and a local partner. 

Coach: for a number of reasons including limited 

awareness, strong local competitors, less 

profitable retail operations (key money), Coach 

has not made it in Europe and we are cautious on 

its prospects for expansion there. Still, Coach 

opened a first store in Le Printemps, in Paris, 

which we believe might be more a case of trying 

to increase brand visibility to tourists, particularly 

the Chinese and Americans, than an attempt to 

capture the locals. 

The biggest danger in not taking the “CO-J-A-C” 

path in our mind is that by skipping countries or 

regions, brands can become too dependent on a 

single region. Logically, if 50% or more of sales 

take place in one region, the risk is that 

management adjusts the nature of the brand to try 

to adapt to local tastes. Chinese luxury consumers 

purchase Western goods for what they are. We are 

convinced that some brands have become too 

Asia-dependent in their design and 

communication; hence losing some of their 

inherent distinctive attributes. 

Beyond this geographic evolution of brands, we 

also very much believe that Chinese luxury 

consumption is influenced by Japanese trends, i.e. 

leading brands in Japan have a better chance of 

being successful in China as consumers look East 

for the latest trends (travelling more and more to 

Tokyo), and closer to home. Shanghai-based 

consumers also go to Japan more. 

While brands must be aware of regional 

differences, it is important that they do not overly 

adapt their designs to the Chinese market as a 

more Chinese-looking brand could lose its appeal. 

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The threat of overdependence 

Ten years ago, the concern was that luxury sales 

were European-based with a strong Japanese 

following, and that Japanese consumers had started 

to represent such a huge chunk of sales that their 

attitudes could make or break a brand’s commercial 

success. 

Three years ago, the luxury sector became more 

global. It had a decent proportion of revenues from 

the US (although less than the US percentage of 

global GDP), a strong presence in Asia ex-Japan 

(Korea, Greater China) and pockets of growth 

elsewhere (Eastern Europe, Middle East). 

Now, the Chinese have become the dominant group 

of consumers, which again poses the risk of the 

luxury brands having too many eggs in the 

same basket. 

Our analysis of sales by nationality for Louis Vuitton 

(to a certain extent a proxy for the sector), shows that 

Chinese nationals could represent 31% of sales in 

just three years. 

In recent months, many brands have been opening 

new flagship stores. The high levels of capex posted 

on these store launches suggest the brands are going 

beyond trying to catch up with pre-crisis levels and 

are expanding aggressively. In addition, many of 

these new flagships are being built in Europe, 

making them particularly risky investments should 

Chinese consumption in Europe dry up owing to a 

reversal in currency trends (i.e. the EUR strengthens) 

or regulations change in China. 

Capital is less of an issue for big groups that 

deleveraged in 2008-09. However, the wisdom of 

global expansion right now could be called into 

question for smaller players. 

Overdependence also poses the issue of what 

valuation investors should be prepared to pay 

given growth is still strong for the sector but much 

of it is linked to a single consumer base: the 

Chinese. 

The emerging market theme is one that goes way 

beyond the realm of luxury stocks. What is 

interesting though is that for luxury, Chinese 

consumers are by far the most important driver. 

Unlike fast moving consumer goods companies 

(say, beverages), luxury goods have a limited 

footprint in Russia, India, Latam and Africa for 

reasons that are either economic (affordability), 

cultural or linked to poor retail infrastructure, in 

our view. 

We get the sense that investors are discounting 

emerging market growth as a given. However, we 

believe a strong dependence on a single market 

may be a double-edged sword and the market may 

have fully priced in the positives for now. 

Louis Vuitton brand sales by nationality of customer 

% 2003 2007 2010 2015e 

European 22 19 17 13 

American 13 15 15 14 

Japanese 51 36 21 15 

Chinese mainland & travel 4 12 21 31 

Other Asian 6 11 17 18 

Other 4 7 9 10 

Total 100 100 100 100 

Source: HSBC estimates, Company data 

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Company profiles 

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Burberry 

Lack of operating leverage (at least in the short term) despite strong 

sales growth may now become an issue, especially since Prada and 

Ferragamo have been listed and both display strong growth and 

leverage 

We see uncertainties in perfumes and cosmetics operations and 

regarding the future of the Japanese license 

Remain Neutral (adding V-flag); decrease target price to 1,500p 

(from 1,550p); valuation not supportive (trading at 16.9x FY13e PE, 

an 11% premium to peers) 

11% PE premium not justified 

Still a top-line growth story 

Burberry has been repositioned from a UK 

outerwear manufacturer to a successful global brand, 

embracing a strong retail roll-out and investing 

heavily in digital marketing (more than 10m 

Facebook fans, artofthetrench website etc.) to 

capture a younger and more connected generation. 

Over the last few years, the British icon has 

consistently outperformed the industry in terms of 

sales growth and has taken advantage of this to clean 

its distribution network (taking back licenses, closing 

its country-specific business in Spain, cutting the 

number of wholesale doors etc.). In terms of 

sentiment, we believe management has successfully 

convinced even the most sceptical investors about 

the strength of the Burberry brand. 

Need some clarification on two 

businesses 

The perfumes and cosmetics license: on 27 July, 

Burberry announced that discussions with 

InterParfums regarding the renewal for the Burberry 

fragrance and beauty business had been terminated 

(note that this business represented 2% of Burberry 

sales but generated EUR211m sales in 2011 at 

wholesale value). At the end of December 2012, the 

contract will be terminated and Burberry will have to 

pay a GBP181m indemnity in cash to compensate 

for the time left in the contract (which was to expire 

end-2017). Burberry has not yet announced how it 

will handle this business going forward (the group 

can operate internally or find another partner, in our 

view). Whatever the outcome, we believe Burberry 

is now under pressure to generate enough 

incremental business to justify the hefty price paid. 

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The Japanese license: Burberry’s Japanese 

business, still under license for apparel, needs to be 

taken back and this should happen only when the 

contract expires in 2015 (note that annual brand sales 

at retail equivalent represented cGBP1bn in FY 

March 2012). We acknowledge that terminating the 

license will be a good thing in terms of brand image, 

but the market needs to have some clarity on how 

this business will be operated and at what cost. In the 

past, the takeover of their licences by Dior and YSL 

demonstrated that it can take a while before a brand 

can generate more profits by operating directly 

rather than through a licence. 

Lack of operating leverage in the short 

term 

On top of the two significant uncertainties 

mentioned above, the market expectations of finally 

seeing operating leverage come through have once 

again been postponed, when Burberry gave its initial 

FY March 13 EBIT margin guidance for 

Wholesale/Retail, calling for a “modest 

improvement over the full year, but a decline in 

1H12 due to the phasing of investment”. This is 

exactly the same guidance given a year before for 

FY March 12; however, we believe Burberry will 

continue to be a top-line story rather than a margin 

story for at least one more year. 

From an industry standpoint, this may not be an 

issue per se: we understand the rationale for 

investing behind new avenues for growth, and it 

makes sense to invest in the development of a 

second-to-none digital marketing platform. This 

would ensure great visibility on the recruitment of 

new consumers, as well as creating a potential buzz 

on the brand with a younger consumer profile. 

From a stock market standpoint, this may be an 

issue, given Prada and Ferragamo have been listed in 

2011 and they both display strong sales potential 

with significant operating leverage. 

Earnings, valuation and risks 

Company guidance for FY March 2013 includes: 

Retail space (average) increase of 12-14%, 

which should translate into +8-9% sales growth. 

We factor in 16% retail sales growth at constant 

FX with 7% comps 

Wholesale revenue to be up mid-single digits at 

constant FX in H1, including the rationalisation in 

the US and in Europe. We factor in 6% growth at 

constant FX 

Licence revenues over the full year should be flat 

at constant FX and in reported terms. We factor in 

0% growth at constant FX 

We have kept our FY March 2013-15 EBIT estimates 

unchanged. For 2013e, 2014e and 2015e, we forecast 

organic sales growth of 13%, 12% and 11%, 

respectively. In terms of EBIT margin, we expect 

20.6% (vs 20.8% previously), 21.0% (vs 21.2% 

previously) and 21.2%, respectively, for FY March 

2013-15e. Note that Burberry, which reports in GBP, 

does not benefit as much from the recent FX moves as 

other companies reporting in EUR and CHF. 

We decrease our DCF-based target price to 1,500p 

from 1,550p on the back of lower medium-term 

assumptions beyond March 2015 to reflect the 

uncertainties on the Japanese license. The assumptions 

used to generate our target price are detailed on page 

37. Under our research model, the Neutral band for 

volatile UK stocks is 10 percentage points above and 

below the hurdle rate of 7.5%. Our 1,500p target price 

provides a 10.3% potential return, which is within the 

Neutral range; therefore we reiterate our Neutral (V) 

rating. We add the volatility flag in recognition of the 

stock’s historical volatility having increased. Potential 

return equals the percentage difference between the 

current share price and the target price, including the 

forecast dividend yield when indicated. 

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We feel the valuation is not supportive in the light 

of the above-mentioned uncertainties. Burberry 

shares are up 15% year-to-date, compared to 26% 

for our European luxury coverage. But the stock is 

still trading at an 11% premium (16.9x FY13e PE) 

to its peers. The main downside risks to our rating 

include a failure to address the issue of expiration of 

the Japanese license in 2015 (the local line is a 

significant source of profit, even though it is below 

the positioning of the international lines). 

In addition, as the brand has attracted outside talent 

in recent years, there is a risk that this talent may 

prove difficult to retain. Risks to the upside include 

a potential takeover bid (Burberry remains a 100% 

free float company), and the possibility that market 

share gains translate into much greater sales growth 

than we have factored into our model. 

Burberry P&L Full Year ending March 

GBPm 2008a % 2009a % 2010a % 2011a % 2012a % 2013e % 2014e % 2015e % 

Sales 995 17 1,202 21 1,280 7 1,501 17 1,857 24 2,110 14 2,366 12 2,623 11 

Gross profit 618 18 666 8 804 21 1010 26 1299 29 1511 16 1713 13 1909 11 

Gross profit margin 62.1% 55.4% 62.8% 67.3% 69.9% 71.6% 72.4% 72.8% 

Operating expenses 416 14 485 17 584 20 709 21 922 30 1,076 17 1,217 13 1,353 11 

As a % of sales 41.8% 40.4% 45.6% 47.2% 49.6% 51.0% 51.4% 51.6% 

Adjusted EBIT 206 11 181 -12 220 22 301 37 377 25 435 15 496 14 556 12 

EBIT margin 20.7% 15.0% 17.2% 20.1% 20.3% 20.6% 21.0% 21.2% 

Reported EBIT 202 28 -10 -105 171 -1,828 302 77 367 21 435 19 496 14 556 12 

EBIT margin 20.3% -0.8% 13.4% 20.1% 19.7% 20.6% 21.0% 21.2% 

Pre-tax profit 196 25 -16 -108 166 -1,131 296 78 366 24 440 20 506 15 571 13 

Reported net profit 135 23 -6 -104 81 -1,456 208 156 263 26 321 22 369 15 417 13 

Clean net profit 140 27 132 -6 155 17 217 40 263 21 321 22 369 15 417 13 

EPS (clean diluted) 31.6 28 30.2 -5 35.1 16 48.8 39 61.6 26 72.3 17 83.1 15 93.8 13 


Burberry Sales and EBIT by network – Full Year ending March 

GBPm 2008a YOY 

% chg 

2009a 

YOY 

% chg 

2010a 

YOY 

% chg 

Retail sales 484 18 630 30 749 19 962 29 1270 32 1489 17 1707 15 1929 13 

Wholesale sales 426 20 489 15 434 -11 441 2 478 9 513 7 550 7 583 6 

License Sales 85 -2 83 -3 97 18 98 1 109 10 108 -1 109 2 111 1 

Total sales 995 17 1202 21 1280 7 1501 17 1857 24 2110 14 2366 12 2623 11 

Retail & Wholesale EBIT 136 21 110 -19 138 25 220 59 287 31 346 21 405 17 464 14 

Retail & Wholesale EBIT margin 14.9% 9.8% 11.6% 15.6% 16.4% 17.3% 18.0% 18.5% 

License EBIT 71 -4 71 0 82 16 82 -1 90 10 89 -1 91 2 92 1 

License EBIT margin 83.3% 85.6% 84.3% 82.9% 82.9% 82.9% 82.9% 82.9% 


2011a 

YOY 

% chg 

2012a 

YOY 

% chg 

2013e 

YOY 

% chg 

2014e 

YOY 

% chg 

2014e 

YOY 

% chg 

Burberry Sales by geography – Full Year ending March 

GBPm 2008a YOY 

% chg 

2009a 

YOY 

% chg 

2010a 

YOY 

% chg 

Europe 453 19 524.3 16 515.0 -2 474.6 7 552.6 16 619.6 12 678.6 10 732.9 8 

North America 235 19 304.7 30 321.0 5 386.5 35 434.5 12 468.0 8 511.5 9 549.5 7 

Asia Pacific 189 13 240.0 27 282.6 18 457.1 131 652.5 43 784.0 20 911.5 16 1,048.3 15 

Rest of the world 33 79 49.9 50 63.9 28 84.7 71 109.0 29 130.8 20 155.0 19 181.3 17 

Licensing 85 -2 82.6 -3 97.5 18 98.4 11 108.6 10 107.6 -1 109.4 2 111.0 1 

Total sales 995 17 1,201.5 21 1,279.9 7 1,501.3 45 1,857.7 24 2,110.0 14 2,366.0 12 2,623.0 11 

Source: company, HSBC estimates 

2011a 

YOY 

% chg 

2012e 

YOY 

% chg 

2013e 

YOY 

% chg 

2014e 

YOY 

% chg 

2014e 

YOY 

% chg 

36

1 

0 

. 

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Financials & valuation: Burberry Group 

Financial statements 

Year to 03/2012a 03/2013e 03/2014e 03/2015e 

Profit & loss summary (GBPm) 

Revenue 1,857 2,110 2,366 2,623 

EBITDA 454 533 604 675 

Depreciation & amortisation -88 -98 -108 -119 

Operating profit/EBIT 377 435 496 556 

Net interest -1 5 10 15 

PBT 366 440 506 571 

HSBC PBT 366 440 506 571 

Taxation -101 -119 -137 -154 

Net profit 264 321 369 417 

HSBC net profit 274 321 369 417 

Cash flow summary (GBPm) 

Cash flow from operations 358 406 466 523 

Capex -153 -190 -190 -190 

Cash flow from investment -161 -190 -190 -190 

Dividends -99 -109 -126 -145 

Change in net debt -40 -107 -150 -188 

FCF equity 181 216 276 333 

Balance sheet summary (GBPm) 

Intangible fixed assets 133 133 133 133 

Tangible fixed assets 329 421 503 574 

Current assets 1,003 1,156 1,346 1,577 

Cash & others 547 654 804 992 

Total assets 1,611 1,855 2,127 2,430 

Operating liabilities 493 526 554 585 

Gross debt 209 209 209 209 

Net debt -338 -445 -595 -783 

Shareholders funds 867 1,080 1,323 1,595 

Invested capital 425 530 624 708 

Ratio, growth and per share analysis 

Year to 03/2012a 03/2013e 03/2014e 03/2015e 

Y-o-y % change 

Revenue 23.7 13.6 12.1 10.9 

EBITDA 24.6 17.4 13.3 11.7 

Operating profit 25.2 15.4 14.0 12.1 

PBT 23.8 20.2 15.0 12.8 

HSBC EPS 26.2 17.3 15.0 12.8 

Ratios (%) 

Revenue/IC (x) 4.9 4.4 4.1 3.9 

ROIC 70.8 66.5 62.8 61.0 

ROE 34.6 33.0 30.8 28.6 

ROA 17.8 18.5 18.6 18.3 

EBITDA margin 24.5 25.3 25.5 25.7 

Operating profit margin 20.3 20.6 21.0 21.2 

EBITDA/net interest (x) 649.0 

Net debt/equity -38.0 -40.4 -44.2 -48.4 

Net debt/EBITDA (x) -0.7 -0.8 -1.0 -1.2 

CF from operations/net debt 

Per share data (GBPp) 

EPS Rep (fully diluted) 59.33 72.30 83.14 93.82 

HSBC EPS (fully diluted) 61.63 72.30 83.14 93.82 

DPS 25.00 28.92 33.26 37.53 

Book value 199.20 247.95 303.84 366.28 

DCF analysis 

HSBC assumptions 

DCF, comprising 

Neutral (V) 

Risk-free rate (%) 3.00 EBIT growth 2011-21e CAGR (%) 8.4 

Equity premium (%) 4.50 EBIT growth 2021-41e CAGR (%) 3.2 

Sector beta 1.20 Fade period 2041-47e 

Specific beta 1.00 WACC (%) 8.40 

Sensitivity and valuation range (GBP/share) 

Cost of capital vs fade period 4 years 8 years 12 years 

7.4% 16.77 17.21 17.54 

7.9% 15.67 16.04 16.35 

8.4% 14.69 15.00 15.29 

8.9% 13.81 14.08 14.33 

9.4% 13.02 13.24 13.47 

Valuation data 

Year to 03/2012a 03/2013e 03/2014e 03/2015e 

EV/sales 3.0 2.6 2.2 1.9 

EV/EBITDA 12.2 10.2 8.8 7.6 

EV/IC 13.0 10.3 8.5 7.2 

PE* 22.1 18.8 16.4 14.5 

P/Book value 6.8 5.5 4.5 3.7 

FCF yield (%) 3.1 3.7 4.7 5.7 

Dividend yield (%) 1.8 2.1 2.4 2.8 

Note: * = Based on HSBC EPS (fully diluted) 

Issuer information 

Share price (GBPp)1,360 Target price (GBPp)1,500 

Reuters (Equity) BRBY.L Bloomberg (Equity) BRBY LN 

Market cap (USDm) 9,487 Market cap (GBPm) 6,004 

Free float (%) 100 Enterprise value (GBPm) 5435 

Country United Kingdom Sector Textiles, Apparel & Luxury 

Goods 

Analysts Sophie Dargnies Contact 331 5652 4348 

Antoine Belge Contact 331 5652 4347 

Erwan Rambourg Contact 852 2996 6572 

Price relative 

1633 

1533 

1433 

1333 

1233 

1133 

1033 

933 

833 

733 

Source: HSBC 

Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 

Burberry Group Rel to FTSE ALL-SHARE 

Note: price at close of 27 Aug 2012 

1633 

1533 

1433 

1333 

1233 

1133 

1033 

933 

833 

733 

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Christian Dior 

A cheaper way to access LVMH’s robust fundamentals 

Increasing target price to EUR140 from EUR139 on higher 

assumptions for the Dior Couture business 

We reiterate Overweight with TP of EUR140 (from EUR139); if 

liquidity is not a major issue for investing, we favour Dior over 

LVMH (downgraded to Neutral with a TP of EUR145) 

Reiterate OW on Dior in spite 

of our downgrade to Neutral for 

LVMH 

28% discount to RNAV 

Christian Dior is the main holding company for 

LVMH, controlling 40.9% of the shares and c57% 

of the voting rights. Besides its stake in LVMH 

(contributing 90% of RNAV), Dior’s only 

operational entity is the Dior Couture brand (8% of 

RNAV). Christian Dior’s holding in LVMH has 

changed slightly since the dilution from the Bulgari 

deal in 2011. Christian Dior now holds a 40.9% 

stake (vs 42.4% before the deal) and c57% of voting 

rights (c58% previously). 

Since the beginning of 2012, Dior shares have gained 

28% vs 22% for LVMH shares. Dior’s discount to 

our estimated restated net asset value (RNAV) is now 

28% (vs 30% on 2 January 2012). There is nothing 

surprising here as conglomerate/holding discount to 

RNAV tends to fall during bull market phases and 

vice versa. As evidenced by the chart on the next 

page, the discount to RNAV has moved within a 6%- 

34% range (average 20%) since 2005. Note that 

higher levels of discounts were witnessed in the 

1995-2005 period, but we would discard them from 

the analysis since the LVMH control structure was 

much more complicated and the French tax regime 

back then (taxation on capital gains) implied a higher 

discount for most French conglomerates. 

We downgrade LVMH to Neutral (from Overweight) 

but maintain our target price of EUR145 – see our 

detailed LVMH investment case on page 66. We 

value Dior on sum-of-the-parts, based on LVMH’s 

target price of EUR145 and a targeted discount to 

RNAV of 20% for Dior (the average since 2005). We 

increase our Dior target price to EUR140 (vs 

EUR139 previously) on the back of higher 

assumptions for the Dior Couture business following 

a strong H1 2012 – see our detailed assumptions on 

page 41. 

Under our research model, for stocks without a 

volatility indicator, the Neutral band is 5 percentage 

points above and below the hurdle rate for Europe 

ex-UK stocks of 9%. Our target price of EUR140 

implies a potential return of 19.7%, above the Neutral 

band of our model; therefore, we reiterate our 

Overweight rating on Christian Dior. Potential return 

equals the percentage difference between the current 

share price and the target price, including the forecast 

dividend yield when indicated. 

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Strong performance for Dior Couture 

Dior Couture registered stellar growth (organic sales 

growth +22% in H1 2012) with retail (c85% of 

sales) up 30%. Wholesale continued to 

underperform but Dior’s target is to reduce its 

wholesale footprint (representing 12% of sales in 

2011 compared to 19% in 2009). 

H1 2012 EBIT margin strongly improved and 

gained 500bp to 8.6% thanks to: (i) a higher 

operating leverage; (ii) a better mix; and (iii) a 

higher share of products being sold at full price. 

Dior Couture's own stores sales by region, 2011 

Europe and 

Middle East 

47% 

Asia 

44% Americas 

9% 


For 2012, we forecast 16% organic sales growth 

and a 250bp EBIT margin improvement to 11% 

on the back of a higher proportion of its own 

stores sales, higher gross margin and better 

SG&A leverage (including improved store 

productivity). For 2013e and 2014e, we forecast 

11% and 9% organic sales growth, respectively, 

and a 150bp EBIT margin improvement to 12.5% 

in 2013e and a 100bp improvement to 13.5% 

in 2014e. 

We consider the value of the Dior Couture brand 

to be a limited driver, as it is too marginal (only 

8% of Dior’s current RNAV) relative to Dior’s 

40.9% stake in LVMH (90% of RNAV). 

Risks 

The main downside/(upside) risks to our rating on 

Dior would be a negative/(positive) development 

in LVMH’s share price. Another risk would be a 

change in the market’s view of the discount to 

apply to holding companies (positive or negative). 

Since Dior’s IPO in 1995, there has been press 

speculation about a potential streamlining of the 

current LVMH control structure. In theory, any 

expectations or announcements about such a 

simplification (eg. an LVMH/Dior merger or a 

Dior minority buy-out) – provided it benefited 

Dior’s minority shareholders – could trigger a 

sharp narrowing in the company’s discount to 

RNAV. We think this could be a potential upside 

catalyst for Dior. 

Dior discount to our estimated net asset value 

0% 

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 

-10% 

-20% 

-30% 

-40% 

-50% 

-60% 

Source: Thomson Reuters Datastream, using share price close at 27 August 2012 

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Dior Couture sales & EBIT evolution 

EURm 

1993a 1994a 1995a 1996a 1997a 1998a 1999a 2000a 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012e 2013e 2014e 

Sales 124 137 157 187 200 200 220 296 350 492 523 595 663 731 787 765 717 826 1,000 1,233 1,394 1,521 

EBIT 19 22 24 24 11 -1 9 14 -5 33 40 50 53 56 74 9 13 35 85 136 174 205 

EBIT margin 15.3 16.1 15.1 13.1 5.6 -0.3 3.9 4.7 -1.5 6.7 7.7 8.4 8.0 7.7 9.4 1.2 1.8 4.2 8.5 11.0 12.5 13.5 

y-o-y change (%) 

Sales 10 15 19 7 0 10 35 18 41 6 14 11 10 8 -3 -6 15 21 23 13 9 

EBIT 16 8 3 -54 nm nm 64 nm nm 21 25 6 6 32 -88 44 nm 143 60 28 18 


Dior restated net asset value 

EURm % stake Restated NAV Method % of RNAV 

LVMH 40.89% 27,744 Share price EUR133.5 90.5% 

Dior Couture 100.00% 2,467 2x 2012e sales 8.0% 

Property 100.00% 108 90,000m2 at EUR12,000/m2 0.4% 

Treasury stocks 1.43% 328 Share price EUR117.0 1.1% 

Restated NAV 30,647 100% 

Parent company debt -1,168 

RNAV (EURm) 29,479 

RNAV per share (EUR) 162.22 

Share price (EUR) 117.00 

Discount (%) -28% 


Dior target price calculation based on HSBC's LVMH target price 

EURm % stake Restated NAV Method % of RNAV 

LVMH 40.89% 30,134 HSBC target price EUR145 91% 

Dior Couture 100.00% 2,467 2x 2012e sales 7% 

Property 100.00% 108 90,000m2 at EUR12,000/m2 0% 

Treasury stocks 1.43% 328 Share price 1% 

Restated NAV 33,037 100% 

Parent co.debt -1,168 


Targeted discount to RNAV (%) -20% 

HSBC Dior target price (EUR per share) 140 


40

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9 

. 

