Rise of The Yummy

Consumer Brands & Retail Global luxury goods Equity March 2014
Rise of the Yummy

Young, Urban, Male: three reasons to rejoice
Luxury names have reeled from emerging market macro doubts, but we remain condent that emerging market demand for luxury brands will prove more than resilient In this report, we outline why we are optimistic: 1) Urbanisation and economic growth create more emerging client targets for luxury; 2) China is no country for old men but rather a market that could be driven more by young women. In other markets, a metro-sexual shift is starting to move the needle, with Japan and Korea showing the way; and 3) Around the world, purchases will increasingly be made by the digitally plugged-in youth Our preferred stocks are Burberry, Richemont and Luxottica. We initiate coverage on Emperor Watch and Jewellery. All are OW rated
By Erwan Rambourg, Antoine Belge and Cathy Chao
Disclosures and Disclaimer This report must be read with the disclosures and analyst certications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Consumer Brands & Retail Global Luxury Goods Equity March 2014
abc
Summary
Emerging clienteles driven by youth, economic development and, with the exception of China, men should continue to strongly support luxury demand growth for this year and beyond. Current emerging market doubts provide an opportunity to buy luxury names. We prefer Burberry, Richemont and Luxottica and initiate on Emperor Watch & Jewellery with an OW rating
Leaving aside FX, 2014 wont be that bad really

2014 sales outlook still solid
Here and there, threats to travel (SARS, 9/11) and political turmoil will put pressure on markets such as Russia or Thailand. But when looking at luxurys core Chinese consumer, as well as Korea, Japan, the US and even parts of Europe, there are still reasons to believe 2014 should be at least as strong as 2013 in terms of organic sales growth for the sector (+9% vs +8%). Having spent much time recently with brand managers, watch distributors, mall operators and many other contacts in headhunting, e-commerce, brand consultancy and more in Shanghai, Hong Kong, Macau and Seoul, we believe the outlook for the industry sounds optimistic or, more importantly for this report, that investors sound too pessimistic!
Margins under pressure mostly a short-term issue

FX: Most currencies have continued to deteriorate against the EUR so far this year. Therefore, both reported sales and operating margins should now be if current spot rates prevail slightly lower than in our previous publications. Of course the RUB and the Brazilian Real are not as key for luxury players as they will be for other consumer subsectors but the citizens of these countries will see their spending power affected abroad and their spending translated into a lower amount of EUR for the brands Cost of growth in soft luxury is a structural weakness: We still struggle with the concept of peak margins for the luxury industry, which many investors are die-hard fans of. History suggests that brands in the space will want to control their image, their distribution, and their prices so that gross margins are supported by an incremental retail (versus wholesale) exposure and a better image and inventory management. Moreover, while growth in the noughties was price and mix driven, more recent years have seen volume growth, which implies greater SG&A leverage. While all brands (except maybe Louis Vuitton) should aspire to higher operating margins, soft luxury companies (apparel, handbags, accessories) will likely find they will have to re-invest more than hard luxury companies (watches, jewellery, pens).
abc
Young, Urban, Male: three reasons to rejoice

Youth: benefits and issues of selling to a younger consumer
Premium consumers are getting much younger. In particular, Asian ones, who are now the ones significantly moving the needle for luxury, are younger than their Western counterparts. Youth is a positive as consumers want to display social status early on, but fast-changing expectations and fashion trends put pressure on the mainstream brands. Not everyone is nimble in luxury. And, with many consumers seriously plugged into digital and social media, it might become an issue that most luxury brands leaving aside Burberry are not.
Emerging markets: better GDP growth, wealth creation and urbanisation

With much travelling and many meetings in Asia lately, we have developed the sense that there is too much negativity on China. While it may sound counter-intuitive given the macro economic news, individual interviews give us the sense that, after three years of hiding (from the economic environment in 2011 and 2012, and from the anti-corruption rhetoric since September 2012), the high-end Chinese consumer is ready to make a few purchases again. Meanwhile, urbanisation powers on, and GDP growth and wealth creation are creating hordes of new luxury targets as the upper middle class swells. Beyond China, many emerging markets are starting to appear on the luxury map as wealth creation is also creating new luxury targets for the brands.
Men: starting to move the needle elsewhere than in China

China is a particular market, having been dominated by male purchases from the on-set as gifting and wealth creation were structurally male dominated. This is about to change: the future of Chinese luxury consumption is female. Nothing surprising here, just Chinese spending patterns converging towards those of Japan, Korea, Western Europe and the US. Spending patterns in the latter are changing as well, with luxury consumption becoming more male now. The metro-sexual, that clich from twenty years ago, is now becoming a commercial reality, with Japan and Korea (as so often) showing the way. We warn however, that this male-driven growth could trigger new pressures on the brands.
Ranking luxury stocks

Three preferred stocks: Burberry, Richemont, Luxottica
We like Burberry for its digital supremacy and the misplaced pessimism of the market. Similarly, with regard to Richemont, we think fears on China are overdone, while the valuation is compelling and Cartier watches are rebounding. For Luxottica, its captain-of-industry status and retail / wholesale synergies as well as M&A opportunities should support the shares.
Soft luxury: we also like Prada, Kering, Tods, Coach, Hugo Boss
Prada's de-rating has gone too far, in our view, and we think the valuation relative to peers is now very compelling. For Kering, Tod's and Coach, although we see no short-term catalysts, we are confident of an H2 rebound. We are upgrading Hugo Boss in this report following the recent sell-off. The brand is operating in a less crowded segment than most peers, should benefit from the development of male purchases and consensus expectations have now come down.
abc
Hard luxury: Tiffany and Emperor Watch & Jewellery stand out
Tiffany's higher-end repositioning, along with lower raw material prices, should continue to support the stock. We initiate with an OW on Emperor, a great way to play the Chinese traveler.
Why we are Neutral on LVMH, Christian Dior, Herms, and Ferragamo

LVMH's current valuation relative to growth is still not compelling and we believe Christian Dior also has limited upside. Herms, and Ferragamo also looked fairly valued.
Why we are Neutral on the Swatch Group and Hengdeli

Sales for Swatch should be robust but limited jewellery exposure makes it less interesting than Richemont. We remain uncomfortable with recent M&A deals and communication at Hengdeli.
Key data for luxury goods Reuters Burberry* Coach* Emperor Watch Hugo Boss Kering Luxottica Prada Tiffany Tod's Richemont* Christian Dior* Ferragamo Hengdeli Herms LVMH Swatch Moncler ____ Rating ______ New Old Currency unchanged unchanged NA Neutral unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged unchanged GBP(p) USD HKD EUR EUR EUR HKD USD EUR CHF EUR EUR HKD EUR EUR CHF EUR Price at 18/03/14 1,442.00 50.23 0.59 92.19 139.95 39.36 56.45 92.67 93.95 83.50 134.95 21.38 1.51 234.6 129.1 560 12.83 __ Target price ___ Potential New Old return*** 1,820.00 64.00 0.80 110.00 176.00 46.00 75.00 110.00 111.00 106.00 140.00 24.00 1.66 262.00 141.00 625.00 12.60 1,850.00 64.00 NA 110.00 185.00 46.00 82.00 106.00 118.00 108.00 140.00 27.50 2.30 279.00 141.00 630.00 13.00 26.2% 27.4% 35.8% 19.3% 25.8% 16.9% 32.9% 18.7% 18.1% 26.9% 3.7% 12.3% 9.9% 11.7% 9.2% 11.6% -1.8% Average _________ PE __________ Implied 2015 PE 2013e 2014e 2015e (based on target price) 19.1 15.0 13.5 19.0 14.3 28.4 21.4 24.1 21.5 18.4 14.1 23.9 8.7 30.4 19.0 15.8 33.3 19.3 17.1 15.7 9.7 16.8 14.1 25.1 18.1 20.1 20.5 16.5 12.6 23.0 8.7 28.4 17.2 16.2 26.2 17.4 15.2 14.5 7.8 14.4 11.7 21.7 15.4 17.2 17.4 14.5 11.4 19.7 8.0 25.4 15.6 14.6 21.7 15.1 19.1 18.5 10.6 17.1 14.7 25.4 20.5 20.5 20.6 18.4 11.8 22.1 8.8 28.4 17.1 16.3 21.4 17.7
BRBY.L OW COH.N OW 0887.HK OW BOSSn.DE OW PRTP.PA OW LUX.MI OW 1913.HK OW TIF.N OW TOD.MI OW CFR.VX OW DIOR.PA N SFER.MI N 3389.HK N(V) HRMS.PA N LVMH.PA N UHR.VX N MONC.MI UW (V)
Note: *Based on calendar data, **average do not include Herms, ***Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Source: HSBC estimates
abc
Summary of HSBC sales estimates changes and comparison with Bloomberg consensus __________________________ 2014e Sales __________________________ ______ HSBC _______ HSBC vs cons. Currency New Old Change Consensus GBP (p) EUR USD EUR CNY EUR EUR EUR EUR EUR EUR HKD EUR CHF USD EUR 2,315 31,664 4,880 1,320 14,435 4,092 2,610 10,105 7,710 31,180 676 3,586 10,600 9,200 4,040 1,000 2,330 31,468 4,880 1,350 14,537 4,104 2,660 10,285 7,732 31,000 684 3,650 10,625 9,200 4,040 1,030 -1% 1% 0% -2% -1% 0% -2% -2% 0% 1% -1% -2% 0% 0% 0% -3% 2,330 32,657 4,892 1,354 14,763 4,122 2,635 10,174 7,706 31,541 672 3,611 10,655 9,299 4,032 1,005 -1% -3% 0% -3% -2% -1% -1% -1% 0% -1% 1% -1% -1% -1% 0% 0% _____________________ 2015e Sales _______________________ _______HSBC _______ HSBC vs New Old Change Consensus cons. 2,505 34,090 5,110 1,440 15,018 4,505 2,865 10,943 8,346 33,600 784 3,993 11,480 9,920 4,430 1,100 2,550 33,844 5,110 1,540 15,211 4,516 2,925 11,149 8,371 33,401 795 4,075 11,600 9,920 4,419 1,131 -2% 1% 0% -6% -1% 0% -2% -2% 0% 1% -1% -2% -1% 0% 0% -3% 2,539 35,701 5,137 1,480 16,213 4,593 2,873 10,920 8,290 34,129 775 4,021 11,602 10,153 4,333 1,076 -1% -5% -1% -3% -7% -2% 0% 0% 1% -2% 1% -1% -1% -2% 2% 2%
(m) Burberry* Christian Dior** Coach** Ferragamo Hengdeli Herms Hugo Boss Kering Luxottica LVMH Moncler Prada Richemont* Swatch Tiffany Tod's
*FY March n+1, ** FY June n+1 Source: HSBC estimates, Bloomberg consensus
Summary of HSBC EBIT estimates changes and comparison with Bloomberg consensus ___________________________2014e EBIT __________________________ ______ HSBC _______ HSBC vs cons. Currency New Old Change Consensus GBP (p) EUR USD EUR CNY EUR EUR EUR EUR EUR EUR HKD EUR CHF USD EUR 471 6,378 1,269 238 992 1,292 496 1,795 1,181 6,384 202 959 2,442 2,290 807 200 473 6,385 1,269 257 1,045 1,290 498 1,921 1,205 6,418 203 998 2,455 2,300 807 213 0% 0% 0% -7% -5% 0% 0% -7% -2% -1% -1% -4% -1% 0% 0% -6% 462 6,631 1,299 245 1,295 1,315 512 1,830 1,178 6,564 195 973 2,450 2,349 797 199 2% -4% -2% -3% -23% -2% -3% -2% 0% -3% 3% -1% 0% -3% 1% 0% ______________________2015e EBIT _______________________ _______HSBC _______ HSBC vs New Old Change Consensus cons. 519 6,917 1,329 272 1,074 1,441 574 2,095 1,347 6,992 234 1,100 2,825 2,540 949 232 529 6,940 1,329 314 1,143 1,432 580 2,209 1,375 7,019 237 1,172 2,892 2,550 942 246 -2% 0% 0% -13% -6% 1% -1% -5% -2% 0% -1% -6% -2% 0% 1% -6% 510 7,383 1,371 279 1,472 1,477 579 2,046 1,337 7,241 225 1,095 2,774 2,611 902 218 2% -6% -3% -3% -27% -2% -1% 2% 1% -3% 4% 0% 2% -3% 5% 6%
(m) Burberry* Christian Dior** Coach** Ferragamo Hengdeli Herms Hugo Boss Kering Luxottica LVMH Moncler Prada Richemont* Swatch Tiffany Tod's
*FY March n+1, ** FY June n+1
Source: HSBC estimates, Bloomberg consensus
Summary of HSBC EPS estimates changes and comparison with Bloomberg consensus ___________________________ 2014e EPS ___________________________ ______ HSBC _______ HSBC vs cons. Currency New Old Change Consensus GBP (p) EUR USD EUR CNY EUR EUR EUR EUR EUR EUR HKD EUR CHF USD EUR 0.77 9.58 3.10 0.91 0.14 8.25 5.38 9.91 1.57 7.50 0.49 0.25 3.78 34.32 3.85 4.58 0.78 9.49 3.10 1.00 0.15 8.24 5.41 10.68 1.60 7.47 0.50 0.26 3.80 34.50 3.85 4.95 0% 1% 0% -9% -7% 0% -1% -7% -2% 0% -2% -4% -1% -1% 0% -8% 0.77 9.84 3.14 0.95 0.16 8.35 5.46 10.30 1.51 7.71 0.47 0.26 3.81 34.63 3.76 4.61 1% -3% -1% -4% -14% -1% -1% -4% 4% -3% 5% -3% -1% -1% 2% -1% ______________________ 2015e EPS _______________________ _______HSBC _______ HSBC vs New Old Change Consensus cons. 0.86 10.73 3.29 1.06 0.15 9.23 6.28 11.91 1.81 8.27 0.59 0.29 4.28 38.19 4.61 5.39 0.88 10.64 3.29 1.15 0.16 9.17 6.36 12.57 1.85 8.22 0.61 0.31 4.38 38.40 4.58 5.79 -2% 1% 0% -8% -5% 1% -1% -5% -2% 1% -3% -6% -2% -1% 1% -7% 0.86 11.45 3.41 1.10 0.18 9.42 6.20 11.83 1.75 8.61 0.56 0.29 4.20 38.60 4.27 5.09 0% -6% -4% -3% -16% -2% 1% 1% 4% -4% 6% 0% 2% -1% 8% 6%
(m) Burberry* Christian Dior** Coach** Ferragamo Hengdeli Herms Hugo Boss Kering Luxottica*** LVMH Moncler Prada Richemont* Swatch Tiffany Tod's
*FY March n+1, ** FY June n+1, *** HSBC EPS for Luxottica is before trade-mark amortisation
Source: HSBC estimates, Bloomberg consensus
abc
Contents
Calendar of events Young Urban Males could support luxury growth Luxury industry outlook & valuation Ranking the luxury stocks Company profiles
Burberry (BRBY LN) Christian Dior (CDI FP) Coach (COH US) Emperor Watch & Jewellery (887 HK) Hengdeli (3389 HK) Herms (RMS FP) Hugo Boss (BOSS GR) Kering (KER FP) Luxottica (LUX IM) LVMH (MC FP) Moncler (MONC IM) Prada (1913 HK) Richemont (CFR VX)
6 7 16 23 25
26 30 34 38 46 50 54 58 62 66 70 74 78
Salvatore Ferragamo (SFER IM) Swatch (UHR VX) Tiffany (TIF US) Tods (TOD IM)
82 86 90 94
Disclosure appendix Disclaimer
101 104
We would like to thank Anne-Laure Jamain* (HSBC Bank Plc) and Carole Madjo (HSBC Bank plc, Paris branch for their contribution to this report. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
5
abc
Calendar of events
Luxury goods calendar of events Company Burberry Burberry Burberry Burberry Christian Dior Coach Emperor Watch & Jewellery Hengdeli Herms Herms Herms Herms Hugo Boss Hugo Boss Hugo Boss Luxottica Luxottica Luxottica LVMH LVMH Moncler Moncler Moncler Kering Kering Prada Prada Richemont Richemont Richemont Salvatore Ferragamo Salvatore Ferragamo Salvatore Ferragamo Swatch Tiffany Tiffany Tod's Tod's Tod's FHS Data FHS Data FHS Data FHS Data FHS Data FHS Data FHS Data FHS Data FHS Data FHS Data FHS Data
Source: company data
Type of Event H2 2013/2014 sales Prelim FY2013/2014 earnings Q1 2014-2015 retail sales H1 2014/2015 FY 2014 earnings 3Q 14 earnings release H1 2014 earnings Prelim FY13 earnings FY 2013 earnings 1Q 2014 sales 2Q 2014 sales H1 2014 results 1Q 2014 results H1 2014 results 9M 2014 results 1Q 2014 results H2 2014 results 9M 2014 results Q1 2014 sales H1 2014 results Q1 2014 results H1 2014 results 9M 2014 results Q1 2014 sales H1 2014 results FY13 earnings 1Q 14 earnings FY 2013/2014 Results 5 months sales (ending August 2014) H1 2014/2015 results 1Q 2014 Results H1 2014 results Q3 2014 results H1 2014 results Q4 2013 results Q1 2014 results 1Q 2014 results H1 2014 results 9M 2014 results February period March period April period May period June period July period August period September period October period November period December period
Date 16-Apr-14 21-May-14 09-Jul-14 Oct-14 Jul-14 29-Apr-14 Aug-14 24-Mar-14 20-Mar-14 29-Apr-14 18-Jul-14 29-Aug-14 07-May-14 31-Jul-14 04-Nov-14 29-Apr-14 24-Jul-14 29-Oct-14 Apr-14 End July 2014 15-May-14 06-Aug-14 11-Nov-14 24-Apr-14 End July 2014 02-Apr-14 09-Jun-14 15-May-14 17-Sep-14 07-Nov-14 13-May-14 28-Aug-14 13-Nov-14 End July 2014 21-Mar-14 May-14 14-May-14 07-Aug-14 12-Nov-14 20-Mar-14 24-Apr-14 27-May-14 24-Jun-14 22-Jul-14 21-Aug-14 18-Sep-14 21-Oct-14 20-Nov-14 18-Dec-14 03-Feb-15
abc
Young Urban Males could support luxury growth

The 2014 sales outlook remains solid and Greater China could
surprise positively. However, margins are still under pressure from FX, hence we are cutting estimates for most companies
Longer term, urbanisation, and the shifts towards younger, and
more male, consumers should support strong sales growth; we believe fears on emerging markets are overdone
Prefer Burberry in soft luxury, Richemont in hard luxury, and
Luxottica. Initiate on Emperor Watch & Jewellery at OW
Youth: benefits and issues of selling to a younger consumer

Premium consumers are getting younger, especially in Asia
Although it may sound quite counter-intuitive, luxury goods consumers are in fact relatively young. And they are getting younger. This is driven by psychological and social trends whereby consumers prefer to display social status earlier on (while older, better-off consumers may have less to prove and will tend to buy for themselves rather than to impress others). In addition, with increasing wealth creation and affordability of travel, as well as online blogs and forums, information on brands is more readily accessible to target audiences than ever before. In a 2012 survey published by the Bocconi University, it is said that Chinese luxury consumers are up to 14 years younger on average than their European counterparts and 25 years younger than those in America. We believe the greater
youthfulness is bound to be similar in other emerging markets, notably Brazil, Indonesia, Vietnam and many countries in Africa (eg Nigeria, Ghana). The same Bocconi report claims that the majority of luxury consumers in three to five years time will be aged between 25 and 30.
An issue for mainstream brands, an opportunity for alternative brands

A brand cant complain about attracting a younger consumer. Or can it? The issue with youth is quite obvious. Young consumers, especially those who are wealthy enough to afford luxury products, have very fast changing expectations and follow fashion trends quite quickly. If your brand is not nimble enough, there is everything to lose. We often hear comments that Chinese luxury consumers, for instance, do not show high levels of brand loyalty. We think this is a misunderstanding.
abc
The reality is Chinese luxury consumers are young and so more demanding, and have higher expectations. They are loyal, as long as they have a reason to be so. In other words, its not so much a question of consumer loyalty but more one of brand innovation. We believe mainstream brands will find it more difficult than alternative ones to respond, simply as scale hinders speed. Moreover, as we explained in our recent Multi-baggers? A bit of caution report published on 15 January 2014, soft luxury companies will be more under pressure than hard luxury ones because of the simple fact that barriers to entry are quite low. The ability to respond to the desire for newness is one reason that Zara-type business models such as the flash collection approach developed by Prada offer better protection than traditional business models in soft luxury.
For instance, in October 2013, Herms introduced a new application which shows how to use a piece of silk in a fun way. Via an interactive platform, consumers can scroll down 38 pieces of silk and create for example a headband or a dress. Kering, meanwhile, is continuing to strengthen its online channel with the integration in November 2013 of Brioni in its JV with Yoox (signed in August 2012) to manage the online stores (seven of Kerings brands are already managed by Yoox online). Note that nearly all of Kerings luxury brands are available online, with Gucci having its own website. Federico Barbieri, senior VP of ebusiness at Kering, has said: I cant understand why the industry has been hesitant or shy about jumping into it. In digital, if you want to keep engaging the consumer and keep positioning your brand and molding your business, you have to do it. There is no barrier, and the future is there, and you have to define what a luxury brand experience is online. The online channel is a particularly important component when it comes to attracting, and building brand awareness among, the younger generation. As the table below shows, according to a survey conducted by Ipsos mediaCT in September 2013, US affluent consumers (household income of USD100,000+) aged 18-31 years spent an average of 53 hours a week online vs c42 or less hours for older age groups.
Weekly time spent online by US affluents*, by generation, 20112013 (hours) 2011 Millenials (18-31) Gen X (32-48) Baby boomers (49-67) Seniors (68+) Total 40.2 35.6 29.4 21.8 32.8 2012 42.4 42.4 334 20.3 37.4 2013 52.7 42.6 35.7 26.0 41.6
Consumers are seriously digitally plugged-in; what about the brands?

Luxury goods companies cannot ignore digitalization. The emergence of new smart devices everywhere has led to a more and more connected world, especially among the younger generation. Burberry has been the first mover in terms of digitalization, including online streaming of runway shows as well as in-store online experiences. In addition, the company has signed an agreement with WeChat which, according to CEO Christopher Bailey opens up a huge new world of opportunity in the digital space. He added that the exciting thing is the deeper and more meaningful way that we are able to tell our stories using this platform. The digital focus truly sets Burberry apart in terms of product and service, which helps to boost the brand awareness, especially in Asia. However, other luxury companies have reassessed the need to develop and strengthen their online platforms and are now fully embracing digital opportunities.
Note:* household income of USD100,000+ Source: Ipsos MediaCT, Ipsos Affluent Survey USA (Sept 19, 2013)
abc
Luxury goods: Online search frequency in China

Less than once 6 months Once every 3 months Once a month Once 2 weeks More than a week 12% 15% 19% 12% 27% 24%
Luxury goods: Interest in purchasing online in China

Not interested Somewhat not interested Neutral Somewhat interested 16% 9% 7% 34% 19% 34% 34%
11%
30%
30%
6%
35%
0% 5% 10% 15% 20% 25% 30% 35% 40%
2010 2012
Very much interested
10%
0% 5% 10% 15% 20% 25% 30% 35%
2011 2012
Source: KPMG, TNS
Source: KPMG, TNS
The Chinese are by far the most advanced consumers in terms of digitalization. And as the table below shows, in a very short period of time, Chinese consumers have built up a large repertoire of brand knowledge.
Brand recognition levels of middle-class Chinese (aided recall) Clothes Numbers of brand list (2006) Average number recognised (2006) Number of brands in list (2011) Average number recognised (2011)
Source: KPMG-TNS
A survey from the same firm in relation to online search frequency highlighted that 70% of potential consumers searched for luxury brands on the internet at least once a month in 2012. The survey also showed a surge in online shopping intentions, with 40% of respondents indicating they are interested in purchasing luxury goods online in 2012, a substantial increase from 22% in 2011. One of the main challenges relating to online business is that it accelerates the process of consumer knowledge, especially in the BRIC countries. In addition, as social media trends move very fast, it is difficult to find the right people to blog about your brand. Lastly, as online sales are not regulated, some consumers are concerned about counterfeiting. Overall, online sales still represent only a very small proportion of the total, accounting for c4.5% of global luxury sales in FY2013, according to Altagamma.
Bag & Watches Jewellery Shoes 15 4.7 40 15.9 25 7.6 26 8.8 9 2.5 13 5.6
36 9.3 39 13.5
China is connected: what a difference six years make _____ 2007 ______ _____ 2013 ______ Internet % of total Internet % of total users (m) users (m) National Beijing Shanghai Guangdong
Source: CNNIC 2012
210 7.4 8.3 33.4
15.9% 46.6% 45.8% 35.9%
591 15.3 16.9 69.5
44.1% 71.6% 75.6% 66.1%
According to KPMG Chinas chairman: The internet has become an increasingly important channel for brand positioning. Consumers will only continue to spend more online, an important point to which luxury brands need to respond.
abc
Emerging markets: stronger GDP growth, wealth creation and urbanisation

Why the market is too pessimistic on China for 2014
As we highlighted recently in our Luxury post card A slightly Greater China report published on 24 February, after meeting with many brand managers, retail operators, shop managers, headhunters and other luxury-relevant people in Shanghai, Hong Kong and Macau, we found a shared sentiment of "cautious optimism" in the trade which doesn't seem to be shared by many investors. In mainland China, despite the on-going anticorruption messages being delivered by the Xi administration, there is a sense that consumer sentiment may have reached a trough. Indeed, following the poor economic environment in 2011-12 and the negative effects of the anticorruption campaign in 2013, it seems premium consumers may slowly be starting to stage a comeback. According to the 2013 Hurun report, the HNWI (High Net Worth Individuals) of China are becoming more optimistic and more confident in the Chinese economy. For the first time in 5 years, the Hurun business confidence index rose in 2013, by 25% yoy. Meanwhile, we have never heard so many industry contacts talk so much, and in such excited tones, about Macau. Our conversations with brand managers imply that real estate projects in Cotai are regarded as extremely attractive and current sell-through trends in luxury goods are likely to be very impressive. This seems linked to the continuous increases in minimum bets (drawing in higher- ticket consumers) as well as (more structurally) the under-penetration of luxury in Macau. Finally, Hong Kong seems to be holding its own. While feedback from watch retailers is quite
diverse, Lunar New Year sales were likely better than expectations, especially for high-end watches. In addition, the level of discounts is not as steep as it was a few months back, and inventories are looking healthier.
Emerging Asia continues to outperform the world; South Korea, Hong Kong and LatAm are also firm _______GDP ________ 2013 2014 2015 World (nominal GDP weights) World (PPP weights) Developed Emerging North America Asia / Pacific China Japan Hong Kong SAR Indonesia Singapore South Korea Taiwan Thailand Vietnam Western Europe Eurozone Germany France Italy Spain Other Western Europe EMEA Latin America
Source: HSBC estimates
2.1 2.8 1.2 4.6 1.9 4.3 7.7 1.7 2.9 5.6 4.0 2.7 1.7 2.8 5.2 0.1 -0.4 0.6 0.2 -1.8 -1.3 1.6 2.3 2.0
2.7 3.2 1.8 4.9 2.5 4.2 7.4 1.3 3.7 5.0 4.2 3.2 2.8 4.4 5.4 1.2 0.8 1.7 0.6 0.4 0.3 2.3 2.7 3.0
2.9 3.4 1.9 5.2 2.5 4.5 7.7 1.3 4.0 6.0 4.5 3.4 3.4 5.2 5.8 1.4 1.0 1.5 1.0 0.6 0.9 2.3 3.1 2.6
While a pick-up in luxury sales growth in Greater China will sound counter-intuitive to many, we believe it is logical, notably on the watch front, as we are lapping the steep declines seen in late 2012/early 2013. The gifting market does not even need to improve for the trend to look better.
Long-term wealth creation

In addition to GDP growth rates, long-term wealth creation gives us plenty of reason to be optimistic. The HNWI population grew by 3.8% in Asia in 2013, while in other emerging markets such as the Middle East and Africa, the growth was greater, at 15.3% and 9.5%, respectively.
10
abc
The Wealth-X and UBS report of 2013 predicts that Asia will outpace the US and Europe in the next 5 years in terms of growth in the number of HNWIs. In China, the number of HNWIs is expected to grow by 80% in the next ten years to reach 14.200 people, according to Knight Frank LLP. According to HSBC economists, the financial wealth of the Chinese might overtake that of the Japanese by 2015 (see the report The Wealth of Asians, how rich really?). By 2020, the financial wealth of SouthEast Asia and India is expected to be growing faster than that of China.
The degree of urbanisation is also increasing in emerging markets. As a consequence of urbanisation and rising incomes, the swelling middle class will quickly become more sophisticated which will lead to changes in their consumption tastes. This phenomenon will benefit luxury brands as they are often used as a way of displaying social status. Consequently, the long term CAGR (2012-2050e) of clothing and footwear should be higher in emerging markets compared to Europe and the US (see table below).
All dressed up with places to go CAGR between 2012 and 2050 Philippines Malaysia India China Peru Turkey Egypt, Arab Rep. Pakistan Colombia Mexico Indonesia Saudi Arabia Poland Thailand Russian Federation Argentina Brazil Europe US
Source: HSBC Report Consumer in 2050, the rise of the EM middle class
The swelling middle class

According to a McKinsey study, the upper middle class in China (ie the population with an income ranging from 106,000 to 229,000 renminbi) represented 5% of urban households in 2012 but should account for 15% in 2022, equating to a total upper middle class population of 54m. This growth will be the fastest of any social category, followed by that of the affluent category (income >229,000 renminbi). The mass middle class and poor categories, on the contrary, are expected to shrink by 2022, as China gets richer. The growth of the middle class will stem mainly from third-tier cities, notably in the north and west of China. In other emerging markets, the middle class will also see strong growth. In India, the middle class is expected to account for 20% of the population by 2015 (according to McKinsey) and in Russia it is expected to reach 40% (HSBC estimate). Our economists believe that, through to 2030, the countries with the strongest growth in their middle classes (as a % of the total population) will be China and Russia, with the middle class representing c70% of the population for both countries. In other countries, such as Brazil, Turkey, the Philippines and Egypt, the middle class will also represent a significant share of the population.
Clothing & Footwear 5.8% 5.3% 4.8% 4.6% 4.5% 4.5% 4.5% 4.1% 3.8% 3.6% 3.6% 3.5% 3.3% 3.3% 3.3% 3.1% 2.7% 1.7% 1.7%
11
abc
Share of middle class and upper income segments in total population in 2030 (%)
100 80 60 40 20 0
Argentina Brazil China Colombia Egypt India Indonesia Malaysia Mexico Pakistan Peru Philippines Poland Russia Saudi ArabiaThailand Turkey
2011 Middle class share 2030 Middle class share

Source: HSBC Report Consumer in 2050, the rise of the EM middle class
2011 Upper income share 2030 Upper income share
12
abc
Apart from China, men to move the needle

In China, the future is female
Hitherto, luxury goods sales in China have been driven by men (c90% of luxury purchases in 1995 were made by men, according to a Bain report). Nowadays, however, women account for c50% of luxury goods spending, a significant shift driven by the greater financial independence of women, who keen to reward themselves with luxury products. According to the last available list of Forbes Billionnaires, the greatest number of self-made billionaire women is to be found in China. In addition, half of the senior management jobs in China are held by women, above the global average of 24% according to a survey conducted by Grant Thornton in November 2013. Luxury brands are moving to address this shift e.g. by dedicating more floor space to womens wear. We have argued for some time now that in mainland China, the only male-driven market for luxury, the future is female and we think imported jewellery has an important role to play, as described in our report Give us a ring published in October 2013. While there is debate over the existence of a branding process in the jewellery segment (by which brands take share from non-branded jewellers), we still think that there are six relevant global brands in the space, two of which (Cartier and Van Cleef & Arpels) are part of Richemont.
This has clearly now changed. Whether it is cosmetics, outdoor sports, fashion or accessories, male purchases have really started to impact overall growth rates. As is often the case with consumer trends, we saw the initial impulse in Japan, with Korea following close behind. In Japan, an offshoot of the metro-sexual man is the "herbivore man, defined in the late noughties by their lack of interest in relationships and their obsession with personal grooming and health. Men-specific luxury stores are one of the ways in which brands have adapted to this new type of Japanese consumer. In Korea, a bit like in Japan and in the West, men are awakening to the luxury sector (as described in our Luxury Post Card: Seoul search report from 3 March). The trend is visible in cosmetics, watches, manbags and accessories. But why now? In the interviews we conducted, we heard various explanations, including that men already had cars and so were now moving on to other luxury categories; that they were marrying at a later age and could therefore invest on themselves instead of having to support a family; and that soap operas had started to make "metro-sexual" attitudes more acceptable socially. The results of the trend are reflected in, for example, the COEX location at Hyundai including a lot more space for watches, even though the awareness of most watch brands aside from Rolex still being quite limited. In addition, Jaeger-LeCoultre now has four stores in Seoul, coming from none three years back, and should be opening another location soon. And Montblanc has decided to go solo in the market after having previously had the Korean operations run by a partner. Meanwhile, from the UK to Japan, preppy-looking brands Jack Wills, Crew Clothing (not the same as J Crew), United Arrows and others are starting to gain traction. As Richard Cope, a researcher from Mintel puts it: "Taking pride and taking greater confidence from maintaining a well groomed appearance now
The metro-sexual reality kicks in: Japan and Korea showing the way
"Metro-sexual" was a term coined exactly twenty years ago to describe men who are interested in their appearance, and spend much time, effort and money on shopping. In the beginning, though, this did not translate into strong growth in purchases of luxury goods by men as "metro-sexuals" were not mainstream.
13
abc
defines what it is to be "a man" in today's society. Rather than being in a minority, men who buy grooming products to boost self-esteem or feel more attractive are now in the majority. We're seeing men occupy previously "feminine" space in the home spending more time on housework and parenting but also as consumers, embracing yoga, beauty goods and the act of shopping itself".
Global luxury revenue split by gender
choices of the finest fabrics and personalization of products. Some brands (eg Tods and Ralph Lauren) also provide clients with the opportunity to relax and share a drink in their lounge bar. At Burberry, menswear is already one of the biggest drivers of growth: menswear and male accessories accounted for more than half of the growth in mainline store revenue in FY2012/13. Retail sales of mens tailoring grew by nearly 70% in the same period. However, the luxury menswear market also presents a few challenges. We believe that the main challenges are faced by longer-established menswear brands such as Ermenegildo Zegna, Corneliani and Canali as they will face tougher competition coming from newer brands such as Brioni (part of Kering) and Tom Ford. The positive for Hugo Boss is that it is not significantly established in emerging markets yet. Another challenge, faced by luxury brands, will be to develop a more diversified product offer responding to the needs of clients. Finally, men are less crisis-resilient as the motto cut for yourself, then for your wife, then for your kids appears to have some truth behind it, and historically watches in a downturn have been a good example of this. Hence having a greater proportion of sales to men could mean greater downside in a downturn.
Men-specific store openings in 2012-2013 Brand Burberry Alexander McQueen Bottega Veneta Prada Gucci Balenciaga Louis Vuitton Tod's (Sartorial floor) Lanvin Ralph Lauren Dolce & Gabbana
Source: Company data
100% 80% 60% 40% 20% 0% 1995

