Bulgari SpA Transferring Coverage BULG.MI BUL IM MIL BULG … · prices in our numbers, assuming...

Europe Italy Consumer & Luxury Goods Luxury Goods

18 January 2006

Bulgari SpA Reuters: BULG.MI Bloomberg: BUL IM Exchange: MIL Ticker: BULG

Breakfast at Bulgari's

Francesca DiPasquantonio Research Analyst (39) 02 86379 753 [email protected]

Gerry Gallagher Research Analyst (44) 20 754 72710 [email protected]

Transferring coverage; moving to Buy with Euro 10.5 fair value Bulgari should deliver good Q4 numbers following three disappointing quarters in a row. Strategy and fundamentals on solid brand equity should warrant our Euro 10.5 fair value, which is based on minimal watch sales growth and limited margin improvement. Although we incorporate the risk of further increase in raw material prices in our numbers, assuming that they will eat up most of the benefits of vertical integration, this remains the main risk to the share price in the short-term

Forecasts and ratios

Year End Dec 31 2003A 2004A 2005E 2006E 2007E

Revenue (EURm) 759 828 920 1,004 1,090

EBITDA (EURm) 156 175 185 207 228

EBITA (EURm) 118 139 146 164 185

DB EPS (EUR) 0.31 0.39 0.40 0.46 0.52

OLD DB EPS (EUR) 0.32 0.37 0.41 0.49 0.57

P/E (DB EPS) (x) 17.6 20.3 22.4 19.8 17.5

EV/EBITDA (x) 10.7 13.3 14.8 13.2 11.7

DPS (EUR) 0.11 0.23 0.26 0.29 0.32

Yield (%) 2.0 2.9 2.8 3.2 3.6Source: Deutsche Bank Securities Inc. estimates, company data

Deutsche Bank AG/London

All prices are those current at the end of the previous trading session unless otherwise indicated

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Investors should consider this report as only a single factor in making their investment decision.

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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

Transferring Coverage

Buy Price at 18 Jan 2006 (EUR) 9.04Price Target (EUR) 10.5052-week range (EUR) 9.93 - 8.26

Key changes

Rating Hold to Buy

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Bulgari SpA (R.H. Scale)

Performance (%) 1m 3m 12mAbsolute -2.5 -0.6 -1.0Dow Jones EURO STOXX Price 2.5 9.2

Stock data

Market cap (EUR)(m) 2,675.2Shares outstanding (m) 296Free float (%) 52Dow Jones EURO STOXX Price 334.2

Key indicators

ROE (%) 17.6ROA (%) 13.4Net debt/equity (%) 9.3Book value/share (EUR) 2.4Price/book (x) 3.8Net interest cover (x) 48.5EBIT margin (%) 15.8

Upcoming events Date

FY 2005 Revenues 31 Jan 2006, no conf. callFY 2005 Results 27 March 2006, conf. call 18:00 CETQ1 2006 Results 11 May 2006, conf. call 18:00 CET

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2005: an exceptional concentration of investments In 2005, earnings will incorporate the costs of Bulgari’s expansion strategy, which will exert its positive impact from 2006, namely new major retail initiatives (renovation, refurbishment/enlargement of flagship stores) and the internalisation of fragrance distribution in the US. 2006 should begin under more favourable conditions and sales should accelerate triggering operational gearing.

Mid-term margin upside potential Bulgari has diversified its product portfolio and lowered its break-even point over the recent past. We envisage high single-digit organic sales growth, driven by Jewellery and Accessories, space growth and product launches. The acceleration of Bulgari’s upstream integration should enhance profitability and help mitigate the impact of raw material prices. The latter factor might jeopardize management guidance of avg. growth of +50/70bp in gross margin (we have a lower +20bp estimate), but lower growth of operating costs and a stable advertising budget at around 11-11.5%, should anyway deliver a 2007E EBIT margin of 17%.

Valuation & risks Our DCF points to a fair value of Euro 10.5 (based on a 6% sales growth, exit operating margin of to 18.4%, 2.5% perpetuity and 7.8% WACC). Bulgari is trading at a small discount to the luxury sector PE, which, in our view, does not reflect potential margin expansion. The main risks in addition to pressure from raw material prices would be weak watch sales, unsuccessful new product launches, pressures on returns from higher investments, strengthening Euro and economic slowdown.

18 January 2006 Luxury Goods Bulgari SpA


Model updated: 18 January 2006 Year Ending 31 December 2000 2001 2002 2003 2004 2005E 2006E 2007E

INCOME STATEMENT (EUR m)Sales revenue 676 766 773 759 828 920 1,004 1,090Operating EBITDA 151 141 147 156 175 185 207 228Depreciation 20 26 27 25 23 31 35 35Amortisation 9 13 13 14 13 9 8 8EBIT 122 102 108 118 139 146 164 185Net interest income(expense) -8 -13 -10 -10 -7 -3 -3 -3Associates/affiliates 0 0 0 0 0 0 0 0Investment/other income(expense) 9 9 2 1 -3 0 0 0Exceptionals/extraordinaries -12 -10 -7 0 -2 0 0 0Income tax expense 14 17 14 17 13 21 24 27Minorities/preference dividends 3 4 1 0 2 2 2 2Net income 95 68 76 92 113 120 135 153CASH FLOW (EUR m)Cash flow from operations -58 -37 177 185 134 68 132 150Movement in net working capital -190 -125 12 61 -19 -92 -51 -50Capex -97 -46 -33 -38 -45 -55 -50 -50Free cash flow -155 -83 144 147 89 13 82 100Other investing activities 12 5 26 -35 -21 0 0 0

+39-02-8637-9753 Equity raised(bought back) 4 17 0 0 0 0 0 0Dividends paid -17 -25 -22 -22 -33 -68 -76 -85Net inc(dec) in borrowings 0 0 0 0 0 0 0 0

+44 20 754 72710 Other financing cash flows 0 0 0 0 0 0 0 0Total cash flows from financing -12 -8 -22 -22 -33 -68 -76 -85Net cash flow -155 -86 148 90 36 -55 5 15Movement in net debt(cash) 155 86 -148 -90 -36 55 -5 -15BALANCE SHEET (EUR m)Cash and other liquid assets 45 48 52 48 48 72 78 78Tangible fixed assets 88 96 88 86 90 101 106 107Goodwill 0 0 0 0 0 0 0 0Other intangible assets 64 64 59 57 70 66 68 69Associates/investments 13 24 27 31 42 45 45 50Other assets 612 715 659 589 650 761 827 892Total assets 822 947 884 811 899 1,045 1,123 1,196Interest bearing debt 243 332 188 93 57 138 133 119Other liabilities 174 140 147 131 175 199 211 229Total liabilities 418 472 336 224 231 337 344 347Shareholders' equity 395 464 539 578 662 700 769 837Minorities 10 11 10 9 7 8 10 12Total shareholders' equity 405 475 548 587 668 709 779 849Net working capital 429 554 541 480 499 595 645 695Net debt(cash) 198 284 137 45 8 66 55 41Capital 603 759 685 632 677 774 835 889RATIO ANALYSISSales growth (%) 39.3 13.3 0.9 -1.8 9.0 11.2 9.1 8.6Op. EBITDA/sales (%) 22.4 18.5 19.1 20.6 21.1 20.1 20.6 20.9EBIT/sales (%) 18.1 13.4 13.9 15.5 16.8 15.8 16.3 17.0Payout ratio (%) 26.8 26.9 28.8 35.2 60.3 63.7 63.1 62.5

52-week Range: EUR 8.26 - 9.93 ROE (%) 27.4 15.9 15.2 16.6 18.2 17.6 18.4 19.0Market Cap (m) EUR 2,675 Return on Capital (%) 21.5 11.5 11.8 15.3 18.2 16.8 17.1 18.0

USD 3,236 Operating Return on Capital (%) 22.3 12.1 12.6 15.2 19.5 17.4 17.6 18.6Capex/sales (%) 14.3 6.0 4.3 5.0 5.4 6.0 5.0 4.6

Company identifiers Capex/depreciation (x) 3.3 1.2 0.8 1.0 1.2 1.4 1.2 1.2Cusip NA Net debt/equity (%) 48.9 59.9 24.9 7.7 1.3 9.3 7.1 4.8SEDOL 5256477 Net interest cover (x) 15.4 8.2 10.4 12.4 20.4 48.5 54.7 61.6

Source: Company data, Deutsche Bank estimates

[email protected] Di Pasquantonio

Gerry [email protected]

Research Team

Bulgari's core product portfolio includes jewellery(41% of sales) and watches (31% of sales),Fragrances and accessories account respectivelyfor 19% and 7% of sales. Bulgari's retail networkconsists of 194 exclusive Bulgari stores (of which107 are DOS, accounting for c50% of sales, 49 arefranchised stores and 38 are travel retail). Bulgarialso distributes in the wholesale channel throughindependent watch retailers (ca. 700), as well asthrough department stores and duty-free stores.Bulgari owns the Genta and Roth luxury watchbrands, 11% of Opera fund and 50% of OperaManagement, and has a joint venture with ritz

Running the NumbersHeadline EPS (EUR)

EuropeItalyLuxury Goods

Reuters: BULG.MI Bloomberg: BUL IMP/CFPS (x)Bulgari SpA

SUMMARY

P/E ratio Headline (x)Headline EPS growth (%)

DPS (EUR)

Operating CFPS (EUR)

EPS FD (EUR)

Dividend Yield (%)

Free CFPS (EUR)

P/E ratio FD (x)

EV/Operating Capital

Company websitehttp://www.bulgari.itCompany description

EV/SalesEV/EBITDAEV/EBIT

Enterprise value (EUR m)Average market cap (EUR m)

Price as of 18 JanuaryTarget price

EUR 9.04EUR 10.50

Weighted average shares (m)Price/BV (x)

Buy BV/Share (EUR)

0.35 0.26 0.28 0.31 0.39 0.40 0.46 0.5235.3 44.2 23.6 17.6 20.3 22.3 19.8 17.568.2 -27.1 7.6 12.8 24.1 4.6 13.0 13.10.32 0.23 0.26 0.31 0.38 0.40 0.46 0.5238.7 49.2 25.3 17.6 20.6 22.3 19.8 17.5

-0.20 -0.12 0.60 0.63 0.45 0.23 0.44 0.51-0.52 -0.28 0.49 0.50 0.30 0.04 0.28 0.34

nm nm 10.9 8.8 17.4 39.5 20.3 17.80.09 0.06 0.07 0.11 0.23 0.26 0.29 0.32

0.7 0.5 1.1 2.0 2.9 2.9 3.2 3.61.34 1.57 1.82 1.95 2.24 2.37 2.60 2.839.80 5.56 2.48 3.76 4.07 3.82 3.48 3.20296 296 296 296 296 296 296 296

3,677 3,354 1,928 1,627 2,326 2,675 2,675 2,6753,957 3,699 2,081 1,675 2,332 2,740 2,734 2,677

5.85 4.83 2.69 2.21 2.82 2.98 2.72 2.4626.1 26.2 14.1 10.7 13.3 14.8 13.2 11.732.3 36.1 19.3 14.2 16.8 18.8 16.7 14.5

6.4 4.9 3.0 2.7 3.5 3.6 3.3 3.1

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Investment thesis Outlook

In 2005, Bulgari underperformed the luxury sector by over 30%, due mainly to downwards consensus earnings revisions in a buoyant economic environment, sector and stock market, in our view. We believe that, following three disappointing quarters, Bulgari will show an inversion in the trend starting with Q4 results, and its fundamentals will re-emerge. We believe Q4 will benefit from a recovery in watches (driving gross margin), the new diamond collection’s contribution to jewellery, favourable currency impact on gross margin, and easier comps base on costs, notwithstanding the recent spikes in gold prices.

In recent years, Bulgari has coped well with difficult market conditions, streamlining its operations and achieving significant cost optimisation. Management’s strategy is to continue with vertical integration in Jewellery, Watches and Leather goods. Increasing in-house production should enhance margins, despite a less favourable product mix (watches contribute to 35% of sales today vs. 45% in 2000). We expect an average 30bp organic improvement p.a. at gross margin over 2005-07, to which the main threat is the pressure from raw material prices and Bulgari’s ability to absorb them or pass them on to consumers.

At this stage, Bulgari can continue its mono-brand expansion strategy. However, it needs to invest more than it has in the past for its growth, as seen in 2005. We expect Bulgari to post 8% organic sales growth in 2005-08E, mainly driven by Jewellery and Accessories, and sustained by space growth, advertising and product innovation. Jewellery should benefit from Bulgari’s ability to consolidate market share in a very fragmented market, as the market shifts from unbranded to branded jewellery. Accessories should benefit from a significant increase in SKUs and the opening of dedicated stores. Despite aggressive product innovation and the recent repositioning of the brand towards more technical features, we believe that Bulgari’s heritage as jeweller and its watches’ design connotation will limit the division’s potential. New product launches will be a critical issue, with all costs and risks involved.

Upstream integration and improving channel mix (Directly Operated Stores) should partly offset the unfavourable product mix and rising raw material prices. Moreover, decreasing A&P as a percentage of sales and cost control suggest sales are expected to flow through to the EBIT. We expect that margins dilution from new space growth will be limited as (i) new flagship openings are limited while most activity will be enlargement/relocations; (ii) the store base is large and allows absorbing these costs more easily; (iii) accessories dedicated stores will be smaller than average. There should be significant margin upside if strong sales growth is delivered. According to our estimates, Bulgari should reach an EBIT margin of 17% in 2007E.

Valuation

Our DCF leads to a fair value of Euro 10.5 based on a 6% organic sales growth, operating margin progressing to 18.4%, a perpetual growth of 2.5% and a WACC of 7.8%. On a P/E 2006E of 19.8x, Bulgari trades at a small discount to the average luxury sector (P/E 2006E of 21x), which does not reflect Bulgari’s potential margin expansion. We move our rating to Buy to account for the 18% potential upside, implied by our fundamental valuation. Rising gold and other precious metals price is the main risk, which might restrain the otherwise expected strong margin rebound, in a year during which investing activity will continue.

Risks General risks take into account a slowing world GDP growth, political instability and a strengthening Euro. Bulgari is increasing its in-house production, and sales are critical in order to leverage the related fixed costs. Key risks include weakness in watch sales and unsuccessful product innovation. Bulgari is also exposed to increasing raw material prices. Industry risks include potentially diluting returns as uniform strategies to win market share lead to increasingly higher investments in A&P, in the retail network, vertical integration and product innovation.