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Financials & valuation: Christian Dior 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

Profit & loss summary (EURm) 

Revenue 24,659 29,604 32,604 35,181 

EBITDA 6,270 7,196 8,165 8,952 


Operating profit/EBIT 5,348 6,381 7,301 8,037 

Net interest -283 -105 -125 -34 

PBT 4,962 6,162 7,086 7,915 

HSBC PBT 4,962 6,162 7,086 7,915 

Taxation -1,466 -1,816 -2,192 -2,448 

Net profit 1,356 1,710 1,931 2,167 

HSBC net profit 1,356 1,710 1,931 2,167 

Cash flow summary (EURm) 

Cash flow from operations 3,987 4,374 5,304 6,002 

Capex -1,749 -1,400 -1,500 -1,600 

Cash flow from investment -6,309 -1,400 -1,500 -1,600 

Dividends -448 -560 -644 -740 

Change in net debt 1,988 -1,273 -1,935 -2,360 

FCF equity 2,238 2,974 3,804 4,402 

Balance sheet summary (EURm) 

Intangible fixed assets 21,740 21,740 21,740 21,740 

Tangible fixed assets 8,344 8,927 9,560 10,242 


Cash & others 2,426 2,426 2,426 2,426 

Total assets 51,109 54,048 56,182 58,187 

Operating liabilities 6,648 7,906 8,665 9,320 

Gross debt 8,852 7,579 5,644 3,284 

Net debt 6,426 5,153 3,218 858 

Shareholders funds 12,956 15,427 18,178 21,269 

Invested capital 34,636 36,119 37,296 38,445 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 16.7 20.1 10.1 7.9 

EBITDA 21.2 14.8 13.5 9.6 


PBT 4.6 24.2 15.0 11.7 

HSBC EPS 7.5 26.1 12.9 12.2 

Ratios (%) 

Revenue/IC (x) 0.8 0.8 0.9 0.9 

ROIC 12.0 12.7 13.7 14.7 

ROE 13.1 12.1 11.5 11.0 

ROA 8.0 8.4 9.0 9.6 



EBITDA/net interest (x) 22.2 68.8 65.1 261.9 

Net debt/equity 25.8 18.5 10.3 2.5 

Net debt/EBITDA (x) 1.0 0.7 0.4 0.1 

CF from operations/net debt 62.0 84.9 164.8 699.2 

Per share data (EUR) 



DPS 2.61 3.26 3.75 4.31 

Book value 72.57 86.41 101.82 119.14 

Dior restated net asset value (target price) 

EURm 

Overweight 

RNAV 

LVMH (40.89% stake) @ EUR145 per share 30,134 

Dior Couture (2x 2012e sales) 2,467 

Property (90,000m2 at EUR12,000/m2) 108 

Treasury stocks 328 

Restated NAV 33,037 

Parent company debt -1,168 


Target discount (%) -20% 

Target price Dior (EUR per share) 140 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 2.3 1.9 1.7 1.5 

EV/EBITDA 9.2 7.8 6.6 5.8 

EV/IC 1.7 1.6 1.5 1.3 

PE* 15.4 12.2 10.8 9.6 

P/Book value 1.6 1.4 1.1 1.0 

FCF yield (%) 4.3 5.8 7.4 8.7 




Share price (EUR)117.00 Target price (EUR)140.00 

Reuters (Equity) DIOR.PA Bloomberg (Equity) CDI FP 

Market cap (USDm) 26,611 Market cap (EURm) 21,262 

Free float (%) 29 Enterprise value (EURm) 56428 

Country France Sector Textiles, Apparel & Luxury 

Goods 





124 

114 

104 

94 

84 

74 

74 


Christian Dior Rel to SBF-120 

Source: HSBC 


124 

114 

104 

94 

84 

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Coach 

Most of the Q4 damage was self-inflicted, in our view 

Valuation (10% discount to European peers and 6% discount to 

Tiffany) discounts a dramatic change in the business model which 

we do not foresee 

Remain Overweight (adding V-flag) but lower target price to USD79 

(from USD88) on reduced estimates 

The business model is not 

broken 

Q4 publication (31 July) a ‘shocker’ 

On 31 July, when Coach reported Q4 results, its 

shares closed down 20% to USD49.33 after having 

already lost 22% since their 27 March peak of 

USD79.46. This was the worst daily share price 

decline since 11 September 2001. Even if the shares 

have recovered a bit since then (+13% in August to 

date), we believe Coach’s share price is pricing in a 

significant change in the company's business model 

which we do not foresee. 

Before analysing what caused this sell-off, it is worth 

noting that Q4 EPS (USD0.86) rose 27% and 

actually beat consensus estimates (USD0.85). But 

we believe investors focused on the slowdown in 

North America (NA) same store sales growth 

(SSSG) from 6.7% in Q3 to 1.7% in Q4 and did not 

credit the company for the following positive 

elements: 

The 16% sales increase (in yen) in Japan (with 

18% of sales from Japan in FY11/12, Coach 

remains one of companies most exposed to 

Japan in our coverage universe). 

The above-60% sales growth in Greater China 

(with double-digit SSSG). 

The 180bp increase in ‘clean’ EBIT margin. 

Most of the damage was self-inflicted, in our 

view, and as such should be temporary 

Even if Coach said that sales trends in its NA fullprice 

stores (c40% of total NA retail sales according 

to our estimates) did not slow sequentially from Q3 

to Q4, we doubt that the US affluent consumer was 

as buoyant in Q4 as in the previous quarters. In 

addition, Coach, which for many years had been 

operating on a sweet spot (ie. in the USD200-400 

handbag segment where it faced limited 

competition), has seen the emergence of Michael 

Kors (which now holds a c8% market share of the 

US handbag and accessories market). 

Having said that, we believe most of the Q4 damage 

was self-inflicted. In Q3 ending March-12, Coach 

took the decision to eliminate in-store couponing in 

its factory outlet stores, only to re-instate it in a cross 

section of stores in June and in the whole factory 

store network by 4 June, the big holiday outlet 

shopping weekend. 

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European luxury brands – which operate mostly in 

the USD1,000 and above price segment – definitely 

have pricing power, and even Coach in its full-price 

channel can afford a no-discount policy (its average 

consumer is a 20-30 year old single woman driven by 

‘newness’. But Coach’s average factory outlet store 

consumer is a 40-year old mother driven by ‘value 

for money’). We believe Coach overestimated its 

pricing power in the US (especially in the current 

environment. 

Even if the factory outlet store consumer may be 

confused for one or two quarters, we are confident 

that Coach will find smarter ways to restore the 

brand’s appeal in that channel through marketing and 

merchandising initiatives. 

Significant growth drivers still in place 

The growth drivers which are specific to Coach are 

still in place in our view: 

The men’s opportunity, which in our view offsets 

the traditional bear issue regarding Coach’s maturity 

in North America (Coach already has 354 full-price 

and 169 factory stores there), with the prospect of 

opening stores dedicated to men, shop-in-shops and 

dual-gender locations, and allows productivity gains 

in existing stores via expanded assortments (concept 

store within existing stores). The company intends to 

increase its North American square footage by at 

least 10% in FY13, driven by men’s opportunity. 

The Asia opportunity: the brand’s “New York” 

positioning is unique in China, and the brand plans to 

add c35% space in FY13. Short-term, the entry-level 

positioning of Coach makes it less vulnerable than 

the European luxury brands to the slowdown in 

corporate gift giving. In addition, even if the buyback 

of key Asian businesses will have a negative impact 

on EBIT margin initially, we expect it to have a 

positive payback in the next three years. 


The company’s FY13 guidance is calling for doubledigit 

sales growth (including low-to-mid single digit 

SSSG in NA) and a modest gross margin gain being 

more than offset by negative SG&A leverage coming 

from the integration of international acquisitions 

(resulting in a compression in EBIT margin to c31% 

from the ‘clean’ FY12 level of 32.1%). We have cut 

our FY2013e and 2014e EPS estimates by 12% and 

13%, respectively; on the back of lower North 

American SSSG (we now forecast 2% in FY13e and 

5% in FY13e). 

We lower our DCF-based target price to USD79 (from 

USD88) on the back of our above-mentioned earnings 

estimate downward revision. The assumptions used to 

generate our DCF-derived target price are detailed on 

page 45. Under our research model, for US stocks with 

a volatility indicator, the Neutral band is 10 percentage 

points above and below the hurdle rate for US stocks 

of 7.0%. Our new target price implies a 41.3% 

potential return, which is above the Neutral band; 

therefore we reiterate our Overweight (V) rating. We 

add the volatility flag in recognition of the stock’s 

historical volatility having increased. Potential return 


share price and the target price, including the forecast 


On our updated figures, the stock is trading at a 15.3x 

calendar 2012e and 13.7x 2013e PE, a 10% discount 

to European luxury stocks, and a 6% discount to 

Tiffany. Downside risks in the long term include the 

brand’s different positioning in its two channels (fullprice 

retail and factory outlets), which could pose a 

threat to its image, and a lack of success in entering the 

European market. In the short term, US consumer 

confidence may weaken and impact traffic/conversion. 

International distribution (% of FY June 12 sales) 

North 

American 

Stores 

62% 


Japan 

18% 


6% 

Other Intl 

4% 

NA Internet 

4% 

US 

Department 

stores 

6% 

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Coach simplified P&L 

USDm FY07/08e FY08/09 FY09/10a 1Q11a 2Q11a 3Q11a 4Q11a FY10/11a 1Q12a 2Q12a 3Q12a 4Q12e FY11/12a FY12/13e FY13/14e FY14/15e 

Net sales 3,181 3,230 3,608 912 1,264 951 1,032 4,159 1,050 1,449 1,109 1,155 4,763 5,215 5,829 6,560 

Cost of sales 774 908 974 236 349 259 291 1,135 286 403 291 317 1,297 1,398 1,539 1,706 

Gross Profit 2,407 2,323 2,634 676 915 692 740 3,024 765 1,045 818 838 3,466 3,818 4,290 4,854 

Gross margin 75.7% 71.9% 73.0% 74.2% 72.4% 72.8% 71.8% 72.7% 72.8% 72.2% 73.8% 72.6% 72.8% 73.2% 73.6% 74.0% 

Selling, G&A 1,228 1,322 1,484 391 462 438 428 1,719 443 544 481 487 1,954 2,184 2,425 2,691 

SG&A as % of sales 38.6% 40.9% 41.1% 42.8% 36.5% 46.1% 41.5% 41.3% 42.1% 37.6% 43.3% 42.1% 41.0% 41.9% 41.6% 41.0% 

Operating Income 1,179 1,000 1,150 286 453 254 312 1,305 322 501 337 352 1,512 1,633 1,865 2,163 

Operating margin 37.1% 31.0% 31.9% 31.3% 35.9% 26.7% 30.2% 31.4% 30.7% 34.6% 30.4% 30.4% 31.7% 31.3% 32.0% 33.0% 

Interest income 37.1 3.2 1.8 -0.6 -0.9 -0.8 -1.4 -3.7 -1.4 -1.8 -1.7 -1.5 -6.3 15.0 35.0 50.0 

PBT 1,216 1,003 1,152 285 452 253 311 1,301 321 499 336 350 1,506 1,648 1,900 2,213 

Income taxes 474 381 417 96 149 67 108 420 106 152 111 99 467 544 627 730 

Tax rate 39.0% 38.0% 36.2% 33.7% 32.9% 26.5% 34.8% 32.3% 32.9% 30.4% 33.0% 28.2% 31.0% 33.0% 33.0% 33.0% 

Minority interest 

Net income 742 622 735 189 303 186 202 881 215 347 225 251 1,039 1,104 1,273 1,483 

Net EPS common 

(Diluted) 

Weighted avg com share 

outst. (D) 

2.06 1.91 2.33 0.63 1.00 0.62 0.68 2.92 0.73 1.18 0.77 0.86 3.53 3.78 4.36 5.08 

360.3 325.6 315.8 301.3 304.7 301.6 298.7 301.6 296.1 295.5 293.5 291.8 294.1 291.8 291.8 291.8 

Net sales 22% 2% 12% 20% 19% 14% 9% 15% 15% 15% 17% 12% 15% 9% 12% 13% 

Cost of sales 31% 17% 7% 11% 19% 20% 15% 17% 21% 15% 12% 9% 14% 8% 10% 11% 

Gross profit 19% -4% 13% 23% 19% 12% 6% 15% 13% 14% 18% 13% 15% 10% 12% 13% 

Operating expenses 19% 8% 12% 19% 18% 19% 7% 16% 13% 18% 10% 14% 14% 12% 11% 11% 

Income before tax & 19% -15% 15% 28% 19% 2% 5% 13% 13% 10% 33% 13% 16% 8% 14% 16% 

minority interest 

Diluted EPS 22% -7% 22% 43% 33% 23% 9% 25% 16% 18% 24% 27% 21% 7% 15% 16% 

North America retail 

comps 

10% -7% 4% 9% 13% 10% 10% 11% 9% 9% 7% 2% 7% 2% 5% 5% 

Direct-to-consumer 2,544 2,727 3,156 776 1,096 832 919 3,622 910 1,283 984 1,047 4,232 4,684 5,298 6,029 

Indirect 637 504 452 136 168 119 113 537 140 166 125 108 531 531 531 531 

Total sales 3,181 3,231 3,608 912 1,264 951 1,032 4,159 1,050 1,449 1,109 1,155 4,763 5,215 5,829 6,560 


44

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Financials & valuation: Coach 


Year to 06/2012a 06/2013e 06/2014e 06/2015e 

Profit & loss summary (USDm) 

Revenue 4,763 5,215 5,829 6,560 

EBITDA 1,650 1,787 2,035 2,349 




PBT 1,506 1,648 1,900 2,213 

HSBC PBT 1,506 1,648 1,900 2,213 

Taxation -467 -544 -627 -730 



Cash flow summary (USDm) 


Capex -200 -224 -246 -271 


Dividends -283 -392 -450 -518 


FCF equity 966 972 1,138 1,334 

Balance sheet summary (USDm) 


Tangible fixed assets 855 925 1,002 1,087 


Cash & others 917 1,593 2,376 3,288 

Total assets 3,104 3,932 4,868 5,947 


Gross debt 23 23 23 23 

Net debt -894 -1,570 -2,353 -3,265 


Invested capital 891 1,023 1,159 1,308 


Year to 06/2012a 06/2013e 06/2014e 06/2015e 


Revenue 14.5 9.5 11.8 12.5 

EBITDA 15.4 8.4 13.9 15.4 


PBT 15.7 9.5 15.3 16.4 

HSBC EPS 20.9 7.2 15.3 16.4 

Ratios (%) 

Revenue/IC (x) 5.8 5.4 5.3 5.3 

ROIC 127.2 114.3 114.5 117.5 

ROE 57.6 46.1 39.0 34.9 

ROA 36.2 31.4 28.9 27.4 







Per share data (USD) 



DPS 1.20 1.38 1.59 1.83 

Book value 6.97 9.87 13.11 16.85 

DCF analysis 



Overweight (V) 





Sensitivity and valuation range (USD/share) 


7.5% 87.5 89.8 91.6 

8.0% 82.2 84.1 85.7 

8.5% 77.4 79.0 80.4 

9.0% 73.0 74.4 75.6 

9.5% 69.0 70.2 71.3 


Year to 06/2012a 06/2013e 06/2014e 06/2015e 

EV/sales 3.2 2.8 2.3 1.9 

EV/EBITDA 9.1 8.0 6.7 5.4 

EV/IC 16.9 14.0 11.7 9.7 

PE* 15.8 14.8 12.8 11.0 

P/Book value 8.0 5.7 4.3 3.3 

FCF yield (%) 6.1 6.1 7.1 8.4 




Share price (USD)55.92 Target price (USD)79.00 

Reuters (Equity) COH.N Bloomberg (Equity) COH US 

Market cap (USDm) 15,948 Market cap (USDm) 15,948 

Free float (%) 100 Enterprise value (USDm) 14378 

Country United States Sector Textiles, Apparel & Luxury 

Goods 

Analyst Erwan Rambourg Contact 852 2996 6572 


Sophie Dargnies Contact 331 5652 4348 


90 

80 

70 

60 

50 

40 

30 

30 


Coach Rel to S&P 500 

Source: HSBC 


90 

80 

70 

60 

50 

40 

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Ferragamo 

The strongest earnings growth profile in our universe after Prada, 

driven by improved execution 

Valuation (17.6x 2013e PE), a 16% premium to peers, is 

warranted by higher earnings growth prospects in 2014e and 

beyond, in our view 

Reiterate Overweight (V); increase TP to EUR21 from EUR18 on 

higher estimates 

Strongest earnings growth profile after Prada 

The Ferragamo investment case is relatively 

simple: this is a story of improved execution for a 

medium-sized mono brand (EUR1bn in sales in 

2011), which should in our view lead to the 

strongest earnings growth profile in our universe 

after Prada (driven by a combination of aboveaverage 

top-line and margin expansion). 

Indeed, in spite of attractive products and 

geographic and distribution mixes (in 2011, Asia 

and retail already accounted for 36% and 67% of 

sales, respectively), Ferragamo's EBIT margin lag 

those of 'soft' luxury peers (companies primarily 

involved in leather goods, apparel and shoes). 

Even if Ferragamo’s EBIT margin improved 

480bps in 2011 demonstrating the ongoing 

changes at the company, this level of margin 

remained well below peers (29% on average). We 

are confident that Ferragamo can narrow the gap 

with peers and register a 330bp EBIT margin 

enhancement over 2011-14e (vs c200bp for the 

luxury peers) to reach 19% in 2014e. 

Execution, execution, execution 

Since its 2011 listing, Ferragamo has moved to a 

more aggressive/pragmatic management 

approach, leading to better execution. 

In terms of top-line growth, Ferragamo should 

benefit from the drivers common to the overall 

industry. The main specific growth opportunity 

lies in Western Europe ex-Italy, where the brand 

awareness is high but the brand image is 

somewhat dusty (Ferragamo customers are on 

average much older in Western Europe than in 

Asia ex-Japan and the Americas). 

Ferragamo’s issues of lower profitability by 

product line and lower profitability in its retail 

store network are linked. In the luxury industry, 

EBIT margins in retail are usually 15-20 

percentage points higher than EBIT margins in 

wholesale, but Ferragamo – which already 

generates 67% of its sales in retail – does not 

seem to benefit from that yet. 

In our view, the key way to improve store 

productivity will be to reduce the average level of 

markdowns, which remains high compared to 

46




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peers – even after two years of improvement in 

2010 and 2011. 

We believe achieving a higher share of sales at 

full price will require: 

A higher share of permanent (‘evergreen’) 

products, notably in handbags and shoes, or at 

least iconic styles that can be adapted from 

one season to another 

More high margin entry-level products 

(notably more small leather goods) 

Increased cross-selling opportunities through 

greater coherence between collections guided 

by a single design direction since June 2010 

Increased product continuity and availability 

in stores via a stock replenishment 

programme aimed at automatically managing 

the procurement and distribution of products 

Better in-store merchandising 

Increasing the average size of stores – which 

is well below that of peers – in order to better 

display the brand’s full range of products 

Some of these requirements will be implemented 

through the roll-out of the next phases of project 

‘Marlin” initiated three years ago, which also 

aims to increase supply-chain efficiencies. 


H1 organic sales growth was 18% in H1 with Q2 

(+17%) showing a limited slowdown compared to 

Q1 (+19%). H1 EBITDA rose 25%, implying a 

30bp EBITDA margin improvement. The gross 

margin was flat as lower markdowns and positive 

product mix (outperformance of leather goods) 

were offset by negative FX hedging impacts and 

negative distribution mix (outperformance of 

wholesale). The communication-to-sales ratio rose 

140bp to 7% whilst the ratio of other SG&A 

declined 170bp. Ferragamo characterises itself by 

a different accounting of hedging, which is 

booked at the sales level. As a consequence of 

this, the group should benefit from the EUR 

weakness as from Q2 2013, i.e. with roughly a 

one year delay compared to peers. Ferragamo’s 

long-term strategy is to develop retail more than 

wholesale. But since 2011, the brand is enjoying 

stronger growth in wholesale due to stellar growth 

in EM markets and strong travel retail 

developments. During the Q2 conference call 

management stated it was comfortable with 

consensus expectations of a c100bp EBITDA 

margin increase over FY12. 

Our 2012-14 forecasts call for organic sales growth 

of 16%, 13% and 11%, respectively, and 330bp 

EBIT margin gains over the period (with the EBIT 

margin reaching 19% in 2014e). The improvement 

in store profitability should, in our view, translate 

into a 150bp gross margin enhancement and 180bp 

SG&A leverage over the period. We have raised our 

2012-14 EBIT estimates by 4%, 11% and 13%, 

respectively, on the back of higher sales forecasts 

(mostly for Europe and the US) leading to stronger 

SG&A leverage. 

We increase our DCF-based target price to EUR21 

from EUR18 on the back of the above-mentioned 

earnings upgrade. The assumptions used to generate 

our target price are detailed on page 49. Under our 

research model, for stocks with a volatility indicator, 

the Neutral band is 10 percentage points above and 

below the hurdle rate for Europe ex-UK stocks of 

9%. Our target price provides a potential return of 

20.8%, above the Neutral band of our model; 

therefore, we reiterate our Overweight (V) rating on 

Ferragamo. Potential return equals the percentage 

difference between the current share price and the 

target price, including the forecast dividend yield 

when indicated. Company-specific downside risks 

include failure to execute initiatives aiming at 

increasing store sales productivity and a placement 

of shares from Ferragamo family members. 

47




abc 

In 2012 y-t-d, the stock is up 71%. Based on our 

2013 estimates, which are 9% above consensus at 

the EBIT level and 17% at the EPS level, 

Ferragamo is trading at 17.6x 2013e PE, a 16% 

premium to peers, warranted in our view by the 

superior earnings growth prospects in 2014e (EPS 

up 17%) and beyond. 

We believe that consensus notably underestimates 

the impact of the company’s strategy to 

buy back minorities (we forecast the share of 

minorities of total net profit to drop from 20% in 

2012 to 5% in 2013 and beyond). These buybacks 

explain why we forecast EPS will grow 

much faster than EBIT in 2013e (40% vs 17%). 

Salvatore Ferragamo – Profit & Loss 

(EURm) FY 07a FY 08a FY 09a FY 10a FY 11a Q1 12a Q2 12a FY 12e FY 13e FY 14e 

Revenues 687.4 690.8 619.6 781.6 986.3 259.6 305.5 1,200.0 1,380.0 1,530.0 

COGS 260.6 271.9 256.1 289.4 352.9 96.5 109.0 422.4 474.7 514.1 

% of sales 37.9% 39.4% 41.3% 37.0% 35.8% 37.2% 35.7% 35.2% 34.4% 33.6% 

Gross profit 426.8 419.0 363.5 492.2 633.4 163.1 196.5 777.6 905.3 1,015.9 

Gross margin 62.1% 60.6% 58.7% 63.0% 64.2% 62.8% 64.3% 64.8% 65.6% 66.4% 

Operating expenses -349.4 -355.2 -327.1 -405.8 -476.8 -133.0 -138.2 -570.2 -645.4 -707.2 

% of sales -50.8% -51.4% -52.8% -51.9% -48.3% -51.2% -45.2% -47.5% -46.8% -46.2% 

Operating profit (EBIT) 77.4 63.8 36.5 86.4 156.6 30.1 58.3 207.4 259.8 308.8 

EBIT margin 11.3% 9.2% 5.9% 11.1% 15.9% 11.6% 19.1% 17.3% 18.8% 20.2% 

EBITDA 100.0 86.0 61.9 113.1 183.6 38.2 66.6 236.9 292.2 344.4 

EBITDA margin 14.5% 12.4% 10.0% 14.5% 18.6% 14.7% 21.8% 19.7% 21.2% 22.5% 

Net financial result -9.7 -0.4 -2.1 2.4 -3.0 -1.5 0.8 0.0 1.0 2.0 

Associates 0.3 0.8 0.4 0.5 0.7 0.2 0.3 

Profit before tax 67.9 64.2 34.8 89.3 154.3 28.9 59.4 207.4 260.8 310.8 

Income tax expense 20.8 25.3 49.5 28.5 51.1 11.9 20.5 68.5 86.1 102.5 

Effective tax rate 30.6% 39.5% 142.1% 31.9% 33.1% 41.2% 34.5% 33.0% 33.0% 33.0% 

Net profit for the period 47.1 38.9 -14.7 60.8 103.2 17.0 38.9 139.0 174.8 208.2 

o/w group 38.5 29.8 -20.9 48.9 81.3 12.0 32.8 111.2 166.0 197.8 

o/w minority interests 8.7 9.1 6.2 11.9 22.0 5.0 6.1 27.8 8.7 10.4 

Diluted EPS 0.22 0.22 -0.12 0.29 0.48 0.07 0.19 0.66 0.99 1.17 

YoY Variation 

Net sales na 1% -10% 26% 26% 23% 23% 22% 15% 11% 

Operating expenses na 2% -8% 24% 17% 22% 23% 20% 13% 10% 

EBIT na -18% -43% 137% 81% 43% 17% 32% 25% 19% 

PBT na -5% -46% 157% 73% 78% 24% 34% 26% 19% 

Net profit (group share) na -23% -170% -334% 66% -1% 37% 37% 49% 19% 


48

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Financials & valuation: Ferragamo 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 986 1,200 1,380 1,530 

EBITDA 184 237 292 344 




PBT 154 207 261 311 

HSBC PBT 154 207 261 311 

Taxation -51 -68 -86 -103 





Capex -42 -39 -43 -47 


Dividends -45 -71 -80 -111 

Change in net debt -32 58 -47 -56 

FCF equity 61 86 128 167 




Current assets 443 498 603 709 

Cash & others 73 59 106 162 

Total assets 676 770 886 1,004 


Gross debt 58 58 58 58 

Net debt -14 44 -3 -60 

Shareholders funds 256 324 419 516 



Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 26.2 21.7 15.0 10.9 

EBITDA 62.3 29.0 23.4 17.8 


PBT 72.8 34.4 25.7 19.1 

HSBC EPS 67.6 36.8 49.3 19.1 

Ratios (%) 

Revenue/IC (x) 3.8 4.0 3.8 3.8 

ROIC 39.9 46.5 47.9 50.7 

ROE 36.2 38.3 44.7 42.3 

ROA 18.0 19.2 21.1 22.0 




Net debt/equity -4.8 13.6 -0.8 -11.5 

Net debt/EBITDA (x) -0.1 0.2 0.0 -0.2 

CF from operations/net debt 285.6 




DPS 0.28 0.32 0.47 0.56 

Book value 1.52 1.93 2.49 3.06 

DCF analysis 








Sensitivity and valuation range (GBP/share) 


9.1% 23.6 24.2 24.7 

9.6% 22.0 22.5 22.9 

10.1% 20.6 21.0 21.4 

10.6% 19.3 19.6 20.0 

11.1% 18.1 18.4 18.7 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 3.0 2.5 2.1 1.9 

EV/EBITDA 16.1 12.5 10.0 8.3 

EV/IC 11.5 8.7 7.5 6.7 

PE* 36.0 26.3 17.6 14.8 

P/Book value 11.4 9.0 7.0 5.7 

FCF yield (%) 2.0 2.9 4.4 5.7 





Reuters (Equity) SFER.MI Bloomberg (Equity) SFER IM 



Country Italy Sector Textiles, Apparel & Luxury 

Goods 





21 

21 

19 

19 

17 

17 

15 

15 

13 

13 

11 

11 

9 

9 

7 

7 

Aug-11 Feb-12 Aug-12 

Sa lvatore Fe rragam Rel to BCI AL L-SHARE INDEX 

Source: HSBC 


49




abc 

Hengdeli Holdings 

Potentially the biggest victim of Chinese purchasing abroad; 

without regulation changes, Hengdeli’s structural growth would 

trend lower 

Unlike European partners, momentum should not deteriorate 

much from here though, which makes it an interesting stock 

Reiterate OW(V) but cut estimates in the short and long term; cut 

target price to HKD3.20 (from HKD4.10) 

Structurally lower growth 

unless… 

H1 results showed disappointing sales, 

solid margins but a dull outlook 

Sales disappointing: H1 reported retail sales growth 

of just 4.6%, with mainland China doing fine 

(+8.8%) but Hong Kong down 2.4% (up only 1.0% 

at constant FX) and wholesale outperforming 

(+11%). The results were driven by a number of 

factors, including: products at entry price points; its 

dominance in wholesale and to a lesser degree in 

mainland, which are seeing more resilient demand 

than in high-end watches; and its dominance in HK 

which appears to be affected by the drying up of 

corporate gifting. Looking at mainland China, the 

"mid-end" – basically the entry price point sold at 

"With Time" and "Prime Time" concepts – was up 

24% while the high-end (“Elegant” concept) 

declined 8%. The high-end segment in HK was 

slightly up as we believe consumers look more 

closely at prices in uncertain times and corporate 

gifting has shifted to overseas markets. In mainland 

China, same store sales growth was flat all in (- 

0.2%) but up 10.4% for the mid-end. 

