Você está na página 1de 56

CONSUMER DISCRETIONARY | Overweight

Hong Kong Cosmetics Retailers 28 April 2011

Beauty never sleeps


Hong Kong’s cosmetics retail market is flourishing. The Analysts
Claudia Ching
city is a favourite destination for mainland shoppers and (852) 2532 2528
claudiaching@ccbintl.com
will continue to be so as the renminbi appreciates and the
Forrest Chan, CFA
government expands the scope of the visa scheme. (852) 2532 6743
forrestchan@ccbintl.com
Meanwhile, domestic consumption is about to take off
Timon Tai
thanks to a thriving local economy and government cash (852) 2532 2574
timontai@ccbintl.com
payouts. Bonjour (653 HK, Outperform) and Sa Sa
Timothy Sun
(178 HK, Outperform), enjoying both brand recognition (852) 2532 6746
timonthysun@ccbintl.com
and dominant market positioning, stand to benefit from
prevailing trends. Valuations remain attractive, with
23-25% EPS CAGR for CY10-13F and over 4% dividend
yield. We initiate coverage on both retailers with an
Outperform rating.

Please read the analyst certification and other important disclosures on last page
Hong Kong Cosmetics Retailers 28 April 2011

Table of Contents

Beauty never sleeps .................................................................................................................................3

Investment summary ................................................................................................................................4

Far from saturated....................................................................................................................................7

Buoyant outlook for domestic consumption ............................................................................................12

Dominant players continue to lead..........................................................................................................14

Key industry risks ...................................................................................................................................17

SWOT analysis.......................................................................................................................................18

Bonjour Holdings (653 HK) .....................................................................................................................19

Sa Sa International (178 HK)..................................................................................................................37

2
Hong Kong Cosmetics Retailers 28 April 2011

Hong Kong Cosmetics Retailers


Sector Rating: Overweight
Beauty never sleeps (maintained)

 We initiate coverage on the Hong Kong cosmetics retail


sector with Outperform company ratings on its two Valuations summary
dominant players: Bonjour (653 HK) and Sa Sa Bonjour (653 HK) Sa Sa (178 HK)
International (178 HK), popular brands among both local
Rating Outperform Outperform
and mainland consumers.
Share price (HK$)* 1.35 4.61
Target price (HK$) 1.60 5.45
 Hong Kong is well positioned to keep its title as the “top
Upside/downside (%) 24.1 22.9
shopping destination for cosmetics products”, given the
Market cap (US$m) 517 1,727
city’s diversified and comprehensive product offerings,
EPS growth – CY11 (%) 23 26
relatively cheap prices, quality assurance and the
EPS growth – CY12 (%) 22 23
availability of parallel trade cosmetics.
PE – CY11 (x) 16.8 23.3
PE – CY12 (x) 13.7 18.9
 The contribution from mainland tourists will only grow
Yield – CY11 (%) 4.7 4.3
stronger on the back of continued renminbi appreciation
* Share prices as at close on 28 April 2011
and the widening scope of the visa scheme. Greater
Source: Bloomberg, CCBIS estimates
numbers of mainland tourists with more and more to spend
will underpin Bonjour and Sa Sa’s sales growth.

 We view concerns over the potential change in China’s


import tax as misplaced and we are confident Hong Kong
will remain a preferred cosmetics shopping destination for
mainlanders.

 Local shopping sentiment is improving. The domestic


economy is strong and we anticipate the proposed
government cash payout will stimulate local consumer
discretionary spending, putting Hong Kong retailers on track
for growth.

 Rent hikes have, by and large, been mitigated by robust


same-store sales growth and constant gross margin
expansion achieved through the contribution of additional
private labels and exclusive brands, two areas Bonjour and
Sa Sa have been focusing on.
Claudia Ching
 Both companies are committed to allocating greater (852) 2532 2528
resources to developing their mainland businesses, which claudiaching@ccbintl.com
we believe have considerable long-term potential.
Forrest Chan, CFA
 Earnings visibility is high for both retailers on the back of (852) 2532 6743
forrestchan@ccbintl.com
sustainable sales and margin enhancement. Valuations
remain reasonable, offering attractive dividend yields and
Timon Tai
over 23% earnings CAGR for CY10-13F. In our view, most (852) 2532 2574
market concerns have been priced in and we see long-term timontai@ccbintl.com
investment opportunities for the industry leaders.
Timothy Sun
(852) 2532 6746
timonthysun@ccbintl.com

3
Hong Kong Cosmetics Retailers 28 April 2011

Investment summary

We initiate coverage on the Hong Kong cosmetics sector with Outperform ratings on
the two leading cosmetics chain operators in Hong Kong: Bonjour (653 HK,
Outperform) and Sa Sa International (178 HK, Outperform). Bonjour and Sa Sa are
both sprawling one-stop shops carrying a long list of high-profile international brands
and niche domestic beauty products. The two chain operators own more than half the
total market share in Hong Kong and enjoy strong brand recognition and popularity
among local and mainland consumers. In our view, the two companies are good
tourist plays, well placed to capture rising mainland spending on cosmetics goods.

Our bullish view rests on Hong Kong’s healthy industry growth outlook. Hong Kong is
considered the “heaven of cosmetics” in Asia, on the strength of its diversified mix of
international and domestic brands offered at a wide range of prices. This combination
of popular brands at competitive prices has, over the years, appealed to mainland
customers who have shown a strong preference for shopping in Hong Kong. Product
authenticity and quality control tend to be better in Hong Kong compared with
mainland China, providing more reasons for mainland customers to engage in
cross-border shopping sprees. The availability of products through parallel trade
(more on this later), a practice banned in China, offers yet another attraction to
mainland shoppers. Most importantly, Hong Kong’s duty-free status ensures that
skincare products and cosmetics remain competitively priced and are popular
purchases for visitors.

We believe the contribution from mainland customers will only strengthen over time,
boding well for Hong Kong cosmetics players. The influx of mainland travelers is
expected to remain high due to the widening scope of the travel scheme. Hong Kong
cosmetics retailers will also benefit as the renminbi continues to appreciate. A
stronger renminbi translates to greater purchasing power for mainland tourists. It also
means more Hong Kong consumers will be inclined to shop in town.

We believe rising rents can be mitigated by steady same-store sales growth (SSSG)
and gross margin improvement through cost controls and the shift in sales mix
towards higher-margin in-house brands and/or exclusive distribution products.
Industry leaders, Bonjour and Sa Sa, will enjoy margin improvement as a result of
these trends.

Besides purchases by mainland customers, Hong Kong is benefitting from improving


shopping sentiment at the local level, with local Hong Kong consumers exhibiting a
greater propensity to spend. The local retail market remains strong, supported by low
unemployment, steady wage growth and the wealth effect. Local consumer sentiment
will also receive a boost from the government’s HK$6,000 cash payout. Both Bonjour
and Sa Sa are committed to allocating more resources to developing their mainland
businesses, which we believe have considerable long-term potential.

In our opinion, most market concerns have been priced in, in particular the potential
that the Chinese mainland import tax will be relaxed, a fear we believe is misplaced.
Earnings visibility remains high for Bonjour and Sa Sa and both are beginning to show
highly attractive valuations. Trading at 14-19x CY12F PE, valuations remain
reasonable. Having yields in the range of 4% to 7% in CY11-13F, both counters are
promising investment picks to capture sustainable development within Hong Kong’s
cosmetics sector.

4
Hong Kong Cosmetics Retailers 28 April 2011

Valuations summary (continued)


Stock Share price Market cap 3M average value traded EPS growth (%)# PE (x) PE/G (x) Yield (%) P/B ROAE Net cash/share Net gearing
Company Code (local currency) (US$m) (US$m) CY11 CY12 CY11 CY12 CY11 CY11 CY11 CY11 (%) (%)
HK retailers
Lifestyle 1212 HK 21.35 4,604 5 7 15 23.7 20.7 3.2 1.7 4.4 19.5 3 Net cash
Luk Fook 590 HK 28.75 2,002 8 26 5 16.9 16.0 0.6 2.4 4.3 30.2 Net debt 2
Sa Sa* 178 HK 4.80 1,727 4 26 23 23.3 18.9 0.9 4.3 10.0 44.1 5 Net cash
Texwinca 321 HK 8.56 1,495 2 14 4 9.3 9.0 0.7 6.9 2.1 24.5 Net debt 19
I.T* 999 HK 6.66 1,034 4 32 21 17.6 14.5 0.6 2.8 3.4 16.9 6 Net cash
Emperor Watch & Jewellery 887 HK 1.12 851 4 233 31 14.0 10.7 0.1 2.1 2.3 19.5 6 Net cash
Bonjour* 653 HK 1.37 517 2 23 22 16.8 13.7 0.7 4.7 15.5 99.6 4 Net cash
Average 52 17 17.4 14.8 1.0 3.6 6.0 36.3