Table of Contents

Earnings momentum......................................................................... 5 Summary...................................................................................................................................5 2005: investing for the long term.............................................................................................. 5 2006: expecting a recovery.......................................................................................................8

Valuation .......................................................................................... 12 Summary................................................................................................................................. 12 A laggard in sector performance............................................................................................. 12 Luxury sector multiples analysis ............................................................................................. 13 Discounted cash flow analysis................................................................................................ 15 Shareholders value creation.................................................................................................... 16

Sector dynamics and returns ......................................................... 18 Are sector dynamics diluting Bulgari’s returns?...................................................................... 18 Product innovation .................................................................................................................. 18 Advertising.............................................................................................................................. 19 Space growth.......................................................................................................................... 20

Product mix...................................................................................... 22 Summary................................................................................................................................. 22 From a jewellery heritage to product extension...................................................................... 22 Jewellery: Bulgari to gain market share .................................................................................. 23 Watches: any real reason for concern?................................................................................... 26 Accessories should deliver the highest growth rate ............................................................... 30 Fragrances .............................................................................................................................. 31

Geographical mix............................................................................. 32 Summary................................................................................................................................. 32

A more efficient supply chain......................................................... 35 Towards higher in-house production....................................................................................... 35 Jewellery................................................................................................................................. 37 Watches.................................................................................................................................. 39 Accessories ............................................................................................................................ 40

Margins............................................................................................. 41 Vertical integration at the base of mid-term margins enhancement ....................................... 41 Mid-term gross margin of at least 65% .................................................................................. 41 The operating leverage ........................................................................................................... 44

Appendix .......................................................................................... 46 Luxury sector growth drivers .................................................................................................. 46 Bulgari in a snapshot............................................................................................................... 50 Historical results ..................................................................................................................... 51



Earnings momentum Summary

While 2005 was a year of investments for Bulgari affecting profitability, we expect newsflow to turn positive in Q4 2005. 2006 should benefit from investments in retail and important new products.

2005: investing for the long term

Like Tod’s Group in 2003, Bulgari in 2005 invested heavily on its future growth. At the same time, a number of contingent factors in 2005 influenced the Group’s financial performance. This translated into a weak share price performance; investors preferred other luxury players offering better earnings momentum in 2005 and/or a more immediate exposure to the recovery of the watch market.

2005: earnings momentum affected by a few specifics Strong investments in important product innovation in jewellery (including the

diamond jewellery project), watches and a wider assortment of accessories.

The timing of the product launches was different in 2005 vs. 2004 when jewellery was launched in Q1 and watches in Q2 vs.H2 this year for watches and most of the jewellery, which also partly explains the different performance of Bulgari watches vs. the sector (Swiss watch exports were up by 10.5% in 9M 2005 vs. flat for Bulgari).

Figure 1: Bulgari – main product launches in 2005 1Q 2Q 3Q 4Q

Aqua (fragrance) Ipno(Watches) Assioma (Watches) – October

Cabochon, Cicladi (Jewellery – April)

Carbon-gold Diamond Jewellery

Saphire (Jewellery) -June Two new Collections (accessories)

Ominia Crystalline and seasonal flankers

Grande Complication Source: Deutsche Bank

Bulgari has been investing on space growth in 2005. Out of a total of 7-8 major retail projects for the renovation, refurbishment, enlargement or relocation of flagship stores due to be completed within H1 2007, two were opened at the end of 2004 (Osaka and London New Bond Street) and Place Vendome in Paris was opened in November 2005, thus affecting the whole of 2005. Two, started during 2005, (Milan Montenapoleone and Florence, both possibly with an accessories store next door) will be opening in H1 2006, and for two of the three planned for 2006-07 (New York, which will close after St Valentine and will be relocated in a temporary store, and Tokyo Ginza) Bulgari has already secured the locations. Meanwhile, those stores where refurbishment has already been completed will start to contribute fully in 2006. As for new openings, the company has for the moment only officialised two stores in the PRC.

In Q2 2005 Bulgari had internalised fragrances distribution in the US. This means internalising the cost of 100 people. While previously unfeasible because of low critical mass, it has now become more convenient to have internal distribution rather than an external, turnkey partner. The increasing sales volume should help to absorb the higher fixed costs in 2006.

A more distributed flow of

products introduction in

2005



Perimeter. In 2005 Bulgari had consolidated the remaining 50% of Crova (bought in December 2004) which led to gross margin benefits, but also higher operating costs. The Hotel business, consolidated line-by-line, is still in a start-up phase and is expected to break even at EBITDA only by year-end.

In 2005 the FCF felt the brunt of higher capex (Euro 55m vs. Euro 45m in 2004) due to the acceleration and concentration of retail projects and a slowdown in inventory turns (from around 200 days in 2004 to 215-220 days in 2005), mainly as a result of the launch of the new diamonds collection.

A closer look at influence of raw material and selling prices on gross margin In addition, 2005 had felt the impact of raw material prices on the gross margin especially in H2 (gold, which represents 30% of COGS, recorded a +17% YoY growth in October and +8/10% in Q3 2005).

Bulgari has always described the cost of gold as a negligible component in the COGS. Historically, however, movements in raw material prices have been contained, and until Q1 2005 a weak US$ had partly compensated for the rise in the gold price. As the US$ has started to appreciate, however, Bulgari has increasingly felt the impact of the surge in gold, which accelerated in October and also platinum and diamond prices. The combination of the two could cause some worries for 2006. We assume that at least part of this increase will be offset by an increase in the selling prices of products in the spring, in line with the sector’s customs. We have assumed a neutral currency impact (we note that a strengthening US$ vs. Euro has a positive impact on sales but a negative impact on COGS as it magnifies a higher gold price).

Incidentally, Bulgari hedges raw materials, like it does currencies (80% of the amount), with a 6-8 month time horizon; hence, hedging strategies tend to be more effective in H1 vs. H2. In addition to hedging, Bulgari fine-tunes its expected gross margin through price increases, normally twice a year (April and September). In 2005, the company only raised jewellery prices by 3% in April. It will probably raise prices at the beginning of 2006 with the new product launches and should continue to be able to pass these negative influences on to consumers in the mid term.

Newsflow should improve as of Q4 In mid-November, at the release of 9M 2005 earnings, management confirmed its guidance of top-line growth in excess of 10% for 2005, supported by initial evidence of a recovery of watches (mid single-digit growth forecast confirmed vs. flat in 9M 2005). The earnings growth guidance was moved from “higher than” to “in line” with sales factoring in the acceleration in raw material prices. Hence, we expect improving newsflow in Q4 thanks to:

Acceleration in sales (+13.5% YoY in Q4 2005);

A favourable product mix with a strong rebound in watch sales (>20% YoY expected), thanks to (i) the easier base effect (in Q4 2004 the company started to cut sales in order to fight the grey market for its watches); (ii) the very good reception of the new Assioma model (in the group’s DOS as from the end of September and recording an excellent sell-out and already re-assorted); (iii) double-digit YoY sales growth in the Group’s DOS; and (iv) double-digit order growth;

The new diamond collection’s contribution to jewellery sales: this collection, with an average price of Euro 1m, was presented in Rome and Geneva in September 2005. Gross margin should be below the current consolidated average 65%, though the impact per unit on the bottom line could be significant]

A favourable FX impact on gross margin and a favourable product and channel mix should balance the pressures from gold prices; and

An easier comparison base on costs (both in terms of A&P and of other operating costs).

2005 preliminary sales

should be released at the

end of January



Figure 2: Bulgari – Quarterly Sales Breakdown by Product (Euro m) Euro m 1Q04 2Q04 1H04 3Q04 YTD04 4Q04 2004 1Q05 2Q05 1H05 3Q05 YTD05 4Q05 E 2005E

Jewels 66.2 86.7 152.9 80.6 233.5 109.2 342.8 72.2 91.3 163.5 85.9 249.4 115.9 365.3

Watches 49.4 60.1 109.5 65.1 174.6 81.8 256.4 50.3 57.9 108.2 63.6 171.8 104.2 276.0

Perfumes 28.4 29.4 57.8 37.7 95.5 58.6 154.1 34.1 36.4 70.5 44.7 115.2 59.6 174.8

Accessories 13.7 13.3 27.0 15.1 42.1 19.8 62.0 17.5 18.7 36.2 18.4 54.6 25.4 80.0

Royalties&other 2.6 3.0 5.6 4.8 10.3 6.0 16.3 5.3 5.5 10.8 5.7 16.5 7.4 23.9

TOTAL 160.3 192.5 352.8 203.3 556.0 275.5 831.5 179.4 209.8 389.2 218.3 607.5 312.5 920.0

as % of total

Jewels 41.3% 45.1% 43.4% 39.7% 42.0% 39.6% 39.0% 40.2% 43.5% 42.0% 39.3% 41.1% 37.1% 39.7%

Watches 30.8% 31.2% 31.0% 32.0% 31.4% 29.7% 35.5% 28.0% 27.6% 27.8% 29.1% 28.3% 33.3% 30.0%

Perfumes 17.7% 15.3% 16.4% 18.5% 17.2% 21.3% 17.7% 19.0% 17.3% 18.1% 20.5% 19.0% 19.1% 19.0%

Accessories 8.5% 6.9% 7.7% 7.4% 7.6% 7.2% 5.8% 9.8% 8.9% 9.3% 8.4% 9.0% 8.1% 8.7%

Royalties 1.6% 1.5% 1.6% 2.3% 1.9% 2.2% 2.0% 3.0% 2.6% 2.8% 2.6% 2.7% 2.4% 2.6%

TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

yoy change

Jewels 7.6% 15.5% 12.0% 12.1% 12.0% 10.1% 11.4% 9.1% 5.3% 6.9% 6.6% 6.8% 6.1% 6.6%

Watches -6.1% 10.8% 2.5% 20.3% 8.5% -1.8% 5.0% 1.8% -3.6% -1.2% -2.3% -1.6% 27.4% 7.7%

Perfumes 2.9% 22.9% 12.2% -6.5% 4.0% 30.8% 12.8% 20.1% 23.9% 22.0% 18.6% 20.7% 1.7% 13.5%

Accessories -7.4% 2.6% -2.7% 25.8% 5.9% 24.8% 11.3% 27.7% 40.1% 33.9% 21.9% 29.6% 28.2% 29.1%

Royalties -36.6% -10.3% -24.9% 31.9% -6.3% -6.4% 9.5% 103.8% 85.9% 94.3% 20.0% 60.1% 23.7% 46.7%

TOTAL -0.2% 13.6% 6.9% 11.7% 8.6% 11.5% 9.5% 11.9% 9.0% 10.3% 7.4% 9.3% 13.5% 10.6%Source: Deutsche Bank and Company data

Figure 3: Bulgari – Quarterly Sales Breakdown by Market (Euro m) 1Q04 2Q04 1H04 3Q04 YTD04 4Q04 2004 1Q05 2Q05 1H05 3Q05 YTD05 4Q05E 2005E

Italy 17.8 26.7 44.5 27.3 71.8 42.0 113.8 21.7 29.9 51.6 34.3 85.9 46.0 131.9

Europe 38.2 46.2 84.4 46.3 130.7 59.3 190.0 37.9 51.6 89.5 50.7 140.2 61.4 201.6

America 23.4 25.8 49.2 28.8 78.0 44.6 122.6 30.3 31.0 61.3 30.0 91.3 43.7 135.0

Japan 39.9 44.4 84.3 51.2 135.5 70.9 206.4 47.2 50.5 97.7 57.6 155.3 76.6 231.9

Far East 29.8 33.6 63.4 36.4 99.8 46.8 146.6 32.1 34.3 66.4 31.2 97.6 67.5 165.1

Middle East 11.2 15.8 27.0 13.2 40.2 12.0 52.2 10.2 12.5 22.7 14.3 37.0 17.4 54.4

TOTAL 160.3 192.5 352.8 203.2 556.0 275.6 831.5 179.4 209.8 389.2 218.1 607.3 312.7 920.0

as % of total

Italy 11.1% 13.9% 12.6% 13.4% 12.9% 15.2% 13.7% 12.1% 14.3% 13.3% 15.7% 14.1% 14.7% 14.3%

Europe 23.8% 24.0% 23.9% 22.8% 23.5% 21.5% 22.8% 21.1% 24.6% 23.0% 23.2% 23.1% 19.6% 21.9%

America 14.6% 13.4% 14.0% 14.2% 14.0% 16.2% 14.7% 16.9% 14.8% 15.8% 13.8% 15.0% 14.0% 14.7%

Japan 24.9% 23.1% 23.9% 25.2% 24.4% 25.7% 24.8% 26.3% 24.1% 25.1% 26.4% 25.6% 24.5% 25.2%

Far East 18.6% 17.4% 18.0% 17.9% 17.9% 17.0% 17.6% 17.9% 16.3% 17.1% 14.3% 16.1% 21.6% 17.9%

Middle East 7.0% 8.2% 7.6% 6.5% 7.2% 4.4% 6.3% 5.7% 6.0% 5.8% 6.6% 6.1% 5.6% 5.9%

yoy change

Italy -22.9% 3.1% -9.2% 25.2% 1.4% 10.5% 8.1% 21.9% 12.1% 16.0% 25.6% 19.7% 9.6% 15.9%

Europe -5.0% 6.0% 0.7% -8.3% -2.7% 6.6% 0.1% -0.8% 11.7% 6.1% 9.5% 7.3% 3.6% 6.1%

America 5.9% 26.1% 15.6% 9.1% 13.1% 12.6% 12.9% 29.5% 19.9% 24.5% 4.2% 17.0% -1.9% 10.1%

Japan 16.7% 23.5% 20.2% 29.9% 23.7% 25.0% 24.1% 18.3% 13.6% 15.8% 12.5% 14.6% 8.1% 12.4%

Far East -4.8% 6.9% 1.1% 9.3% 3.9% 0.2% 2.7% 7.7% 2.2% 4.8% -14.3% -2.2% 44.3% 12.7%

Middle East 15.5% 29.2% 23.1% 26.9% 24.3% -4.0% 12.7% -8.9% -20.7% -15.8% 8.3% -7.9% 45.1% 4.3%

TOTAL -0.2% 13.5% 6.9% 11.8% 8.6% 11.5% 9.5% 11.9% 9.0% 10.3% 7.3% 9.2% 13.5% 10.6%Source: Deutsche Bank and Company data



Figure 4: Bulgari – Quarterly Income Statement (Euro m) Euro m 1Q04 2Q04 1H04 3Q04 YTD04 4Q04 2004 1Q05 2Q05 1H05 3Q0 YTD05 4Q05E 2005E

Sales 160.3 192.5 352.8 201.6 554.4 277.2 831.5 179.4 209.8 389.2 218.1 607.3 312.7 920.0

yoy change -0.2% 13.6% 6.9% 10.8% 8.3% 12.2% 9.6% 11.9% 9.0% 10.3% 8.2% 9.5% 12.8% 10.6%

Gross Profit 100.3 122.1 222.4 126.9 349.3 178.3 527.6 117.1 133.5 250.6 140.6 391.2 199.6 590.8

yoy change 2.6% 12.9% 8.0% 15.3% 10.5% 12.7% 11.3% 16.7% 9.3% 12.7% 10.8% 12.0% 11.9% 12.0%

Gross Margin (%) 62.6% 63.4% 63.0% 62.9% 63.0% 64.3% 63.4% 65.3% 63.6% 64.4% 64.5% 64.4% 63.8% 64.2%