Margin decent: gross margin was nonetheless up 

100bps (to 26.7%) as Hengdeli is: a) getting better 

terms with its partners, b) not discounting as much 

(despite inventory build-up) as last year, and c) 

benefitting from a better mix (gross margin is greater 

in mainland China and on lower-priced items). The 

difference in gross margin between mid-end and 

high price points is between 300 to 500 bps. 

Stripping out the exceptional gain (related to the 

Omas disposal), core profit margin was up 20bps to 

13.5%, not a bad result as staff costs and rental costs 

were up as a percentage of sales to a respective 5.1% 

(from 4.7%) and 6.0% (from 5.5%). 

Dull outlook: Visibility remains poor on Greater 

China demand as we believe consumer psychology 

is being affected and they treat China stores as 

showrooms, where they discover the products that 

they eventually end up purchasing abroad. The 

recent currency movement and notably the EUR 

collapse have not helped Hengdeli. We believe Q3 

so far has seen trends in line with Q2, with the 

entry price points rebounding very slightly (which 

by our estimates were softer than in Q1; hence, if 

H1 all-in price points were up 6.3%, Q2 would 

probably be flattish). 

50




abc 

Management’s goal is to try to grow the business in 

H2 and address the inventory situation (195 days at 

the end of H1) inherited through an overly optimistic 

stance at the beginning of the year with an obligation 

to carry the products that it has committed to during 

the watch fairs at the beginning of the year. 

The company mentioned that it is working with the 

brand managers to reign in inventories (ie. order 

much less), which has started happening since July. 

They are also working to replace the low-turnover 

products with high-turnover ones. 

Future not so bright: We don’t expect sales to 

rebound in the short term. We believe the group is 

adopting a realistic attitude of not pushing the idea 

that with the upcoming change in the Chinese 

administration, everything will be resolved and 

corporate gifting would resume. We believe the 

future is not as bright and the c20% growth that 

Hengdeli was envisaging at the beginning of 2012 

for the industry in China over the next five years will 

not be realistic, as Chinese nationals are making 

more purchases abroad. This implies a new 

sustainable growth rate at a much lower level – mid 

to high single digit, in our view. However, we 

believe one element could change this lower outlook 

– if the new administration would lower: a) the VAT 

rate, b) import duties on watches, and c) the 

consumption tax on high-end watches. In our view, 

the visibility on a lower VAT rate is low but 

lowering the import duties on watches should 

eventually happen. A lower consumption tax on 

high-end watches would make sense but could take 

longer to implement as the Ministry of Finance and 

Ministry of Commerce have been debating this for a 

while. 

Things won’t get better in a wink but we 

see a bottoming of trends 

Guanxi has played key role in how business was 

done in China; hence we expect it to eventually 

regain its importance. We believe Q3 (ending 

September) sales growth, although usually not 

disclosed by the company, will remain flattish before 

picking up again due to easier retail comps (H2 2011 

was up 21%, versus up 36% in H1 2012). 

With Hengdeli’s scale (36% market share in China) 

and its expansion focusing on smaller cities where 

demand for products with entry price points remains 

strong and is more profitable, we believe H2 sales 

and core profits will not deteriorate significantly 

relative to H1. 


We have cut our earnings estimates significantly for 

2012 and 2013 (by a respective 3% and 23%, 

excluding exceptionals) on much lower sales growth 

than previously expected. For 2012, we now expect 

5.4% reported sales growth, less than half of our 

previous growth estimate. With EBIT margin flattish 

on a full-year basis, and excluding exceptionals, we 

expect earnings growth of c7% in 2012?. 

We believe the risk of discounting products (to reign 

in inventories) is low as Hengdeli will take a longterm 

view on brand distribution and address the 

inventory issue by ordering less rather than risk 

damaging their brands’ equity. 

Valuation 

We decrease our DCF-based target price to 

HKD3.20 (from HKD4.10) on the back of these 

lower assumptions. Our key assumptions are a RFR 

of 3.0% vs 3.5%, ERP of 7.0% vs 6.5% and a 

WACC of 10.21 (see table on page 53). 

Under our research model, for stocks with a 

volatility indicator, the Neutral band is 10ppts 

above and below the hurdle rate for Chinese stocks 

of 10%. Our HKD3.20 target price implies a 47.5% 

potential return, which is above the Neutral band; 

therefore, we reiterate our Overweight (V) rating 

on Hengdeli stock. Potential return equals the 

percentage difference between the current share 

price and the target price, including the forecast 


Hengdeli has the highest potential return in our 

coverage, although we note it is among one of the 

highest risk stocks as well. At the current price, and 

51




abc 

on our EPS estimates, Hengdeli is trading at 

10.2x2012e and 11x2013e earnings. On our target 

price, the stock would be trading at 11.9x 2012e 

earnings. We believe the stock’s recent de-rating vs 

the European stocks has gone too far, in our view. 

Risks 

Downside risks to our thesis include execution risk 

in managing the store expansion plans, and higherthan-expected 

rent and M&A activity (eg. buyout of 

retail stores, further investment in Ming Fung) that 

could be negatively viewed by the market. 

Hengdeli/Emperor vs Swatch/Richemont 

30% 

5% 

-20% 

'05 '06 '07 '08 '09 '10 '11 

Av g=-27.2% 

-45% 

-70% 

Prem/Disc Av erage 

Source: Thomson Reuters Datastream, I/B/E/S estimates for Emperor, HSBC estimates 

Hengedeli - P&L Statement 

Year to Dec (RMBm) 2009 1H10 2H10 2010 1H11 2H11 2011 1H12 2H12 2012e 2013e 2014e 

Total number of stores 270 302 350 350 380 405 405 428 451 451 494 535 

+/- 58 32 48 80 30 25 55 23 23 46 43 41 

% POS yoy 27% 30% 16% 11% 10% 8% 

PRC retail (RMBm) 2,722 1,774 1,996 3,770 2,596 2,614 5,210 2,825 2,710 5,534 6,040 6,599 

- No. of stores 224 252 286 286 311 332 332 352 372 372 410 446 

same-store sales growth 12% 34% 32% 33% 38% 22% 30% 0% -2% -1% 3% 4% 

% change yoy 17% 40% 37% 38% 46% 31% 40% 9% 4% 6% 9% 9% 

HK retail (RMBm) 1,705 1,046 1,366 2,412 1,449 1,708 3,157 1,415 1,679 3,094 3,156 3,251 


+/- 3 5 3 3 0 3 3 -3 0 -3 0 0 

% change yoy 20% 45% 33% 41% 39% 25% 31% -2% -2% -2% 2% 3% 

Taiwan retail (RMBm) 8 68 125 193 103 120 222 100 123 222 224 227 


% change yoy 51% -4% 15% -3% 3% 0% 1% 1% 

Retailing (RMBm) 4,428 2,888 3,487 6,375 4,148 4,442 8,589 4,339 4,512 8,851 9,420 10,077 

y/y 44% 41% 44% 44% 27% 35% 5% 2% 3% 6% 7% 

Wholesale (RMBm) 1,330 751 910 1,661 1,156 1,395 2,551 1,284 1,573 2,857 3,257 3,712 

y/y -19% 10% 40% 25% 54% 53% 54% 11% 13% 12% 14% 14% 

Others (RMBm; e.g., after-sales) 134 75.6 104 180 104 132 235 127 156 283 331 380 

y/y -6% 22% 45% 34% 37% 26% 31% 22% 18% 20% 17% 15% 

Sales (RMBm) 5,892 3,715 4,501 8,216 5,407 5,968 11,375 5,750 6,240 11,990 13,007 14,169 

y/y 6.8% 37.8% 40.8% 39.4% 45.6% 32.6% 38.5% 6.3% 4.6% 5.4% 8.5% 8.9% 

Gr profit (RMBm) 1,401 915 1,134 2,049 1,392 1,465 2,857 1,536 1,549 3,085 3,284 3,544 

GP margin 23.8% 24.6% 25.2% 24.9% 25.7% 24.5% 25.1% 26.7% 24.8% 25.7% 25.2% 25.0% 

bp change -35.4 -0.8 213.2 115.6 112.9 -66.0 17.7 95.9 28.5 61.4 -48.1 -23.6 

EBIT 578 387 432 819 643 516 1,160 678 525 1,203 1,268 1,376 

y/y 6.2% -2402.8% - 41.6% 66.3% 19.5% 41.6% 5.3% 1.7% 3.7% 5.4% 8.5% 

EBIT margin 9.8% 10.4% 9.6% 10.0% 11.9% 8.7% 10.2% 11.8% 8.4% 10.0% 9.7% 9.7% 

Pre-tax profit 513 425 391 816 647 551 1,198 771 456 1,227 1,158 1,277 

y/y -14.0% -1659.4% -27.7% 58.9% 52.4% 41.0% 46.9% 19.2% -17.3% 2.4% -5.7% 10.4% 

Tax -128 -95 -103 -198 -147 -133 -280 -158 -112 -270 -266 -307 

Eff tax rate (excl CB loss) 24.9% 22.4% 26.4% 24.3% 22.7% 24.2% 23.4% 20.4% 24.7% 22.0% 23.0% 24.0% 

Minorities -21 -25 -39 -63 -52 -51 -103 -51 -51 -102 -93 -102 

Net profit/(Loss) - reported 364 305 249 554 448 367 815 563 293 855 799 869 

y/y -16.8% -406.4% -46.4% 52.0% 46.8% 47.5% 47.1% 25.6% -20.3% 4.9% -6.6% 8.8% 

Net margin 6.2% 8.2% 5.5% 6.7% 8.3% 6.1% 7.2% 6.1% 4.7% 7.1% 6.1% 6.1% 

HSBC core net profit 360 279 249 528 445 348 793 424 309 733 799 869 

y/y -17.9% 31.7% 68.6% 46.8% 59.2% 40.0% 50.1% -4.8% -11.1% -7.6% 8.9% 8.8% 

Core net margin 6.1% 7.5% -7.4% 6.4% 8.2% -7.7% 7.0% 5.8% -3.5% 6.1% 6.1% 6.1% 


52

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Financials & valuation: Hengdeli Holdings Ltd 



Year to 12/2011a 12/2012e 12/2013e 12/2014e 

Profit & loss summary (CNYm) 

Revenue 11,375 11,990 13,007 14,169 

EBITDA 1,235 1,283 1,355 1,471 



Net interest 6 -71 -81 -67 

PBT 1,198 1,227 1,158 1,277 

HSBC PBT 1,198 1,227 1,158 1,277 

Taxation -280 -270 -266 -307 



Cash flow summary (CNYm) 

Cash flow from operations 158 38 1,068 1,106 

Capex -207 -300 -150 -150 


Dividends -185 -281 -257 -240 

Change in net debt 309 712 -377 -465 

FCF equity 198 -467 692 718 

Balance sheet summary (CNYm) 


Tangible fixed assets 921 917 983 1,043 


Cash & others 3,942 4,160 4,287 4,501 

Total assets 11,155 11,931 12,539 13,333 


Gross debt 4,244 5,174 4,924 4,674 

Net debt 302 1,014 637 173 




Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 38.5 5.4 8.5 8.9 

EBITDA 41.5 3.9 5.6 8.5 


PBT 46.9 2.4 -5.7 10.4 

HSBC EPS 46.5 4.9 -6.6 8.8 

Ratios (%) 

Revenue/IC (x) 2.4 2.1 2.1 2.2 

ROIC 18.7 16.6 15.5 16.0 

ROE 17.7 16.5 13.9 13.7 

ROA 9.8 9.2 8.2 8.3 



EBITDA/net interest (x) 18.2 16.8 22.1 




Per share data (CNY) 



DPS 0.06 0.06 0.05 0.06 

Book value 1.11 1.24 1.37 1.51 

DCF analysis 




Equity Premium (%) 7.0 EBIT growth 19-39e CAGR (%) 2.5 



Key forecast drivers 

Year to 12/2011a 12/2012e 12/2013e 12/2014e 

Total number of stores 405 451 494 535 

PRC retail sales growth (%) 40 6 9 9 

HK retail sales growth (%) 31 -2 2 3 

Retail turnover growth (%) 35 3 6 7 

Wholesales revenue growth (%) 54 12 14 14 

Total sales growth (%) 38 5 8 9 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 0.7 0.8 0.7 0.6 

EV/EBITDA 6.9 7.2 6.6 5.9 

EV/IC 1.7 1.5 1.4 1.3 

PE* 10.7 10.2 11.0 10.1 

P/Book value 1.6 1.4 1.3 1.2 

FCF yield (%) 2.4 -5.6 8.3 8.5 




Share price (HKD)2.17 Target price (HKD)3.20 

Reuters (Equity) 3389.HK Bloomberg (Equity) 3389 HK 

Market cap (USDm) 1,229 Market cap (HKDm) 9,532 

Free float (%) 15 Enterprise value (CNYm) 9277 

Country China Sector Distributors 

Analyst Erwan Rambourg Contact 852 2996 6572 




7 

6 

5 

4 

3 

2 

1 

1 


Hengdeli Holdings Ltd Rel to SSE COMPOSITE INDEX 

Source: HSBC 


7 

6 

5 

4 

3 

2 

53




abc 

Hermès 

Underperformance of Hermès’ shares year-to-date 

Technical effects (limited free float and grants of shares to 

employees) should put a floor to the shares 

Upgrading to Neutral (from Underweight) but reducing target price 

to EUR245 (from EUR272) due to a lower WACC 

Upgrade to Neutral 

Underperformance of Hermès’ shares 

year-to-date 

Hermès’ shares are down 4% year-to-date whilst 

our overall European luxury coverage stocks have 

increased by 26%. 

Hermes' share price performance since January 2010 

300 

250 

200 

150 

100 

50 

janv -10 juil-10 janv -11 juil-11 janv -12 juil-12 


Robust fundamentals 

Hermès continued to register strong organic sales 

growth in H1 (+15%). We do not believe that the 

group is immune against an economic slowdown, 

but we feel that Hermès should be able to 

continue to post robust EBIT growth over 2012e- 

14e (+19%, +12% and +9%, respectively), thanks 

to its distinctive positioning (perceived to be the 

most luxurious brand, scarcity of the product, 

classic style). 

Technical effects (a shares grant 

program and limited free float) should 

put a floor to the shares 

At the last AGM (on 29 May 2012), the group 

received authorisation to raise the share buyback 

maximum price from EUR250 to EUR400. Yearto-date, 

Hermès has bought 89.5k shares for an 

amount of EUR21m in order to cover the grants of 

shares to employees. True, the group mentioned 

that all grants of shares to employees for 2012 

have been covered but we believe that the group 

will have to continue to buy shares in order to 

cover future grants of shares. In addition, as the 

free float is so limited (c5.1% by our estimates), 

this technical effect should put a floor to the 

shares. At end-2011, LVMH owned 22.4% of 

Hermès International. On 3 December 2011, the 

Hermès family created a private holding company 

in France, named H51. H51 has 50.2% of total 

Hermès International share capital and has 

preferential rights on 12.3% of total share capital 

directly owned by family group members. Only 

20 people from the family who owned c10% of 

the stock decided not to be part of this holding 

company or to be subject to preferential rights. 

54




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On 19 July, Hermès published 13% organic sales 

growth for Q2 2012 (compared to +18% in Q1). 

All regions registered a slowdown (at constant 

FX) except for Asia ex-Japan (+27% in Q2 vs 

22% in Q1 12): mainland China (up c30%), the 

Americas (+8% in Q2 vs +11% in Q1 12 due to a 

strong basis in comparison, especially in Hermès' 

own stores (+34%)), Europe excluding France 

(+16% in Q2 vs +27% in Q1 12), France (+7% in 

Q2 vs +14% in Q1 12), and Japan (-1% in Q2 vs 

8% in Q1 12). 

Management guided towards 10% organic sales 

growth for 2012 (with c10% in Europe, above 

10% in Americas and Asia, and 0%+ in Japan), as 

Hermès should benefit from a lower number of 

store openings (one opening and 11 renovations in 

H2 2012 expected vs more than 10 openings in 

H2 2011). Still, this sales guidance appears 

conservative in our view as a +10% organic sales 

growth for 2012 would mean a strong slowdown 

in 2H (+5% organic sales growth in H2 vs +15% 

in H1 2012). In terms of EBIT margin, the group 

expects to have an EBIT margin between the 2010 

and the all-time high level achieved in 2011 

(30.4%), as several elements (operating leverage, 

FX impact, price increase not sufficient to offset 

raw materials increase, new share buyback 

accounting methodology) should not be as 

positive for 2012 compared to 2011. 

We increase both our 2012-13e EBIT estimates by 

3%, due to the weaker euro. For 2012e and 2013e, 

we forecast organic sales growth of 13% 

(unchanged) and 11% (vs 10% previously), and 

EBIT margin of 31.1% (vs 31.0% previously) and 

31.3% (vs 31.5% previously), respectively. For 

2014e, we expect a 9% organic sales growth and a 

31.4% EBIT margin. 

value (and as a result, we continue to apply a 25% 

premium). For many years, Hermès’ stock has 

been supported by the limited free float, takeover 

speculation in the press (e.g. Bloomberg) and the 

potential for short squeezes. 

On our fundamental DCF valuation, we value 

Hermès at EUR196 (down from EUR217.60), on 

the back of a our earnings estimate increases and a 

change to our WACC (5.88% vs 5.16% as we are 

now using a 0.4 specific beta instead of 0.3, as the 

creation of the family holding company should 

reduce further potential takeover speculation) . 

Applying a 25% premium to this fundamental 

valuation, we derive a new target price of 

EUR245 (down from EUR272). A full breakdown 

of our DCF assumptions is provided in the 

financials and valuation on page 57. 

Under our research model, for Europe ex-UK 

stocks without a volatility indicator, the Neutral 

band is 5 percentage points above and below the 

hurdle rate for Europe ex-UK stocks of 9.0%. As 

our target price implies an 11% potential return, 

within the Neutral band, we upgrade the stock to 

Neutral (from Underweight). Potential return 

equals the percentage difference between the 

current share price and the target price, including 

the forecast dividend yield when indicated. 

Although the current 33.0x2012e and 29.5x 2013e 

PE multiple still seems very high relative to peers 

(c100% premium), we believe those investors 

who still own Hermès’ free float should hold on to 

the shares. Upside risks include the current thin 

free float (c5%) being further reduced by share 

purchases by LVMH on the market or a buy-back 

by Hermès to cover employees’ grant shares. On 

the downside, the top line may suffer more than 

expected if the company loses share to other highend 

leather-goods manufacturers. 

Since March 2009, we have believed Hermès 

should trade structurally at a premium to its DCF 

55




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Hermès FY results and forecasts 

EURm 2005a YoY 2006a 

(%) 

YoY 2007a 

(%) 

YoY 2008a 

(%) 

YoY 2009a 

(%) 

YoY 2010a 

(%) 

YoY 2011a 

(%) 

YoY 2012e 

(%) 

YoY 2013e 

(%) 

YoY 2014e 

(%) 

YoY 

(%) 

Sales 1,427 7 1,515 6 1,625 7 1,765 9 1,914 8 2,401 25 2,841 18 3,373 19 3,750 11 4,085 9 

Gross profit 929 7 990 7 1,055 7 1,140 8 1,213 6 1,586 31 1,955 23 2,321 19 2,588 11 2,823 9 

Gross margin (%) 65.1% 65.4% 64.9% 64.6% 63.3% 66.1% 68.8% 68.8% 69.0% 69.1% 

Communication 76 7 90 18 93 3 98 5 91 -7 126 38 148 18 180 21 195 8 210 8 

as a % of sales 5.3% 5.9% 5.7% 5.5% 4.8% 5.2% 5.2% 5.3% 5.2% 5.1% 

Other operating costs 469 7 499 6 547 10 593 8 658 11 792 20 921 16 1091 18 1220 12 1330 9 

EBIT 384 7 401 5 415 3 449 8 463 3 668 44 885 32 1050 19 1173 12 1283 9 

EBIT margin 26.9 26.5 25.5 25.5 24.2 27.8 31.2 31.1 31.3 31.4 

Financial income 4 0 12 18 -13 -13 12 13 15 20 

Pre-tax profit 388 13 409 6 438 7 455 4 444 -3 653 47 893 37 1063 19 1188 12 1303 10 

Net profit 247 16 268 9 288 7 290 1 289 0 422 46 594 41 702 18 785 12 861 10 

HSBC EPS (EUR) 2.26 10 2.50 11 2.71 8 2.76 2 2.74 -0.5 4.00 46 5.66 41 6.69 18 7.48 12 8.20 10 


Hermès sales by geographic and product category 

EURm 2005a YoY 2006a 

(%) 

YoY 2007a 

(%) 

YoY 2008a 

(%) 

YoY 2009a 

(%) 

YoY 2010a 

(%) 

YoY 2011a 

(%) 

YoY 2012e 

(%) 

YoY 2013e 

(%) 

YoY 2014e 

(%) 

YoY 

(%) 

By product category 

Silk 163 9% 174 6% 193 11% 208 8% 227 9% 284 25% 347 22% 413 19% 457 11% 498 9% 

Handbags & Travel 568 7% 664 17% 675 2% 763 13% 936 23% 1,205 29% 1,348 12% 1,570 16% 1,753 12% 1,927 10% 

RTW & accessories 294 8% 294 0% 315 7% 337 7% 360 7% 445 24% 576 29% 708 23% 804 14% 877 9% 

Other activities 141 6% 77 -45% 86 11% 80 -6% 78 -2% 87 11% 109 25% 142 31% 155 9% 165 7% 

Perfume 73 13% 101 38% 119 18% 125 5% 117 -6% 138 17% 159 16% 185 16% 201 9% 215 7% 

Watches 104 4% 110 6% 105 -5% 95 -10% 87 -8% 113 30% 139 23% 168 21% 182 9% 195 7% 

Tableware 37 6% 45 21% 51 14% 48 -6% 38 -20% 44 14% 51 17% 57 12% 60 6% 63 5% 

Other products 48 1% 52 8% 82 60% 109 33% 71 -35% 86 21% 113 31% 131 16% 139 6% 146 5% 

Total 1,427 1,515 1,625 1765 1,914 2,401 2,841 3,373 3,750 4,085 

By geographic 

France 269 5% 290 8% 327 13% 359 10% 370 3% 437 18% 495 13% 544 10% 588 8% 632 7% 

Europe 243 9% 280 15% 346 24% 382 10% 385 1% 463 20% 560 21% 654 17% 714 9% 764 7% 

Total Europe 512 7% 570 11% 673 18% 741 10% 756 2% 901 19% 1,055 17% 1,198 14% 1,302 9% 1,396 7% 

Japan 415 4% 410 -1% 382 -7% 393 3% 408 4% 453 11% 472 4% 523 11% 542 4% 553 2% 

Asia 245 13% 261 6% 282 8% 321 14% 423 32% 631 49% 808 28% 1,038 28% 1,224 18% 1,407 15% 

Total Asia 660 7% 671 2% 664 -1% 713 7% 831 16% 1,084 30% 1,280 18% 1,562 22% 1,766 13% 1,960 11% 

America 216 10% 232 8% 246 6% 265 8% 294 11% 385 31% 464 21% 566 22% 632 12% 676 7% 

Rest of the world 39 -4% 42 8% 43 1% 46 7% 34 -25% 31 -8% 43 37% 47 10% 50 6% 52 5% 

Total 1427 1515 1,625 1,765 1,914 2,401 2,841 3,373 3,750 4,085 


56

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Financials & valuation: Hermès 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 2,841 3,373 3,750 4,085 

EBITDA 1,011 1,185 1,317 1,437 


Operating profit/EBIT 885 1,050 1,173 1,283 

Net interest 12 13 15 20 

PBT 893 1,063 1,188 1,303 

HSBC PBT 893 1,063 1,188 1,303 

Taxation -290 -351 -392 -430 





Capex -185 -250 -280 -313 


Dividends -167 -735 -263 -294 

Change in net debt -210 164 -371 -394 

FCF equity 551 570 634 687 



Tangible fixed assets 869 985 1,121 1,280 


Cash & others 1,048 883 1,254 1,647 

Total assets 3,248 3,247 3,799 4,398 


Gross debt 39 39 39 39 

Net debt -1,038 -875 -1,245 -1,639 


Invested capital 958 1,101 1,263 1,449 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 18.3 18.7 11.2 8.9 

EBITDA 28.1 17.2 11.2 9.1 


PBT 36.9 19.0 11.8 9.7 

HSBC EPS 41.5 18.2 11.8 9.7 

Ratios (%) 

Revenue/IC (x) 3.0 3.3 3.2 3.0 

ROIC 64.0 68.3 66.5 63.4 

ROE 26.6 30.6 30.9 27.9 

ROA 19.6 21.9 22.6 21.3 



EBITDA/net interest (x) 







DPS 7.00 2.51 2.80 3.08 

Book value 21.61 21.30 26.17 31.47 

DCF analysis 



Neutral 





Sensitivity and valuation range (DCF) to which we then add a 25% premium to 

derive our target price (EUR245 per share) 


5.5% 200.8 208.9 216.0 

5.7% 194.7 202.3 209.1 

5.9% 188.9 196.0 202.6 

6.1% 183.4 190.0 196.3 

6.3% 178.1 184.3 190.3 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 7.7 6.5 5.8 5.2 

EV/EBITDA 21.6 18.6 16.5 14.8 

EV/IC 22.8 20.0 17.2 14.7 

PE* 39.0 33.0 29.5 26.9 

P/Book value 10.2 10.4 8.4 7.0 

FCF yield (%) 2.4 2.5 2.8 3.0 





Reuters (Equity) HRMS.PA Bloomberg (Equity) RMS FP 




Goods 

Analyst Sophie Dargnies Contact 331 5652 4348 




348 

298 

248 

198 

148 

98 

98 


Hermes Rel to SBF-120 

Source: HSBC 


348 

298 

248 

198 

148 

57




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Hugo Boss 

Higher relative sales exposure to Europe (and mostly through 

wholesale) to finally hit HB from H2 2012 

Earnings momentum at rest after a flurry of positive surprises 

between 2010 and early 2012 

Remain Neutral (V), lower target price to EUR84 (from EUR88) on 

our lower estimates 

Earnings momentum at rest 

Surprisingly strong Europe in H1, but negative 

inflection ahead 

Amongst our global luxury coverage, Hugo Boss 

(HB) is the second most exposed company to 

Europe (60% of sales in 2011) behind Tod’s (71%) 

and we believe that local European customers 

account for c80% of sales reported in Europe for HB 

(vs c50% on average for the luxury brands). 