China specialty retailers/other brands


Belle* 1880 HK 15.10 16,343 26 11 18 28.7 24.3 2.6 0.9 5.7 21.0 5 Net cash
Gome* 493 HK 2.77 5,980 25 24 19 16.0 13.5 0.7 1.9 2.5 16.1 11 Net cash
Hengdeli* 3389 HK 4.54 2,562 7 19 21 24.6 20.4 1.3 1.5 3.8 16.9 1 Net cash
Bosideng 3998 HK 2.37 2,364 9 20 4 10.1 9.7 0.5 7.9 2.2 20.8 35 Net cash
China Lilang* 1234 HK 11.10 1,710 3 39 21 20.4 16.8 0.5 2.4 5.3 28.0 2 Net cash
Trinity* 891 HK 8.62 1,874 6 35 31 29.5 22.4 0.8 1.9 5.9 21.0 Net debt 10
Boshiwa 1698 HK 5.19 1,382 2 44 47 20.6 14.0 0.5 1.4 2.9 14.9 19 Net cash
Ports 589 HK 21.30 1,554 5 19 22 18.2 15.0 0.9 3.2 5.3 31.7 2 Net cash
Daphne 210 HK 6.32 1,328 4 30 20 13.4 11.2 0.5 2.1 3.0 23.8 14 Net cash
Pou Sheng 3813 HK 1.17 644 0 96 28 11.3 8.8 0.1 NA 0.8 6.9 Net debt 4
Sparkle Roll* 970 HK 1.50 573 2 40 33 19.0 14.3 0.5 1.1 3.3 17.1 1 Net cash
Evergreen 238 HK 3.80 479 1 (9) 26 15.5 12.3 NA 2.3 2.0 13.4 36 Net cash
China Nepstar NPD US 3.63 378 1 295 (1) 45.9 46.5 0.2 4.0 2.1 4.3 46 Net cash
Huiyin App 1280 HK 1.80 242 1 56 (35) 5.9 9.1 0.1 NA 1.0 13.0 Net debt 40
Average 51 18 20.0 17.0 0.7 2.5 3.3 17.8
(continued on following page)

5
Hong Kong Cosmetics Retailers 28 April 2011

Valuations summary
Stock Share price Market cap 3M average value traded EPS growth (%)# PE (x) PE/G (x) Yield (%) P/B ROAE Net cash/share Net gearing
Company Code (local currency) (US$m) (US$m) CY11 CY12 CY11 CY12 CY11 CY11 CY11 CY11 (%) (%)
Department stores
Golden Eagle 3308 HK 20.80 5,189 13 27 27 28.5 22.4 1.1 1.2 7.8 30.0 5 Net cash
Parkson Group 3368 HK 11.98 4,321 10 20 22 24.3 19.8 1.2 1.9 5.4 24.4 8 Net cash
Intime 1833 HK 12.00 2,943 6 1 27 26.2 20.7 34.0 1.6 3.6 14.2 Net debt 25
Maoye 848 HK 3.89 2,574 2 22 42 24.4 17.2 1.1 1.2 3.7 14.7 Net debt 45
Springland* 1700 HK 6.68 2,143 2 66 30 23.2 17.9 0.4 1.7 3.4 15.5 10 Net cash
NWDS China 825 HK 6.96 1,506 2 10 8 18.2 16.9 1.8 2.3 2.2 12.6 31 Net cash
PCD Stores 331 HK 2.11 1,144 3 26 28 18.1 14.1 0.7 1.7 2.9 17.0 4 Net cash
Shirble Store 312 HK 1.53 491 1 (2) 26 13.4 10.7 NA 2.3 2.0 15.1 56 Net cash
Average 21 26 22.0 17.5 5.7 1.7 3.9 17.9

Sportswear brands
ANTA Sports* 2020 HK 12.22 3,911 12 15 12 14.6 13.0 1.0 4.1 4.1 29.4 16 Net cash
China Dongxiang* 3818 HK 2.60 1,891 7 (21) 10 10.9 9.9 NA 6.4 1.6 15.1 52 Net cash
Li Ning* 2331 HK 13.78 1,862 9 (28) 7 15.4 14.4 NA 2.6 3.3 22.4 9 Net cash
Peak Sport* 1968 HK 6.18 1,664 4 21 15 11.2 9.8 0.5 3.6 2.7 26.1 23 Net cash
Xtep* 1368 HK 5.38 1,502 3 18 15 10.5 9.1 0.6 4.8 2.6 26.4 24 Net cash
361 Degrees* 1361 HK 5.27 1,399 3 18 16 8.0 6.9 0.5 5.7 2.1 28.2 23 Net cash
Average 4 12 11.8 10.5 0.6 4.5 2.7 24.6
# Calculated in HK dollar terms

* Denotes CCBIS estimates


Note: Based on share closing prices on 28 April 2011
Source: Bloomberg, CCBIS estimates

6
Hong Kong Cosmetics Retailers 28 April 2011

Far from saturated

Cosmetics sales growth Hong Kong enjoys a well-earned reputation as the top overseas destination for
outpacing total retail sales growth mainland shoppers seeking high quality and safe cosmetics products. It is estimated
in Hong Kong that mainland tourists accounted for up to 30% of Hong Kong’s retail sales in
cosmetics, skincare and toiletry products in 2009. The strong franchise – “Asia’s
shopping paradise“ – has supported exceptional growth within the cosmetics retail
segment, which has achieved an 18% CAGR in value terms since 2007, compared
with the already high CAGR of 12% for the overall retail market in the territory. Such
outperformance is bound to continue as increased mainland spending drives the retail
market in Hong Kong in an environment where the renminbi is appreciating and with
the relaxation of the tourist visa scheme; local cosmetics retailers are well positioned
to take advantage of the consumption boom.

Total sales and growth of Hong Kong’s cosmetics market

HK$b
10 35%
9
30%
8
7 25%

6 20%
5
4 15%

3 10%
2
5%
1
0 0%
31-Mar-07 31-Aug-07 31-Jan-08 30-Jun-08 30-Nov-08 30-Apr-09 30-Sep-09 28-Feb-10 31-Jul-10 31-Dec-10
Cosmetics sales in HK (LHS) YoY (RHS)

Source: Bloomberg

“Cosmetics Central” in the eyes of mainland shoppers

Hong Kong is the number-one Judging by the influx of mainlanders traveling to Hong Kong every year, the city has
shopping destination for become the overseas shopping destination of choice of mainlanders, a place where
mainland visitors shoppers spend a considerable portion of their time and budgets. Mainland travelers
made up 64% of total visitor arrivals in Hong Kong in 2010, with a rate of growth
outpacing total travelers visiting Hong Kong last year. The Hong Kong Tourism Board
projects visitor arrivals will increase 10% YoY to 40m, and mainland visitor growth will
continue to rise by 12% YoY to 25m in 2011.

7
Hong Kong Cosmetics Retailers 28 April 2011

Total tourist arrivals to Hong Kong and growth Mainland tourist arrivals and growth
m m
6.6 45% 4.8 60%

5.5 4.0
45%
30%
4.4 3.2
30%
3.3 15% 2.4
15%
2.2 1.6
0%
0%
1.1 0.8

0.0 (15)% 0.0 (15)%


Oct-07

Oct-09

Oct-07

Oct-09
Jan & Feb-07
Apr-07
Jun-07
Aug-07

Dec-07
Mar-08

Jul-08
Sep-08

Jan & Feb-09


Apr-09
Jun-09
Aug-09

Dec-09
Mar-10

Jul-10
Sep-10

Jan & Feb-11

Jan & Feb-07


Apr-07
Jun-07
Aug-07

Dec-07
Mar-08

Jul-08
Sep-08

Jan & Feb-09


Apr-09
Jun-09
Aug-09

Dec-09
Mar-10

Jul-10
Sep-10

Jan & Feb-11


May-08

Nov-08

May-10

Nov-10

May-08

Nov-08

May-10

Nov-10
Total visitor arrivals (LHS) Total visitor arrivals YoY (RHS) China Visitor arrivals (LHS) China visitor arrivals Yoy (RHS)

Source: Bloomberg, CEIC, Hong Kong Tourism Board Source: Bloomberg, CEIC, Hong Kong Tourism Board

Mainland travelers on average spend over 70% of their total spending (equivalent to
HK$3,500) on shopping during their stays. On the basis of rising income levels, the
propensity of mainland tourists to spend, and ever-more-buoyant sentiment, we
expect per capita spending from mainland shoppers to continue to strengthen and
support local retail sales.

Mainland spending on shopping Per capita spending on shopping from mainland visitors

HK$m HK$
90,000 77% 8,000 20%

7,000 15%
75,000 75%
6,000 10%
60,000 73% 5%
5,000
0%
45,000 71% 4,000
(5)%
3,000
30,000 69% (10)%
2,000 (15)%
15,000 67%
1,000 (20)%
0 65% 0 (25)%
2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010
Mainlanders spending (LHS) China visitor per capita spending (LHS)
Mainlanders spending on shopping (LHS) China visitor per capita spending on shopping (LHS)
Shopping spending as % of overall spending (RHS) China visitor per capita spending on shopping YoY (RHS)

Source: CEIC Source: CEIC

Cosmetics products are often at the top of the shopping lists of mainland tourists for
several compelling reasons:

 Competitive prices: The Chinese government has imposed import tariffs on


top of a 17% VAT, a 30% consumption tax and product registration costs on all
foreign cosmetic products in China. These extra costs do not apply in
Hong Kong. There are also no import duties on cosmetics and skincare
products in Hong Kong and registration is not required for cosmetics products.
This has resulted in price arbitrage in the 70% range. The cheaper prices make
Hong Kong cosmetics retailers more competitive.

8
Hong Kong Cosmetics Retailers 28 April 2011

Import duties for major cosmetics products in China


HS Code Product Import duty (%)
33030000 Perfume 10.0
33041000 Lip gloss and lipstick 10.0
33042000 Eye makeup 10.0
33043000 Manicure and pedicure products 10.0
33049100 Face powder puffs and pads 10.0
33049900 Other beauty or makeup products including lotions, sun-tan oil 6.5
33051000 Shampoo 6.5
33053000 Mousse 10.0
Source: Custom General Administration, CCBIS

 Comprehensive product offerings. There is a wide variety of cosmetics


products on offer in Hong Kong in part because most local retailers closely
follow overseas trends in the hopes of enticing a market highly knowledgeable
of, and receptive to, foreign products. Government regulations restrict the
number of brand offerings in China leading mainland tourists to travel to Hong
Kong to purchase personal care products from the wide variety on offer there. In
China, cosmetics manufacturers must have both a cosmetics manufacturer’s
hygiene permit and a cosmetics production license. Both of these require testing
that is time consuming and costly, and when the license is finally secured it lasts
only four years.

