Hong Kong Retail Sector - Credit Suisse

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

04 January 2012Asia Pacific/Hong Kong

Equity ResearchRetailing

Hong Kong Retail Sector SECTOR REVIEW

Rental cycle is catching up Figure 1: Rental cycle started catching retail cycle in September

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1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 1Q12

Overall prime Premium prime High-street Retail sales growth

(%)

Source: Jones Lang LaSalle, CEIC, Credit Suisse estimates

■ Rental pressure kicked in since September 2011. Given the typical Hong Kong retail lease structure of three-year fixed terms, the retail cycle normally runs ahead of the rental cycle by 9-12 months. While overall Hong Kong retail sales growth started decelerating in September 2011, the speed of rental rate growth shows no sign of decelerating. That said, rental pressure is building up.

■ The catch-up could be significant. Retail sales growth has been outpacing rental rate growth since 1Q09; this rarely happened over the previous ten years, suggesting that landlords underestimated the growth potential. Hence, we expect lots of catching up by rental rates and this explains the significant rental hikes recorded, particularly in tourist districts. Historically, rental rate growth has outpaced retail sales growth, and we believe this cycle is no exception. Thus, existing earnings forecasts could be optimistic, and rental pressure may force some retailers to scale down store expansion plans, triggering even more downward earnings estimate revisions.

■ Cautious on mid- to high-end apparel retailers. We studied the financial track record of 22 Hong Kong retail companies for the past 11 years and found that mid- to high-end apparel retailers in general have the highest rental expenses-to-turnover ratio, making them more vulnerable to rental hike pressure. Among them, Bauhaus (0483.HK), I.T (0999.HK), Moiselle (0130.HK) and Veeko (1173.HK) have rental expenses that exceeded 20% of their turnover in 2010. On the other hand, cosmetic retailers have shown the most resilient sales growth during economic downturns.

Research Analysts Gabriel Chan, CFA

852 2101 6523 [email protected]

Isis Wong 852 2101 7109

[email protected]

04 January 2012

Hong Kong Retail Sector 2

Focus charts Figure 2: Retail sales versus retail rental growth Figure 3: Weakening consumer confidence in China

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China consumer confidence index

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Increasing contribution from mainland visitors Figure 5: Apparel & accessories retailers have the highest rental expense-to-turnover ratio

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Ch in e s e vis ito rs' sh o p p in g s p e n d in g (H K $ m n ) - L H SCo n tr ib u t io n to H K re ta il s a le s

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C A G R = 2 2 .3 %

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Apparel &accessories

Hard luxury Cosmetic F&B Others

2010 rental expense to turnover ratio

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 6: HOLT® analysis—rental expense as a percentage of gross cash flow

Figure 7: HOLT analysis—price potential to HOLT’s best warranted prices

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280 5 92 483 130 1 13 999 709 9 84 647 5 2 6 53 341 178 8 87 398 573 1 16 738 590

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113 590 116 999 398 483 887 653 738 709 573 178 341 647 592 984 52 130 280

Potential to HOLT's best warranted price (%)

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Source: Company data, Credit Suisse HOLT Source: Company data, Credit Suisse estimates

04 January 2012


Rental cycle is catching up Rental pressure kicked in since September 2011 Given the typical Hong Kong retail lease structure of three-year fixed terms, the retail cycle normally runs ahead of the rental cycle by 9-12 months, as landlords refer to current sales performance as benchmarks for setting new rental rates. While overall Hong Kong retail sales growth started decelerating in September 2011, the speed of rental rate growth shows no sign of decelerating. That said, rental pressure is building up.

Note that we expect Hong Kong retail sales to grow about 15% YoY in 2012, compared to about 24-25% YoY in 2011. The deceleration, in our view, will be driven by: (1) weakening consumer sentiment in both Hong Kong and China; (2) higher-based comparison; (3) slower Rmb appreciation; (4) slower GDP growth (both in real and nominal terms) in China; and (5) continuous down-trading by locals.

Note that retail sales growth has been outpacing rental rate growth since 1Q09, which rarely happened over the past ten years, suggesting that landlords had underestimated the growth potential. Hence, we expect lots of catching up by the rental rate and this explains the significant rental hikes recorded, particularly in popular tourist districts. Historically, the rental rate growth has outpaced retail sales growth, and we believe this cycle is no exception.

We are cautious on mid- to high-end apparel retailers With increasing pressure from rental costs, we believe existing earnings forecasts for Hong Kong retailers could be optimistic. Furthermore, the high rental cost may eventually force some retailers to scale down their store expansion plans, which could trigger even more downward earnings estimate revisions and result in some valuation de-rating.

We studied the financial track record of 22 Hong Kong retail companies for the past 11 years and found that mid- to high-end apparel retailers in general have the highest rental expense-to-revenue ratios, making them more vulnerable to rental hike pressure. Among them, Bauhaus (0483.HK, HK$1.85, not rated), I.T (0999.HK, HK$4.27, not rated), Moiselle (0130.HK, HK$2.06, not rated) and Veeko (1173.HK, HK$0.23, not rated) have rental expenses that exceeded 20% of their turnover in 2010.

While the hard luxury segment has historically been more cyclical in terms of sales performance, we believe this cycle is different due to the much increased revenue contribution from mainland Chinese shoppers in Hong Kong who take advantage of lower retail prices here due to the absence of VAT, consumption tax and import duties. Besides, hard luxury retailers normally have a very low rental-to-turnover ratio of less than 5%, making them less vulnerable to rental pressure. We reiterate Luk Fook (0590.HK, HK$27.70, OUTPERFORM [V], TP HK$37.80) as our top pick in the Hong Kong retail sector.

On the other hand, cosmetics retailers such as Sa Sa (0178.HK, HK$4.36, NEUTRAL [V], TP HK$5.00) and Bonjour (0653.HK, HK$1.23, not rated) have shown the most resilient sales growth during economic downturns. However, we observe severe competition for rental spaces in key tourist districts, resulting in significant increases in rental costs. Thus, we remain cautious on cosmetic retailers’ margins.