Nevertheless, HB organic sales growth in Europe 

remained robust in H1 2012 (+12%), with 

particularly strong performances in key markets of 

Germany, UK and France; even Spain sales grew at 

a double-digit pace. 

However, during its Q2 earnings conference call, 

HB stated that order intake by European retailers for 

deliveries in H2 was down y-o-y. Given the weight 

of wholesale within Europe (c60% of sales vs 55% 

worldwide), this reversal of trends was the main 

reason why management guided towards flat 

worldwide wholesale revenues at constant FX over 

FY12 (implying a decline in H2 as H1 was up 4%, 

with Q3 growth even more negative than Q4 since 

some of the fall/winter merchandise were shipped 

earlier this year – ie. booked in Q2). 

Underperformance in China vs peers 

HB organic sales growth in China (9% of sales in 

2011) slowed from +13% in Q1 to +1% in Q2, one 

of the slowest growth rates within our coverage. 

Management blamed the overall industry slowdown 

in China, translating mostly into much slower traffic 

(conversion and average ticket was still up y-o-y). 

Whilst we believe it is too early to attribute this 

underperformance to HB’s main product category 

(ie. is apparel less resilient than accessories?) or to 

potential issues with the brand itself in China, we 

note that this 1% growth rate in Q2 was the slowest 

within our coverage. 

Strategy is still sound 

Although deteriorating economic environment is 

finally taking its toll, we believe the strategy outlined 

in the 2015 plan is still sound, in particular: 

The retail push, which should result in an overproportionate 

growth in retail sales (which 

should reach at least 55% of sales in 2015e vs 

40% in 2010), including a mid single-digit 

average comps increase, 50 store openings per 

annum (70 in 2012 due to the partnership with 

Galeries Lafayette), some franchise buy-backs 

and conversion of corners into shop-in-shops. 

58




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The search for better efficiencies (notably 

thanks to the "DRIVE" programme), notably 

in terms of supply chain, logistics and 

customer service. 

We believe the risk is that HB may not deliver (at 

least in 2012) the targeted over-proportionate 

growth in sales in Asia, which should account for 

21% of sales in 2015e vs 13% in 2010. 

Less room for positive surprises 

During the 2010-11 period, HB has been the best 

‘earnings momentum’ story in the sector. This 

performance has been rewarded by a significant rerating 

of HB, both in absolute and relative terms. 

HB shares rose strongly in the first few months of 

2012, reaching a high of EUR89.35 on 25 April 

on the back of several positive catalysts (recovery 

from the weakness that followed a 14 November 

2011 placement by controlling shareholder 

Permira, higher-than-expected 2011 results, 

robust 2012 guidance, and conversion of all 

preferred shares into ordinary shares). 

True, HB shares lost 16% since the high on 25 

April, and the stock is now trading at a 2013e PE 

of 13.8x, which we do not find demanding. 

However, we now see limited short-term catalysts 

for a further re-rating and less potential for 

earnings upgrades. 


EBITDA rose 16% in H1 2012, with a 10bp 

EBITDA margin increase. As expected, organic 

sales growth picked up to 14% in Q2 (vs +10% in 

Q1) due to timing effects affecting wholesale: the 

change in the timing of collections implied a transfer 

of sales from Q1 to Q2 as well as from Q3 to Q2. 

The FY12 guidance was confirmed and a few 

elements were specified: organic growth up to 10% 

(unchanged), 10-12% EBITDA growth (vs 

“EBITDA expected to increase at a slightly higher 

rate than sales” previously). 

Our 2012 and 2013 forecasts are for organic sales 

growth of 9% and 7.5% (vs 10% and 9% previously 

due to lower sales forecasts in Asia and Europe) and 

EBITDA margin y-o-y change of -10bp (vs +100bp 

due to a lack of leverage and one-off depreciation 

charges in Q2) and +70bp, respectively. 

We lower our 2012-14 EPS estimates by 4% and 

therefore decrease our DCF-based target price for 

Hugo Boss to EUR84 from EUR88. The 

assumptions used in our DCF-derived target price 

are detailed on page 61. Under our research 

model, for stocks with a volatility indicator, the 

Neutral band is 10 percentage points above and 


9.0%. Our target price provides a potential return 

of 12%, within the Neutral band of our model; 

therefore, we are reiterating our Neutral (V) 

rating. Potential return equals the percentage 



when indicated. 

Upside specific risks include continued outperformance 

on 2015 targets and a potential 

disposal by Permira (who still owns 66% of HB) 

of a majority stake in the company triggering a 

minority buyout. Downside theoretical risks 

include another partial share placement by 

Permira. 

Hugo Boss sales breakdown by region – 2011 

Americas 

22% 

Source: Company 

Asia 

15% 

Licenses 

2% 

Europe 

61% 

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Hugo Boss - Profit & loss 

(EURm) 2006a 2007a 2008a 2009a 2010a 2011a 2012e 2013e 2014e 

Sales 1,495.5 1,632.0 1,686.1 1,561.9 1,729.4 2,058.8 2,330.0 2,520.0 2,720.0 

% yoy 14.2% 9.1% 3.3% -7.4% 10.7% 19.0% 13.2% 8.2% 7.9% 

Gross profit 854.5 946.4 1,010.6 850.1 1,027.1 1,264.8 1,459.4 1,598.5 1,744.4 

Gross profit margin 57.1% 58.0% 59.9% 54.4% 59.4% 61.4% 62.6% 63.4% 64.1% 

Total SG&A -621.1 -658.7 -723.0 -691.7 -762.6 -870.7 -1,008.7 -1,094.2 -1,182.9 

% yoy 17.9% 6.1% 9.8% - 10.3% 14.2% 15.8% 8.5% 8.1% 

ratio (%) -41.5% -40.4% -42.9% -44.3% -44.1% -42.3% -43.3% -43.4% -43.5% 

Adjusted EBITDA 233.4 287.7 287.6 270.2 349.0 469.0 530.0 590.0 654.0 

Yoy 13.9% 23.3% -0.0% -6.0% 29.1% 34.4% 13.0% 11.3% 10.8% 

adjusted EBITDA margin (%) 15.6% 17.6% 17.1% 17.3% 20.2% 22.8% 22.7% 23.4% 24.0% 

One-off adj. EBITDA to EBITDA 0.0 0.0 -36.0 -42.7 -13.6 -1.5 0.0 0.0 0.0 

EBITDA 233.4 287.7 251.6 227.5 335.4 467.5 530.0 590.0 654.0 

EBITDA margin (%) 15.6% 17.6% 14.9% 14.6% 19.4% 22.7% 22.7% 23.4% 24.0% 

Amortization & Depreciation -49.1 -67.5 -60.9 -69.1 -70.9 -73.4 -79.3 -85.6 -92.5 

EBIT 184.4 220.2 190.7 158.4 264.5 394.1 450.7 504.3 561.5 

% yoy 13.2% 19.4% -13.4% -16.9% 67.0% 49.0% 14.4% 11.9% 11.3% 

EBIT margin (%) 12.3% 13.5% 11.3% 10.1% 15.3% 19.1% 19.3% 20.0% 20.6% 

Net financial Result -4.5 -7.9 -41.7 -21.8 -14.8 -11.7 -11.0 -2.0 3.0 

EBT 179.9 212.3 149.0 136.6 249.7 382.4 439.7 502.3 564.5 

Income tax expenses -51.2 -58.3 -36.4 -32.7 -59.9 -91.4 -105.5 -120.6 -135.5 

Tax rate (%) -28.5% -27.5% -24.4% -23.9% -24.0% -23.9% -24.0% -24.0% -24.0% 

Net profit 128.7 154.0 112.6 104.0 189.8 291.0 334.2 381.8 429.0 

Minorities 0.0 -0.1 -0.1 -0.1 -3.3 -6.5 -7.0 -8.0 -9.0 

Net profit after minorities 128.6 153.9 112.5 103.9 186.4 284.5 327.2 373.8 420.0 

EPS preferred 1.86 2.24 1.63 1.51 2.70 4.13 4.74 5.42 6.09 

% yoy 20.1% 20.4% -27.2% -7.4% 79.0% 52.7% 15.0% 14.2% 12.4% 

Number of shares 69.1 68.7 69.0 68.8 69.0 69.0 69.0 69.0 69.0 

Sources: Company data, HSBC estimates 

Hugo Boss - Split of sales 

(EURm) 2006 2007 2008 2009 2010 2011 2012e 2013e 2014e 

By Region 

Europe 1,029 1,124 1,170 1,041 1,073 1,245 1,360 1,428 1,499 

America 274 299 307 312 381 455 550 614 676 

Asia 150 161 162 165 230 309 363 416 478 

Licenses 43 49 47 44 45 49 57 62 67 

Total 1,496 1,632 1,686 1,562 1,729 2,059 2,330 2,520 2,720 

Europe 69% 69% 69% 67% 62% 60% 58% 57% 55% 

America 18% 18% 18% 20% 22% 22% 24% 24% 25% 

Asia 10% 10% 10% 11% 13% 15% 16% 17% 18% 

Licenses 3% 3% 3% 3% 3% 2% 2% 2% 2% 

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 

By Distribution Network 

Wholesale na na 1,183 1,008 993 1,085 1,118 1,144 1,179 

Retail na na 456 510 691 924 1,156 1,313 1,474 

Licenses na na 47 44 45 49 57 62 67 

Total na na 1,686 1,562 1,729 2,059 2,330 2,520 2,720 

Wholesale na na 70% 65% 57% 53% 48% 45% 43% 

Retail na na 27% 33% 40% 45% 50% 52% 54% 

Licenses na na 3% 3% 3% 2% 2% 2% 2% 

Total na na 100% 100% 100% 100% 100% 100% 100% 

Sources: Company report, HSBC estimates 

60

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Financials & valuation: Hugo Boss 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 2,059 2,330 2,520 2,720 

EBITDA 468 530 590 654 



Net interest -12 -11 -2 3 

PBT 382 440 502 564 

HSBC PBT 382 440 502 564 

Taxation -91 -106 -121 -135 





Capex -108 -120 -120 -120 


Dividends -140 -199 -229 -262 


FCF equity 198 236 308 360 




Current assets 932 1,059 1,194 1,352 

Cash & others 200 258 341 446 

Total assets 1,449 1,616 1,785 1,971 


Gross debt 389 389 389 389 

Net debt 147 90 6 -98 

Shareholders funds 499 634 787 954 

Invested capital 838 936 1,010 1,080 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 19.0 13.2 8.2 7.9 

EBITDA 39.4 13.4 11.3 10.8 


PBT 53.1 15.0 14.2 12.4 

HSBC EPS 52.7 15.0 14.2 12.4 

Ratios (%) 

Revenue/IC (x) 2.6 2.6 2.6 2.6 

ROIC 38.4 38.6 39.4 40.8 

ROE 67.5 57.7 52.6 48.2 

ROA 20.8 21.8 22.4 22.8 



EBITDA/net interest (x) 40.0 48.2 295.0 

Net debt/equity 28.1 13.6 0.8 -10.0 

Net debt/EBITDA (x) 0.3 0.2 0.0 -0.1 

CF from operations/net debt 207.0 395.6 6790.4 




DPS 2.89 3.32 3.79 4.26 

Book value 7.24 9.20 11.41 13.84 

DCF analysis 



Neutral (V) 





Sensitivity and valuation range (EUR/share) 


9.0% 94 96 98 

9.5% 88 90 91 

10.0% 82 84 85 

10.5% 77 79 80 

11.0% 73 74 75 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 2.6 2.3 2.1 1.9 

EV/EBITDA 11.7 10.2 9.0 8.0 

EV/IC 6.5 5.8 5.3 4.8 

PE* 18.2 15.8 13.8 12.3 

P/Book value 10.4 8.2 6.6 5.4 

FCF yield (%) 3.7 4.4 5.8 6.8 





Reuters (Equity) BOSSn.DE Bloomberg (Equity) BOSS GR 



Country Germany Sector Textiles, Apparel & Luxury 

Goods 





97 

97 

87 

87 

77 

77 

67 

67 

57 

57 

47 

47 

37 

37 

27 

27 


Hugo Boss Rel to DAX-100 

Source: HSBC 


61




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Luxottica 

North America (c60% of sales) trends still robust and weaker EUR 

is a booster 

Self-help (Coach and Armani licences, M&A, retail margin 

recovery) should benefit with best-in-class operating leverage 

Remain Neutral, increase DCF-based target price to EUR30.50 

(from EUR28.50) on higher estimates 

Self-help and best-in-class 

operating leverage 

North America trends still robust 

Still accounting for c60% of Luxottica’s sales, North 

America (NA) continues to be the company’s main 

growth driver. Overall, NA sales increased 8% in 

USD in H1 (compared to 9% in Q1). 

Wholesale sales rose 18% in Q1 and 21% in Q2 

(against a 15-18% target for FY12), boosted by the 

successful launch of Coach, a further increase in 

demand for luxury, Oakley and Ray-Ban “still on 

fire”. 

Retail NA was quite stable in Q2 compared to Q1 

(comps up 5.6% vs +6%), even though the key chain 

LensCrafters slowed to +1.1% from +4.9% in Q1, 

however, we believe that Q3 so far has been trending 

up 2-3%, which would support management view 

that the weakness was linked to the SAP 

implementation. Sunglass Hut NA comps remained 

strong (+11.7% in Q2 after +10.3% in Q1). 

We note however that the Retail NA comps are 

artificially boosted by the exclusion (as from Q2) of 

Pearle Vision, for which the business proposition is 

moving away from running corporate stores to a 

franchising model. 

Weaker EUR is a booster 

Luxottica is a strong beneficiary of the weaker 

EUR. According to the company, each 1% 

strengthening of the USD against the EUR has a 

+0.8%/0.9% impact on EPS. 

A lot of self-help expected in 2012 and 2013 

We like Luxottica because it should benefit from a lot 

of self-help in 2012 and 2013. 

The Coach licence, which we estimate will 

contribute EUR50m in sales in year 1 (vs our 

previous forecast of EUR40m), started to impact 

the business in January 2012. 

As from 2013, the Armani licence (won from 

competitor Safilo) should generate EUR150m in sales 

in year 1 with the potential, in our view, to reach 

EUR200m in year 3. 

New licences create significant value: not only 

can they be considered the equivalent of an 

acquisition at zero cost, but they also add to the 

size of the Wholesale division (leveraging 

existing fixed distribution costs and reinforcing 

Luxottica’s position as the supplier of choice for 

eyewear retailers). Before adding Coach and 

Armani to its portfolio, Luxottica was already by 

far the leader in eyewear licensing with a global 

62




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market share of more than 40%. We now estimate 

that share at more than 50%. Luxottica also owns 

Ray-Ban and Oakley, the two star ‘house’ brands 

of the industry. 

In 2012 and 2013, Luxottica should start to 

benefit from its recent acquisitions (Tecnol in the 

wholesale division and emerging markets (EM) 

eyewear chains in the retail division), and the 

company has made it clear that other acquisitions 

will follow. Although we have always expressed 

caution on M&A in the luxury industry, Luxottica 

has developed a strong track record in creating 

value via acquisitions. 

In the short term, however, the integration of 

Tecnol is generating one-off restructuring charges 

which would penalise Wholesale margins. 

In 2012, the Retail EBIT should benefit from the 

very favourable 2011 basis of comparison. Last 

year, EBIT margin declined 30bp to 11.6%, but 

would have been 13.9% at constant FX excluding 

one-offs (notably due to the Australian business). 

Even assuming continued investments in EM and 

taking into account the EUR22m one-off charge 

linked to the reorganisation the Australian chain 

OPSM in 2012, we forecast improvement of 60bp 

in 2012 and 130bp in 2013 based on the current 

FX (EUR/USD=1.25) and the confirmation of 

improving trends in Australia/New Zealand. 

Aggressive yet realistic 2012 target 

On 28 February, Luxottica gave an aggressive 

2012 target, but it was realistic in our view: 30% 

sales growth in EM, 5-7% retail comps and 15% 

wholesale growth in North America, and 4-6% 

wholesale growth in Western Europe. All in all, 

we estimate these regional trends should translate 

into 9-10% top-line growth. In addition, 

Luxottica’s leverage ‘rule of thumb’ of c2x (ie 

EBIT growth/sales growth), which was met in 

2011, was reiterated for 2012 and confirmed when 

the company reported H1 2012. 


Luxottica posted a 20% increase in EBIT in Q2 

2012, ie. an 80bp EBIT margin increase to 17.7% 

Reported sales were up 15.2% in Q2 (+5.1% 

excluding FX and acquisition impacts, compared 

to +8.1% in Q1). Worldwide Retail comps slightly 

slowed (from 6.5% in Q1 to 5.1% in Q2) on the 

back of the above-mentioned weakness at 

LensCrafters, store closures in Australia and 

weaker Western Europe wholesale sales (down 

4% in Q1 vs +6% in Q2). 

We forecast worldwide Retail comps of 5.5% for 

2012e (vs 5.5% in 2011), to which we add a 2.2% 

contribution from acquisitions and an 8% FX 

impact, and deduct a -0.5% contribution from new 

stores , leading to a 15.2% reported sales growth 

in 2012e. 

We forecast Wholesale sales to slow from 11.2% 

in 2011 at constant FX to 9% in 2012 (including 

Coach). Reported sales growth should amount to 

15.7% as Tecnol and FX impact should add 2.7% 

and 4%, respectively. 

For this division, which has historically shown a 

high operating leverage, we forecast 90bp EBIT 

margin enhancement in 2012 (after 80bp in 2011) 

to a hefty 22.4%. 

At the group level, Luxottica sales and EBIT 

should thus grow at a respective 15% and 23% in 

2012, with an operating leverage of 1.5x, amongst 

the best-in-class with Ferragamo, PPR and Prada. 

We have lowered our 2012 EPS estimate due to 

higher interest charges, but raised our 2013-14 

EPS estimates by 3% and 2%, respectively, due to 

the lower EUR. 

63




abc 

We increase our DCF-based target price to 

EUR30.50 from EUR28.50 on the back of our 

higher estimates. The assumptions used in our 

target price are detailed on page 65. Under our 

research model, for stocks without a volatility 

indicator, the Neutral band is 5ppts above and 


9.0%. Our new target price implies a 5.5% 

potential return; within the Neutral band of our 

model; hence we reiterate our Neutral rating. 

Potential return equals the percentage difference 

between the current share price and the target 

price, including the forecast dividend yield when 

indicated. 

Upside risks to our rating include a better-thanexpected 

resilience of the group’s North American 

business, a faster-than-expected development in EM, 

a USD/EUR strengthening, value-enhancing 

acquisitions and new license deals. Downside risks 

include poor execution in integrating new deals and 

non-renewal of licence contracts. 

Luxottica is trading at 21.9x 2012e and 18.2x 

2013e PE (note that our EPS exclude trademark 

amortisation), implying a c20% premium to its 

peers (compared to a c10% historical level). 

Luxottica P&L summary 

EURm 2005a 2006a 2007a 2008a** 2009e 2010a 2011a 2012e 2013e 2014e 06 vs 

05 

07 vs 

06 

08 vs 

07 

09 vs 10 evs 11e vs 

08 09 10e 

12e vs 13e vs 

11e 12e 

14e vs 

13e 

Wholesale 1,311 1,715 1,993 2,092 1,955 2,236 2,456 2,841 3,189 3,412 31% 16% 5% -7% 14% 10% 16% 12% 7% 

Retail 3,062 3,294 3,234 3,109 3,139 3,562 3,766 4,339 4,654 4,934 8% -2% -4% 1% 13% 6% 15% 7% 6% 

Inter-Segments -238 -333 -348 40% 4% -100% 

Oakley 88 

Total sales 4,135 4,676 4,967 5,202 5,094 5,798 6,222 7,180 7,843 8,346 13% 6% 5% -2% 14% 7% 15% 9% 6% 

Wholesale 304 446 528 440 356 462 529 637 738 810 46% 18% -17% -19% 30% 15% 20% 16% 10% 

Retail 355 431 362 431 367 424 437 531 627 683 21% -16% 19% -15% 15% 3% 22% 18% 9% 

Inter-Segments -78 -121 -60 -121 -140 -174 -159 -178 -195 -214 55% -50% 101% 16% 25% -9% 12% 10% 10% 

Oakley EBIT 3 

Total EBIT 581 756 833 750 583 712 807 990 1,170 1,280 30% 10% -10% -22% 22% 13% 23% 18% 9% 

Wholesale 23.2% 26.0% 26.5% 21.0% 18.2% 20.7% 21.5% 22.4% 23.1% 23.8% 

Retail 11.6% 13.1% 11.2% 13.8% 11.7% 11.9% 11.6% 12.2% 13.5% 13.9% 

TOTAL EBIT margin 14.1% 16.2% 16.8% 14.4% 11.4% 12.3% 13.0% 13.8% 14.9% 15.3% 

Reported diluted EPS 0.73 0.94 1.07 0.83 0.69 0.83 0.98 1.21 1.48 1.65 29% 14% -23% -17% 21% 18% 24% 22% 12% 

HSBC diluted EPS* 0.73 0.94 1.10 0.96 0.80 0.99 1.09 1.32 1.59 1.76 29% 17% -13% -17% 23% 10% 21% 20% 11% 

Retail comps (worldwide) 5.5% 6.7% 1.2% -5.4% -4.2% 4.5% 5.5% 5.5% 4.0% 4.0% 

* Excluding exceptional items and trademark amortisation ** change in sales & EBIT breakdown methodology 


64

5 

. 