 Quality assurance. We believe mainland Chinese visitors are attracted to


purchase cosmetics products in Hong Kong over China, given the perceived
authenticity and reliability of the Hong Kong products, which are protected by
well-established and rigorous intellectual property laws, which in the judgment
of many affluent Chinese consumers, outweigh price considerations.

 Parallel trade. Parallel imports, known as “grey markets”, refer to a


cross-boarder and non-counterfeit products sold without official permission from
the intellectual property owner. The Chinese government has banned all
cosmetics retailers from selling parallel products within China. However, given
that parallel products are typically 30-40% cheaper than sanctioned distributed
products, the favorable prices attract a larger customer pool to purchase in
Hong Kong.

Benefitting from the expansion of the individual visit scheme and


appreciation of the renminbi

China’s relaxed visa scheme has In July 2003, China launched its individual visit scheme (IVS), a set of regulations
been a boon to Hong Kong permitting mainland tourists to visit the Hong Kong Special Administrative Region
retailers as more mainland individually rather than as part of a tour. As we elaborate below, the program has
visitors cross the border since been expanded several times, resulting in ever larger numbers of mainland
tourists descending on Hong Kong each year.

9
Hong Kong Cosmetics Retailers 28 April 2011

IVS tourist arrivals

m
7 54%

6 44%

4 34%

24%
3
14%
2
4%
1 (6)%

0 (16)%
Mar-07 Sep-07 Apr-08 Oct-08 May-09 Nov-09 Jun-10 Dec-10
Total visitor arrivals (LHS) China visitor arrivals (LHS)
Total visitor arrivals YoY (RHS) China visitor arrivals YoY (RHS)

Source: Hong Kong Post, Hong Kong Tourism Board

Strong likelihood of adding more The most recent and impactful change to the IVS has been the expansion of the
cities to the IVS list scheme to include non-Guangdong residents in Shenzhen, which in our view
contributed significantly to the strong pickup in the Hong Kong retail market in 2010.
Due to the success of the IVS, we anticipate the Chinese government will further
loosen its visa policy. A potential form of relaxation scheme might be implemented for
other major mainland cities, including those in the three provinces of northeast China
and the provinces of Zhejiang and Jiangsu.

Individual visit scheme city coverage


Effective date Individual visit scheme
28 July 2003 Donguang, Foshan, Zhongshan, Jiangmen
20 August 2003 Guangzhou, Shenzhen, Zhuhai, Huizhou
1 September 2003 Shanghai, Beijing
1 January 2004 Shantou, Chaozhou, Meizhou, Zhaoqing, Qingyuan, Yunfu
1 May 2004 Shanwei, Maoming, Zhangjiang, Shaoguan, Jieyang, Heyuan, Yangjiang
1 July 2004 Nanjing, Suzhou, Wuxi, Hangzhou, Ningbo, Taizhou, Fuzhou. Xiamen, Quanzhou
1 March 2005 Tianjin, Chongqing
1 November 2005 Chengdu, Jinan, Dalian, Shenyang
1 May 2006 Nanchang, Changsha, Nanning, Haikou, Guiyang, Kunming
1 January 2007 Shijiazhuang, Zhengzhou, Changchun, Hefei, Wuhan
1 April 2009 launch of year-round multiple-entry visa arrangements for Shenzhen residents
15 December 2010 non-Guangdong residents in Shenzhen
Source: China News, China National Tourist Office

The renminbi has appreciated 27% against the Hong Kong dollar, which since 2005
has been pegged to the US dollar. Revaluation of the renminbi has significantly
enhanced the purchasing power of mainland shoppers visiting Hong Kong, fuelling
their shopping sprees, encouraging them to visit more often and spend more on each
trip. Meanwhile, local consumers have also shown a greater propensity to shop within
their home market. As the renminbi has appreciated, so too has strength in the Hong
Kong retail market. In late 2009, when the renminbi began to take off, Hong Kong
shops suddenly swelled with Chinese tourists. CCBIS estimates that the renminbi will
appreciate by 7%, 5% and 5% in 2011-2013, respectively, which, in our view, will
result in a feeding frenzy by mainland shoppers within the malls and retail outlets of
Hong Kong.

10
Hong Kong Cosmetics Retailers 28 April 2011

Renminbi vs. Hong Kong dollar

HK$/RMB
1.20

1.15

1.10

1.05

1.00

0.95
Jan-06 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11

Source: Bloomberg

No fear of removal of cosmetics tariff

Worries over the removal of Local media is rife with speculation that China may reduce or even remove altogether
cosmetics tariff are overplayed the 50% import tariff currently imposed on cosmetics and other luxury products, a
move that would add greater incentive to mainland consumers to shop locally. This
has been cause for concern for Hong Kong retailers and investors. Our advice to them
would be not to get too worked up over these rumors based for the following factors.

1. If the tariff was reduced or even cut, the spread between selling prices in China
and Hong Kong for the same products would likely remain material, due to
China’s VAT and consumption tax as well as the appreciating renminbi.

2. Brands operating in the mid-to-upscale market are unlikely to lower their selling
prices in China for fear of diluting their brand image and brand equity, even if
the tariff were lowered.

11
Hong Kong Cosmetics Retailers 28 April 2011

Buoyant outlook for domestic consumption

Hong Kong’s retail market has taken a sharp upturn since 2009 as the impact of the
financial crisis subsided. Besides the marked increase in tourist spending, robust
consumption by local consumers has been a key contributor and we believe the
prospects for strong local consumption patterns remains promising.

Local economy remains buoyant, There are several reasons we think the favorable trends we are seeing will continue.
creating a healthy retail First, wage and household income growth is accelerating across the board for
environment Hong Kong workers. In the meantime, the jobless rate in Hong Kong is at 3.4% in
March 2011, its lowest level since 2009. Consumers are confident and the economy
has the appearance of being quite stable. Add to the mix the buoyant property market
and one can see why consumption patterns have been rampant of late.

Hong Kong retail sales growth Hong Kong nominal wage growth
HK$b HK$
40 40% 165 5%
35%
4%
30% 160
30 25% 3%
155
20% 2%
15%
20 150 1%
10%
5% 0%
145
10 0% (1)%
(5)% 140
(2)%
(10)%
0 (15)% 135 (3)%
Oct-07

Oct-08

Oct-09

Oct-10
Apr-07
Jun-07
Aug-07

Dec-07
Feb-08
Apr-08
Jun-08
Aug-08

Dec-08
Feb-09
Apr-09
Jun-09
Aug-09

Dec-09
Feb-10
Apr-10
Jun-10
Aug-10

Dec-10
Feb-11

Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Retail sales (LHS) Retail sales YoY (RHS) Nominal wage value (LHS) YoY (RHS)

Source: Bloomberg, Census and Staistics Department Source: Bloomberg

Hong Kong monthly unemployment rate Centa-City leading index CCL


5.8% 100

5.4% 90

5.0% 80

4.6% 70

4.2% 60

3.8% 50

3.4% 40

3.0% 30
Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bloomberg, Census and Staistics Department Source: Centadata

12
Hong Kong Cosmetics Retailers 28 April 2011

Local retailers benefit from We expect local consumption in Hong Kong to receive an additional boost from the
“wealth-sharing” windfall government’s plan to distribute HK$6,000 in cash handouts some time in the next few
months. This is in addition to the HK$6,000 tax rebate in 2011 to all Hong Kong’s
permanent residents as part of its relief measures. These disbursements are
unprecedented and will have a strong and positive impact on Hong Kong’s consumer
market, in our view. It is estimated that HK$41b in total will be given away, a sizeable
amount when one considers that the entire Hong Kong retail market amounted to
HK$325b in 2010.

13
Hong Kong Cosmetics Retailers 28 April 2011

Dominant players continue to lead

Strong franchises behind industry We believe the best way to play the cosmetics theme in China and Hong Kong is
leadership through Hong Kong-listed players, Bonjour and Sa Sa, the two leading cosmetics and
personal product retail store chains in Hong Kong, enjoying strong consumer
recognition both domestically and among mainland shoppers. Their flexible operating
models and popular franchises keep them ahead of peers who can only envy their
wider customer base.

Together owning over half of the cosmetics market share in Hong Kong and an
extensive network covering major shopping areas within the city, both Bonjour and
Sa Sa are well positioned to accommodate the rising number of mainland tourists who
seem to have an insatiable appetite for branded cosmetics products, an area both
companies specialize in. Both retailers are among the top-ten favourite brands in
Hong Kong according to Retail Asia Magazine. They are gaining wide popularity and
recognition among mainland customers. With consumers now exhibiting a greater
propensity to spend, demand for cosmetics products will only increase and support
long-term growth for the two dominant players.

A new dimension of the cosmetics retailing business

A major attraction of Bonjour and Sa Sa in the eyes of locals and visitors is their focus
on “cosmeceuticals”, a term coined to define a group of products that combine
cosmetics with vitamins, herbs and pharmaceuticals.

Creating a “one-stop” shopping Both operators derive more than 25% of their sales from non-cosmetics related
experience products using a “one-stop cosmetics specialty store” concept. Their range of
products includes not only cosmetics but also spans haircare, health food and beauty
accessories. Take the example of the ingredient aloe vera, which has been used
extensively in both medical and beauty treatments in the cosmetic/healthcare
community. We find it in slimming teas, diet pills, fiber pills and meal replacement
drinks.