A&P 15.9 27.1 43.0 20.9 63.9 32.5 96.4 23.6 31.7 55.3 22.2 77.5 37.5 115.0

yoy change 14.4% 34.2% 26.1% 34.8% 28.8% 4.6% 19.5% 48.4% 17.0% 28.6% 6.2% 21.3% 15.4% 19.3%

% of sales 9.9% 14.1% 12.2% 10.4% 11.5% 11.7% 11.6% 13.2% 15.1% 14.2% 10.2% 12.8% 12.0% 12.5%

EBIT pre- A&P 34.8 50.5 85.3 56.1 141.4 89.1 230.5 41.9 51.9 93.8 54.1 147.9 112.7 260.6

yoy change 15.6% 29.2% 23.3% 31.7% 26.5% 3.4% 16.4% 20.4% 2.8% 10.0% -3.6% 4.6% 26.5% 13.0%

Operating Margin pre A&P (%) 21.7% 26.2% 24.2% 27.8% 25.5% 32.2% 27.7% 23.4% 24.7% 24.1% 24.8% 24.3% 36.0% 28.3%

Other costs 65.5 71.6 137.1 70.8 207.9 89.2 297.1 75.2 81.6 156.8 86.6 243.4 86.9 330.2

yoy change -3.3% 3.7% 0.3% 5.0% 1.8% 23.8% 7.5% 14.8% 14.0% 14.4% 22.3% 17.1% -2.6% 11.1%

% of sales 40.9% 37.2% 38.9% 35.1% 37.5% 32.2% 35.7% 41.9% 38.9% 40.3% 39.7% 40.1% 27.8% 35.9%

Operating profit 18.9 23.4 42.3 35.2 77.5 56.6 134.1 18.3 20.2 38.5 31.9 70.4 75.2 145.6

yoy change 16.7% 23.8% 20.5% 29.9% 24.6% 2.7% 14.3% -3.2% -13.7% -9.0% -9.5% -9.2% 32.8% 8.5%

Operating Margin (%) 11.8% 12.2% 12.0% 17.5% 14.0% 20.4% 16.1% 10.2% 9.6% 9.9% 14.6% 11.6% 24.0% 15.8%

Pretax profit 17.4 20.4 37.8 32.7 70.5 52.2 122.7 17.9 16.8 34.7 29.0 63.7 78.8 142.6

yoy change 33.5% 32.7% 33.1% 27.8% 30.5% -5.4% 12.4% 3.2% -17.8% -8.1% -11.3% -9.6% 51.0% 16.2%

Net profit 13.5 20.2 33.7 28.3 62.0 46.2 108.2 14.7 14.2 28.9 26.3 55.3 64.4 119.7

yoy change 18.4% 48.5% 34.8% 49.8% 41.2% -4.1% 17.5% 9.0% -29.7% -14.2% -6.9% -10.9% 39.4% 10.6%Source: Deutsche Bank and Company data

2006: expecting a recovery

From 2006 onwards, management guidance is for gross margin to continue to increase organically by some 50-70bp per year driven by the ongoing vertical integration, efficiency gains, and the expected increase in profitability for accessories. We have taken a more conservative view factoring in the higher gold price scenario, hence we expect flat gross margin in 2006 and an improvement in 2007.

We estimate operating costs will increase in 2006 at the same pace as in 2005 since most of the investments concentrated in 2005 had a bearing only on H2, and also considering the recent opening of the two accessories test stores and the likely opening of additional accessories stores in 2006. However, these investments are lower than for a standard Bulgari store (smaller locations – average 150sqm, lower security requirements, and faster turnover). Management has also indicated a lower advertising budget from 2006 onwards (we assume 11.5% on revenues vs. 12.5% in 2005). Also, according to management’s guidance, the Hotel business is expected to be profitable in 2006.

We expect the operating leverage of Bulgari’s business model to deliver good margins expansion on the back of a solid sales expansion driven by jewellery and accessories, and a recovery in watches. Hence, in 2006 we expect sales to go up 9% YoY, EBIT up 13% YoY with a 50bp improvement in the margin to 16.3% and net profit up 13% YoY. For 2007, we expect sales to go up 8.6% YoY, EBIT up 12.7% YoY with a 70bp improvement in the margin to 17% and net profit up 13% YoY.

FCF generation (before dividends) should grow to around Euro 70m in 2006 and Euro 90m in 2007 from Euro 13m estimated in 2005, recovering thanks to the expected rise in profitability, lower capex, and working capital as the diamonds assortment should be completed. This should allow for Euro 76m dividends to be paid in 2006 and Euro 85m in 2007 corresponding to an average 65% payout ratio, which is the highest in the luxury sector.



Our sales and margins forecasts are discussed in greater detail in the following sections of this report.

Figure 5: Gross Margin 2006E: Estimated Impact from

Raw materials

Figure 6: Raw Material prices: Sensitivity Analysis (2006

numbers, Euro m)

55%

65%

Gross Margin2005

Raw materials Efficiencies Prices Mix Gross Margin2006

64.2% 64.2%-180bp+80bp

+70bp +30bp

Best case Central Case Worst Case

Sales growth 9.1% 9.1% 9.1%

Row materials growth 20.0% 15.8% 11.7%

Gross Margin 63.3% 64.2% 65.5%

EBIT 153.0 164.1 175.1

EBIT Margin 15.2% 16.3% 17.4%

Net profit 126.0 135.2 144.6

% difference vs. base case -6.8% 6.9%

Source: Deutsche Bank Source: Deutsche Bank



Figure 7: Bulgari – Consolidated Income Statement (Euro m) 2000 2001 2002 2003 2004 2004 IFRS 2005E IFRS 2006 E IFRS 2007 E IFRS

REVENUES 676.0 766.0 773.3 759.3 827.7 831.5 920.0 1,004.1 1,090.4

Costs of goods sold (223.6) (259.7) (304.4) (285.5) (299.6) (302.1) (329.2) (359.5) (385.7)

GROSS PROFIT 452.4 506.3 468.8 473.8 528.1 529.4 590.8 644.7 704.7

% of sales 66.9% 66.1% 60.6% 62.4% 63.8% 63.7% 64.2% 64.2% 64.6%

Selling costs (26.5) (30.2) (25.6) (27.1) (30.5) (31.0) (35.9) (40.2) (43.6)

Advertising (82.3) (102.3) (76.2) (80.7) (96.4) (96.4) (115.0) (115.5) (124.3)

General & Administrative (95.3) (112.2) (102.4) (80.6) (87.2) (105.6) (112.9) (124.1) (141.4)

Labour costs (96.8) (120.2) (117.2) (129.0) (139.0) (129.2) (142.1) (157.6) (167.3)

EBITDA 151.5 141.4 147.4 156.4 175.0 167.2 184.9 207.3 228.1

EBITDA Margin % 22.4% 18.5% 19.1% 20.6% 21.1% 20.1% 20.1% 20.6% 20.9%

Depreciation (19.7) (26.4) (27.2) (26.8) (28.9) (23.9) (30.6) (34.9) (34.9)

Amortization (9.3) (12.6) (12.6) (12.3) (12.2) (11.5) (8.7) (8.3) (8.3)

EBIT 122.5 102.4 107.6 117.3 134.0 131.8 145.6 164.1 184.9

Operating Margin % 18.1% 13.4% 13.9% 15.5% 16.2% 15.9% 15.8% 16.3% 17.0%

Financial costs (7.9) (12.5) (10.4) (9.5) (6.8) (7.4) (3.0) (3.0) (3.0)

Forex 9.2 9.0 1.7 1.0 (2.5) 0.0 0.0 0.0 0.0

Others (12.1) (10.3) (7.5) 0.4 (2.1) 0.0 0.0 0.0 0.0

PRE-TAX PROFIT 111.6 88.6 91.4 109.2 122.6 124.4 142.6 161.1 181.9

Income taxes (13.5) (16.6) (14.1) (16.8) (12.9) (14.0) (21.4) (24.2) (27.3)

Tax rate 12.1% 18.7% 15.4% 15.4% 10.5% 11.2% 15.0% 15.0% 15.0%

Minorities (3.0) (3.8) (1.3) (0.3) (1.6) (1.7) (1.5) (1.7) (1.7)

NET PROFIT 95.1 68.2 76.1 92.1 108.1 108.8 119.7 135.2 152.9

ADJUSTED NET PROFIT 105.7 76.6 82.4 91.7 110.0 108.8 119.7 135.2 152.9

CASH FLOW 127.1 111.0 117.2 131.5 150.7 145.9 160.5 180.1 197.8

% Change vs previous year:

Revenues 39.3% 13.3% 0.9% -1.8% 9.0% 10.6% 9.1% 8.6%

Gross operating profit 61.4% -6.6% 4.2% 6.1% 11.9% 10.6% 12.1% 10.0%

Net operating profit 70.5% -16.4% 5.1% 9.0% 14.2% 10.4% 12.7% 12.7%

Pre-tax profit 62.9% -20.6% 3.2% 19.5% 12.2% 14.6% 13.0% 12.9%

Net profit 61.0% -28.3% 11.6% 21.0% 17.4% 10.0% 13.0% 13.1%

Cash flow 53.1% -12.7% 5.5% 12.2% 14.6% 10.0% 12.2% 9.8%Source: Deutsche Bank, Company data



Figure 8: Bulgari – Consolidated Balance Sheet (Euro m) 2000 2001 2002F 2003F 2004F 2004 IFRS 2005E IFRS 2006 E IFRS 2007 E IFRS

Operating Working Capital 416.7 552.5 502.4 453.0 469.0 480.2 554.8 605.3 645.1

Other net current assets 12.1 1.2 39.0 27.0 30.0 27.8 40.0 40.0 50.0

Net Working Capital 428.8 553.7 541.4 480.0 499.0 508.0 594.8 645.3 695.1

Net tangible assets 87.8 96.1 87.5 83.4 86.5 85.6 101.1 106.2 107.3

Net intangible assets 64.0 64.4 58.6 59.0 69.8 66.0 66.4 68.1 68.8

Other fixed assets 13.0 23.6 26.6 31.4 41.8 38.9 45.0 44.8 49.8

Net Fixed Assets 164.7 184.0 172.7 173.8 198.1 190.5 212.4 219.1 225.9

Other 35.6 42.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0

NET INVESTMENTS 629.1 780.3 714.1 653.8 697.1 698.4 807.2 864.3 921.0

Severance fund (6.0) (7.7) (8.8) (10.6) (13.6) (12.4) (13.6) (14.6) (15.6)

Other M/L term fund (net) (20.4) (13.5) (20.7) (11.0) (10.0) (29.5) (19.1) (15.1) (16.1)

CAPITAL REQUIREMENTS 602.6 759.1 684.7 632.2 673.5 656.5 774.5 834.6 889.3

Equity 395.4 464.5 538.6 578.3 656.8 636.6 700.3 769.3 836.9

Minorities 9.6 10.6 9.6 8.5 6.7 6.9 8.3 10.0 11.7

NET FINANCIAL POSITION (197.6) (284.0) (136.6) (45.4) (10.0) (13.0) (65.8) (55.3) (40.8)

o.w. Cash 45.3 47.9 51.9 48.1 48.1 77.0 72.0 77.8 77.8

o.w. S/T Debt (125.5) (189.7) (65.9) (93.4) (58.1) (29.9) (82.8) (83.1) (68.5)

o.w. L/T Debt (117.9) (142.5) (122.5) 0.0 0.0 (60.1) (55.1) (50.0) (50.0)

Debt/Equity 50.0% 61.1% 25.4% 7.8% 1.5% 2.0% 9.4% 7.2% 4.9%

Working cap./Sales 61.6% 72.1% 65.0% 59.7% 56.7% 57.8% 60.3% 60.3% 59.2%Source: Deutsche Bank, Company data

Figure 9: Bulgari – Consolidated Statement of Cash flow (Euro m) 2000 2001 2002F 2003F 2004F 2005E IFRS 2006 E IFRS 2007 E IFRS

NET FINANCIAL POS. BOP (43.1) (198.2) (284.0) (135.7) (45.5) (13.0) (60.6) (55.3)

Cash Flow 127.1 111.0 117.2 131.5 150.7 160.5 180.1 197.8

Change in Net Working Capital (189.7) (124.9) 12.2 61.4 (19.0) (91.8) (50.5) (49.9)

Change in M/L term Fund 12.6 (5.3) 8.2 (7.8) 2.0 5.0 2.0 2.0

Others (8.1) (17.6) 39.6 0.0 0.0 (6.0) 0.0 0.0

CASH FLOW FROM OPERATIONS (58.1) (36.7) 177.1 185.1 133.7 67.8 131.6 149.9

Capital Expenditures (97.0) (46.0) (33.0) (38.0) (45.0) (55.0) (50.0) (50.0)

Dividends (16.6) (25.1) (21.9) (21.9) (32.6) (68.1) (76.2) (85.4)

FREE CASH FLOW (171.7) (107.8) 122.3 125.2 56.2 (55.3) 5.4 14.5

Investments/Disposals (0.8) 0.0 0.0 (35.0) (19.0) 0.0 0.0 0.0

Change in Equity 4.2 17.0 0.0 0.0 0.0 0.0 0.0 0.0

Others 13.2 5.0 26.0 (1.6) 0.0 0.0

CHANGE IN NET FIN. POSITION (155.1) (85.8) 148.3 90.2 35.6 (55.3) 5.4 14.5

NET FIN. POS. EOP (198.2) (284.0) (135.7) (45.5) (10.0) (68.3) (55.3) (40.7)Source: Deutsche Bank, Company data



Valuation Summary

We believe Bulgari has the potential to end its underperformance in 2005 vis-à-vis the sector. 2006 should be a more normal year from a costs and investments viewpoint, following the peak concentration in 2005.

A laggard in sector performance

Our valuation analysis suggests share price upside though we believe there are some risks. Given concerns about Bulgari watch sales and a challenging environment for raw materials, we ran a sensitivity analysis, which gives a reasonable floor valuation at Euro 9, although negative momentum in relation to rising gold prices might push the stock below this level.

We note that consensus estimates for Bulgari came down throughout 2005 on the back of lower-than-expected watch sales and earnings progression. This translated into weak share price performance and underperformance relative to the sector of more than 30%, which is even more noteworthy considering that (i) the worldwide economy and stock markets were supportive of luxury stocks, (ii) world travelling has gone back to its peak levels, (iii) the watch market has been extremely strong (Swiss Watch export statistics show +10.5% in 9M 2005), and (iv) all other luxury players have reported good results.

Figure 10: Bulgari – NFY EPS Revsions during 2005

Figure 11: Luxury Stocks – 2005 Share Price

Performance

0

2

4

6

8

10

12

Dec-04 Apr-05 Aug-05 Dec-05

0.3

0.4

0.5

Share Price BUL EPS

50

70

90

110

130

150

170

190

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06

I:BUL I:TOD F:LVMHF:RMS S:CFR S:UHR


We believe there is no fundamental problem at Bulgari, at least for now, as the strength of jewellery and accessories should balance a volatile watch division until the transition to a renewed product positioning and image is completed, and the integrated supply chain will help offset the pressures from rising raw material costs and an unfavourable product mix.