5 




abc 

Financials & valuation: Luxottica 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 6,222 7,180 7,843 8,346 

EBITDA 1,131 1,330 1,527 1,655 


Operating profit/EBIT 807 990 1,170 1,280 


PBT 695 870 1,063 1,186 

HSBC PBT 695 870 1,063 1,186 

Taxation -237 -300 -367 -409 




Cash flow from operations 811 836 974 1,088 

Capex -307 -325 -345 -366 


Dividends -202 -226 -281 -343 


FCF equity 491 510 629 723 





Cash & others 905 905 905 905 

Total assets 8,644 8,867 8,991 9,106 


Gross debt 2,937 2,747 2,397 2,016 

Net debt 2,032 1,842 1,492 1,111 




Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 7.3 15.4 9.2 6.4 

EBITDA 9.4 17.6 14.8 8.4 


PBT 14.8 25.2 22.2 11.6 

HSBC EPS 10.4 21.5 20.4 10.7 

Ratios (%) 

Revenue/IC (x) 1.1 1.2 1.3 1.4 

ROIC 9.3 10.9 12.7 13.7 

ROE 14.6 16.2 17.8 17.9 

ROA 6.5 7.4 8.6 9.3 










DPS 0.49 0.61 0.74 0.83 

Book value 7.92 8.66 9.56 10.49 

DCF analysis 



Neutral 







7.25% 35.6 36.7 37.3 

7.75% 32.5 33.4 34.0 

8.25% 29.8 30.5 31.1 

8.75% 27.3 27.9 28.6 

9.25% 25.2 25.7 26.3 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 2.5 2.1 1.9 1.8 

EV/EBITDA 13.8 11.6 9.9 8.9 

EV/IC 2.7 2.6 2.5 2.4 

PE* 26.6 21.9 18.2 16.4 

P/Book value 3.6 3.3 3.0 2.8 

FCF yield (%) 3.6 3.8 4.6 5.3 





Reuters (Equity) LUX.MI Bloomberg (Equity) LUX IM 




Goods 

Analyst Antoine Belge Contact 33 1 5652 4347 




45 

40 

35 

30 

25 

20 

15 

15 


Luxottica Rel to BCI ALL-SHARE INDEX 

Source: HSBC 


45 

40 

35 

30 

25 

20 

65




abc 

LVMH 

Whilst Cognac and DFS should continue to surprise positively, LV’s 

growth is the main victim of our ‘first-mover disadvantage’ theme 

After the share’s recent good run, we see limited (8.6%) potential 

return to our TP; we prefer investing in Dior (OW, TP EUR140), 

LVMH’s parent company, which offer a 19.7% potential return 

Downgrade to Neutral from Overweight; target price of EUR145 

remains unchanged 

Downgrade to Neutral 

LV the main victim of our ‘first-mover 

disadvantage’ theme 

LVMH does not disclose the specific sales and EBIT 

performance of the LV brand, its main profit 

contributor. But during the H1 2012 conference call, 

management said that LV’s organic sales growth in 

Q2 was slightly below the 8% recorded by the 

Fashion & Leather division as a whole and that its 

EBIT margin declined in H1 (with the decline at the 

divisional level being 220bp). We estimate that 

organic sales growth was 6% at LV in Q2, one of the 

lowest within our coverage. 

In our previous reports, we wrote that achieving the 

8% organic growth we were forecasting for 2012-14 

(even underperforming the industry), would be 

another considerable achievement as it would 

represent an annual increase of EUR500m (ie. the 

size of a brand like YSL). We now forecast organic 

growth of 7% in 2012-14. 

Beyond this sheer size effect (ie. it is more difficult 

for a EUR6.5bn sales brand to grow), we believe LV 

is also the main victim of our ‘first-mover 

disadvantage’ theme in Asia. Whilst LV benefited 

from being a pioneer in China up until 2011, smaller 

brands are now growing faster due to the increasing 

sophistication of the Chinese consumers. 

LVMH also owns smaller brands – notably Fendi, 

Céline, Loewe and Marc Jacobs – which are 

growing at a faster rate than LV, but are too small 

relative to the size of LV and other group assets to 

really matter in terms of numbers. 

We also note that H2 2012 should face an 

unfavourable basis of comparison as organic sales 

growth was 18% in Fashion & Leather in both Q3 

and Q4 of last year (vs +14% in H1 2011). 

From a margin standpoint, we expect a lower rate of 

decline in H2 y-o-y, compared to H1 y-o-y as costs 

have been front-loaded in H1 whilst H2 should see a 

stronger pipeline of product launches (notably the 

collection in collaboration with the Japanese artist 

and designer Kusama). Nevertheless, we forecast a 

130bp decline in the Fashion & Leather EBIT 

margin over the FY2012, since investments behind 

Berluti, the negative impact from the takeover of the 

jeans license at Donna Karan or the streamlining of 

Fendi wholesale distribution will continue to weigh 

on margins. 

66




abc 

Cognac and DFS likely to continue to surprise 

positively 

Cognac: Beginning of 2012, management was 

cautious on Cognac volume growth due to 

anticipated shortage of inventories of older qualities 

of eau-de-vie. But this caution proved unfounded: 

organic growth was 18% in H1 2012 (volumes +8% 

and price/mix +10%) and management sounded 

confident about H2 during the H1 results conference 

call, even though the magnitude of price mix effects 

should be lower. We forecast 11% organic sales 

growth in H2 (volumes +6% and price/mix +5%). 

DFS: This business continues to be the star 

performer as an increasing share of its sales (c40% 

in 2011) are now generated by mainland Chinese 

tourists, leveraging an existing store network with 

limited capex need. 

Other businesses more of a mixed bag 

We are less enthusiastic regarding the prospects of 

champagne (historically the group’s most cyclical 

business), perfumes (47% of sales in Europe) and 

watches (which underperformed peers in Q2 with 

9% organic sales growth and for which the Bulgari 

integration is proving a short-term drag). 

LVMH: 2012e EBIT by division 

Louis Vuitton 

brand 

49% 

Perfumes and 

Cosmetics 

6% 


Watches and 

Jewellery 

6% 

Other Fashion 

brands 

5% 

Selective 

retailing 

14% 

Champagne 

and Wines 

9% 

Cognac & 

spirits 

11% 


Organic sales growth was 10% in Q2 2012 

(compared to 14% in Q1). EBIT grew 20% in H1 

2012, implying an 110bp EBIT margin deterioration 

at the group level (-220bp in Fashion & Leather and 

-60bp in Wines & Spirits). 

For 2012, we forecast a 19.9% reported sales growth 

(9.5% organic, 7.2% FX, 3.2% from consolidation). 

We expect a 19% y-o-y rise in EBIT (18% excluding 

Bulgari), implying a 20bp EBIT margin decline to 

22%. The limited margin improvement is linked to 

the outperformance of lower-margin businesses 

(DFS and smaller fashion brands), the full 

integration of Bulgari (c12% EBIT margin in 2011) 

and the above-mentioned elements weighing on 

Fashion & Leather margins. 

We decrease our 2012 EBIT estimates by 2%, but 

leave our 2013-14 EBIT estimates unchanged. More 

favourable FX is offsetting our lower Fashion & 

Leather estimates. 

Our DCF-based target price for LVMH is EUR145 

(unchanged). The assumptions used in our target 

price are detailed on page 69. Under our research 

model, for stocks without a volatility indicator, the 

Neutral band is 5 percentage points above and below 

the hurdle rate for Europe ex-UK stocks of 9%. Our 

target price of EUR145 implies a potential return of 

8.6%, within the Neutral band of our model; 

therefore, we downgrade LVMH to Neutral (from 

Overweight). Potential return equals the percentage 




Note that our EUR140 target price for Dior implies a 

19.7% potential return (OW, 27 Aug 2012 price of 

EUR117, DIOR.PA) (see detailed investment case 

on page 37). We thus prefer to play LVMH’s robust 

fundamentals via its parent company (for which its 

40.9% stake in LVMH accounts for 90% of restated 

net asset value). 

The main specific upside risks to our rating are 

higher sales and margins at the LV brand. The main 

specific downside risks would be destocking of the 

wholesale businesses (Wines & Spirits, Watches, 

Perfumes) and value destruction linked to M&A 

activities (past and future). 

67




abc 

LVMH FY results & forecasts 

EURm 2007a YoY 

% chg 

2008a 

YoY 

% chg 

2009a 

YoY 

% chg 

Sales 16,481 8 17,193 4 17,053 -1 20,320 19 23,659 16 28,370 20 31,210 10 33,660 8 

Current operating income (EBIT) 3,555 12 3,628 2 3,352 -8 4,321 29 5,263 22 6,245 19 7,127 14 7,831 10 

Other operating income and expenses -126 -143 -191 -152 -109 -122 -100 -100 

Operating income 3,429 12 3,485 2 3,161 -9 4,169 32 5,154 24 6,123 19 7,027 15 7,731 10 

Net financial expenses -252 -281 -342 612 -242 -69 -94 -8 

Income before taxes 3,177 6 3,204 1 2,819 -12 4,781 70 4,912 3 6,054 23 6,932 15 7,723 11 

Taxes -853 -893 -849 -1,469 -1,453 -1,786 -2,149 -2,394 

Associates 7 7 3 7 6 8 10 12 

Minority interests -306 -292 -218 -287 -400 -482 -560 -619 

Net pft before goodwill and 

2,025 8 2,026 0 1,755 -13 3,032 73 3,065 1 3,794 24 4,234 12 4,722 12 

exceptionals 

EPS 4.22 7 4.26 1 3.70 -13 6.32 71 6.23 -1 7.56 21 8.43 12 9.41 12 

Sales by division 

Wines & Spirits 3,226 8 3,126 -3 2,740 -12 3,261 19 3,524 8 4,144 18 4,570 10 4,914 8 

Leather and Fashion 5,628 8 6,010 7 6,302 5 7,581 20 8,712 15 10,108 16 11,119 10 12,008 8 

Perfume and cosmetics 2,731 8 2,868 5 2,741 -4 3,076 12 3,195 4 3,568 12 3,772 6 3,941 4 

Selective distribution 4,179 7 4,376 5 4,533 4 5,378 19 6,436 20 7,873 22 8,768 11 9,533 9 

Watches 833 13 879 6 764 -13 985 29 1,949 98 2,923 50 3,239 11 3,531 9 

Others -116 nm -66 nm -27 nm 39 nm -157 nm -246 nm -257 nm -268 nm 

Total sales 16,481 8 17,193 4 17,053 -1 20,320 19 23,659 16 28,370 20 31,210 10 33,660 8 

EBIT by division 

Wines & Spirits 1,058 10 1,060 0 760 -28 930 22 1,101 18 1,322 20 1,524 15 1,675 10 

Leather and Fashion 1,829 12 1,927 5 1,986 3 2,555 29 3,075 20 3,434 12 3,870 13 4,228 9 

Perfume and cosmetics 256 15 290 13 291 0 332 14 348 5 393 13 422 8 449 6 

Selective distribution 439 10 388 -12 388 0 536 38 716 34 923 29 1,069 16 1,191 11 

Watches 141 76 118 -16 63 -47 128 103 265 107 395 49 470 19 530 13 

Others -168 34 -155 -8 -136 -12 -160 18 -242 51 -221 -9 -228 3 -241 6 

Total EBIT 3,555 12 3,628 2 3,352 -8 4,321 29 5,263 22 6,245 19 7,127 14 7,831 10 

EBIT margin by division 

Wines & Spirits 32.8% 33.9% 27.7% 28.5% 31.2% 31.9% 33.3% 34.1% 

Leather and Fashion 32.5% 32.1% 31.5% 33.7% 35.3% 34.0% 34.8% 35.2% 

Perfume and cosmetics 9.4% 10.1% 10.6% 10.8% 10.9% 11.0% 11.2% 11.4% 

Selective distribution 10.5% 8.9% 8.6% 10.0% 11.1% 11.7% 12.2% 12.5% 

Watches 16.9% 13.4% 8.2% 13.0% 13.6% 13.5% 14.5% 15.0% 

Others nm nm nm nm nm nm nm nm 

Total EBIT margin 21.6% 21.1% 19.7% 21.3% 22.2% 22.0% 22.8% 23.3% 

Source : Company, HSBC estimates 

2010a 

YoY 

% chg 

2011a 

YoY 

% chg 

2012e 

YoY 

% chg 

2013e 

YoY 

% chg 

2014e 

YoY 

% chg 

68

8 

. 

6 




abc 

Financials & valuation: LVMH 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 23,659 28,370 31,210 33,660 

EBITDA 6,187 7,062 7,993 8,750 




PBT 4,918 6,062 6,942 7,735 

HSBC PBT 4,912 6,054 6,932 7,723 

Taxation -1,453 -1,786 -2,149 -2,394 





Capex -1,749 -1,400 -1,500 -1,600 

Cash flow from investment -6,309 -1,400 -1,500 -1,600 

Dividends -1,069 -1,324 -1,482 -1,631 

Change in net debt 1,982 -1,273 -1,935 -2,360 

FCF equity 2,209 2,907 3,707 4,279 





Cash & others 2,606 2,606 2,606 2,606 

Total assets 47,372 50,311 52,445 54,450 


Gross debt 7,266 5,993 4,058 1,698 

Net debt 4,660 3,387 1,452 -908 




Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 16.4 19.9 10.0 7.8 

EBITDA 19.9 14.1 13.2 9.5 


PBT 2.7 23.3 14.5 11.4 

HSBC EPS -1.5 21.4 11.6 11.5 

Ratios (%) 

Revenue/IC (x) 0.9 0.9 1.0 1.0 

ROIC 13.6 14.1 15.1 16.0 

ROE 15.5 16.0 16.1 16.2 

ROA 8.6 8.9 9.5 10.0 




Net debt/equity 19.8 12.8 4.9 -2.7 

Net debt/EBITDA (x) 0.8 0.5 0.2 -0.1 

CF from operations/net debt 78.2 118.0 338.7 




DPS 2.60 2.91 3.20 3.52 

Book value 44.18 49.04 54.45 60.53 

DCF analysis 



Neutral 







8.1% 166 169 171 

8.6% 154 156 158 

9.1% 143 145 147 

9.6% 133 135 137 

10.1% 124 126 128 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 3.0 2.5 2.2 1.9 

EV/EBITDA 11.4 9.8 8.5 7.4 

EV/IC 2.3 2.2 2.0 1.9 

PE* 21.4 17.7 15.8 14.2 

P/Book value 3.0 2.7 2.5 2.2 

FCF yield (%) 3.3 4.4 5.6 6.6 





Reuters (Equity) LVMH.PA Bloomberg (Equity) MC FP 




Goods 





145 

135 

125 

115 

105 

95 

85 

85 


LVMH Rel to SBF-120 

Source: HSBC 


145 

135 

125 

115 

105 

95 

69




abc 

PPR 

We believe PPR’s luxury division has the potential to continue to 

outperform its peers in terms of EBIT growth in 2012 as it did in 

2011 

26 July announcement regarding CFAO: a step further in terms of 

divesture of non-core assets 

Reiterate Overweight, raise target price to EUR156 (from 

EUR150) on higher estimates 

Increasingly a great luxury play 

Luxury division: Potential to continue to 

outperform peers in 2012 as in 2011 

In 2011, PPR’s Luxury division registered 34% 

EBIT growth (restated for the accounting change 

affecting central costs), which was the fourthstrongest 

in our coverage after Ferragamo, Prada 

and Hugo Boss. For 2012, we forecast 26% EBIT 

growth, again above our estimate for the average 

of the industry (18%). 

Even though the Gucci brand may be a victim of 

our ‘first-mover disadvantage’ theme (outlined on 

page 19 of this report) in certain Asian countries, 

its sales continued to grow at a double-digit pace 

on a worldwide basis in Q2 (+10% after +11.6% in 

Q1) and its EBIT margin increased further in H1 

(+30bp after +180bp in 2011). 

Moreover, PPR’s Luxury division growth profile is 

boosted by the stellar performance (both in terms of 

sales and margins) of Bottega Veneta, YSL and 

smaller brands (Balenciaga in particular). 

Gucci brand; some weak spots, but still 

growing EBIT nicely 

Since Q4 2011, not everything has been running 

smoothly at the Gucci brand. True, on a worldwide 

basis, the brand’s average price in leather goods 

has risen by c30% in the last three years by 

focusing on the medium segment of its handbag 

proposition, with a higher leather content vs canvas 

and fewer logo products, and achieving a higher 

share of carry-overs. But in Korea for instance, this 

upgrade has been more recent and probably is too 

sudden, which may have disoriented clients. 

In mainland China, organic growth remained robust 

(+18.5% in Q1 and +16.1% in Q2). Management is 

monitoring the current ‘bipolarisation’: whilst in 

tier-2 and moreover tier-3 cities, customers are still 

eager to buy logo products, clients from tier-1 cities 

are now clearly trading up. 

We forecast a 14% EBIT CAGR over 2012-14e 

for the Gucci brand on the back of an 8% organic 

sales growth in H2 2012, 2013 and 2014. We 

believe the Gucci brand has significant EBIT 

margin improvement potential, even after the 

180bp gain to 30.2% seen in 2011: we forecast 

EBIT margin to increase from 28.7% in 2010 to 

32% in 2014 (mostly driven by lower markdowns 

and scale effects). 

70




abc 

BV, Balenciaga, YSL: strong profit contributors 

Bottega Veneta and Balenciaga, in our view, have 

the potential to outpace the industry average due to 

their niche positioning and the credibility of their 

leather goods offering (more than 70% of sales for 

both of them). For Bottega in particular, which 

accounts for 18% in 2012e of PPR’s Luxury 

division’s EBIT, we forecast organic sales growth of 

27% in 2012 after 34% in 2011. YSL (+28% organic 

sales growth and 340bp EBIT margin expansion in 

2012e), Alexander McQueen, Stella McCartney, 

Brioni and Girard-Perregaux also have significant 

sales and margin potential, in our view. 

CFAO announcement: a step further in terms of 

divesture of non-core assets 

On 26 July, PPR announced that it had agreed to sell 

29.8% of CFAO capital to Toyota Tsusho Corp and 

to tender its remaining 12.2% stake into the public 

tender offer which TTC is considering. 

Regarding the different assets lodged in the Redcats 

division, PPR stated it was now seeking to sell them 

in pieces after failing to secure a buyer for the entire 

division. Whilst this is in our view increasing the 

likelihood of some disposal before the end of 2012, 

this may also probably mean it will take longer to 

sell the least interesting pieces. Finally, we do not 

expect the disposal of Fnac to happen before 2013, 

i.e. when the effect of the ongoing restructuring 

should be more visible. 

Acquisition risks overstated 

In our view, not only does the market not seem to 

recognise that PPR’s good track record in selling 

assets would be a proxy for future disposals, it also 

appears worried about the potential dilution risk 

linked to PPR’s stated M&A ambitions in luxury 

and branded goods. We have fewer concerns than 

most about PPR’s possible next move, especially in 

the next 12-18 months. 2011 showed that PPR is 

focusing on small to medium-sized deals, and no 

deal has occurred so far in 2012. PPR acquired the 

sports & lifestyle company Volcom (for an EV of 

USD516m), the premium menswear company 

Brioni (EUR170m in sales in 2010, undisclosed 

price – our estimate is EUR300m) and increased its 

stake in the watch company Sowind (Girard- 

Perregaux and JeanRichard brands as well as watch 

movements manufacturing capacities) from 23% to 

50.1% for cEUR200m (a hefty price, in our view, 

but on a small deal). 

Puma: the true real weak spot 

We acknowledge that Puma’s disappointing 

operating and share price performance since its 

acquisition may lead to scepticism about PPR’s 

ability to create value from acquisitions in sporting 

goods and lifestyle. 


We have lowered our overall 2012 EBIT estimates 

by 1%, but increased our 2013 and 2014 EBIT 

estimates by 2% and 3%, respectively. More 

importantly, we have raised our 2012-14 EBIT 

estimates for the Luxury division by 6%, 8% and 9% 

on the back of the weaker EUR and higher earnings 

forecasts for Bottega Veneta and YSL. Since the 

Luxury division accounts for more than 75% of our 

sum-of-the-parts, this upgrades more than offset the 

downward revision on Puma (see our Puma report 

dated 09 August). We are thus increasing our sumof-the-parts-based 

target price to EUR156 (from 

EUR150). For details of our sum-of-the-parts 

valuation approach, please refer to page 73. Under 

our research model, for Europe ex-UK stocks 

without a volatility indicator, the Neutral band is 5 

percentage points above and below the hurdle rate of 

9.0%. Since our target price implies a 23.5% 

potential return, which is above the Neutral band, we 

reiterate our Overweight rating on PPR. Potential 

return equals the percentage difference between the 

current share price and the target price, including the 

forecast dividend yield when indicated. 

Downside risks to our Overweight rating include 

underperformance of the Gucci brand, disposals of 

assets at lower-than-expected prices, and value 

destruction linked to acquisitions. 

71




abc 

PPR - Earnings forecasts 

EURm 

2003 pro 2004 pro 

forma forma 

2005a 2006a 2007a 2008a 2009a* 2010a* 2011a 2012e 2013e 2014e 

Sales 

Luxury Goods 2,576 2,712 3,034 3,568 3,867 3,380 3,390 4,011 4,917 6,165 6,816 7,401 

Retail 13,903 14,358 13,906 14,365 14,196 14,318 10,690 7,909 4,165 4,123 4,247 4,374 

Puma 1,718 2,524 2,461 2,706 3,009 3,240 3,470 3,720 

Volcom 147 292 307 322 

Other -30 -29 -2 -2 -20 -21 -16 -21 -10 -14 -18 -21 

Total PPR 16,449 17,042 16,938 17,931 19,761 20,201 16,525 14,605 12,227 13,807 14,822 15,797 

Sales growth y-o-y (%) 

Luxury Goods 5.3 11.9 17.6 8.4 -12.6 0.3 18.3 22.6 25.4 10.6 8.6 

Retail 3.3 -3.1 3.3 -1.2 0.9 -25.3 -26.0 -47.3 -1.0 3.0 3.0 

Puma 47.0 -2.5 10.0 11.2 7.7 7.1 7.2 

Volcom 99.0 5.0 5.0 

Total PPR 3.6 -0.6 5.9 10.2 2.2 -18.2 -11.6 -16.3 12.9 7.4 6.6 

EBIT 

Luxury Goods 250 288 392 565 731 731 692 897 1,263 1,588 1,825 2,047 

Retail 754 760 729 759 785 695 422 353 103 70 106 131 

Puma 236 350 320 337 333 300 350 400 

Volcom 14 23 28 32 

Holding companies & other -61 -59 -50 -57 -54 -50 -56 -110 -111 -116 -116 

Total PPR 1,003 986 1,063 1,275 1,696 1,721 1,383 1,531 1,602 1,870 2,193 2,494 

EBIT margins (%) 

Luxury Goods 9.7 10.6 12.9 15.8 18.9 21.6 20.4 22.4 25.7 25.8 26.8 27.7 

Retail 5.4 5.3 5.2 5.3 5.5 4.9 3.9 4.5 2.5 1.7 2.5 3.0 

Puma 13.7 13.9 13.0 12.5 11.1 9.3 10.1 10.8 

Volcom 9.2 8.0 9.0 10.0 

Total PPR 6.1 5.8 6.3 7.1 8.6 8.5 8.4 10.5 13.1 13.5 14.8 15.8 

EBIT growth y-o-y (%) 

Luxury Goods 15.3 36.3 44.2 29.3 0.0 -5.3 29.7 40.7 25.8 14.9 12.1 

Retail 0.8 -4.0 4.1 3.4 -11.5 -39.3 -16.3 -70.9 -31.7 51.5 23.6 

Puma 48.2 -8.6 5.5 -1.2 -10.0 16.7 14.3 

Volcom 73.0 18.1 16.7 

Total PPR -1.7 7.7 19.9 33.1 1.5 -19.6 10.7 4.6 16.7 17.3 13.7 

Other operating inc/charges nm nm 3 0 100 -361 -547 -194 -58 -180 0 0 

Operating income nm nm 1,066 1,274 1,796 1,360 837 1,337 1,544 1,690 2,193 2,494 

Net Interest nm nm -307 -290 -322 -373 -381 -254 -215 -235 -195 -135 

Tax nm nm -187 -260 -298 -335 -177 -304 -317 -386 -530 -625 

Tax rate (%) nm nm -24.7% -26.4% -20.2% -33.9% -38.8% -28.1% -23.9% -26.5% -26.5% -26.5% 

Equity Affiliate Share nm nm 3 2 1 1 0 36 47 41 21 24 

Minorities nm nm -38 -47 -119 -117 -32 -51 -59 -60 -70 -80 

Net profit reported nm 536 685 922 537 985 964 986 1,111 1,479 1,737 

Net profit (base of diluted EPS calculation) 578 698 904 875 712 932 1,055 1,243 1,479 1,737 

Avg Number of shares used in diluted EPS nm 132.5 121.7 128.7 126.1 126.5 126.7 126.3 126.3 126.3 126.3 

HSBC EPS (diluted)** nm 4.36 5.73 7.03 6.94 5.63 7.35 8.35 9.84 11.72 13.76 

HSBC EPS growth nm nm 31.3 22.6 -1.2 -18.8 30.5 13.6 17.8 19.0 17.4 

*2009 not restated for the disposal of Conforama, 2010 not restated for Redcats discontinuation and change in central costs accounting 

**HSBC 2012-2014e EPS includes discontinued activities 

Source: company data, HSBC estimates 

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Financials & valuation: PPR 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 12,227 13,807 14,822 15,797 

EBITDA 1,911 2,202 2,545 2,867 




PBT 1,376 1,496 2,019 2,382 

HSBC PBT 1,329 1,455 1,998 2,359 

Taxation -317 -386 -530 -625 

Net profit 999 1,051 1,419 1,677 




Capex -325 -390 -418 -447 

Cash flow from investment 104 -152 -418 -447 

Dividends -441 -448 -475 -503 


FCF equity 819 941 1,242 1,487 





Cash & others 1,271 1,271 1,271 1,271 

Total assets 24,954 25,015 25,374 25,765 


Gross debt 4,678 3,968 3,190 2,203 

Net debt 3,407 2,698 1,920 933 




Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue -16.3 12.9 7.4 6.6 

EBITDA 2.7 15.2 15.6 12.6 


PBT 22.9 8.8 34.9 18.0 

HSBC EPS 13.6 17.8 19.0 17.4 

Ratios (%) 

Revenue/IC (x) 0.8 1.0 1.1 1.2 

ROIC 8.4 10.4 12.1 13.5 

ROE 9.8 11.0 12.3 13.2 

ROA 4.9 5.1 6.5 7.3 










DPS 3.50 3.71 3.93 4.17 

Book value 86.09 91.19 99.11 108.83 

PPR sum-of-the-parts valuation 

Valuation 

(EURm) 

Per share 

(EUR) 

Overweight 

Methodology 

Gucci brand 11,843 94 9.5x12e EBITDA 

Bottega Veneta 3,925 31 13x12e EBITDA 

Other luxury businesses 1,910 15 1.5x12e sales (adj for minorities) 

Sub-total Luxury 17,678 140 

Fnac 1,237 10 0.3x12e sales 

Redcats 949 8 0.3x12e sales 

Retail (Fnac+Redcats) 2,186 17 

CFAO (12.18%) 281 2 Price of August 2012 partial 

disposal (EUR37.50) 

Puma (82.4%) 2,911 23 HSBC target price EUR265 

Volcom 356 3 Acquisition price 

Other -1,113 -9 10x12e EBITDA 

Total PPR 22,299 177 

Net debt end 12e 2,698 -21 

Total PPR equity value 19,602 156 

Note: CFAO (CFAO FP, EUR36.90, N); Puma (PUM GR, EUR229.90, OW) 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 1.6 1.3 1.2 1.1 

EV/EBITDA 10.1 8.5 7.0 5.9 

EV/IC 1.4 1.4 1.3 1.2 

PE* 15.1 12.8 10.8 9.2 

P/Book value 1.5 1.4 1.3 1.2 

FCF yield (%) 5.1 5.9 7.8 9.3 





Reuters (Equity) PRTP.PA Bloomberg (Equity) PP FP 



Country France Sector Multiline Retail 

Antoine Belge Contact 33 1 5652 4347 




145 

135 

125 

115 

105 

95 

85 

85 


PPR Rel to SBF-120 

Source: HSBC 


145 

135 

125 

115 

105 

95 

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Prada 

If as mentioned in our previous report, “Prada is the next 

Burberry”, then we believe it’s too early to sell despite the high 

perceived valuation 

The real operational benchmark is probably Louis Vuitton and 

market share gains and operating leverage should continue 

Consensus does not believe the story in our view; our EBIT is 

14% higher; we raise TP to HKD71 (from HKD62) on H1 strength 

and lower beta; reiterate OW(V) 

The snowball effect: roll with it! 