Hong Kong has become a quality Milk powder is also popular on the shopping lists of mainland visitors who still have
milk powder hub the melamine-tainted milk powder scandals of two years ago on their minds. Mainland
parents cross the border to snatch up milk products in Hong Kong, secure in the
knowledge that Hong Kong’s regulatory regime has put great emphasis on food
quality and safety.

Bonjour was one of the earliest cosmetics retailers to offer Japanese and Australian
baby milk formula in Hong Kong. The retailer has a pool of loyal customers and wide
recognition among mainland shoppers given its comprehensive brand offerings and
stable supply.

14
Hong Kong Cosmetics Retailers 28 April 2011

Bonjour slimming products Japanese milk powder distributed by Bonjour

Source: Bonjour’s website Source: Bonjour’s website

Expanding into the growing male One interesting trend we have been following for some time is the upswing in demand
grooming market for men’s skincare products, driven in large part by the desire to gain a competitive
edge within Hong Kong’s highly competitive workplace. The male grooming market is
a rapidly growing segment with much potential. Both Bonjour and Sa Sa are on top of
this trend and are marketing their respective products accordingly. Witness Sa Sa’s
“Methode Swiss” and “Suisse Programme”, both established popular male cosmetics
lines. Although products geared to the male market only accounted for 13% of the
total Hong Kong cosmetics market in 2008, the segment is expected to see
exponential growth over the next few years.

Suisse Programme men’s product set Methode Swiss men’s care set

Source: Sa Sa’s website Source: Sa Sa’s website

In addition to the traditional distribution channels, Bonjour and Sa Sa have the added
advantage of being more flexible in offering different tiers of cosmetics brands. For
example, they sell branded cosmetics imported from parallel import sources and/or
grey market dealers and mass-market non-branded products from Japan, Taiwan,
Korea, US and the EU.

15
Hong Kong Cosmetics Retailers 28 April 2011

Comprehensive product offerings An extensive range of products coupled with many tiers of cosmetics and
non-cosmetics allow both Bonjour and Sa Sa to cater to a wide range of different
consumer needs. Both Bonjour and Sa Sa carry over 15,000 stock-keeping units
(SKU) representing over 400 local and international cosmetics brands, with a broad
price range from mass market to premium.

The popularity of specialty retailers has risen in recent years on the wave of “one-stop
convenience shopping”. According to Datamonitor, specialty retailers lead Hong
Kong’s cosmetics retailing market with a 42% share, followed by supermarkets (19%),
department stores (17%), independent retailers (10%) and pharmacies (5%) in 2009.

Extensive presence in major tourist spots

Strong network established in To capture the growing spending power of mainland shoppers, Bonjour and Sa Sa
major tourist shopping areas have established wide coverage over prime shopping precincts in Mongkok,
Tsimshatsui and Causeway Bay. Bonjour and Sa Sa often establish more than one
shop within certain districts popular with travelers, so it should not come as a surprise
that over 60% of stores for both retailers are located in tourist areas, constituting more
than one-third of both retailers’ total sales in Hong Kong.

Growing penetration into Besides expanding network coverage into major tourist spots, Bonjour and Sa Sa are
residential communities to eyeing residential communities, thereby creating more opportunities to capture
capture local consumer sales growing demand from local consumers.

Since 1997, there have been more than 620,000 mainlanders residing in Hong Kong,
and the numbers are swelling. Areas on Hong Kong’s peripheries are popular
destinations, including Shatin, Sheung Shui and Tseung Kwan O. Anticipating
growing demand, Bonjour and Sa Sa have increased their store penetration into these
residential areas.

Growing importance of private labels and exclusive brands

Bonjour and Sa Sa currently sell over 100 brands or 2,000 SKUs from private labels
and labels with exclusive distribution rights. These private labels are exclusively
owned by the individual retailers, who have full authority to set their own prices and
gain attractive margins, often up to 80 or 90%.

Gross profit margins for Sa Sa and Bonjour products


Sourcing Gross profit margin range (%)
Private labels and products with exclusive distribution rights 80 – 90
Purchases from sole agents in Hong Kong 25 – 40
Parallel imports from overseas 5 – 15
Source: Bonjour, Sa Sa

House brands offer Bonjour and Bonjour and Sa Sa have placed heavy emphasis on promoting their self-owned/
Sa Sa higher margins exclusive products. Sales contribution from exclusive or self-owned brand products
jumped from 20% in FY09 to 22% in FY10 for Bonjour and increased from 38% in
FY10 to 40% in 1HFY11 for Sa Sa.

Going forward, management from both retailers are keen to introduce more exclusive
products to the market, a strategy designed to garner higher margins and profitability
through better marketing and product mix adjustments. The on-going gross margin
uptrend provides Bonjour and Sa Sa with an important buffer against rising rents.

16
Hong Kong Cosmetics Retailers 28 April 2011

Key industry risks

Policy risk on China visa scheme. Approximately 50% of Sa Sa’s retail sales and
35% of Bonjour’s retail sales in Hong Kong come from mainland tourists. This leaves
both companies vulnerable to any adjustments in China’s travel regulations. Although
the Chinese government is unlikely to change the current individual visit scheme, any
tightening in this regard would affect inbound visitor volume to Hong Kong, reducing
foot traffic and ultimately lowering Sa Sa and Bonjour sales. The market is anticipating
a further relaxation on visas to Hong Kong in other China regions.

Exposure to parallel products. Parallel imports, also known as “grey markets”, refer
to cross-boarder non-counterfeit products sold without official permission from the
intellectual property owners. Parallel trade accounts for over 20% of products sold by
Bonjour and Sa Sa, so their sales and operating models will be hit if the Hong Kong
government prohibits parallel trade activities, an outcome very hard to predict.
Nonetheless, Bonjour and Sa Sa are switching their focus to expanding their
self-owned brands, which we believe would minimize the reliance on parallel
products.

Rising rents. Rental pressure is a growing risk for retailers, and Bonjour and Sa Sa
are no exceptions. Buoyed by the strong asset market in Hong Kong, rentals for prime
retail locations have risen over 20-50% on average over the last few years. Bonjour
and Sa Sa have wide exposure to rental stores and are, therefore, susceptible to
rising rents, which could ultimately affect its pace of expansion. Both companies need
to sustain healthy levels of same-store sales growth to avoid seeing their rental
expense ratios get out of hand. For now, Bonjour and Sa Sa enjoy significant
bargaining power facilitated by wide brand recognition. They are likely to remain in a
good position to secure relatively reasonable rental terms.

Currency risk. Although the risk of renminbi depreciation is limited, any slowdown in
renminbi appreciation will hurt the sentiment of mainland shoppers, and as a result
affect tourist spending on Bonjour and Sa Sa products. Moreover, Sa Sa and Bonjour
source some of their products directly from Europe, Japan, Korea and the U.S. and
are thus exposed to currency fluctuations. Sa Sa also has overseas business
transacted in the local currency of the country where the business was conducted.
Neither cosmetics retailer is engaged in foreign currency hedging activity.

Risks related to China business. The China business will expose Bonjour and
Sa Sa to new risks given the operating landscape in China is very different from that
of Hong Kong insofar as it has much greater exposure to regulatory, political and
currency fluctuation risks. For one, the prolonged product registration process would
create a major obstacle for retailers wishing to import cosmetics products. Moreover,
China does not allow parallel trading and could impose heavy fines on offenders.

17
Hong Kong Cosmetics Retailers 28 April 2011

SWOT analysis

Strengths

 Strong recognition by Chinese mainlanders and recognizable household brands


in Asia

 Hefty cash pile on top of strong balance sheet

 Wide range of product offerings covering different customer segments and


lower inventory risk

 Long established industry leaders with strong bargaining power with landlords
and brand distributors

 Well-rated management with unmatched market knowledge and cosmetics


trend foresight

Weaknesses

 Significant reliance on mainland consumers

 Heavy exposure to the Hong Kong consumer market

Opportunities

 Robust demand for quality cosmetics products in China

 Greater focus on private labels to improve margins

 Introduction of additional house brands or exclusive distributed products

 Increased penetration in other Southeast Asia countries on top of the existing


network

Threats

 Competition from international distributors as more brand owners are expanding


into Hong Kong and China’s markets given the upbeat demand

18
Hong Kong Cosmetics Retailers 28 April 2011

Bonjour Holdings (653 HK)


Chinese consumers say “Bonjour” to Company Rating: Outperform
affordable cosmetics (initiation)

Bonjour, the second-largest cosmetics retailer in Hong Kong,


appeals to the mass-market by concentrating on affordable
Price: HK$1.35
cosmetics products. Over the years it has built a brand well
recognized by local and mainland consumers. It is now in Target: HK$1.60
position to capitalize on the voracious demand of mainland (initiation)
shoppers streaming across the border in search of
value-for-money cosmetics. Bonjour’s business model is unusual
Trading data
in that it is a retail business that also operates beauty salons.
52-week range HK$0.97–1.84
 Dual operation. Bonjour operates both retail stores and
Market capitalization (m) HK$3,974/US$517
beauty salons in an effort to meet rising customer needs.
Shares outstanding (m) 2,943
The dual operation not only allows Bonjour to capture the
Free float (%) 31
booming demand for quality beauty services, but it also
3M average daily T/O (m share) 9.0
creates an effective channel to distribute and promote
3M average daily T/O (US$m) 1.6
Bonjour’s house brands.
Expected return (%) – 1 year 24
 Milk products particularly appealing. Bonjour has a Closing price on 28 April 2011
reputation for offering safe high-quality milk formula. Its milk
powder products are credited with driving store traffic. Stock price and HSI
 Expect margin improvement. Bonjour sells more than HK$
150 house brands and has plans to introduce more as they 1.8

tend to be highly profitable.