Besides pressure from rental hikes (F&B is one of the few sub-segments whose revenue growth has been outpaced by rental rate hikes since the end of the global financial crisis in 2008-09), food inflation has also been catching up quickly. The margin pressure is particularly severe for fast food chains, such as Café de Coral (0341.HK, HK$17.82, not rated) and Fairwood (0052.HK, HK$10.10, not rated), on the back of the minimum wage law imposed since May 2011.

The rental cycle normally lags the retail cycle by 9-12 months

We expect Hong Kong retail sales growth to slow to around 15% YoY in 2012E

Rental growth normally outpaces retail sales growth

Earnings forecasts and valuations are at risk

Mid- to high-end apparel retailers have the highest rental cost-to-revenue ratios

Stiff price differential between Hong Kong and China may help support the sales growth of luxury retailers

Cosmetic retailers have been most resilient in terms of sales growth

F&B is likely to remain under margin pressure

04 January 2012


Valuation summary Figure 8: Valuation comparison—Hong Kong retailers Mkt Credit Pot. P/E EV/EBITDA cap Price Suisse TP up/down (x) (x) Company Ticker (US$ mn) (l.c.) rating (l.c.) (%) CY11E CY12E CY13E CY11E CY12E CY13EApparels and accessories BOSSINI INT'L 0592.HK 123 0.59 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Giordano Intl. 0709.HK 1,106 5.65 Not rated n.a. n.a. 11.7 10.3 9.3 7.1 6.1 5.4Bauhaus Int'l 0483.HK 86 1.85 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.I.T 0999.HK 671 4.27 Not rated n.a. n.a. 11.0 9.2 7.5 6.8 5.5 4.3Joyce Boutique 0647.HK 155 0.74 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Le Saunda Hldgs 0738.HK 221 2.69 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Moiselle Int'l 0130.HK 75 2.06 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Veeko Intl 1173.HK 63 0.23 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Dickson 0113.HK 189 3.95 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Hard luxury CHOW SANG SANG 0116.HK 1,527 17.52 Not rated n.a. n.a. 11.0 9.1 7.7 8.6 7.2 6.1Emp Wat & Jew 0887.HK 856 0.99 Not rated n.a. n.a. 11.5 8.9 7.0 8.0 6.2 4.8King Fook Hldgs 0280.HK 65 1.16 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Luk Fook 0590.HK 1,934 27.70 OUTPERFORM 37.80 36.5 11.6 9.8 8.2 8.9 7.1 5.7Oriental Watch 0398.HK 259 3.53 Not rated n.a. n.a. 7.0 5.8 5.0 n.a. 3.3 2.7Milan Station 1150.HK 116 1.34 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Cosmetics BONJOUR Hldg 0653.HK 476 1.23 Not rated n.a. n.a. 13.1 10.5 8.4 10.9 8.9 7.5Sa Sa International Holding 0178.HK 1,580 4.36 NEUTRAL 5.00 14.7 20.3 16.2 13.7 14.3 11.2 9.2Food & beverage Fairwood Hold 0052.HK 162 10.10 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Cafe De Coral 0341.HK 1,299 17.82 Not rated n.a. n.a. 21.1 19.0 16.6 10.7 9.2 7.7Tao Heung 0573.HK 401 3.06 Not rated n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Others Aeon stores 0984.HK 599 17.90 Not rated n.a. n.a. 14.7 12.4 11.0 3.7 2.5 1.6CRA 0831.HK 304 3.22 Not rated n.a. n.a. 15.3 12.9 10.7 7.3 5.9 4.7 12.3 10.3 8.7 7.8 6.4 5.3

Source: Company data, I/B/E/S estimates for Not Rated stocks, Credit Suisse estimates

04 January 2012


Rental cycle is catching up Retail sales momentum started weakening in September 2011 Hong Kong retail sales growth momentum started weakening in September 2011, with growth decelerating from 29% in July and August to 24% in September, and further decelerating to 23.1% in October.

We expect the deceleration to continue to be driven by the following factors:

(1) weakening consumer sentiment in both Hong Kong and China: Both reached their lowest levels since early 2009 in the latest survey.

Figure 9: China consumer confidence index Figure 10: Hong Kong consumer confidence index

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(2) Higher-based comparison: Retail sales growth accelerated from about 20% in 2010 to 24-25% in 2011.

Figure 11: Hong Kong retail sales growth trend

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Source: CEIC, Credit Suisse estimates

04 January 2012


(3) Slower Rmb appreciation: This reduces the price attractiveness of consumer products in Hong Kong as it narrows the price gap. For more information, please refer to our previous report, A bargain for luxury products, published on 8 August 2011.

Figure 12: Rmb non-deliverable forward price

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Note that mainland Chinese visitors to Hong Kong have been the most important driver of retail sales growth. Over the past ten years, retail spending by mainland visitors increased at a 22.3% CAGR between 2000 and 2010. And their contribution to the Hong Kong retail sales also increased from 5% to 23% during the same period.

Figure 13: Mainland Chinese visitors’ contribution to Hong Kong retail sales

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(4) Slower GDP growth (both in real and nominal terms) in China: Credit Suisse economists have recently revised down China’s 2012 GDP growth rate projection from 8.2% to 8.0%.

(5) Continuous down-trading by locals: Despite the robust retail sales growth registered, Hong Kong locals have been spending less in the past two years; the following chart shows Hong Kong retail sales excluding visitors’ spending.

04 January 2012


Figure 14: Retail sales contributed by Hong Kong locals

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While we do not have a quantitative model for the overall retail sales growth projection, we believe the slowing trend will continue to mid-teen levels in 2012E, converging back to the long-term CAGR of about 10%.

Figure 15: Hong Kong retail sales trend, 2004-10

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Source: CEIC

Retail rental rate hike is accelerating Despite the retail sales growth momentum starting to weaken in September, retail rental rate hikes continue to accelerate. Based on data from Jones Lang LaSalle, retail rental growth has been accelerating since 1Q09, and at a even faster rate over the past two quarters.