Is this finally the next big thing? 

Greed is good. Guilt is cumbersome. In mid-June, 

we wrote the following: While Burberry has been 

the most compelling stock re-rating story in our 

luxury coverage over the past four years (with Hugo 

Boss), we believe Prada may just be at the beginning 

of becoming a market darling. Keeping an OW(V) 

rating on what consensus will inevitably say is “a 

high PE stock on a story that has unfolded” can be 

seem as greedy. We felt guilty downgrading 

Burberry in the midst of its transformation process 

which saw that stock increasing sevenfold from the 

2008 lows. So we would rather appear as greedy 

rather than feel guilty. 

We think the reason Prada is doing so well is that 

there is a snowball effect and that positive changes in 

brand perception are slow and sustained and 

resisting them is like standing in front of a train or a 

(very big) snowball. Prada, four years ago was a 

good to have, complimentary brand, now it’s 

become a challenger in the handbag and accessories 

space. In a few years, we argue the brand will have 

become one of the very few reference brands 

alongside Louis Vuitton and Cartier. 

As consumer’s perception changes, so does the 

perspective of retail operators who will gradually 

give better terms to the brand, better locations, 

and priority over competitors. 

From a stock perspective, we thought it was 

interesting to compare Prada to Burberry, which is 

a similar-sized brands, has very different 

operating leverage, and great capacity to surprise 

(for Burberry in the past, for Prada now). From an 

operational standpoint, we believe the true 

benchmark for Prada now is Louis Vuitton. LV 

dominates in scale (brand should generate 

EUR7.4bn in sales this year, close to 2.7x times 

the Prada brand), with EBIT margins at low 40s 

vs low 30s at Prada, tight image control (sales are 

100% retail), good execution, and top of mind for 

consumers. Of course, we believe every brand 

aspires to emulate LV but very few have a shot 

and we think Prada does. With a goal to generate 

90% of sales at retail in the next three years, 

aggressive store openings (263 Prada-brand stores 

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at end-July, c200 less than LV) and innovative as 

well as fast-moving product flow (thanks to 

monthly “flash” collections), we see the strong 

market share gains and momentum experienced 

over the past 18 months not disappearing 

overnight. 


What to expect for H1 results 

Q2 sales growth at constant FX was c19% 

(compared to +41% in Q1). As anticipated, growth 

in wholesale turned negative in Q2 (c-12% at 

constant FX vs +39% in Q1 which was boosted by 

deliveries postponed from Q4 2011). This negative 

wholesale figure was not a surprise since the 

company was guiding towards “flat to slightly 

positive” trends at constant FX over the full year. 

Growth at constant FX in retail was c33% in Q2 (vs 

42% in Q1), driven by 19% same-store-sales growth 

(vs 19% in Q1) – by far the highest in the sector – 

and a contribution from new stores of c14% (vs 23% 

in Q1). The company mentioned that leather goods 

outperformed in H1. By brand, Prada grew 40.5% in 

H1 and Miu Miu was up 23.6% on a reported basis. 

By region, Prada disclosed the following growth 

rates in reported terms for H1: Italy +22%, Europe: 

+37%, Asia ex Japan +45%, Americas +31%, Japan: 

+34%. Based on our own estimates of how FX 

impacted each region, we estimate that the Q2 sales 

growth at constant FX rates were the following: Italy 

+6% (vs +54% in Q1), Europe +25% (vs +55% in 

Q1), Americas (+13% vs +26% in Q1), Japan +15% 

(vs +28% in Q1), and Asia ex Japan +26% (vs +37% 

in Q1). The above-mentioned wholesale impact 

which boosted Q1 impacted Italy, Europe and the 

US the most (elsewhere, Prada is almost only retail). 

Gross margin should be up in Q2 as it is a more 

retail-driven quarter and retail also outperformed 

wholesale significantly. Whilst we see negative 

leverage on selling expenses (new store concepts and 

lower wholesale sales weighing), we believe other 

SG&A items such as advertising (again linked to 

retail outperformance), product and development 

expenses and admin costs will have seen strong 

leverage from the sales growth. All in, we are 

expecting a 210bps EBIT margin improvement in 

Q2 (to 28.0%) after a 670bps improvement in Q1, 

leading to a 390bps improvement for H1 to 26.2% of 

sales. 

Still well ahead of consensus 

We believe either consensus does not believe in the 

market share gain story as much as we do or 

underestimates the operating leverage from Prada’s 

strong top-line growth. Whatever the case is, we are, 

for 2012 and 2013 respectively, 6% and 4% ahead 

on sales and 13% and 15% ahead on EBIT 

estimates. For FY Jan 13e, we continue to take the 

view that Prada should have the highest sales growth 

in the sector (24% organic, 31% reported). Gross 

margin should increase by 70bps (to 72.2%), less 

than before as the shift to retail from wholesale 

continues but is capped by the transfer of 

consumption from Asia (high gross margin) to 

Europe (low gross margin). At the EBIT margin 

level, we have factored in another 280bps of 

improvement to 27.4% of sales, implying a 200bps 

increase in H2. 

We have increased our FY Jan 13-14e EBIT 

estimates by 2% and 6%, respectively, on the back 

of higher sales and have also lower the specific beta 

of the company on greater visibility (longer, stronger 

track record) with new stores showing no 

cannibalisation on the existing base for now. We 

increase our DCF-based target price to HKD71 

(from HKD62) on these revisions. Our assumptions 

are RFR 3.0% vs 3.5%, ERP 5.5% vs 4.5%, WACC 

8.94% (vs 9.60% previously); see page 77 for 

details. Under our research model, for stocks with a 

volatility indicator, the Neutral band is 10ppts above 

and below the hurdle rate for Hong Kong stocks of 

8.5%. Our target price of HKD71 provides a 

potential return of 20%, which is above the Neutral 

band, therefore we reiterate our Overweight (V) 

rating. Potential return equals the percentage 


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On our new estimates, Prada is trading at 25.0x 

CY12e and 20.0x CY13e EPS, a 15% premium to 

Burberry, and a 30% premium to LVMH. Risks 

include a potential placement of shares from Prada 

family members as the lock-up agreement expired 

on 24 June 2012 and the failure to execute the retail 

strategy, translating into lower operating leverage 

than we model. 

Prada SPA (EURm) – Profit & Loss 

__________________ 2011____________________ _____________ 2012 _____________ 

FY06 FY07 FY08 FY09 FY10 Q1 Q2 H1 Q3 Q4 H2 FY Q1 Q2 H1 H2(e) FY(e) FY 13e FY 14e 

Net Sales 1,604 1,531 2,017 456 662 1,117 589 817 1,406 2,523 673 852 1,525 1,784 3,309 3,820 4,271 

Royalties 40 31 30 9 8 17 7 8 15 32 13 10 23 18 41 46 51 

Net revenues 1,335 1,425 1,644 1,561 2,047 464 670 1,134 596 825 1,421 2,555 687 861 1,548 1,803 3,351 3,865 4,323 

Gross Profit 744 829 953 975 1,388 341 464 805 431 592 1,023 1,828 496 607 1,104 1,316 2,419 2,833 3,220 

Gross margin (%) 55.8% 58.1% 58.0% 62.4% 67.8% 73.5% 69.3% 71.0% 72.2% 71.8% 72.0% 71.5% 72.3% 70.5% 71.3% 73.0% 72.2% 73.3% 74.5% 

Product and development (78) (85) (88) (97) (97) (22) (30) (51) (22) (30) (52) (103) (25) (37) (62) (51) (113) (120) (124) 

expenses 

as a % of sales 5.8% 5.9% 5.4% 6.2% 4.7% 4.6% 4.5% 4.5% 3.7% 3.7% 3.6% 4.0% 3.7% 4.2% 4.0% 2.8% 3.4% 3.1% 2.9% 

Advertising and promotion (60) (87) (100) (76) (85) (30) (24) (54) (37) (39) (75) (129) (35) (34) (70) (88) (157) (180) (195) 

expenses 


Selling expenses (428) (485) (643) (171) (186) (357) (199) (246) (446) (803) (228) (242) (471) (585) (1,055) (1,206) (1,340) 

as a % of sales 26.0% 31.0% 31.4% 36.9% 27.7% 31.5% 33.9% 30.1% 31.4% 31.1% 33.2% 28.2% 30.4% 32.4% 31.5% 31.2% 31.0% 

General and administrative (634) (221) (146) (130) (145) (38) (51) (89) (34) (41) (75) (164) (43) (53) (96) (79) (175) (190) (205) 

expenses 


SG&A as a % of sales 47.4% 56.2% 43.4% 48.6% 49.5% 43.5% 45.5% 46.9% 48.3% 42.5% 45.1% 44.5% 44.8% 43.7% 43.1% 

EBIT 99.3 607.2 191.0 187 414 80 173 253 139 237 376 629 165 241 406 513 918 1,137 1,357 

EBIT margin (%) 7.4 42.6 11.6 12.0 20.2 17.3 25.9 22.3 23.3 28.7 26.4 24.6 24.0 28.0 26.2 28.4 27.4 29.4 31.4 

PBT 68.3 574.8 153.8 155 388 78 164 242 133 229 361 603 166 239 406 508 913 1,137 1,362 

Taxation (20) (47) (53) (53) (135) (20) (41) (61) (38) (68) (106) (166) (43) (67) (110) (137) (247) (301) (354) 

Tax rate 29.6% 8.1% 34.2% 33.8% 34.7% 25.1% 25.0% 25.1% 28.6% 29.8% 27.6% 27.6% 25.9% 28.0% 27.1% 26.9% 27.0% 26.5% 26.0% 

PAT 48.1 528.1 101.2 103 254 59 123 181 95 161 255 437 123 172 296 371 667 836 1,008 

Net profit for group (1,448) (259) 101 101 254 59 121 180 95 161 257 437 123 171 294 373 667 836 1,008 

Net margin (%) -108.5 -18.2 6.1 6.4 12.4 12.6 18.1 15.8 15.9 19.5 17.1 17.1 18.0 19.8 19.0 19.9 19.9 21.6 23.3 

Prof. attrib. to noncontrolling 

1,496 787 2 0 (3) (1) 6 5 (1) 0 (10) (4.5) (2) (1) (3) (4) (6.5) (8.5) (10.5) 

interests 

Prof. attributable to equity 

98 98 251 58 125 183 94 161 247 432 122 168 289 371 660 827 997 

owner 

Weighted avg number of 

2,548 2,506 2,528 2,500 2,512 2,512 2,512 2,512 2,512 2,536 2,559 2,559 2,559 2,559 2,559 2,559 2,559 

shares (m) 

EPS (Basic) (EUR) 0.040 0.04 0.10 0.02 0.05 0.07 0.04 0.06 0.10 0.17 0.05 0.07 0.11 0.14 0.26 0.32 0.39 


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Financials & valuation: Prada SPA 


Year to 01/2012a 01/2013e 01/2014e 01/2015e 


Revenue 2,555 3,351 3,865 4,323 

EBITDA 759 1,069 1,311 1,551 


Operating profit/EBIT 629 918 1,137 1,357 

Net interest -26 -5 0 5 

PBT 603 913 1,137 1,362 

HSBC PBT 603 913 1,137 1,362 

Taxation -166 -247 -301 -354 




Cash flow from operations 530 740 963 1,160 

Capex -257 -294 -320 -365 


Dividends -6 -127 -188 -236 


FCF equity 273 446 643 796 



Tangible fixed assets 947 1,090 1,235 1,406 


Cash & others 362 682 1,137 1,697 

Total assets 2,944 3,616 4,348 5,194 


Gross debt 344 344 344 344 

Net debt -18 -338 -793 -1,353 




Year to 01/2012a 01/2013e 01/2014e 01/2015e 


Revenue 24.9 31.1 15.4 11.8 

EBITDA 42.9 40.8 22.7 18.3 


PBT 55.3 51.4 24.5 19.7 

HSBC EPS 71.7 52.8 25.3 20.5 

Ratios (%) 

Revenue/IC (x) 1.4 1.6 1.7 1.8 

ROIC 24.7 32.7 37.1 40.9 

ROE 28.5 31.6 30.9 29.5 

ROA 17.2 20.4 21.0 21.0 



EBITDA/net interest (x) 29.2 213.8 


Net debt/EBITDA (x) 0.0 -0.3 -0.6 -0.9 





DPS 0.05 0.07 0.09 0.10 

Book value 0.72 0.93 1.18 1.48 

DCF analysis 








Sensitivity and valuation range (HKD/share) 


8.6% 79.7 81.9 83.6 

9.1% 74.3 76.1 77.7 

9.6% 69.4 71.0 72.3 

10.1% 65.0 66.3 67.5 

10.6% 60.9 62.1 63.1 


Year to 01/2012a 01/2013e 01/2014e 01/2015e 

EV/sales 6.1 4.6 3.8 3.3 

EV/EBITDA 20.5 14.3 11.3 9.2 

EV/IC 8.0 7.1 6.3 5.6 

PE* 35.7 23.4 18.7 15.5 

P/Book value 8.5 6.6 5.2 4.1 

FCF yield (%) 1.7 2.9 4.1 5.1 




Share price (HKD)59.15 Target price (HKD)71.00 

Reuters (Equity) 1913.HK Bloomberg (Equity) 1913 HK 

Market cap (USDm) 19,515 Market cap (HKDm) 151,354 


Country Hong Kong Sector Textiles, Apparel & Luxury 

Goods 





64 

59 

54 

49 

44 

39 

34 

29 

24 

Aug-11 Feb-12 Aug-12 

Prada SPA Rel to HANG SENG INDEX 

Source: HSBC 


64 

59 

54 

49 

44 

39 

34 

29 

24 

77




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Richemont 

Although valuation appears reasonable, the positive alert in August 

implies a lack of short-term catalysts 

Despite a “favorable basis of comparison”, sales growth should slow 

in H2 as Greater China’s turbulences are not fully mitigated 

Remain N, increase TP to CHF67 (from CHF62) on higher 

estimates 

What’s the next catalyst? 

In an unusual move, Richemont published on 6 

August a trading statement saying that organic sales 

growth in the first 4 months (April-July 2012) rose 

13% (or 24% reported due to a +11% FX impact). 

On this basis, Richemont expects EBIT and net 

profit to increase between 20% and 40% in H1 

ending September-12. April organic sales growth 

was +20%, hence organic growth in May-July was 

c10% according to our estimates. Management 

stated that monthly trends had slowed sequentially 

from the high level of April (+20%), but is unwilling 

to give more details (the official 5-month trading 

statement will be released on 5 Sep). According to 

our estimates, it is likely that Richemont sales were 

no longer growing at a double-digit pace in July at 

constant FX. 

Richemont: organic sales growth rates 

FY March 2008a 2009a 2010a 2011a 2012a 2013e 

H1 16% 16% -20% 22% 36% 11% 

H2 15% -12% 10% 16% 19% 6% 

FY 16% 2% -5% 19% 27% 8% 


The company’s confidence about H1 profits is 

mostly FX-related: the strength of the USD and the 

EUR/CHF peg would boost H1 profits. In April-July 

alone, the FX boost at the sales level was +11% and 

August should benefit even more as we anniversary 

the CHF spike. Even if Richemont’s FY12 opex 

guidance is calling for a +14% increase y-o-y in 

SG&A excluding communication, we believe the H1 

gross margin will be supported by FX. 

Whilst H1 results should be strong as anticipated by 

the company, we expect the market to now focus on 

the 5-months trading statement (5 Sep) as well as on 

H1 results (9 Nov) and could be more focused on 

sales trends than on operating margin – as the EBIT 

increase has been guided for by management. In 

other words, while don’t doubt that Richemont will 

deliver, we struggle to find the next catalyst for 

shares to continue to re-rate, especially following the 

summer’s rally. 

It’s not all about China, but still 

This part is common to the investment cases of 

Richemont and the Swatch Group. Looking at the 

recent poor sales growth at Hendgeli and given the 

amount of inventory this major distributor still 

carries on its books (not to mention other retailers 

having more), we believe “sell-in” growth rates for 

Greater China will now finally see a step down. This 

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abc 

is especially true when looking at the higher-end 

portion of Hengdeli sales (‘Elegant” concept). 

As watch retailers in Greater China look to reduce 

excess inventory, we believe there are two options: 

a) to discount product to clear excess stock, or b) to 

order less from the brands. We believe the only 

viable option (brands and retailers still believe in the 

long-term growth in China) is option b and as we 

have finally seen a slowdown in Swiss Watch 

Exports in July (China was down 9%, HK was down 

1%). We expect export (ie. sell-in) to be soft 

between now and the year-end in Greater China, as 

inventories are gradually kept in check. 

In Greater China, we believe our “high and dry 

versus cheap and cheerful” theme is still valid as 

high-end watches, driven by gift giving, and within 

this category, the more “mainstream” brands like 

Rolex and Cartier will suffer more than those at 

access price points. 

We estimate that up to two-thirds of consumers 

purchasing luxury products in China are new to the 

brands they buy (ie. not “repeat purchasers”) and are 

taking the view that the proportion of clients “new to 

a brand” is greater at the lower price points (Rado, 

Mido, Longines, Tissot) than for Omega and above 

type of price points. We believe that consumers able 

to afford higher price points are more “travelled” and 

exposed to negative headline news weighing on 

sentiment and will take the view that they can 

postpone a EUR10k purchase, waiting for a better 

environment. We are convinced that corporate gift 

giving (or Guanxi) drives high-end purchases more 

than it drives sales of the likes of Rado, Longines, 

Tissot, etc. As real estate deals are scarce and 

government officials continue to be vocal against 

corporate gifting, we are seeing the trend of gift 

giving slowing, at least temporarily. 

Our estimate for Greater China is that sales growth 

for the high end (Omega and above price points) will 

be flat in H2 while lower-priced brands could still 

grow in the mid-teens, on the back of middle-class 

expansion and higher wages. On those assumptions, 

Asia ex-Japan should underperform global trends at 

both Swatch and Richemont. 


We have raised our FY March 13e and 14e EBIT 

estimates by 14% and 8%, respectively, on the back 

of the weaker euro and higher gross margin 

assumptions (we now see an increase in FY March 

13 despite the fact that FX hedging will no longer be 

booked in the gross margin and that Richemont is 

hiring watch makers to reduce its dependence on 

Swatch – thanks to the shift towards retail and price 

increases). Regarding FY March 13, we have based 

our SG&A forecasts on the company’s guidance of a 

9.5% communication-to-sales ratio (as the shift 

towards more retail sales technically lowers the 

ratio) and 14% increase y-o-y at constant FX of 

other SG&A (retail, Net-à-Porter, China 

infrastructure, watch repairs facilities). On our 

revised estimates, EBIT margin should dip by 60bps 

in FY March 2013 and by 50bp in FY March 14, and 

then regain 40bps (to 22.3% of sales) in FY March 

15. 

We have raised our DCF-based target price to 

CHF67 (vs CHF62) following these revisions). Our 

DCF assumptions are unchanged (see table on page 

81). Under our research model, for stocks without a 

volatility indicator, the Neutral band is 5 ppts above 

and below the hurdle rate for Swiss stocks of 7.5%. 

Our target price of EUR67 provides a potential 

return of 11.8%, within the Neutral band; therefore, 

we remain Neutral on the stock. Potential return 


share price and the target price, including the 

forecast dividend yield when indicated. On our new 

estimates, Richemont is trading at 15.6x CY 2012e 

and 14.2x CY 2013e EPS. 

Specific risks include the Swiss franc’s strength 

(on the downside) or weakness (on the upside). 

Downside risks are the historically lower 

resilience of watches compared to other luxury 

79




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segments in case of a severe economic downturn, 

and failure to improve results of the 

underperforming assets. Upside risks include a 

much better resilience of sales trends and more 

convincing margin turnaround at Baume & 

Mercier, Dunhill and Net-à-Porter. 

Richemont - FY results and forecasts 

______ 2010a ______ ______ 2011a ______ _______ 2012 ______ ______ 2013e______ 

EURm, year ending March 2007a 2008a 2009a H1 H2 FY H1 H2 FY H1(a) H2(a) FY(e) H1 H2 FY 2014e 2015e 

Net sales 4,827 5,302 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,653 8,867 5,110 5,140 10,250 10,925 11,725 

% change 12.0% 9.8% 2.2% -15.0% 6.8% -4.5% 37.0% 29.9% 33.2% 29.3% 28.1% 28.7% 21.3% 10.5% 15.6% 6.6% 7.3% 

Gross profit 3,074 3,405 3,417 1,464 1,727 3,191 2,113 2,281 4,394 2,665 2,986 5,651 3,300 3,291 6,591 6,992 7,551 

Gross margin 63.7% 64.2% 63.1% 61.5% 61.7% 61.6% 64.8% 62.8% 63.8% 63.2% 64.2% 63.7% 64.6% 64.0% 64.3% 64.0% 64.4% 

Selling & distribution 1,090 1,181 1,235 598 679 1,277 761 893 1,654 891 1,071 1,962 1,105 1,269 2,374 2,564 2,769 


Administration 503 528 542 259 286 545 314 342 656 342 405 747 424 480 904 958 1,016 


Communication 570 607 644 204 302 506 264 435 699 340 519 859 404 570 974 1,038 1,114 


Other / Non-recurring items -5 -13 28 13 20 33 14 16 30 17 26 43 17 26 43 43 43 

Total operating exps 2,158 2,297 2,449 1,074 1,287 2,361 1,353 1,686 3,039 1,590 2,021 3,611 1,950 2,345 4,295 4,603 4,942 


EBIT reported 916 1,108 968 390 440 830 760 595 1,355 1,075 965 2,040 1,350 946 2,296 2,389 2,609 

EBIT underlying 900 1,108 968 390 440 830 760 595 1,355 1,075 965 2,040 1,350 946 2,296 2,389 2,609 

EBIT margin underlying 18.6% 20.9% 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 20.7% 23.0% 26.4% 18.4% 22.4% 21.9% 22.3% 

Financial result 31 47 -101 24 -161 -137 -120 -163 -283 -227 -9 -236 0 18 18 23 29 

Exceptional 102 0 102 0 0 0 0 

Taxation -158 -195 -133 -70 -24 -94 -98 -98 -196 -139 -125 -264 -226 -161 -386 -403 -441 

Minority interest -1 1 3 0 4 4 -2 103 101 0 0 0 0 0 0 0 0 

Luxury net profit (reported) 788 961 737 344 259 603 642 437 1,079 709 831 1,540 1,125 803 1,928 2,009 2,198 


Richemont - FY sales and EBIT by segment 

______ 2010a ______ ______ 2011a ______ _______ 2012 ______ ______ 2013e______ 

EURm, year ending March 2007a 2008a 2009a H1 H2 FY H1 H2 FY H1(a) H2(a) FY(e) H1 H2 FY 2014e 2015e 

Sales by segment 

Jewellery maisons 2,435 2,657 2,762 1,222 1,465 2,688 1,619 1,860 3,479 2,165 2,425 4,590 2,598 2,708 5,306 5,633 6,004 

Specialist watchmakers 1,203 1,378 1,437 655 699 1,353 901 873 1,774 1,171 1,152 2,323 1,434 1,283 2,717 2,885 3,087 

Writing instruments 585 637 587 238 313 551 303 369 672 334 389 723 381 400 781 820 861 

Other businesses 604 630 632 264 320 584 436 531 967 544 688 1,232 696 750 1,446 1,587 1,774 

Total Sales 4,827 5,302 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,653 8,867 5,110 5,141 10,250 10,925 11,725 

EBIT by segment 

Jewellery maisons 667 767 777 349 393 742 541 521 1,062 734 776 1,510 925 812 1,737 1,817 1,963 

Specialist watchmakers 274 376 301 133 98 231 259 120 379 312 227 539 410 235 645 642 715 

Writing instruments 110 120 69 29 50 79 48 61 109 54 65 119 60 70 130 135 145 

Other businesses 9 2 -39 -29 -7 -36 -19 -16 -35 -17 -18 -35 -1 -1 -2 24 33 

Total EBIT before unallocated costs 1,060 1,265 1,108 482 534 1,016 829 687 1,516 1,083 1,050 2,133 1,394 1,117 2,511 2,618 2,856 