1.6
 Taste of success in China. Bonjour’s pilot store in
Guangzhou surprised management by achieving
breakeven within a year. Disciplined network expansion 1.4

and a widely recognized household brand will hold the


company in good stead as it attempts to tap into the vast 1.2
potential of the China market.
 Undervalued. At only CY12F 14x PE, the stock is trading 1.0
28-Apr-10 28-Jun-10 28-Aug-10 28-Oct-10 28-Dec-10 28-Feb-11 28-Apr-11
at a PE discount to its peers. Bonjour has high earnings Bonjour HSI
visibility with forecasted EPS CAGR growth of 23% for
Source: Bloomberg
FY10-13F. We rate the stock Outperform and we set our
target price at HK$1.60 based on an undemanding target
of CY12F PE of 16x and PE/G of 0.7x.
Forecast and valuation
Year to 31 Dec 2009 2010 2011F 2012F 2013F
Revenue (HK$ m) 1,705 2,121 2,573 3,087 3,627
Revenue (YoY, %) 23 24 21 20 18
Net profit (HK$ m) 128 191 235 288 352 Claudia Ching
Net profit (YoY, %) (4) 49 23 22 22
(852) 2532 2528
claudiaching@ccbintl.com
EPS (HK$) 0.047 0.066 0.081 0.100 0.122
EPS (YoY, %) (4) 40 23 22 22
Timon Tai
PER (x) 28.58 20.38 16.57 13.54 11.08 (852) 2532 2574
Yield (%) 4.3 4.2 4.7 5.9 7.2 timontai@ccbintl.com
FCF yield (%) 7.2 10.6 14.1 17.4 21.2
ROAE (%) 79 106 100 100 100 Forrest Chan, CFA
Net gearing (%) Net cash Net cash Net cash Net cash Net cash (852) 2532 6743
Source: Bonjour data, CCBIS estimates forrestchan@ccbintl.com

19
Hong Kong Cosmetics Retailers 28 April 2011

Head-to-toe catering to customers

Bonjour began operations in 1991 with only one shop and a handful of employees,
and grew to become the second-largest cosmetics retailer in Hong Kong, with market
share of around 20%. Since its establishment, the group has gained a firm foothold in
the mid-mass segment with its retail network covering Hong Kong (41 stores), Macau
(1 store) and China (2 stores).

Strength lies in its wide selection Bonjour now sells more than 20,000 SKUs of beauty and healthcare products. Unlike
of cosmetics products at other well-known health and beauty retailers focusing solely on luxury brands, Bonjour
discounted prices carries an extensive range of products in every price range, and is best positioned
among its peers to secure a wider clientele.

Bonjour shop Bonjour shop

Source: Bonjour Source: Bonjour

The only cosmetics retailer in In order to capture the growing demand in Hong Kong for premium beauty services,
Hong Kong also operating beauty Bonjour expanded into the slimming business in 2000 through the brand name “About
salons Beauty” and other auxiliary beauty services under the brands “Dr. Protalk”, “Top
Comfort” and “Bonjour Nail Bar”. “About Beauty” provides a range of slimming, beauty
and spa treatments. Other auxiliary beauty services include comprehensive and
professional quality beauty services, such as facial treatments, manicure services and
foot massages. Bonjour also has an online sales platform through
http://www.bonjourhk.com.

Each of Bonjour’s outlets is a one-stop shopping destination for health and beauty
products offering professional advice to customers. By operating all of its 55 retail
outlets and beauty salons, Bonjour has been able to deliver consistent service quality,
and is positioned to be the key beneficiary of Hong Kong’s buoyant retail environment.

Dual business with multi-faceted sales channels

Bonjour is the only beauty product retailer operating both cosmetics retail stores and
beauty salons in Hong Kong, a dual operation model that avails the company of an
extra pool of customers seeking quality beauty services. Bonjour promotes its in-house
products in its own beauty parlors, which creates an effective distribution channel for
its house brands and provides synergies for its house brands’ sales and development.

20
Hong Kong Cosmetics Retailers 28 April 2011

Corporate structure

Bonjour Retail
Retail Chain
Store Chain

Bonjour Holdings Limited


(653 HK) About Beauty
Dr. Protalk
(悦榕庄)
悦榕庄)

Beauty

Auxiliary Beauty Top Comfort


Services (水云庄)
水云庄)

Bonjour Nail Bar

Source: Bonjour

Retail stores

Bonjour sells a wide range of cosmetics and skincare products amounting to


approximately 20,000 SKUs available in store. Authorized dealers or local agents
supply 49% of its products, while parallel imports and private labels account for 29%
and 22%, respectively. Its products tend to be on average 5% cheaper than those sold
by its rivals.

Sales breakdown by sourcing channel

100%

29% 29% 25%


80%

60%
45%
51% 49%
40%

20%
30%
20% 22%
0%
2009 2010 2015F
Parallel imports from overseas
Purchase from sole agents in Hong Kong
Private labels & products with exclusive distribution rights

Source: Bonjour

Beauty and health salon services

Noting the growing popularity of slimming and shaping services, management


launched its beauty and health business in 2000 as a means of further diversifying the
company’s business and generating attractive margins of over 90%.

Bonjour currently operates 12 “About Beauty” beauty parlors in Hong Kong and
Macau, seven of which provide auxiliary beauty services under the franchise names
“Dr. Protalk”, “Top Comfort” and “Bonjour Nail Bar“.

21
Hong Kong Cosmetics Retailers 28 April 2011

About Beauty shop Top Comfort shop

Source: Bonjour Source: Bonjour

“Bonjour Beauty” provides a full range of high quality treatment services including
facials, slimming, spa and body massages, nail art and foot massages. Most of these
services are considered premium services. Experienced beauty consultants,
beauticians and massage therapists are hired to ensure that a high standard of
personal care is provided.

Customers are requested to open an individual account whereby services are offered
as part of pre-paid packages. Fees paid for these beauty treatment packages are
non-refundable and terms of these packages range from one month to two years.

Bonjour’s beauty and health salon segment accounted for 10% of total sales in FY10.
Growth was driven by an increase in membership signups as well as network
expansion. We expect its beauty and health salon service business to remain
dynamic, with the more mature client base driving operating leverage. Management
guided that the business generally requires six-to-nine months to achieve breakeven
in terms of operating profit.

One of mainland customers’ favourite shops

Rising contribution from mainland Mainland tourists account for 35% of Bonjour’s retail sales with average ticket size of
shoppers about HK$600, triple the average spending of a local customer. Bonjour offers a
comprehensive range of popular cosmetics products with attractive pricing, making it
a must visit shop for mainland tourists favoring cosmetics. The company will continue
to strengthen its marketing campaign in China in an effort to attract more tourists and
increase the retail sales proportion of locals to tourists, from 35% to 50% in five years.

Reputation for quality milk power Milk powder business: Bonjour is one of the earliest cosmetics retailers offering
Japanese baby milk formula in Hong Kong. This business constituted 11% of the
company’s total sales in FY10. Many mainland mothers worried about the quality of
mainland milk products, travel to Hong Kong to purchase baby foods which they
perceive to be much safer. Margins of around 6-8% are less attractive than margins
for skincare or bodycare products; nevertheless, the distribution of Japanese milk
powder serves as an effective tool to gain access to a different segment of customers.

While concerns over the spread of radiation in Japan may weaken consumer
confidence, Bonjour is switching the sourcing of its milk formula from Japan to

22
Hong Kong Cosmetics Retailers 28 April 2011

Australia. Australian milk-formula products offer higher gross margins than Japanese
milk formula, and are expected to boost Bonjour’s overall earnings in the long-run.

Collaboration with Ctrip: Bonjour has strengthened its marketing campaign in China
to attract more tourists to its Hong Kong stores. Part of this effort includes teaming up
with Ctrip.com International, a major online travel service portal in mainland China, to
issue VIP cards for Bonjour customers.

First triumph in the China market

Superior performance from China Bonjour’s first foray into the mainland began was its pilot store in Guangzhou in
business July 2010. Bonjour is now a well recognized brand in China, known for its affordable,
high-quality and wide-ranging product offerings. Its pilot store achieved breakeven in
profit within six months of operation and a purported HK$5m in sales in 2010.

Bonjour Guangzhou shop Bonjour Guangzhou shop

Source: Bonjour Source: Bonjour

Product offerings and displays in its China stores are different from those of Hong
Kong. As Bonjour still targets the mass-to-mid market customer group in China,
domestic brands will begin to play a more significant role in the country. They currently
account for approximately 60% of total sales. Imported brands and Bonjour’s
self-owned labels account for 40% of Bonjour’s China store products. Imported
products are mostly sourced from local authorized agents to save time and/or avoid
high operation costs.

There are currently 2,000 SKUs available in the Guangzhou store, including 200
private labels made in China. Management is targeting 3,000-4,000 SKUs by 2012,
with emphasis on skincare merchandise. Bonjour will source the majority of its
products from high-quality local suppliers.

Sustainable growth in the future

Keeping average sales per store On the heels of the success of its pilot store in Guangzhou and the overall positive
high, on relatively modest outlook for the economy. Bonjour opened two new stores in 1Q11. It plans to maintain
expansion in China a prudent pace of expansion within China. The company targets adding two-to-three
retail stores with an average floor area of 2,500 sq ft in 2011 and eight more stores in
2012.

23
Hong Kong Cosmetics Retailers 28 April 2011

New openings will be concentrated in Guangzhou, where Bonjour already has a strong
franchise. The city’s close proximity to Hong Kong also gives management tighter
control over its China business and back office. Disciplined expansion into China will
provide Bonjour with margin stability and will support its long-term development in the
China market.