Luxury sector multiples analysis

As shown by Figures 12 and 13, the company has historically traded at an average 32% premium to its luxury peers. Today, Bulgari is trading in line with the luxury sector.

Figure 12: Luxury sector and Bulgari historical P/E Figure 13: Bulgari historical P/E discount to the sector

0

10

20

30

40

50

60

70

1997 1998 1999 2000 2001 2002 2003 2004 2005

Luxury sector P/E Bulgari PE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: DataStream Source: DataStream

During the period 1997-2002, Bulgari traded at a premium to the luxury sector as it was experiencing superior growth compared to luxury peers. Furthermore, Bulgari’s smaller scale meant upside was potentially higher than competition.

Our Euro 10.5 valuation implies that Bulgari would trade on a P/E 2006E of 23.6 reflecting a 10% premium to the sector (in line with that of the past two years). The main issue when using multiples is that this method does not reflect mid-term potential margin upside.

Figure 14: : Luxury sector valuation multiples FCF Yield Div. Yield EV / EBITA EV / EBITDA EV / Sales EV / CE PE Ratio

2006 2006 2006 2006 2006 2006 2006 2007

TOD's Spa 3.9% 2.0% 15.5 12.4 2.98 4.5 26.8 22.3

Hermes 2.7% 1.3% 16.0 14.6 4.61 8.1 26.2 23.9

LVMH 4.1% 1.6% 14.5 12.5 2.96 3.0 21.7 19.0

Richemont 4.8% 1.9% 15.5 13.4 2.71 2.1 20.5 17.9

Swatch Group 5.1% 1.0% NA NA NA NA 18.4 17.7

Burberry 4.6% 2.0% 12.2 10.5 2.58 5.8 17.3 14.2

PPR 6.3% 3.2% 12.4 9.1 0.85 1.2 16.6 14.2

Bulgari SpA 3.1% 3.2% 16.7 13.2 2.72 3.3 19.8 17.5Source: Deutsche Bank

All our value maps show that Bulgari is positioned in the bottom right corner suggesting a situation of relative attractiveness on the metrics considered.



Figure 15: Value map – net margin & m.cap/sales (06E) Figure 16: Value map – net margin & m.cap/sales (07E)

Burberry

Hermes

Richemont

LVMH

TOD'sBulgari

Luxottica

R2 = 0.9407

0123456789

0% 5% 10% 15% 20% 25% 30%

Net Margin 2006

M C

ap/S

ales

200

6

Luxottica

BulgariTOD's

LVMH

Richemont

Hermes

Burberry

R2 = 0.9503

0

1

2

3

4

5

6

7

8

0% 5% 10% 15% 20% 25% 30%

Net Margin 2007

M C

ap/S

ales

200

7


Figure 17: Value map – ROE & PBV (06E) Figure 18: Value map – ROE & PBV (07E)

BurberryHermes

Richemont

LVMHTOD's Bulgari

Luxottica

R2 = 0.6948

0123456789

10% 15% 20% 25% 30%

ROE 2006

PB

V 2

006

BurberryHermes

Richemont

LVMH

TOD's BulgariLuxottica

R2 = 0.6342

0

1

2

3

4

5

6

7

10% 15% 20% 25% 30% 35%

ROE 2007

PB

V 2

007


Figure 19: Value map – ROIC & EV/CE (06E) Figure 20: Value map – ROIC & EV/CE (07E)

Burberry

Hermes

Richemont

LVMH

TOD'sBulgari

Luxottica

R2 = 0.84

0123456789

0% 10% 20% 30% 40%

ROIC 2006

EV

/CE

200

6E

Burberry

Hermes

Richemont

LVMH

TOD's

BulgariLuxottica

R2 = 0.8068

0123456789

0% 10% 20% 30% 40%

ROIC 2007

EV

/CE

200

7




Discounted cash flow analysis

We assume organic 10-year sales growth of 5.7% compound for Bulgari, which we believe to be fairly conservative. We estimate that the operating margin will reach 17.2% in FY 2007E and increase 20-25bps p.a. from 2008 to 2015 on the back of operational gearing. We assume that the 15% tax rate is sustainable, in line with the company’s indications.

Figure 21: Bulgari: main assumptions for our DCF model Sales growth rate 2005-2007 7.9%

Sales growth rate 2008-2015 5.4%

Terminal growth rate 2.5%

Operating margin 2005-2007 From 15.9% to 17%

Operating margin 2008-2015 From 17.7% to 18.4%

Nominal Tax rate 15.0%

WACC 7.8% Source: Company data, estimates

With the company planning to enlarge the number of SKUs in Accessories and considering investments in high-end jewellery, we believe NWC requirements will increase, but broadly in line with sales. We forecast that capital expenditure will be below the Euro 55m peak of 2005, but will remain in the Euro 45m range in the coming years mainly to fund space growth, in terms of both store openings and especially store refurbishments.

With an estimated net debt close to zero, we use a WACC of 7.8% which is Bulgari’s cost of equity. This reflects a risk free rate of 4.5% and a market risk premium of 3.5%. Terminal growth rate (2.5%) is in line with the assumptions we use for other luxury companies.

Figure 22: Bulgari DCF valuation 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

Net sales 920.0 1004.1 1090.4 1155.8 1225.1 1298.5 1376.4 1458.9 1539.1 1608.3 1672.5

change 11.2% 9.1% 8.6% 6.0% 6.0% 6.0% 6.0% 6.0% 5.5% 4.5% 4.0%

EBITDA 184.9 207.3 228.1 239.3 257.3 276.6 296.7 317.4 337.9 356.3 373.9

EBITDA margin 20.1% 20.6% 20.9% 20.7% 21.0% 21.3% 21.6% 21.8% 22.0% 22.2% 22.4%

D&A (39.3) (43.2) (43.2) (45.8) (48.5) (51.4) (55.1) (58.4) (61.6) (64.3) (66.9)

as % of sales 4.3% 4.3% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

EBIT 145.6 164.1 184.9 193.5 208.8 225.2 241.6 259.0 276.3 292.0 307.0

EBIT margin 15.8% 16.3% 17.0% 16.7% 17.0% 17.3% 17.6% 17.8% 18.0% 18.2% 18.4%

Taxes (21.4) (24.2) (27.3) (28.6) (30.8) (33.2) (35.7) (38.2) (40.8) (43.1) (45.3)

Tax rate 14.7% 14.7% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8%

NOPAT 124.2 139.9 157.6 164.9 178.0 192.0 205.9 220.8 235.6 248.9 261.7

D&A 39.3 43.2 43.2 45.8 48.5 51.4 55.1 58.4 61.6 64.3 66.9

Change in working capital (91.8) (50.5) (49.9) (43.0) (41.0) (39.0) (38.0) (37.0) (35.0) (35.0) (34.0)

Operating cash flow 71.8 132.6 150.9 167.7 185.5 204.4 223.0 242.2 262.1 278.2 294.6

Capex (55.0) (50.0) (50.0) (45.0) (48.0) (45.0) (45.0) (45.0) (46.0) (46.0) (46.0)

as % of sales 6.0% 5.0% 4.6% 3.9% 3.9% 3.5% 3.3% 3.1% 3.0% 3.1% 2.7%

as % of D&A 139.8% 115.8% 115.8% 98.3% 98.9% 87.5% 81.7% 77.1% 74.7% 71.5% 68.7%

Free cash flow 16.8 82.6 100.9 122.7 137.5 159.4 178.0 197.2 216.1 232.2 248.6Source: Deutsche Bank estimates



Figure 23: Bulgari DCF model – conclusions (Euro)

Sum of Present values 3187.0

NFP 2005E (65.8)

less: Other funds & minorities (21.9)

Equity value 3099.2

N. shares 295.9

Fair value 10.5Source: Deutsche Bank

Sensitivity analysis

Figure 24: Estimated mid-term group sales growth in function of Watch sales growth Watch sales growth assumption 7.0% 6.0% 5.0% 4.3% 3.0% 2.0% 1.0% 0.0%

Estimated group sales growth 9.6% 9.3% 9.1% 8.9% 8.5% 8.2% 7.9% 7.6%Source: Deutsche Bank

Figure 25: DCF sensitivity analysis to exit Ebit margin and sales growth Mid-term CAGR (2008-2015E)

Exit EBIT Margin 3.5% 4.5% 5.5% 6.5%

17.4% 8.4 9.1 9.8 10.2

17.9% 8.6 9.4 10.2 10.6

18.4% 8.7 9.7 10.5 10.9

18.9% 9.2 10 10.8 11.2

19.4% 9.5 10.3 11.1 11.5Source: Deutsche Bank

We also run a sensitivity analysis in relation to different assumptions of perpetuity rate and WACC.

Figure 26: DCF sensitivity analysis to discount rate and terminal growth rate discount rate

Terminal growth rate 7.0% 7.5% 8.0%

1.0% 10.1 9.2 8.5

1.5% 10.8 9.8 8.9

2.0% 11.5 10.4 9.4

2.5% 12.5 11.1 10.0

3.0% 13.7 12.0 10.7Source: Deutsche Bank

Shareholders value creation

Bulgari has been creating value since 1995, as reflected by a ROCE exceeding the WACC. This indicates that all initiatives undertaken by Bulgari have been creating value, despite a short-term dilutive impact, including the hotels business, where capital invested was in any case limited. We also expect the accessories strategy to create value, on the back of limited requirements for invested capital and strong margins potential of the products.



Figure 27: Bulgari ROCE (%) Figure 28: Bulgari value creation and EVA spread (%)

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Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data

Bulgari uses cash in a shareholder friendly manner Bulgari has been investing its cash flows in the expansion of its brand, and capex has more than tripled since 1995 to fund product diversification and distribution expansion. Only in the 1998-2001 period was FCF generation negative, first because of aggressive investments, and second because of deteriorating NWC on the back of sales weakness in 2001. Bulgari undertook major efforts on NWC in 2002 and 2003 that enabled the company to reduce the rotation considerably (from 257 days in 2001 to 203 days in 2003). As of today, we expect that the group will control its working capital expansion, 2005 being an exception given that Bulgari is increasing its high-end jewellery and is extending its SKUs in Accessories.

Bulgari is also using cash to increase its payout ratio, which moved to c.60% in 2004 from 35.4% in 2003. Management is seeking to keep this payout ratio stable in the mid term. As a result, dividends are to increase reaching Euro 0.32 in 2007E from Euro 0.22 in 2004, which underlines a dividend yield of c.3% p.a.

Figure 29: Bulgari’s gearing ratio Figure 30: Bulgari’s dividend policy

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E 2006E 2007E

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Dividends Payout ra tio

Source: Deutsche Bank estimates & Company data s Source: Deutsche Bank estimates & Company data



Sector dynamics and returns Are sector dynamics diluting Bulgari’s returns?

The luxury goods market is increasingly competitive and, in order to gain market shares, companies increasingly invest in advertising, product innovation and space growth.

These are relatively high capital-intensive activities which would trigger a dilution in profitability and returns, especially if these investments do not generate the expected fall-back in terms of sales growth rates. Companies invest more to drive acceleration in the top line, which produces operational gearing that allows additional investments.

However, we show that Bulgari’s strategy to expand the selling space, and to aggressively pursue product innovation and A&P, has not translated into diluting profitability and returns, and we do not expect these consequences for the future either. A number of factors have helped in more than offsetting this dilutive impact:

In our view, Bulgari’s well-preserved brand equity and successful products make it well positioned to continue to gain market share;

Sales growth has been reasonable in the 2001-2004 period, despite a geo-political and macroeconomic environment which only started to improve in 2004, as a result of:

The impact of space growth, A&P and product innovation

Sector dynamics especially in jewellery (growth of branded jewellery vs. unbranded), accessories and fragrances See Section “Product Mix” on page 22

Vertical integration and cost optimisation have reduced and are reducing the break-even point. See Sections “A more efficient Supply Chain” and “Margins” on pages 35 and 41

In a year like 2005 when Bulgari has been investing aggressively, higher capital employed (fixed assets and working capital) is an inevitable consequence, which should be absorbed by an acceleration of sales growth and a deceleration of expenditures in the subsequent years.

In this section we briefly illustrate Bulgari’s main drivers for its sales growth: space growth, product innovation, and A&P.

Product innovation

Innovation is part of Bulgari’s heritage. Since the early days, when no jeweller was using product innovation, Bulgari was offering breakthrough products (tubogas in 1940, coloured clips in 1950). More recently, in a given year, Bulgari used to launch major products in only one of the main product categories, ie in Watches or in Jewellery. Recently, Bulgari has accelerated its speed to market and in the past two years the company has simultaneously launched major product innovations in both Watches and Jewellery.

Product innovation is increasingly important, as new products or line extensions not only boost sales but also strengthen the brand image, create traffic in stores and refresh customers’ interest in existing products. Indeed, the life cycle of products has shortened and luxury companies have to update their product range in order to keep customers interested in the brand. Limited editions have a role in reinterpreting the heritage product in more contemporary ways. Also, product innovation helps increase selling prices. As an example, according to Swiss watch exports, watch sales growth comes mainly from price rather than volume, and innovation leads to price increases.

Increasing competition in

the industry

Intensifying new products

launches



In 2004, Bulgari launched its Astrale high-end jewellery collection and its new Ergon watch. In 2005, the innovation rate was even higher as Bulgari launched four new jewellery collections (Cabochon, Cicladi, Sapphire Flower and the Diamond project) and three new watch models (Assioma, Ipno and Ergon Chrono). Of these, the major launches were Sapphire, Assioma and Aqua. We should expect a number of novelties also from the Basel 2006 April Exhibition, and in particular we believe that Bulgari will want to address those segments where it is under-represented (ladies watches, for instance).

Figure 31: Major product launches by division at Bulgari since 2000 Jewellery Watches Perfumes Accessories

2000 Perle Rettangolo Blv for women Logomania

Tubini New collections

Caramelle

2001 Lucea Diagono Blv for Men Logomania II

extra-large Bulgari-Bulgari New collections

2002 Bzero1 Blv St Valentine edition Bzero1

Ritual limited edition

2003 Allegra Lucea Omnia Ascot

High jewellery

2004 Astrale Ergon

Marryme Octo (Genta)

Bulgari-Bulgari Tourbillon

2005 Cabochon Assioma Aqua Cruise

Cicladi Ipno Spring

Sapphire Flower

Diamond project Source: Company data

Bulgari also introduces one-off products or “product animation”, such as Astrale colour, Ladies diamond Ergon chrono, carbongold, pink gold St. Valentine products, and omnia crystalline.

In our view, sales of new products could account for c.20% of total sales in the mid term from less than 15% currently. Hence, with our forecast of total sales growing 8% p.a. in the next three years, the implied sales growth of new products is in excess of 20%, while existing products would post a <5% increase in sales.