Note that such rental hike acceleration is registered across the board in overall prime, premium prime and high-street level. But among the three sub-segments, high-street retail rental normally shows the highest volatility, i.e., it rises and drops more than other segments during a cycle.

Retail rental growth has been accelerating since 1Q09

04 January 2012


Figure 16: Retail sales versus retail rental growth

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Overall prime Premium prime High-street Retail sales growth

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Source: Jones Lang LaSalle, CEIC, Credit Suisse estimates

Retail sales cycle normally runs ahead of rental cycle by 9-12 months

In Hong Kong, retail leases normally have a term length of three years, with a fixed monthly rental rate during the lease period (and sometimes have a pre-set rental rate increase for the next rental renewal). When landlords enter into new rental agreements with retailers, they normally use the latest retail sales trend to set the new rental rate. From the retailers’ perspective, every year, they have about a third of rental agreements that are subject to renewal. Thus, it is typical that the retail sales cycle is running ahead of the rental rate cycle by 9-12 months.

Rental rate growth has historically surpassed retail sales growth

On the other band, in the past ten years, retail sales growth has underperformed the retail rental growth rate, particularly when retail sales momentum starts to slow.

However, the past two years marks an interesting period in which retail sales growth has consistently been faster than retail rental growth, suggesting that landlords have underestimated retail sales growth significantly; therefore, we expect rental rate growth to catch up and eventually surpass retail sales growth, like in previous cycles.

We believe retail rentals will be further stimulated by the influx of foreign brands setting up their flagship stores in Hong Kong. A few most eye-catching examples include Abercrombie & Fitch’s (ANF, $48.84, not rated) and Gap’s (GPS, $18.55, not rated) new flagship stores in Central, Hong Kong, with monthly rentals of HK$7 mn and HK$3.2 mn, respectively.

On the other hand, robust jewellery and luxury watches sales have also driven rental rates in major tourist districts, such as Causeway Bay and Tsimshatsui (TST) significantly. The highest rental increase we recognised was registered in October, with Chow Sang Sang (0116.HK, HK$17.52, not rated), one of the leading jewellery retailers, replacing Bonjour (0653.HK, HK$1.23, not rated), a cosmetic retail chain, in a 400 sq ft shop in TST, and the monthly rental rate increasing 525% from HK$0.4 mn per month to HK$2.5 mn per month.

The following table shows the list of rental agreements registered since late August. Note that the majority of them have rental rate increases of more than 100%, compared to the previous lease agreements. With the overall retail sales level estimated to be 48% higher in 2012 compared to 2011, margin pressure from rental rate hikes is definitely kicking in.

The rental cycle normally lags behind the retail cycle by 9-12 months

Landlords have been underestimating retail sales growth over the past two years

Incoming foreign brands are driving up rental rates as well

04 January 2012

Hong K

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Figure 17: Recently registered rental agreement Date Size Current lease agreement New lease agreement % chg.registered Location District (sq. ft) Lessee Rent

(HK$/month)Rent

(HK$/sq. ft) Lessee Rent

(HK$/month)Rent

(HK$/sq. ft)(rent/sq. ft)

22-Aug-11 J & K, 39-47 Lee Garden Road Causeway Bay 3,150 Fashion/Eyewear retailer

600,000 190 Luk Fook 1,500,000 476 150

2-Sep-11 41 Queen's Road Central 1,250 Bonjour 600,000 480 Seed 850,000 680 422-Sep-11 23-25 Lee Garden Road Causeway Bay 1,400 Bonjour 580,000 414 Swatch 2,300,000 1,643 2976-Sep-11 G-1/F, 28 Hankow Rd Tsim Sha Tsui 18,300 HMV 1,200,000 103 CSL/Bauhaus 2,500,000 137 327-Sep-11 Shop no. 3-7, 2-4 Hysan Road Causeway Bay 1,446 n.a. 250,000 173 Foreign chained

fashion retailer 500,000 346 100

12-Sep-11 G-1/f, Airland Center Mong Kok 15,000 Sa Sa/ Café De Coral

700,000 47 Lowry Farm 1,200,000 80 71

12-Sep-11 Argyle Street Mong Kok 2,000 Crocodile Shirt 980,000 490 Crocodile Shirt 1,800,000 900 8412-Sep-11 Sino Plaza Mong Kok 4,000 n.a. n.a 200 TSL/Wing Guang Jew 2,200,000 550 17514-Sep-11 G-2/f, MPM Mong Kok 15,000 Bonjour 600,000 53 GAP 3,200,000 213 30019-Sep-11 G/f, Park Lane HK Causeway Bay 3,000 Fashion retailer 650,000 217 King Fook Jewellery 1,200,000 400 8520-Sep-11 Unit B, G/f Melbourne Center,

33-33A Qeen's Road Central n.a. Tong Ren Tang 800,000 n.a. Tong Ren Tang 1,200,000 n.a. 50

20-Sep-11 G/f, 18 Queen's Road Central n.a. Standard Chartered Bank

1,500,000 n.a. Emperor Watch & Jew. 3,000,000 n.a. 100

20-Sep-11 G/F, 76 Percival Street Causeway Bay 600 RADO 640,000 1,067 RADO 1,330,000 2,217 10821-Sep-11 B-1/f, Lee Theatre Plaza Causeway Bay 30,000 California/Esprit 1,150,000 38 UNIQLO 2,300,000 77 10023-Sep-11 Shop C, 52 Yun Ping Road Causeway Bay 300 Lo Hang Ka 120,000 400 Citychain 250,000 833 10823-Sep-11 Shop A&B, 52 Yun Ping Road Causeway Bay 1,000 Longines 330,000 330 Longines 700,000 700 11223-Sep-11 G/f, 47 Haiphong Road Tsim Sha Tsui 1,500 Millie's 355,000 237 Crocs 710,000 473 10028-Sep-11 Shop 2, MPM Mong Kok 900 Hui Lau Shan 250,000 278 Crocs 580,000 644 13230-Sep-11 G/f, 68 Percival Street Causeway Bay 1,000 CSL 1010 295,000 295 CSL 1010 500,000 500 6930-Sep-11 G/-2/f, 108 Johnston Road Wanchai 4,819 Physical Fitness 150,000 31 Sa Sa 350,000 73 13330-Sep-11 1-2/f, 35- 37 Haiphong Road, Tsim Sha Tsui 3,600 沙嗲王 (Satay