Go online

Besides mainland Chinese, Bonjour is looking to attract more customers from


overseas. In 2005, Bonjour launched an online shopping portal designed to promote
its brands and products, the prices of which are claimed to be the lowest and which
offer the best value compared with others. The portal provides a convenient and
reliable online platform for customers worldwide and is gaining popularity with
20-30% YoY growth p.a. We believe the online business could help Bonjour promote
its brands in overseas markets to capture a larger customer base.

Partnership with Town Health

Bonjour entered into partnership with Town Health (3886 HK, Not Rated) in April 2010,
with the latter holding a 4.6% stake in Bonjour. The partnership brings strong
synergies to Bonjour, particularly in the following two business lines.

1. Beauty treatment. Town Health avails Bonjour of its expertise and physicians,
both useful to Bonjour's medical cosmetics services.

2. Retail. Town Health would refer clients to Bonjour’s healthcare and skincare
services and products.

In return, Town Health’s health supplements will be sold in Bonjour’s stores. We view
Bonjour’s partnership with Town Health as a big positive for Bonjour. We believe it will
provide a boost to the company’s brand image and will expand its customer pool.

Extensive coverage on top of cautious store rollout

Bonjour has 60 retail stores and beauty salons in Hong Kong and Macau and plans to
add four-to-five retail stores and two-to-three beauty salons per annum in FY11F and
FY12F. We approve of the measured pace of Bonjour’s expansion efforts as rents in
Hong Kong are rising. A conservative store rollout is one of the means of achieving a
stable operating margin.

24
Hong Kong Cosmetics Retailers 28 April 2011

Bonjour’s retail stores in FY07-13F Bonjour’s beauty salons in FY07-13F


No. of shops No. of stores
60 24
54
21
49 19
50 20
44 17
39 16
40 16 15
14
33
30
30 26 12
25
9
20 8
14 6
4
10 6 4
2
2 2 1 1 1 1 1 1 1 1 1
1 1 1 1 1 1
0 0
2007 2008 2009 2010 2011F 2012F 2013F 2007 2008 2009 2010 2011F 2012F 2013F
Hong Kong Macau China Hong Kong Macau China

Source: Bonjour, CCBIS estmates Source: Bonjour, CCBIS estmates

Increasing penetration of Currently, 65% of Bonjour’s stores are located in tourist areas. Management will keep
residential areas to alleviate part of the new store rollout in busy shopping districts with high pedestrian traffic. It will
rental costs also expand its store network, especially beauty salons, into highly concentrated
residential areas where demand and spending power are strong; more importantly,
rents in residential areas tend to be cheaper than those in the main shopping districts.
This will help alleviate rental pressure. With the company’s diverse product mix and
customer base, we believe Bonjour can successfully deploy its stores in both
residential and tourist areas.

Shifting emphasis to private labels to support margins

Bonjour is engaged in the distribution, marketing and sale of over 150 brands and
2,500 SKUs of private labels and exclusive products. Gross profit margin from its
private labels and exclusive products is higher than all other products at 80-90%.

Gross profit margin for Bonjour products


Sourcing Gross profit margin (FY10) (%)
Private labels and products with exclusive distribution rights 80 – 90
Purchase from sole agents in Hong Kong 25 – 35
Parallel imports from overseas 5 – 15
Source: Bonjour

Focus on promoting in-house Going forward, Bonjour will put greater emphasis on the high value-added segment of
brands private labels and exclusive products, a strategy to garner higher margins through
better marketing efforts. Once management has enriched its product portfolio, it
intends to increase total contribution of its private labels from 22% to 30% within four
years.

25
Hong Kong Cosmetics Retailers 28 April 2011

Sales breakdown by product

100%
9% 11% 12%
5% 6%
5% 6%
80% 6% 5%
11% 10% 10%

60% 19% 18% 18%

40%

51% 50% 49%


20%

0%
2009 2010 2015
Skin care products Fragrance & cosmetics products Hair and body care products
Accessories Pharmaceutical products Health food

Source: Bonjour

Steady improvement in gross Due to increased exposure to the lower gross-margin (approximately 6-8%) Japanese
profit margin milk-powder business, Bonjour has seen retail gross margin dilution in recent years.
Going forward, we believe the contribution from Japanese milk powder will decline
because of the concern on the quality of Japanese products on fears of radiation leaks.
We expect Bonjour’s retail gross margin to improve steadily.

Gross margin trends in FY07-13F

100% 94.8%
92.8% 93.8%
89.8% 91.1% 90.6% 91.8%

85%

70%

55%
47.0%
43.2% 43.1% 43.9% 44.9%
40.8% 42.4%
40%
39.1% 38.2% 39.2%
37.4% 36.2% 37.2%
34.3%
25%
2007 2008 2009 2010 2011F 2012F 2013F
GPM for retail business GPM for beauty service business blended GPM

Source: Bonjour, CCBIS estimates

Effective cost control

Bonjour has an excellent track record of keeping stringent control on its expenses,
thanks to its greater efficiency and economies of scale.

26
Hong Kong Cosmetics Retailers 28 April 2011

Operating cost breakdown for retail business in FY10 Operating cost breakdown for beauty salon business in
FY10

Financial expense Financial expense


Deprectiation 0.75% Rental
0.90% 8%
16%
Deprectiation
7%
Utility & building
Rental management
9.88% 4%

Marketing
Staff
10%
10.39%

Others
Utility &
4%
building
management Staff
Marketing 0.65% 51%
Others 0.93%
2.54%

Source: Bonjour Source: Bonjour

Bonjour’s two key expense items are rental and staff costs, with the cost trend
expected to be largely stable for the coming two years:

Major expenses remain well Rental cost – As a valued tenant, Bonjour enjoys a wider range of options for its store
contained locations thereby minimizing rental risk. Although we anticipate the average rental rate
to increase by over 20% in FY11-12F, we expect rental cost for its retail business to
remain within 11-12% of sales and that for beauty salons at 13-14% of total sales from
beauty salons.

Staff cost – Staff cost for the retail business accounts for approximately 10% of total
retail sales. The beauty salon segment usually entails higher staff costs due to the
needed recruitment of quality cosmetologists. However, thanks to the modest pace of
salon openings and management’s tight control on staff expenses, staff cost could still
be maintained at a reasonable level of 40% of total sales from the beauty salon
segment in FY11F and FY12F.

Rental costs in FY08-13F Staff costs in FY08-13F

HK$m HK$
450 416 28% 560 24%
23% 512
24% 24%
400 24%
24%
430 22%
348 19%
350
20% 420
282 355 21%
300 19% 20%
16%
250 14% 226 289
12% 11% 11% 18%
11% 11% 12% 280 248 18%
200 183 218
161 11%
8%
150 16% 16%
17%
4% 140 15%
100
14% 14%
50 0% 14% 14%
14% 14%
(2)%
0 (4)% 0 12%
2008 2009 2010 2011F 2012F 2013F 2008 2009 2010 2011F 2012F 2013F
Rental costs (LHS) YoY (RHS) As % of sales (RHS) Staff costs (LHS) As % of sales (RHS) YoY (RHS)

Source: Bonjour, CCBIS estmates Source: Bonjour, CCBIS estmates

27
Hong Kong Cosmetics Retailers 28 April 2011

Diversified advertising campaign

In our view, it is critical that retailers target female customers. As a means to build
image and increase public awareness, Bonjour has implemented extensive
promotions, including in-store promotions, magazine advertisements, newspaper ads
and television slots to be shown in the Hong Kong market. The company has also
engaged local celebrities as spokespersons and issued discount coupons and gift
cards to customers.

Bonjour in-house brand advertisement Bonjour in-house brand advertisement

Source: Bonjour Source: Bonjour

In order to encourage customer loyalty and deliver value-added services to customers,


Bonjour has launched a membership program. The Bonjour Master Card was jointly
launched by the group and Dah Sang Bank. Holders of the card are conditionally
granted certain welcome gifts and are able to enjoy discounts on all merchandise as
well as benefits when using Bonjour beauty and health salon services.

To bolster its loyalty program and encourage return visits, Bonjour has launched a
bonus reward program to reward members with cash coupons or sales discounts.
These marketing and promotional strategies have already had some success in
attracting return visits in addition to having a positive effect on the company’s
corporate image and goodwill.

Solid earnings growth ahead

For the retail business, we project sales growth of 22%, 20% and 18% in FY11F-13F,
respectively, helped by stable same-store sales growth and 11-16 new store openings
per annum in Hong Kong, Macau and China in the three years. We estimate
same-store sales growth for Hong Kong and Macau to remain 7-9% YoY in
FY11F-13F. Meanwhile, we expect beauty service revenue growth to be 16-17% in
FY11F-13F, respectively, contributing 11% to total sales.

For the company as a whole, we forecast SG&A expenses at 32% of sales, with rental
expense representing 11-12% of total sales and staff costs 14%. A&P expenses
should be maintained at 3% of total sales for FY11F-13F.

Overall, the company’s net profit is projected to rise 23% in FY11F, and 22% in FY12F
and FY13F. We see low downside risk to our earnings projections as we have
relatively conservative store rollout and margin growth forecasts for Bonjour.