Source: Bain
35%
40%
65%
60%
Women
Men 2013E
In response, Burberry is developing "travel tailoring" for active men, Hugo Boss has launched a creaseresistant, breathable travel line, Tod's has launched a "Sartorial Touch" range, Gucci has developed its own mens capsule collection with Lapo Elkann, and Ralph Lauren, Tom Ford, Berluti and others have invested heavily in flagship stores and product diversification for men.
Men: opportunities and some issues

According to a 2013 Bain report, men account for 40% of the total luxury market and the demand for menswear products keeps on growing. The menswear segment is growing at a stronger pace than womenswear (2010-13 CAGR of 7% for men RTW vs. 4% for women). As mentioned above, luxury brands are seizing this opportunity by opening men-only flagship stores throughout the world. And in order to further seduce this clientele, they are investing in a wide range of services within their men-only stores. Most of the brands offer services such as bespoke tailoring, wide
City London London NYC Milan Milan Manhattan Florence Milan NYC Hong Kong London
Year 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013
14
abc
Ralph Laurens mens store Hong Kong
Source: Company
15
abc
Luxury industry outlook & valuation

The sales outlook remains solid for 2014: we forecast 9%
constant currency industry sales growth after 8% in 2013

Margins will be under pressure though as many currencies have
depreciated further against the EUR

Key themes: underpenetrated jewellery, watches rebounding, low
barriers to entry in soft luxury
2014: sales growth still solid, but margins under pressure

8% constant currency industry growth in Q4 13 and 2013
Industry constant-currency sales growth was 8% yoy in Q4 2013, after 6% in Q1, 10% in Q2 and 8% in Q3, implying an 8% annual growth rate for 2013. While the overall growth rate for Q4 2013 was in line with our expectations, the following surprises were worth noting: Burberry continued to be the fastest growing luxury company in terms of retail lfl sales (up 12% yoy in calendar Q4 vs consensus expectations of 8-9%) LVMH registered 8% organic growth (vs HSBCe +6%) owing to a sequential acceleration at LV (although this was mostly due to a rebound in volumes post a price increase which impacted Q3 sales in Japan) Tods (4% sales growth at constant FX) and Coach (-3%) significantly missed expectations
Prada missed expectations as well; however, its retail sales growth rate (+15%, with lfl up 6.5%) remained one of the best in the industry. For the full year, the relative weakness of wholesale, coupled with initiatives by some brands to close some unsuitable points of sale, weighed on the performance of companies still exposed to this channel (Swatch and Richemont in the hard luxury space; Tods, Hugo Boss, Gucci and Burberry in the soft luxury space). In theory, H2 2013 should have benefited from a basis of comparison effect given that growth in H2 2012 was only 8% (vs 14% in H1). However, in spite of this technical effect, there was no acceleration in H2 2013 (+8%) compared to H1 2013 (+8%). This implies that underlying trends actually worsened. This was particularly notable for Louis Vuitton and Gucci, whose upward repositioning had a more severe negative impact on volumes than anticipated.
16
abc
2014e and 2015e (+9% in both years) to be broadly in line with 2013 (+8%)
We forecast the luxury industry to achieve organic sales growth rates of 9% in both 2014 and 2015 (broadly in line with 2013), with: The above-mentioned wholesale drag waning China mainland growth picking up to 14% in 2014e (after 11% in 2013), but definitely not returning to the c30-50% growth rates prevailing until 2011. Other regions slowing a little (tourist flows normalising in Europe, and US trends moderating after several years of robust growth). If current spot rates prevail, reported sales growth for the industry will actually be higher in 2014e than it was in 2013. For the European companies, FX moves reduced sales growth in 2013 by 5 percentage points; the reduction in 2014e would be only c3 percentage points at current spot rates. In other words, reported sales growth in 2013 was c3% whereas reported growth in 2014e should be c6%.
Trends by geographic region

Asia ex-Japan
In mainland China, we expect trends to continue to differ depending on categories and/or brands: The watch category has been the most affected by the slowdown in economic growth and, probably more importantly, the change in administration in China at the end of 2012, which put political pressure on consumers spending habits, and caused a collapse in gifting. However, we believe there are signs of stabilisation: inventory levels are improving, and end demand is moving sideways rather than down in China (and is still robust in Hong Kong and Macau). We also see average selling prices rising slightly. The jewellery category has continued to be strong, as the category is far less driven by gifting; we expect robust growth in jewellery, boosted by the emergence of financially independent women. Louis Vuitton and Gucci should, in our view, see better growth, but still under-perform as
Luxury goods: contribution of each geographic region to organic sales growth 2007a Geographic breakdown Europe Japan US China Rest of Asia & other Total Organic sales growth rate Europe Japan US China Rest of Asia & other Total Contribution to growth Europe Japan US China Rest of Asia & other Total
Source: Company data, HSBC estimates
2008a 42% 12% 19% 5% 23% 100% 5% -9% 2% 45% 13% 6% 2% -1% 0% 2% 3% 6%
2009a 39% 11% 18% 6% 25% 100% -7% -15% -14% 30% 8% -4% -3% -2% -3% 1% 2% -4%
2010a 36% 9% 18% 8% 28% 100% 9% -4% 14% 45% 23% 15% 3% -1% 2% 3% 6% 15%
2011a H1 2012a H2 2012a 34% 8% 18% 10% 29% 100% 12% 4% 24% 47% 27% 20% 4% 0% 4% 4% 8% 20% 32% 8% 18% 10% 31% 100% 9% 5% 17% 28% 17% 14% 3% 0% 3% 3% 5% 14% 32% 8% 18% 10% 31% 100% 5% 1% 11% 10% 11% 8% 1% 0% 2% 1% 3% 8%
2012a H1 2013a H2 2013a 32% 8% 18% 10% 31% 100% 7% 3% 14% 19% 14% 11% 2% 0% 3% 2% 4% 11% 33% 7% 19% 10% 31% 100% 3% 11% 13% 11% 10% 8% 1% 1% 2% 1% 3% 8% 33% 7% 19% 10% 31% 100% 4% 9% 11% 11% 10% 8% 1% 1% 2% 1% 3% 8%
2013a 31% 8% 19% 10% 32% 100% 4% 10% 12% 11% 10% 8% 1% 1% 2% 1% 3% 8%
2014e 30% 8% 19% 11% 32% 100% 6% 6% 10% 14% 11% 9% 2% 0% 2% 2% 4% 9%
2015e 29% 8% 19% 12% 33% 100% 5% 3% 9% 17% 12% 9% 1% 0% 2% 2% 4% 9%
42% 12% 20% 3% 22% 100% 13% 6% 16% 40% 22% 15% 5% 1% 3% 1% 5% 15%
17
abc
their brand repositioning is a long-term process. Smaller or more niche brands should continue to enjoy strong growth rates (even though rates are normalising as these brands become bigger in China) as long as they are perceived as having a distinctive positioning. In Asia ex-Japan, there is a growing Chinese influence on the luxury markets of Hong Kong, Korea, Taiwan and Singapore, which benefit from ever-increasing Chinese tourist numbers. For more on this, please refer to our The Bling Dynasty thematic report dated 28 March 2013.
Europe
citizens of Hispanic and Asian origins have a higher propensity to buy luxury goods). We forecast y-o-y sales growth of 10% in 2014, and 9% in 2015, after 12% in 2013, but it is worth noting that the US consistently exceeded our forecasts in the 2010-13e period. As we highlighted a while ago in our West Side Stories thematic report, the US remains, to a certain extent, an under-developed market for luxury for social and cultural reasons. But domestic demand is growing fast in this sector and the recent easing of travel constraints including, notably, steps taken by the Obama administration to facilitate Chinese outbound travel to the US means that tourismrelated sales are giving the market an extra boost.
Japan
In Europe, despite the economic uncertainties, business was stronger than expected in 2013. For 2014: Tourism flows (mostly, but not only, Chinese visitors) should again be supportive, even though the emergence of the US as a new destination for Chinese travellers could mean moderating trends We expect a modest resumption of European consumer spending after two and a half years of holding back (as we have already seen for companies in other consumer sub-sectors Samsonite and Nike, for instance). Domestic demand, although sluggish, did not collapse in 2013 as affluent customers proved more resilient than most people thought. We forecast 6% growth in 2014, and 5% in 2015, after 4% in 2013.
US
After years of decline or sluggish growth, Japan was the positive surprise in 2013. In addition to Abenomics boosting consumer confidence, the weaker yen limited the appetite of Japanese customers for buying abroad. We believe our growth estimates (6% in 2014, and 3% in 2015, after 10% in 2013) are prudent for Japan, which is one of the few luxury markets we would call truly mature. Note that in 2013e and 2014e, most of the growth will be driven by the significant price increases implemented to offset the yen weakness (eg 23% in the case of Louis Vuitton over the course of 2013).
Margins under pressure in 2014

We believe the combination of further depreciation of currencies vs the EUR and increases in the cost of growth for many players (notably in soft luxury, as we have highlighted as a key industry theme), will lead to margin pressures in 2014. As a consequence, few companies will see significant EBIT margin expansion according to our estimates.
The US was where luxury demand was hit the most by the psychological shock of the Lehman collapse in September 2008. However, since then, luxury consumption in the US has outperformed overall luxury consumption growth. Demographic trends remain supportive (notably the increasing weight of non-Caucasians in the total US population as US
18
abc
The notable exceptions should be: Luxottica: we believe Luxottica's "rule of thumb" which is to grow sales (at constant FX) at a high single digit pace, and EBIT twice as fast is realistic due to continued leverage of fixed costs in Wholesale and increased store productivity in Retail. Richemont: the EBIT margin should be boosted by lower raw material prices. Meanwhile, the fading of FX hedging won't affect EBIT since hedging gains are booked in the financial result line Tiffany: the EBIT margin should benefit from lower raw material prices and renewed SG&A leverage as US sales pick up Burberry: the overall reported EBIT margin will decrease y-o-y to the decline in Licensing revenues but the Wholesale and Retail margin should continue to increase due to higher sales productivity and leverage on past investments Prada: the company is guiding towards a flat margin y-o-y but our analysis shows that most margin drivers will be positively oriented, thus offsetting the effect of the planned rise in retail investment Currency remains key for this sector with Europeanlisted companies benefiting when the EUR (and the CHF) are weak against the USD-denominated currencies and the JPY. In 2013, FX became a headwind: the JPY was extremely weak (c20% depreciation against the EUR) and, more recently, the USD and several other currencies have also trended lower. However, most of the companies in the luxury goods space had hedged much of their bigger currency exposures (notably JPY and USD against the EUR). Hence, while reported top-line growth took a hit from currency in 2013e, margins will have been protected by the hedging policies in place. Much of the
hedging will roll off in 2014, however, and the margin effects will be sizeable.
EUR to USD since 1 January 2005
1.6 1.55 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1 Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14
Source: Thomson Reuters Datastream
EUR to JPY since 1 January 2005

180 170 160 150 140 130 120 110 100 90 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan05 06 07 08 09 10 11 12 13 14
EUR to CHF since 1 January 2005

1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan05 06 07 08 09 10 11 12 13 14
19
abc
EBIT margin evolution by group 2011-2015e % Herms Luxottica Tiffany*** Burberry* Tod's LVMH Kering Luxury Gucci brand Hugo Boss Ferragamo Swatch Group Richemont* Coach** Hengdeli Prada*** Moncler Average 2011a 31.2 13.0 20.6 20.3 21.8 22.2 25.7 30.2 19.2 15.9 23.9 23.0 31.7 10.2 24.6 28.7 23.5 2012a 32.1 13.9 18.4 21.4 21.7 21.1 25.9 31.0 18.5 16.9 25.4 23.9 30.0 10.3 27.0 29.8 23.8 2013a 32.3 14.4 20.2 20.3 20.0 20.6 26.0 31.8 18.8 17.4 27.4 23.0 26.0 7.5 26.8 29.7 23.6 2014e 31.6 15.3 21.4 20.7 20.0 20.5 25.7 31.3 19.0 18.0 24.9 24.6 26.0 6.9 27.6 29.8 23.8 2015e 32.0 16.1 22.4 20.2 21.0 20.8 26.4 32.0 20.0 18.9 25.6 25.7 26.5 7.2 28.5 29.9 24.4
political pressure on consumers spending habits, and led to a collapse in gifting, we believe there are now signs of stabilisation in the Chinese watch market. Indeed, inventory levels are improving, and end demand is now going sideways rather than down in China, and is still booming in Hong Kong and Macau. As we believe ASPs are also rising slightly, we see potential for a rebound in the short term.
Low barriers to entry in soft luxury
*year ending March n+1 **year ending June n+1 *** year ending January n+1 Note that the average does not include Hengdeli. Source : Companies, HSBC estimates
Key industry themes

Underpenetrated jewellery
We have argued for some time now that in mainland China, the only male-driven market for luxury, the future is female and we think imported jewellery has an important role to play. While there is a debate on the existence of a branding process in the jewellery segment, by which brands take share from non-branded jewellers, we think that there are six relevant global brands in the space, two of which (Cartier and Van Cleef & Arpels) are part of Richemont. The other four are Tiffany (listed, independent), Chopard (non-listed, independent), Bulgari (part of LVMH) and Harry Winston (acquired by the Swatch Group in early 2013). Richemonts Piaget could well develop into a global jewellery brand too. While we believe the Harry Winston acquisition is a good one at a fair price, and the brand has potential, we expect it to represent only 5% of Swatch Group sales in 2015 and to remain margin dilutive for a while.
Watches rebounding
Our updated view on soft luxury goods is that unlike for watches and jewellery barriers to entry are much lower than most investors believe. This is a positive for up-and-coming brands but a negative for the sub-sector as a whole as it implies that the cost of growth (the amount of investment (retail, advertising etc) that has to be incurred to ensure similar growth as in the past) is higher. Louis Vuitton is operating with a stable number of stores globally (around 470 units) but with bigger stores replacing smaller ones. This means that much space is allocated to lower-margin products linked to the lifestyle diversification of the brand (apparel, footwear, hard luxury, eyewear etc). This is the global equivalent of what Coach is doing in the US (although, of course, the two brands are not positioned similarly in terms of price points). Some brands looking to emerge will have to invest strongly in advertising and retail (eg Miu Miu within Prada). Others, while well-known already, may have under-invested in recent years and will need to make up for this if they want to maintain, or win, share (typically Hugo Boss in the Asian region). However, we still dont believe in the idea that there is a fundamental cap to how high margins can go in the soft luxury space. Louis Vuitton has an EBIT margin in the low 40s, so if thats a theoretical cap, all other brands are very far from it. Having said that, in 2014, reinvestments (notably in stores and communication) on top of unfavourable FX movements will weigh on margin expansion possibilities for the space.
After the slowdown in economic growth and, probably more importantly, the change in administration in China in late 2012, which put
20
abc
Sales growth at constant forex and perimeter % Herms LVMH o/w Louis Vuitton Richemont** Swatch Group Burberry** Kering Luxury Gucci brand Hengdeli Prada Tod's Luxottica Tiffany Coach*** Hugo Boss Ferragamo Moncler FY 98a 6 -9 2 8 9 na na 7 na na na na na na na FY 99a 15 10 25 14 7 na na 14 na na na na na na na FY 00a 14 8 20 13 12 40 na 24 na na 15 na 13 12 na na FY 01a 8 4 12 0 1 14 na 1 na na 27 na 0 21 na na FY 02a 6 4 7 0 1 12 na -8 na na 13 3 4 32 na na FY 03a 8 4 14 0 1 15 5 4 na na 8 -2 14 37 na na FY 04a 12 11 13 13 6 10 13 13 na na 15 11 8 29 13 na FY 05a 7 11 12 17 8 3 0 18 na na 20 11 9 26 12 na FY 06a 8 12 11 16 12 15 0 17 na na 0 14 11 29 14 na FY 07a 11 13 14 16 17 19 0 11 na na 0 10 13 20 12 na FY 08a 9 7 12 2 4 7 0 4 20 na 0 -1 -4 -1 6 na FY 09a 4 -3 7 -5 -8 1 0 0 7 -6 0 -4 -5 9 -8 -10 FY 10a 19 14 15 19 22 15 12 11 39 24 0 7 12 14 5 17 FY 11a 18 14 15 30 22 21 0 19 38 25 0 9 15 14 19 24 FY Q1 12a 13a 16 9 6 9 12 8 15 9 7 23 5 6 5 10 10 13 13 7 2 7 5 9 6 4 9 16 -6 5 13 10 -2 10 Q2 13a 16 9 4 9 5 9 9 4 9 14 10 9 8 9 11 13 Q3 13a 13 8 1 10 6 10 6 1 14 13 0 7 11 2 5 10 22 Q4 13a 11 8 5 9 6 12 7 0 14 11 4 7 7 -3 11 9 31 FY 13a 13 8 3 9 6 10 7 2 12 13 2 7 9 -1 6 11 25 FY 14e 11 7 5 10 8 11 8 5 6 13 5 8 10 5 9 8 19 FY 15e 10 8 6 9 8 11 9 8 4 10 10 8 9 8 10 9 16
*half-year **year ending March n+1 ***year ending June n+1 Source : Companies, HSBC estimates
Luxury goods companies 2013 geographical sales breakdown % of sales Herms Richemont* LVMH of which Louis Vuitton Kering*** of which Gucci Brand Burberry* Tod's The Swatch Group Luxottica Ferragamo Hugo Boss Moncler**** European average Coach** Tiffany*** Emperor Watch and Jewellery Hengdeli Prada*** Total average Europe 36% 31% 30% 29% 33% 28% 31% 55% 34% 20% 26% 60% 57% 38% 3% 11% 0% 0% 37% 29% Americas 17% 15% 22% 22% 19% 20% 25% 9% 8% 69% 28% 23% 12% 22% 69% 48% 0% 0% 15% 24% Japan Asia & others 12% 8% 7% 14% 10% 10% 2% 4% 2% 1% 9% 2% 16% 7% 13% 14% 0% 0% 9% 7% 35% 45% 42% 36% 38% 42% 42% 32% 56% 10% 37% 15% 15% 33% 15% 26% 100% 100% 39% 40% Mainland China 9% 9% 10% 11% 11% 13% 14% 12% 18% 2% 11% 7% 9% 10% 4% 3% 8% 65% 10% 13% HK + Taiwan + Macau 10% 20% 10% 9% 9% 10% 9% 12% 20% 1% 11% 2% 4% 10% 7% 12% 90% 35% 15% 17%
Source: company data, HSBC calculation
Rest of Asia & others 16% 16% 21% 20% 23% 21% 19% 8% 18% 7% 14% 6% 2% 14% 4% 11% 2% 0% 14% 11%
This average includes PPR and LVMH (rather than the Gucci Group and Louis Vuitton) *FY March 2013 **FY June2013 ***FY Jan2013 ****HK + Taiwan only
Sales by nationality 2013 LVMH Western Europe Eastern Europe Middle East North America Latam Rest of Asia China Mainland HK+Taiwan+Macau Japan Total 17% 5% 6% 18% 4% 11% 22% 6% 10% 100% LV brand Gucci brand Burberry* 12% 5% 8% 16% 5% 8% 28% 5% 15% 100% 14% 5% 3% 17% 3% 11% 30% 4% 16% 100% 12% 4% 5% 21% 3% 15% 30% 6% 5% 100% Herms 15% 6% 7% 13% 5% 12% 22% 7% 13% 100% Prada Richemont 11% 3% 5% 10% 2% 19% 35% 3% 10% 100% 11% 3% 8% 10% 4% 14% 34% 6% 10% 100% Swatch Ferragamo 9% 4% 7% 5% 3% 12% 50% 7% 3% 100% 11% 4% 4% 18% 7% 14% 22% 10% 11% 100% Tod's 38% 5% 5% 11% 2% 7% 21% 6% 5% 100% Moncler 33% 9% 3% 12% 1% 3% 21% 2% 18% 100%
* For Burberry, figures are based on sales at retail equivalent
21
abc
Sector valuation
While the luxury goods sector overall outperformed markets and re-rated in 2013, most luxury stocks under-performed in Q4 2013 and Q1 2014 (see table below). Unfavourable FX movements, volatile underlying trends and unabated China fears, led to earnings downgrades over the recent period.
We continue to believe that comparing the sector average multiple relative to its history remains quasi-irrelevant for the time being, notably because of the number of IPOs since 2011. From a share price standpoint, the most noticeable trend is the sharp correction of Italian mid-caps Tods, Ferragamo and Moncler, down 19-23% y-t-d. However, these three stocks are still trading at a premium, notably relative to the larger cap stocks.
Share prices performances - Luxury goods FY01 LVMH Herms Richemont The Swatch Group Christian Dior Burberry Tod's Kering Luxottica Hugo Boss Ferragamo** Moncler*** Average Eurotop 300 Prada* Hengdeli Emperor Watch & Jewellery Hang Seng Index Tiffany Coach S&P 500 -35 15 -29 -26 -32 nm 6 -37 20 90 nm nm -6 -18 nm nm nm -24 -1 36 -13 FY02 -14 -24 -16 -23 -7 -2 -34 -52 -32 -58 nm nm -28 -32 nm nm nm -18 -24 69 -23 FY03 47 17 15 29 50 63 13 9 9 59 nm nm 34 12 nm nm nm 35 89 129 26 FY04 -2 -4 27 12 4 10 1 -4 9 54 nm nm 12 9 nm nm nm 13 -29 49 9 FY05 33 44 52 17 50 5 63 29 43 21 nm nm 33 22 nm nm nm 5 20 18 3 FY06 7 35 24 37 8 54 7 19 9 31 nm nm 22 16 nm 220 nm 34 2 29 14 FY07 3 -9 10 27 11 -12 -22 -3 -7 0 nm nm -1 2 nm 37 nm 39 17 -29 4 FY08 -42 16 -74 -57 -55 -61 -37 -58 -42 -58 nm nm -47 -45 nm -73 nm -48 -42 -32 -38 FY09 64 -7 71 80 78 170 72 81 42 70 nm nm 68 26 nm 268 82 52 61 76 23 FY10 57 68 58 59 49 88 42 41 26 130 nm nm 60 7 nm 57 141 5 45 52 13 FY11 -11 47 -14 -17 -14 6 -15 -7 -5 1 13 nm -1 -11 -12 -46 -13 -20 8 11 0 FY12 Q1 13 Q2 13 Q3 13 Q4 13 27 -2 51 33 40 3 52 27 43 45 63 nm 35 13 112 14 -2 23 -14 -9 13 -4 20 4 20 1 8 17 22 26 10 30 nm 14 5 6 -31 -17 -2 21 -10 10 -7 -8 12 -6 -4 2 -3 -9 -1 -3 11 nm -2 -2 -11 -10 -19 -7 5 14 2 17 7 8 13 17 21 28 6 1 13 7 nm 13 7 4 5 8 10 5 -4 5 -9 -1 -2 2 -5 -7 -12 -7 -1 8 8 55 -2 6 -6 -2 -14 2 21 3 10 FY13 Q1 14TD -4 16 24 29 7 24 27 9 25 30 66 55 23 16 -7 -36 -38 3 62 1 30 -3 -11 -6 -6 -2 -5 -23 -9 1 -11 -23 -19 -10 -1 -18 -17 0 -7 0 -11 1
Share prices at 18th March 2014 * Prada's IPO on 23 June 2011, **Ferragamo's IPO on the 18 June 2011, ***Moncler's IPO on the 11 December 2013
Sector valuation history (forward PE) *

40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Jan-97 PE as of 18/03/14: 17.6x Asian financial crisis 09/11 attacks Post-Lehman collapse Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 SARS epidemic China starts to matter 2000 bubble
2007 market peak
Average since 01/01/2003: 17.0x
Note: * Non-weighted average of LVMH, Richemont, Swatch, Tiffany (other companies do not have the necessary history, own non-luxury assets, or their valuations have been distorted by speculation) Source: Factset, HSBC
22
abc
Ranking the luxury stocks

Best of hard Richemont, best of soft Burberry and best of
other Luxottica are our favourite stocks

We have several other OW ratings on a 12-month view, but which
lack short-term catalysts

Our Neutral ratings are mostly due to unsupportive valuations
Three preferred stocks: Burberry, Richemont, Luxottica

We think concerns on Burberry following the announcement of the change in CEO have been overdone and the brand remains comfortably ahead of the pack in terms of digital marketing and its capacity to recruit consumers. In addition, the execution risks for the integration of "Beauty" and Japan will likely prove to be overstated. Meanwhile, a pick-up in Cartier watch sales, strong exposure to the fast growing jewellery category and a compelling valuation make Richemont a good investment opportunity, with fears on China providing a good entry point. Luxottica doesnt look cheap but there are good reasons for that: vertical integration, captain-ofindustry status and possible M&A opportunities are reasons to be enthused.
our view. Coach will be unlikely to see a strong sales pick-up in the short term, but its valuation is compelling and calendar H2 2014 could confirm a brand revival. We upgrade Hugo Boss as we now believe it is time to become more constructive again as consensus expectations have been revised down and the share price is 6% lower
Hard luxury Overweights: Tiffany, Emperor Watch & Jewellery

Tiffany should do well as bolder management initiatives kick in and soft raw material prices support further margin improvement. We initiate on Emperor with an OW rating. The stock should be a great way to play Chinese travellers propensity to purchase watches abroad. In addition, the fact that Emperor is seeing initial success in its jewellery ranges bodes well for margins.
Soft luxury Overweights: Prada, Kering, Tods, Coach, Hugo Boss

Prada's de-rating makes the stock very attractive, in our opinion, as we do not believe in the concept of peak margins for luxury companies nor in the idea of a collapse in sales growth for Prada. For Tod's, the short-term remains challenging but the transformation story towards more retail, more Asia, and more leather goods remains valid, in
Why we are Neutral on LVMH, Christian Dior, Herms, and Ferragamo

LVMH may have underperformed the sector, but we do not see the current valuation as compelling. The stock is trading in line with its historical average, but earnings growth is much lower than it used to be. This is also why, by extension, we
23
abc
see no compelling buy case on the holding company, Christian Dior. Elsewhere, Herms remains exceptionally resilient but that is already well-reflected in its valuation for now. Ferragamo and Moncler continue to trade at valuation levels which are difficult to justify, in our opinion.
Why we are Neutral on the Swatch Group and Hengdeli

Unlike Richemont or Emperor, who have relied more on high-end brands that took a big hit during 2013 in China, Swatch and Hengdeli did not suffer as much due to their more accessible price points. In turn, this implies that the pick-up in sales momentum at the latter two will likely not be as remarkable. Furthermore, as explained earlier, we are uncomfortable with the recent M&A deals and communication at Hengdeli and feel that relying on the domestic China market (rather than trying to capture spending by travelling Chinese) could put a cap on growth. Similarly, for the Swatch Group, we believe many of its brands have become quite Chinadriven as they do not have sufficient clout and awareness globally, which could also limit growth.
24
abc
Company profiles
25
abc
Burberry (BRBY LN)

One of the strongest brand momentum stories in luxury We believe investors comfort on several issues should increase
progressively, thus reducing the negativity on the stock

Remain Overweight, lower target price to 1,820p (from 1,850p) on
FX estimate cuts; Burberry is an HSBC Europe Super Ten stock
Theme implication: positive

Burberry enjoys one of the best brand momentum stories in the luxury industry, which is translating into superior retail same store sales growth (SSSG). We believe the main reasons behind this outperformance are: The brand distinctive positioning (unique sizeable luxury brand with a British heritage, strong outerwear offering) makes Burberry a different proposition from the crowd of French and Italian brands primarily focusing on handbags. The fact that Burberry is the only digitally relevant brand, ie savvy on digital luxury and using this as a competitive advantage, in our luxury coverage; this means it can continue to recruit a younger, savvier clientele base at a faster rate than others. The fact that most legacy issues have been addressed, especially the clean-out of licences (the last one, in Japan, soon going to be tackled) and of products (notably the Nova check canvas line made in China). The companys operational excellence (much better grip on its supply chain, with inventories in check and SAP roll-out done).
A lot of negativity on the stock

In our recent discussions with investors, Burberry is the Overweight stock on which we faced the most pushback, notably about the sustainability of above-average SSSG, the future of the Japan business post 2015, profitability improvement, the Beauty business and last but not least the change in CEO. On all these subjects, we believe that investors fears are overdone, and that their comfort levels regarding these issues will increase progressively: SSSG: double-digit SSSG in Q1, Q2 and Q3 are not sustainable in our view; we forecast 7% in Q4 March 14 and 6% in FY March 15 Japan: the income loss linked to the strategically-sound decision to discontinue local lines is now fully factored into consensus estimates Profitability: many investors have the impression there is no leverage at Burberry, but the reality is that Burberry's Wholesale & Retail EBIT margin rose 80bp in FY March 12 and 70bp in FY March 13, adjusted for the one-off reduction in performance-related pay charge) Beauty: the integration in-house of the Beauty business should enable Burberry to establish a few brand pillars and leverage the overall digital marketing budget
26
abc
Christopher Bailey: he replaced Angela Ahrendts as CEO on top of his existing Chief Creative Officer role but this is not a concern for us; he has a strong business acumen and has worked alongside the previous CEO for eight years, which can only help.
The main downside risks to our rating include a failure to execute properly on the expiry of the Japanese licence in 2015 and FX (GBP becoming stronger). In addition, as the brand has attracted outside talent in recent years, there is a risk that this talent may prove difficult to retain.
Earnings, valuation and risks

On 15 January, Burberry issued a trading statement which only included the Retail performance during the Q3 period (Oct-Dec 2013). Retail growth at constant FX was 14% (12% SSSG). We cut our FY March 15e-16e EBIT estimates by 2% on the back of less favourable FX. For FY March 14e, we forecast 16% reported sales growth (10% organic sales growth, 6% technical impact from integrating the Beauty licence, 0% FX impact). We expect the Wholesale & Retail EBIT margin to increase to 18% (ie a 90bp improvement vs the 17.1% adjusted for the one-off reduction in performance-related pay charge). For FY March 15e, we forecast 8% reported sales growth (11% organic sales growth, -3% FX impact). We expect the Wholesale & Retail EBIT margin to increase 80bp to 18.8%. We lower our target price to 1,820p (from 1,850p) on the back of the above-mentioned estimates cut. Our DCF assumptions are outlined on page 29. Under our research model, the Neutral band for nonvolatile UK stocks is 5ppt above and below the hurdle rate of 8.0%. Our target price implies a 26.2% potential return, which is above the Neutral range; therefore we retain our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
An HSBC Super Ten stock

We believe Burberry offers a long-term growth story, combining both above-industry top line growth and EBIT margin gains. On top of the above-mentioned brand strengths, we believe many markets are still under-penetrated for the brand, which drives a significant contribution to sales from new selling surfaces without cannibalising SSSG. In terms of valuation, the 2010-2012 bubble has burst, and Burberry is now trading at 16.7x14e and 14.6x15e calendar PE, which we find compelling given the projected 13% EPS growth CAGR we see over the next three years.
Sales breakdown by channel (%) FY ending March 2013
Licenses 5% Wholesale 24%
Retail 71%
Retail/wholesale sales breakdown by product category (%) FY ending March 2013