Advertising

The luxury goods market is increasingly competitive and advertising will continue to play a strategic role. Luxury companies spend, on average, c.6% of their sales to promote their brands, while A&P for Bulgari has averaged 11.6% of sales in 1995-2004. Part of the explanation is linked to Bulgari’s relatively smaller scale. In recent years, Bulgari has used A&P more flexibly, reducing it in weak economic conditions (2002), but upgrading it as demand conditions started to recover. A&P range from pure advertising product to PR events (product placements in movies, exhibitions or star partnerships). We believe that Bulgari will stabilise its A&P spend around the luxury sector’s average in the mid term.

The key role of A&P



Figure 32: A&P expenses as % of sales for main brands Figure 33: Bulgari sales vs. adspend (Euro m) in 2004

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Bulgari Hermes Tiffany Gucc i brand LV brand

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Source: Deutsche Bank estimates & Company data s Source: Deutsche Bank estimates & Company data

The Bulgari Hotels is also part of this branding strategy. Bulgari set up a JV with Ritz Carlton to open a limited number of luxury hotels. Bulgari Hotels & Resorts opened its first hotel in Milan in 2004 and is to open a second resort in Bali in 2006 (in franchising). Unique locations, contemporary design and superior service are the key elements destined to characterise the Bulgari brand. The rationale is to improve Bulgari’s luxury image and to increase the visibility of Bulgari’s brand in premium luxury markets. We note that Bulgari has invested a total of below Euro 10m in the Milan Hotel since the project started in 2000.

Space growth

Bulgari sells the bulk of its Watches and Perfumes through third party retailers, while Jewellery and Accessories are mainly sold in Bulgari mono-brand stores.

Bulgari has more than quadrupled its distribution network from 44 stores in 1995 to 194 stores (107 DOS, 49 franchised stores and 38 travel retail) in 2004. We estimate that at the moment retail sales account for c.50% of total sales. Given the estimated product mix (focus on Jewellery and Accessories), Bulgari is expected to increase the share of retail sales. On the other hand, Bulgari is now selling more watches in its stores than in the past, while accessories are also distributed through third parties (department stores).

Figure 34: Bulgari’s retail network Figure 35: Estimated level of DOS sales for main brands

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Direc tly owned stores Franc hises + wholesa le

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LouisVuitton

Tiffany Hermes Bulgari Ric hemont Burberry Swatch

Source: Company data Source: Company data, estimates

A comparison with the other luxury players would suggest that Bulgari has room for further development. New space addition (store openings and store refurbishments) could average c.5% p.a. in the next few years.

The Hotel business is an

indirect communication

platform

Lower pace of space growth

vs. past



The Accessories Stores project In addition, the Accessories dedicated stores will reinforce this trend. The first store fully dedicated to Accessories was opened at the end of November 2005 in Osaka. This new 120sqm store will adjoin the 120sqm Jewellery and Watches store opened by the brand in September 2005. A store in Tokyo has followed. Results from these stores will influence Bulgari’s decision as to the opening of other stores in cities like Milan, Rome, Florence, Paris. Bulgari may open 7-10 locations by end 2006. Stores would be some 150sqm large and would require capex below Euro 1m per store, delivering in turn average sales per store of up to Euro 2-3 m, we believe.

Figure 36: Bulgari organic sales growth and store

growth (%)

Figure 37: DOS network of main luxury brands

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Store growth Organic sa les growth exc luding FX

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Bulgari Hermes Tiffany Cartier Guc c i LV brand

Source: Company data Source: Company data



Product mix Summary

Sales growth should be driven by a dynamic luxury environment, space growth, innovation and market share gains. We believe sales growth in Watches will be below the group average, while Accessories will outpace it to represent more than 10% of total sales by 2008.

Bulgari is favourably positioned in Jewellery, and the Jewellery segment is outgrowing the luxury industry. Bulgari should grow at c8% on the back of focus on product and space growth of c.5% p.a.

In Watches, Bulgari’s efforts to reposition the brand away from its design-oriented, fashion connotation (acquisition of two prestige brands in 2000, upstream integration in production and fight of the grey market since H2 2004) are only now starting to deliver some benefits. However, concerns remain regarding Bulgari’s positioning and we expect organic watch sales growth to average 4% p.a. mainly driven by new product launches.

In Fragrances, in addition to keeping its classical products updated with newer versions and flankers, Bulgari launched the new fragrance Aqva in Q1 2005. We expect perfume sales to grow steadily c.8-9% p.a., in line with the industry’s average.

Accessories could post strong double-digit sales growth driven by the enlargement of the product offering and space growth, and should account for more than 10% of sales by 2008. Bulgari’s accessories are almost exclusively sold through DOS. Bulgari will open dedicated stores in selected cities provided the Osaka and Tokyo tests prove successful.

From a jewellery heritage to product extension

From its heritage as a pure jeweller, Bulgari has diversified its product mix over time. For more than 20 years, Bulgari has consolidated its legitimacy in watches and enjoyed strong growth during the 1990s. Further extensions have been made, and we now do not see Bulgari stretching its brand to new product categories.

Figure 38: Product category expansion Category Date Key product lines

Watches 1970s Bulgari-Bulgari, Rettangolo, Solotempo, Diagono, Ergon, Assioma

Perfumes 1993 Eau parfumée, Bvlgari, Black, Blv, Aqva, Omnia

Silk scarves 1997 Seven-fold neckties

Leather goods 1999 Colore, Lettere, Setamania, Logomania, High-end + SS/AW collections

Eyewear 1996 Licensed to Luxottica

Tableware 1998 Licensed to Rosenthal, essentially phasing out

Hotels 2001 JV with Marriott International, first hotel opened in Milan Source: Company data

Bulgari can achieve an

average 8% organic sales

growth in the mid term

Diversification has been a

way of growing sales for

Bulgari



Figure 39: Luxury Goods Companies: Product extension Bulgari Hermes LVMH Gucci Group Richemont Swatch Tod's

Jewellery X X X X X X

Leather Goods X X X X X X

Watches X X X X X X

Ready to Wear X X X X X

Shoes X X X X

Perfume X X X X

Silk X X X X X

Tableware X X X

Eyewear X X X X X X

Writing instruments X X X

Wines & Spirits X

Selective distribution X

Other X X X X Source: Company data

Jewellery: Bulgari to gain market share

Back to core competencies benefiting from favourable industry trends Jewellery is Bulgari’s heritage and this division still accounts for 41% of group sales.

Jewellery business is an estimated USD 60bn industry. Given the fragmented nature of the supply (branded jewellery still represents a small share of the business, c.15%, although it is growing) and the demand trend towards branded jewellery, we believe that there are significant growth opportunities for large players. Luxury groups have the distribution network and financial means to invest in product innovation and in brand equity. Today, Bulgari is the third largest player in the jewellery industry behind Cartier and Tiffany.

Figure 40: Estimated Jewellery sales (Euro m) and as % of group sales in 2004

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Tiffany's Richemont Bulgari LVM H Gucci brand Hermes0%

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Jewellery Sales % of total sales

Source: Deutsche Bank year ended March 2005 for Tiffany’s, Cartier and VanCleef & Arpels (Richemont). LVMH brands Fred, Chaumet and DeBeers JV

Bulgari is refocusing on the jewellery business and is investing mainly in product innovation and vertical integration/re-engineering of the supply chain. As discussed later in the report, the latter allows Bulgari greater flexibility in terms of new products. This represents a competitive advantage in an industry which is starting to require aggressive product innovation – through its integrated supply-chain, Bulgari can minimise both investments, WC requirements and time to market, thus protecting and even enhancing profitability and ROIC.

Returns not necessarily at

risk despite greater

competition within the

industry



Figure 41: Bulgari - Product innovation and Returns

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Towards higher quality products and higher quality points of sale According to a JCK consumer survey, the most important factors (excluding price) when buying jewellery is quality. Figure 42 highlights the meaningful role of customer reception – sales force, service, reputation and store presentation influence clients’ behaviour. Advertising seems to be of less importance (c.15% of people saying they pay attention to ads) though we believe that adspend reinforces the brand image (c.15% of people pay attention to word of mouth, c.25% to brand name and c.60% to reputation).

Figure 42: Most important factors (excluding price) when buying Jewellery

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Quality

Sa lesforc e

Servic e

Reputa tion

Store presenta tion

Brand name

Advertising

Word of mouth

fashionable

Source: JCK consumer survey

In addition to high quality products, customers look for professional advice and personalised service. Customers tend to be more knowledgeable as they seek information in order to make educated decisions. Sales force is thus crucial in counselling clients. Customers also want to live a special experience when buying jewellery. Stores have to reflect the brand image and create a unique atmosphere. Although adspend is critical for the brand image, local marketing is vital in attracting new customers and creating traffic in stores.

Brand equity in its different

nuances as key

differentiating factor



Women Self-purchasers Gifters, generally men buying jewellery for special occasions, have long been the main customers for jewellery companies. There is now a growing market of self-purchasers and luxury companies are now focusing on discretionary spending products. DeBeers launched its "Women of the World Raise Your Right Hand" campaign in September 2003 that focussed on right-hand rings, dedicated to women consumers who are increasing in number as a result of socio-demographic changes (single women, divorces etc.).

The self-purchase jewel tends to be less expensive. Bulgari has been increasingly dedicating product lines to this segment. From the Bzero1 ring launched in 2002, Bulgari has expanded its offer – in 2005 it introduced the Cabochon and the Cicladi collections.

Figure 43: Bulgari jewels: Bzero1 rings – Cabochon ring – Cicladi ring

Source: Bulgari

Diamond jewellery Bulgari’s objective is to further develop the growing, high-end diamond jewellery business. The luxury Astrale collection was launched in St Petersburg in 2004 and the Diamond project (a collection of diamond jewellery with prices ranging from USD 5,000 to USD 5m) was launched in September 2005. This diamond project has been developed with the diamond producer joint-venture partner LLD Diamonds (Leviev).

The weight of diamond jewellery has increased and, as a reference, jewellery containing diamonds now represent more than 40% of Tiffany jewellery sales.

Figure 44: Diamond jewels: engagement rings, an Astrale necklace and a diamond ring

Source: Bulgari



Watches: any real reason for concern?

Bulgari’s watch business Bulgari entered the watch business in the early 1970s and today Watches represent 31% of total sales – though watch sales peaked at 45% of total sales in the late 1990s on the back of Bulgari’s introduction of new models and of the growing network of third party distributors (the primary distribution channel in the watch industry).

Figure 45: Bulgari sales in the Watch division (Euro m) Figure 46: Bulgari number of watch wholesalers

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The watch market is branded (98% of watch sales are branded) and competition is fierce. The three biggest players are Richemont, Swatch and the private company Rolex. With respect to these, and other more specialised players, Bulgari lacks scale.

Figure 47: Watch sales of luxury groups in 2004 (Euro m)

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Figure 48: Estimated sales of main watch brands (Euro m) Rolex Independent 2000

Cartier Richemont 770

Omega Swatch Group 683

Tag Heuer LVMH 400

Chopard Independent 390

Swatch brand Swatch Group 390

Patek Phillipe Independent 390

Bulgari Bulgari 256

Tissot Swatch Group 210

Longines Swatch Group 200

Rado Swatch Group 200

Franck Mueller Independent 200

Jeager-Lecoultre Richemont 170

Beaume et Mercier Richemont 130

IWC Richemont 130

Breguet Swatch Group 100

Vacheron Constantin Richemont 90

Blancpain Swatch Group 62Source: Company data, estimates , we used a EUR/CHF rate of 0.64 for Swiss companies

Watch industry trends Watches are the most cyclical luxury goods and the watch business is very competitive. We believe that brands positioned in the highly technical segment should keep seeing more dynamic growth than design-oriented brands, as in the recent past.

Figure 49 and Figure 50 illustrate watch sales growth of Bulgari vs. Swatch Group (and Swatch Group’s different watches division: Upper brands, Middle brands and Lower brands).

Figure 49: Bulgari watch sales growth vs. Swatch Group

Figure 50: Bulgari watch sales growth vs. Swatch watch

categories

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Swatch Middle brands Swatc h Lower brands


Technical watches

outperforming design

watches



Figure 51: YoY % change in finished watches by price

category (%)

Figure 52: : YoY % change in finished watches by value

and by volume (%)

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We realise that the main driver of the watch category is price increase. Indeed, volume growth decreased 4.3% p.a. CAGR in 2000-2004 while value growth averaged 2.3% p.a. CAGR. The increase in value is mainly due to innovation, ie, the fact that new products with more technical content can afford their selling prices to be increased.

Bulgari has repositioned its brand Innovation is possibly more critical in the watch business than in the rest of the luxury industry. The bulk of Bulgari watches are still more design oriented. Recent major launches were the Ergon and the Assioma models, both design oriented watches.

Bulgari is also looking at increasing its offering in Lady Watches. The Lady Watch market is very dynamic and presents significant growth prospects. We believe that Bulgari is well positioned to benefit from this trend as women are more interested in jewellery watches. Bulgari has created bijoux watches dedicated to modern women: the Trika, the Ovale, the Lucea and the Bzero1 watches have been joined by the Ipno model in 2005.

Since the acquisition of two prestigious watch brands in 2000 (Gerald Genta and Daniel Roth), the company has focused on more complicated watches. Gerald Genta and Daniel Roth are cult watches, created by independent watchmakers, highly regarded by connoisseurs. On the back of the expertise acquired through these two small brands, Bulgari has ventured into the Grandes Complications world with its Bulgari-Bulgari Tourbillon, the Anfiteatro Tourbillon and the Minute Repeater. However, prestigious mechanical models account for less than 10% of Bulgari Watch division’s sales.

The bulk of Bulgari watches are priced between Euro 1,000 and Euro 15,000, and only c.10% of the models are priced over Euro 15,000, while the most expensive Bulgari watch costs more than Euro 200,000. The entry level price at Daniel Roth is more than Euro 10,000.



Figure 53: Major product launches in Watches since 2000 Watches Key characteristics

2000 Rettangolo Design

2001 Diagono Design

Extra-large Bulgari-Bulgari Design

2002 Bzero1 Fashion accessory

2003 Lucea Precious accessory for ladies

2004 Ergon Design

Octo (Genta)

Bulgari-Bulgari Tourbillon Technical

2005 Assioma Design

Ipno Design, fashion accessory for ladies Source: Company data

The key role of distribution rationalisation Bulgari has been fighting the grey market since the end of 2004, as parallel sales started to become really evident, especially in the Far East (watch sales in Q3 2004 were up 23% YoY).

Bulgari has been restraining sales to watch retailers and only marginally reducing the number of wholesale doors. Bulgari’s strategy came at the expense of sales, and this “clean-up” may continue during 2006 as the problem was even larger than the company’s own expectations. This measure has strengthened the brand so that we are not concerned about the brand image. In addition, this strategy is clearly constructive in the long term and should grant Bulgari pricing power. On the other hand, sales trends in Bulgari DOS are said to be growing double-digit, thanks also to the good success of the newly launched Assioma. Assioma was introduced in the stores in September-October and has already been reassorted.

Other companies have rationalised or are dealing with parallel sales, including Cartier (which has over time reduced the number of third party retailers) and Chanel (which recently stated that they will restrict deliveries to third parties).