28
Hong Kong Cosmetics Retailers 28 April 2011

Key assumptions
Year to end-December (HK$m) 2008 2009 2010 2011F 2012F 2013F
Total sales 1,382 1,705 2,121 2,573 3,087 3,627
Sales of merchandise 1,173 1,508 1,886 2,300 2,770 3,257
Service income of beauty treatment services 195 183 221 256 297 347
Commission income 15 15 15 17 20 23

Sales (YoY %) 14 23 24 21 20 18
Sales of merchandise 9 29 25 22 20 18
Service income of beauty treatment services 64 (6) 21 16 16 17
Commission income (1) 1 1 16 13 15

Sales breakdown (%)


Sales of merchandise 85 88 89 89 90 90
Service income of beauty treatment services 14 11 10 10 10 10
Commission income 1 1 1 1 1 1

Retail sales by region 1,173 1,508 1,886 2,300 2,770 3,257


Hong Kong & Macau 1,173 1,508 1,880 2,250 2,619 3,007
China NA NA 6 50 151 249

Retail sales by region YoY (%)


Hong Kong & Macau 9 29 25 20 16 15
China N/A N/A N/A 740 200 65

No. of retail stores


Hong Kong 26 33 39 44 49 54
Macau 1 1 1 2 2 2
China 0 0 1 6 14 25
HK JV 1 0 NA NA NA NA
Total 28 34 41 52 65 81

Net additions of stores (4) 6 7 11 13 16


Hong Kong (4) 7 6 5 5 5
Macau 0 0 0 1 0 0
China 0 0 1 5 8 11
HK JV 0 (1) N/A N/A N/A N/A

No. of beauty salons 16 17 19 22 26 30


Hong Kong 14 15 16 17 19 21
Macau 1 1 1 1 1 1
China 1 1 2 4 6 8

Net additions of beauty salons 6 1 2 3 4 4

SSSG for retail business (%) 8 19 10 9 8 7

GPM for retail business (%) 39.1 34.3 36.2 37.2 38.2 39.2
YoY (ppt) 1.7 (4.8) 1.9 1.0 1.0 1.0
GMP for beauty service business (%) 91.1 90.6 91.8 92.8 93.8 94.8
YoY (ppt) 1.3 (0.6) 1.2 1.0 1.0 1.0
Group’s gross profit margin (%) 47.0 40.8 42.4 43.1 43.9 44.9
YoY (ppt) 3.8 (6.2) 1.6 0.7 0.8 1.0

Rental expense 161 183 226 282 348 416


Rental expense as % of sales 11.6 10.7 10.7 11.0 11.3 11.5
Staff expense 218 248 289 355 430 512
Staff expense as % of sales 15.8 14.5 13.6 13.8 13.9 14.1
Distribution expense 35 45 60 77 99 123
Distribution expense as % of sales 2.6 2.6 2.8 3.0 3.2 3.4
Source: Bonjour data, CCBIS estimates

29
Hong Kong Cosmetics Retailers 28 April 2011

Initiate with Outperform and target price of HK$1.60

Based on our EPS estimates of HK$0.10 in FY12F, Bonjour’s shares are now trading
at 14x FY12F PER versus an average FY12F PER of 15x for the Hong Kong retailers.
We believe the stock deserves to trade at a higher PE multiple to Hong Kong retailers,
especially when one-third of its sales was driven by mainland consumers. Moreover,
with superior ROAE, we suggest a higher valuation for Bonjour.

We set our target price at 16x FY12F, implying a PE/G ratio of 0.7x applied to
Bonjour’s three-year EPS CAGR of 23% and 24% re-rating upside from the current
share price.

Attractive dividend yield

Bonjour sits on a hefty cash position of over HK$200m in net cash. Its sound financials
with projected ROE of 100% in FY11F should support the company’s attractiveness.

Management has committed to a dividend payout of 80% of recurring earnings in


FY11-13F in view of the company’s strong cash position. Even factoring in slower
sales growth, we still expect Bonjour to offer an attractive dividend yield in the Hong
Kong retail sector. We forecast dividend yield of 5-7% for FY11-13F, one of the highest
within the consumer sector.

Bonjour’s 12-month forward rolling yield

5.9%

5.4%

4.9%

4.4%

3.9%

3.4%
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11

Source: Bloomberg, Bonjour, CCBIS estimates

30
Hong Kong Cosmetics Retailers 28 April 2011

Profit and loss projections


Year to end-December (HK$m) 2008 2009 2010 2011F 2012F 2013F
Revenue 1,382 1,705 2,121 2,573 3,087 3,627
Retail business 1,173 1,508 1,886 2,300 2,770 3,257
Beauty service business 209 198 236 273 316 370
Revenue YoY (%) 14 23 24 21 20 18
Retail business 9 29 25 22 20 18
Beauty service business 57 (6) 19 16 16 17
COGS (733) (1,009) (1,222) (1,464) (1,731) (1,999)
Gross profit 649 696 899 1,109 1,355 1,628
YoY (%) 24 7 29 23 22 20
Gross margin (%) 47.0 40.8 42.4 43.1 43.9 44.9
Other income – sub-total 12 13 13 13 14 14
Rental expense 161 183 226 282 348 416
YoY (%) (2) 14 24 24 24 19
As % of sales 11.6 10.7 10.7 11.0 11.3 11.5
Staff expense 218 248 289 355 430 512
YoY (%) 18 14 17 23 21 19
As % of sales 15.8 14.5 13.6 13.8 13.9 14.1
Distribution expense 35 45 60 77 99 123
YoY (%) 5 27 33 30 28 25
As % of sales 2.6 2.6 2.8 3.0 3.2 3.4
Other SG&A 98 93 117 124 144 166
YoY (%) 28 (5) 26 6 16 15
As % of sales 7.1 5.5 5.5 4.8 4.7 4.6
Total SG&A 512 569 692 839 1,021 1,217
YoY (%) 14 11 22 21 22 19
As % of sales 37.0 33.3 32.6 32.6 33.1 33.6
Other gains – net 12 13 13 13 14 14
EBIT 159 154 230 284 348 424
YoY (%) 85 (3) 50 23 22 22
EBIT margin (%) 11.5 9.0 10.9 11.0 11.3 11.7
Depreciation and amortization 19 22 29 39 42 44
YoY (%) (3) 17 33 34 6 6
EBITDA 178 176 260 324 390 469
YoY (%) 70 (1) 48 24 20 20
EBITDA margin (%) 12.9 10.3 12.3 12.6 12.6 12.9
Interest income 1 0 0 0 0 0
Interest expense 0 1 1 1 1 1
Profit before tax 159 154 229 283 347 424
YoY (%) 87 (4) 49 24 22 22
PBT margin 11.5 9.0 10.8 11.0 11.2 11.7
Income tax (27) (25) (38) (48) (59) (72)
Effective tax rate (%) 16.9 16.5 16.5 17.0 17.0 17.0
Net profit 133 128 191 235 288 352
YoY (%) 87 (4) 49 23 22 22
Net margin (%) 9.7 7.5 9.0 9.1 9.3 9.7
EPS (HK$) 0.049 0.047 0.066 0.081 0.100 0.122
YoY (%) 93 (4) 40 23 22 22
DPS (HK$) 0.036 0.058 0.057 0.065 0.080 0.097
Source: Bonjour data, CCBIS estimates

31
Hong Kong Cosmetics Retailers 28 April 2011

Balance sheet projections


Year to end-December (HK$m) 2008 2009 2010 2011F 2012F 2013F
Property, plant and equipment 39 52 68 76 81 85
Prepaid land lease payments 2 0 0 0 0 0
Goodwill 0 0 0 0 0 0
Investment in an associate 4 0 0 0 0 0
Rental and utility deposits 30 42 63 88 109 131
Held-to-maturity investments 0 3 0 0 0 0
Deferred tax assets 4 3 2 2 3 4
Non-current assets – total 78 101 133 166 193 220

Inventories 131 170 204 243 286 330


Trade receivables 19 26 45 54 65 76
Rental and utility deposits 18 16 21 30 38 45
Prepayments, deposits and other receivables 16 26 27 33 40 47
Held-to-maturity investments 0 0 3 3 3 3
Due from an associate 4 0 0 0 0 0
Current tax assets 0 19 21 20 20 20
Pledged bank balances 0 1 1 1 1 1
Bank and cash balances 159 212 256 295 352 427
Current assets – total 348 471 580 680 805 950

Trade payables 111 122 146 176 208 240


Other payables, deposits received and accrued charges 51 63 80 95 113 130
Deferred revenue 29 156 170 206 247 290
Current portion of long-term bank borrowings 0 3 3 3 3 3
Short-term bank borrowings 0 15 20 18 15 13
Trade finance loans 25 40 55 55 55 55
Bank overdrafts 0 0 0 0 0 0
Finance lease payables 1 1 1 1 1 2
Current tax liabilities 30 17 24 30 37 45
Current liabilities – total 247 418 498 584 678 778

Long-term bank borrowings 0 3 0 0 0 0


Finance lease payables 2 2 1 1 1 1
Long service payment liabilities 1 1 2 2 3 3
Non-current liabilities – total 3.05 5.71 2.52 2.70 3.20 3.70

Equity 176 149 212 260 317 389

Total assets 426 572 713 847 999 1,170


Total liabilities and equities 426 572 713 847 999 1,170

Net debt (cash) (134) (151) (178) (219) (279) (357)


Net gearing (%) Net cash Net cash Net cash Net cash Net cash Net cash
Source: Bonjour data, CCBIS estimates

32
Hong Kong Cosmetics Retailers 28 April 2011

Cashflow projections
Year to end-December (HK$m) 2008 2009 2010 2011F 2012F 2013F
EBIT 159 154 230 284 348 424
D&A 19 22 29 39 42 44
EBITDA 178 176 260 324 390 469
Operating cash flow before changes in working capital 356 352 520 647 779 937

Working capital changes:


Inventories (11) (39) (34) (39) (43) (44)
Trade and other receivables (8) (13) (20) (15) (17) (18)
Rental and utility deposits (5) (11) (26) (34) (28) (29)
Trade and other payables 13 10 24 30 32 32
Other payables 8 16 17 15 17 17
Deferred revenue (7) 43 14 36 41 43
Total working capital changes (10) 8 (25) (7) 2 1