Small Leather Goods 10% Soft 5% Shoes 5% Childrenswear 4%
Womens 33%
Large Leather Goods 19% Mens 24%
27
abc
Burberry P&L - Full Year ending March GBPm Sales Gross profit Gross profit margin Operating expenses As a % of sales Adjusted EBIT EBIT margin Reported EBIT EBIT margin Pre-tax profit Reported net profit Clean net profit EPS (clean diluted)
2009a 1,202 666 55.4% 485 40.4% 181 15.0% -10 -0.8% -16 -6 132 30.2
% 2010a 21 8 17 -12 -105 -108 -104 -6 -5
% 2011a
% 2012a 17 26 21 37 77 78 156 40 39 1,857 1299 69.9% 922 49.6% 377 20.3% 367 19.7% 366 263 274 61.6
% 2013a 24 29 30 25 21 24 26 26 26 1,999 1442 72.1% 1,014 50.7% 428 21.4% 351 17.6% 351 254 312 70.0
% 2014e 8 11 10 14 -4 -4 -3 14 14 2,315 1681 72.6% 1,210 52.3% 471 20.3% 456 19.7% 460 345 356 79.8
% 2015e 16 17 19 10 30 31 36 14 14 2,505 1832 73.1% 1,313 52.4% 519 20.7% 504 20.1% 511 386 397 88.9
% 2016e 8 9 8 10 11 11 12 11 11 2,870 2095 73.0% 1,514 0.0% 581 20.2% 566 19.7% 576 438 449 100.6
% 15 14 15 12 12 13 13 13 13
1,280 7 1,501 804 21 1010 62.8% 67.3% 584 20 709 45.6% 47.2% 220 22 301 17.2% 20.1% 171 -1,828 302 13.4% 20.1% 166 -1,131 296 81 -1,456 208 155 17 217 35.1 16 48.8
Burberry Sales by geography - Full Year ending March GBPm Europe North America Asia Pacific Rest of the world Licensing Total sales
2009a YOY% 2010a YOY% 2011a YOY% 2012a YOY% 2013a YOY% 2014e YOY% 2015e YOY% 2016e YOY% chg chg chg chg chg chg chg chg 524 305 240 50 83 1,202 16 30 27 50 -3 21 515 321 283 64 97 1,280 -2 5 18 28 18 7 475 387 457 85 98 1,501 7 35 131 71 11 17 553 435 653 109 109 1,857 16 12 43 29 10 24 560 463 745 120 109 1,999 1 7 14 10 1 8 679 538 873 144 81 2,315 21 16 17 19 -26 16 723 574 978 157 73 2,505 7 7 12 9 -10 8 774 628 1,267 176 25 2,870 7 9 30 12 -65 15
Burberry Sales and EBIT by distribution channel - Full Year ending March GBPm Retail sales Wholesale sales License Sales Total sales Retail & Wholesale EBIT Retail & Wholesale EBIT margin License EBIT License EBIT margin Total EBIT EBIT margin
2009a YOY% 2010a YOY% 2011a YOY% 2012a YOY% 2013a YOY% 2014e YOY% 2015e YOY% 2016e YOY% chg chg chg chg chg chg chg ch 630 489 83 1,202 110 9.8% 71 85.6% 181 15.0% 30 749 15 434 -3 97 21 1,280 138 11.6% 0 82 84.3% -12 220 17.2% -19 19 962 -11 441 18 98 7 1,501 220 15.6% 16 82 82.9% 22 301 20.1% 25 29 1,270 2 478 1 109 17 1,857 287 16.4% -1 90 82.9% 37 377 20.3% 59 32 1,417 9 473 10 109 24 1,999 336 17.8% 10 93 84.6% 25 428 21.4% 31 12 1,620 -1 614 1 81 8 2,315 403 18.0% 3 68 84.0% 14 471 20.3% 17 14 1,749 30 683 -26 73 16 2,505 458 18.8% -26 61 84.0% 10 519 20.7% 20 8 1,992 11 851 -10 27 8 2,870 558 19.6% -10 23 84.0% 10 581 20.2% 14 14 25 -62 15 22 -62 12
28
abc
Financials & valuation: Burberry Group

Financial statements Year to 03/2013a 03/2014e 03/2015e 03/2016e DCF analysis HSBC assumptions Risk-free rate (%) Equity premium (%) Sector beta Specific beta 3.50 4.50 1.10 1.10 DCF, comprising
Overweight
Profit & loss summary (GBPm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (GBPm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (GBPm) 210 409 937 426 1,746 542 130 -297 1,017 588 210 469 1,150 558 2,019 596 130 -428 1,235 676 210 515 1,390 738 2,305 635 130 -609 1,482 741 210 538 1,693 976 2,631 679 130 -846 1,765 786 346 -320 -320 -114 42 8 458 -200 -200 -126 -131 258 520 -200 -200 -139 -181 320 593 -200 -200 -155 -238 393 1,999 462 -111 428 0 351 351 -92 254 312 2,315 596 -140 471 4 460 460 -115 345 356 2,505 658 -154 519 7 511 511 -125 386 397 2,870 743 -177 581 10 576 576 -138 438 449
EBIT growth FY2014-24e CAGR (%) EBIT growth FY2024-44e CAGR (%) Fade period FY2044-52e WACC (%)
8.1 3.7 8.95
Sensitivity and valuation range Cost of capital vs fade period 8.0% 8.5% 9.0% 9.5% 10.0% 4 years 20.25 18.98 17.84 16.81 15.88 8 years 20.75 19.41 18.20 17.12 16.14 12 years 21.14 19.76 18.52 17.40 16.39
Issuer information Share price (GBPp) 1,442 Reuters (Equity) BRBY.L Market cap (USDm) 10,602 Free float (%) 100 Country United Kingdom Analyst Erwan Rambourg Antoine Belge Target price (GBPp) 1,820
Bloomberg (Equity) BRBY LN Market cap (GBPm) 6,397 Enterprise value (GBPm) 5809 Sector TEXTILES, APPAREL & LUXURY GOODS Contact 852 2996 6572 Contact 33 1 5652 4347
Price relative
1747 1647 1547 1447 1347 1247 1147 1047 947 847 2012
Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (GBPp) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 56.95 69.97 29.00 233.58 77.26 79.78 31.91 283.77 86.39 88.92 35.57 340.38 98.03 100.59 40.23 405.28 3.9 51.2 33.2 15.4 23.1 21.4 1540.7 -28.2 -0.6 3.7 54.1 31.6 18.3 25.7 20.3 -33.7 -0.7 3.5 53.7 29.2 17.8 26.3 20.7 -40.1 -0.9 3.8 56.3 27.7 17.7 25.9 20.2 -47.0 -1.1 7.6 1.7 13.6 -4.2 13.5 15.8 28.9 10.0 31.2 14.0 8.2 10.4 10.2 11.1 11.5 14.6 12.9 12.0 12.7 13.1 03/2013a 03/2014e 03/2015e 03/2016e
2013
Burberry Group
2014
Rel to FTSE ALL-SHARE
1747 1647 1547 1447 1347 1247 1147 1047 947 847 2015
Note: price at close of 18 Mar 2014
29
abc
Christian Dior (CDI FP)

Diors discount to our estimated restated net asset value (RNAV)
is 16% (vs 20% on historical average)

Unchanged target price of EUR140 on the back of an unchanged
value for LVMH (TP EUR141)

We have a Neutral rating and a EUR140 target price
Another strong performance for Dior Couture in H1 13-14

Dior Couture has adopted a more premium strategy in the last five years, which has brought benefits as the group has delivered consistent and solid performances quarter after quarter. Logo products are now very limited in the group sales mix. Although Dior Couture has reduced logoproducts for non-logo products, the group has successfully managed to keep product clearly recognisable by customers. The group has now moved to a FY July-June format to match its reporting with LVMHs half-year reporting period. On 28 February 2014, Christian Dior reported H1 2013-2014 (June-December).Dior Couture sales were up 14% reported and 20% at constant FX, and accelerated to 21% in Q2 (OctoberDecember) from the 19% posted in Q1 (JulySept). Management mentioned a good performance of leather goods, mens/womens read-to-wear and accessories. EBIT was EUR108m, up 31% y-o-y. The EBIT margin was 14%, up 190bps. For FY ending June 2014, we expect 18% organic sales growth, implying 16% in H2 owing to a tougher basis of comparison. We expect an EBIT margin of 12%. For FY ending June 2015-16e, we forecast 13% and 12% organic sales growth respectively, and EBIT margins of 13.5% and 14.5%.

16% discount to RNAV
Christian Dior is the main holding company for LVMH, controlling 40.9% of the shares and 57.5% of the voting rights. As well as its stake in LVMH (89% of assets), Diors only operational entity is the Dior Couture brand (10%). In 2013, Dior shares gained 7% vs -4% for LVMH shares, and Dior shares are down 2% vs. -3% for LVMH shares y-t-d 2014. Diors discount to restated net asset value (RNAV) is 16%, below its 20% historical average. There is nothing surprising here as conglomerate/ holding discounts to RNAV tend to fall during bull market phases and vice versa. As evidenced by the chart on page 31, the discount to RNAV has moved within a 6%-34% range (average 20%) since 2005. Note that higher levels of discounts were witnessed in 1995-2005, but we do not consider them relevant to our analysis since the LVMH control structure at the time was much more complicated, and the French tax regime back then was less favourable (taxation on capital gains).
30
abc
We continue to value Christian Dior using a sum of parts valuation based on LVMH (89% of RNAV) unchanged target price of EUR141 and a Diortargeted discount to RNAV of 20% (unchanged and in line with past history as highlighted on the previous page.) As a result of our unchanged target price of LVMH, our Christian Dior valuation and our target price are unchanged at EUR140 (see details on following page). Under our research model, for stocks without a volatility indicator, the Neutral band is 5 ppt above and below the hurdle rate for eurozone stocks of 9.5%. At the time we set our target price for Christian Dior it implied a potential return of which was within the Neutral band of our model; therefore, we have Neutral rating on Christian Dior stock. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
The main downside/(upside) risks to our rating on Dior would be a negative/(positive) development in LVMHs share price. Another risk would be a change in the markets view of the discount to apply to holding companies (positive or negative). Since Diors IPO in 1995, there has been recurring press speculation about a potential streamlining of the current LVMH control structure (notably an article in The Independent dated 25 November 2012 elaborated on several scenarios). In theory, any expectations or announcements about such a simplification (for example, an LVMH/Dior merger or a Dior minority buy-out as mentioned in the press) provided it benefited Diors minority shareholders could trigger a sharp narrowing in the companys discount to RNAV. We think this could be a potential upside catalyst for Dior.
Dior discount to our estimated net asset value

0% -10% -20% -30% -40% -50% -60%
Source: Thomson Reuters Datastream, using share price close at 18 March 2014
16% on 18/03/2014
31
abc
Dior Couture sales & EBIT evolution EURm Sales EBIT EBIT margin YoY evolution (%) Sales EBIT 1995a 1996a 1997a 1998a 1999a 2000a 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012/ 2013/ 2014/ 2015/ 13a* 14e** 15e** 16e** 157 24 15.1 15 8 187 24 13.1 19 3 200 11 5.6 7 -54 200 -1 -0.3 0 nm 220 9 3.9 10 nm 296 14 4.7 35 64 350 -5 -1.5 18 nm 492 33 6.7 41 nm 523 40 7.7 6 21 595 50 8.4 14 25 663 53 8.0 11 6 731 56 7.7 10 6 787 74 9.4 8 32 765 9 1.2 -3 -88 717 13 1.8 -6 44 826 1,000 1,289 1,500 1,700 1,900 35 85 131 180 229 275 4.2 8.5 10.2 12.0 13.5 14.5 15 nm 21 143 29 54 16 37 13 27 12 20
Notes: * FY ending April N+1, ** FY ending June N+1 Source: Company data, HSBC estimates
Dior restated net asset value EURm LVMH Dior Couture Property Treasury stocks Restated NAV Parent co.debt RNAV (EURm) RNAV per share (EUR) Share price Discount (%)
% stake 40.89% 100.00% 100.00% 1.24%
Restated NAV 26,830 3,166 108 304 30,408 -1,065 29,343 161.48 134.95 -16%
Method Share price EUR129.10 2x 2014e calendar sales 90,000m2 at EUR12,000/m2 Share price EUR133.80
% of RNAV 89% 10% 0% 1% 100%
Dior target price calculation based on HSBC's LVMH target price EURm LVMH Dior Couture Property Treasury stocks Restated NAV Parent co. debt RNAV (EURm) Targeted discount to RNAV (%) HSBC Dior target price (EUR per share)
% stake 40.89% 100.00% 100.00% 1.24%
Restated NAV 29,303 3,166 108 304 32,881 -1,065 31,817 -20% 140
Method HSBC target price EUR141 2x 2014e sales 90,000m2 at EUR12000/m2 Share price
% of RNAV 89% 10% 0% 1% 100%
32
abc
Financials & valuation: Christian Dior

Financial statements Year to 04/2013a 06/2014e 06/2015e 06/2016e Dior restated net asset value EURm LVMH (40.89% stake) Dior Couture (2x 2014e sales) Property (90,000m2 at EUR12,000/m2) Treasury stocks Restated NAV Parent co.debt RNAV (EURm) Targeted discount to RNAV (%) HSBC Dior target price (EUR per share) Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 04/2013a 2.0 8.5 1.6 16.9 2.2 4.7 2.1 06/2014e 1.9 7.4 1.5 14.1 1.6 6.9 2.5 06/2015e 1.7 6.6 1.4 12.6 1.4 8.2 2.8
Neutral
RNAV 29,303 3,166 108 304 32,881 -1,065 31,817 -20% 140
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 4,226 -1,702 -2,048 -498 213 2,524 (EURm) 23,208 9,286 14,651 1,925 55,555 6,586 8,534 6,609 10,964 38,634 24,716 10,074 16,919 3,331 60,469 7,473 9,488 6,157 14,962 40,905 24,716 10,322 17,883 3,331 61,912 8,001 7,535 4,204 17,244 41,589 24,716 10,592 18,978 3,331 63,509 8,601 5,382 2,051 19,750 42,354 5,372 -1,663 -4,130 -572 -452 3,709 6,114 -1,763 -1,763 -658 -1,953 4,351 6,621 -1,863 -1,863 -757 -2,153 4,758 29,881 7,084 -994 6,090 -129 5,847 5,847 -1,916 1,431 1,431 31,664 8,045 -1,667 6,378 -146 6,137 6,137 -1,911 1,715 1,715 34,090 8,677 -1,759 6,917 -20 6,827 6,827 -2,145 1,919 1,919 36,819 9,438 -1,857 7,581 23 7,536 7,536 -2,367 2,125 2,125
06/2016e 1.5 5.8 1.3 11.4 1.2 9.0 3.3
Note: * = Based on HSBC EPS (fully diluted)
Issuer information Share price (EUR) 134.95 Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst DIOR.PA 34,117 29 France Antoine Belge Erwan Rambourg Target price (EUR) 140.00
3. 7
Bloomberg (Equity) CDI FP Market cap (EURm) 24,524 Enterprise value (EURm) 59529 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 8.00 8.00 2.90 61.27 9.58 9.58 3.34 83.60 10.73 10.73 3.84 96.36 11.87 11.87 4.41 110.36 0.8 11.2 13.9 7.5 23.7 20.4 54.9 23.6 0.9 63.9 0.8 11.0 13.2 7.5 25.4 20.1 55.2 20.2 0.8 87.3 0.8 11.5 11.9 7.7 25.5 20.3 424.9 12.6 0.5 145.4 0.9 12.4 11.5 8.2 25.6 20.6 5.6 0.2 322.8 21.3 10.8 14.4 19.1 11.9 6.0 13.6 4.7 5.0 19.8 7.7 7.8 8.5 11.2 11.9 8.0 8.8 9.6 10.4 10.7 04/2013a 06/2014e 06/2015e 06/2016e
Price relative
153 143 133 123 113 103 93
Mar-12 Sep-12 Mar-13 Sep-13 Christian Dior Rel to SBF-120
153 143 133 123 113 103

Mar-14
93
Source: HSBC
33
abc
Coach (COH US)

New Creative Director's first collection gets positive feedback Valuation (calendar 2014e): 15.4x PE, 8.3x EV/EBITDA, 6% FCF
yield, 2.3x EV/sales for a 26% EBIT margin

Reiterate Overweight and target price of USD64
Some encouraging signs

On 6 February, Coachs new Creative Director Stuart Vevers unveiled his first collection to the press (Fall 2014) at the New York Fashion week. This was Coach's first-ever ready-to-wear presentation. Stuart Vevers joined Coach last October, having worked previously at Loewe, Louis Vuitton (both LVMH brands), Bottega Veneta (Kering) and Mulberry. Although the reaction from consumers (visible in H1 of FY 14/15) will matter more than that of fashion editors, we noted the feedback from the press was positive overall. From the press commentaries we were particularly encouraged that: There was a clear message from Stuart Vevers that Coach was no longer only focused on leather goods Styles were younger, edgier, fresher and more streetwise than before With regard to new handbags, some comments mentioned a sturdiness and heft lacking in recent designs. Again, these are purely words at this stage, but if there is no such thing as bad publicity, good publicity has to be even better.
In an interview with WWD, Stuart Vevers stated that rather than rehashing the archives, the collection should be about what Coach should be, not so much what it was. We welcome this approach as we believe younger consumers are the customer group where Coach has lost market share the most in the last two years. In our view, although Coach did not lose many existing customers to the competition, it failed to recruit new ones, notably amongst first-time buyers. As well as the change in Creative Director, many steps have now been taken that tend to show these issues are well acknowledged and are being thoroughly and systematically addressed: A brand new advertising campaign New York stories (traditionally Coach has done little advertising as store fronts were considered as being the essential vehicle for brand exposure) A brand new store concept has been tested Logo represented 11% of full-price sales and 42% of factory in Q2 versus respectively 23% and 57% just a year before Department store locations are evolving quickly: last year Coach had about 1,000 locations in North America with 600 caselines (ie product sold behind glass"), 300 shop in shops and 100 open sell areas (ie product readily
34
abc
available to the consumer). The company plans to convert all 600 caselines to open sell environments over the next two years A new bi-monthly window display approach. The results of these measures will take some time to filter through but we are confident the new brand direction will prove successful.
inventory amortisation from the JV acquisition in Coach Europe. SG&A: Modest SG&A dollar growth increase in H2, investments in Europe, marketing and other brand transformation initiatives generally funded by the restructuring actions taken in Q4 last year. An EBIT margin of 26%-27% (vs c28% previously). Having published on Coach on 11 February 2014, our FY13/14e-FY15/16e EPS estimates are unchanged. Our FY13/14e estimates assume a 7% decline in NA comps and a 26% EBIT margin. For FY14/15e and FY15/16e, we forecast a 2% increase in NA comps in both years and an EBIT margin of 26% and 26.5%, respectively. Our DCF-derived target price is unchanged at USD64. Our DCF assumptions are outlined on page 37. Under our research model, for US stocks without a volatility indicator, the Neutral band is 5 percentage points above and below the hurdle rate of 7%. Our target price implies a 27.4% potential return which is above the Neutral band; therefore we reiterate our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Downside risks include the brands different positioning in its two channels (full-price retail and factory outlets), which could pose a threat to its image, a lack of success in diversifying out of the core handbags and accessories product and a lack of traction in the European market.

Q2 results published on 22 January 2014 were a miss: NA comps declined 13.6% (vs HSBC -7%) and Q2 EPS of USD1.06 was down 14% for the key quarter (ended December) missing consensus (USD1.11) and our own expectations (USD1.13). Q2 sales declined 3% at constant FX. The performance in NA was impacted by substantially lower traffic in stores and by the decision to limit access to the e-factory flash website. International sales increased 11% at constant currency in Q2 with China sales increasing 25% (with comps remaining in double digits). Japan sales were down 2% in organic terms, translating into a 21% decline in USD. The group mentioned strong comps in the quarter in Europe. Q2 EBIT was USD437m, down 17%, implying an EBIT margin of 30.7% vs 35% in Q2 ended December 2012. Gross margin was down 300bp to 69.2%, due to rising sourcing costs and inventory amortisation from the JV acquisition in Europe. SG&A decreased 2% in USD but that was insufficient to avoid SG&A deleverage. Following these disappointing Q2 numbers, Coach updated its FY June 2014 guidance: Sales: low-single-digit sales declines at constant currency; NA comps to be around the Q2 level for the balance of the year. Gross margin: at about 70% (vs 72.9% last year) due to increased factory clearance levels, the weaker JPY, rising sourcing costs, as well as
35
abc
Coach simplified P&L USDm Net sales Cost of sales Gross Profit Gross margin Selling, G&A SG&A as % of sales Operating Income Operating margin Interest income PBT Income taxes Tax rate Minority interest Net income FY08/ FY09/ FY10/ 1Q12a 2Q12a 3Q12a 4Q12a FY11/ 1Q13a 2Q13a 3Q13a 4Q13a FY12/ 1Q14a 2Q14a FY13/ FY14/ FY15/ 09a 10a 11a 12a 13a 14e 15e 16e 3,230 3,608 4,159 1,050 1,449 1,109 1,155 4,763 1,161 1,504 1,188 1,223 5,075 1,151 1,420 4,880 5,110 5,520 908 2,323 71.9% 1,322 40.9% 1,000 31.0% 3.2 974 1,135 2,634 73.0% 1,484 41.1% 1,150 31.9% 1.8 286 403 291 317 1,297 316 418 307 335 1,377 324 437 1,454 1,523 1,628
3,024 765 1,045 818 838 3,466 845 1,085 880 887 3,698 827 983 3,426 3,587 3,892 72.7% 72.8% 72.2% 73.8% 72.6% 72.8% 72.8% 72.2% 74.1% 72.6% 72.9% 71.8% 69.2% 70.2% 70.2% 70.5% 1,719 443 544 481 487 1,954 513 559 532 570 2,174 505 547 2,157 2,258 2,428 41.3% 42.1% 37.6% 43.3% 42.1% 41.0% 44.2% 37.2% 44.8% 46.6% 42.8% 43.9% 38.5% 44.2% 44.2% 44.0% 1,305 322 501 337 352 1,512 332 527 349 318 1,525 322 436 1,269 1,329 1,464 31.4% 30.7% 34.6% 30.4% 30.4% 31.7% 28.6% 35.0% 29.3% 26.0% 30.0% 27.9% 30.7% 26.0% 26.0% 26.5% 0.0 -4.0 1.6 2.0 12.0 25.0 35.0 -3.7 -1.4 -1.8 -1.7 -1.5 -6.3 -2.0 -1.2 -0.7 321 499 336 350 1,506 330 525 348 318 1,521 323 438 1,281 1,354 1,499
1,003 1,152 1,301
99 467 108 173 109 96 486 105 140 410 433 480 381 417 420 106 152 111 38.0% 36.2% 32.3% 32.9% 30.4% 33.0% 28.2% 31.0% 32.8% 32.8% 31.3% 30.3% 32.0% 32.6% 32.1% 32.0% 32.0% 32.0% 622 735 881 215 347 225 251 1,039 221 353 239 221 1,034 218 297 871 921 1,019
Net EPS common (Diluted, USD) 1.91 2.33 2.92 0.73 1.18 0.77 0.86 3.53 0.77 1.23 0.84 0.78 3.61 0.77 1.06 3.10 3.29 3.64 Weighted avg com share out (D, m) 325.6 315.8 301.6 296.1 295.5 293.5 291.8 294.1 288.5 286.2 284.6 285.3 286.3 284.5 281.5 281.1 280.0 280.0 Growth 4% 7% 6% 7% -1% -6% -4% 5% 8% Net sales 2% 12% 15% 15% 15% 17% 12% 15% 11% 9% 14% 11% 4% 6% 6% 6% 3% 4% 6% 5% 7% Cost of sales 17% 7% 17% 21% 15% 12% 4% 8% 6% 7% -2% -9% -7% 5% 8% Gross profit -4% 13% 15% 13% 14% 18% 13% 15% 11% 3% 11% 17% 11% -2% -2% -1% 5% 8% Operating expenses 8% 12% 16% 13% 18% 10% 14% 14% 16% 3% 5% 3% -10% 1% -3% -17% -17% 5% 10% Operating Income -15% 15% 13% 13% 10% 33% 13% 16% 6% 5% 10% -10% 2% 0% -14% -14% 6% 11% Diluted EPS -7% 22% 25% 16% 18% 24% 27% 21% North America retail comps
-7%
4%
11%
9%
9%
7%
2%
7%
6%
-2%
1%
-2%
0%
-7% -14% -12%
-4%
2%
Sale by country & distribution channel in FY2013-14e

Japan 13% Greater China 11% North American Stores 62% Other Intl 5% NA Internet 4% US Department stores 5%
Sales by product category in FY2013-14e
All Other Products 8% Men's 11% Women's Handbags 58%
Women's accessories 23%

36
abc
Financials & valuation: Coach

Overweight
Profit & loss summary (USDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (USDm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,421 -241 -389 -340 -240 1,059 (USDm) 440 824 1,835 1,135 3,532 1,122 1 -1,134 2,409 842 440 962 1,867 1,107 3,702 1,140 1 -1,106 2,561 1,022 440 1,068 2,316 1,481 4,257 1,159 1 -1,480 3,096 1,184 440 1,184 2,817 1,898 4,873 1,181 1 -1,897 3,691 1,362 1,013 -280 -322 -369 27 733 1,067 -308 -308 -386 -373 759 1,180 -339 -339 -424 -417 841 5,075 1,688 -163 1,525 -4 1,521 1,521 -486 1,034 1,034 4,880 1,453 -184 1,269 12 1,281 1,281 -410 871 871 5,110 1,531 -202 1,329 25 1,354 1,354 -433 921 921 5,520 1,686 -223 1,464 35 1,499 1,499 -480 1,019 1,019
6.5 3.0 8.31
Sensitivity and valuation range (USD/share) Cost of capital vs fade period 7.3% 7.8% 8.3% 8.8% 9.3% 4 years 70.9 66.6 62.7 59.2 55.9 8 years 72.8 68.1 64.0 60.3 56.9 12 years 74.2 69.4 65.2 61.3 57.8
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 06/2013a 2.5 7.5 15.0 13.9 5.8 7.7 2.7 06/2014e 2.6 8.7 12.4 16.2 5.4 5.3 2.7 06/2015e 2.4 8.0 10.4 15.3 4.4 5.5 2.8 06/2016e 2.1 7.0 8.7 13.8 3.7 6.1 3.1
Issuer information Share price (USD) 50.23 COH.N 13,943 100 United States Antoine Belge Erwan Rambourg Target price (USD) 64.00
2 7. 4
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (USD) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 3.61 3.61 1.35 8.66 3.10 3.10 1.35 9.38 3.29 3.29 1.42 11.38 3.64 3.64 1.56 13.57 5.9 119.7 47.0 31.2 33.2 30.0 420.3 -47.1 -0.7 5.2 92.6 35.0 24.1 29.8 26.0 -43.2 -0.8 4.6 81.9 32.5 23.1 30.0 26.0 -47.8 -1.0 4.3 78.2 30.0 22.3 30.6 26.5 -51.4 -1.1 6.6 2.6 0.8 1.0 2.3 -3.9 -13.9 -16.8 -15.8 -14.3 4.7 5.4 4.7 5.7 6.1 8.0 10.1 10.2 10.7 10.7 06/2013a 06/2014e 06/2015e 06/2016e
Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst
Bloomberg (Equity) COH US Market cap (USDm) 13,943 Enterprise value (USDm) 12639 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
90 80 70 60 50 40 30
Mar-12 Sep-12 Mar-13 Sep-13 Coach Rel to S&P 500
90 80 70 60 50 40
Mar-14
30
Source: HSBC
37
abc
Emperor Watch & Jewellery (887 HK)

Best watch retailer to capture Chinese travel flows as well as the
rebound in high-end watches with the best Hong Kong locations

Jewellery part of the business to provide incremental sales and
margin kicker
Initiate coverage with an Overweight rating and HKD0.80 TP
Capturing travelling Chinese

Buying Chinese not China growth
Over the past year, we have consistently produced research pointing to our bullish stance on Chinese travel while we have remained cautious on China itself. In luxury goods particularly, we believe incremental growth in purchases by Chinese consumers will continue to take place outside China and growth should be more related to Chinese outbound travel than to Chinese GDP per se. Chinese will continue purchasing watches abroad given: Ease of travel: laxer travel regulations in China have gone hand-in-hand with numerous bilateral agreements on visas that have contributed to lifting some of the barriers that previously weighed on travel Economics: differences in taxation regimes make it cheaper to purchase goods abroad if you are a mainland resident Holiday indulgence: consumers are keener to spend during holidays, whether on a restaurant meal or a handbag all the more as low-cost transport increasingly allows savings
Better shopping experience: product collections abroad can be wider than in the mainland. The product assortment, and the service that goes with it (ie knowledgeable staff), are other reasons to shop outside the mainland Overseas purchases may be considered as status enhancers in some cases Given its important Hong Kong bias, and the likely outperformance of Macau and other Asian markets (Singapore today, Malaysia and Thailand tomorrow) relative to mainland China, Emperor is ideally positioned to capture purchases made by the travelling Chinese.
Chinese not China dependent: Emperor 2013 sales split
China 8% Macau 6% Singapore and others 2%
Hong Kong 84%

38
abc
Chinese more than China: global luxury estimates for 2013 Contribution to sales Rest of Asia Hong Kong Korea Macau Other Asia Singapore Taiwan China Europe US Japan Global sales 32.0% 10.0% 7.0% 2.0% 7.0% 4.0% 3.0% 10.0% 31.0% 18.0% 8.0% 100.0% Of which Chinese 11.5% 6.0% 1.5% 1.5% 1.0% 1.0% 0.5% 10.0% 9.0% 1.5% 0.0% 32.0%
Retail price breakdown for an imported luxury watch (HKD)

150 100 50 0 M ainland China Import price Consump. tax (20%)* Wholesale price
Source: HSBC estimates- *: calculated on import price
Wholesale pric e
Hong Kong VAT (17.5%*) Import duty (11%)* Distributor's gross margin
In red, countries where Emperor has or will have a presence Source: HSBC estimates
Limited threat of consumers going back to purchasing in China

In accordance with Chinas commitments to the World Trade Organization, tariffs on imported luxury goods have been reduced since 2005, but they still exist. In May 2013, Bloomberg announced that China agreed to cut import tariffs on Swiss watches by 60% over10 years as the two nations seek to expand trade. The duties will be cut by 18% in the first year and by around 5%in each of the following nine years, according to a transcript posted on the ministrys website. The policy has not yet been enacted, but even if it were, the savings would be minimal: it equates to only a 2% reduction initially, followed by another a 0.55% reduction every year thereafter. This would not significantly, nor quickly, reduce the gap between the mainland price points and those of Hong Kong. Indeed, should a consumer choose to buy a watch in China versus Hong Kong, the price will be marked up by three layers of taxes: Import taxes: 11% for watches Consumption taxes: 20% for watches retailing at more than RMB10k; and Value-added tax (VAT): 17.5%.
Capturing the rebound in high-end watches

Close ties to Richemont and high end consumers
Each of the three most important listed watch retailers for greater China is very much affiliated with a different group of brands: Hengdeli is quite dependent on the Swatch Group brands with notably entry price point luxury brands such as Tissot, Longines, Rado. The groups growth is driven by middle class expansion and wage inflation Oriental derives around 70% of its sales from Rolex (and the groups other brand, Tudor) and as such has taken a direct hit from the drying up of gifting , which started to affect demand late last Autumn after the change in the Chinese administration Emperor is a key distributor for the Richemont group and we believe Cartier, alongside Rolex and Patek Philippe (both independent companies), are important drivers of sales. As Cartier has also suffered in China from the drying up of gifting and, probably, a momentary lack of successful innovation in watches, this has weighed on Emperors growth.
39
abc
The swing in same store sales growth has been extreme: +46% in 2010, +30%, flat in 2012 (with H1 up 7% and H2 down c6.5%), and close to flat (1.2%) in 2013 as well.
The best Hong Kong locations
This is ideally situated in the Orchard Road shopping district of the city where the ION Orchard mall, Ngee Am City shopping centre, and the Scotts Walk DFS Galleria are located. In Q2 2014, the group will be opening a Patek Philippe shop as a replacement for the jewellery boutique. While more expansion is planned in both and Macau, the group is also working on other areas where it can capture Chinese tourism flows. Malaysia and, probably more importantly, Thailand a country which has committed to cut taxation on luxury purchases and where inbound Chinese travel is booming are currently being assessed for potential projects. Of course, given recent events in Thailand, the timing of those projects may have to be delayed but the fact that Emperor has both the will, and the means, to pursue Chinese travellers purchases abroad is a key differentiation point versus Hengdeli (N) and Oriental (NR). Having said that, expanding in Singapore, Malaysia and Thailand will not be accretive as expanding in Macau and Hong Kong, as gross margins in the former countries are in the high teens to low 20s vs the more sustainable 23-25% levels the group enjoys today. However, these new ventures will probably only account for 5%+ of sales within the next 5 years, and there will be increasing cost efficiencies over time, linked to greater scale and footprint, registering below the gross profit line.
Emperor has, in our view, by far the best store locations to capture Chinese flows in Hong Kong, i.e. a dominant position in the key Kowloon district (5 locations in TSTs Canton Road) and the most locations in Causeway Bays Russell Street, the most expensive, and yet most productive, shopping street on the planet. The group opened a sixth location in Kowloon, at number 33, Canton Road since October 2013. This is a multi-brand watch and jewellery shop. In Q2 2014, the group plans to open 3,300 square feet in the Richemont-dominated 1881 Heritage building in Canton Road with two mono-brand watch boutiques Patek Philippe and Chopard and one dedicated jewellery store. If you are a mainlander looking for a high-end watch, you are very likely to end up shopping at Emperor if you come to Hong Kong. We believe the group captures about a third of such trade.
More stores to come
Emperor runs 6 stores in Macau and has a project to open a very big store (12,000 sq. ft) in Q2 2015. In January 2013, the group entered the Singapore market with 4 locations a jewellery shop and then mono-brand watch stores for Rolex, Cartier and Jaeger-LeCoultre at the shopping gallery of the Hilton hotel.
A diversified, small yet productive footprint: retail network as at 19 March 2014 Watch mono-brand Hong Kong Macau China Singapore Total
Watch mono-brand with or w/o jewellery 11 1 6 0 18
Jewellery only 5 3 19 1 28
Total 22 6 44 4 76
average sq ft 4,975 1,404 1,048 593 2,189
6 2 19 3 30
40
abc
The jewellery kicker

Sustainably higher growth rates
Greater China is the only male-driven market for luxury for historical reasons (watches entered early compared to other luxury items ), economic reasons (lower financial autonomy of women), social reasons (men looking to develop guanxi/status) and gifting reasons. But, as we have highlighted several times in past reports, the future for China is female, and female-driven categories which tend to be driven by self-purchasing or true gifting should outperform in the future, in our view. The jewellery positioning at Emperor is quite unique. The company describes three markets: 1) Super high end: starting with Cartier, Bulgari and going higher to Van Cleef, Harry Winston, and Graff; 2) Premium mass: defined by management as Tiffany and Chopard, and 3) Mass: Chow Tai Fook and other local jewellers. Emperor considers that what it develops is positioned between the mass and the premium mass and that its added value is mostly linked to design and the use of materials that imported jewellers dont work with (e.g. jade). Hence, there is no obvious competition as the proportion of gold product is lower than 20% of total jewellery sales with the exception of H1 2013 during which Emperor benefited, along with all local jewellers, from the gold rush. Emperor thinks of jewellery in the same way the imported brands do, meaning they focus on design above all rather than on selling commoditised products. The company has indicated that the contribution of jewellery to sales should increase eventually to 50% of group sales (from 22% in 2013) though this could take some time!
Hence, the gross margin on watches is currently around 22% (the sustainable level is 23-25% but FY 2013 was affected by limited price increases and more discounting than usual) while the gross margin on jewellery has been around 35% for some time now. As the contribution to sales from jewellery increases, the gross margin is naturally supported, and the EBIT margin should also benefit from greater leverage of fixed costs at the SG&A level.