EBIT reported 916 1,108 968 390 440 830 760 595 1,355 1,075 965 2,040 1,350 946 2,296 2,389 0 

EBIT margin by segment 

Jewellery maisons 27.4% 28.9% 28.1% 28.6% 26.8% 27.6% 33.4% 28.0% 30.5% 33.9% 32.0% 32.9% 35.6% 30.0% 32.7% 32.3% 32.7% 

Specialist watchmakers 22.8% 27.3% 20.9% 20.3% 14.0% 17.1% 28.7% 13.8% 21.4% 26.6% 19.7% 23.2% 28.6% 18.3% 23.7% 22.2% 23.2% 

Writing instruments 18.8% 18.8% 11.8% 12.2% 16.0% 14.3% 15.8% 16.5% 16.2% 16.2% 16.7% 16.5% 15.8% 17.6% 16.7% 16.5% 16.8% 

Other businesses 1.5% 0.3% -6.2% -11.0% -2.2% -6.2% -4.4% -3.0% -3.6% -3.1% -2.7% -2.9% -0.1% -0.1% -0.1% 1.5% 1.9% 

Total EBIT margin before unallocated 22.0% 23.9% 20.4% 20.3% 19.1% 19.6% 25.4% 18.9% 22.0% 25.7% 22.6% 24.1% 27.3% 21.7% 24.5% 24.0% 24.4% 

costs 

EBIT margin reported 19.0% 20.9% 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 20.7% 23.0% 26.4% 18.4% 22.4% 21.9% 22.3% 


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Financials & valuation: Richemont 


Year to 03/2012a 03/2013e 03/2014e 03/2015e 


Revenue 8,867 10,250 10,925 11,725 

EBITDA 2,359 2,647 2,775 3,034 




PBT 1,804 2,314 2,412 2,638 

HSBC PBT 1,804 2,314 2,412 2,638 

Taxation -264 -386 -403 -441 





Capex -511 -750 -803 -859 


Dividends -204 -253 -326 -373 

Change in net debt -598 -1,035 -1,064 -1,174 

FCF equity 778 1,289 1,389 1,546 





Cash & others 4,036 4,245 5,309 6,483 

Total assets 11,753 12,771 14,600 16,580 


Gross debt 848 22 22 22 

Net debt -3,188 -4,223 -5,287 -6,461 




Year to 03/2012a 03/2013e 03/2014e 03/2015e 


Revenue 28.7 15.6 6.6 7.3 

EBITDA 34.0 12.2 4.8 9.3 


PBT 53.7 28.3 4.2 9.4 

HSBC EPS 59.5 25.2 4.2 9.4 

Ratios (%) 

Revenue/IC (x) 2.3 2.2 2.1 2.0 

ROIC 45.3 41.9 38.3 37.3 

ROE 19.8 20.4 18.1 17.1 

ROA 16.2 15.6 14.5 13.9 










DPS 0.45 0.58 0.67 0.67 

Book value 14.99 17.91 20.84 24.02 

DCF analysis 



Neutral 





Sensitivity and valuation range (CHF/share) 


8.5% 74.4 75.7 76.7 

9.0% 70.0 71.1 72.0 

9.5% 66.0 67.0 67.9 

10.0% 62.5 63.3 64.1 

10.5% 59.3 60.0 60.7 


Year to 03/2012a 03/2013e 03/2014e 03/2015e 

EV/sales 2.8 2.3 2.1 1.8 

EV/EBITDA 10.5 9.0 8.2 7.1 

EV/IC 5.8 4.8 4.1 3.5 

PE* 18.1 14.5 13.9 12.7 

P/Book value 3.3 2.8 2.4 2.1 

FCF yield (%) 2.8 4.6 5.0 5.5 




Share price (CHF)59.95 Target price (CHF)67.00 

Reuters (Equity) CFR.VX Bloomberg (Equity) CFR VX 

Market cap (USDm) 35,869 Market cap (CHFm) 34,423 


Country Switzerland Sector Textiles, Apparel & Luxury 

Goods 


Antoine Belge Contact 33 1 5652 4347 



65 

60 

55 

50 

45 

40 

35 

35 


Richemont Br Rel to SMI 

Source: HSBC 


65 

60 

55 

50 

45 

40 

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Swatch 

2012 should be supported by Omega and access price points 

While the slowdown in orders should affect Swatch in H2, we see 

this as limited vs. what Richemont may experience 

Reiterate OW with an unchanged TP of CHF500 

Omega and access price 

points should show resilience 

While Omega may suffer from a bit of “first-mover 

disadvantage” in China (a bit like Louis Vuitton in 

handbags and accessories), we believe the brand 

may be suffering less there than Rolex (very 

volume-driven) and Cartier (exposed to gifting). 

Outside of China, however, we believe that the 

brand should be doing very well this year (at least in 

terms of sales growth) driven by retail investments 

which are finally starting to put the brand on the 

radar in the US, the recent London Olympics’ global 

advertising campaign, and the sponsorship of 

Skyfall, the latest James bond movie to be released 

at the end of this year. 

Access price points (ie. Tissot, Longines) in our 

view should continue to perform well as they are 

mostly volume-led brands (ie. price increases 

have been minimal so as not to alienate the 

consumer base). Besides, there is evidence 

(notably in the Hengdeli H1 results released 

recently) that sell-through rates have remained 

very strong for these brands. 

It’s not all about China, but still 

This part is common to the investment cases of 

Richemont and the Swatch Group. Looking at the 

recent poor sales growth at Hendgeli and given the 

amount of inventory this major distributor still 

carries on its books (not to mention other retailers 

having more), we believe “sell-in” growth rates for 

Greater China will now finally see a step down. 

This is especially true when looking at the higherend 

portion of Hengdeli sales (‘Elegant” concept). 

As watch retailers in Greater China look to reduce 

excess inventory we believe there are two options: a) 

to discount product to clear excess stock, or b) to 

order less from the brands. We believe the only 

viable option (brands and retailers still believe in the 

long-term growth in China) is option b and as we 

have seen finally a slowdown in Swiss Watch 

Exports in July (China was down 9%, HK was down 

1%). We expect export (ie. sell-in) to be soft 

between now and the year-end in Greater China as 

inventories are gradually kept in check. 

Swatch 2011 sales by region 

Greater 

Japan 


2% 

Oceania 

38% 

1% 

Africa 

Asia ex 

1% 

GC ex 

Japan 

14% 

Europe 

Americas 

36% 

8% 


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In Greater China, we believe our “high and dry 

versus cheap and cheerful” theme is still valid as 

high-end watches, driven by corporate gift giving, 

and within this category, the more “mainstream” 

brands like Rolex and Cartier will suffer more 

than those at access price points. 

Swatch 2011 sales breakdown 

Electronic Systems 

5% 

Production external sales 

7% 

Low end watch 

segment 

14% 

High end watch 

segment* 

30% 

We estimate that up to two-thirds of consumers 

purchasing luxury products in China are new to 

the brands they buy (ie. not “repeat purchasers”) 

and are taking the view that the proportion of 

clients “new to a brand” is greater at the lower 

price points (Rado, Mido, Longines, Tissot) than 

for the above-Omega type of price points. 

We believe that consumers able to afford higher 

price points are more “travelled” and exposed to 

negative headline news weighing on sentiment 

and will take the view that they can postpone a 

EUR10k purchase, waiting for a better 

environment. We are convinced that corporate gift 

giving (or Guanxi) drives high-end purchases 

more than it drives sales of the likes of Rado, 

Longines, Tissot, etc. As real estate deals are 

scarce and government officials continue to be 

vocal against corporate gifting, we are seeing the 

trend of gifting slowing, at least temporarily. 

Our estimate for Greater China is that sales 

growth for the high-end (above Omega price 

points) will be flat in H2 while lower-priced 

brands could still grow in the mid-teens, on 

the back of middle-class expansion and higher 

wages. On those assumptions, Asia ex-Japan 

should underperform global trends at both 

Swatch and Richemont. 


As compared to Richemont, Swatch’s H2 should 

be supported at the P&L level by the fact that last 

year, the summer’s currency swing (strong CHF) 

weighed significantly on H2 margins at Swatch. 

Even though we factor in a sales slowdown, H2 

EBIT margin should be better for Swatch than H1. 

Medium watch segment 

44% 

*Includes Breguet, Blancpain, Glasshütte, Léon Hatot, Jacquet Droz, 50% of Omega sales 


H1 EBIT rose 19%, implying an 80bp EBIT margin 

improvement to 24.5%, mostly coming from the 

Production division (+290bp to 19.2% vs HSBC 

17%) whilst Watches & Jewellery's margin declined 

slightly (-40bp to 22.2% vs HSBC 22%) due to input 

cost inflation and investments in retail and 

marketing. The CEO said CHF8bn (in gross sales) 

was still the official target for FY12. Yet at the same 

time, he mentioned that July was up double-digit in 

CHF (up 6-8% at constant FX according to our 

estimates) and that H2 could potentially increase at a 

double-digit growth rate in CHF: this would imply a 

gross sales figure closer to CHF8.1-8.2bn. 

We factor in an 11% group organic sales growth for 

2012, driven by a 12% increase in Watches & 

Jewellery sales, a 20% increase in Production and a 

12% decline in Electronic Systems. We have kept 

our 2012-14 EBIT estimates unchanged as positive 

FX (strengthening of the USD against the CHF) 

should be mitigated by higher ad spend. 

Our DCF assumptions are unchanged (see table on 

page 85). Under our research model, for stocks 

without a volatility indicator, the Neutral band is 

5ppts above and below the hurdle rate for Swiss 

stocks of 7.5%. Our unchanged CHF500 target price 

implies a potential return of 24.4%, above the 

Neutral band; therefore, we reiterate our Overweight 

rating on Swatch. 

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Potential return equals the percentage difference 

between the current share price and the target price, 

including the forecast dividend yield when indicated. 

Swatch currently trades at 14.1x 2012e PE and 12.7x 

2013e PE. Restated for the group’s net cash pile 

(CHF2.5bn at end-2012e), Swatch’s cash 2013e PE 

would be 10.9x. We believe this is an 

attractive valuation. 

Downside risks to our rating include a slower-thanexpected 

return of the Production division’s EBIT 

margin to the 2007 peak; watch movement shortages 

weighing on sales, negative macro news flow on 

China, and a stronger CHF. 

The Swatch Group - Results & forecasts 

CHFm 2005a 2006a YoY 2007a YoY 2008a YoY 2009a YoY 2010a* YoY 2011a YoY 2012e YoY 2013e YoY 2014e YoY 

Sales 

Watches & Jewellery 3,272 3,723 14 4,456 20 4,547 2 4,187 -8 5,225 25 5,953 14 6,909 16 7,489 8 8,053 8 

Watches Production 1,230 1,335 9 1,624 22 1,742 7 1,429 -18 1,487 4 1,972 33 2,366 20 2,568 9 2,760 8 

Electronics Systems 538 586 9 623 6 526 -16 391 -26 436 12 334 -23 299 -11 318 6 337 6 

General services 6 6 0 5 7 5 5 5 5 5 5 

Elimination internal sales -754 -830 10 -1,062 28 -1,145 8 -870 -24 -1,045 20 -1,500 44 -1,809 21 -1,961 8 -2,105 7 

Total net sales 4,292 4,820 12 5,646 17 5,677 1 5,142 -9 6,108 19 6,764 11 7,770 15 8,420 8 9,050 7 

Total gross sales 4,497 5,050 12 5,941 18 5,966 0 5,421 -9 6,440 19 7,143 11 8,176 14 8,854 8 9,514 7 

EBIT 

Watches 626 738 18 920 25 828 -10 804 -3 1,257 56 1,352 8 1,589 18 1,753 10 1,892 8 

Watches production 47 147 213 235 60 281 20 94 -67 186 98 322 73 402 25 449 12 497 11 

Electronics systems 78 106 36 99 -7 104 5 24 -77 62 158 13 -79 21 61 29 37 34 18 

General services -16 -18 13 -18 0 -11 -39 -19 73 -69 263 -73 6 -76 4 -79 4 -82 4 

Total 735 973 32 1,236 27 1,202 -3 903 -25 1,436 59 1,614 12 1,936 20 2,151 11 2,341 9 

EBIT margin 

Watches 19.1% 19.8% 20.6% 18.2% 19.2% 24.1% 22.7% 23.0% 23.4% 23.5% 

Watches production 3.8% 11.0% 14.5% 16.1% 6.6% 12.5% 16.3% 17.0% 17.5% 18.0% 

Electronics systems 14.5% 18.1% 15.9% 19.8% 6.1% 14.2% 3.9% 7.0% 9.0% 10.0% 

Total 17.1% 20.2% 21.9% 21.2% 17.6% 23.5% 23.9% 24.9% 25.6% 25.9% 

Net financial result & associates 49 84 37 -196 46 -38 -3 35 47 59 

Taxes -163 -227 -258 -168 -186 -318 -335 -424 -473 -516 

Tax rate 20.8% 21.5% 20.3% 16.7% 19.6% 22.7% 20.8% 21.5% 21.5% 21.5% 

Minority interest -7 -3 -4 -4 -4 -6 -7 -9 -11 -13 

Net consolidated income (reported) 614 827 35 1,011 22 834 -18 759 -9 1,074 42 1,269 18 1,538 21 1,714 11 1,871 9 

Earnings per bearer share (reported) 10.74 14.87 39 18.50 24 15.76 -15 14.48 -8 20.28 40 23.49 16 28.47 21 31.74 11 34.63 9 

Earnings per bearer share (HSBC) 10.55 14.87 41 18.50 24 15.76 -15 14.48 -8 20.28 40 23.49 16 28.47 21 31.74 11 34.63 9 

*Restated 

Source : company, HSBC estimates 

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Financials & valuation: Swatch 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

Profit & loss summary (CHFm) 

Revenue 6,764 7,770 8,420 9,050 

EBITDA 1,843 2,174 2,399 2,599 




PBT 1,611 1,971 2,198 2,399 

HSBC PBT 1,611 1,971 2,198 2,399 

Taxation -335 -424 -473 -516 



Cash flow summary (CHFm) 

Cash flow from operations 644 966 1,516 1,736 

Capex -515 -640 -450 -450 


Dividends -270 -317 -385 -429 

Change in net debt 183 -23 -693 -867 

FCF equity 129 326 1,066 1,286 

Balance sheet summary (CHFm) 




Cash & others 2,169 2,192 2,885 3,752 

Total assets 9,805 11,140 12,590 14,161 


Gross debt 91 91 91 91 

Net debt -2,078 -2,101 -2,794 -3,661 




Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 10.7 14.9 8.4 7.5 

EBITDA 11.2 18.0 10.3 8.3 


PBT 15.2 22.3 11.5 9.2 

HSBC EPS 15.8 21.2 11.5 9.1 

Ratios (%) 

Revenue/IC (x) 1.3 1.2 1.1 1.1 

ROIC 24.4 23.8 23.0 23.1 

ROE 16.8 17.8 17.2 16.5 

ROA 13.9 14.5 14.2 13.7 







Per share data (CHF) 



DPS 5.87 7.12 7.93 8.66 

Book value 149.11 171.71 196.33 223.02 

DCF analysis 



Overweight 





Sensitivity and valuation range (CHF/share) 


8.5% 562 573 581 

9.0% 525 534 542 

9.5% 492 500 507 

10.0% 462 469 476 

10.5% 436 442 448 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 2.7 2.3 2.1 1.8 

EV/EBITDA 9.9 8.4 7.3 6.4 

EV/IC 3.2 2.6 2.3 2.0 

PE* 17.1 14.1 12.7 11.6 

P/Book value 2.7 2.3 2.0 1.8 

FCF yield (%) 0.6 1.6 5.2 6.3 




Share price (CHF)401.80 Target price (CHF)500.00 

Reuters (Equity) UHR.VX Bloomberg (Equity) UHR VX 

Market cap (USDm) 21,915 Market cap (CHFm) 21,031 

Free float (%) 73 Enterprise value (CHFm) 18214 

Country Switzerland Sector Textiles, Apparel & Luxury 

Goods 





478 

428 

378 

328 

278 

278 


Swatch Rel to SMI 

Source: HSBC 


478 

428 

378 

328 

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Tiffany 

Underperformance vs peers led to three profit warnings since 

January 2012 

c25% exposure to silver jewellery and higher vulnerability than 

European brands to aggressive discounting from the US ‘mom & 

pop” jewellers are the main specific issues 

Remain Neutral (adding V-flag) with an unchanged USD69 target 

price 

Strong Q4 is not a given 

Third profit warning since January 2012 

Since January 2012, Tiffany has issued three profit 

warnings: 

On 10 January, Tiffany warned on FY Jan 

2012 following weaker-than-expected 

November-December sales. 

On 24 May, Tiffany lowered its FY Jan 2013 

EPS guidance to USD3.70-3.80, only two 

months after providing an initial guidance of 

USD3.95-4.05 on 20 March 

On 27 August, Tiffany warned again on FY 

Jan 2013 profits, lowering its EPS guidance to 

USD3.55-3.70 

Underperformance in all regions except Japan 

With the exception of Japan, which has been a 

constant provider of positive surprises over the last 

few quarters, Tiffany has been underperforming in 

all regions since the end of 2011. 

Tiffany’s sales growth at constant FX has slowed 

from 17% in Q3 2011 to 7% in Q4 2011, then 

stabilised to 8% in Q1 2012 before falling to 3% in 

Q2 2012. In our universe, most companies still 

achieved double-digit growth at constant FX, 

excluding acquisitions in Q2 and those which did 

not (Tod’s, Luxottica, Coach and Hengdeli) register 

at least +5% growth. True, the basis of comparison 

was very high in Q1 and more so for Q2, as 

constant FX growth was +16% and +24% in Q1 

and Q2 last year. But that was the case for almost 

everybody in the industry, which saw an average 

20% growth in H1 2011. 

Price increases hurting silver jewellery (c25% 

of sales) 

On the back of the sharp inflation in the price of 

silver, Tiffany raised prices substantially for its 

silver jewellery products. Unfortunately, the 

customer base for silver products (which are on 

average much cheaper than other luxury products) 

reacted negatively to these price increases, proving 

once again that the pricing power of these products 

cannot be compared to that of luxury goods (similar 

to what happened to Pandora). 

Aggressive discounting from the US ‘mom & 

pop” jewellers 

In the Americas (which accounts for 49% of sales), 

comps have slowed sequentially from 15% in 

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Q3 2011 to 3% in Q4 2011, before becoming flat 

in Q1 2012 and then negative (-5%) in Q2. 

On top of the above-mentioned negative trends 

affecting silver jewellery sales, Tiffany is always 

more vulnerable than its European peers to the 

discounting habits of the US local ‘mom & pop’ 

jewellers in tougher times. This is particularly true 

for a significant part of Tiffany’s diamond 

jewellery offering where there is a ‘commodity’ 

aspect – ie. basic lower-carat products for which 

the customer is less ready to pay a premium for 

the brand on top of the price of the stone when the 

economy is less buoyant. As a reminder, Tiffany 

has a no-discount policy. 

Another reason behind Tiffany’s underperformance 

is that it does not benefit as much 

from tourist-related sales (which can account for 

more than 50% of European sales for European 

players). 

Beyond that, it is still a bit early to determine 

whether or not the brand initiatives since the end 

of 2011 in terms of product innovation and 

merchandising were less impactful than before. 

Tiffany’s 2011 sales breakdown by region 

Americas 

49% 


Japan 

17% 

Other 

1% 

Asia Pacific 

21% 

Europe 

12% 


Sales rose 2% in Q2 (worldwide comps down 1%, 

contribution from new stores +4%, FX -1%). 

Excluding one-offs which affected Q2 last year, 

EBIT dropped 12% in Q2, with a 270bp EBIT 

margin decline to 17.4%, entirely linked to a 

270bp deterioration in the gross margin. SG&A 

only rose 1%, marginally lower than sales, but 

management noted a different timing of marketing 

spending compared to last year (less in Q2, more 

in Q3). Inventories were 21% higher than a year 

ago (notably due to higher input costs and 

increased rough diamond sourcing). Management 

still expects a more moderate increase over this 

fiscal year (+10%). 

We lower our FY 2012 EBIT estimates by 1%, 

and leave our FY 2013 estimates unchanged; thus 

our DCF-based target price is unchanged at 

USD69. The assumptions used to generate our 

DCF-derived target price are detailed on page 89. 

Under our research model, for stocks with a 

volatility indicator, the Neutral band is 10 

percentage points above and below the hurdle rate 

for US stocks of 7.0%. Our target price of USD69 

implies a potential return of 10%, within the 

Neutral band; therefore, we reiterate our Neutral 

(V) rating on Tiffany. We add the volatility flag in 

recognition of the stock’s historical volatility 

having increased. Potential return equals the 




After its marked underperformance y-t-d (shares 

down 7% vs +21% on average for the European 

players, Tiffany currently trades at 14.7x calendar 

2013e, a 4% discount to the European peers. But 

we believe this valuation gap is not attractive 

enough to justify taking a risky view that the more 

favourable basis of comparison in Q4 will be 

sufficient for earnings growth to resume and allow 

the company to meet its revised guidance (Tiffany 

said that Q3 earnings should also be down y-o-y). 

Upside risks to our rating include stronger-thanexpected 

comps in the US and SG&A leverage as 

well as speculation that Tiffany may be a takeover 

target following the termination of the watch 

contract with Swatch (announced on 

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11 September, 2011), which has been described as 

a poison pill (see FT article from 22 May 2008). 

Downside risks to our rating include a more 

pronounced US slowdown than the one embedded 

in our forecasts, and non-domestic investment 

weighing on earnings (stores, ad spend). 

Tiffany results & forecasts 

________________ 2011a _________________ _________2012 _________ 

USDm FY08 FY09 FY10a Q1 Q2 Q3 Q4 FY Q1(a) Q2 (a) FY(e) FY13e FY14e 

Net sales 2,860.0 2,709.7 3,085.3 761.0 872.7 821.8 1,187.6 3,642.9 819.2 886.6 3,800.0 4,100.0 4,440.0 

Gross Profit 1,645.4 1,530.2 1,822.3 443.7 514.7 475.8 717.0 2,151.2 469.0 499.2 2,211.6 2,419.0 2,632.9 

Gross margin 57.5% 56.5% 59.1% 58.3% 59.0% 57.9% 60.4% 59.0% 57.3% 56.3% 58.2% 59.0% 59.3% 

SG&A 1,172.6 1,089.7 1,227.5 307.7 374.2 329.7 431.2 1,442.7 334.0 344.6 1,456.2 1,565.5 1,682.9 

SG&A as % of sales 41.0% 40.2% 39.8% 40.4% 42.9% 40.1% 36.3% 39.6% 40.8% 38.9% 38.3% 38.2% 37.9% 

Operating Income reported 472.8 440.5 594.8 136.0 140.5 146.2 285.9 708.4 135.0 154.6 755.4 853.5 950.1 

Operating Income HSBC* 472.8 440.5 610.8 145.0 174.0 146.2 285.9 750.9 135.0 154.6 755.4 853.5 950.1 

Operating margin HSBC* 16.5% 16.3% 19.8% 19.0% 19.9% 17.8% 24.1% 20.6% 16.5% 17.4% 19.9% 20.8% 21.4% 

Interest income 28.9 50.5 47.3 10.1 9.6 10.4 13.3 43.5 10.6 14.3 53.0 20.0 10.0 

Earnings before tax 346.1 390.0 547.4 125.8 130.9 135.8 272.5 665.0 124.4 140.3 702.4 833.5 940.1 

Income taxes 126.1 124.3 179.0 44.8 40.9 46.1 94.0 225.8 42.9 48.5 242.3 287.6 324.3 

tax rate 36.4% 31.9% 32.7% 35.6% 31.2% 33.9% 34.5% 34.0% 34.5% 34.6% 34.5% 34.5% 34.5% 

Net earnings 220.0 264.8 368.4 81.1 90.0 89.7 178.5 439.2 81.5 91.8 460.1 546.0 615.7 

Net EPS common (Diluted) HSBC* 1.74 2.11 2.93 0.67 0.86 0.70 1.39 3.60 0.64 0.72 3.61 4.28 4.83 

Net EPS common (Diluted) reported 1.74 2.11 2.87 0.63 0.69 0.70 1.39 3.40 0.64 0.72 3.61 4.28 4.83 

Weighted avg com share outst. (D) 126.4 125.4 128.4 129.4 129.8 128.8 128.3 129.1 128.2 127.7 127.6 127.6 127.6 

Americas 1,586.6 1,410.9 1,574.6 374.7 438.2 387.7 605.1 1,805.8 386.0 434.0 1,855.3 1,986.1 2,144.4 

Japan 543.4 527.1 546.5 123.4 142.5 146.4 204.2 616.5 142.0 159.0 653.5 673.1 686.6 

Asia ex-Japan 378.6 430.0 549.2 167.2 173.2 183.2 224.6 748.2 195.0 174.0 823.0 938.3 1,069.6 

Europe 284.6 311.8 360.8 85.6 101.3 92.5 141.7 421.1 88.0 100.0 416.9 446.1 477.3 

Other 66.7 29.9 54.2 10.1 17.4 11.9 11.9 51.3 9.0 20.0 51.3 56.4 62.1 

Total sales 2,860.0 2,709.7 3,085.3 761.0 872.6 821.8 1,187.6 3,642.9 820.0 887.0 3,800.0 4,100.0 4,440.0 

Americas 55% 52% 51% 49% 50% 47% 51% 50% 47% 49% 49% 48% 48% 

Japan 19% 19% 18% 16% 16% 18% 17% 17% 17% 18% 17% 16% 15% 

Asia ex-Japan 13% 16% 18% 22% 20% 22% 19% 21% 24% 20% 22% 23% 24% 

Europe 10% 12% 12% 11% 12% 11% 12% 12% 11% 11% 11% 11% 11% 

Other 2% 1% 2% 1% 2% 1% 1% 1% 1% 2% 1% 1% 1% 

Total sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 

YoY evolution 

Sales -3% -5% 14% 20% 30% 21% 8% 18% 8% 2% 4% 8% 8% 

Selling, G&A -3% -7% 13% 18% 37% 10% 10% 18% 9% -8% 1% 8% 8% 

EBIT 11% -7% 35% 29% 24% 50% 3% 19% -1% 10% 7% 13% 11% 

PBT -34% 13% 40% 35% 28% 61% 2% 21% -1% 7% 6% 19% 13% 

Net earnings -34% 20% 39% 26% 33% 63% -1% 19% 1% 2% 5% 19% 13% 

EPS Diluted (HSBC) -25% 21% 39% 39% 56% 51% -3% 23% -5% -16% 0% 19% 13% 

Reported sales growth 

Americas -10% -11% 12% 19% 25% 17% 5% 15% 3% -1% 3% 7% 8% 

Japan 4% -3% 7% 7% 7% 12% 12% 13% 15% 12% 6% 3% 2% 

Asia ex-Japan 10% 20% 29% 37% 29% 44% 19% 36% 17% 0% 10% 14% 14% 

Europe 17% 10% 16% 25% 32% 19% 3% 17% 3% -1% -1% 7% 7% 

Other -18% -55% 81% -18% 46% -18% -23% -5% -11% 15% 0% 10% 10% 

Total sales -3% -5% 14% 20% 30% 21% 8% 18% 8% 2% 4% 8% 8% 

Comp store sales 

Americas -14% -11% 8% 17% 23% 15% 3% 13% 0% -5% 0% 4% 5% 

Japan -10% -12% -4% -3% 8% 4% 4% 4% 12% 10% 8% 3% 2% 

Asia ex-Japan 5% 10% 14% 26% 41% 36% 13% 27% 10% -5% 3% 7% 7% 

Europe 6% 9% 18% 15% 11% 6% -2% 6% 0% 2% -2% 3% 3% 

Total sales -9% -7% 8% 15% 22% 16% 4% 13% 4% -1% 2% 4% 5% 


88

1 

0 

. 