Figure 54: Bulgari Group – Watches quarterly sales (YoY % change)

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1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

E

Source: Company Data

Fighting the grey market



Accessories should deliver the highest growth rate

The company entered the Accessories business in 1997 (during 1997-1999, Bulgari was only selling small prototype collections exclusively in DOS) and sales have risen to 7% of total sales in 2004, or from Euro 10m in 1998 to more than Euro 60m in 2004.

Compared to other luxury groups, the weight of accessories is still low at Bulgari and management has made this product category a priority. The company is expecting Accessories to account for 10% of group sales in the coming years, which would underline, according to our assumptions, a 15% growth rate. Growth should be sustained by dynamic demand trends, from which most luxury players are profiting.

Figure 55: Bulgari sales of Accessories (Euro m) Figure 56: Accessories sales as % of total sales, 2004

0

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40

50

60

70

1998 1999 2000 2001 2002 2003 2004

0%

1%

2%

3%

4%

5%

6%

7%

Accessories as % of sales

0%

10%

20%

30%

40%

50%

60%

Bulg

ari

Burb

erry

Gucc i G

roup

Hermes

LVM

H

Richemont

Swatc

h

Tod's*


Our 15% organic sales growth assumption in the mid-term reflects:

Product offering: The number of SKUs in Accessories is still limited at Bulgari, although broadly aligned with the offering of some of its more niche competitors like Bottega Veneta. Bulgari is selling handbags, belts, wallets, diaries, as well as silk ties and scarves. Management will increase SKUs and the focus would be on the Euro 2,000-7,000 price range in particular. In addition to new collections, Bulgari will launch new lines.

Accessory dedicated stores: Accessories sales will be supported by space growth through the opening of dedicated stores in selected cities. Accessories are mainly sold trough DOS and existing DOS are not spacious enough to present the entire collections. Also, dedicated stores would prevent customers from feeling intimidated at entering a jewellery shop to buy small leather goods. New dedicated accessories stores should grant Bulgari with additional space to present the whole range of accessories. Bulgari may open 7-10 locations by end 2006. Stores would be about 150sqm in size and would require capex below Euro 1m per store.

The recent success of other players: Burberry has increased the contribution of Accessories to total sales from 22% in 2000 to 28% in 2004. At Tod’s, the percentage of sales derived from Leather goods grew from 11% in 2000 to 20% in 2004.



Figure 57: Main luxury leather brands Brand Owner Activities Stores

Fendi LVMH Leather - Shoes – RTW 118

Loewe LVMH Leather c.55

Celine LVMH Leather – RTW 112

Dior LVMH Leather – Accessories –RTW 184

YSL PPR Leather - Shoes - RTW - Other 60

Bottega Veneta PPR Leather - Shoes - RTW -Other 65

Cartier Richemont Leather – Watches - Jewellery 228

Lancel Richemont Leather – Accessories 122

Dunhill Richemont Leather - Accessories - Watches - RTW 158

Chloe Richemont Leather - Accessories – RTW - Shoes 14

Furla Private Leather - Shoes - Jewellery - Watches 264

Longchamps Private Leather – Accessories 400+

Mulberry UK Listed Leather goods c.50Source: Company data, Deutsche Bank estimates

Fragrances

We expect the fragrance business to continue to benefit from new products on average every other year (Aqua, the latest introduction, was launched in Q1 2005). In the meantime, previously launched fragrances are being established as highly recognisable classics, and the company continues to update them through new packages, new flankers, etc.

We expect the recent acquisition of the US distributor to provide additional scale to Bulgari’s perfumes business.

Figure 58: Bulgari: fragrances sales trend (Euro m)

0

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120

140

160

180

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Sales % of sales % yoy change




Geographical mix Summary

The geographical breakdown of Bulgari sales is broadly balanced across all regions. However, we note that the weight of the US on total sales has reduced from 24% in 1998 to 15% in 2004 and Asia (excl. Japan) represents 18% of annual sales.

In our view, Bulgari is still under-represented in the US and in Asia excluding Japan, where the luxury goods market presents significant growth opportunities.

Figure 59: Sales by regions in 2004 for main luxury groups

0%

20%

40%

60%

80%

100%

120%

Bulgari Hermes LVMH Ric hemont

Europe Americ a Japan Far East Other


Recovery in the US Bulgari suffered in 2001 in the US market (-17% in FY01) and the recovery started in 2003 (+9% in FY03, +22% in FY04 and +28% in 1H05). We believe that this trend is likely to slow in the short term. However, Bulgari is taking a number of initiatives to refocus on the US market in the mid term including space growth, the refurbishment of the New York 5th Avenue flagship, the acquisition of a fragrances distributor in the US, and the strengthening of the diamond, and especially bridal, collection. There is considerable potential for Bulgari to improve its penetration into the US market, although we understand the company has re-considered, at least for the moment, the idea of opening stores in the secondary cities.



Figure 60: Distribution network in the US (number of stores) in 2004

0

10

20

30

40

50

60

70

80

90

Bulgari Cartier* Tiffany Hermes LV brand Burberry

Source: Company data, estimates, *fiscal year ended March 2005

Growth opportunities in Asia excluding Japan Bulgari is well represented in Asia excluding Japan as 47 stores are located in this region. We believe that the development of the accessories line and of dedicated stores could facilitate expansion in this area.

Bulgari also runs two stores in China. Bulgari just obtained authorisation from the Chinese authorities to register the company name Bulgari Commercial (Shanghai) Co. Ltd. which is the first step in obtaining the authorisations required by the local authorities for the registration in China of new companies whose capital is wholly owned by foreigners. The group intends to manage the stores in China directly.

Figure 61: Distribution network in China in 2004 for main luxury brands

0

5

10

15

20

25

30

35

Bulgari Cartier* Tiffany Hermes LV brand Burberry

Source: Company data, estimates, *fiscal year ended March 2005



In addition, thanks to its widespread network in Asia, Bulgari should capture Chinese tourists who visit countries in the region. Chinese tourists are officially only allowed to travel to countries which have obtained Approved Destination Status Agreement (ADS). As of May 2004, 28 countries had received ADS. The most popular long-haul destinations for Chinese travellers are Japan, Thailand, Korea, Australia, New Zealand, Germany and France. Chinese citizens travelling outside the country reached 28 million in 2004 and it is forecast that over 100 million Chinese will travel abroad by 2020, becoming one of the world’s biggest tourism generators. Price differentials (as well as the revaluation of the Chinese currency) should make it attractive for tourists to buy luxury products abroad. Prices in mainland China are commonly some 30% higher than in Paris and 10-15% higher than in Hong Kong. Asian tourist hubs such as Hong Kong will benefit from this trend.

Japan Even in its most difficult years, Japan has remained a key market for Bulgari, which generates some 25-26% of its sales in the country. As the economic situation improves in Japan, we expect luxury consumption to benefit from it. Bulgari’s focus on the bridal collection, as well as the expansion of accessories, should also represent drivers for its growth in Japan.

Figure 62: Importance of Japan for luxury companies (Japanese sales as % of total)

0%

5%

10%

15%

20%

25%

30%

35%

Bulgari Burberry Hermes LVMH Richemont Swatch Average

2004 2005E 2006E

Source: Company data, Deutsche Bank



A more efficient supply chain Towards higher in-house production

Bulgari appears as one of the least vertically integrated companies compared to its luxury peers. Since 2003, Bulgari has accelerated its upstream integration in order to achieve a more efficient supply chain. We believe an integrated supply chain provides the following benefits:

Financial benefits as production integration should improve the gross margin.

We believe that an integrated supply chain, given that it accelerates time-to-market, could also enhance the ability to innovate. The time-to-market for jewels should as an example shorten from one year previously to below one year.

It reinforces control over the brand equity and should enhance Bulgari’s image as a luxury manufacturer.

Internal know-how and execution should secure supply and preserve product quality.

Figure 63: Estimated internal production and EBIT margin for luxury brands in 2004 Brands In-house prod EBIT margin Comments

Louis Vuitton brand 100% 46% Just launched in-house eyewear production

Hermes group 80% 25% RTW (20% of sales) is outsourced

Tiffany 63% 13.4% Mid-term target is 75% in-house production

Cartier (Richemont) c.70% 22.1% Estimated mid-term EBIT margin of 29%

Omega (Swatch) 100% c.29%

Burberry c.23% 20% Mainly outerwear produced in-house in UK

Bulgari c.30% 16% 10% of jewellery / 100% of Watches in-house Source: Deutsche Bank estimates & Company data

In Watches, Bulgari was assembling 100% of its production in-house though that corresponds to the minimal requirements for a watch to be Swiss (assembly and inspection in Switzerland, and at least 50% of Swiss components). In jewellery, prior to acquiring Crova, Bulgari was producing 10% in-house, in its own atelier, and working close to a number of Italian subcontractors including Crova.

Figure 64: Bulgari’s production organisation before 2004 Jewellery Watches Perfumes Accessories Eyewear

Product conception Internal Internal Internal Internal Internal

Design Prototyping Internal Internal Internal Internal Internal in coop. with Luxottica

Purchase of raw material Partially internal Internal Internal External Licensed to Luxottica

Internal manufacturing 10% 100% assembling Zero Zero Licensed to Luxottica

Quality control Internal Internal Internal Internal Licensed to Luxottica

Outsourcing 90% components/movements 100% 100% 100% Source: Company data

Bulgari is one of the least

integrated luxury companies

Hermes, Louis Vuitton,

Cartier, and Swatch produce

mainly in-house



Figure 65: Bulgari’s production organisation in the mid term Jewellery Watches Perfumes Accessories Eyewear

Product conception Internal Internal Internal Internal Internal

Design Prototyping Internal Internal Internal Internal Internal (in coop. with Luxottica)

Purchase of raw material Partially internal (j/v with leviev)

Internal Internal Partly internal for Leather Licensed to Luxottica

Internal manufacturing 70% (expansion of Atelier for high jewellery, Crova for basic)

100% assembling

high value parts, critical components (dials, bracelets, other?)

Zero Partly internal for Leather Licensed to Luxottica

Quality Control Internal Internal Internal Internal Licensed to Luxottica

Outsourcing 30 Only basic components and movements

100% 100% 100%


Figure 66: Bulgari main vertical integration operations Company Year Target Business Comments

Bulgari 2005 Pacini Production of leather handmade handbags 100% stake

Bulgari 2005 Prestige d’Or Production of high-end watches straps 51% stake

Bulgari 2005 Cadrans Production of high-end watches components 50% stake

Bulgari 2004 Crova Medium/high end jewellery manufacturer 100% (from 50%)

Bulgari 2004 Leviev Group Diamond sourcing 50-50 JV

Bulgari 2002 Marriot International First hotel in Milan 50-50 JV

Bulgari 2002 Crova Medium/high end jewellery manufacturer 50% stake

Bulgari 2000 Daniel Roth High-end watch manufacturer 100% stake

Bulgari 2000 Gerald Genta High-end watch manufacturer 100% stake Source: Company data

Figure 67: Main vertical integration operations in the luxury industry Tiffany 2004 Tahera Diamond sourcing Business agreement

Hermes 2004 internal 3 new production units Total = 27

LVMH 2004 Glenmorangie Wines & Spirits: Whisky 100% stake

Tiffany 2004 Aber Diamond sourcing Sold stake

Tiffany 2003 internal Laurelton Diamonds cutting and polishing center -

Richemont 2003 VC & Arpels Manufacturer and retailer of high-end jewellery 100% from 80%

Aber 2003 Harry Winston Jewellery

Hermes 2001 Leica Camera Cameras 31.5% stake

LVMH 2001 RossiModa Shoe manufacturer minority stake

LVMH 2001 DeBeers Diamond jewellery retail 50-50 JV

Gucci 2001 DiModolo Watch designer and manufacturer 100% stake

Gucci 2001 Caravel Skin tannery (Leather goods, Shoes, Watches) Majority stake

Gucci 2001 Regain Men Footwear manufacturer 70% stake

Hermes 1999 JP Gaultier Haute couture 35% stake

Tiffany 1999 Aber Diamond sourcing 13.9% stake Source: Deutsche Bank estimates & Company data



Jewellery

Bulgari has been relying on third parties for the bulk of its production and the company has established long-term relationships with its subcontractors. The objective is to bring this expertise in-house and to produce internally more than two-thirds of its jewellery products.

Figure 68: Bulgari’s integration process in the Jewellery division Previously Afterwards Comments

Product Conception Internal Internal

Design Prototyping Internal Internal

Purchase of raw material Barely internal Partially internal Now reinforced with 50% JV with Lev Leviev

Internal manufacturing 10% 70% Expansion of Bulgari atelier (High jewellery) and Crova acquisition

Quality Control Internal Internal

Outsourcing 90% of production 30% of production Want to keep a certain degree of flexibility Source: Company data

Crova Crova is one of the main Italian jewellery manufacturers and masters all different production stages. The acquisition provided Bulgari with increased production capacity and expertise in jewellery manufacturing. Crova operated in the basic and medium-end jewellery segments and Bulgari has been leveraging its manufacturing expertise for the internal production of fine jewels.

Joint Venture with Lev Leviev: internalisation of diamonds supply In May 2004, Bulgari signed an agreement with Lev Leviev, one of the world’s major producers of cut diamonds. Leviev is the only diamond group in the world with controls over the whole diamond value chain starting from rough diamond production and distribution to diamond cutting and polishing. The Leviev group is the third world’s largest producer of uncut diamonds but is the biggest producer of cut diamonds. The company runs its own diamond mines in Angola, Namibia, and Russia among others and has cutting facilities in Israel, Russia, the US and other countries.

Figure 69: World rough diamond supply in 2004

Rank Company Carats

(m)

Value

(USD m)

Market share

(by carats)

Market share

(by value)

1 DeBeers 58.9 5,695 37.8% 50.8%

2 Alrosa 23.5 1,470 15.1% 13.1%

3 Leviev 5.5 1,000 3.5% 8.9%

4 Rio Tinto 25.2 640 16.2% 5.7%

5 BHP Billiton 4.1 490 2.6% 4.4%

Others 38.5 1,905 24.7% 17.0%

TOTAL 155.7 11,200 100.0% 100.0%Source: Rapaport

This partnership grants access to premium diamonds including rare, fancy colourful stones from Leviev’s mines that Bulgari will use for producing its high-end jewellery collections.

The Bulgari-Leviev joint venture will be a competitive advantage. Indeed, not only Bulgari will improve its gross margin (as the elimination of several intermediaries should reduce raw material costs) but will also secure the quality of its jewels. Direct sourcing allows Bulgari to overcome the rarity of high quality diamonds.

This JV also permits to diversify the diamond supply from DeBeers, the world’s largest producer of rough diamonds whose domination (De Beers deals c.2/3rd of global supply through its rough diamond selling arm, the Diamond Trading Company) is reflected into de

Leviev’s market share by

value (8.9%) is higher than

market share by carats

(3.5%)

Securing supply and

controlling input costs



facto control of diamond prices as other diamond producers simply match the price set by DeBeers. In 2004, DeBeers increased prices three times and diamond prices were up 14%. Furthermore, in the first six months of 2005, the DTC had increased prices c.8% and this trend is expected to continue.