Looking for a strong revenue and margin rebound in 2014
Lackluster 2013
Emperor reported sales and margins on 19 March 2014. Overall sales growth was muted at +1% yoy to HKD6.62bn and SSSG was down 1.2% at the group level and -1.6% in Hong Kong. By geography, HK was flattish (84% of sales), Macau up 7% (6% of sales) while the mainland (8% of sales) was down 16% on "anti-corruption headwinds". The new Singapore venture accounted for HKD120m or c2% of sales. By category, watches were down 3% (78% of sales) and jewellery reached an impressive 22% growth and now accounts for 22% of sales. Discounting in watches, notably getting rid of products above the "bread and butter" range of HKD50-300k, along with a negative product mix within jewellery the April "gold rush" meant that gold was c20% of sales of jewellery vs the normalized mid teen level meant that gross margin contracted by 190bps to 24.1%. Despite an increase in rents (60bps up to 9.9% of sales) and staff costs (40bps up to 3.1% of sales), EBITDA margin was "only" down 250bps to 6.3% of sales. Inventory days were 265 days (in line with last the 2012 level of 267 days), despite jewellery days being down (from 400 to 380). This is linked to the fact
Strong margin enhancement possibilities

The mechanics are pretty simple here. You make a better margin if you sell your own products rather than selling someone elses.
41
abc
that on watches, the number of days slightly increased from 150 late 2012 to 160 late 2013. The company believes this is the lowest level in the industry and a healthy one. We tend to agree as we believe the slight increase is mostly to feed the new store openings in the short term. Besides, the company is debt free it actually has HKD657m cash at hand. Rental pressure is likely to continue but the incremental increase from lease renewals should be less drastic than prior years due to the weakening market sentiment; other operating costs for the group are expected to remain stable relative to sales. Rents for renewal are up about 15% currently (vs 20% in 2013) and, as a rule of thumb, leases last 3 years in Hong Kong so a coherent approach would be to consider rents to be up an aggregate of around 55 this year. In 2013, brands did not increase prices with the exception of the following Richemont brands: Cartier, Jaeger-LeCoultre, Panerai and Lange & Sohne having increased prices in April 2013 by c5%. In 2014 so far, Audemars Piguet and Zenith have increased prices early in the year; Tah Hueer and Panerai mid-March and Lange & Sohne as well as Baume & Mercier are increasing early April. The hope for Emperor (though it is clearly not embedded in any guidance) is for the big three ie Patek Philippe, Rolex and Cartier to increase prices later in the year. Obviously, as and when brands increase prices, this re-values the existing inventory and implies higher gross margins for distributors like Emperor.
The 2014 rebound
Gross margin should be helped by a lower rate of discounting on watches, meaning the group could revert to a 23-25% gross margin range for watches after seeing 22% recently. The shift to more jewellery should also provide some positive support. While reported sales should only grow by 6% this year, we have factored in 150bps of EBITDA margin expansion from 6.3% to 7.8%, implying a 33% EBITDA increase after two consecutive years of EBITDA collapse, implying that EBITDA virtually halved between 2011 and 2013.
Valuation and risks

Despite obvious signs of a stabilisation in sales trends and a positive outlook for margins (less discounting, jewellery outperformance, price increases), Emperor Watch & Jewellery shares have been flat over the past 3 months. Our DCF-derived target price is HKD0.80. Under our research model, for Hong Kong stocks without a volatility indicator, the Neutral band is 5 percentage points above and below the hurdle rate of 8.50%. Our target price implies a 36% potential return which is above the Neutral band; therefore we initiate coverage with an Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Downside risks include lowering of luxury taxes in mainland China, a weaker Euro and a slower pick-up than expected in the high-end watch market.
We are factoring in a rebound in 2014,which relies on watches after the 2013 re-set going back to 4% sales growth led by low-single digit volume growth and low single digit mix and price increases. With jewellery outperforming, we have sales growth reaching close to 14% that year. More importantly we see margins rebounding significantly.
42
abc
Emperor Watch (0887.HK) HKDm, for year-ended Dec 31 Simplified P&L Net Sales Change in percent Gross profit Gross margin Selling & distribution expenses Administrative expenses Other operating costs Total production costs as % of sales EBITDA as % of sales Depreciation & amortisation EBIT Percent of revenue Financial Income Income before Taxes Taxes Tax rate Consolidated net Profit Percent of revenue EPS diluted Variation % in HKDm, for year-ended Dec 31 Sales by region Hong Kong Macau China Singapore and others Total as a % of sales Hong Kong Macau China Singapore and others Total in HKDm, for year-ended Dec 31 Sales by product category Watches Jewellery of which Diamonds and Jade of which others Total as % of sales Watches Jewellery of which Diamonds and Jade of which others Total
Source: company, HSBC estimates
2007 1,561 44.0% 350 22.4% 115 39 0 155 9.9% 204 13.1% 9 195 12.5% 3 192 33 17.2% 159 10.2% 15.88 194% 2007 1,484 78 0 0 1,561 95.0% 5.0% 100% 2007 1,346 215 1,561
2008 1,842 18.0% 514 27.9% 170 65 9 242 13.1% 286 15.5% 14 272 14.8% 3 269 47 17.5% 223 12.1% 10.75 -32% 2008 1,722 102 19 0 1,842 93.5% 5.5% 1.0% 100% 2008 1,623 220 1,842
2009 2,686 45.8% 694 25.8% 338 116 0 448 16.7% 268 10.0% 22 245 9.1% 2 243 43 17.7% 196 7.3% 4.35 -60% 2009 2,229 179 278 0 2,686 83.0% 6.6% 10.4% 100% 2009 2,320 366 2,686
2010 4,095 52.4% 1,048 25.6% 472 173 199 832 20.3% 257 6.3% 42 215 5.3% 11 204 70 34.5% 126 3.1% 2.42 -44% 2010 3,366 267 462 0 4,095 82.2% 6.5% 11.3% 100% 2010 3,461 634 469 165 4,095
2011 5,862 43.1% 1,686 28.8% 739 190 9 927 15.8% 825 14.1% 66 759 12.9% 2 757 130 17.2% 627 10.7% 9.70 301% 2011 4,863 377 622 0 5,862 83.0% 6.4% 10.6% 100% 2011 4,832 1,030 790 240 5,862
2012 6,531 11.4% 1,697 26.0% 992 210 0 1,197 18.3% 572 8.8% 73 500 7.6% 4 495 91 18.4% 404 6.2% 5.97 -38% 2012 5,520 354 658 0 6,531 84.5% 5.4% 10.1% 100% 2012 5,320 1,211 871 340 6,531
2013 6,624 1.4% 1,600 24.1% 1,072 181 0 1,244 18.8% 415 6.3% 59 356 5.4% 0 356 66 18.4% 290 4.4% 4.22 -29% 2013 5,545 404 555 120 6,624 83.7% 6.1% 8.4% 1.8% 100% 2013 5,144 1,481 942 539 6,624
2014 7,054 6.5% 1,809 25.6% 1,136 190 0 1,316 18.7% 553 7.8% 59 493 7.0% 0 493 91 18.4% 402 5.7% 5.85 39% 2014 5,923 416 571 144 7,054 84.0% 5.9% 8.1% 2.0% 100% 2014 5,361 1,693 1,093 600 7,054
2015 7,590 7.6% 2,002 26.4% 1,199 197 0 1,385 18.3% 677 8.9% 60 617 8.1% 0 617 114 18.4% 503 6.6% 7.32 25% 2015 6,333 498 601 158 7,590 83.4% 6.6% 7.9% 2.1% 100% 2015 5,693 1,898 1,240 657 7,590
2016 8,096 6.7% 2,160 26.7% 1,287 210 0 1,486 18.4% 735 9.1% 61 674 8.3% 0 674 124 18.4% 550 6.8% 8.00 9% 2015 6,699 586 625 185 8,096 82.7% 7.2% 7.7% 2.3% 100% 2015 6,035 2,060 1,364 696 8,096
86.2% 13.8% 100%
88.1% 11.9% 100%
86.4% 13.6% 100%
84.5% 15.5% 11.5% 4.0% 100%
82.4% 17.6% 13.5% 4.1% 100%
81.5% 18.5% 13.3% 5.2% 100%
77.6% 22.4% 14.2% 8.1% 100%
76.0% 24.0% 15.5% 8.5% 100%
75.0% 25.0% 16.3% 8.7% 100%
74.6% 25.5% 16.9% 8.6% 100%
43
abc
Financials & valuation: Emperor Watch & Jewellery

Overweight
Profit & loss summary (HKDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (HKDm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (HKDm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 195 120 4,481 657 4,796 389 0 -657 4,407 3,750 195 180 4,530 886 4,905 332 0 -886 4,689 3,687 195 270 4,747 1,235 5,212 286 0 -1,235 5,041 3,691 195 360 5,001 1,644 5,555 245 0 -1,644 5,426 3,667 273 -100 -100 -87 -203 174 585 -120 -120 -121 -229 465 650 -150 -150 -151 -349 500 611 -150 -150 -165 -409 461 6,624 415 -59 356 0 356 356 -66 290 290 7,054 553 -59 493 0 493 493 -91 402 402 7,590 677 -60 617 0 617 617 -114 503 503 8,096 735 -61 674 0 674 674 -124 550 550
10.7 2.8 10.93
Sensitivity and valuation range (USD/share) Cost of capital vs fade period 10.5% 10.7% 10.9% 11.1% 11.3% 4 years 0.8 0.8 0.8 0.8 0.8 8 years 0.8 0.8 0.80 0.8 0.8 12 years 0.9 0.8 0.8 0.8 0.8
Issuer information Share price (HKD) 0.59 0887.HK 523 47 Hong Kong Erwan Rambourg Antoine Belge Target price (HKD) 0.80
3 5. 6
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (HKD) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.04 0.04 0.01 0.64 0.06 0.06 0.02 0.68 0.07 0.07 0.02 0.73 0.08 0.08 0.02 0.79 1.8 7.8 6.8 6.3 6.3 5.4 207353.0 -14.9 -1.6 1.9 10.8 8.8 8.3 7.8 7.0 -18.9 -1.6 2.1 13.6 10.3 9.9 8.9 8.1 -24.5 -1.8 2.2 15.0 10.5 10.2 9.1 8.3 -30.3 -2.2 1.4 -27.5 -28.8 -28.1 -29.3 6.5 33.2 38.6 38.6 38.6 7.6 22.5 25.1 25.1 25.1 6.7 8.6 9.4 9.4 9.4 12/2013a 12/2014e 12/2015e 12/2016e
Bloomberg (Equity) 887 HK Market cap (HKDm) 4,061 Enterprise value (HKDm) 3174 Sector Global Luxury Goods Contact 852 2996 6572 Contact 331 5652 4347
Price
1.4 1.2 1 0.8 0.6 0.4 0.2 Mar-12
Source: HSBC
Sep-12
Mar-13
Sep-13
Mar-14
44
abc
This page has been left blank intentionally
45
abc
Hengdeli (3389 HK)

Despite the stock price falling by 17% YTD, we are still sceptical
of a possible recovery
Margin-dilutive acquisitions and corporate governance concerns
are expected to weigh on the valuation

Maintain N(V) rating, lower our TP to HKD1.66 (from HKD2.30) on
lower estimates; move to PE valuation approach from DCF
Limited rebound in China

Entry price point watches in China to see less of a rebound
Concerns over acquisitions

Recent acquisitions are margin-dilutive and present limited synergies
As mentioned in our previous report (Give us a ring, 16 October 2013), although a pick-up in watch demand should help all watch retailers exposed to Greater China, we believe Hengdeli will see less of a rebound. This is because it relies more on entry price points and brands, notably from within the Swatch stable of brands (such as Tissot and Longines) that are historically driven more by the growth of the middle class and self-purchasing than by gifting. We expect SSSG for high-end watches to have bottomed in 1H13 at -19% yoy but any rebound could be offset by continued flat growth in midrange brands (growth was flat in 1H13, down from 8% for the full-year 2012). We have already heard from Hengdelis competitors that sales in China have been tough. Although the Hong Kong business (which only carries the high-end Elegant banner) has shown a rebound with sales growing 11% in 1H13 despite four store closures Hong Kong contributes only a quarter of sales.
Harvest Max: Hengdeli raised its stake from 40% to 70% in April 2013. The company operates retail stores in Hong Kong selling jewellery, watches and duty-free commodities, primarily in locations targeting Chinese tour groups Shenzhen Feierpusi Electronics: the company was acquired in order to gain access to the 89% equity interest in Nanchang Hengdeli, a business principally engaged in the business of selling watches, gold, jewellery and eyewear Both businesses are margin-dilutive (Harvest Max is barely breakeven, and Nanchang Hengdelis c4% net margin in 2012 compares to Hengdelis preacquisition net margin of 7.1%).
Cash balance to fall after acquisitions and repayment of convertible bond
As at end-June 2013, the group had approximately RMB3,150m in cash and cash equivalents. Much of the cash was raised through a senior note issuance of RMB2,205m in June 2013. However, most of the proceeds were expected to be used to redeem a
46
abc
convertible bond in October 2013. This will lower the financial expense, but will also lower the cash balance. In addition, the cost of the acquisitions totalled RMB707m. Hence we expect the cash and equivalents balance to reduce to RMB 1,367m by end-Dec 2013.
We lower our target price to HKD1.66 (from HKD2.30 previously) as we change our valuation methodology from DCF to price-to-earnings (PE). We change our valuation methodology as we think there is uncertainty over the free cash flow generation of the business and we think negative perceptions of the recent acquisitions will weigh on the stock's valuation. We use a target forward multiple of 8.6x, which represents one standard deviation below the company's historical average since listing in September 2005. Apart from during the post-2008 financial crisis, the stock has not traded at more than one standard deviation below its historical average. We think it is fair to use one standard deviation below the historical average as this is similar to the trough level it traded at in 201112 when corporate governance and anti-corruption concerns weighed. We think concerns over the logic of recent acquisitions plus continued pressure on the business will prevent the stock from re-rating back to the historical average. Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppt above and below the hurdle rate for Chinese stocks of 9.5%. Our target price implies a potential return (including the forecast dividend yield of 3.5%) of 9.9%, within the Neutral band; therefore, we reiterate our Neutral (V) rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Downside risks include a greater-than-expected decrease in margins (due to higher retail discounting affecting gross margin and higher staff/rental costs affecting EBIT margin) and loss of business to the brands own stores. Upside risks include a rapid lowering of import taxes from Switzerland and an increase in the stakes Swatch and LVMH hold.
Corporate governance concerns persist

Most recently, in November 2013, Hengdelis biggest shareholder Best Growth (a joint holding between Chairman Zhang Yuping and his brother and sister) sold 4.6% of its stake to Chengwei Capital at an average price of HKD1.96, reducing its stake to 30.55%. The shares sold by Best Growth represent the stake held by Chairman Zhangs siblings so they no longer have a holding in the company. Although the siblings were not involved in the operations of Hengdeli, we think this move aesthetically reflects badly. Meanwhile, the personal loan from the Swatch Group to Hengdelis chairman is expected to expire this year in July. As a reminder, Zhang Yuping (the chairman of Hengdeli) pledged 300m of his Hengdeli shares as collateral in return for a threeyear USD100m personal loan from the Swatch Group back in July 2011. If Zhang defaults on the loan, Swatchs stake in Hengdeli would increase from 9.05% currently to 20.42%. To the best of our knowledge, the Chairman has not used the loan proceeds but closing out the loan could be a step towards reassuring shareholders of his commitment to the business.

We lower our EBIT estimates for 2014 and 2015 by 5% and 6%, respectively, to take into account the lower margin assumptions (due to discounting pressure, operating cost pressure, and the integration of Harvest Max driving up distribution costs).
47
abc
Hengdeli - Comparison with consensus and previous forecast _____________ FY13e ______________ _____________ FY14e ______________ _____________ FY15e ______________ __ HSBC____ Cons _ Diffce vs. _ __ HSBC ___ Cons _ Diffce vs. _ ___HSBC ___ Cons _ Diffce vs. _ Old New old cons Old New old cons Old New old cons 13,531 13,560 13,531 992 7.3% 610 4.5% 1,015 7.5% 621 4.6% 0% 0% 14,537 14,435 15,022 1,045 7.2% 718 4.9% 992 6.9% 675 4.7% -1% -4% 15,211 15,018 16,410 1,143 7.5% 792 5.2% 1,074 7.2% 735 4.9% -1% -8%
In RMBm Revenue EBIT EBIT margin Net profit Net profit margin
1,230 2% -18% 9.1% 0.2ppt -1.6ppt -6% 663 2% 4.9% 0.1ppt -0.3ppt
1,411 -5% -30% 9.4% -0.3ppt -2.5ppt 824 -6% -18% 5.5% -0.3ppt -0.8ppt
1,618 -6% -34% 9.9% -0.4ppt -2.7ppt 948 -7% -23% 5.8% -0.3ppt -0.9ppt
Source: Bloomberg, HSBC estimates
Hengdeli - P&L Summary Year to Dec (RMBm) Total number of stores +/PRC retail (RMBm) - No. of stores same-store sales growth % change yoy HK retail (RMBm) - No. of stores +/% change yoy Taiwan retail (RMBm) - No. of stores % change yoy Harvest Max (RMBm) % change yoy Retailing (RMBm) y/y Wholesale (RMBm) y/y Others (RMBm; e.g., after-sales) y/y Sales (RMBm) y/y Gr profit (RMBm) GP margin bp change EBIT y/y EBIT margin Pre-tax profit y/y Tax Eff tax rate (excl CB loss) Minorities Net profit/(Loss) - reported y/y Net margin HSBC core net profit y/y Core net margin
2009a 270 58 2,722 224 11% 17% 1,705 13 3 20% 8 33
2010a 350 80 3,770 286 33% 38% 2,412 16 3 41% 193 48
2011a 405 55 5,210 332 30% 38% 3,157 19 3 31% 222 54 15% 8,589 35% 2,551 54% 235 31% 11,375 38.5% 2,857 25.1% 17.7 1,160 41.6% 10.2% 1,198 46.9% -280 23.4% -103 815 47.1% 7.2% 793 50.1% 7.0%
1H12a 428 23 2,825 352 0% 9% 1,415 16 -3 -2% 100 60 -3% 4,339 5% 1,284 11% 127 22% 5,750 6.3% 1,536 26.7% 95.9 678 5.3% 11.8% 771 27.8% -158 20.4% -51 563 39.1% 6.9% 424 5.5% 6.6%
2H12a 452 24 2,803 374 1% 7% 1,699 22 6 -1% 115 56 -4% 4,617 4% 1,641 18% 113 -15% 6,371 6.7% 1,619 25.4% 86.6 571 10.5% 9.0% 460 -22.7% -128 27.8% -39 292 -28.7% 4.6% 368 -5.9% 5.8%
2012a 452 47 5,628 374 1% 8% 3,114 22 3 -1% 215 56 -3% 8,956 4% 2,925 15% 239 2% 12,120 6.6% 3,154 26.0% 90.9 1,248 7.6% 10.3% 1,231 2.7% -285 23.2% -90 855 4.9% 7.1% 792 -0.1% 6.5%
1H13a 461 9 2,852 384 -8% 1% 1,593 18 1 13% 90 59 16% 284 4,819 11% 1,361 6% 114 -10% 6,294 9.5% 1,673 26.6% -12.2 530 -21.7% 8.4% 419 -45.6% -117 27.9% -30 273 -51.6% 4.3% 329 -22.3% 5.2%
2H13e 480 19 2,647 402 -3% -6% 1,864 20 2 10% 107 58 -7% 796 5,414 17% 1,739 6% 114 1% 7,266 14.1% 2,067 28.4% 303.4 484 -15.1% 6.7% 501 8.9% -131 26.2% -21 349 19.2% 4.8% 347 -5.9% 4.8%
2013e 480 28 5,499 402 -5% -2% 3,456 20 -2 11% 197 58 -8% 1,080 na 10,233 14% 3,100 6% 227 -5% 13,560 11.9% 3,740 27.6% 155.6 1,015 -18.7% 7.5% 920 -25.2% -248 27.0% -51 621 -27.4% 4.6% 676 -14.7% 5.0%
2014e 503 23 5,629 422 0% 2% 3,595 20 0 4% 190 61 -4% 1,566 45% 10,979 7% 3,224 4% 232 2% 14,435 6.4% 4,153 28.8% 118.8 992 -2.3% 6.9% 992 7.8% -258 26.0% -60 675 8.6% 4.7% 675 -0.2% 4.7%
2015e 536 33 5,941 452 2% 6% 3,703 20 0 3% 188 64 -1% 1,597 2% 11,428 4% 3,353 4% 236 2% 15,018 4.0% 4,310 28.7% -7.0 1,074 8.3% 7.2% 1,072 8.1% -279 26.0% -59 735 8.9% 4.9% 735 8.9% 4.9%
4,428 1,330 -19% 134 -6% 5,892 6.8% 1,401 23.8% -35.4 578 6.2% 9.8% 513 -14.0% -128 24.9% -21 364 -16.8% 6.2% 360 -17.9% 6.1%
6,375 44% 1,661 25% 180 34% 8,216 39.4% 2,049 24.9% 115.6 819 41.6% 10.0% 816 58.9% -198 24.3% -63 554 52.0% 6.7% 528 46.8% 6.4%
48
abc
Financials & valuation: Hengdeli Holdings Ltd

Financial statements Year to 12/2012a 12/2013e 12/2014e 12/2015e Key forecast drivers Year to Total number of stores PRC retail sales growth (%) HK retail sales growth (%) Retail turnover growth (%) Wholesales revenue growth (%) Total sales growth (%) 12/2012a 452 8 -1 4 15 7 12/2013e 480 -2 11 14 6 12
Neutral (V)
12/2014e 503 2 4 7 4 6 12/2015e 536 6 3 4 4 4
Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 263 -431 -552 -281 -1,012 -363 (CNYm) 474 1,026 9,810 2,870 11,925 2,389 2,160 -710 5,457 6,051 468 1,707 9,016 1,367 11,816 2,223 3,415 2,049 5,903 7,601 463 1,732 9,480 1,444 12,312 2,219 3,365 1,922 6,392 8,011 457 1,760 9,950 1,711 12,809 2,172 3,315 1,604 6,924 8,284 128 -807 -415 -175 2,758 -814 517 -150 -124 -186 -127 263 721 -150 -124 -202 -317 454 12,120 1,361 -113 1,248 -108 1,231 1,168 -285 855 792 13,560 1,140 -125 1,015 -61 920 975 -248 621 676 14,435 1,124 -133 992 -53 992 992 -258 675 675 15,018 1,204 -130 1,074 -50 1,072 1,072 -279 735 735
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2012a 0.4 3.6 0.8 7.5 1.0 -6.4 3.3 12/2013e 0.6 6.8 1.0 8.7 0.9 -14.2 3.4 12/2014e 0.5 6.9 1.0 8.8 0.9 4.5 3.5 12/2015e 0.5 6.2 0.9 8.1 0.8 7.8 3.8
Issuer information Share price (HKD) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.51 3389.HK 933 47 China Erwan Rambourg Antoine Belge Target price (HKD) 1.66
9. 9
Bloomberg (Equity) 3389 HK Market cap (HKDm) 7,247 Enterprise value (CNYm) 7772 Sector Distributors Contacat 852 2996 6572 Contact 331 5652 4347
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.17 0.16 0.04 1.24 0.13 0.14 0.04 1.28 0.14 0.14 0.04 1.32 0.15 0.15 0.05 1.43 2.2 17.3 15.3 9.3 11.2 10.3 12.6 -12.0 -0.5 2.0 10.9 11.9 6.4 8.4 7.5 18.8 32.0 1.8 6.2 1.8 9.5 11.0 6.6 7.8 6.9 21.0 27.6 1.7 26.9 1.8 9.8 11.0 6.8 8.0 7.1 24.0 21.2 1.3 45.0 6.6 10.2 7.6 2.7 0.2 11.9 -16.3 -18.7 -25.2 -14.7 6.4 -1.3 -2.3 7.8 -0.2 4.0 7.1 8.3 8.1 8.9 12/2012a 12/2013e 12/2014e 12/2015e
Price relative
4.5 4 3.5 3 2.5 2 1.5 1
Mar-12 Sep-12 Mar-13 Hengdeli Holdings Ltd Sep-13 Rel to HSCEI
4.5 4 3.5 3 2.5 2 1.5

Mar-14
Source: HSBC
49
abc
Herms (RMS FP)

Herms should continue to outperform peers in terms of organic
sales growth in calendar FY2014e (HSBCe 11%) FY2014 EBIT margin should be under pressure due to lower hedging gains; we expect an EBIT margin attrition of 70bp to 31.6% Reiterate Neutral, cut target price to EUR262 (from EUR279) on higher WACC
Organic sales growth outperformance

Herms was one of the fastest growing luxury groups in FY2013; quarter after quarter the groups sales outperformed sector peers. Organic sales growth in FY2013 was 13% (vs 8% on average for European peers). For FY2014e, we expect Herms to continue to outperform sector peers. Our sales forecast is 11% (vs 9% on average for Luxury peers). The recipe for maintaining robust organic growth over the years has been and remains to: Maintain a scarcity effect for iconic handbags such as the Kelly and the Birkin (which have two-year waiting lists for some versions)
Herms FY2013 sales breakdown by geography
RTW & accessories 22% Other activities 6%
Develop other handbags lines such as Lindy and Victoria still at high price points as well as more entry-level products such as Picotin or Evelyne. Leverage Herms franchise in other product categories where the brand has certain legitimacy. Although the brand is perceived by consumers as one of the most luxurious, Herms products attract women and men of all ages by selling many entry-level products as well as high-end hand bags.
Herms organic growth vs calendar sector peers

23% 20% 19% 20% 18% 18% 17% 13% 12% 9% 4% 10% 19% 16% 16% 11% 13% 10% 7% 8% 8% 8% 9% 16% 13% 11% 13% 11%
Perfume 6% Watches 4% Tableware 2%
18% 15% 13% 10% 8% 5% 3% 0% -3% -1%
16%
Handbags & Travel 43%
Other products 5% Silk 12%
FY FY FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY FY 09a 10a 11a 12a 12a 12a 12a 12a 13a 13a 13a 13a 13a 14e Herms organic sales growth Calendar average organic sales growth Luxury Peers
50
abc

Herms reported its FY 2013 sales on 13 February 2014. FY2013 sales were EUR3,755m, up 8% reported and 13% at constant FX, implying 11% in Q4 2013 ( vs 13% in Q3, 16% in Q2, 13% in Q1). By channel (at constant FX) in Q4: retail slowed to 9% (vs 13% in Q3, 17% in Q2, 14% in Q1) while wholesale accelerated to 17% (vs 13% in Q3, 13% in Q2 and 10% in Q1). By region (at constant FX): Asia ex-Japan was up 16%, Japan up 5% and the Americas were up only 9% (vs 18% in Q3) owing to a tough basis of comparison (+21% in Q4 2012). In Europe, France increased 8%, and Europe excluding France remained strong, up 11%. Note that Mainland China grew 20% in FY2013 and accounted for 9% of total sales. By product category (at constant FX) in Q4: the performance in Leather Goods remained solid, up 7%. The group is still investing in production capacities with the expansion of the two factories opened in 2012 and plans to create two new facilities. Silk was up 9%, perfumes (15%), ready-to-wear (12%) and watches (1%). The group will report its FY2013 earnings on 20 March 2014. Management updated its FY13 EBIT margin guidance with the release of its FY13 sales. The EBIT margin is now expected to be very slightly above the all-time high achieved in 2012 (vs close to FY2012 level previously (32.1%), due to a betterthan-expected SG&A leverage in Q4. Our forecasts assume an EBIT margin of 32.3% in FY13. For FY2014, Herms is targeting 10% organic sales growth, in line with its long-term stated goals, with Asia and the US growing double-digit and Europe and Japan by less than 10%. Management expects an EBIT margin down y-o-y in FY2014. Since August 2013, Herms has been flagging that the JPY weakness would hurt EBIT margin in 2014. Herms raised prices in Japan by 3% in 2013 (vs LV 23% and Prada 10-12%) and by 10% in February 2014. This will not be enough to offset less favourable hedging rates: 130 for EUR/JPY in 2014 vs 105 in 2013. For the EUR/USD, Herms is hedged at 132
vs 128. Outside of Japan, Herms raised prices by 5% in early 2014. Our 2014e-15e EPS estimates are barely changed. We anticipate 11% and 10% organic sales growth, respectively. We expect a significant FX headwind at the EBIT level in 2014e (EBIT margin attrition of 70bp to 31.6% in 2014e), as hedging will fade. We expect an EBIT margin of 32% in 2015e. We now introduce our FY2016 estimates, for which we expect 10% growth at constant FX and an EBIT margin of 32.4%. Since March 2009, we have believed Herms should trade structurally at a premium to its DCF value as for many years, Herms stock has been supported by the limited free float, takeover speculation in the press and the potential for short squeezes. On our fundamental DCF valuation, we now value Herms at EUR228 per share (from EUR243) on a higher WACC (6.14% vs 5.64% previously) due to a higher RFR for eurozone stocks (3.5% from 3%). Applying our (unchanged) 15% premium, we derive a new target price of EUR262 (from EUR279). The assumptions used in our target price are detailed on page 53. Under our research model, for stocks without a volatility indicator, the Neutral band is 5pppt above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a potential return of 11.7%, within the Neutral band of our model; therefore, we reiterate our Neutral rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Company-specific upside risks include: the current thin free float (c6%) being further reduced by share purchases by LVMH on the market (in H1 2013, LVMH increased its stake in Herms from 22.6% to 23.1% from the acquisition of shares on the market, an opportunistic move according to LVMH) or a buy-back by Herms to cover employees grant share. Company-specific downside risks include: the top line may suffer more than expected if the company loses share to other high-end leathergoods manufacturers.
51
abc
Herms FY results and forecasts EURm Sales Gross profit Gross margin (%) Communication as a % of sales Other operating costs EBIT EBIT margin Financial income Pre-tax profit Net profit HSBC EPS (EUR) 2007a 1,625 1,055 64.9% 93 5.7% 547 415 25.5 12 438 288 2.71 YoY 2008a (%) 7 1,765 7 1,140 64.6% 3 98 5.5% 10 593 3 449 25.5 18 7 455 7 290 8 2.76 YoY 2009a (%) 9 1,914 8 1,213 63.3% 5 91 4.8% 8 658 8 463 24.2 -13 4 444 1 289 2 2.74 YoY 2010a (%) 8 2,401 6 1,586 66.1% -7 126 5.2% 11 792 3 668 27.8 -13 -3 653 0 422 -0.5 4.00 YoY 2011a (%) 25 2,841 31 1,955 68.8% 38 148 5.2% 20 921 44 885 31.2 12 47 893 46 594 46 5.66 YoY 2012a (%) 18 3,484 23 2,373 68.1% 18 182 5.2% 16 1,073 32 1,119 32.1 -19 37 1,100 41 740 41 7.07 YoY 2013e* (%) 23 21 23 16 26 23 25 25 3,755 2,573 68.5% 201 5.3% 1,161 1,211 32.3 15 1,226 807 7.71 YoY 2014e (%) 8 4,092 8 2,783 68.0% 10 220 5.4% 8 1,271 8 1,292 31.6 20 11 1,312 9 864 9 8.25 YoY 2015e (%) 9 4,505 8 3,078 68.3% 10 249 5.5% 9 1,388 7 1,441 32.0 25 7 1,466 7 966 7 9.23 YoY 2016e (%) 10 4,965 11 3,407 68.6% 13 280 5.6% 9 1,516 12 1,610 32.4 30 12 1,640 12 1,081 12 10.33 YoY (%) 10 11 13 9 12 12 12 12
* Sales have already been reported on 13 February 2014 Source: Company data, HSBC estimates
Herms sales by geographic and product category By product EURm Silk Handbags & Travel RTW & accessories Other activities Perfume Watches Tableware Other products Total By region EURm France Europe Total Europe Japan Asia Total Asia America Rest of the world Total 2007a 193 675 315 86 119 105 51 82 1,625 2007a 327 346 673 382 282 664 246 43 1,625 YoY 2008a (%) 11% 2% 7% 11% 18% -5% 14% 60% YoY 2009a (%) YoY 2010a (%) YoY 2011a (%) 25% 347 29% 1,348 24% 576 11% 109 17% 159 30% 139 14% 51 21% 113 2,841 2011a 18% 495 20% 560 19% 1,055 11% 472 49% 808 30% 1,280 31% 464 -8% 43 2,841 YoY 2012a (%) 22% 425 12% 1,597 29% 746 25% 165 16% 184 23% 173 17% 61 31% 135 3,484 2012a 13% 556 21% 662 17% 1,217 4% 545 28% 1,100 18% 1,645 21% 569 37% 53 3,484 YoY 2013a (%) 22% 454 18% 1,634 30% 843 52% 216 15% 210 25% 167 19% 61 19% 170 3,755 YoY 2014e (%) 7% 497 2% 1,747 13% 950 31% 228 14% 236 -3% 177 1% 64 26% 192 4,092 YoY 2015e (%) 9% 556 7% 1,923 13% 1,057 5% 246 13% 260 6% 191 4% 67 13% 204 4,505 2015e 8% 702 10% 865 9% 1,568 -3% 467 13% 1,636 9% 2,103 9% 752 14% 83 4,505 YoY 2016e (%) 12% 621 10% 2,122 11% 1,176 8% 266 10% 286 8% 207 5% 71 6% 216 4,965 2016e 6% 744 7% 926 7% 1,670 4% 486 16% 1,891 13% 2,377 10% 827 10% 91 4,965 YoY (%) 12% 10% 11% 8% 10% 8% 5% 6%
208 8% 227 9% 284 763 13% 936 23% 1,205 337 7% 360 7% 445 80 -6% 78 -2% 87 125 5% 117 -6% 138 95 -10% 87 -8% 113 48 -6% 38 -20% 44 109 33% 71 -35% 86 1,765 1,914 2,401 2008a 359 382 741 393 321 713 265 46 1,765 2009a 2010a 370 3% 437 385 1% 463 756 2% 901 408 4% 453 423 32% 631 831 16% 1,084 294 11% 385 34 -25% 31 1,914 2,401
13% 24% 18% -7% 8% -1% 6% 1%
10% 10% 10% 3% 14% 7% 8% 7%
2013a 2014e 12% 613 10% 663 18% 737 11% 809 15% 1,350 11% 1,471 16% 463 -15% 449 36% 1,248 13% 1,413 29% 1,711 4% 1,862 23% 627 10% 683 23% 66 26% 75 3,755 4,092
6% 7% 7% 4% 16% 13% 10% 10%
52
abc
Financials & valuation: Herms