0 




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Financials & valuation: Tiffany 


Year to 01/2012a 01/2013e 01/2014e 01/2015e 

Profit & loss summary (USDm) 

Revenue 3,643 3,800 4,100 4,440 

EBITDA 854 913 1,021 1,127 




PBT 665 702 834 940 

HSBC PBT 665 702 834 940 

Taxation -226 -242 -288 -324 



Cash flow summary (USDm) 


Capex -239 -230 -248 -268 


Dividends -143 -161 -181 -202 

Change in net debt 323 40 -137 -163 

FCF equity -74 145 285 330 

Balance sheet summary (USDm) 


Tangible fixed assets 767 840 921 1,012 


Cash & others 442 402 539 702 

Total assets 4,159 4,447 4,859 5,322 


Gross debt 712 712 712 712 

Net debt 270 310 173 10 




Year to 01/2012a 01/2013e 01/2014e 01/2015e 


Revenue 18.1 4.3 7.9 8.3 

EBITDA 15.0 6.9 11.8 10.4 


PBT 21.5 5.6 18.7 12.8 

HSBC EPS 23.1 0.0 18.7 12.8 

Ratios (%) 

Revenue/IC (x) 2.0 1.7 1.7 1.6 

ROIC 25.1 22.6 22.5 22.6 

ROE 20.6 18.5 19.3 18.9 

ROA 11.9 11.5 12.0 12.2 







Per share data (USD) 



DPS 1.16 1.28 1.43 1.61 

Book value 18.39 20.74 23.90 27.47 

DCF analysis 



Neutral (V) 





Sensitivity and valuation range (USD/share) 


7.7% 79 81 83 

8.2% 73 75 76 

8.7% 68 69 70 

9.2% 63 64 65 

9.7% 58 59 60 


Year to 01/2012a 01/2013e 01/2014e 01/2015e 

EV/sales 2.3 2.2 2.0 1.8 

EV/EBITDA 9.6 9.0 8.0 7.1 

EV/IC 4.0 3.5 3.1 2.7 

PE* 17.4 17.4 14.7 13.0 

P/Book value 3.4 3.0 2.6 2.3 

FCF yield (%) -0.9 1.8 3.6 4.2 




Share price (USD)62.71 Target price (USD)69.00 

Reuters (Equity) TIF.N Bloomberg (Equity) TIF US 

Market cap (USDm) 7,941 Market cap (USDm) 7,941 

Free float (%) 100 Enterprise value (USDm) 8252 

Country United States Sector Specialty Retail 





94 

84 

74 

64 

54 

44 

34 

34 


Tiffany Rel to S&P 500 

Source: HSBC 


94 

84 

74 

64 

54 

44 

89




abc 

Tod’s 

Tod’s brand itself (55% of sales in 2011) amongst the industry 

best performers 

But Hogan and Fay (whose sales exposure to the Italian market is 

over 90%) are dragging, resulting in lower sales and earnings 

growth relative to peers 

Remain Neutral and increase target price to EUR90 (from EUR81) 

on higher estimates 

Tod’s performance blurred by 

Hogan and Fay 

Tod’s brand itself (55% of sales in 2011) amongst 

the industry best performers 

Whilst the Tod’s group as whole underperformed 

the industry in both Q1 and Q2 2012 (7% organic 

sales growth), the Tod’s brand itself (55% of 

group sales in 2011) continued to grow strongly in 

terms of sales. 

We believe the main reasons for the strong 

performance of the Tod’s brand are the following: 

A distinctive positioning: The Tod’s brand has 

a distinctive positioning (classic, discreet, 

comfortable, yet perceived as luxury) which 

makes the brand less vulnerable to ‘trading less’ 

from European customers (including Italians). 

The non-reliance on logo products: This is a 

positive at a time when Asian consumers are 

becoming more sophisticated and moving away 

from logo products (as outlined in the thematic 

section of this report). 

A better geographic sales mix than the 

overall group: Whilst the overall group’s 

geographic mix was Italy (51%), Rest of Europe 

(20%), North America (7%) and Rest of the 

World (22%), the geographic mix of the Tod’s 

brand itself is more favourable and diverse: Italy 

at c25%, Rest of Europe at c25-30%, North 

America at 10-15% and Rest of the World at 

c35% (according to our estimates). 

The brand is an emerging brand outside 

Europe: The Tod’s brand accounts for most of 

the group sales outside Europe, which grew 

47% in H1 2012 (with China outpacing this 

trend). In our view, Tod’s is clearly not at risk 

from our ‘first-mover disadvantage’ theme 

outlined on page 19. 

Roger Vivier a (small) gem 

Roger Vivier represented only 3% of sales in 2011, 

but its sales more than doubled in H1 2012, 

overtaking Fay as the number 3 brand in size within 

the group. 

Hogan and Fay dragging 

Italy represented 50% of the total group sales in 

2011, of which c55% was from Hogan, c20% from 

Fay and c25% from the Tod’s brand itself, plus 

Roger Vivier. Hogan and Fay, which are mainly 

90




abc 

exposed to the Italian market (c90% for Hogan and 

c95% for Fay) are suffering more than the Tod’s 

brand itself (with c15-20% of sales from Italy) even 

in Italy, as Hogan and Fay are not as well-known as 

Tod’s with tourists. Both brands saw a worsening of 

their overall sales trends in Q2 2012 compared to 

Q1: Hogan (-29% at constant FX vs -2%), Fay (- 

17% vs -2%) and were the main culprits for the 

deterioration of group trends in Italy (-25% in Q2 vs 

-4% in Q1). 

The distribution rationalisation of Hogan also 

impacted sales. In Italy, the number of independent 

retailers distributing Hogan has been reduced by 

c10%. 


Q2 EBITDA came in at EUR60m, up 18% y-o-y 

and implied a 150bp EBITDA margin improvement 

to 27.3%. As expected, Tod’s was able to recoup 

part of the EBITDA decline seen in Q1 as the 

phasing of communication cost was skewed towards 

Q1 (vs Q2 and to a lesser extent Q3 last year). For 

H1 overall, EBITDA margin declined 70bp (with 

management mentioning higher rents). 

By channel, organic sales growth was +15% in retail 

in Q2 (vs +17% in Q1) and down 9% in wholesale 

in Q2 (vs +1% in Q1). Same store sales growth in 

euro terms accelerated in May-July, leading to a 

+10.6% YTD trend compared to +7.8% up to the 

beginning of May. The weaker EUR clearly helped, 

but according to management, trends also 

accelerated at constant FX in May-July. 

Management confirmed that the wholesale order 

book for FY12 was flat y-o-y. Management does not 

expect Italy to get worse (H2 should be quite similar 

to H1), and believes that the US can grow at least 

25% in euro terms over FY 2012 (H1 was up 30% in 

euro terms and +23% at constant FX). They also 

mentioned that growth rates accelerated in China in 

Q2. Prices have increased by 2-3% y-t-d on average. 

The group opened 7 stores in H1 and said it would 

open 20 over the FY 2012. 

During the conference call, management mentioned 

that the 6.5% reported sales increase and the 26.1% 

EBITDA margin expected by consensus (ie a 10bp 

improvement) was ‘feasible’. We expect a 20bp 

increase in EBITDA margin to 26.2% in 2012. On 

that basis, Tod’s as a group should be generating 

lower sales and earnings growth compared to peers. 

We increase our 2012, 2013 and 2014 EPS estimates 

by 7%, 10% and 9%, respectively, on the back of 

higher sales growth in Asia, the stronger euro and a 

lower tax rate assumption (29.5% vs 32%). The 

lower tax rate alone has a +4% impact. 

All in all, we increase our DCF-based target price 

from EUR81 to EUR90 on the back of our estimate 

changes (see above). The assumptions used to 

generate our DCF-derived target price are detailed 

on page 93. Tod’s is currently trading at 17.0x 2012e 

and 15.3x 2013e PE, in line with the sector. 

Under our research model, for stocks without a 

volatility indicator, the Neutral band is 5ppts above 

and below the hurdle rate for Europe ex-UK stocks 

of 9%. Our new target price implies a potential 

return of 6.5%, within the Neutral band; we 

therefore reiterate Neutral. Potential return equals the 




Downside risks to our rating include: (i) longer-thanexpected 

economic downturn in Italy; (ii) failure to 

expand significantly beyond shoes, and (iii) new sale 

of shares by the family, which has repeatedly said 

that it wanted to increase the free float and only has 

more than 50% (currently, the Della Valle family 

holds c57%). 

Upside risks include a faster-than-expected recovery 

of the Hogan’s brand. 

91




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Tod's - FY results and forecasts 

Year end December (EURm) 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012e 2013e 2014e 

Net Sales 421 503 573 657 708 713 788 894 975 1,060 1,135 

Change in percent 13.3% 19.5% 13.9% 14.7% 7.7% 0.8% 10.4% 13.5% 9.1% 8.7% 7.1% 

Total production costs 336 396 445 517 567 570 613 677 736 796 845 

as % of sales 79.8% 78.7% 77.6% 78.7% 80.1% 79.9% 77.9% 75.8% 75.5% 75.1% 74.5% 


EBITDA 89 113 137 153 155 159 193 232 255 280 306 

as % of sales 21.1% 22.4% 24.0% 23.3% 22.0% 22.2% 24.5% 26.0% 26.2% 26.5% 27.0% 


Amortization and reserves 22 23 24 27 30 32 33 38 40 43 47 

EBIT 67 90 114 126 126 126 160 195 215 237 259 

Percent of revenue 15.9% 17.9% 19.9% 19.3% 17.8% 17.7% 20.3% 21.8% 22.0% 22.4% 22.8% 

Change in percent 53.4% 34.3% 26.3% 11.2% -0.5% 0.5% 26.5% 21.7% 10.4% 10.3% 9.3% 

Financial Income 0 2 -1 0 -1 0 3 2 2 4 6 

Income before Taxes 67 92 113 127 125 127 163 197 217 241 265 


Change in percent 44.7% 37.2% 23.2% 11.9% -1.2% 1.1% 29.1% 20.6% 10.1% 11.2% 10.0% 

Taxes 28 38 46 48 41 40 53 61 64 71 78 

Tax rate 42.1% 41.4% 41.0% 37.8% 33.2% 31.9% 32.2% 31.1% 29.5% 29.5% 29.5% 

Minority interests 0 1 1 1 1 0 2 1 1 1 1 

Consolidated net Profit 38 53 66 77 83 86 109 135 152 169 186 



EPS diluted 1.24 1.68 2.08 2.43 2.66 2.80 3.56 4.41 4.97 5.53 6.08 

Variation % 36% 24% 17% 9% 5% 27% 24% 13% 11% 10% 


Tod's - FY sales by segment 

Year end December (EURm) 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011 2012e 2013e 2014e Split in 

2004 

Sales by brand 

Tod's 240 289 326 348 357 349 407 488 569 629 676 57% 60% 

Hogan 102 126 155 200 239 257 268 281 256 263 271 24% 24% 

Fay 69 77 82 90 93 92 90 88 79 79 81 16% 7% 

Other 10 11 9 20 19 16 23 37 71 89 107 2% 9% 

Total 421 503 573 657 708 713 788 894 975 1,060 1,135 

Sales by product category 

Shoes 268 315 358 427 486 506 565 647 715 784 842 64% 74% 

Leather goods & accessories 85 112 133 139 127 111 123 145 164 180 194 20% 17% 

Apparel 67 75 81 89 95 95 99 102 95 95 98 16% 9% 

Other 1 1 1 1 1 1 1 1 1 1 1 0% 0% 

Total 421 503 573 657 708 713 788 894 975 1,060 1,135 

Sales by channel 

DOS 220 259 283 318 336 349 404 474 565 610 664 52% 59% 

Third parties 201 244 290 339 372 364 384 420 410 434 459 48% 41% 

Total 421 503 573 657 708 713 788 894 975 1,044 1,123 

Sales by region 

Italy 205 241 280 334 384 405 426 449 399 404 412 49% 36% 

Europe 117 135 145 161 161 151 164 182 197 205 213 28% 19% 

North America 50 57 60 66 59 46 53 62 80 86 93 12% 8% 

Rest of World 50 70 88 97 103 111 145 200 300 365 418 12% 37% 

Total 421 503 573 657 708 713 788 894 975 1,060 1,135 


Split in 

2014e 

92

6 

. 

5 




abc 

Financials & valuation: TOD'S 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 894 975 1,060 1,135 

EBITDA 232 255 280 306 



Net interest 2 2 4 6 

PBT 197 217 241 265 

HSBC PBT 197 217 241 265 

Taxation -61 -64 -71 -78 





Capex -68 -50 -50 -49 


Dividends -61 -78 -88 -97 


FCF equity 62 117 149 164 




Current assets 602 673 755 954 

Cash & others 188 217 267 431 

Total assets 1,044 1,125 1,213 1,414 


Gross debt 77 77 77 77 

Net debt -111 -139 -190 -354 

Shareholders funds 683 748 819 1,006 



Year to 12/2011a 12/2012e 12/2013e 12/2014e 


Revenue 13.5 9.1 8.7 7.1 

EBITDA 20.4 9.7 10.0 9.1 


PBT 20.6 10.1 11.2 10.0 

HSBC EPS 23.8 12.7 11.2 10.0 

Ratios (%) 

Revenue/IC (x) 1.6 1.6 1.7 1.7 

ROIC 24.1 24.8 26.1 27.6 

ROE 20.9 21.3 21.6 20.4 

ROA 13.8 14.1 14.5 14.2 



EBITDA/net interest (x) 







DPS 2.54 2.86 3.18 3.50 

Book value 22.58 24.72 27.09 33.24 

DCF analysis 



Neutral (V) 







9.8% 93.0 94.7 96.0 

10.0% 90.7 92.3 93.6 

10.2% 88.5 90.0 91.2 

10.4% 86.5 87.8 89.0 

10.6% 84.4 85.7 86.9 


Year to 12/2011a 12/2012e 12/2013e 12/2014e 

EV/sales 2.8 2.5 2.3 2.0 

EV/EBITDA 10.7 9.6 8.5 7.3 

EV/IC 4.2 3.9 3.7 3.3 

PE* 19.2 17.0 15.3 13.9 

P/Book value 3.7 3.4 3.1 2.5 

FCF yield (%) 2.4 4.5 5.8 6.3 





Reuters (Equity) TOD.MI Bloomberg (Equity) TOD IM 




Goods 





120 

120 

110 

110 

100 

100 

90 

90 

80 

80 

70 

70 

60 

60 

50 

50 


TOD'S Rel to BCI ALL-SHARE INDEX 

Source: HSBC 


93




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Notes 

94




abc 

Notes 

95




abc 

Notes 

96




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Disclosure appendix 

Analyst Certification 

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the 

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their 

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific 

recommendation(s) or views contained in this research report: Erwan Rambourg, Antoine Belge and Sophie Dargnies 

Important disclosures 

Stock ratings and basis for financial analysis 

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which 

depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. 

Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities 

based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; 

and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, 

technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. 

HSBC has assigned ratings for its long-term investment opportunities as described below. 

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when 

HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at 

www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this 

website. 

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's 

existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating 

systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research 

report. In addition, because research reports contain more complete information concerning the analysts' views, investors 

should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not 

be used or relied on in isolation as investment advice. 

Rating definitions for long-term investment opportunities 

Stock ratings 

HSBC assigns ratings to its stocks in this sector on the following basis: 

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, 

regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock 

to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the 

potential return, which equals the percentage difference between the current share price and the target price, including the 

forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months 

(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be 

expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points 

for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. 

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility 

status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, 

expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily 

triggering a rating change. 

97




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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 

months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, 

stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past 

month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, 

however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. 

Rating distribution for long-term investment opportunities 

As of 31 August 2012, the distribution of all ratings published is as follows: 

Overweight (Buy) 49% (26% of these provided with Investment Banking Services) 

Neutral (Hold) 38% (25% of these provided with Investment Banking Services) 

Underweight (Sell) 13% (19% of these provided with Investment Banking Services) 

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its longterm 

investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research. 

HSBC & Analyst disclosures 

Disclosure checklist 

Company Ticker Recent price Price Date Disclosure 

BURBERRY GROUP BRBY.L 13.28 30-Aug-2012 4, 7 

HERMES HRMS.PA 223.75 30-Aug-2012 2, 6, 7 

LUXOTTICA LUX.MI 28.72 30-Aug-2012 7, 11 

LVMH LVMH.PA 129.20 30-Aug-2012 2, 5, 6, 7, 11 

PPR PRTP.PA 124.65 30-Aug-2012 1, 2, 5, 6, 7, 11 

PRADA SPA 1913.HK 59.30 30-Aug-2012 6 

RICHEMONT(CIE FIN) CFR.VX 58.30 30-Aug-2012 2, 7 

SALVATORE FERRAGAM SFER.MI 16.28 30-Aug-2012 7 

SWATCH UHR.VX 392.00 30-Aug-2012 4 

Source: HSBC 

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 

2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 

3 months. 

3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this 

company. 

4 As of 31 July 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 

5 As of 31 July 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of 

and/or paid compensation to HSBC in respect of investment banking services. 


and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 


and/or paid compensation to HSBC in respect of non-securities services. 

8 A covering analyst/s has received compensation from this company in the past 12 months. 

9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as 

detailed below. 

10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this 

company, as detailed below. 

11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in 

securities in respect of this company 

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment 

banking revenues. 

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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that 

company available at www.hsbcnet.com/research. 

* HSBC Legal Entities are listed in the Disclaimer below. 

Additional disclosures 

1 This report is dated as at 02 September 2012. 

2 All market data included in this report are dated as at close 27 August 2012, unless otherwise indicated in the report. 

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its 

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research 

operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier 

procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or 

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4 As of 31 July 2012, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed 

by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more 

of the total capital of the subject companies securities in the market for the following Company(ies): BURBERRY 

GROUP, SWATCH 

5 HSBC is acting as broker for Hermes's shares buyback program. 

99




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Disclaimer 

* Legal entities as at 8 August 2012 

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written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 

206/01/2012 

341161 

100

Global Consumer Brands & Retail 

Research Team 

Europe 


Antoine Belge 

Head of Consumer Brands and Retail Equity Research 

+33 1 56 52 43 47 antoine.belge@hsbc.com 

Sophie Dargnies 

Analyst 

+33 1 56 52 43 48 sophie.dargnies@hsbc.com 

Cedric Besnard 

Analyst 

+33 1 56 52 43 66 cedric.besnard@hsbc.com 

Florence Dohan 

Analyst 

+44 207 992 4647 florence.dohan@hsbc.com 

Jérôme Samuel 

Analyst 

+33 1 56 52 44 23 jerome.samuel@hsbc.com 

Emmanuelle Vigneron 

Analyst 

+33 1 56 52 43 19 emmanuelle.vigneron@hsbc.com 

Paul Rossington 

Analyst 

+44 20 7991 6734 paul.rossington@hsbcib.com 

Leisure 

Lena Thakkar 

Analyst 

+44 20 7991 3448 lena.thakkar@hsbcib.com 

CEEMEA 


Michele Olivier 

Analyst 

+27 11 6764208 michele.olivier@za.hsbc.com 

Specialist Sales 

Lynn Raphael 

+44 20 7991 1331 lynn.raphael@hsbcib.com 

David Harrington 

+44 20 7991 5389 david.harrington@hsbcib.com 

Asia 


Erwan Rambourg 

Head of Consumer Brands and Retail Equity Research 

+852 2996 6572 erwanrambourg@hsbc.com.hk 

Chris Zee 

Analyst 

+852 2822 2912 chriscmzee@hsbc.com.hk 

Christopher Leung 

Analyst 

+852 2996 6531 christopher.k.leung@hsbc.com.hk 

Lina Yan 

Analyst 

+852 2822 4344 linayjyan@hsbc.com.hk 

Catherine Chao 

Analyst 

+852 2996 6570 catherinefchao@hsbc.com.hk 

Karen Choi 

Analyst 

+822 3706 8781 karen.choi@kr.hsbc.com 

Jena Han 

Associate 

+822 3706 8772 jenahan@kr.hsbc.com 

Sean Monaghan 

Analyst 

+65 6658 0610 seanmonaghan@hsbc.com.sg 

Permada (Mada) Darmono 

Analyst 

+65 6658 0613 permada.w.darmono@hsbc.com.sg 

Thilan Wickramasinghe 

Analyst 

+65 6658 0609 thilanw@hsbc.com.sg 

Abel Lee 

Analyst 

+8862 6631 2866 abelchlee@hsbc.com.tw 

Amit Sachdeva 

Analyst 

+91 22 2268 1240 amit1sachdeva@hsbc.co.in 

North & Latin America 

Consumer & Retail 

Francisco J Chevez 

Analyst, Latin America & US 

+1 212 525 5350 francisco.j.chevez@us.hsbc.com 

Stewart Ragar 

Analyst 

+1 212 525 3460 stewart.h.ragar@us.hsbc.com 

Manisha A Chaudhry 

Associate, Latin America & US 

+1 212 525 3035 manisha.a.chaudhry@us.hsbc.com 

Beverages 

Lauren Torres 

Analyst, Global Beverages 

+1 212 525 6972 lauren.torres@us.hsbc.com 

James Watson 

Analyst, Global Beverages 

+1 212 525 4905 james.c.watson@us.hsbc.com 

Food & Agricultural Products 

Pedro Herrera 

Analyst, Global Food & Agricultural Products 

+1 212 525 5126 pedro.herrera@us.hsbc.com 

Ravi Jain 

Analyst, Global Food & Agricultural Products 

+1 212 525 3442 ravijain@us.hsbc.com 

Diego T Maia 

Analyst, Food & Agricultural Products, Brazil 

+55 11 33718192 diego.t.maia@hsbc.com.br 

Household Durables 

Francisco Suarez 

Analyst, Household Durables, Mexico 

+52 55 5721 2173 francisco.suarez@hsbc.com.mx 

Berenice Munoz 

Associate, Household Durables, Mexico 

+52 55 5721 5623 berenice.munoz@hsbc.com.mx 

abc

Erwan Rambourg* 

Analyst 

The Hongkong and Shanghai Banking Corporation Limited 

+852 2996 6572 

erwanrambourg@hsbc.com.hk 

Erwan Rambourg is Head of Consumer Brands and Retail Equity Research and is a top ranked analyst covering the luxury, sporting 

goods and spirits sectors. He joined HSBC in January 2005 and in 2011 relocated from London to Hong Kong as many stocks under 

coverage are now Asia-driven. Before moving to HSBC, Erwan worked for eight years as Marketing Manager in the luxury industry, 

notably for Richemont and LVMH. 

Antoine Belge* 

Analyst 

HSBC Bank Plc, Paris branch 

+33 1 56 52 4347 

antoine.belge@hsbc.com 

Antoine Belge is Head of Consumer Brands and Retail Equity Research and is a top ranked analyst covering the luxury, sporting goods 

and spirits sectors. He has been an analyst since 1998 and joined HSBC in 2003. Prior to this, he worked for seven years in the industry 

as a Finance Controller for Christian Dior and Chanel. 

Sophie Dargnies* 

Analyst 

HSBC Bank Plc, Paris branch 

+33 1 56 52 4348 

sophie.dargnies@hsbc.com 

Sophie is an equity analyst covering the luxury, sporting goods and spirits sectors. She joined the Luxury and Sporting Goods 

team at HSBC in May 2008. Before joining HSBC, Sophie worked as a consultant for three years. She is a graduate of EDHEC 

Business School. 

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

Luxury "red bull" - French Chamber of Commerce and Industry in ...

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