The diamond pipeline is split up between numerous intermediaries, so the diamond selling price is determined by the cost of the rough diamond, cutting cost, financial carrying cost, and cost of the polished diamond, plus the retail mark-up.

Vertical integration eliminates the intermediaries and there is much value to get back from successive mark-ups. The diamond sourcing agreement with Leviev signed in 2004 should, in addition to strengthening the brand’s credibility, optimise the cost of raw materials.

Figure 70: Value creation in the jewellery business (Euro bn)

0

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50

60

Roughproduc tion

Mining sa les Va lue ofpolished

diamonds

Cost ofjewellery

produc tion

Reta il sa les ofdiamondjewellery

Source: Tacy Consultants by Chaim Even-Zohar, THE 2002 DIAMOND PIPELINE, May 01 2003,

Tiffany’s example Bulgari is replicating the choices made by Tiffany’s, which at the beginning of the 1990s was only producing 25% of its jewellery internally but has increased its in-house production through the building of production units and the acquisition of small independent jewellers. Tiffany today runs three facilities and is building a fourth one, producing c.60% of its jewellery internally, with a mid-term target of 75%. In addition, for high-quality rough diamonds, Tiffany has a direct-sourcing relationships with Aber Resources and Tahera.



Figure 71: Tiffany & Co gross margin evolution (%) year ended March

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Deutsche Bank estimates & Company data

Watches

In the Watch industry, upstream integration began in the 1970s and 1980s in Switzerland when industry know-how was bought and pooled to save the industry. This resulted in the development of a vertical production structure where independent watchmakers produce their products almost from start to finish. Examples of well-known integrated watch producers include Zenith (LVMH), Breguet (Swatch), Jeager-Lecoultre (Richemont), Patek Philippe, Rolex and Audemars Piguet.

In the late 1990s, further consolidation of the watch industry led to the emergence of two main leading groups ie Richemont and Swatch, as luxury groups bought technical know-how and in-house expertise. Acquisitions mainly occurred in the upper segments as bigger groups integrated smaller brands that did not have the financial means to expand.

Bulgari’s integration of watch production continues Bulgari Time was founded in the early 1980s in Switzerland and all Bulgari watches are manufactured in its production units in Neuchâtel.

Bulgari had already made a first step towards the prestige watch segment buying Daniel Roth and Gerald Genta in 2000 and their partner - the Manufacture de Haute Horlogerie.

This transaction granted Bulgari with additional expertise, in particular in the production of complicated timekeepers, and to take advantage of significant manufacturing and distribution synergies. Daniel Roth and Gerald Genta have the particularity to produce their own complicated movements. Movements are considered as the heart of watches and give most expensive watches their value. Following these acquisitions, Bulgari presented its first “Grandes Complications” timepieces entirely conceived and produced by the Group.

Bulgari has decided to take new steps towards the integration of its watch activities and following delivery problems experienced in complicated calibres, the management intends to produce internally its movements with the objective to only outsource basic components and basic movements. Recently, the Swatch Group announced that it will stop supplying to other watchmakers (including Bulgari) with key components. The restrictions over the supply of kits and movements will start in 2010. Bulgari could take this opportunity to further integrate.

Luxury groups bought

prestigious watchmakers for

their expertise

Grande Complication

expertise



Figure 72: Bulgari’s integration process in the Watch division Previously Afterwards Comments



Purchase of raw material Internal Internal

Internal manufacturing

100% assembling

100% assembling

Complicated movements

High value components

100% stake in Daniel Roth and Gerald Genta

50% stake in Cadrans Design

51% stake in Prestige d’Or (high-end watch straps maker)


Outsourcing Components

Movements

Basic components

Basic movements

Will only outsource basic movements and components


Cadrans In 2005, Bulgari acquired 50% in Cadrans Design, a Swiss company leader in the creation and production of complicated and high-value dials for high-end watches. It has been decided that the firm will also supply other high-end watchmakers, hence improving purchasing power.

Prestige d’Or In October 2005, Bulgari signed a 51% stake in the Swiss firm Prestige d’Or, leader in the production of steel and precious metals watch straps for high-end watches. This firm was supplying Bulgari group with watch straps for high-end Bulgari models. The founder has maintained a 49% stake and will continue to head its manufacturing operations.

Accessories

The first two steps of the production pipeline (product conception and prototyping) are managed internally in order to preserve brand equity. 100% of production is outsourced to subcontractors, however, the group intends to bring part of the production in-house.

Bulgari recently acquired 100% of Pacini, a Tuscan firm producing leather and reptile handbags. This company has been renamed Bulgari Accessori and is already planning to hire 35 people on top of 15 current employees. This new division will thus produce internally handbags in order to meet strong underlying demand for Bulgari Accessories.

Depending on the brand strength, Silk and Leather present high gross margins (c.70-80%) and the Accessories business can be very profitable if fully integrated, as shown by the high profitability of Hermes, LV, and Gucci. Hermes owns 27 production units and the company regularly opens new facilities while Louis Vuitton is producing in-house its leather bags.

Figure 73: Bulgari’s integration process in the Accessories division Previously Afterwards Comments



Purchase of raw material External Silk external Partially internal for Leather 100% stake in Pacini handbag manufacturer

Internal manufacturing Zero Silk Zero Partially internal for Leather 100% stake in Pacini handbag manufacturer


Outsourcing 100% 100% Silk Partially in Leather Bulgari could pursue additional targeted acquisitions Source: Company data



Margins Vertical integration at the base of mid-term margins enhancement

We expect the gross margin to improve by an average 50bp p.a. in the 2004-07 period, which compares with the company’s indications of a +60-80bp p.a. and discounts a scenario of higher average raw material costs. We believe that the gross margin could reach 64.5% in 2005E and we forecast a mid-term gross margin of 65% in 2007 despite an unfavourable product mix and rising concerns about raw material prices. We note that in 2005, gross margin should benefit from the perimeter change with the full consolidation of Crova and the first consolidation of the hotel business.

Gross margin organic improvements should be above all driven by manufacturing improvements as a result of a better integrated supply chain with further upstream integration and the ongoing re-engineering of production lines.

Since 2002, management has also achieved significant cost optimisation and has streamlined operations. We believe that management will continue to control costs in the coming years. Bulgari will benefit from a decreasing incidence of A&P charges as a percentage of sales and from the operational leverage as sales expand. According to our estimates, the operating margin could rise to 17.2% as soon as 2007E and could grow up to 19% in the long term.

Figure 74: Gross margin evolution in 1995-2008E Figure 75: Bulgari EBIT margin evolution in 1995-2008E

58.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

E

2006

E

2007

E

2008

E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

E

2006

E

2007

E

2008

E

Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates

Mid-term gross margin of at least 65%

Bulgari’s gross margin has improved since 2003, and we forecast further improvements. According to management, the gross margin should improve 60-80bp p.a. in the next three years, thanks to manufacturing improvements (ie 200bp in 2005E/2007E). We have a more conservative 50bp forecast to account for the increase in raw materials prices. The bulk of the improvement should be driven by the manufacturing efficiencies, as illustrated in the previous section.

Change in the consolidation scope in FY2005 In FY 2005, the gross margin benefited from the full consolidation of Crova as Bulgari bought the remaining 50% in 2004. Furthermore, the Hotel business will be consolidated line by line in the P&L, hence gross margin benefits from the revenues from the Bulgari Hotel in Milan.



According to management, the change in the consolidation scope should positively impact the gross margin c.50bp in FY2005E.

However, the impact of this change in the consolidation scope should be slightly negative at the EBIT level. Both Crova and the hotel business are expected to inflate operating costs due to the integration of over 200 employees (Crova alone has 180 people), and to the losses of the Milan Hotel (expected to break even at EBITDA by year end).

Cost of raw materials Figure 76 highlights price increases of raw materials since 2000. We note that diamond price increases exceeded 9% p.a. in 2000-mid 2005. Prices of other raw materials (Gold, Silver, Platinum, and Steel) are more volatile though price increases were very high in 2002, 2003 and 2004. The trend seems to continue in 2005 and has accelerated in October (gold recorded a +17% YoY growth in October and +8/10% in 3Q05).

Bulgari has historically described the cost of gold and other precious metals as a negligible component in the COGS, although they used to account for approximately one-third of them. Historically, however, movements in raw material prices have been under control, and until Q1 2005 a weak US$ has partly compensated for it. As the US$ has started to appreciate (and the Swiss franc as well), however, Bulgari has been increasingly feeling their impact. So it is the combination of the two which could cause some worries also for 2006.

We assume that at least part of this increase will be offset by (i) positive FX on sales; (ii) increases in the selling prices of the products; (iii) internalisation of supplies (Leviev joint venture in diamonds).

Figure 76: Price growth of main raw materials

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2000 2001 2002 2003 2004 2005

Gold Silver Steel Platinum Diamonds

Source: Rapaport, DataStream, *June 2005

The role of the product mix Watches present the highest gross margin of the group while Perfume is the least profitable division. As for Jewellery and Accessories, we assess that both categories present gross margins in line with the group. We expect that increasing their scale, accessories will move to become the highest profit margin category.



We estimate that Jewellery and Accessories will grow faster than the rest of the group, reducing further the weight of Watches on group sales. As a result, the group’s gross margin should be negatively impacted by product mix.

In the recent past, a number of factors have more than offset the impact of a weaker product mix on the gross margin, and in the coming years, these should continue to support the gross margin:

Vertical integration and the re-engineering of the supply chain from purchasing to logistics to manufacturing to the reduction of SKUs;

The industrialisation of production processes (especially in Jewellery and Leather goods);

Restructuring efforts with overall cost optimisation at all levels;

The rising share of Accessories (it is the product category with the highest gross margin in the sector) as a percentage of total sales. The gross margin of the accessories division is in turn also improving as the group increases scale and in-house production of leather goods; and

The optimisation of supply (JV with Lev Leviev).

Figure 77: Bulgari watch sales as % of total sales and gross margin (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

Watc h sa les as % of group sa les gross margin


The role of the channel mix According to our estimates, Bulgari retail sales represent c.50% of group sales in 2004. Bulgari appears as one of the least retail integrated businesses of the luxury sector. This is mainly due to the fact that Watches, which still represent more than 30% of Bulgari sales, rely largely on third-party distribution (we estimate that more than 30% of Bulgari Watches are sold through DOS). As an example, Swatch, the least retail integrated business, derives 75% of its sales from Watches.

We believe that Bulgari could sell more than 60% of its products via retail as Jewellery and Accessories will keep increasing as percentage of total sales and considering that Bulgari has reduced the number of its Watches wholesalers, and that it will create a dedicated retail distribution for accessories.

Management’s commitment

for downstream integration



Figure 78: Estimated level of DOS sales for major luxury brands in 2004

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LouisVuitton

Tiffany Hermes Bulgari Ric hemont Burberry Swatc h

Source: Company data, estimates

The operating leverage

We realise that the measures undertaken to improve the gross margin took more than a year to positively impact the gross margin. The cycle of production for Jewellery is one year and improvements only occurred in 2003. Bulgari has also been successful in cutting operating costs and the operating margin climbed back from 13.4% in 2001 to 16.2% in 2004.

Bulgari should continue to contain operating costs and benefit from fixed costs leverage. Thanks to the high operational gearing, strong sales growth should flow through to the bottom line, resulting in improving the operating margin.

We have estimated that c.45% of operating costs was fixed in 2004, and this percentage could increase by some 1-2pp per year.

Figure 79: Bulgari – breakdown of fixed vs. variable costs (2004E)

0%

20%

40%

60%

80%

100%

120%

Raw m

ater

ials

Producti

on costs

Prod an

d adm

in ex

pense

sFe

es

Sellin

g expen

ses

A&P

Servic

e to cu

stom

ers

Renta

ls an

d leas

es

Other

Perso

nnel co

stsD&A

Total c

osts

Fixed Costs Variable Costs

Source: Deutsche Bank, Company data

Bulgari management clearly

demonstrated its ability to

control operating costs since

2002



Figure 80: Growth assumptions: sales vs. costs Topline 8.9% Bulgari mid-term growth assumption

Variable costs 8% We assume that variable costs will grow broadly in line with sales. In particular we assume that rents will be stable as % of sales (space growth>sales growth), but some pressure from raw materials partly balanced by price increases

Fixed costs 3% We assume fixed costs will grow below sales growth

A&P 4.0% We assume that A&P will decline as % of total sales

Personnel costs 8.5% Personnel costs are mainly fixed costs and should increase in line with sales as headcounts should increase from some space growth and acquisitions




Appendix Luxury sector growth drivers

Sales growth of luxury companies has been cyclical mainly given that demand for luxury goods is also cyclic. Global GDP growth, consumer confidence and tourism flows are the major drivers for luxury products.

Global GDP growth There is a clear correlation between economic growth and the consumption of luxury goods. Global economic growth will continue to be an important indicator to time the fluctuations of the luxury goods cycle and economists take the view that economic growth will remain robust in FY06E.

Figure 81: Global GDP and average sales growth of main European luxury groups(1)

excluding FX and acquisitions (in %)

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In addition, we believe that the clientele base for luxury goods has actually varied, widening to more occasional shoppers in years when economic growth and consumer confidence were strong, and contracting back to the very wealthy in a weaker environment. However, swings from trough to peak of the luxury sector in the 1990s have been more extreme than those of the wider economy as consumers extending their purchasing and then contract markedly from exaggerated levels of spend. Figure 82-Figure 85 present last consumer confidence indicators in main luxury goods markets, ie the US, Japan and Europe.



Figure 82: US consumer confidence SADJ Figure 83: Japanese consumer confidence SADJ

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High net worth individuals However, swings from trough to peak of the luxury sector in the 1990s have been more extreme than those of the economy. We would point out the fact that luxury goods are not vital products even for HNWI (high net worth individuals) which partly explains that demand is very elastic.

Demand for luxury goods is also fuelled by rising personal incomes. The usual definition of a HNWI is an individual with over USD 1m in financial assets. According to the World Wealth Report 2005 published by Cap Gemini and Merrill Lynch & Co, the number of HNWIs totalled 8.3 million people in 2004, an increase of 7.3% over 2003. Both GDP growth (+4.8% in 2004) and increase in market capitalisation were the drivers of accelerated gains in personal wealth.



Figure 86: HNWI population by region in 2004 Figure 87: HNWI population growth by region in 2004

Afric a1%

Middle East4%

Latin America4% Europe

31%

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Asia28%

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Source: World Wealth Report 2005 by Cap Gemini and Merrill Lynch Source: World Wealth Report 2005 by Cap Gemini and Merrill Lynch

The number and wealth of HNWIs grew at faster rates in North America and in Asia than in Europe. We expect the US and Asia excluding Japan to drive luxury groups’ sales in the coming years. According to this World Wealth Report, HNWI financial wealth is expected to reach USD 42.2tr by 2009 (vs. USD 30.8tr in 2004) ie growing at an annual rate of 6.5%. The growth of HNWI should help to offset the worst of the decline in sales forced by changes in the macro backdrop.