Neutral
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 181 1,007 1,803 697 3,406 993 38 -686 2,344 1,301 181 1,148 2,240 1,078 3,984 1,013 38 -1,067 2,890 1,477 180 1,293 2,710 1,488 4,597 1,035 38 -1,478 3,468 1,658 178 1,450 3,250 1,966 5,293 1,059 38 -1,928 4,129 1,853 737 -263 -263 -742 352 466 908 -280 -280 -262 -381 643 968 -293 -293 -286 -411 695 1,075 -316 -316 -306 -449 784 3,484 1,249 -130 1,119 -19 1,100 1,100 -349 740 740 3,755 1,350 -139 1,211 15 1,226 1,226 -407 807 807 4,092 1,442 -149 1,292 20 1,312 1,312 -436 864 864 4,505 1,601 -160 1,441 25 1,466 1,466 -487 966 966
EBIT growth 2013-23e CAGR (%) EBIT growth 2023-43e CAGR (%) Fade period 2043-51e WACC (%)
6.5 4.0 6.14
Sensitivity and valuation range (DCF) to which we then add a 15% premium to derive our target price (EUR262 per share) Cost of capital vs fade period 5.7% 5.9% 6.1% 6.3% 6.5% 4 years 234 227 220 214 208 8 years 243 235 228 221 215 12 years 251 243 235 228 221
Issuer information Share price (EUR) 234.60 Target price (EUR) 262.00
1 1. 7
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 7.07 7.07 2.50 21.90 7.71 7.71 2.73 27.00 8.25 8.25 2.92 32.41 9.23 9.23 3.26 38.57 3.1 67.6 31.8 22.6 35.8 32.1 67.1 -29.1 -0.5 2.7 58.2 30.8 22.2 36.0 32.3 -36.6 -0.8 2.6 55.1 27.2 20.4 35.2 31.6 -42.2 -1.0 2.6 54.8 25.4 19.8 35.5 32.0 -46.1 -1.2 22.6 23.5 26.4 23.1 24.9 7.8 8.1 8.3 11.5 9.1 9.0 6.8 6.7 7.0 7.0 10.1 11.1 11.5 11.7 11.8 12/2012a 12/2013e 12/2014e 12/2015e
HRMS.PA 34,455 6 France Antoine Belge Erwan Rambourg
Bloomberg (Equity) RMS FP Market cap (EURm) 24,767 Enterprise value (EURm) 23284 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
327 307 287 267 247 227 207 187 167
Mar-12 Sep-12 Mar-13 Sep-13 Hermes Rel to SBF-120
327 307 287 267 247 227 207 187

Mar-14
167
Source: HSBC
53
abc
Hugo Boss (BOSS GR)

Mono-brand operating in a less crowded segment than most peers Time to become more constructive again: the shares are lower and
consensus expectations have come down

Upgrade to OW (from Neutral); target price unchanged (EUR110)
Upgrade to OW
Time to be more constructive again
sizeable player in premium womenswear, with only Armani and Max Mara being significantly bigger. Even though we would not go as far as calling premium menswear a niche, it is, in our view, a less crowded category than watches and womens handbags, which are the categories on which most listed companies under our coverage are focussing.
Business model transformation is ahead of plan; still more to come though
We downgraded Hugo Boss (HB) on 15 January 2014. We felt that, after having outperformed since the beginning of Q4 2013, the risk/reward had become less compelling. We also noted that, at that time, consensus was still expecting a c60bp EBITDA margin improvement in 2014. We now feel it is time to become more constructive again on HB as consensus expectations have been revised down and the stock is down 11% ytd. The stock is now trading on PEs of 17.1x 2014e and 14.7x 2015e. On 13 March, HB introduced initial guidance for 2014 calling for high-single-digit sales growth at constant FX (with double-digit retail growth and flat wholesale growth) and high-single digit EBITDA growth in euros. Given that the FX impact on sales should be -1 to -2%, this would imply a flat-to- slightly up EBITDA margin expansion.
Mono-brand operating in a less crowded segment than most peers
Retail sales accounted for 54% of total sales in 2013 compared to 33% in 2009, ie a jump of more than 20pp in just 4 years. In addition, the quality of the network has improved, notably with the recent conversions of wholesale locations into retail and the significant increase in the number of flagship stores (from 16 at the end of 2012 to 245 at the end of 2013). We believe there is still more to come though, notably in Greater China (see below). The portfolio streamlining is enabling the brand to deliver a more coherent message to consumers, and the migration to the new distribution centre will shorten the time to market.
Brand specific issues in Greater China (9% of group sales)
In spite of Hugo Bosss efforts to develop womenwear and mens accessories, menswear still accounted for c80% of group sales in 2013. Womenswear only accounts for 11% of HB sales globally (although for more within retail). However, with EUR250m in sales, Hugo Boss is already a
HB has, in our view, some specific untapped potential, especially in Greater China, which is still low in the group sales mix (accounting for only 9% of group sales in FY2013). China is HBs most profitable market, but sales
54
abc
productivity is lower than at competitor Zegna , due to legacy issues (mostly stores being in the wrong locations after a period of over-expansion and a wrong product assortment before HB took over the distribution from a partner). The store relocation process is not a quick fix since HB has decided to wait for leases to expire before acting. However, management has fully acknowledged these issues and has been focusing on improved execution in China (via relocation of stores, and providing a product assortment more aligned with local needs).Greater China is still seen by management as a EUR400m market over the medium-term (which is the current size of Zegna's Chinese business), ie twice its current size.
weigh on profitability before starting to help the margin in H2 14, and more fully in 2015. During the investor day on 26 November 2013, HB slightly tweaked its 2015 targets. It is still committing to hitting sales of EUR3bn that year, however, the 25% EBITDA margin target is now expected to be achieved later (no exact timing was given). This downward tweak was not a surprise given the negative geographic mix experienced since the beginning of the 2010-2015 plan (the US has been growing ahead of expectations and Asia has performed below expectations, and the US is less profitable than Asia). Our 2015 forecasts call for 9.8% organic sales growth. On that basis, 2015 sales would reach EUR2,865m, 4% below the HB guidance of EUR3bn. We believe that the EBITDA margin will be 24.4% in 2015 and that the 25% medium-term EBITDA margin target will be reached in 2016. We leave our target price unchanged at EUR110 (with no material changes in our estimates). The assumptions used to generate our DCF-derived target price are detailed on page 57. We use a WACC of 9.38% (vs 9.50%): the increase in the RFR to 3.5% (from 3%) is offset by the decrease in the specific beta to 0.9 (vs 1.0) as we believe the stocks risk profile relative to the market is lower than previously. Under our research model, for stocks without a volatility indicator, the Neutral band is 5 ppts above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a potential return of 19.3%, which is above the Neutral band; therefore, we upgrade Hugo Boss to Overweight from Neutral. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Specific downside risks include a longer-thanexpected recovery in Greater China and another partial share placement by Permira (which still owns 56% of Hugo Boss post the placement on 3 May 2013, with a lock-up period which expired in Feb 2014).

Sales growth at constant FX accelerated in Q4 2013, to 10% vs 5% in Q3 mostly due to the higher proportion of retail sales (63% in Q4 vs 49% in Q3). Retail sales growth was 17% in Q4 (3% SSSG + 14% contribution from new space) vs 23% in Q3 (4% SSSG ) and wholesale was flat (vs -7.5% in Q3). By region, the Americas accelerated sequentially (to +9% in Q4 vs flat in Q3) because of better wholesale developments but retail continued to be difficult. Europe saw a double-digit increase in Q4 (+13%) vs +8% in Q3. In Asia, sales growth was +6% in Q4 vs +4% in Q3, here also driven by better wholesale. Mainland China continued to be tough whilst HK was still strong. EBITDA rose 17% in Q4 to EUR157m, implying an EBITDA margin improvement of c200bp, mostly driven by a better gross margin (as a result of the shift in the channel mix towards more retail and less markdowns compared to last year). Our 2014 forecasts call for 8.7% organic sales growth (vs high-single-digit guidance) and an 8% increase y-o-y in the adjusted EBITDA, implying a 20bp increase in the EBITDA margin, to 23.4%. FX movements have been unfavourable, and there will be a step-up in advertising as Asia and Womenswear need a boost. In H1 2014, the new logistics centre will come on line but the transition will initially
55
abc
Hugo Boss Profit & Loss Profit & Loss (EURm) Sales % yoy Gross profit gross profit margin Total SG&A % yoy ratio (%) Adjusted EBITDA Yoy adjusted EBITDA margin (%) One-off adj. EBITDA to EBITDA EBITDA EBITDA margin (%) Amortization & Depreciation EBIT % yoy EBIT margin (%) Net financial Result EBT Income tax expenses Tax rate (%) Net profit Minorities Net profit after minorities EPS preferred (EUR) % yoy # of shares (m)
Sources: company data, HSBC estimates
2007 1,632.0 9.1% 946.4 58.0% -658.7 6.1% -40.4% 287.7 23.3% 17.6% 0.0 287.7 17.6% -67.5 220.2 19.4% 13.5% -7.9 212.3 -58.3 -27.5% 154.0 -0.1 153.9 2.24 20.4% 68.7
2008 1,686.1 3.3% 1,010.6 59.9% -723.0 9.8% -42.9% 287.6 -0.0% 17.1% -36.0 251.6 14.9% -60.9 190.7 -13.4% 11.3% -41.7 149.0 -36.4 -24.4% 112.6 -0.1 112.5 1.63 -27.2% 69.0
2009 1,561.9 -7.4% 850.1 54.4% -691.7 -44.3% 270.2 -6.0% 17.3% -42.7 227.5 14.6% -69.1 158.4 -16.9% 10.1% -21.8 136.6 -32.7 -23.9% 104.0 -0.1 103.9 1.51 -7.4% 68.8
2010 1,729.4 10.7% 1,027.1 59.4% -762.6 10.3% -44.1% 349.0 29.1% 20.2% -13.6 335.4 19.4% -70.9 264.5 67.0% 15.3% -14.8 249.7 -59.9 -24.0% 189.8 -3.3 186.4 2.70 79.0% 69.0
2011 2,058.8 19.0% 1,264.8 61.4% -870.2 14.1% -42.3% 469.5 34.5% 22.8% -1.5 468.0 22.7% -73.4 394.6 49.2% 19.2% -11.7 382.9 -91.4 -23.9% 291.5 -6.5 285.0 4.13 53.0% 69.0
2012 2,345.9 13.9% 1,453.2 61.9% -1,020.0 17.2% -43.5% 529.3 12.7% 22.6% -4.2 525.1 22.4% -91.9 433.2 9.8% 18.5% -23.6 409.6 -98.1 -24.0% 311.5 -4.1 307.4 4.46 7.9% 69.0
2013 2,432.1 3.7% 1,579.6 64.9% -1,123.4 10.1% -46.2% 564.7 6.7% 23.2% -3.3 561.4 23.1% -105.2 456.2 5.3% 18.8% -22.7 433.5 -100.1 -23.1% 333.4 -4.4 329.0 4.77 7.0% 69.0
2014e 2,610.0 7.3% 1,731.7 66.3% -1,235.4 10.0% -47.3% 612.0 8.4% 23.4% 0.0 612.0 23.4% -115.7 496.3 8.8% 19.0% -7.0 489.3 -113.0 -23.1% 376.3 -5.4 370.9 5.38 12.7% 69.0
2015e 2,865.0 9.8% 1,929.5 67.3% -1,355.7 9.7% -47.3% 700.0 14.4% 24.4% 0.0 700.0 24.4% -126.1 573.8 15.6% 20.0% -2.0 571.8 -132.0 -23.1% 439.8 -6.4 433.4 6.28 16.9% 69.0
2016e 3,100.0 8.2% 2,109.5 68.0% -1,470.5 8.5% -47.4% 776.5 10.9% 25.0% 0.0 776.5 25.0% -137.5 639.0 11.4% 20.6% 1.0 640.0 -147.8 -23.1% 492.2 -7.4 484.8 7.03 11.9% 69.0
Split of Sales (EURm) By Region Europe Americas Asia Licenses Total Europe Americas Asia Licenses Total By Distribution Network Wholesale Retail Licenses Total Wholesale Retail Licenses Total
Sources: company data, HSBC estimates
2007 1,124 299 161 49 1,632 69% 18% 10% 3% 100% na na na na na na na na
2008 1,170 307 162 47 1,686 69% 18% 10% 3% 100% 1,183 456 47 1,686 70% 27% 3% 100%
2009 1,041 312 165 44 1,562 67% 20% 11% 3% 100% 1,008 510 44 1,562 65% 33% 3% 100%
2010 1,073 381 230 45 1,729 62% 22% 13% 3% 100% 993 691 45 1,729 57% 40% 3% 100%
2011 1,245 455 309 49 2,059 60% 22% 15% 2% 100% 1,085 924 49 2,059 53% 45% 2% 100%
2012 1,378 559 353 57 2,346 59% 24% 15% 2% 100% 1,140 1,150 57 2,346 49% 49% 2% 100%
2013 1,457 570 347 58 2,432 60% 23% 14% 2% 100% 1,060 1,314 58 2,432 44% 54% 2% 100%
2014e 1,588 604 354 64 2,610 61% 23% 14% 2% 100% 1,063 1,484 64 2,610 41% 57% 2% 100%
2015e 1,703 683 410 69 2,865 59% 24% 14% 2% 100% 1,105 1,691 69 2,865 39% 59% 2% 100%
2016e 1,804 758 464 74 3,100 58% 24% 15% 2% 100% 1,138 1,888 74 3,100 37% 61% 2% 100%
56
abc
Financials & valuation: Hugo Boss

Overweight
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 139 369 900 119 1,501 348 179 57 714 941 139 383 1,045 220 1,660 360 179 -44 860 987 139 387 1,191 308 1,810 372 179 -132 996 1,036 139 379 1,365 427 1,976 385 179 -251 1,149 1,071 412 -173 -334 -215 -73 220 460 -130 -130 -230 -101 330 520 -130 -130 -303 -88 390 588 -130 -130 -339 -119 458 2,432 561 -105 456 -23 434 434 -100 329 329 2,610 612 -116 496 -7 489 489 -113 371 371 2,865 700 -126 574 -2 572 572 -132 433 433 3,100 776 -137 639 1 640 640 -148 485 485
10.7 4.0 9.38
Sensitivity and valuation range Cost of capital vs fade period 8.5% 9.0% 9.5% 10.0% 10.5% 4 years 124 115 108 101 95 8 years 127 118 110 103 97 12 years 129 120 112 105 98
Issuer information Share price (EUR) 92.19 BOSSn.DE 9,029 44 Germany Antoine Belge Erwan Rambourg Target price (EUR) 110.00
1 9. 3
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 4.77 4.77 3.34 10.35 5.38 5.38 3.77 12.47 6.28 6.28 4.40 14.45 7.03 7.03 4.92 16.66 2.6 37.8 49.6 21.6 23.1 18.8 24.7 7.7 0.1 722.7 2.7 39.6 47.1 23.8 23.4 19.0 87.4 -4.9 -0.1 2.8 43.6 46.7 25.4 24.4 20.0 350.0 -12.9 -0.2 2.9 46.6 45.2 26.0 25.0 20.6 -21.3 -0.3 3.7 6.9 5.3 5.8 7.0 7.3 9.0 8.8 12.9 12.7 9.8 14.4 15.6 16.9 16.9 8.2 10.9 11.4 11.9 11.9 12/2013a 12/2014e 12/2015e 12/2016e
Bloomberg (Equity) BOSS GR Market cap (EURm) 6,490 Enterprise value (EURm) 6473 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
105 100 95 90 85 80 75 70 65 60 105 100 95 90 85 80 75 70 65 60
Mar-12
Sep-12
Mar-13 Sep-13 Hugo Boss Rel to DAX-100
Mar-14
Source: HSBC
57
abc
Kering (KER FP)

Compelling valuation (14.1x 2014e PE): Q1 unlikely to be a catalyst,
but H2 2014 should see a pick-up at Gucci and Puma

Gucci: progress on product, still a lot to be done on retail network Remain Overweight; lower target price to EUR176 (from EUR185)
on estimate cuts mostly linked to FX and Puma
Compelling valuation
Looking at the stocks valuation, the market in our view is exaggerating the negatives: Kering is trading at 14.1x 2014e PE, a 16% discount to the average of LVMH, Richemont and Swatch (ie the luxury large caps). Although we do not believe that Q1 sales (due 24 April) will be a catalyst, we expect a pick-up in H2 2014 at Gucci and Puma.
Gucci: progress on product, still a lot to be done on retail network
In China, Gucci had 61 stores at the end of 2013. However, a significant part of the network should evolve this year: in 2014, the brand should open seven stores, close seven and refurbish seven others. A new management team has been in place in China since Q4 2013. We believe the Gucci brand could grow sales 5% at constant FX in 2014 after a 2% increase in 2013. Wholesale should still be slightly negative in 2014 (down mid single digit in H1 with Q1 the weaker quarter). Managements objective is to return to slightly positive retail comps in every region (in 2013 only Japan and the US saw positive comps). The long-term sustainable organic sales growth rate of the Gucci brand, in our view, is a high single-digit figure. We forecast 8% in 2015e. In terms of profitability, Gucci will try to protect its 2013 EBIT margin, which was boosted by a c120bp impact from FX hedging gains. We forecast a 50bp EBIT margin decline in 2014e and then a 70bp improvement in 2015e to 32%. We believe that Gucci will never match the Louis Vuitton brand's EBIT margin (42% in 2013e). However, in terms of trajectory, we believe Gucci can go from 31% in 2012 to c35% over the longer term thanks to positive channel mix effects and the above-mentioned retail network improved efficiencies.
At Gucci, the speed of the 'brand elevation' process is quite impressive with the share of non-logo handbags increasing to 60% in Q4 2013 vs 45% in Q1 2013 and the share of leather and precious skin handbags reaching 75% in Q4 2013 vs 60% in Q1 2013. However, Gucci still needs to improve the efficiency of its retail network. The customer experience in the store is not at the right level and knowledge of the customer base is lacking. The rollout of the new store format (named Frida after Guccis creative director Frida Giannini) will continue: at the end of 2013, 50-60% of the store network was in the new format and the aim is to reach 100% by 2017. The new format generates 10-15% more sales productivity with lower operating costs.
58
abc
Brands other than Gucci now account for half of luxury sales and a third of EBIT

We have cut our 2014e-15e EBIT estimates by 7% and 5%, respectively, mostly due to unfavourable FX and the recent reduction in our Puma estimates (see Sporting goods industry report dated 20 March 2014). We thus lower our DCF-derived target price to EUR176 (from EUR185). The assumptions used in our DCF-derived target price are detailed in the Financial & Valuation on page 61. We use a WACC of 8.93% (vs 9.16%): the increase in the RFR to 3.5% (from 3%) is offset by the decrease in the specific beta to 0.95 (vs 1.0) as we believe the stocks risk profile relative to the market is lower than previously. Under our research model, for eurozone stocks without a volatility indicator, the Neutral band is 5 ppt above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a 25.8% potential return, which is above the Neutral band, we reiterate our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Downside risks to our Overweight rating include underperformance of the Gucci brand, failure to turnaround Puma, and value destruction linked to acquisitions.
In 2014e Kerings Luxury division should account for 92% of group EBIT. In our view, Kerings portfolio is well balanced in terms of brands, which are different in terms of positioning. Gucci is Kerings largest brand, however, the so-called smaller luxury brands altogether should account for 47% of Kerings Luxury sales and 36% of EBIT (before minorities) in 2014e and are growing faster than the industry average. We remain bullish on the medium-term prospects for the so-called smaller luxury brands, notably Bottega Veneta (BV), Saint Laurent, Balenciaga, Alexander McQueen and Stella McCartney: BV should grow sales at a double-digit pace in our view in 2014, but we expect EBIT growth to be in the high single digits, implying a 50bp margin deterioration due to the fading of FX hedging (hedging boosted margins by close to 150bp in 2013). Asian customers account for 70% of sales, meaning that BV is underpenetrated amongst European and US clienteles. Although BV sales exceeded EUR1bn in 2013, brand awareness remains low, notably in the US. Saint Laurent: in our view, sales should increase at a double-digit pace and the EBIT margin improves at least 100bp per annum, mostly owing to leverage on fixed costs (design team, samples, admin, etc).
Kering: Sales breakdown between logo and non-logo handbags (%)
100% 80% 60% 40% 20% 0% Q1 2009 Logo
Source: Company daya
Kering: Breakdown of handbags sales by materials (%)

100% 3% 30% 57% 66% 3% 3%
10% 48% 54%
80% 60%
90% 52% 46%
40% 20% 0%
Q1 2013 Q3 2013 Non logo
67% 40% 30%
Q1 2009 Fabric
Q1 2013 Q3 2013 Leather Precious skins
59
abc
Kering sales & EBIT by brand EURm Sales Gucci brand Saint Laurent Bottega Veneta Other luxury Total Luxury Puma Volcom Eliminations Total Kering EBIT Gucci brand Saint Laurent Bottega Veneta Other luxury Total Luxury Puma Volcom Eliminations Total Kering EBIT margin Gucci brand Saint Laurent Bottega Veneta Other luxury Total Luxury Puma Volcom Eliminations Total Kering
2012 3,639 473 945 1,156 6,212 3,271 261 -8 9,736 1,126 65 300 120 1,612 290 15 -125 1,792 31.0% 13.7% 31.8% 10.4% 25.9% 8.9% 5.7% na 18.4%
2013 3,561 557 1,016 1,337 6,470 3,002 245 31 9,748 1,132 77 331 144 1,683 192 9 -133 1,750 31.8% 13.8% 32.5% 10.7% 26.0% 6.4% 3.5% na 18.0%
2014e 3,632 618 1,128 1,518 6,896 2,980 201 28 10,105 1,136 93 361 180 1,769 155 8 -138 1,795 31.3% 15.0% 32.0% 11.9% 25.7% 5.2% 4.0% na 17.8%
2015e 3,923 680 1,274 1,669 7,546 3,159 211 27 10,943 1,254 110 418 212 1,994 231 11 -141 2,095 32.0% 16.2% 32.8% 12.7% 26.4% 7.3% 5.0% na 19.1%
2016e 4,236 748 1,440 1,837 8,261 3,353 222 26 11,862 1,384 130 482 245 2,242 279 13 -144 2,390 32.7% 17.4% 33.5% 13.3% 27.1% 8.3% 6.0% na 20.1%
60
abc
Financials & valuation: Kering

Overweight
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,382 -678 -1,046 471 948 846 (EURm) 15,487 1,677 4,925 1,419 22,811 6,379 4,870 3,451 10,587 14,290 15,487 1,875 5,145 1,419 23,229 6,440 4,754 3,335 11,056 14,648 15,487 2,090 5,383 1,419 23,682 6,507 4,163 2,744 12,029 15,034 15,487 2,337 5,640 1,419 24,187 6,578 3,410 1,991 13,207 15,467 1,388 -500 -500 -480 -115 917 1,650 -535 -535 -528 -591 1,146 1,900 -572 -572 -581 -753 1,363 9,748 2,046 -296 1,750 -212 1,097 1,095 -235 871 1,229 10,105 2,097 -302 1,795 -182 1,613 1,613 -339 1,249 1,249 10,943 2,415 -320 2,095 -142 1,953 1,953 -420 1,501 1,501 11,862 2,715 -325 2,390 -102 2,288 2,288 -492 1,759 1,759
8.3 4.0 8.93
Sensitivity and valuation range (CHF/share) Cost of capital vs fade period 8.5% 8.7% 8.9% 9.1% 9.3% 4 years 186.9 179.5 172.4 165.8 159.4 8 years 191.1 183.3 176.0 169.1 162.5 12 years 193.8 186.3 179.1 172.3 165.7
2 5. 8
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 6.91 9.75 3.75 84.08 9.91 9.91 4.13 87.81 11.91 11.91 4.54 95.53 13.96 13.96 4.99 104.89 0.7 10.5 11.2 4.3 21.0 18.0 9.6 30.8 1.7 40.0 0.7 9.8 11.5 6.2 20.7 17.8 11.5 28.6 1.6 41.6 0.7 11.1 13.0 7.0 22.1 19.1 17.0 21.7 1.1 60.1 0.8 12.3 13.9 7.8 22.9 20.1 26.5 14.4 0.7 95.4 0.1 -1.0 -2.3 -33.7 -3.1 3.7 2.5 2.6 47.0 1.6 8.3 15.2 16.7 21.1 20.1 8.4 12.4 14.1 17.2 17.2 12/2013a 12/2014e 12/2015e 12/2016e
PRTP.PA 24,576 55 France Antoine Belge Erwan Rambourg
Bloomberg (Equity) KER FP Market cap (EURm) 17,665 Enterprise value (EURm) 22280 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
195 185 175 165 155 145 135 125 115 105 95 195 185 175 165 155 145 135 125 115 105 95
Mar-12
Sep-12 kering
Mar-13 Sep-13 Rel to SBF-120
Mar-14
Source: HSBC
61
abc
Luxottica (LUX IM)

High visibility on mid-teen EBIT growth at constant FX
(FX headwinds the main issue, in our view)

Acquisitions and US pick-up could act as catalysts Remain Overweight, target price unchanged at EUR46
High visibility on mid-teen EBIT growth at constant FX

A rare case of margin expansion in 2014e
We believe Luxottica's "rule of thumb", ie at constant FX it should grow sales at a high singledigit pace and EBIT twice as fast, is realistic in our view, due to continued leverage on fixed costs in Wholesale and increased store productivity in Retail. On that basis, Luxottica would be one of the few luxury companies expanding its EBIT margin in 2014e. We believe there is superior visibility on Luxottica continuing to deliver this in 2014e and 2015e (even though the EUR strength will continue to weigh as a 10% increase in the EUR against the USD has a c8% negative impact on EPS). We see several catalysts ahead: (i) a pick-up in the US after a somewhat disappointing 2013, (ii) the announcement of the Chanel licence renewal, which we are confident will occur soon, and (iii) add-on acquisitions of mid-sized brands or retail chains.
Luxottica an industry captain
40%. We now estimate that share at more than 50%. Luxottica also owns Ray-Ban and Oakley, the two star house brands of the industry, whose potential is untapped (notably in terms of prescription glasses). For an eyewear retailer (independent optician or optical chain), it is extremely difficult not to be in the hands of Luxottica. In addition, with Lenscrafters and Sunglass Hut, Luxottica owns two strong retail franchises.
Favourable structural trends even in some mature markets
Luxotticas growth profile differs from the rest of our coverage as it is much more balanced geographically: it offers EM exposure (14%) whilst still growing significantly in mature economies (notably in North America at 55% of sales, in spite of its leading positions in the region). Beyond the obvious demographic and social trends, which are common to most global consumers companies, we believe Luxottica will benefit from the following trends, notably in North America: There are still plenty of untouched customers: 20m people living in the US have vision issues that are undiagnosed; 1 out of 4 children is unaware of having a vision problem, Premiumisation is more than just a buzz word: even though the premium segment has
We believe the additions of the Coach licence in 2012 and the Armani licence in 2013 mean that Luxottica is even more in control of the industry than before. Before these additions to its portfolio, Luxottica was already by far the leader in eyewear licensing with a global market share of more than
62
abc
grown faster than the overall eyewear market, 80% of the US population still has only one pair of sunglasses and bought it at a unit price of less than USD50.
EM exposure: 14% sales only, but growing fast

In 2013, sales grew 7.5% at constant FX (6.8% excluding the Mikli acquisition) even though Luxotticas sales in its largest market, North America, only grew 3.5%, thanks to robust growth in Europe (11% ) and emerging markets (22%). EBIT grew 16% at constant FX and excluding the EUR9m one-off charge related to the Alain Mikli acquisition (on a reported basis, EBIT rose 7% due to an unfavourable FX impact). We have cut our 2014-15 estimates by 2% following the slight 2013 miss. For FY 2014e, we anticipate 5.4% sales growth at constant FX, and a 90bp EBIT margin improvement to15.3%. We leave our DCF-derived target price unchanged at EUR46, despite our modest estimate revisions. The assumptions used in our DCF are detailed on page 65. We use a WACC of 7.42% (vs 7.53%): the increase in the RFR to 3.5% (from 3%) is offset by the decrease in the specific beta to 0.7 (vs 0.8) as we believe the stocks risk profile relative to the market is lower than previously. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a 16.9% potential return, which is above the Neutral band of our model; hence we reiterate our Overweight rating. Potential returns equal the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. The main specific downside risks to our rating are a lower-than-expected resilience of the groups North American business (55% of the group sales), a slower-than expected development in EM, a EUR/USD strengthening and poor execution in integrating new deals and non-renewal of licence contracts (eg the Chanel licence).
With 14% of sales in EM in 2013, Luxotticas exposure does not compare favourably with most consumer goods companies. However, in terms of recent growth rates in EM, Luxottica has not suffered from the slowdown experienced by others: Sales of the Wholesale division grew 22% at constant FX in EM in 2013 (with China wholesale sales doubling y-o-y and soon to become Luxotticas 10th wholesale market) In Brazil, a country where the development of most luxury brands is hampered by the high level of import duties, Luxottica introduced Made in Brazil collections using the platform provided by the acquisition of Tecnol in 2012. Brazil is now Luxotticas second biggest wholesale market after North America In China, on top of the above-mentioned strong wholesale developments, Luxottica resumed store openings in Q2 2013 after a period of caution. Management itself recognises having made a few mistakes since acquiring three local players in 2006. After finding the right retail format for the roll-out of stores in China under the Lenscrafters banner, Luxottica now plans to add c50 stores per annum to the 231 stores it had in the region at the end of September 2013.
63
abc
Luxottica P&L summary EURm, except per share data Wholesale Retail Inter-Segments Oakley Total sales Wholesale Retail Inter-Segments Oakley EBIT Total EBIT Wholesale Retail Total EBIT margin Reported diluted EPS HSBC diluted EPS* Retail comps (worldwide) 2007a 2008a** 2009a 2010a 2011a 2012a 2013a 2014e 2015e 2016e 1,993 3,234 -348 88 4,967 528 362 -60 3 833 2,092 1,955 2,236 2,456 2,773 2,991 3,216 3,537 3,891 3,109 3,139 3,562 3,766 4,313 4,321 4,494 4,809 5,145 5,202 5,094 5,798 6,222 7,086 7,313 7,710 8,346 9,036 440 431 -121 750 356 367 -140 583 462 424 -174 712 529 437 -159 807 604 553 -175 649 586 -179 722 649 -190 823 726 -202 938 812 -215 08vs 07 5% -4% -100% 5% -17% 19% 101% -10% 09vs 10a vs 11a vs 12a vs 13a vs 14e vs 15e vs 08 09 10a 11a 12a 13a 14e -7% 1% -2% -19% -15% 16% -22% 14% 13% 14% 30% 15% 25% 22% 10% 6% 7% 15% 3% -9% 13% 13% 15% 14% 14% 27% 10% 22% 8% 0% 3% 7% 6% 2% 7% 8% 4% 5% 11% 11% 6% 12% 10% 7% 8% 14% 12% 6% 14%
982 1,056 1,181 1,347 1,536
26.5% 21.0% 18.2% 20.7% 21.5% 21.8% 21.7% 22.5% 23.3% 24.1% 11.2% 13.8% 11.7% 11.9% 11.6% 12.8% 13.5% 14.4% 15.1% 15.8% 16.8% 14.4% 11.4% 12.3% 13.0% 13.9% 14.4% 15.3% 16.1% 17.0% 1.07 1.10 1.2% 0.83 0.96 0.69 0.80 0.83 0.99 4.5% 0.98 1.09 5.5% 1.15 1.26 5.8% 1.14 1.39 3.4% 1.46 1.57 5.0% 1.70 1.81 5.0% 1.98 2.09 5.0% -23% -13% -17% -17% 21% 23% 18% 10% 18% 16% -1% 10% 27% 13% 17% 16%
-5.4% -4.2%
Note:*excl. Exceptional items and trademark amortisation 'Note: ** change in sales & EBIT breakdown methodology Source: Company data, HSBC estimates
64
abc
Financials & valuation: Luxottica