King) 250,000 69 Sa Sa 500,000 139 100

4-Oct-11 2W-2X, Sai Yeong Choi Street South

Mong Kok 2,045 Sa Sa 700,000 342 Dai Lei Café 850,000 416 21

7-Oct-11 53 Carnavon Mans Tsim Sha Tsui 400 Bonjour 400,000 1,000 Chow Sang Sang 2,500,000 6,250 52511-Oct-11 G-1/f, 14 Kai Chiu Road Causeway Bay 3,000 Sa Sa 900,000 300 Chow Sang Sang 2,200,000 733 14411-Oct-11 G/f, Century Square, 1-13

D'Aguilar Street Central 1,000 Telecom shop 500,000 500 Watch retailer 650,000 650 30

13-Oct-11 Unit A, G/f Melbourne Center, 33-33A Qeen's Road

Central 1,300 Staccato 650,000 500 Pandora 1,600,000 1,231 146

14-Oct-11 No. 4-6, G/f, China Hong Kong City

Tsim Sha Tsui 15,000 Esprit 2,000,000 133 Emperor Watch & Jew. 3,500,000 233 75

26-Oct-11 16 Canton Road Tsim Sha Tsui 800 Swarovski 850,000 1,063 Swarovski 1,700,000 2,125 10027-Oct-11 Unit A,B, G-2/f, Soundwill Plaza,

Russell Street Causeway Bay 5,200 Nokia 1,850,000 356 Burberry 6,500,000 1,250 251

27-Oct-11 86-96 Canton Road Tsim Sha Tsui 4,200 Sa Sa 1,590,000 556 Asia Comm 6,300,000 1,500 1703-Nov-11 10 Kai Chiu Road Causeway Bay 1,500 Sa Sa 1,000,000 667 VIP Station 1,800,000 1,200 80

04 January 2012

Hong K

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Figure 17: Recently registered rental agreement (cont’d) Date Size Current lease agreement New lease agreement % chg.registered Location District (sq. ft) Lessee Rent

(HK$/month)Rent

(HK$/sq. ft) Lessee Rent

(HK$/month)Rent

(HK$/sq. ft)(rent/sq. ft)

3-Nov-11 G-1/f, 18 D'Aguilar Street Central 2,000 Coffee shop 250,000 125 G2000 500,000 250 1004-Nov-11 G/f, 54-64B Nathan Road Tsim Sha Tsui 844 Pharmacy n.a. n.a. Pharmacy 600,000 711 n.a.4-Nov-11 15-17 Lee Garden Road Causeway Bay 1,500 Westwood 400,000 267 Sa Sa 1,000,000 667 15016-Nov-11 38-40 Haiphong Road Tsim Sha Tsui 2,300 Bonjour 680,000 296 Bonjour 1,140,000 496 6817-Nov-11 3-4/f, Entertainment Building Central 17,000 King Group 629,630 37 HMV 1,700,000 100 17022-Nov-11 Shop 38. G/f, 83-96 Nathan

Road Tsim Sha Tsui 500 Bird nest shop 253,000 506 Pharmacy 500,000 1,000 98

23-Nov-11 G/f, Island Beverly Center, 1 Great George Street

Causeway Bay 530 The Body Shop 500,000 943 The Body Shop 850,000 1,604 70

23-Nov-11 G/f, Honest Motors Building, Leighton Road

Causeway Bay 4,809 Quicksilver 290,000 60 I.T. 500,000 104 72

23-Nov-11 Shop 3-7, G/f, 2-4 Leighton Road Causeway Bay 1,700 n.a. 250,000 147 Replay 520,000 306 10824-Nov-11 Shop 76A, Fa Yuen Street Mong Kok n.a. Nike 2,015,000 n.a. Nike 2,490,000 n.a. 2429-Nov-11 Unit F, G/f, 601 Nathan Road Mong Kok 2,760 Mi-Ne Sushi 398,000 144 Jewellery retailer 900,000 326 12629-Nov-11 G/f, 717 Nathan Road Mong Kok 1,200 Jewellery retailer 235,000 196 Luk Fook 475,000 396 10229-Nov-11 Unit A, 701 Nathan Road Mong Kok 883 幸福珠寶 (Hang

Fook Jewellery) n.a. n.a. Luk Fook 350,000 396 n.a.

30-Nov-11 Unit F, G-1/f, Soundwill Plaza, Russell Street

Causeway Bay 6,952 Sa Sa 2,500,000 360 Omega 5,000,000 719 100

1-Dec-11 Unit G-J, Hong Kong Mansion, 1A-1L Yee Wo Street

Causeway Bay 5,520 King Fook 2,000,000 362 Sa Sa 3,000,000 543 50

Source: Company data, Credit Suisse estimates

04 January 2012


We are cautious on mid- to high-end apparel retailers Earnings and valuations are at risk With increasing pressure from rental costs, we believe existing earnings forecasts for Hong Kong retailers could be optimistic. We have already seen some retailers reporting slower operating margin improvement in their latest half-yearly results, and the trend could continue with slower sales growth and higher operating costs.

Furthermore, the higher rental cost may eventually force some retailers to scale down their store expansion plans, which would trigger even more downward earnings estimate revisions, and result in some valuation de-rating.

What we learn from history? We studied the financial track record of 22 Hong Kong retail companies, under four different categories (namely apparel, hard luxury, cosmetic, F&B and others) for the past 11 years as well as the respective segment growth trend since 2002. The key findings from our study include:

(1) Among all sub-segments, the ‘apparels & accessories’ segment has the highest rental expenses-to-revenue ratio, followed by ‘food & beverages’, ‘cosmetics’, ‘others’ and ‘hard luxury’ segments.