International tourism We estimate that sales to tourists account for some 20-25% of luxury goods sales (close to 15% to Japanese tourists).

Japanese tourism flows tend to be quite closely correlated to the Yen/USD rate as shown in Figure 88. In the past year, tourism flows have clearly benefited from FX and the growth in the number of Japanese tourists was strong (also due to the weak comparison basis of 2003 affected by the Iraq war and SARS). Tourism flows remained steady in 2005 and we expect this trend to continue in 2006 (though the oil price, natural disasters and unstable political environment could have an impact).

Figure 88: Japanese outbound travellers trend

Figure 89: Monthly change in number of Japanese

travellers and the USD/JPY rate

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Japanese tourism appears mature while Chinese outbound tourism offers strong prospects. The number of Chinese outbound travellers overcame Japanese outbound travellers in 2002. As shown in Figure 90, Chinese outbound tourism has enjoyed strong growth since the mid 1990s and Chinese citizens travelling outside the country reached 28 million in 2004. Furthermore, Chinese tourists, like Japanese tourists, are big spenders. In addition to required tourist consumption on their travel, Chinese tourists spend heavily on purchasing during trips to developed countries, especially luxury goods.

Figure 90: Chinese outbound travellers trend

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According to Chinese National Tourist Agency (CNTA) and WTO, it is forecast that over 100 million Chinese citizens will travel abroad by 2020, becoming one of the world’s biggest tourism generators. This trend will be both supported by wealth growth and Approved Destination Status (ADS) countries. The number of ADS countries should reach 100 at the end of 2005. ADS simplify the exit procedures for Chinese tourists - they are able to use ordinary passports and apply for tourist visas when wanting to visit an ADS country.

Chinese tourists spend up to USD 987 per capita on shopping overseas, the highest in the world, according to a survey by ACNielsen and Tax Free World Association (TFWA) of 1,500 consumers from Beijing, Shanghai and Guangzhou who have travelled abroad. Although Chinese total tourism expenditures per trip rank second in the world, next only to Japan, shopping (1/3 of total Chinese travel costs) ranks China no.1 worldwide.



Bulgari in a snapshot

Bulgari, which was started in 1884, has built its reputation upon Italian craftsmanship, high quality material and daring designs. In the 1970s, Bulgari started to internationalise its activities by opening its first stores abroad, in Paris, New York Geneva and Monte Carlo. The company went public in 1995 in order to raise the financial resources to further develop its activities, and Bulgari has become the world’s third largest jeweller behind Cartier and Tiffany’s. Such expansion was achieved through a carefully pursued monobrand strategy of geographic expansion and product category extension whose execution has been so immaculate that Bulgari’s brand equity has remained integer.

Figure 91: Bulgari sales by division in 1995 Figure 92: Bulgari sales by division in 2004

Jewellery43%

Watc hes43%

Perfumes12%

Roya lties2%

Jewellery41%

Watc hes31%

Perfumes19%

Ac c essories7%

Roya lties2%


Figure 93: Sales by regions in 1995 Figure 94: Sales by regions in 2004

Ita ly16%

Europe28%

Americ a21%

Japan16%

Far East19%

Ita ly14%

Europe (exc l. Ita ly)23%

America15%

Japan24%

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Historical results

Figure 95: Bulgari sales (Euro m) Figure 96: Sales growth ex FX and Sales growth in €

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During the last decade, Bulgari outpaced its luxury peers. Bulgari’s top line has been mainly driven by store openings. The growth in the number of retail stores has averaged 16% in 1995-2004 and we expect space growth (expressed in sqm) to have reached c.20%. Furthermore, the continuing introduction of new collections in Jewellery and Watches, as well as the launch of new product categories, have sustained organic growth.

Figure 97: 1995-2004 sales CAGR for luxury players (%) Figure 98: Bulgari’s growth in number of retail stores

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Table of Figures Figure 1: Bulgari – main product launches in 2005 ...................................................................5 Figure 2: Bulgari – Quarterly Sales Breakdown by Product (Euro m) ........................................7 Figure 3: Bulgari – Quarterly Sales Breakdown by Market (Euro m) .........................................7 Figure 4: Bulgari – Quarterly Income Statement (Euro m).........................................................8 Figure 5: Gross Margin 2006E: Estimated Impact from Raw materials ....................................9 Figure 6: Raw Material prices: Sensitivity Analysis (2006 numbers, Euro m)............................9 Figure 7: Bulgari – Consolidated Income Statement (Euro m) ................................................ 10 Figure 8: Bulgari – Consolidated Balance Sheet (Euro m) ....................................................... 11 Figure 9: Bulgari – Consolidated Statement of Cash flow (Euro m) ........................................ 11 Figure 10: Bulgari – NFY EPS Revsions during 2005............................................................... 12 Figure 11: Luxury Stocks – 2005 Share Price Performance .................................................... 12 Figure 12: Luxury sector and Bulgari historical P/E ................................................................. 13 Figure 13: Bulgari historical P/E discount to the sector........................................................... 13 Figure 14: : Luxury sector valuation multiples......................................................................... 13 Figure 15: Value map – net margin & m.cap/sales (06E)......................................................... 14 Figure 16: Value map – net margin & m.cap/sales (07E)......................................................... 14 Figure 17: Value map – ROE & PBV (06E) ............................................................................... 14 Figure 18: Value map – ROE & PBV (07E) ............................................................................... 14 Figure 19: Value map – ROIC & EV/CE (06E)........................................................................... 14 Figure 20: Value map – ROIC & EV/CE (07E)........................................................................... 14 Figure 21: Bulgari: main assumptions for our DCF model ...................................................... 15 Figure 22: Bulgari DCF valuation ............................................................................................. 15 Figure 23: Bulgari DCF model – conclusions (Euro) ................................................................ 16 Figure 24: Estimated mid-term group sales growth in function of Watch sales growth......... 16 Figure 25: DCF sensitivity analysis to exit Ebit margin and sales growth ............................... 16 Figure 26: DCF sensitivity analysis to discount rate and terminal growth rate........................ 16 Figure 27: Bulgari ROCE (%)................................................................................................... 17 Figure 28: Bulgari value creation and EVA spread (%) ............................................................ 17 Figure 29: Bulgari’s gearing ratio ............................................................................................ 17 Figure 30: Bulgari’s dividend policy......................................................................................... 17 Figure 31: Major product launches by division at Bulgari since 2000 ..................................... 19 Figure 32: A&P expenses as % of sales for main brands ....................................................... 20 Figure 33: Bulgari sales vs. adspend (Euro m) in 2004............................................................ 20 Figure 34: Bulgari’s retail network .......................................................................................... 20 Figure 35: Estimated level of DOS sales for main brands....................................................... 20 Figure 36: Bulgari organic sales growth and store growth (%) ............................................... 21 Figure 37: DOS network of main luxury brands ...................................................................... 21 Figure 38: Product category expansion................................................................................... 22 Figure 39: Luxury Goods Companies: Product extension ....................................................... 23 Figure 40: Estimated Jewellery sales (Euro m) and as % of group sales in 2004................... 23 Figure 41: Bulgari - Product innovation and Returns ............................................................... 24 Figure 42: Most important factors (excluding price) when buying Jewellery.......................... 24 Figure 43: Bulgari jewels: Bzero1 rings – Cabochon ring – Cicladi ring................................... 25 Figure 44: Diamond jewels: engagement rings, an Astrale necklace and a diamond ring ...... 25 Figure 45: Bulgari sales in the Watch division (Euro m) .......................................................... 26 Figure 46: Bulgari number of watch wholesalers.................................................................... 26 Figure 47: Watch sales of luxury groups in 2004 (Euro m)...................................................... 26 Figure 48: Estimated sales of main watch brands (Euro m).................................................... 27 Figure 49: Bulgari watch sales growth vs. Swatch Group....................................................... 27 Figure 50: Bulgari watch sales growth vs. Swatch watch categories ..................................... 27 Figure 51: YoY % change in finished watches by price category (%) ..................................... 28 Figure 52: : YoY % change in finished watches by value and by volume (%) ......................... 28 Figure 53: Major product launches in Watches since 2000 .................................................... 29 Figure 54: Bulgari Group – Watches quarterly sales (YoY % change) ..................................... 29 Figure 55: Bulgari sales of Accessories (Euro m).................................................................... 30 Figure 56: Accessories sales as % of total sales, 2004 .......................................................... 30 Figure 57: Main luxury leather brands..................................................................................... 31 Figure 58: Bulgari: fragrances sales trend (Euro m) ................................................................ 31



Figure 59: Sales by regions in 2004 for main luxury groups ................................................... 32 Figure 60: Distribution network in the US (number of stores) in 2004.................................... 33 Figure 61: Distribution network in China in 2004 for main luxury brands................................ 33 Figure 62: Importance of Japan for luxury companies (Japanese sales as % of total) ........... 34 Figure 63: Estimated internal production and EBIT margin for luxury brands in 2004............. 35 Figure 64: Bulgari’s production organisation before 2004 ...................................................... 35 Figure 65: Bulgari’s production organisation in the mid term ................................................. 36 Figure 66: Bulgari main vertical integration operations ........................................................... 36 Figure 67: Main vertical integration operations in the luxury industry ..................................... 36 Figure 68: Bulgari’s integration process in the Jewellery division........................................... 37 Figure 69: World rough diamond supply in 2004 .................................................................... 37 Figure 70: Value creation in the jewellery business (Euro bn) ................................................. 38 Figure 71: Tiffany & Co gross margin evolution (%) year ended March.................................. 39 Figure 72: Bulgari’s integration process in the Watch division ............................................... 40 Figure 73: Bulgari’s integration process in the Accessories division ...................................... 40 Figure 74: Gross margin evolution in 1995-2008E .................................................................. 41 Figure 75: Bulgari EBIT margin evolution in 1995-2008E ........................................................ 41 Figure 76: Price growth of main raw materials ....................................................................... 42 Figure 77: Bulgari watch sales as % of total sales and gross margin (%)............................... 43 Figure 78: Estimated level of DOS sales for major luxury brands in 2004 .............................. 44 Figure 79: Bulgari – breakdown of fixed vs. variable costs (2004E) ........................................ 44 Figure 80: Growth assumptions: sales vs. costs .................................................................... 45 Figure 81: Global GDP and average sales growth of main European luxury groups(1) excluding FX and acquisitions (in %)....................................................................................................... 46 Figure 82: US consumer confidence SADJ............................................................................. 47 Figure 83: Japanese consumer confidence SADJ .................................................................. 47 Figure 84: French consumer confidence SADJ....................................................................... 47 Figure 85: German consumer confidence SADJ..................................................................... 47 Figure 86: HNWI population by region in 2004 ....................................................................... 48 Figure 87: HNWI population growth by region in 2004........................................................... 48 Figure 88: Japanese outbound travellers trend....................................................................... 48 Figure 89: Monthly change in number of Japanese travellers and the USD/JPY rate ............. 48 Figure 90: Chinese outbound travellers trend ......................................................................... 49 Figure 91: Bulgari sales by division in 1995 ............................................................................ 50 Figure 92: Bulgari sales by division in 2004 ............................................................................ 50 Figure 93: Sales by regions in 1995 ........................................................................................ 50 Figure 94: Sales by regions in 2004 ........................................................................................ 50 Figure 95: Bulgari sales (Euro m) ............................................................................................ 51 Figure 96: Sales growth ex FX and Sales growth in €............................................................. 51 Figure 97: 1995-2004 sales CAGR for luxury players (%)........................................................ 51 Figure 98: Bulgari’s growth in number of retail stores ............................................................ 51 Figure 99: 1995-2001 sales CAGR for luxury players (%)........................................................ 51 Figure 100: 2001-2004 sales CAGR for luxury players (%)...................................................... 51



Appendix 1 Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price Disclosure Bulgari SpA BULG.MI 9.04 (EUR) 17 Jan 06 8,13,14

8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services

from this company in the next three months.

13. Deutsche Bank and/or its affiliate(s) holds a trading position, as that term is defined by German law, in shares of the company whose securities are subject of the research.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Francesca DiPasquantonio/Gerry Gallagher

Equity rating key Equity rating dispersion and banking relationships

Buy: Expected total return (including dividends) of 10% or more over a 12-month period.

Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period.

Sell: Expected total return (including dividends) of -10% or worse over a 12-month period.

Notes: 1. Published research ratings may occasionally fall outside these definitions, in which case additional disclosure will be included in published research and on our disclosure website (http://gm.db.com);

2. Newly issued research recommendations and target prices always supersede previously published research.

7%

51%42%

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Buy Hold Sell

European Universe

Companies Covered Cos. w/ Banking Relationship



Regulatory Disclosures

Disclosures required by United States laws and regulations

See company-specific disclosures above for any of the following disclosures required for covered companies referred to in this report: acting as a financial advisor, manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; market making and/or specialist role. The following are additional required disclosures:

Ownership and Material Conflicts of Interest: DBSI prohibits its analysts, persons reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of DBSI, which includes investment banking revenues. Analyst as Officer or Director: DBSI policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Distribution of ratings: See the distribution of ratings disclosure above. Price Chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the DBSI website at http://gm.db.com. Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, in addition to those already made pursuant to United States laws and regulations. Analyst compensation: Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking revenues Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Germany: See company-specific disclosures above for (i) any net short position, (ii) any trading positions (iii) holdings of five percent or more of the share capital. In order to prevent or deal with conflicts of interests Deutsche Bank AG has implemented the necessary organisational procedures to comply with legal requirements and regulatory decrees. Adherence to these procedures is monitored by the Compliance-Department. EU: A general description of how Deutsche Bank AG identifies and manages conflicts of interest in Europe is contained in our public facing policy for managing conflicts of interest in connection with investment research. Hong Kong: See http://gm.db.com for company-specific disclosures required under Hong Kong regulations in connection with this research report. Disclosure #5 includes an associate of the research analyst. Disclosure #6, satisfies the disclosure of financial interests for the purposes of paragraph 16.5(a) of the SFC's Code of Conduct (the "Code"). The 1% or more interests is calculated as of the previous month end. Disclosures #7 and #8 combined satisfy the SFC requirement under paragraph 16.5(d) of the Code to disclose an investment banking relationship. Japan: See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Deutsche Bank AG research on the companies which are the subject of this research. Turkey: The information, interpretation and advice submitted herein are not in the context of an investment consultancy service. Investment consultancy services are provided by brokerage firms, portfolio management companies and banks that are not authorized to accept deposits through an investment consultancy agreement to be entered into such corporations and their clients. The interpretation and advices herein are submitted on the basis of personal opinion of the relevant interpreters and consultants. Such opinion may not fit your financial situation and your profit/risk preferences. Accordingly, investment decisions solely based on the information herein may not result in expected outcomes.

Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about Deutsche Bank, Deutsche Bank makes no representation as to the accuracy or completeness of such information.

This published research report may be considered by Deutsche Bank when Deutsche Bank is deciding to buy or sell proprietary positions in the securities mentioned in this report.

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Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, except if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results.

Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.

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