Overweight
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 4,306 1,482 1,997 618 8,083 1,585 2,079 1,461 4,150 5,583 4,306 1,512 2,094 618 8,209 1,633 1,769 1,151 4,538 5,661 4,306 1,535 2,197 618 8,335 1,684 1,377 759 5,006 5,736 4,306 1,563 2,308 618 8,474 1,739 920 302 5,547 5,821 970 -380 -525 -269 -201 589 1,036 -403 -414 -307 -310 633 1,171 -427 -427 -346 -392 744 1,322 -453 -453 -404 -457 869 7,313 1,422 -367 1,056 -92 956 956 -408 545 660 7,710 1,566 -385 1,181 -87 1,094 1,094 -394 695 747 8,346 1,752 -404 1,347 -67 1,280 1,280 -461 813 865 9,036 1,961 -424 1,536 -47 1,489 1,489 -536 946 998
10.2 4.0 7.42
Issuer information Share price (EUR) 39.36 LUX.MI 26,155 28 Italy Antoine Belge Erwan Rambourg Target price (EUR) 46.00
1 6. 9
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 1.14 1.39 0.65 9.07 1.46 1.57 0.73 9.92 1.70 1.81 0.85 10.94 1.98 2.09 0.99 12.12 1.3 10.8 16.2 7.4 19.4 14.4 15.4 35.2 1.0 66.3 1.4 13.4 17.2 9.3 20.3 15.3 18.0 25.4 0.7 90.0 1.5 15.1 18.1 10.4 21.0 16.1 26.1 15.2 0.4 154.3 1.6 17.0 18.9 11.7 21.7 17.0 41.6 5.4 0.2 437.4 3.2 6.1 7.5 11.7 9.6 5.4 10.1 11.9 14.4 13.0 8.3 11.9 14.1 17.0 15.8 8.3 11.9 14.0 16.3 15.3 12/2013a 12/2014e 12/2015e 12/2016e
Bloomberg (Equity) LUX IM Market cap (EURm) 18,801 Enterprise value (EURm) 19894 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
47 42 37 32 27 22 47 42 37 32 27 22
Mar-12
Sep-12 Luxottica
Mar-13 Sep-13 Rel to BCI ALL-SHARE INDEX
Mar-14
Source: HSBC
65
abc
LVMH (MC FP)

We expect group EBIT growth of 6% (4% excluding Loro Piana) in
2014e after 2% in 2013

Potential return more limited than for other luxury stocks Remain Neutral with unchanged target price of EUR141
Potential return more limited than for other luxury stocks

Organic sales growth at LVMHs Fashion & Leather (F&L) division accelerated sequentially from 3% in Q3 2013 to 7% in Q4 2013. We estimate organic sales growth at the Louis Vuitton brand picked up from 1% in Q3 2013 to 5% in Q4 2013. However, we do not see this acceleration as a positive inflexion point for the LV brand. Trends in Q3 and Q4 were distorted by a price increase in Japan, which temporarily hurt sales in the country in Q3 before a catch-up effect in Q4. In other words, Q3 was not that bad and Q4 was not that good, and overall H2 trends (5% for F&L and 3% for LV), in our view, are more meaningful. Some observers of the luxury industry talk about a brand 'repositioning' when analysing initiatives implemented at LV since the end of 2012. True, 2013 saw the successful launches of new leather bags priced above EUR3,000 (notably the Capucines), but they did not move the needle that much: in 2013, the share of non-leather products (within the handbags and soft accessories category which accounted for 73% of sales) declined only marginally (from 63% in 2012 to 60% in 2013). According to management, LV is missing a significant offering of leather bags in the EUR2,000-
3,000 range. The summer of 2014 will be key with several launches expected in that segment, which brands like Prada have occupied very successfully after discontinuing sales of nylon handbags. Canvass gross margin is 6% above that of leather. It did not open stores but still grew space by 8-9% in 2013. It opened 11 stores (much larger on average) and closed 11 (much smaller), significantly enlarging some (ie Munich from less than 300 sqm to more than 1,200 sqm, etc). Within Fashion & Leather, brands other than LV should account for 34% of divisional sales in 2014e. On top of Loro Piana, acquired at the end of 2013 (7% of divisional sales), three brands are close to the EUR500m annual sales threshold (Fendi, Cline and Marc Jacobs) and thus account for c5% of divisional sales each. For 2014e, our F&L divisional forecasts call for 7.3% organic sales (5% for the LV brand) and a 150bp EBIT margin deterioration driven by: A 50bp EBIT margin decline at LV due to the fading of hedging; at constant FX, margins should be flattish even though the gross margin of leather bags is 6-7% lower than canvass bags (as profitability in other categories is improving on the back of increasing scale) A 90bp dilution linked to the consolidation of Loro Piana
66
abc
A negative brand mix (non-LV brands as a whole are growing faster than LV but are far less profitable) A slight improvement in the overall EBIT margin of the non-LV brands after two years of decline: for a brand like Cline, investments will weigh on 2014 whilst for other brands, most investments occurred in 2012 and 2013. Cognac was hit six months later than luxury by the collapse of gifting. So H1 2014 is likely to be soft even though according to management the bulk of the distributor de-stocking is over for Hennessy (sell-in should now be in line with sellout), which is less super premium than Rmy Martin (and less XO than Martell). China is 'only' 20% of Hennessys volumes (vs 42% for the US) and 40% of revenues. However, since close to 80% of the 300bp EBIT margin gain in 2013 was linked to hedging gains, we forecast a 100bp EBIT margin deterioration in 2014 for Cognac.
LVMH EBIT breakdown by business (2014e)
Champagne and Wines 10% Cognac & spirits 12%
investment in the non-LV fashion & leather brands and a negative brand mix (outperformance of less profitable businesses). For 2014e, we forecast 7.1% organic sales growth (7% reported including a -2.5% FX impact and a 2.4% acquisition impact of Loro Piana) and a 6% EBIT progression (4% excluding Loro Piana). Our DCF-derived target price remains EUR141 as our 2014-15 EBIT estimates are barely changed. The assumptions used in our DCF are detailed on page 69. We use a WACC of 8.85% (vs 8.59%): the increase in the RFR to 3.5% (from 3%) is offset by the decrease in the specific beta to 0.85 (vs 0.9) as we believe the stocks risk profile relative to the market is lower than previously. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a 9.2% potential return, which is within the Neutral band of our model; hence we reiterate our Neutral rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. The main company-specific upside risks to our rating are higher sales and margins at the LV brand. The main specific downside risks are destocking of the wholesale businesses (Wines & Spirits, Watches and Perfumes) and value destruction linked to M&A activities (past and future). LVMH is trading on PES of 17.2x 2014e and 15.6x 2015e, multiples which are below historical averages. However, according to our estimates, LVMH earnings growth, even though it should pick up in 2014e and 2015e, should still underperform the industry average.
Other Fashion brands 5%
Selective retailing 15% Watches and Jewellery 6% Perfumes and Cosmetics 7%
Louis Vuitton brand 45%


FY13 EBIT rose 2% y-o-y, slightly above our estimate (1%) due to higher-than-expected organic sales growth in Q4 (8% vs 6%) driven by the abovementioned technical effect boosting LV sales in Japan. The group EBIT margin declined 40bp in 2013 mostly due to the consolidation of three new DFS concessions (loss-making in year 1), continued
67
abc
LVMH FY results & forecasts EURm

Sales Current operating income (EBIT) Other operating income and expenses Operating income Net financial expenses Income before taxes Taxes Associates Minority interests Net pft before goodwill and exceptionals EPS (EUR) Sales by division Wines & Spirits Leather and Fashion Perfume and cosmetics Selective distribution Watches Others Total sales EBIT by division Wines & Spirits Leather and Fashion Perfume and cosmetics Selective distribution Watches Others Total EBIT EBIT margin by division (%) Wines & Spirits Leather and Fashion Perfume and cosmetics Selective distribution Watches Others Total EBIT margin
2010a YoY% 2011a YoY% H112 YoY% H212 YoY 2012a YoY H113 YoY% H213 YoY% 2013a YoY% 2014e YoY 2015e YoY 2016e YoY% a a % ch % ch a a ch ch ch ch ch ch % ch % ch ch
20,320 4,321 -152 4,169 612 4,781 -1,469 7 -287 3,032 6.32 3,261 7,581 3,076 5,378 985 39 20,320 930 2,555 332 536 128 -160 4,321 19 23,659 29 5,263 -109 32 5,154 -242 70 4,912 -1,453 6 -400 73 3,065 71 19 20 12 19 29 nm 19 6.23 3,524 8,712 3,195 6,436 1,949 -157 23,659 16 12,966 22 2,659 -122 24 2,537 56 3 2,593 -705 4 -211 1 1,681 -1 8 15 4 20 98 nm 16 3.35 1,759 4,656 1,727 3,590 1,343 -109 12,966 26 15,137 20 3,262 -60 17 3,202 -70 25 3,132 -1,115 0 -274 28 1,743 26 23 17 14 27 133 nm 26 3.47 2,378 5,270 1,886 4,289 1,493 -179 15,137 13 28,103 7 5,921 -182 8 5,739 -14 11 5,725 -1,820 4 -485 -1 3,424 4 14 11 12 19 9 nm 13 6.82 4,137 9,926 3,613 7,879 2,836 -288 28,103 19 13,695 13 2,712 -40 11 2,672 -76 17 2,596 -795 5 -229 12 1,577 9 17 14 13 22 46 nm 19 3.13 1,808 4,711 1,804 4,215 1,310 -153 13,695 6 15,454 2 3,301 -87 5 3,214 -123 0 3,091 -960 2 -282 -6 1,851 -6 3 1 4 17 -2 nm 6 3.68 2,379 5,171 1,913 4,723 1,474 -206 15,454 2 29,149 1 6,013 -127 0 5,886 -199 -1 5,687 -1,755 7 -511 6 3,428 6 0 -2 1 10 -1 nm 2 6.81 4,187 9,882 3,717 8,938 2,784 -359 29,149 4 31,180 2 6,384 -80 3 6,304 4 -1 6,308 -1,987 9 -556 0 3,774 0 1 0 3 13 -2 nm 4 9 -4 1 6 12 -10 2 7.50 4,329 10,993 3,829 9,547 2,895 -413 31,180 1,405 3,321 433 1,004 414 -193 6,384 7 33,600 6 6,992 -80 7 6,912 42 11 6,954 -2,190 11 -614 10 4,160 10 3 11 3 7 4 nm 7 3 6 4 11 10 8 6 8.27 4,655 11,817 4,020 10,450 3,127 -470 33,600 1,537 3,606 462 1,126 469 -209 6,992 8 36,239 10 7,619 -80 10 7,539 80 10 7,620 -2,400 13 -673 10 4,559 10 8 8 5 9 8 nm 8 9 9 7 12 13 8 10 9.06 5,006 12,716 4,221 11,446 3,377 -527 36,239 1,681 3,911 494 1,228 530 -225 7,619 9 10 8 9
10 10 8 8 5 10 8 nm 8 9 8 7 9 13 8 9
22 1,101 29 3,075 14 348 38 716 103 265 18 -242 29 5,263
18 496 20 1,516 5 197 34 373 107 159 -82 51 22 2,659
20 764 10 1,748 9 211 30 481 87 175 -34 -117 20 3,262
11 1,260 3 3,264 26 408 12 854 -3 334 -1 -199 7 5,921
14 542 6 1,497 17 200 19 407 26 156 -18 -90 13 2,712
9 828 -1 1,635 2 214 9 494 -2 219 10 -89 2 3,301
8 1,370 -6 3,132 1 414 3 901 25 375 -24 -179 1 6,013
28.5 33.7 10.8 10.0 13.0 nm 21.3
31.2 35.3 10.9 11.1 13.6 nm 22.2
28.2 32.6 11.4 10.4 11.8 nm 20.5
32.1 33.2 11.2 11.2 11.7 nm 21.5
30.5 32.9 11.3 10.8 11.8 nm 21.1
30.0 31.8 11.1 9.7 11.9 nm 19.8
34.8 31.6 11.2 10.5 14.9 nm 21.4
32.7 31.7 11.1 10.1 13.5 nm 20.6
32.5 30.2 11.3 10.5 14.3 nm 20.5
33.0 30.5 11.5 10.8 15.0 nm 20.8
33.6 30.8 11.7 10.7 15.7 nm 21.0
68
abc
Financials & valuation: LVMH

Neutral
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 4,393 -1,663 -4,130 -1,501 1,077 3,233 (EURm) 21,417 9,602 16,135 3,509 55,962 7,300 8,847 5,338 26,695 36,345 21,417 9,838 17,015 3,509 57,307 7,782 6,985 3,476 28,864 36,979 21,417 10,098 18,063 3,509 58,846 8,356 4,940 1,431 31,260 37,713 21,417 10,378 19,206 3,509 60,502 8,983 2,679 -830 33,877 38,509 5,230 -1,763 -1,763 -1,605 -1,862 3,767 5,672 -1,863 -1,863 -1,765 -2,044 4,109 6,166 -1,963 -1,963 -1,941 -2,261 4,503 29,149 7,467 -1,454 6,013 -199 5,694 5,687 -1,755 3,428 3,428 31,180 7,911 -1,527 6,384 4 6,317 6,308 -1,987 3,774 3,774 33,600 8,595 -1,603 6,992 42 6,965 6,954 -2,190 4,160 4,160 36,239 9,302 -1,683 7,619 80 7,633 7,620 -2,400 4,559 4,559
8.3 4.0 8.85
Sensitivity and valuation range (EUR/share) Cost of capital vs fade period 7.9% 8.4% 8.9% 9.4% 9.9% 4 years 163 150 139 129 120 8 years 167 153 141 130 121 12 years 168 155 143 132 123
9. 2
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 6.81 6.81 3.10 52.57 7.50 7.50 3.41 56.84 8.27 8.27 3.75 61.56 9.06 9.06 4.13 66.71 0.8 12.0 13.4 7.7 25.6 20.6 37.5 19.3 0.7 82.3 0.9 11.9 13.6 7.6 25.4 20.5 11.4 0.4 150.5 0.9 12.8 13.8 8.2 25.6 20.8 4.3 0.2 396.3 1.0 13.7 14.0 8.7 25.7 21.0 -2.3 -0.1 3.7 3.4 1.6 -0.6 -0.1 7.0 5.9 6.2 10.9 10.1 7.8 8.6 9.5 10.3 10.2 7.9 8.2 9.0 9.6 9.6 12/2013a 12/2014e 12/2015e 12/2016e
LVMH.PA 91,177 47 France Antoine Belge Erwan Rambourg
Bloomberg (Equity) MC FP Market cap (EURm) 65,540 Enterprise value (EURm) 69396 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
156 146 136 126 116 106 96
Mar-12 Sep-12 Mar-13 Sep-13 LVMH Rel to SBF-120
156 146 136 126 116 106

Mar-14
96
Source: HSBC
69
abc
Moncler (MONC IM)

An already very profitable mono-brand company with distinctive
positioning (luxury outerwear)

A story of retail expansion outside Italy Remain Underweight (V) rating purely on valuation grounds (21.7x
2015e PE); lowering TP to EUR12.60 (from EUR13) on EPS cut
Climbing high with retail roll-out

Established in 1952 in France, Moncler is a fastgrowing and very profitable mid-sized luxury brand (EUR581m of sales and a 33% EBITDA margin in 2013) with a distinctive and unique positioning (outerwear accounted for 85% of sales in FY 2013). Moncler has successfully repositioned its down jacket from a highperformance sportswear brand for skiers and mountaineers to a luxury brand. Moncler maintained the brands heritage with the development of versatile and timeless products with careful attention to style and quality whilst preserving the original technical aspect of the brand. Remo Ruffini, who joined Moncler as creative director in 1999, and then acquired the brand in 2003, was instrumental in transforming the positioning of the down jacket. Monclers goose down jacket can be worn in the mountains and in the city, as declared by the Moncler brand concept which is Born in mountains and living in the cities. The brand has developed a wider array of outerwear products (with an average selling price of EUR800-900) and engaged in controlled product diversification.
On top of the long-term drivers common to the luxury industry (such as a growing middle class and increased travel), we believe Monclers main growth driver will be the continuation of its strategy of retail expansion outside Italy, leveraging its distinctive positioning in the luxury industry. Total sales grew at a 27% CAGR over 2010-13, to EUR581m in 2013, mostly driven by a 64% retail sales CAGR. Retail sales accounted for 57% of sales in 2013 versus 27% in 2010 on the back of strong like-for-like growth (18% in 2010, 9% in 2011, 13% in 2012 and 14% in 2013) and a significant store roll-out (22 openings in both 2011 and 2012, 24 in 2013). The proportion of sales in Italy declined from 42% in 2010 to 23% in 2013 due to the retail expansion, mainly in Asia but also in the Americas and other parts of Europe. We believe Moncler will continue achieving above-industry-average top-line growth, thanks to untapped potential in all countries outside of Italy. Revenue growth should be supported, in our view, by superior retail like-for-like growth and further retail expansion (c20 store openings per annum over 2014-16, combined with an increase in the average store size) leading to retail potentially accounting for c70% of total sales by 2016. Wholesale sales could grow at a mid-single-digit
70
abc
pace as selective expansion in certain countries would offset a reduction in the number of multibrand retailers carrying the brand in Italy (in order to ensure distribution selectivity). Remo Ruffini, who is serving as Creative Director, Chairman and CEO, continues to bring innovation to Monclers core product, the down jacket. This allows Moncler to continue to grow fast in spite of rising competition from other brands which have been attracted by the growth of that product category. Even though Moncler has been investing in new product categories (such as leather accessories, knitwear and soft accessories), we believe outerwear (85% of sales) and the winter collection should remain the brands main offering. The main rationale for Monclers strategy of significant retail expansion outside of Italy is to recruit new consumers primarily attracted by the brands core outerwear products. The rule of big numbers implies that the share of Autumn and Winter will only slightly decline from 77% in 2012 to c70% in 2016 according to our estimates. This implies that H2 is likely to continue to account for the bulk of annual profits (84% in 2013).
EMEA ex Italy +28%, the Americas +44%, Asia/ROW +34%. We project 22% CAGR net profit growth during 2014-16e. We view Moncler mostly as a top-line growth story rather than an EBIT margin story. As the main driver is the companys significant retail expansion, the weight of immature stores will limit EBIT margin gains in the 2013-16e period. Moncler is already very profitable (with a 29.7% EBIT margin in 2013) due to high sales densities (annual sales per sqm of cEUR27,000 including surfaces used for storage) and an efficient organisation. Hence our forecast of limited EBITDA margin improvement (and a flat EBIT margin) until 2016. We have cut our 2014-2016 EPS estimates by 2-3% following the slightly lower-than-expected retail performance in Q4 2013. We are thus lowering our DCF target price to EUR12.60 (from EUR13). The assumptions used to generate our target price are detailed on page 73. We use a WACC of 9.76% (vs 9.38%) due to the increase in the RFR to 3.5% (from 3%). Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a potential return of -1.8%, below the Neutral band; hence we reiterate our Underweight (V) rating. Moncler shares rose 55% in December 2013 (the price of the IPO on 16 December 2013 was EUR10.50). The shares are down 21% y-t-d in 2014, but are still trading on PEs of 26.2x 2014e and 21.7x 2015e, which we find demanding. Specific upside risks include greater-thanexpected international diversification and takeover speculation (we note that 3 out of the 4 main recent M&A transactions in luxury involved mid-sized Italian companies like Moncler and commanded significant takeover premiums).

2013 was a strong year for Moncler, with sales up 25% at constant FX (with retail like-for-like sales up 14%) and EBITDA growing 19% y-o-y, leading to a 33% EBITDA margin (the same as in FY12). Due to Monclers seasonality, Q4 is a significant quarter (33% of annual sales in 2013, 42% of EBIT): Moncler posted Q4 sales growth of +30% at constant FX (on a tough basis of comparison as Q4 2012 grew 55% at constant FX). The performance in retail was lower than expected, up 34% in Q4 2013 (vs HSBCe +38%) with retail comps up 11% (vs HSBCe +12%) and contribution from new stores of 23% (vs HSBCe 26%). Wholesale was better than expected, up 15% in Q4 2013 (vs HSBCe +5%). By geography, at constant FX in FY2013, Italy was up 2%,
71
abc
Moncler - P&L EURm Revenues % change yoy COGS % of sales Gross profit Gross margin Selling costs General & Administrative costs Advertising & Promotion costs Operating expenses % of sales Operating profit (EBIT) EBIT margin Depreciation and amortisation % of sales EBITDA EBITDA margin Net financial result Non-recurring items Profit before tax PBT margin Income tax expense Effective tax rate Profit for the year from continuing operations Net profit for the period o/w group o/w minority interests Net margin YoY Variation (%) Net sales Operating expenses EBITDA EBIT PBT Net income As a % of sales Selling Costs General & administrative cost Marketing & Communication costs Operating expenses (total)
Source: company, HSBC estimates
FY 2011 363.7 na 120.0 33.0% 243.7 67.0% -77.0 -41.1 -21.1 -139.2 -38.3% 104.5 28.7% 9.9 2.7% 114.4 31.5% -12.4 -2.8 89.3 24.6% 31.0 34.7% 58.3 58.3 55.9 2.4 15.4% 28.1% na 26.3% na na na 21.2% 11.3% 5.8% 38.3%
FY 2012 489.2 34.5% 148.3 30.3% 340.9 69.7% -115.0 -51.2 -29.0 -195.2 -39.9% 145.7 29.8% 15.8 3.2% 161.5 33.0% -17.1 0.0 128.6 26.3% 43.9 34.1% 84.7 84.7 82.4 2.3 16.8% 34.5% 40.2% 41.2% 39.4% 44.0% 47.4% 23.5% 10.5% 5.9% 39.9%
FY 2013 580.6 18.7% 166.5 28.7% 414.1 71.0% -147.6 -57.9 -36.0 -241.5 -41.6% 172.6 29.7% 19.1 3.3% 191.7 33.0% -21.2 0.0 151.4 26.1% 52.7 34.8% 98.7 98.7 96.4 2.3 16.6% 18.7% 23.7% 18.7% 18.5% 17.7% 17.0% 25.4% 10.0% 6.2% 41.6%
FY 2014e 676.0 16.4% 189.5 28.0% 486.5 72.0% -176.3 -66.1 -42.6 -285.0 -42.2% 201.5 29.8% 22.8 3.4% 224.3 33.2% -14.0 0.0 187.5 27.7% 65.3 34.8% 122.2 122.2 122.2 18.1% 16.4% 18.0% 17.0% 16.8% 23.9% 26.8% 26.1% 9.8% 6.3% 42.2%
FY 2015e 784.0 16.0% 213.8 27.3% 570.2 72.7% -210.0 -75.8 -50.2 -336.0 -42.9% 234.2 29.9% 27.2 3.5% 261.4 33.3% -8.0 0.0 226.2 28.9% 78.7 34.8% 147.5 147.5 147.5 18.8% 16.0% 17.9% 16.5% 16.2% 20.6% 20.6% 26.8% 9.7% 6.4% 42.9%
FY 2016e 887.0 13.1% 237.3 26.7% 649.7 73.3% -241.8 -84.9 -57.7 -384.3 -43.3% 265.4 29.9% 31.3 3.5% 296.7 33.4% 2.0 0.0 267.4 30.1% 93.1 34.8% 174.3 174.3 174.3 19.7% 13.1% 14.4% 13.5% 13.3% 18.2% 18.2% 27.3% 9.6% 6.5% 43.3%
72
abc
Financials & valuation: Moncler

Financial statements Year to 12/2012a 12/2013e 12/2014e 12/2015e DCF analysis HSBC assumptions Risk-free rate (%) Equity premium (%) Sector beta Specific beta 3.5 6.0 1.10 1.00
Underweight (V)
DCF, comprising EBIT growth 2013-23e CAGR (%) EBIT growth 2023-43e CAGR (%) Fade period 2043-51e WACC (%) 13.0 4.0 9.76
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 408 47 225 94 680 155 324 229 192 431 408 58 252 98 719 151 276 178 282 470 408 65 342 149 816 168 276 127 361 498 408 68 455 220 931 188 276 56 457 523 82 -26 -25 -8 -41 55 109 -34 -34 -2 -51 73 124 -30 -30 -43 -51 94 153 -30 -30 -52 -71 123 489 162 -16 146 -17 129 129 -44 82 82 581 192 -19 173 -21 151 151 -53 96 96 676 224 -23 202 -14 188 188 -65 122 122 784 261 -27 234 -8 226 226 -79 147 147
Sensitivity and valuation range (EUR/share) Cost of capital vs fade period 8.8% 9.3% 9.8% 10.3% 10.8% 4 years 14.3 13.2 12.3 11.5 10.7 8 years 14.6 13.6 12.6 11.7 10.9 12 years 15.0 13.8 12.8 11.9 11.1
Issuer information Share price (EUR) 12.83 MONC.MI 4,462 31 Italy Antoine Belge Erwan Rambourg Target price (EUR) 12.60
1. 8
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.33 0.33 0.00 0.77 0.39 0.39 0.13 1.13 0.49 0.49 0.17 1.45 0.59 0.59 0.21 1.83 1.2 23.0 52.1 14.9 33.0 29.8 9.4 119.3 1.4 35.7 1.3 25.0 40.7 16.1 33.0 29.7 9.0 63.2 0.9 61.3 1.4 27.1 38.0 17.1 33.2 29.8 16.0 35.2 0.6 97.3 1.5 29.9 36.0 17.5 33.3 29.9 32.7 12.2 0.2 272.8 34.5 41.2 39.4 44.0 47.8 18.7 18.7 18.5 17.7 17.0 16.4 17.0 16.8 23.9 26.8 16.0 16.5 16.2 20.6 20.6 12/2012a 12/2013e 12/2014e 12/2015e
Bloomberg (Equity) MONC IM Market cap (EURm) 3,208 Enterprise value (EURm) 3386 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
17 16 15 14 13 12 16/12/13 29/12/13 11/01/14 24/01/14 06/02/14 19/02/14 04/03/14 17/03/14
Source: HSBC
73
abc
Prada (1913 HK)

The Prada group should remain one of the fastest growers in the
luxury industry
However, recent M&A and the time it is taking to turnaround
MiuMiu will likely continue to weigh on sentiment

Remain OW, decrease TP to HKD75 (from HKD82) on higher
WACC and slightly lower estimates
Still great growth at a now even-more-reasonable price

Prada shares have had a very poor evolution YTD in 2014 (down close to 20%) with doubts over the margin profile of the company weighing in particular. We continue to believe the market share story of Prada relative to peers (Louis Vuitton and Gucci, if we are just looking at institutional brands) is intact. Indeed, in FY January 2015, the Prada brand will likely see around 14% organic sales growth with Louis Vuitton and Gucci posting only half of that, or less. In two years FY Jan 2011 to FY Jan 2013 Prada has managed to increase sales by more than 60%, more than doubling EBIT in the process, with the EBIT margin gaining close to 700bp to reach 27.0%. FY January 2014 will likely have proven to be a re-investment year. However, while FY January 2015 is likely to see strong investment as well, we do not subscribe to Chairman Bertellis view that we would be happy with stable margins, as we see a few leverage possibilities not to mention a natural further progression of the gross margin on the back of channel shifts, price increases and a still favourable product mix (i.e. faster growth of leather goods).
Some issues undeniably weighing on sentiment now

Luxury dj vu in a bad way
On March 17, Prada shares traded at a 15-month low as the market saw a confectionery deal announced over the weekend as a negative. This, in our view, is logical. Prada announced they were taking an 80% stake in Milan-based "Pasticceria Marchesi". There are no synergies that we know of and while the investment is tiny (probably the same as a single store capex i.e. just a few million euros), the rationale for Prada to purchase this asset rather than for key managers to do it on their own account is unclear. Although other luxury groups have made similar acquisitions (LVMH, for instance, acquired the Cova coffee chain not that long ago), investors probably remember that one of the reasons Prada went to market was to get financing for expansion after some brand acquisitions went wrong (notably Helmut Lang and Jil Sander). While there seem to be no other M&A opportunities in the pipe, we think focusing on the MiuMiu turnaround and the core Prada brand would have been more rational.
74
abc
The new MiuMiu: show me the money

We believe HSBC was the first and, in any case, the most bullish on the MiuMiu brand transformation as we have highlighted many elements of the transformation process in previous reports. From a revamped product assortment, the advertising and PR push, a clearer retail concept and the first meaningful flagships in Asia, much has been done to make sure this 21 year-old Japan-driven kawaii brand becomes global, legitimate and recognised more broadly. While we remained convinced that we are at a tipping point in terms of brand awareness, which should ensure strong growth in the upcoming years, we understand the market still has some doubts as the figures as yet have not been that convincing overall.
over the next two years, and despite continuous reinvestment in Miu Miu, and more localised in-store events, we do not see the ad spend ratio rising beyond FY January 2014s 5.0% level. But we dont see any leverage either, so 5.0% seems about right as the sustainable level going forward. General and admin: No change here; we still expect about EUR10m more every year, so there should be leverage on sales. Selling expenses: This is by far the largest bucket, including store rents and staff costs, and should equate to c33.3% of sales in FY January 2014. We see negative leverage here for the current year (FY Jan 15) as in-store events and less profitable Miu Miu stores weigh. It is only next year i.e. FY January 2016, so a year later than we initially expected that we expect the ratio to stabilise and positive leverage to return. Our target price change (to HKD75 from HKD82) is primarily driven by the increase in our WACC (from 7.9% to 8.5%). Following the execution uncertainties and ill-timed M&A, we believe Prada now has a slightly higher risk profile. Hence we have moved from a company-specific beta of 0.8 to 0.9. While the flash collection approach should ensure Prada is more nimble and adaptive than its larger peers (Louis Vuitton and Gucci), we believe that recent communication and news has pointed to a slightly more risky profile. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for Hong Kong stocks of 8.5%. Our target price implies a potential return of 32.9%, above the Neutral band; therefore, we reiterate our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key downside risks include a potential placement of shares by family members, failure to execute the retail strategy, and translate into the operating leverage we currently model.
Earnings valuation and risks

We are slightly trimming our estimates for FY Jan 14-16, by about 1%, to take into account slightly more negative FX and a bit more re-investment. Our gross margin assumptions are broadly unchanged, but we see operating leverage coming through more slowly than we previously factored in, due to the additional re-investment. We list below how we think about the four different buckets of SG&A costs (see the following page for a more detailed table). Product and development: This was inflated in FY January 2014 as Prada accounted for the first time for long-term incentive plans to retain 120 staff (notably within the design team). This was a onetime step-up and from here costs should increase by only EUR10-15m a year, so leverage returns in FY January 2015. This is broadly unchanged relative to our previously published assumptions. Advertising: This was inflated last year by the Americas Cup and extra spending on Miu Miu. Prada will also participate in the next Americas Cup (likely in 2017), but the costs will likely be lower
75
abc
Prada simplified P&L EURm, year ending Jan + 1 Net Sales Royalties Net revenues Gross Profit Gross margin (%) Product and development as a % of sales Advertising and promotion as a % of sales Selling expenses as a % of sales General and admin as a % of sales SG&A as a % of sales EBIT EBIT margin (%) PBT Taxation Tax rate Net profit Net margin (%) Prof. attrib. to non-controlling interests Net profit group Weighted avg number of shares (m) EPS (Basic, EUR)
FY 10 2,017 30 2,047 1,388 67.8% (97) 4.7% (85) 4.2% (643) 31.4% (145) 7.1% 47.4% 414 20.2% 388 (135) 34.7% 254 12.4% (3) 251 2,528 0.10
FY 11 2,523 32 2,556 1,828 71.5% (103) 4.0% (129) 5.1% (803) 31.1% (164) 6.7% 46.9% 629 24.6% 603 (166) 27.6% 437 17.1% (4.5) 432 2,536 0.17
FY 12 3,256 41 3,297 2,377 72.1% (111) 3.4% (151) 4.6% (1,040) 31.5% (185) 5.6% 45.1% 890 27.0% 884 (250) 28.3% 633 19.2% (7.6) 626 2,559 0.24
H1 13 1,708 20 1,728.1 1,268 73.4% (66) 3.8% (82) 4.7% (564) 32.6% (97) 5.6% 46.8% 458 26.5% 443 (131) 29.5% 313 18.1% (5) 308 2,559 0.120
Q3 13 839 9 848.0 642 75.7% (28) 3.3% (54) 6.3% (295) 34.8% (45) 5.3% 49.8% 219.5 25.9% 220 (85) 38.4% 136 16.0% (3) 133 2,560 0.05
Q4 13e 1,000 9 1,010 748 74.1% (35) 3.5% (42) 4.1% (335) 33.2% (55) 5.4% 46.2% 281.3 27.9% 276 (79) 28.6% 197 19.5% (2) 195 2,560 0.08
H213e 1,839 19 1,858 1,389 74.8% (63) 3.4% (95) 5.1% (630) 33.9% (100) 5.4% 47.8% 500.9 27.0% 497 (164) 32.9% 333 17.9% (6) 328 5,120 0.13
FY 13e 3,547 39 3,586 2,657 74.1% (129) 3.6% (177) 5.0% (1,194) 33.3% (197) 5.5% 47.4% 959 26.8% 940 (294) 31.3% 646 18.0% (10.1) 636 2,559 0.25
FY 14e 3,949 44 3,993 2,999 75.1% (138) 3.5% (198) 5.0% (1,356) 34.0% (208) 5.2% 47.6% 1,100 27.6% 1,100 (336) 30.5% 765 19.1% (12.6) 752 2,559 0.29
FY 15e 4,359 49 4,408 3,332 75.6% (148) 3.4% (218) 5.0% (1,496) 34.0% (216) 4.9% 47.2% 1,254 28.5% 1,259 (378) 30.0% 881 20.0% (15.1) 866 2,559 0.34
76
abc
Financials & valuation: Prada SPA

Overweight
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 879 1,096 1,387 572 3,385 652 254 -317 2,320 2,138 879 1,342 1,581 700 3,825 676 254 -446 2,726 2,425 879 1,507 1,994 1,032 4,403 732 254 -777 3,236 2,617 879 1,672 2,410 1,365 4,984 788 254 -1,110 3,745 2,808 759 -321 -332 -127 -299 437 773 -414 -414 -230 -128 358 918 -345 -345 -242 -332 573 1,053 -363 -363 -357 -333 690 3,297 1,053 -163 890 -7 884 884 -250 626 626 3,586 1,128 -169 959 -20 940 940 -294 636 636 3,993 1,280 -180 1,100 0 1,100 1,100 -336 752 752 4,408 1,452 -198 1,254 5 1,259 1,259 -378 866 881
EBIT growth14-24e CAGR (%) EBIT growth14-44e CAGR (%) Fade period 2044-2052e WACC
10.4 3.9 8.5
Issuer information Share price (HKD) 56.45 1913.HK 18,596 20 Hong Kong Antoine Belge Erwan Rambourg Target price (HKD) 75.00
3 2. 9
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.24 0.24 0.09 0.91 0.25 0.25 0.09 1.07 0.29 0.29 0.14 1.26 0.34 0.34 0.16 1.46 1.6 31.3 30.2 20.2 31.9 27.0 147.6 -13.6 -0.3 1.6 28.9 25.2 18.3 31.4 26.8 56.4 -16.2 -0.4 1.6 30.3 25.2 18.6 32.0 27.6 -23.8 -0.6 1.6 32.4 25.3 18.7 33.0 28.4 -29.3 -0.8 29.0 38.7 41.5 46.6 43.5 8.7 7.1 7.8 6.4 1.6 11.4 13.5 14.7 17.0 18.3 10.4 13.5 14.0 14.4 17.2 01/2013a 01/2014e 01/2015e 01/2016e
Bloomberg (Equity) 1913 HK Market cap (HKDm) 144,446 Enterprise value (EURm) 12919 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
87 77 67 57 47 37 87 77 67 57 47 37
Mar-12
Sep-12 Prada SPA
Mar-13 Sep-13 Rel to HANG SENG INDEX
Mar-14
Source: HSBC
77
abc
Richemont (CFR VX)