(2) Both the ‘apparel & accessories’ and ‘hard luxury’ segments have recorded consistent rises in rental expense-to-revenue ratios.

(3) The ‘cosmetics’ segment has been the most resilient in terms of retail sales growth, while the ‘hard-luxury’ segment has been the most volatile. On the other hand, the ‘food & beverage’ segment has consistently underperformed other sub-segments.

(4) Among the sub-segments, ‘apparel & accessories’ and ‘hard luxury’ sales growth is still outpacing that of rental rate growth. On the other hand, rental rate growth started catching up with retail sales growth for the ‘cosmetic’ segment in 3Q11, while ‘food & beverage” sales revenue growth has been outpaced by rental rate growth since 1Q10.

04 January 2012


Figure 18: Rental expense as a percentage of revenue Company Ticker 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Apparels & accessories Bossini 0592.HK 14.0% 15.4% 16.6% 16.6% 15.0% 14.1% 16.0% 17.0% 16.9% 17.1% 16.3%Giordano 0709.HK 12.6% 13.3% 14.2% 15.1% 15.5% 16.0% 17.6% 16.4% 19.2% 20.2% 18.8%Bauhaus 0483.HK 17.1% 19.2% 18.9% 18.7% 18.8% 20.3% 23.2% 25.4% 25.4%I.T 0999.HK 17.5% 17.4% 16.8% 17.2% 18.0% 17.9% 18.5% 20.6% 20.1%Joyce Boutique 0647.HK 22.8% 23.1% 18.0% 17.5% 19.3% 17.8% 20.9% 21.5% 20.4% 18.2%Le Saunda 0738.HK 12.7% 12.7% 15.4% 10.9% 8.4% 9.4% 9.8% 10.3% 8.9% 6.7% 5.2%Moiselle 0130.HK 21.3% 25.6% 26.4% 24.2% 22.9% 25.2% 26.8% 30.4% 34.4% 33.2%Veeko 1173.HK 22.1% 25.8% 27.3% 26.3% 25.7% 25.4% 26.9% 25.5% 23.5% 23.9% 23.7%Dickson Concepts 0113.HK 9.1% 11.1% 11.8% 13.3% 13.3% 14.3% 16.5% 16.9% 17.6% 18.5% 18.6%Average 14.1% 17.5% 18.8% 18.1% 17.3% 17.5% 18.5% 19.1% 20.0% 20.8% 20.0%Median 12.7% 15.4% 17.1% 17.4% 16.8% 17.2% 17.8% 17.9% 19.2% 20.4% 18.8%Hard luxury Chow Sang Sang 0116.HK 2.1% 2.1% 2.0% 1.5% 1.4% 2.2% 4.2% 4.7% 2.2% 3.1% 2.8%Emperor Watch 0887.HK 2.5% 2.9% 3.1% 5.3% 8.0% 6.7%King Fook 0280.HK 3.6% 4.3% 5.0% 6.3% 6.0% 5.9% 5.5% 5.5% 5.7% 7.3% 8.4%Luk Fook 0590.HK 1.2% 1.1% 1.0% 1.4% 3.3% 3.6% 4.1% 3.7% 3.9% 4.0% 3.5%Oriental Watch 0398.HK 0.6% 0.6% 0.6% 0.6% 0.6% 0.8% 1.1% 1.5% 2.4% 3.5% 3.5%Milan station 1150.HK 6.0% 5.8% 5.9%Average 1.9% 2.0% 2.1% 2.4% 2.8% 3.0% 3.6% 3.7% 4.2% 5.3% 5.3%Median 1.6% 1.6% 1.5% 1.5% 2.3% 2.5% 4.1% 3.7% 4.6% 5.7% 5.9%Cosmetics Bonjour 0653.HK 9.8% 10.4% 10.4% 9.9% 9.6% 13.6% 14.9% 13.5% 11.6% 10.7% 10.7%Sa Sa 0178.HK 10.6% 9.8% 8.5% 8.4% 9.3% 9.6% 9.6% 9.7% 9.7%Average 9.8% 10.4% 10.5% 9.8% 9.0% 11.0% 12.1% 11.5% 10.6% 10.2% 10.2%Median 9.8% 10.4% 10.5% 9.8% 9.0% 11.0% 12.1% 11.5% 10.6% 10.2% 10.2%Food & Beverage Fairwood 0052.HK 18.3% 19.1% 19.2% 18.4% 16.9% 15.8% 14.6% 14.1% 14.3% 14.8% 14.7%Café de Coral 0341.HK 11.3% 10.9% 11.2% 11.3% 11.0% 10.7% 10.8% 11.1% 11.1% 11.0% 11.2%Tao Heung 0573.HK 6.3% 6.4% 6.8% 6.6% 7.1% 7.5% 7.4%Average 14.8% 15.0% 15.2% 14.8% 11.4% 11.0% 10.7% 10.6% 10.8% 11.1% 11.1%Median 14.8% 15.0% 15.2% 14.8% 11.0% 10.7% 10.8% 11.1% 11.1% 11.0% 11.2%Others Aeon stores 0984.HK 8.7% 8.9% 9.2% 8.2% 9.2% 9.8% 10.6% 10.2% 9.7% 11.1% 10.2%CRA 0831.HK 6.7% 6.7% 6.7% 6.8% 7.1% 7.6% 8.0% 8.6% 8.9% 9.3% 9.1%Average 7.7% 7.8% 7.9% 7.5% 8.1% 8.7% 9.3% 9.4% 9.3% 10.2% 9.7%Median 7.7% 7.8% 7.9% 7.5% 8.1% 8.7% 9.3% 9.4% 9.3% 10.2% 9.7%Overall average 9.5% 11.6% 12.9% 12.5% 11.8% 11.7% 12.3% 12.6% 12.6% 13.3% 12.6%Overall median 9.5% 11.0% 11.8% 11.3% 10.3% 10.7% 10.8% 11.1% 10.4% 10.8% 10.7%