Too much focus on second-tier brands, while the real issue in
2013 was Cartier watches lagging; this issue is being addressed

Jewellery growth, that of specialist watchmakers and a Montblanc
turnaround could be the cherry on the cake

Remain Overweight, lower target price to CHF106 (from CHF108)
on slight FX-driven EPS cut
Cartier in 2014: the king returns

Although Q3 sales (ended December) were a bit shy of expectations with 9% organic sales growth for the group (versus consensus at 11%), we saw two silver linings that bode well for the group: First, there should soon be an uptick in wholesale as the gap in growth between channels has become very wide. The retail channel saw 14% organic sales growth in Q3 while wholesale was still growing at only 3%. We believe that given the relatively cleaner wholesale inventory situation, growth rates should converge with wholesale improving. By region, this mostly means that the underperformance of Asia (6% vs group at 9%) could also moderate. Second, the Jewellery Maisons division, which is made up of Cartier and Van Cleef & Arpels, outperformed with sales up 10% in the quarter. This is a positive as jewellery and watches at Cartier, the bigger contributor, are margin-enhancing.
Our enthusiasm on the stock for the short term, ie the next 12 months, is based on this idea that Cartier watches a third of group profits should grow after 15 months of going sideways. We notably believe Cartier, for watches: was one of the most gifted brands in China, and even though corporate gifting is clearly not coming back anytime soon, its collapse in 2013 means that it cannot be hit significantly in 2014; and should be quite visible in 2014, whether through the re-launch of a broader Tortue range, the sporty masculine Calibre diver watch and complication watches with inhouse movements.
Three cherries on a nice cake

Longer term, our buy case is based on three incremental factors.
The imported jewellery boom
As we highlighted at length in our Give us a ring, October 2013 report, we are very bullish on prospects for imported jewellery, as the Chinese would put it, ie brands such as Cartier and Van Cleef & Arpels within Richemont but also Tiffany
78
abc
and Bulgari outside the group. We expect these to continue to do well with the Chinese consumer on the back of the theme that the future is female in terms of Chinese luxury consumption and the emergence of self-purchasing.
Watchmakers have a clear roadmap
gross margin to be down 30bps y-o-y after having dropped 90bp in H1 as currency may be less of a drag and capacity (step-up in Cartier watches) helps. We see the SG&A to sales ratio remaining stable with selling expense up slightly but some leverage on admin costs. For FY Mar 15, we see 10% organic sales growth (9% reported) and good margin growth. Gross margin could jump c140bp next year on a combination of FX weighing less, better production capacity utilisation (partly on Cartier watches coming back), lower raw material costs starting to kick in, notably in the second half of the year, and a rebound at Montblanc, after the brand went through an inventory cleaning process. And after years of over-investment, we believe the group should also see some slight operating leverage. We lower our DCF-derived target price to CHF106 (from CHF108) on the back of our 2% FX-driven EPS cut. Our DCF valuation assumptions can be found on page 81. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for Swiss stocks of 7.5%. Our target price implies a potential return of 26.9%, which is above the Neutral band; therefore, we reiterate our Overweight rating on the stock. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Richemont is valued similarly to the Swatch Group by the market. We see better growth for the former, meaning there is a justification for Richemont to rerate relative to Swatch (and given higher EPS growth, the potential even without a re-rating to make a better return). Risks on the downside include currency and underperforming divisions (such as Montblanc and Dunhill) weighing more heavily than we forecast. Another risk factor is availability of component parts for watches, but this is waning, in our view.
The specialist watchmaking division comprises brands that are still very niche-y in terms of number of units and global exposure. We believe that notably IWC, Panerai and Jaeger-LeCoultre still have strong growth opportunities over a long period of time; even Baume & Mercier could start doing better. The brand had very limited awareness in China but by setting up a JV with Chow Tai Fook there and by promoting its history (it was created in 1830), it could be at a turning point now.
Can Montblanc reach a new peak?
The brand will probably not see a repeat of the 18.8% EBIT margin it delivered in FY Mar 2008, but we are confident that after a year of restructuring (the better part of FY Mar 14) followed by a year of repositioning and restructuring, Montblanc can deliver high-teen margins again. Jrome Lambert, has joined as CEO, transferring from JaegerLeCoultre where he had built a solid reputation, and brought with him part of his dream team from his former company. There is no such thing as an easy fix when a luxury brand goes astray, yet some fairly obvious moves have been taken already to limit the damage. We couldnt help but notice when we attended the Watches & Wonders event in September 2013 in Hong Kong that while distributors seemed to have a wait-and-see attitude initially, they are now more willing to give a brand turnaround the benefit of the doubt.

Richemont will publish FY results on 15 May. After EBIT margin contraction of 130bp in H1, we see flattish margins in H2 (-20bp to 20.5%). We expect
79
abc
Richemont FY results and forecasts EURm, year ending March Net sales % change Gross profit Gross margin Selling & distribution as a % of sales Administration as a % of sales Communication as a % of sales Other / Non-recurring items Total operating exps as a % of sales EBIT reported EBIT underlying EBIT margin underlying Financial result Exceptional Taxation Minority interest Luxury net profit (reported)
2009a H1 10a H2 10a 2010 a H1 11a H2 11a 2011a H1 12a H2 12a 2012a H1 13a H2 13a 2013a H1 14a H2 14e 2014e 2015e 2016e 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,654 8,868 5,106 5,044 10,150 5,324 5,276 10,600 11,480 12,470 2.2% -15.0% 6.8% -4.5% 37.0% 29.9% 33.2% 29.3% 28.1% 28.7% 21.2% 8.4% 14.5% 4.3% 4.6% 4.4% 8.3% 8.6% 3,417 1,464 1,727 3,191 2,113 2,281 4,394 2,665 2,987 5,652 3,310 3,209 6,519 3,402 3,340 6,742 7,462 8,193 63.1% 61.5% 61.7% 61.6% 64.8% 62.8% 63.8% 63.2% 64.2% 63.7% 64.8% 63.6% 64.2% 63.9% 63.3% 63.6% 65.0% 65.7% 1,235 22.8% 542 10.0% 644 11.9% 28 2,449 45.2% 598 25.1% 259 10.9% 204 8.6% 13 1,074 45.1% 679 24.3% 286 10.2% 302 10.8% 20 1,287 46.0% 1,277 761 893 1,654 891 24.7% 23.3% 24.6% 24.0% 21.1% 545 314 342 656 342 10.5% 9.6% 9.4% 9.5% 8.1% 506 264 435 699 340 9.8% 8.1% 12.0% 10.1% 8.1% 33 14 16 30 17 2,361 1,353 1,686 3,039 1,590 45.6% 41.5% 46.4% 44.1% 37.7% 1,071 23.0% 405 8.7% 519 11.2% 26 2,021 43.4% 1,962 22.1% 747 8.4% 859 9.7% 43 3,611 40.7% 1,096 21.5% 408 8.0% 418 8.2% 8 1,930 37.8% 1,169 23.2% 468 9.3% 521 10.3% 5 2,163 42.9% 2,265 22.3% 876 8.6% 939 9.3% 13 4,093 40.3% 1,149 21.6% 459 8.6% 419 7.9% 5 2,032 38.2% 1,241 23.5% 474 9.0% 546 10.3% 8 2,268 43.0% 2,390 22.5% 933 8.8% 965 9.1% 13 4,300 40.6% 2,581 22.5% 998 8.7% 1,045 9.1% 13 4,637 40.4% 2,787 22.4% 1,063 8.5% 1,122 9.0% 13 4,986 40.0%
390 440 830 760 595 1,355 1,075 966 2,041 1,380 1,046 2,426 1,370 1,072 2,442 2,825 3,207 968 390 440 830 760 595 1,355 1,075 966 2,041 1,380 1,046 2,426 1,370 1,072 2,442 2,825 3,207 968 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 20.8% 23.0% 27.0% 20.7% 23.9% 25.7% 20.3% 23.0% 24.6% 25.7% -101 -133 3 737 24 -70 0 344 -161 -24 4 259 -137 -94 4 603 -120 102 -98 -2 646 -163 0 -98 103 -283 102 -196 101 -227 0 -139 0 709 -9 0 -125 0 -236 -264 0 -99 0 -199 0 52 0 -175 0 -47 -374 0 67 0 -252 0 9 0 -151 0 76 -403 0 29 -457 0 38 -519 0
433 1,079
832 1,541 1,082
923 2,005 1,185
930 2,115 2,398 2,725
Richemont FY sales and EBIT by segment EURm, year ending March Sales by segment Jewellery maisons Specialist watchmakers Writing instruments Other businesses Total Sales EBIT by segment Jewellery maisons Specialist watchmakers Writing instruments Other businesses Total EBIT before unallocated costs EBIT reported EBIT margin by segment Jewellery maisons Specialist watchmakers Writing instruments Other businesses Total EBIT margin before unallocated costs EBIT margin reported
Source: company data, HSBC estimates
2009a H1 10a H2 10a 2010 a H1 11a H2 11a 2011a H1 12a H2 12a 2012a H1 13a H2 13a 2013a H1 14e H2 14e 2014e 2015e 2016e 2,762 1,222 1,465 2,688 1,619 1,860 3,479 2,165 2,425 4,590 2,607 2,599 5,206 2,667 2,705 5,372 5,763 6,224 655 699 1,353 901 873 1,774 1,171 1,152 2,323 1,459 1,293 2,752 1,587 1,371 2,958 3,258 3,584 1,437 238 313 551 303 369 672 334 389 723 368 398 766 358 394 752 805 861 587 264 320 584 436 531 967 544 688 1,232 672 754 1,426 712 806 1,518 1,655 1,802 632 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,653 8,867 5,106 5,044 10,150 5,324 5,276 10,600 11,480 12,470 777 301 69 -39 1,108 968 28.1% 20.9% 11.8% -6.2% 20.4% 349 133 29 -29 482 390 28.6% 20.3% 12.2% -11.0% 20.3% 393 742 98 231 50 79 -7 -36 534 1,016 440 26.8% 14.0% 16.0% -2.2% 19.1% 830 27.6% 17.1% 14.3% -6.2% 19.6% 541 259 48 -19 829 760 33.4% 28.7% 15.8% -4.4% 25.4% 521 1,062 734 776 1,510 958 860 1,818 984 890 1,874 2,039 2,233 120 379 312 227 539 470 263 733 504 264 768 879 1,005 61 109 54 65 119 53 67 120 24 47 71 125 146 -16 -35 -17 -18 -35 -15 -22 -37 -35 -19 -54 1 47 687 1,516 1,083 1,050 2,133 1,466 1,167 2,633 1,477 1,183 2,660 3,043 3,431 595 1,355 1,075 28.0% 13.8% 16.5% -3.0% 18.9% 30.5% 21.4% 16.2% -3.6% 22.0% 33.9% 26.6% 16.2% -3.1% 25.7% 965 2,040 1,380 1,046 2,426 1,370 1,072 2,442 2,825 3,207 32.0% 19.7% 16.7% -2.7% 22.6% 32.9% 23.2% 16.5% -2.9% 24.1% 36.7% 32.2% 14.4% -2.2% 28.7% 33.1% 20.3% 16.9% -2.9% 23.1% 34.9% 26.6% 15.7% -2.6% 25.9% 36.9% 31.8% 6.7% -4.9% 27.7% 32.9% 19.2% 12.0% -2.4% 22.4% 34.9% 26.0% 9.5% -3.6% 25.1% 35.4% 27.0% 15.5% 0.0% 26.5% 35.9% 28.0% 17.0% 2.6% 27.5%
17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 20.7% 23.0% 27.0% 20.7% 23.9% 25.7% 20.3% 23.0% 24.6% 25.7%
80
abc
Financials & valuation: Richemont

Overweight
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,598 -612 -117 -250 -27 911 (EURm) 59 1,787 10,553 5,155 14,497 1,689 1,940 -3,215 10,216 5,555 59 2,135 10,376 4,600 14,668 1,807 345 -4,255 11,864 6,163 59 2,434 12,078 5,898 16,669 1,934 345 -5,553 13,738 6,739 59 2,677 14,104 7,491 18,937 2,069 345 -7,146 15,872 7,279 2,281 -850 -850 -467 -1,040 1,507 2,672 -850 -850 -524 -1,298 1,822 3,035 -850 -850 -592 -1,593 2,185 10,150 2,882 -456 2,426 -47 2,379 2,379 -374 2,005 2,005 10,600 2,943 -502 2,442 76 2,518 2,518 -403 2,115 2,115 11,480 3,377 -552 2,825 29 2,854 2,854 -457 2,398 2,398 12,470 3,814 -607 3,207 38 3,244 3,244 -519 2,725 2,725
8.7 4.0 8.78
Sensitivity and valuation range (CHF/share) Cost of capital vs fade period 7.8% 8.3% 8.8% 9.3% 9.8% Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 03/2013a 3.5 12.2 6.4 19.2 3.9 2.4 1.2 03/2014e 3.2 11.6 5.6 18.2 3.3 3.9 1.4 03/2015e 2.9 9.8 4.9 16.0 2.9 4.7 1.5 03/2016e 2.5 8.2 4.3 14.1 2.5 5.7 1.7 4 years 118.2 110.7 103.9 97.9 92.4 8 years 121.1 113.1 106.0 99.6 93.9 12 years 123.1 115.0 107.8 101.2 95.3
Issuer information Share price (CHF) 83.50 Target price (CHF) 106.00
2 6. 9
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 3.58 3.58 0.83 17.79 3.78 3.78 0.93 20.66 4.28 4.28 1.06 23.93 4.87 4.87 1.18 27.64 2.1 41.7 21.3 15.6 28.4 23.9 61.3 -31.5 -1.1 1.8 35.0 19.2 14.1 27.8 23.0 -35.9 -1.4 1.8 36.8 18.7 15.1 29.4 24.6 -40.4 -1.6 1.8 38.4 18.4 15.1 30.6 25.7 -45.0 -1.9 14.5 22.1 18.9 31.8 29.8 4.4 2.1 0.6 5.8 5.5 8.3 14.7 15.7 13.4 13.4 8.6 12.9 13.5 13.7 13.7 03/2013a 03/2014e 03/2015e 03/2016e
Reuters (Equity) CFR.VX Market cap (USDm) 54,834 Free float (%) 91 Country Switzerland Analyst Erwan Rambourg Antoine Belge
Bloomberg (Equity) CFR VX Market cap (CHFm) 47,946 Enterprise value (EURm) 34268 Sector Global Luxury Goods Contact 852 2996 6572 Contact 331 5652 4347
Price relative
102 92 82 72 62 52 42
Mar-12 Sep-12 Mar-13 Richemont Br Sep-13 Rel to SMI
102 92 82 72 62 52
Mar-14
42
Source: HSBC
81
abc
Salvatore Ferragamo (SFER IM)

Ferragamo should continue to grow earnings faster than peers,
although to a lesser extent than in previous years

But valuation (23.5x 2014e PE) still not compelling, in our view Reiterate Neutral; lower target price to EUR24 from EUR27.50 on
estimate cuts and higher WACC
Ferragamo is above all a margin catch-up story

Retail top-line growth is slowing
The Ferragamo investment case over the medium term is relatively simple: this is a story of improved execution by a medium-sized mono brand (EUR1.26bn of sales in 2013) which, since the companys 2011 IPO, has led to a combination of above-average top-line and margin expansion. Ferragamo has, over recent years, been successfully focusing on rejuvenating its brand image, which was somewhat dusty, notably in Western Europe where Ferragamo customers are on average much older than in Asia ex-Japan and the Americas. In Q4 2013 though, while Ferragamos overall sales growth (at constant FX) was 9% (vs the 8% sector average), the brands retail sales growth was only 5% (vs 10% in the first 9M). The reason why Ferragamo outperformed was the continued strong growth in wholesale (up 19% yoy in Q4). As outlined in previous reports, we do not feel 100% at ease with the aggressive wholesale expansion pursued by Ferragamo since its IPO. In 2011, 2012 and 2013, wholesale sales at constant FX grew at 38%, 19% and 14%, respectively, compared to 19%, 10% and 9% growth for retail.
Quarter after quarter, management has stated that the wholesale sales growth rate will soon converge towards that of retail, but this is not happening. Ferragamo is the only luxury player expanding in wholesale at a time when most players are downsizing their exposure to this channel, in which it is more difficult to ensure control over brand equity (compared to the retail channel). However, one has to admit that, so far, there is no evidence that this strategy has damaged brand equity. According to management, this is because Ferragamo was lagging behind in terms of presence in the travel retail segment and in markets where Ferragamo is using third-party distributors (notably parts of China, Indonesia, the Philippines, Vietnam, Brazil, Colombia, Venezuela, the Middle East, Russia, and US department stores).
Margin catch-up potential

In spite of attractive products and geographic and distribution mixes (in 2013, Asia and retail already accounted for 37% and 64% of sales, respectively), Ferragamo's EBIT margin lags those of 'soft' luxury peers (companies primarily involved in leather goods, apparel and shoes). Even though Ferragamos EBIT margin improved 480bps in 2011, 100bp in 2012 and 50bp 2013, demonstrating the on-going changes at the company, the level of margin remains well below peers (c 17% vs c29% on average).
82
abc
Ferragamos issues of lower profitability by product line and lower profitability in its retail store network are linked. In the luxury industry, EBIT margins in retail are usually significantly higher than EBIT margins in wholesale, but Ferragamo which already generates 64% of its sales in retail does not seem to be benefitting from that yet. Since its 2011 listing, Ferragamo has moved to a more aggressive/pragmatic management approach, leading to better execution. We believe that, while some low-hanging fruits have already been picked (notably the reduction in the number of SKUs and better replenishment and in-store merchandising), there is still a lot of potential for improvement. The average level of markdowns remains high compared to peers even after several years of improvement. An even higher share of permanent (evergreen) products and of high-margin entry-level products (notably more small leather goods) can be achieved, in our view.
We lower our DCF-based target price to EUR24 from EUR27.50 on the back of the above-mentioned estimate cuts and a higher WACC (we now use a 3.5% ERP instead of 3%). The assumptions used to generate our target price are detailed on page 85. Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage points above and below the hurdle rate for eurozone stocks of 9.5%. Our target price implies a potential return of 12.3% which is within the Neutral band of our model; therefore, we reiterate our Neutral rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Company-specific upside risks include wholesale sales continuing to grow significantly. Company-specific downside risks include failure to execute initiatives aiming at increasing store sales productivity and a placement of shares by Ferragamo family members.

Organic growth for 2013 was 11%, with retail up 9% and wholesale up 14%. The EBIT margin rose 50bp to 17.4%. The gross margin was down 90bp as lower markdowns were offset by negative FX hedging impacts and a negative distribution mix (outperformance of wholesale). Ferragamo characterises itself by a different accounting for hedging, which it books at the sales level. A significant SG&A leverage was once again achieved. Note that the communication-to-sales ratio was flat at 6.2%. Our 2014e-2016e forecasts call for organic sales growth of 8%, 9% and 9%, and a 220bp EBIT margin gain over the period (with the EBIT margin reaching 19.6% in 2016e). However, we cut our 2014 and 2015 EBITDA estimates by 6% and 8%, respectively, on the back of the Q4 13 margin miss and lower retail sales forecasts.
83
abc
Ferragamo P&L (EURm) Revenues COGS % of sales Gross profit Gross margin Operating expenses % of sales Operating profit (EBIT) EBIT margin EBITDA EBITDA margin Net financial result Associates Profit before tax Income tax expense Effective tax rate Net profit for the period o/w group o/w minority interests Diluted EPS (EUR) YoY Variation Net sales Operating expenses EBIT PBT Net profit (group share) FY 07a 687.4 260.6 37.9% 426.8 62.1% -349.4 -50.8% 77.4 11.3% 100.0 14.5% -9.7 0.3 67.9 20.8 30.6% 47.1 38.5 8.7 0.22 na na na na na FY 08a 690.8 271.9 39.4% 419.0 60.6% -355.2 -51.4% 63.8 9.2% 86.0 12.4% -0.4 0.8 64.2 25.3 39.5% 38.9 29.8 9.1 0.22 1% 2% -18% -5% -23% FY 09a 619.6 256.1 41.3% 363.5 58.7% -327.1 -52.8% 36.5 5.9% 61.9 10.0% -2.1 0.4 34.8 49.5 142.1% -14.7 -20.9 6.2 -0.12 -10% -8% -43% -46% -170% FY 10a 781.6 289.4 37.0% 492.2 63.0% -405.8 -51.9% 86.4 11.1% 113.1 14.5% 2.4 0.5 89.3 28.5 31.9% 60.8 48.9 11.9 0.29 26% 24% 137% 157% -334% FY 11a 986.4 352.9 35.8% 633.5 64.2% -476.8 -48.3% 156.6 15.9% 183.7 18.6% -3.0 0.7 154.3 51.1 33.1% 103.3 81.3 22.0 0.48 26% 17% 81% 73% 66% FY 12a 1,153.0 411.0 35.6% 742.0 64.4% -547.7 -47.5% 194.3 16.9% 228.3 19.8% -6.6 0.6 188.4 63.1 33.5% 125.3 105.6 19.7 0.63 17% 15% 24% 22% 30% FY 13a 1,258.0 459.0 36.5% 799.1 63.5% -580.0 -46.1% 219.1 17.4% 260.0 20.7% 1.6 0.0 220.7 60.7 27.5% 160.0 150.4 9.5 0.89 9% 6% 13% 17% 43% FY 14e 1,320.0 475.0 36.0% 845.0 64.0% -606.9 -46.0% 238.2 18.0% 283.2 21.5% -5.0 0.0 233.2 69.9 30.0% 163.2 153.4 9.8 0.91 5% 5% 9% 6% 2% FY 15e 1,440.0 509.5 35.4% 930.5 64.6% -658.7 -45.7% 271.7 18.9% 321.3 22.3% -1.0 0.0 270.7 81.2 30.0% 189.5 178.2 11.4 1.06 9% 9% 14% 16% 16% FY 16e 1,570.0 547.6 34.9% 1,022.3 65.1% -715.2 -45.6% 307.1 19.6% 361.6 23.0% 3.0 0.0 310.1 93.0 30.0% 217.1 204.0 13.0 1.21 9% 9% 13% 15% 15%
Note:* from 2013, we forecast the share of minority interest falls to 6% from 18% of net profit Source: company data, HSBC estimates
84
abc
Financials & valuation: Salvatore Ferragamo

Neutral
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 141 175 526 70 845 328 103 33 400 445 141 204 613 131 961 348 103 -28 496 480 141 235 726 202 1,104 371 105 -98 616 529 141 266 857 289 1,266 395 105 -184 754 580 185 -82 -68 -62 -25 104 202 -75 -75 -67 -60 127 220 -80 -80 -69 -70 141 251 -85 -85 -80 -86 166 1,258 260 -41 219 2 221 221 -61 150 150 1,320 283 -45 238 -5 233 233 -70 153 153 1,440 321 -50 272 -1 271 271 -81 178 178 1,570 362 -54 307 3 310 310 -93 204 204
11.3 4.0 9.39
Issuer information Share price (EUR) 21.38 SFER.MI 5,009 25 Italy Antoine Belge Erwan Rambourg Target price (EUR) 24.00
1 2. 3
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.89 0.89 0.40 2.37 0.91 0.91 0.41 2.94 1.06 1.06 0.47 3.66 1.21 1.21 0.54 4.48 3.1 39.0 42.0 22.7 20.7 17.4 8.2 0.1 568.8 2.9 36.1 34.3 18.5 21.5 18.0 56.6 -5.6 -0.1 2.9 37.7 32.0 18.4 22.3 18.9 321.3 -15.8 -0.3 2.8 38.7 29.8 18.3 23.0 19.6 -24.4 -0.5 9.1 13.9 12.7 17.2 42.5 4.9 8.9 8.7 5.7 2.0 9.1 13.5 14.1 16.1 16.1 9.0 12.5 13.0 14.5 14.5 12/2013a 12/2014e 12/2015e 12/2016e
Bloomberg (Equity) SFER IM Market cap (EURm) 3,601 Enterprise value (EURm) 3573 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
32 30 28 26 24 22 20 18 16 14 12 32 30 28 26 24 22 20 18 16 14 12
Mar-12
Sep-12 Salvatore Ferragam
Mar-14
Source: HSBC
85
abc
Swatch (UHR VX)

Swatch should benefit from the watch rebound we forecast in 2014 Our target price for Swatch implies 11.6% potential return, thus we
prefer Richemont among the watch players (implies 26.9%)

Reiterate Neutral, lower price target price to CHF625 (from CHF630)
on slight estimate cut
Watch: youre back!

In our 18 February 2014 report titled Luxury watches should start ticking along nicely, we stated that with cleaner inventories, female purchases rising and gifting out of the Chinese equation, we expected good growth in watches in 2014. We believe the watch trade is the closest it has been to being out of the woods in the past two years. Inventories in the trade seem to have become much lighter, Swiss watch exports have started to stabilise (if not grow again) for the Greater China region and corporate comments as well as anecdotal evidence suggest sales of highend watches should be doing better in 2014 after a dreadful 2013. Why? Watches are more cyclical than other luxury categories so matching sell-in rates with real sell-through activity can take a while. Self-purchasing, notably by women, is increasing. And while gifting is by no means coming back, its impact has been broadly eliminated from the watch equation in China. Swatch is the luxury company the most exposed to China (37% of sales in Greater China in 2012, c17% in the mainland itself) and so should benefit from the rebound we forecast in 2014. Middle class income expansion on a worldwide basis
should continue to offer strong growth for the Swatch Group. However, our target price for Swatch implies a lower potential return (11.6% on our CHF625 target price) than our target price for Richemont at 26.9% (potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.) Swatch notably: is less exposed to jewellery (c6% of sales in 2013 including Harry Winston on a full-year basis, compared with 27% of sales for FY2013 for Richemont) and jewellery exposure is a positive for both growth and margin enhancement; relies a lot on the success of Tissot and Longines, which remain predominantly Chinadriven, and could hence suffer from more limited pricing power, while Richemonts portfolio is made up of truly global brands with considerable pricing power; will suffer from a negative brand mix in 2014: we see slightly lower margin expansion here than at Richemont as the consolidation of Rivoli (Middle East distributor) and the growth of Harry Winston should be slightly
86
abc
dilutive. We also factor in strong growth for the Swatch brand itself but that again is less profitable than the group average.

Group net sales growth at constant FX was 9% in FY13 (stripping out the contributions from the acquisitions of Harry Winston of cCHF280m and Rivoli of cCHF10m) and organic growth was c5.5%. The recovery in China that CEO Mr Hayek was anticipating at end-July did not occur. China was positive overall for the group though, with robust trends at Tissot and Longines offsetting negative trends for luxury brands. FY13 clean EBIT increased 4% to CHF2,064m (CHF2,314m on a reported basis including the exceptional profit linked to the damages awarded to Swatch after the failure of its JV with Tiffany), in line with consensus estimates. This implies a 100bp EBIT margin deterioration to 24.4% (of which an 80bp dilution linked to the consolidation of Harry Winston, whose EBIT margin was in the low single digits). As we anticipated, EBIT growth gathered pace in H2 (+7%) vs H1 (+1%) as the timing of marketing investments was skewed towards H1 in 2013 versus H2 in 2012 (Olympics). CEO Mr Hayek said sales in China picked up in December 2013 and continued to recover in January 2014, even for high-end watches. He said that genuine consumption was now more than compensating for the reduction in corporate gifting. Hayek also sounded optimistic about local consumption picking up in 2014 in Europe, the US and Japan. Regarding Chinese tourists, he mentioned that trends slowed down in October and November 2013 before recovering in December 2013 and January 2014. There was a short-term negative impact of the new legislation on conducted tours, but it did not last long.
CEO M. Hayek is confident that sales could grow at a double-digit pace in CHF in 2014 if FX stayed at the current level (a growth rate that probably includes the consolidation of Harry Winston and Rivoli, which should add cCHF250m in 2014). For 2014, we forecast 8.4% reported sales growth (7.8% organic, 3% contribution from Harry Winston and Rivoli, -1.8% FX impact). However, as in 2013, he did not want to commit to an EBIT margin target. He acknowledged that the decline in gold prices in 2013 will be a significant tailwind in 2014 (lag effect due to hedging and inventories), but reminded investors that if he saw an opportunity to invest he would take it even if it were to lead to a short-term negative impact on margins. For 2014, we forecast a 60bp EBIT margin improvement, mostly because of higher profitability at Harry Winston offsetting a slight dilution from the consolidation of Rivoli and a limited recovery in Electronic Systems (which lost CHF12m in EBIT in 2013). We lower our DCF-based target price to CHF625 (from CHF630) as we have cut our 2014-16e estimates by 1% on lower margin asumptions for Harry Winston. The assumptions used in our target price are detailed in the Financials & Valuation on page 89. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for Swiss stocks of 7.5%. Our new target price implies an 11.6% potential return, which is within the Neutral band of our model; hence, we reiterate our Neutral rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Upside (downside) risks to our rating include stronger (weaker)-than-expected trends in Greater China, value creation (destruction) on the Harry Winston acquisition and a weaker (stronger) CHF.
87
abc
The Swatch Group Results & forecasts CHFm Sales Watches & Jewellery of which Harry Winston Watches Production Electronics Systems General services Elimination internal sales Total net sales Total gross sales EBIT Watches of which Harry Winston Watches production Electronics systems General services Total EBIT margin Watches of which Harry Winston Watches production Electronics systems Total Net financial result & associates Taxes Tax rate Minority interest Net consolidated income (reported) Earnings per bearer share (reported) Earnings per bearer share (HSBC) 4,547 1,742 526 7 -1,145 5,677 5,966 828 281 104 -11 1,202 18.2% 16.1% 19.8% 21.2% -196 -168 16.7% -4 834 15.76 15.76 -18 2 4,187 7 1,429 -16 391 5 8 -870 1 5,142 0 5,421 -10 20 5 -39 -3 804 94 24 -19 903 19.2% 6.6% 6.1% 17.6% 46 -186 19.6% -4 759 -8 5,225 -18 1,487 -26 436 5 -24 -1,045 -9 6,108 -9 6,440 -3 1,257 -67 186 -77 62 73 -69 -25 1,436 24.1% 12.5% 14.2% 23.5% -38 -318 22.7% -6 -9 1,074 -8 20.28 -8 20.28 25 5,953 4 1,972 12 334 5 20 -1,500 19 6,764 19 7,143 56 1,352 98 322 158 13 263 -73 59 1,614 22.7% 16.3% 3.9% 23.9% -3 -335 20.8% -7 42 1,269 40 23.49 40 23.49 14 6,955 33 2,215 -23 308 5 44 -1,687 11 7,796 11 8,143 8 1,633 73 442 -79 1 6 -92 12 1,984 23.5% 20.0% 0.3% 25.4% 33 -409 20.3% -8 18 1,600 16 29.64 16 29.64 26 26 26 17 12 -8 12 15 14 21 37 -92 26 23 8,173 280 297 7 -21 8,456 8,817 2,424 6 18 8,917 - 437 297 7 -99 -21 8 9,200 8 9,587 48 2,391 26 -4 9 9,629 56 503 306 7 0 -22 9 9,920 9 10,333 -1 2,638 368 50 nm 6 3 -104 -1 2,540 27.4% 10.0% 2.0% 25.6% 30 -488 19.0% -11 -3 2,071 -3 38.19 -3 38.19 0 8 10,400 15 578 315 7 3 -22 8 10,700 8 11,142 10 2,898 92 69 nm 9 3 -107 11 2,800 27.9% 12.0% 3.0% 26.2% 47 -541 19.0% -13 11 2,293 11 42.27 11 42.27 11 11 11 3 8 15 3 3 8 8 10 38 55 3 10 2008a y-o-y 2009a y-o-y 2010a* y-o-y 2011a y-o-y 2012a y-o-y 2013a y-o-y 2014e y-o-y 2015e y-o-y 2016e y-o-y
-12 -1,300 0 -98 7 -101 2,314 17 2,290 26.6% ** 2.0% -4.0% 24.0%** 36 -428 18.2% -7 1,921 35.42 35.42 26.8% 6.0% 0.0% 24.9% 20 -439 19.0% -9 20 1,862 19 34.32 19 34.32
-15 14.48 -15 14.48
* Restated ** EBIT margin calculation exclude a CHF250m gain in 2013 Source: Company, HSBC estimates
88
abc
Financials & valuation: Swatch

Neutral
Profit & loss summary (CHFm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CHFm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 827 -706 -1,450 -366 658 121 (CHFm) 136 2,272 8,673 1,233 11,639 1,323 59 -1,174 9,508 8,525 136 2,556 9,972 1,937 13,222 1,429 59 -1,878 10,962 9,298 136 2,871 11,401 2,723 14,966 1,543 59 -2,664 12,568 10,142 136 3,215 12,977 3,605 16,887 1,667 59 -3,546 14,343 11,057 1,697 -600 -600 -407 -704 1,097 1,889 -650 -650 -465 -786 1,239 2,090 -700 -700 -518 -882 1,390 8,456 2,618 -304 2,314 23 2,356 2,356 -428 1,921 1,921 9,200 2,606 -316 2,290 20 2,309 2,309 -439 1,862 1,862 9,920 2,876 -335 2,540 30 2,570 2,570 -488 2,071 2,071 10,700 3,155 -355 2,800 47 2,846 2,846 -541 2,293 2,293
6.9 4.0 8.78
Sensitivity and valuation range (CHF/share) should show 625 Cost of capital vs fade period 7.8% 8.3% 8.8% 9.3% 9.8% 4 years 710 659 614 574 538 8 years 726 672 625 583 545 12 years 734 681 634 592 553
Issuer information Share price (CHF) 560.00 Target price (CHF) 625.00
1 1. 6
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CHF) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 35.42 35.42 7.50 175.30 34.32 34.32 8.58 202.12 38.19 38.19 9.55 231.72 42.27 42.27 10.57 264.45 1.1 24.0 20.4 16.7 31.0 27.4 -12.3 -0.4 1.0 20.8 18.2 14.9 28.3 24.9 -17.0 -0.7 1.0 21.2 17.6 14.6 29.0 25.6 -21.1 -0.9 1.0 21.4 17.0 14.2 29.5 26.2 -24.6 -1.1 8.5 16.6 16.6 16.8 19.5 8.8 -0.5 -1.0 -2.0 -3.1 7.8 10.3 10.9 11.3 11.3 7.9 9.7 10.2 10.7 10.7 12/2013a 12/2014e 12/2015e 12/2016e
UHR.VX 33,938 73 Switzerland Antoine Belge Erwan Rambourg
Bloomberg (Equity) UHR VX Market cap (CHFm) 29,675 Enterprise value (CHFm) 27239 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
614 564 514 464 414 364 314
Mar-12 Sep-12 Mar-13 Sep-13 Swatch Rel to SMI
614 564 514 464 414 364

Mar-14
314
Source: HSBC
89
abc
Tiffany (TIF US)

Brand is gaining in assertiveness as it repositions itself towards
"real luxury": results should be sustainably supported by this shift

US growth should pick up in 2014. Global growth should ensure
Tiffany has one of the fastest EPS growth rates in our coverage
Increase target price to USD110 (from USD106) on slightly higher
estimates and lower WACC, remain Overweight
Strong 9M results not a blip

Sales growth in the first nine months of 2013 was solid and the gross margin improvement was impressive. In addition, sales in North America picked up in November/December (comps up 7% vs 3% in Q1, 0% in Q2 and 1% in Q3). Two recent steps and one fortunate development suggest to us the Q3 results were not a blip.
Solid hires
articulation of the global brand and focuses on increased engagement with consumers. This, in our view, is a good way of expressing the fact that Tiffany as an American brand wants to go global, but also the US market has something to learn from the Asian success stories. In other words, the brand could be more aligned, which seems logical given travel patterns of luxury consumers we have highlighted in all of our major thematic reports, notably The Bling Dynasty dated 28 March 2013. Francesca Amfitheatrof was recruited in September 2013 with the mission of interpreting Tiffany in a new way for the modern, global consumer. She will focus on fashion jewellery and the self-purchase customer and her influence on product should be seen starting in H2 2014. New blood is not always a good thing, but we believe Tiffany was lagging in a few areas, notably design, brand elevation and global alignment. We believe these appointments are an acknowledgement of past issues and a clear commitment to the need for change. They will help increase the luxury quotient of the brand.
Frederic Cumenal joined as Executive Vice President in 2011 from LVMH, initially with responsibility for the Asia Pacific, Japan, Europe and Emerging Markets regions. Since September 2013Mr Cumenal has been President and oversees global retail as well as design, marketing and merchandising functions. We believe he has done much to make the brand more assertive, rethinking the retail environment, on advertising as well as the strategic positioning. We also believe he has been instrumental in recruiting new talent to the brand. Anthony Ledru joined in May 2013 as a Senior VP Northern America from Harry Winston with a strong track record at Cartier prior to that. Mr Ledru will be contributing a key voice to the
90
abc
Shifting towards a real luxury positioning

On 10 January, Tiffany reported November/ December worldwide sales up 4% with worldwide comps up 6%, the contribution from new stores of 2% and a -4% FX impact. US comps (up 7%) were well above expectations, but this was mitigated by flat Asia ex-Japan comps. This led the company to confirm its FY EPS guidance of USD3.65-3.75 (our own forecast is USD3.85). Initial guidance for 2015 should be given when Tiffany reports 2014 figures (year-end 31 January) on 21 March. For 2014, we forecast 9.7% reported sales growth (6.4% comps, 3.9% contribution from new stores and -0.6% FX) and a 120bp EBIT margin improvement driven by a 100bp gross margin increase (lower raw material prices). Our EPS estimates are above consensus by 2% for 2014, 8% for 2015 and 11% for 2016, primarily because of our higher margin assumptions. We increase our DCF-derived target price to USD110 from USD106 as we raise our EPS estimates by 1% for Jan 2015-16 and lower our WACC to 8.23% (from 8.40% as we now use RFR of 3.5% vs 3.0% and ERP of 3.5% vs 4.0%). The assumptions used to generate our DCF-derived target price are detailed on page 93. Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage points above and below the hurdle rate for US stocks of 7.0%. Our target price implies a potential return of 18.7%, which is above the Neutral band; therefore, we reiterate our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Specific downside risks to our rating include a lower-than-expected pick-up in comps in the US; non-domestic investment weighing on earnings (stores, ad spend); and a rise in raw material prices (notably silver and diamonds).
As CEO Mike Kowalski puts it, middle class conversion in the US is not as strong as it used to be, due to the dichotomisation of wealth and income. Consequently, as Tiffanys strength had relied heavily on silver and lower-end fashion jewellery, the brand felt compelled to change and marketing dollars are moving away from the lower price points. Tiffany is re-designing stores to make them look more luxurious, deemphasising silver, learning to step up story telling from its Asian successes and is committed to stepping up advertising. Starting in 2015, the brand should benefit from working with an outside ad agency after having worked on in-house campaigns for the past 15 years. It will also start re-deploying watches, at least in retail initially, before thinking about potential wholesale opportunities. Although new faces and dials have now been developed, the building of infrastructure in Switzerland continues and should be operational by then as the brand gains access to supplies outside the Swatch Group. The legal settlement following the split between the two former partners is still pending.
And now for the luck part: raw material prices will be helpful
Silver still accounts for a little under 25% of total Tiffany sales. After peaking at close to USD50/oz in 2011, silver prices averaged USD31/oz in 2012 and USD24/oz in 2013 and are currently close to USD21/oz. The slowdown in precious material prices does not have an immediate impact on gross margin as there is a certain time lag linked to hedging (Tiffany hedges silver 12 months ahead) and the inventory cycle.
91
abc
Tiffany Results & forecasts USDm Net sales Gross profit Gross margin SG&A SG&A as % of sales Operating Income reported Operating Income HSBC* Operating margin HSBC* Interest income Earnings before tax Income taxes tax rate Net earnings Net EPS common (Diluted) HSBC* Net EPS common (Diluted) reported Weighted avg com share outst. (D) Americas Japan Asia ex-Japan Europe Other Total sales Americas Japan Asia ex-Japan Europe Other Total sales YoY evolution Sales Selling, G&A EBIT PBT Net earnings EPS Diluted (HSBC) Reported sales growth Americas Japan Asia ex-Japan Europe Other Total sales Comp store sales Americas Japan Asia ex-Japan Europe Total sales
*Restated for one-offs Source: Company data, HSBC estimates
FY09 FY10a FY11a Q1 12a Q2 12a Q3 12a Q4 12a FY12a Q1 13a Q2 13a Q3 13a Q4 13e FY13e FY14e FY15e 2,709.7 1,530.2 56.5% 1,089.7 40.2% 440.5 440.5 16.3% 50.5 390.0 124.3 31.9% 264.8 2.11 2.11 125.4 3,085.3 1,822.3 59.1% 1,227.5 39.8% 594.8 610.8 19.8% 47.3 547.4 179.0 32.7% 368.4 2.93 2.87 128.4 3,642.9 2,151.2 59.0% 1,442.7 39.6% 708.4 750.9 20.6% 43.5 665.0 225.8 34.0% 439.2 3.60 3.40 129.1 819.2 469.0 57.3% 334.0 40.8% 135.0 135.0 16.5% 10.6 124.4 42.9 34.5% 81.5 0.64 0.64 128.2 386.0 142.0 195.0 88.0 9.0 820.0 47% 17% 24% 11% 1% 100% 8% 9% -1% -1% 1% -5% 3% 15% 17% 3% -11% 8% 0% 12% 10% 0% 4% 886.6 499.2 56.3% 344.6 38.9% 154.6 154.6 17.4% 14.3 140.3 48.5 34.6% 91.8 0.72 0.72 127.7 434.0 159.0 174.0 100.0 20.0 887.0 49% 18% 20% 11% 2% 100% 2% -8% 10% 7% 2% -16% -1% 12% 0% -1% 15% 2% -5% 10% -5% 2% -1% 852.7 464.3 54.4% 347.0 40.7% 117.3 117.3 13.8% 14.8 102.5 39.3 38.4% 63.2 0.49 0.49 127.9 1,235.8 730.8 59.1% 440.5 35.6% 290.4 290.4 23.5% 14.1 276.3 96.7 35.0% 179.6 1.40 1.40 128.0 3,794.2 2,163.3 57.0% 1,466.1 38.6% 697.2 697.2 18.4% 53.6 643.6 227.4 35.3% 416.2 3.25 3.25 127.9 895.5 503.2 56.2% 362.1 40.4% 141.2 141.2 15.8% 12.7 128.4 44.9 34.9% 83.6 0.70 0.65 128.4 408.0 145.0 223.0 93.0 27.0 896.0 46% 16% 25% 10% 3% 100% 9% 8% 5% 3% 3% 10% 6% 2% 14% 6% 200% 9% 3% 21% 9% 6% 8% 925.9 532.1 57.5% 355.2 38.4% 176.9 176.9 19.1% 14.7 162.2 55.4 34.2% 106.8 0.83 0.83 128.8 444.2 136.2 208.2 111.2 26.1 925.9 48% 15% 22% 12% 3% 100% 4% 3% 14% 16% 16% 15% 2% -14% 20% 11% 31% 4% 0% 8% 13% 7% 5% 911.5 519.5 57.0% 365.9 40.1% 153.6 153.6 16.9% 13.9 139.7 45.1 32.3% 94.6 0.73 0.73 129.0 1,307.2 796.5 60.9% 461.5 35.3% 334.9 334.9 25.6% 16.7 318.3 112.9 35.5% 205.4 1.59 1.59 129.0 4,040.0 2,351.3 58.2% 1,544.7 38.2% 806.6 815.6 20.2% 58.0 748.6 258.3 34.5% 490.3 3.85 3.80 129.0 4,430.0 2,622.6 59.2% 1,673.9 37.8% 948.7 948.7 21.4% 40.0 908.7 313.5 34.5% 595.2 4.61 4.61 129.0 4,841.6 2,905.0 60.0% 1,821.2 37.6% 1,083.8 1,083.8 22.4% 25.0 1,058.8 365.3 34.5% 693.5 5.38 5.38 129.0
1,410.9 1,574.6 1,805.8 527.1 546.5 616.5 430.0 549.2 748.2 311.8 360.8 421.1 29.9 54.2 51.3 2,709.7 3,085.3 3,642.9 52% 19% 16% 12% 1% 100% -5% -7% -7% 13% 20% 21% -11% -3% 20% 10% -55% -5% -11% -12% 10% 9% -7% 51% 18% 18% 12% 2% 100% 14% 13% 35% 40% 39% 39% 12% 7% 29% 16% 81% 14% 8% -4% 14% 18% 8% 50% 17% 21% 12% 1% 100% 18% 18% 19% 21% 19% 23% 15% 13% 36% 17% -5% 18% 13% 4% 27% 6% 13%
400.1 620.0 1,840.1 146.7 192.0 639.7 187.7 254.0 810.7 97.6 146.0 431.6 20.6 24.0 73.6 852.7 1,236.0 3,795.7 47% 17% 22% 11% 2% 100% 4% 5% -20% -25% -30% -29% 3% 0% 2% 6% 73% 4% 1% 5% -4% 8% 1% 50% 16% 21% 12% 2% 100% 4% 2% 2% 1% 1% 1% 2% -6% 13% 3% 102% 4% -2% 2% 6% 0% 0% 48% 17% 21% 11% 2% 100% 4% 2% -2% -3% -5% -10% 2% 4% 8% 2% 43% 4% -2% 7% 2% 2% 1%
417.1 679.4 1,948.7 2,124.0 2,294.9 128.1 167.4 576.7 570.9 588.1 238.1 279.2 948.5 1,100.3 1,254.3 104.1 147.5 455.8 510.5 561.5 24.1 33.2 110.4 124.3 142.8 911.5 1,306.6 4,040.0 4,430.0 4,841.6 46% 14% 26% 11% 3% 100% 7% 5% 31% 36% 50% 49% 4% -13% 27% 7% 17% 7% 1% 5% 22% 2% 7% 52% 13% 21% 11% 3% 100% 6% 5% 15% 15% 14% 13% 10% -13% 10% 1% 38% 6% 7% 10% 0% 3% 5% 48% 14% 23% 11% 3% 100% 6% 5% 16% 16% 18% 18% 6% -10% 17% 6% 50% 6% 3% 11% 10% 4% 6% 48% 13% 25% 12% 3% 100% 10% 8% 18% 21% 21% 20% 9% -1% 16% 12% 13% 10% 5% 5% 10% 7% 6% 47% 12% 26% 12% 3% 100% 9% 9% 14% 17% 17% 17% 8% 3% 14% 10% 15% 9% 5% 3% 8% 6% 6%
92
abc
Financials & valuation: Tiffany

Overweight
Profit & loss summary (USDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (USDm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (USDm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 819 3,072 505 4,631 1,060 959 454 2,611 2,326 0 882 3,360 674 4,982 1,072 959 286 2,951 2,496 0 955 3,728 847 5,423 1,084 959 112 3,379 2,751 0 1,036 4,168 1,077 5,945 1,097 959 -118 3,888 3,030 292 -220 -245 -159 184 45 586 -237 -237 -180 -169 320 628 -256 -256 -198 -174 340 725 -277 -277 -218 -230 414 3,794 861 -164 697 -54 644 644 -227 416 416 4,040 980 -173 816 -58 749 749 -258 490 496 4,430 1,133 -184 949 -40 909 909 -313 595 595 4,842 1,279 -195 1,084 -25 1,059 1,059 -365 693 693
11.8 4.0 8.23
Sensitivity and valuation range (EUR/share) Cost of capital vs fade period 7.2% 7.7% 8.2% 8.7% 9.2% 4 years 126 116 107 99 93 8 years 130 119 110 102 95 12 years 132 122 112 104 97
Issuer information Share price (USD)92.67 TIF.N 11,866 100 United States Antoine Belge Erwan Rambourg Target price (USD)110.00
1 8 . 7
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (USD) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 3.25 3.25 1.28 20.62 3.80 3.85 1.41 23.30 4.61 4.61 1.55 26.68 5.38 5.38 1.70 30.70 1.7 20.7 16.8 10.3 22.7 18.4 16.0 17.4 0.5 64.2 1.7 21.9 17.8 11.0 24.3 20.2 16.9 9.7 0.3 205.1 1.7 23.7 18.8 11.9 25.6 21.4 28.3 3.3 0.1 559.7 1.7 24.6 19.1 12.5 26.4 22.4 51.1 -3.0 -0.1 4.2 0.8 -7.2 -3.2 -9.7 6.5 13.8 17.0 16.3 18.2 9.7 15.6 16.3 21.4 19.9 9.3 12.9 14.2 16.5 16.5 01/2013a 01/2014e 01/2015e 01/2016e
Bloomberg (Equity) TIF US Market cap (USDm) 11,866 Enterprise value (USDm) 12152 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
104 94 84 74 64 54 44
Mar-12 Sep-12 Tiffany
Source: HSBC
104 94 84 74 64 54
Mar-13 Sep-13 Rel to S&P 500 Mar-14
44
93
abc
Tods (TOD IM)

Sales growth has been a lot more muted than expected (this will
continue in 1H14), and margins should remain under pressure

We still believe the group transformation (to retail, more Asia,
more accessories) will occur, though later than we had hoped for
Remain OW, cut target price to EUR111 (from EUR118) on
earnings downgrades
The long term is not compromised

Although Tod's is not delivering in a straight line, we believe the brand's transformation process will prove successful as has been the case for all other companies in the space over the past ten years. So our message remains "brace yourself for an ugly short term; the long term is worth waiting for". Clearly, the beginning of the year has not been good: SSS were down 5% for the first 10 weeks of the year. Margins were under pressure in FY 13 and should remain under pressure in FY14. However, as we have highlighted before including in our report on 7 March Skipped a beat, same music, more adagio than presto, the plan remains the same, its just taking longer to execute.
However, it is almost complete now. Management mentioned during its FY2013 earnings conference call that Spring Summer 2014 was the last season of what the group cut in Italy. The group now has less than 600 wholesale doors (down from more than 900) and does not plan any other significant cuts (although an additional very low single digit number could be considered if some partners suffer further later in the year). This means wholesale sales might be flattish to slightly up in 2014 (we model 2% organic growth) but still showing negative growth in H1 (we model a 4% organic sales decline). This will weigh notably on Q1since the odd quarters are the more wholesale-driven ones.
Wholesale clean-out is almost complete

Spring Summer 14 was the last big cut
Where we were too optimistic was on the cleanout of the wholesale channel in Italy. We had wrongly assumed that the bulk of the cleaning process in wholesale had already been completed a few quarters earlier.
Same-store-sales growth still slowing

SSS for the first 10 weeks of the year (January 1st to March 9th 2014) were down 5%. Management highlighted during the FY2013 conference call a challenging basis of comparison (+8% in the same period last year) and a very volatile environment on a weekly basis. By region: Chinese growth remained negative in particular in Mainland China, while HK was better (i.e. flattish rather than negative),
94
abc
the US was very slightly negative (related to poor weather conditions), in Europe the situation was mixed by country (good in Switzerland and the UK, slightly negative in France and Germany, while in Italy some positive signals observed late in 2013 were confirmed at the beginning of 2014) though overall SSSG was slightly negative. Management remained confident that consensus expectations for 2014 of 4.5% reported sales growth and a flattish EBITDA margin (net of extraordinary items) are a bit challenging but feasible in light of the current volatile environment. Regarding the order backlog for Spring/Summer 2014, management mentioned that the performance was slightly negative (with negative wholesale sales growth partially offset by a positive retail development) and expects a flat H1 14 sales performance, which is a very likely scenario despite evidence that Q1 will be quite negative. As we highlighted before, earnings should remain under pressure in H1 2014 and improve in H2 14 (when the group will face an easier basis of comparison in retail). Our forecasts assume 3% reported growth (and 5% at constant FX) and factor in a slight improvement in the EBITDA margin to 24.6%.
In addition, the group has reiterated its long-term target of an EBITDA margin of 28%-30% which could be achievable with a better performance in leather and accessories.
Geographical breakdown of the store network % of stores by region Italy Europe (without Italy) North America Far East o/w Greater China o/w Japan o/w Row Total Total number of stores
2000 34% 32% 29% 5% 2% 3% 0% 100% 176
2013 20% 20% 7% 53% 32% 13% 8% 100% 219

We revise our target price down from EUR118 to EUR111 on the back of lower sales and margin estimates for FY2014-15 . The assumptions used to generate our DCF-based target price are detailed on page 97. Under our research model, the Neutral band for non-volatile stocks equals the local hurdle rate (9.5% for Italy), plus or minus 5ppt. Our new target price implies a potential return of 18.1%, which is above the Neutral band; we therefore maintain our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Downside risks to our rating include: (1) a longerthan-expected economic downturn in Italy; (2) failure to expand significantly beyond shoes; (3) execution risk linked to retail roll-out, and (4) an additional sale of shares by the family, which has repeatedly said that it plans to increase the free float and only retain more than 50% (the Della Valle family currently holds c57%).
The plan remains the same, its just taking more time
The plan remains for the Tod's group to become more Asia-driven, more retail-driven and more accessory-driven remains. It's just a slower transformation than we had originally factored in. The cleaning out of wholesale should still imply a decline in wholesale sales in 1H this year. And while Tod's should start commenting on the initial commercial reaction to the first accessory-specific collection from Alessandra Facchinetti (Spring Summer 2014), the real impact of faster-growing categories than shoes should be felt more in the Autumn and into next year.
95
abc
Tod's FY results and forecasts Fiscal year ending December (EURm) Net Sales Change in percent Total production costs as % of sales Change in percent EBITDA as % of sales Change in percent Amortization and reserves EBIT Percent of revenue Change in percent Financial Income Income before Taxes Percent of revenue Change in percent Taxes Tax rate Minority interests Consolidated net Profit Percent of revenue Change in percent EPS diluted (EUR) Variation %
Source: company data, HSBC estimates
2007a 657 14.7% 517 78.7% 16.3% 153 23.3% 11.3% 27 126 19.3% 11.2% 0 127 19.3% 11.9% 48 37.8% 1 77 11.8% 17.1% 2.43 17%
2008a 708 7.7% 567 80.1% 9.6% 155 22.0% 1.6% 30 126 17.8% -0.5% -1 125 17.7% -1.2% 41 33.2% 1 83 11.7% 6.7% 2.66 9%
2009a 713 0.8% 570 79.9% 0.6% 159 22.2% 2.0% 32 126 17.7% 0.5% 0 127 17.7% 1.1% 40 31.9% 0 86 12.0% 3.8% 2.80 5%
2010a 788 10.4% 613 77.9% 7.6% 193 24.5% 21.7% 33 160 20.3% 26.5% 3 163 20.7% 29.1% 53 32.2% 2 109 13.8% 27.3% 3.56 27%
2011a 894 13.5% 677 75.8% 10.4% 232 26.0% 20.4% 38 195 21.8% 21.7% 2 197 22.0% 20.6% 61 31.1% 1 135 15.1% 23.8% 4.41 24%
2012a 963 7.8% 735 76.3% 8.5% 250 26.0% 7.6% 41 209 21.7% 7.3% -1 208 21.6% 5.5% 62 29.8% 0 145 15.1% 7.7% 4.75 8%
2013a 968 0.5% 747 77.2% 1.6% 236 24.4% -5.5% 43 193 20.0% -7.5% -2 191 19.8% -7.9% 57 29.9% 0 134 13.8% -8.0% 4.37 -8%
2014e 1,000 3.4% 769 76.9% 3.0% 246 24.6% 4.2% 47 200 20.0% 3.4% 0 200 20.0% 4.4% 59 29.7% 0 140 14.0% 4.7% 4.58 5%
2015e 1,100 10.0% 834 75.8% 8.4% 282 25.6% 14.5% 50 232 21.0% 16.0% 2 234 21.2% 17.0% 68 29.3% 0 165 15.0% 17.7% 5.39 18%
2016e 1,210 10.0% 903 74.7% 8.4% 322 26.6% 14.3% 54 268 22.1% 15.7% 4 272 22.5% 16.4% 79 28.9% 0 193 16.0% 17.1% 6.31 17%
Tod's FY sales by segment Fiscal year ending December (EURm) Sales by brand Tod's Hogan Fay Roger Vivier & other Total Sales by product category Shoes Leather goods & accessories Apparel Other Total Sales by channel DOS Third parties Total Sales by region Italy Europe Americas (*) Greater China (**) Rest of World Total 348 200 90 20 657 427 139 89 1 657 318 339 657 334 161 66 97 657 357 239 93 19 708 486 127 95 1 708 336 372 708 384 161 59 103 708 349 257 92 16 713 506 111 95 1 713 349 364 713 405 151 46 111 713 407 268 90 23 788 565 123 99 1 788 404 384 788 426 164 53 145 788 488 281 88 37 894 647 145 102 1 894 474 419 894 449 182 62 200 894 570 243 75 76 963 710 166 86 1 963 574 389 963 384 200 82 196 101 963 578 217 58 115 968 740 161 66 1 968 618 350 968 323 208 90 238 109 968 578 221 54 147 1,000 770 162 67 1 1,000 645 355 1,000 329 212 95 250 113 1,000 625 235 57 184 1,100 843 184 71 1 1,100 723 377 1,100 349 227 107 287 130 1,100 677 249 60 224 1,210 923 210 75 1 1,210 809 401 1,210 366 243 121 330 150 1,210 49% 36% 13% 2% 100% 71% 16% 13% 0% 100% 49% 51% 100% 57% 21% 7% na 16% 100% 60% 22% 6% 12% 100% 76% 17% 7% 0% 100% 64% 36% 100% 33% 21% 9% 25% 11% 100% 56% 21% 5% 19% 100% 76% 17% 6% 0% 100% 67% 33% 100% 30% 20% 10% 27% 12% 100% 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014e 2015e 2016e Split in 2009 Split in 2013a Split in 2016e
(*) The group changed its reporting by region as of 2013: Americas now includes Northern and Southern America (**) Greater China is now reported separately Source: company data, HSBC estimates
96
abc
Financials & valuation: TOD'S

Overweight
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital (EURm) 196 192 653 228 1,107 190 47 -181 795 624 196 201 703 265 1,166 195 47 -217 849 641 196 205 777 296 1,244 211 47 -249 912 672 196 206 867 339 1,334 228 47 -292 985 702 211 -51 -51 -83 -77 160 178 -55 -55 -83 -36 123 189 -55 -55 -87 -32 134 218 -55 -55 -102 -43 163 968 236 -43 193 -2 191 191 -57 134 134 1,000 246 -47 200 0 200 200 -59 140 140 1,100 282 -50 232 2 234 234 -68 165 165 1,210 322 -54 268 4 272 272 -79 193 193
10.7 4.7 10.10
Issuer information Share price (EUR) 93.95 TOD.MI 4,001 39 Italy Antoine Belge Erwan Rambourg Target price (EUR) 111.00
1 8. 1
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 4.37 4.37 2.70 26.30 4.58 4.58 2.83 28.07 5.39 5.39 3.33 30.14 6.31 6.31 3.90 32.55 1.5 21.0 17.2 12.3 24.4 20.0 119.2 -22.6 -0.8 1.6 22.2 17.0 12.4 24.6 20.0 -25.4 -0.9 1.7 24.9 18.7 13.7 25.6 21.0 -27.2 -0.9 1.8 27.7 20.4 15.0 26.6 22.1 -29.5 -0.9 0.5 -5.5 -7.5 -7.9 -8.0 3.4 4.2 3.4 4.4 4.7 10.0 14.5 16.0 17.0 17.7 10.0 14.3 15.7 16.4 17.1 12/2013a 12/2014e 12/2015e 01/2016e
Bloomberg (Equity) TOD IM Market cap (EURm) 2,876 Enterprise value (EURm) 2658 Sector Global Luxury Goods Contact 331 5652 4347 Contact 852 2996 6572
Price relative
149 139 129 119 109 99 89 79 69 59 149 139 129 119 109 99 89 79 69 59
Mar-12
Sep-12 TOD'S
Mar-14
Source: HSBC
97
abc
Notes
98
abc
Notes
99
abc
Notes
100
abc
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Antoine Belge and Erwan Rambourg.
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
101
abc
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 20 March 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (33% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 38% 18% (31% of these provided with Investment Banking Services) (30% of these provided with Investment Banking Services)
HSBC & Analyst disclosures

Disclosure checklist Company BURBERRY GROUP CHRISTIAN DIOR COACH HENGDELI HOLDINGS LTD HERMES KERING LUXOTTICA LVMH MONCLER PRADA SPA RICHEMONT(CIE FIN) SALVATORE FERRAGAM SWATCH
Source: HSBC
Ticker BRBY.L DIOR.PA COH.N 3389.HK HRMS.PA PRTP.PA LUX.MI LVMH.PA MONC.MI 1913.HK CFR.VX SFER.MI UHR.VX
Recent price 14.30 134.05 50.25 1.47 237.50 139.60 38.85 128.30 12.90 54.80 81.75 21.00 555.50
Price Date 19-Mar-2014 19-Mar-2014 20-Mar-2014 20-Mar-2014 19-Mar-2014 19-Mar-2014 19-Mar-2014 19-Mar-2014 19-Mar-2014 20-Mar-2014 19-Mar-2014 19-Mar-2014 19-Mar-2014
Disclosure 5, 6, 7 2, 5 4, 5 6 2, 6, 7 1, 2, 4, 5, 6, 7, 11 7, 11 1, 2, 5, 6, 7, 11 1, 2, 5 5, 6, 7 2, 6, 7 7 4
1 2 3 4 5 6 7 8 9 10 11
HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 28 February 2014 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
102
abc
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures
1 2 3 This report is dated as at 20 March 2014. All market data included in this report are dated as at close 18 March 2014, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
103
abc
Disclaimer
* Legal entities as at 8 August 2012 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, Paris branch Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR), Moscow; 15, rue Vernet IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, 75419 Paris Cedex 08, France Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Tlphone: +33 1 40 70 70 40 Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Fax: +33 1 58 13 96 48 Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Website: www.research.hsbc.com Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR This document has been issued by HSBC Bank plc, Paris branch (HSBC) for the information of its customers only. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Department of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be accounted for in the supervisory board or any other committee of those companies. The information and opinions contained within the research reports are based upon rates of taxation applicable at the time of publication but which are subject to change from time to time. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this document is for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (FSCMA). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. HSBC Bank plc, Paris branch is authorised by the Comit des tablissements de crdit et des entreprises d'investissement and regulated by the French Banking Commission and the Autorit des marchs financiers. (231105) In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed Commentary in Canada although other affiliate jurisdictions may term Commentary as either macro-research or research), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). Copyright 2014, HSBC Bank plc, Paris branch, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc, Paris branch. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 077/01/2014
408948
104
Erwan Rambourg* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6572 erwanrambourg@hsbc.com.hk Erwan Rambourg is Global Co-Head of Consumer and Retail Research and is a top ranked analyst covering the luxury and sporting goods sectors. He joined HSBC in January 2005 and in 2011 relocated from London to Hong Kong as many stocks under coverage are now Asia-driven. Before moving to HSBC, Erwan worked for eight years as Marketing Manager in the luxury industry, notably for Richemont and LVMH.
Antoine Belge* Analyst HSBC Bank plc, Paris branch +33 1 5652 4347 antoine.belge@hsbc.com Antoine Belge is Global Co-Head of Consumer and Retail Research and is a top ranked analyst covering the luxury and sporting goods sectors. He has been an analyst since 1998 and joined HSBC in 2003. Prior to this, he worked for seven years in the industry as a Finance Controller for Christian Dior and Chanel.
Cathy Chao* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6570 cathyfchao@hsbc.com.hk Cathy Chao joined HSBC in June 2011 and is an analyst in the Asia-Pacic consumer research team. She began her career at a consulting company in Chicago. Following that, she worked at two major investment banks in Hong Kong where she gained experience in equity derivatives and sell-side equity research. She holds an MBA degree from the Hong Kong University of Science and Technology with a specialization in nance and a bachelor of arts degree in mathematics and economics from the University of Chicago.
*Employed by a non-US afliate of HSBC Securities (USA) Inc, and is not registered/qualied pursuant to FINRA regulations.

Rise of The Yummy

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Rise of The Yummy

Încărcat de

Drepturi de autor:

Formate disponibile

Consumer Brands & Retail Global luxury goods Equity March 2014

Rise of the Yummy

By Erwan Rambourg, Antoine Belge and Cathy Chao

Leaving aside FX, 2014 wont be that bad really

Margins under pressure mostly a short-term issue

Young, Urban, Male: three reasons to rejoice

Emerging markets: better GDP growth, wealth creation and urbanisation

Men: starting to move the needle elsewhere than in China

Ranking luxury stocks

Why we are Neutral on LVMH, Christian Dior, Herms, and Ferragamo

Why we are Neutral on the Swatch Group and Hengdeli

*FY March n+1, ** FY June n+1

Source: HSBC estimates, Bloomberg consensus

Source: HSBC estimates, Bloomberg consensus

Disclosure appendix Disclaimer

Young Urban Males could support luxury growth

Luxottica. Initiate on Emperor Watch & Jewellery at OW

Youth: benefits and issues of selling to a younger consumer

An issue for mainstream brands, an opportunity for alternative brands

Consumers are seriously digitally plugged-in; what about the brands?

Luxury goods: Online search frequency in China

Luxury goods: Interest in purchasing online in China

Very much interested

Source: KPMG, TNS

Source: KPMG, TNS

210 7.4 8.3 33.4

15.9% 46.6% 45.8% 35.9%

591 15.3 16.9 69.5

44.1% 71.6% 75.6% 66.1%

Emerging markets: stronger GDP growth, wealth creation and urbanisation

Long-term wealth creation

The swelling middle class

2011 Middle class share 2030 Middle class share

2011 Upper income share 2030 Upper income share

Apart from China, men to move the needle

100% 80% 60% 40% 20% 0% 1995

Men: opportunities and some issues

Ralph Laurens mens store Hong Kong

Luxury industry outlook & valuation

constant currency industry sales growth after 8% in 2013

depreciated further against the EUR

barriers to entry in soft luxury

2014: sales growth still solid, but margins under pressure

Trends by geographic region

2014e 30% 8% 19% 11% 32% 100% 6% 6% 10% 14% 11% 9% 2% 0% 2% 2% 4% 9%

2015e 29% 8% 19% 12% 33% 100% 5% 3% 9% 17% 12% 9% 1% 0% 2% 2% 4% 9%

Margins under pressure in 2014

EUR to JPY since 1 January 2005

EUR to CHF since 1 January 2005

Key industry themes

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

Source: HSBC estimates

Source: Thomson Reuters Datastream

Sector valuation history (forward PE) *

2007 market peak

Average since 01/01/2003: 17.0x

Ranking the luxury stocks

other Luxottica are our favourite stocks

lack short-term catalysts

Three preferred stocks: Burberry, Richemont, Luxottica

Hard luxury Overweights: Tiffany, Emperor Watch & Jewellery

Soft luxury Overweights: Prada, Kering, Tods, Coach, Hugo Boss