04 January 2012


Figure 19: YoY revenue growth Ticker 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Apparels & accessories Bossini 0592.HK 16.9% 3.3% 6.2% 7.4% 12.0% 15.6% 2.5% -6.4% -0.2% 8.5%Giordano 0709.HK 1.4% 3.1% -5.5% 18.1% 10.2% -0.9% 13.2% -4.8% -10.1% 11.8%Bauhaus 0483.HK 8.1% 12.6% 15.9% 24.1% 18.1% 21.1% 16.6% 12.0%I.T 0999.HK 10.1% 25.5% 26.5% 17.8% 29.8% 34.8% 12.9% 25.2%Joyce Boutique 0647.HK 31.7% -38.7% 5.2% 9.0% 17.2% 15.2% 7.9% 14.0% 6.4% 8.4%Le Saunda 0738.HK -4.7% -6.8% 39.2% 25.4% 17.3% 10.5% 8.2% 15.1% 10.8% 28.6%Moiselle 0130.HK 11.6% 11.2% 10.4% 22.0% 8.3% 14.4% 13.4% 2.4% 5.6%Veeko 1173.HK 11.4% 9.1% 12.9% 6.9% 14.1% 13.1% 12.4% 13.8% 6.6% 15.8%Dickson Concepts 0113.HK -20.5% 4.9% 4.8% 6.9% 3.9% -0.2% 18.3% 15.6% 0.3% -5.5%Average 6.0% -1.9% 10.2% 13.6% 15.5% 11.5% 13.8% 13.0% 5.1% 12.3%Median 6.4% 3.3% 8.1% 10.4% 15.9% 13.1% 13.2% 14.0% 6.4% 11.8%Hard luxury Chow Sang Sang 0116.HK 0.0% 2.8% 31.4% 10.9% -17.9% 21.2% 12.8% 25.5% -4.2% 23.7%Emperor Watch 0887.HK 68.1% 44.0% 18.0% 45.8% 52.4%King Fook 0280.HK -13.5% -18.4% -19.2% 8.8% 13.3% 19.6% 21.1% 15.1% -5.7% 9.9%Luk Fook 0590.HK -6.6% -6.3% 1.4% 12.9% 18.6% 15.1% 29.0% 18.1% 22.8% 40.5%Oriental Watch 0398.HK 5.3% 8.2% 7.7% 1.2% 6.2% 6.9% 24.6% 4.1% -4.0% 25.0%Milan Station 1150.HK 19.4% 19.5%Average -3.7% -3.4% 5.3% 8.4% 5.1% 26.2% 26.3% 16.2% 12.4% 29.1%Median -3.3% -1.8% 4.5% 9.8% 9.8% 19.6% 24.6% 18.0% -4.0% 25.0%Cosmetics Bonjour 0653.HK 45.2% 36.0% 26.9% 33.0% 5.8% 6.2% 10.2% 14.2% 23.4% 24.4%Sa Sa 0178.HK 8.7% 6.8% 8.9% 17.0% 20.1% 10.2% 6.8% 18.0% 12.5% 15.4%Average 26.9% 21.4% 17.9% 25.0% 12.9% 8.2% 8.5% 16.1% 18.0% 19.9%Median 26.9% 21.4% 17.9% 25.0% 12.9% 8.2% 8.5% 16.1% 18.0% 19.9%Food & beverage Fairwood 0052.HK -7.8% -7.8% -3.9% 4.5% 13.9% 18.9% 21.3% 14.3% 3.2% 6.6%Café de Coral 0341.HK 4.8% 2.2% 1.2% 5.9% 12.0% 13.1% 12.2% 9.9% 7.9% 5.7%Tao Heung 0573.HK 21.2% 14.3% 32.4% 17.2% 6.8% 12.5%Average -1.5% -2.8% -1.4% 5.2% 15.7% 15.4% 22.0% 13.8% 6.0% 8.3%Median -1.5% -2.8% -1.4% 5.2% 13.9% 14.3% 21.3% 14.3% 6.8% 6.6%Others Aeon stores 0984.HK 8.6% 6.9% 14.8% 5.5% -17.5% 9.4% 11.0% 12.9% 9.8% 3.5%CRA 8052.HK 14.4% 6.8% 9.5% 13.8% 14.9% 11.8% 30.7% 13.9% 0.8% 6.7%Average 11.5% 6.9% 12.1% 9.7% -1.3% 10.6% 20.9% 13.4% 5.3% 5.1%Median 11.5% 6.9% 12.1% 9.7% -1.3% 10.6% 20.9% 13.4% 5.3% 5.1%Overall average 6.0% 1.4% 9.0% 12.4% 11.5% 15.2% 18.1% 14.2% 8.4% 16.9%Overall median 5.0% 3.3% 8.1% 10.4% 14.0% 13.1% 14.4% 14.3% 6.7% 12.5%


04 January 2012


Figure 20: Retail sales growth trend among different segments

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Overall Apparel Hard luxury Cosmetic & medicine F&B

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Figure 21: Apparel sales vs rental rate growth Figure 22: Hard luxury sales vs rental rate growth

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Source: CEIC, Jones Lang LaSalle, Credit Suisse estimates Source: CEIC, Jones Lang LaSalle, Credit Suisse estimates

04 January 2012


Figure 23: Cosmetic sales vs rental rate growth Figure 24: F&B sales vs rental rate growth

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Overall prime Premium prime High-street Retail sales growth - F&B

(%)

Source: CEIC, Jones Lang LaSalle, Credit Suisse estimates Source: CEIC, Jones Lang LaSalle, Credit Suisse estimates

Mid- to high-end apparel retailers seem most vulnerable Based on the above, among all sub-segments, we found that mid- to high-end apparel retailers are the most vulnerable to the catching up of the rental cycle, on the back of their highest rental expense-to-turnover ratio, as well as relatively high revenue growth cyclicality. Bauhaus (0483.HK, HK$1.85, not rated), I.T (0999.HK, HK$4.27, not rated), Moiselle (0130.HK, HK$2.06, not rated) and Veeko (1173.HK, HK$0.23, not rated) all have rental expense that exceeded 20% of their turnover in 2010.

And for those companies that had disclosed rental expenses in their latest half-yearly results, all, except I.T, had recorded rises in rental expense-to-turnover ratios. In the case of I.T, we believe it is partly because of its aggressive store openings; it opened nine additional shops in Hong Kong during the period, and some of them are located in new shopping malls and thus, have a relatively lower-than-advantage rental rate.

Figure 25: Rental expense-to-turnover ratio—select mid- to high-end apparel retailers

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Giordano Bauhaus I.T Joyce Boutique Le Saunda

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Mid- to high-end apparel retailers have the highest rental cost-to-revenue ratios

04 January 2012


Hard luxury segment may see less impact compared to the previous cycle While the hard luxury segment has historically been more cyclical in terms of sales performance, with believe this cycle is different due to the much-increased revenue contribution from mainland Chinese shoppers in Hong Kong, who take advantage of lower retail prices here due to the absence of VAT, consumption tax and import duties (for further details, please refer to our 08 August 2011 report, A bargain for luxury products).

As mentioned above, Hong Kong locals have been on a down-trading mode for more than two years, but the hard luxury segment’s contribution to overall retail sales in Hong Kong has been increasing, accounting for 22.2% of total retail sales in Hong Kong in the first ten months of 2011; in our view, the growth is largely, if not all, driven by the visiting mainland Chinese shoppers.

Figure 26: Hard luxury’s contribution to total retail sales in Hong Kong

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Besides, hard luxury retailers normally have a very low rental-to-turnover ratio of less than 5%, which makes them less vulnerable to rental pressure. We reiterate Luk Fook (0590.HK, HK$27.70, OUTPERFORM [V], TP HK$37.80) as our top pick in the Hong Kong retail sector. Furthermore, the company also has the most potential share price upside, among all the Hong Kong retailers discussed in this report, based on our HOLT analysis. We discuss this in more detail in a later section.

Stiff price differential between Hong Kong and China may help support sales growth of luxury retailers

04 January 2012


Figure 27: Hard luxury segment has the lowest rental expense to turnover ratio

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2010 rental expense to turnover ratio

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Cosmetics segment looks most resilient On the other hand, cosmetics retailers such as Sa Sa (0178.HK, HK$4.36, NEUTRAL [V], TP HK$5.00) and Bonjour (0653.HK, HK$1.23, not rated) have shown the most resilient sales growth during economic downturns. In our view, it could be because cosmetics are considered more ‘essential’ than ‘luxury’ consumption by female consumers, and during economic downturns, they would rather cut spending on clothing than cosmetics.

However, cosmetics are subject to a high consumption tax rate in China, making the price differential steep between Hong Kong and the mainland. Besides, a wider product variety, better product quality and higher certainty of product genuineness also make Hong Kong a better place to buy cosmetics.

However, we notice severe competition for rental spaces (not only among cosmetics retailers, but hard luxury retailers and newly entered foreign brands as well) in key tourist districts, and this results in a significant increase in rental costs.

In the past three months, based on our channel checks, Sa Sa signed four new rental agreements with rental rates 50-150% higher than the previous one. While Bonjour only recorded one new rental agreement during the period, with a rental rate 68% higher than the previous one, it was replaced by other retailers in five other locations, with the new rental rates being 42-300% higher than what it paid previously.

Given their aggressive store expansions in their latest fiscal half-year (both Sa Sa and Bonjour opened six additional stores in Hong Kong), we remain cautious on cosmetics retailers’ margins.

Cosmetic retails have been most resilient in terms of sales growth

04 January 2012


Figure 28: Recently recorded new rental agreement which involved cosmetic retailers Current Rent New Rent Date recorded District lessee (HK$/mo) (HK$/sq. ft) lessee (HK$/mo) (HK$/sq. ft) % chg.2-Sep-11 Central Bonjour 600,000 480 Seed 850,000 680 422-Sep-11 Causeway Bay Bonjour 580,000 414 Swatch 2,300,000 1,643 29712-Sep-11 Mong Kok Sa Sa/ Café De Coral 700,000 47 Lowry Farm 1,200,000 80 7114-Sep-11 Mong Kok Bonjour 600,000 53 GAP 3,200,000 213 30030-Sep-11 Wanchai Physical Fitness 150,000 31 Sa Sa 350,000 73 13330-Sep-11 Tsim Sha Tsui 沙嗲王 (Satay King) 250,000 69 Sa Sa 500,000 139 10011-Oct-11 Causeway Bay Sa Sa 900,000 300 Chow Sang Sang 2,200,000 733 14427-Oct-11 Tsim Sha Tsui Sa Sa 1,590,000 556 Asia Comm 6,300,000 1,500 1703-Nov-11 Causeway Bay Sa Sa 1,000,000 667 VIP Station 1,800,000 1,200 804-Nov-11 Causeway Bay Westwood 400,000 267 Sa Sa 1,000,000 667 15016-Nov-11 Tsim Sha Tsui Bonjour 680,000 296 Bonjour 1,140,000 496 6822-Nov-11 Causeway Bay Bonjour 580,000 414 Watch/Jewellery Shop 2,320,000 1,657 30030-Nov-11 Causeway Bay Sa Sa 2,500,000 360 Omega 5,000,000 719 1001-Dec-11 Causeway Bay King Fook 2,000,000 362 Sa Sa 3,000,000 543 50


F&B retailers remain under pressure Besides pressure from rental hikes (F&B is one of the few sub-segments whose revenue growth has been outpaced by rental rate hikes since the end of the global financial crisis in 2008-09), food inflation has also been catching up. The margin pressure is particularly severe for fast food chains, such as Café de Coral (0341.HK, HK$17.82, not rated) and Fairwood (0052.HK, HK$10.10, not rated), on the back of the minimum wage law imposed since May 2011, putting additional pressure on F&B retailers’ margins.

Figure 29: Food inflation versus growth in restaurant receipts

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HOLT’s view on the Hong Kong retail sector Below is the analysis produced by our HOLT® consumer analyst, Jane Tai. In summary, she believes Hong Kong retailers are priced for peak level returns and robust growth; thus potential upside is only warranted if asset growth surprises on the upside. Among the 19 companies studied, only Luk Fook (0590.HK, HK$27.70, OUTPERFORM [V], TP HK$37.80) and Dickson Concepts (0113.HK, HK$3.95, not rated) show positive upside to HOLT’s best warranted prices.

F&B is likely to remain under margin pressure

04 January 2012

Hong K

ong Retail Sector

19

Figure 30: HOLT’s analysis

1CLARITY IS CONFIDENCE HOLT

HK retailing sector: Priced for peak level returns and robust growth

Performance: HK retailers have achieved fairly stable high single digit CFROI® in the past 6 years with a small dip in 2008. IBES consensus estimates suggest further improvement in economic returns to around 11% for 2011 on a more optimistic consumer spending outlook.

What is in the price? Assuming 2011 consensus can be maintained by 2015, the sector will need to achieve 13% CAGR p.a. to justify the current valuation. Expectations appear fair on account of increasing tourist arrivals, particularly those from Mainland China. Upside is only warranted if asset growth surprises, as last seen in 2010.

10.9%

Source: HOLT Macrostation includes 14 HK retail companies.

Aggregate CFROI & asset growth

13%

Source: Company data, Credit Suisse HOLT

04 January 2012


Figure 31: HOLT analysis—CFROI

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Figure 32: HOLT analysis—asset efficiency (sales/inflation adj. gross investment)

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04 January 2012


Figure 33: HOLT analysis—adjusted operating margin

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Figure 34: HOLT analysis—rental expense as % of gross cash flow

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04 January 2012


Figure 35: HOLT analysis—sales/capitalised operating leases

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Figure 36: HOLT analysis—potential to HOLT's best warranted prices

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Companies Mentioned (Price as of 03 Jan 12) Abercrombie & Fitch Co. (ANF, $48.84, NOT RATED) Aeon Stores (Hong Kong) Company Ltd (0984.HK, HK$17.90, NOT RATED) Bauhaus Int'l (0483.HK, HK$1.85, NOT RATED) Bonjour (0653.HK, HK$1.23, NOT RATED) Bossini Int'l (0592.HK, HK$0.59, NOT RATED) Cafe De Coral Holdings Ltd (0341.HK, HK$17.82, NOT RATED) Chow Sang Sang (0116.HK, HK$17.52, NOT RATED) CRA (0831.HK, HK$3.22, NOT RATED) Dickson Concepts (0113.HK, HK$3.95, NOT RATED) Emperor Watch & Jel. (0887.HK, HK$0.99, NOT RATED) Fairwood (0052.HK, HK$10.10, NOT RATED) Gap, Inc. (GPS, $18.55, NOT RATED) Giordano Intl. (0709.HK, HK$5.65, NOT RATED) I.T (0999.HK, HK$4.27, NOT RATED) Joyce Boutique (0647.HK, HK$0.74, NOT RATED)

04 January 2012


King Fook (0280.HK, HK$1.16, NOT RATED) Le Saunda (0738.HK, HK$2.69, NOT RATED) Luk Fook Holdings International (0590.HK, HK$27.70, OUTPERFORM [V], TP HK$37.80) Milan Station (1150.HK, HK$1.34, NOT RATED) Moiselle (0130.HK, HK$2.06, NOT RATED) Oriental Watch (0398.HK, HK$3.53, NOT RATED) Sa Sa International Holding (0178.HK, HK$4.36, NEUTRAL [V], TP HK$5.00) Tao Heung (0573.HK, HK$3.06, NOT RATED) Veeko (1173.HK, HK$0.23, NOT RATED)

Disclosure Appendix Important Global Disclosures Gabriel Chan, CFA & Isis Wong each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 0590.HK 0590.HK Closing

Price Target

Price

Initiation/ Date (HK$) (HK$) Rating Assumption 5-Jan-11 26.95 33.8 O X 21-Apr-11 29 35 30-Jun-11 37.75 45 2-Aug-11 43.7 51.75 27-Sep-11 25.3 35 29-Nov-11 30.15 37.8

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Closing Pr ice Target Price Initiation/Assumption Rating

HK$

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for 0178.HK 0178.HK Closing

Price Target

Price

Initiation/ Date (HK$) (HK$) Rating Assumption 26-Jun-09 1.445 1.615 30-Nov-09 2.44 2.61 25-Jun-10 3.07 3.55 12-Oct-10 3.11 4.05 X 2-Dec-10 4.885 5.5 8-Sep-11 5.26 5 N 2

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Closing Pr ice Target Price Initiation/Assumption Rating

HK$

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry

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factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 47% (61% banking clients) Neutral/Hold* 40% (57% banking clients) Underperform/Sell* 10% (51% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (0590.HK) Method: Our TP of HK$37.80 for Luk Fook is based on 13x FY3/13 P/E (price-to-earnings ratio). Our valuation target also implies 10% discount to other China focused high-end retailers. In our view, as over 60% of Luk Fook's operating profits are directly or indirectly coming from China, its valuation gap should continue to narrow. Risks: Risks to our HK$37.80 target price includes 1) sharp decline in precious metals or gem prices, 2) higher-than-expected increase in rental costs, and 3) failure to uphold product control and monitor sales through franchisees. Price Target: (12 months) for (0178.HK) Method: Our HK$5.00 target price for Sa Sa is based on 0.80x price/earnings growth (PEG) or 18x FY3/13 P/E. Risks: Risks to our HK$5.00 target price for Sa Sa of include: 1) a slowdown in domestic consumption, 2) bad tourist arrival figures from China at Hong Kong, 3) execution of its China retail expansion plans, and 4) whether continued roll-out of its in-house brands is successful Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0178.HK) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0590.HK, 0178.HK) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

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Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Gabriel Chan, CFA, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited. • Isis Wong, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

04 January 2012Asia Pacific/Hong Kong

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