Interest received 1 0 0 0 0 0
Interest paid (1) (1) (1) (1) (1) (1)
Tax paid (4) (44) (33) (41) (53) (64)
Operating cash flow 342 315 460 598 727 873
Total capex (23) (33) (46) (47) (47) (48)
Free cash flow 318 282 414 552 681 825
Other investing cashflow (0) (1) (0) 0 0 0
Proceeds from issue of shares 4 8 110 0 0 0
Repurchase of shares (25) (7) (42) 0 0 0
Dividends paid to owners of the company (98) (98) (206) (188) (231) (280)
Other financing cashflow 5 35 15 (2) (3) (2)
Net cash flow 205 220 292 362 446 544
Source: Bonjour data, CCBIS estimates

Key financial metrics


Year to end-December (HK$m) 2008 2009 2010 2011F 2012F 2013F
ROAE (%) 81 79 106 100 100 100
ROAA (%) 34 26 30 30 31 32
ROIC (%) 53 41 49 52 54 58
Average inventory days 66 62 61 61 60 60
Average receivable days 5 6 8 8 8 8
Average payable days 55 44 44 44 44 44
Cash conversion cycle (days) 15 23 25 24 24 24
Net gearing (%) Net cash Net cash Net cash Net cash Net cash Net cash
Gross gearing (%) 0 12 9 7 5 3
Source: Bonjour data, CCBIS estimates

33
Hong Kong Cosmetics Retailers 28 April 2011

Bonjour’s brand portfolio

Private labels Products with exclusive distribution rights

Source: Bonjour Source: Bonjour

Products from parallel imports Products from Hong Kong sole agents

Source: Bonjour Source: Bonjour

Top-ten private label and exclusive brands


1. Suisse Reborn Private label
2. Yumei Private label
3. Dr. Schafter Private label
4. Franck Olivier Exclusive
5. Rote Fabrik Private label
6. Forget Me Not Private label
7. I. Color Private label
8. RevitaLash Exclusive
9. Swiss 3 Private label
10. Nature’s Green Private label
Source: Bonjour

34
Hong Kong Cosmetics Retailers 28 April 2011

Bonjour’s management biography and shareholding


structure

Executive directors

 Dr. Ip Chen Heng, Wilson, 52, the founder, chairman, CEO and executive
director of the group. He founded the business with his wife, Ms. Chung Pui
Wan, in June 1991 and has 32 years of experience running retail and service
businesses. Dr. Ip has solid experience in retail and wholesale businesses and
is responsible for the overall strategic planning and formulation of corporate
policy of the group.

 Ms. Chung Pui Wan, 49, vice chairman and executive director. Ms. Chung, the
spouse of Dr. Ip Chen Heng, has more than 27 years of experience in sales and
marketing of cosmetics products. Before the group was founded in 1991,
Ms. Chung had worked for several cosmetics companies in the sale and
marketing of branded cosmetics products for over five years. With her sales
promotion techniques and deep product knowledge in cosmetics, Ms. Chung
has made a significant contribution to the group’s product innovation and
marketing strategy. She is responsible for the overall management of sales and
marketing operations.

 Mr. Chan Chi Chau, 47, executive director. He joined the group in June 2002
and has 17 years of experience in the field of cosmetics retailing and wholesale
management. Mr. Chan is responsible for planning and supervising the
implementation of the electronics point-of-sales system. He also assists the
chairman in formulating policy and strategy development for the group.

Senior management

 Mr. Kwong Chun Chung, 42, financial controller and company secretary. Mr.
Kwong joined the group in 2006 and has over 17 years of experience in auditing,
accounting and financial control.

 Ms. Ha Kwok Chu, Rosina, 52, president. She is responsible for the
management of the group’s beauty service. Ms. Ha joined the group in 2001
and has 27 years of experience in the beauty industry. She was appointed as
one of the Beauty Industry Training Advisory Committees by ITACs or
Education and Manpower Bureau in 2006.

 Mr. Tsui Mang Wai, Eric, 44, information technology manager. Mr. Tsui has
more than 20 years of experience in software development and system
management. He is responsible for the EPOS system and overseeing the
operation of the computer system. He joined the group in July 2002.

35
Hong Kong Cosmetics Retailers 28 April 2011

Shareholding structure

Ip Chun Heng, Wilson Public

64.81% 35.19%

Bonjour Holdings Limited


(653 HK)

Source: Bloomberg, HKEx

36
Hong Kong Cosmetics Retailers 28 April 2011

Sa Sa International (178 HK)


Company Rating: Outperform
A beautiful franchise (initiation)

Sa Sa is one of Hong Kong’s pioneering cosmetics superstores,


enjoying strong recognition from both local and mainland
Price: HK$4.61
customers who have come to appreciate its large basket of
international and self-owned brands. Sa Sa has a major Target: HK$5.45
advantage in terms of scale as it competes with other retailers to (initiation)
accommodate the growing appetite for quality cosmetics.
 Formidable leading position. Sa Sa has over 70 outlets in Trading data
Hong Kong and Macau, with plans to expand by 30 stores 52-week range HK$2.43–5.98
by FY13F (year to end-March), bringing the total to 100 Market capitalization (m) HK$13,462/US$1,727
stores. The company also boasts an extensive overseas Shares outstanding (m) 2,805
network covering major cities throughout Southeast Asia. Free float (%) 34
 Private labels gaining prominence. Sa Sa’s self-owned 3M average daily T/O (m share) 7.6
brands and focused marketing have led to a better sales 3M average daily T/O (US$m) 4.2
mix and higher gross profits – welcome news as the Expected return (%) – 1 year 23
company needs these ramparts to protect it from the Closing price on 28 April 2011
onslaught of landlords intent on raising the rent on its
various stores. Stock price and HSI
 Long-term potential in China. Management reiterated its HK$
5.5
enthusiasm for China and will continue to expand its
network there. It expects to stem the losses of recent years 5.0

and achieve breakeven by FY13F.


4.5

 Attractive dividend yield. Another strong case for


4.0
investment is the company’s high yet sustainable (rich war
chest) dividend yield of over 4% for FY11-13F. 3.5

 Good to keep. While Sa Sa’s loss-making China business 3.0

is still a cloud over the stock price, other markets,


2.5
especially its core market Hong Kong, are expected to 28-Apr-10 28-Jun-10 28-Aug-10 28-Oct-10 28-Dec-10 28-Feb-11 28-Apr-11
Sa Sa HSI
deliver stellar growth. High earnings quality and dividend
yield also appeal. We initiate with Outperform and a target Source: Bloomberg
price of HK$5.45 based on 0.9x PE/G or 21x CY12F PE.

Financial forecast
Year to 31 Mar 2009 2010 2011F 2012F 2013F
Revenue (HK m) 3,609 4,111 4,761 5,481 6,257
Revenue (YoY, %) 12 14 16 15 14
Core net profit (HK m) 314 383 485 609 744 Claudia Ching
Core net profit (YoY, %) 15 22 27 26 22 (852) 2532 2528
Core EPS (HK$) 0.114 0.138 0.173 0.217 0.265 claudiaching@ccbintl.com
Core EPS (YoY, %) 15 21 26 26 22
PER (x) 40.5 33.4 26.6 21.2 17.3
Timon Tai
(852) 2532 2574
Yield (%) 2.5 3.0 3.7 4.8 5.9
timontai@ccbintl.com
FCF yield (%) 2.0 2.6 4.0 4.4 5.4
ROAE (%) 28 33 39 46 52 Forrest Chan, CFA
Net gearing (%) Net cash Net cash Net cash Net cash Net cash (852) 2532 6743
Source: Sa Sa data, CCBIS estimates forrestchan@ccbintl.com

37
Hong Kong Cosmetics Retailers 28 April 2011

Cosmetics superstore

Innovative cosmetics retailing at With over 33 years of operation, Sa Sa is a leading cosmetics specialist retailer in Asia
competitive prices in Asia with regional operations and a network encompassing over 177 stores in Hong Kong,
Macau, China, Singapore, Malaysia and Taiwan.

The company engages in retail and brand management for over 100 global skincare
and cosmetics brands exclusively; and sells over 400 brands and 15,000 products.
Founded in 1978, the brand has built a good reputation among Asian customers.
Based on Euromonitor estimates, Sa Sa operations accounted for a 44% share of
Hong Kong’s cosmetics and skincare market in 2009.

Besides “Sa Sa” branded stores, the group operates mono-brand stores for its
self-owned “La Colline” and “Suisse Programme” brands. The company has obtained
sole agent/distributor status for some core global cosmetics brands, such as the
prestigious global brand, Elizabeth Arden, which appointed Sa Sa as its sole agent in
Hong Kong and Macau in October 2002.

An innovative business model to drive its success

Sa Sa’s market leadership Sa Sa’s efficient and not easily duplicated sourcing model ensures its status as an
reflects a global purchasing industry powerhouse. Its sourcing mix comprises: parallel trade (26% of sales), private
strategy and a retailing formula labels/exclusive products (40% of sales) and local agents (34% of sales). Few
based on choice and cosmetics operators have the capability of adopting a similar business model;
convenience moreover Sa Sa is the most scalable operation among peers. The diversified
distribution model gives Sa Sa a distinct advantage over peers in price, product mix,
and ability to extend client coverage. In regard to the latter, we identify the following
specific advantages.

 While Hong Kong single-store operators or small-scale local cosmetics stores


can only sell parallel trade products as they lack capital and access to brand
agents, Sa Sa offers a more comprehensive variety of brands thanks to its close
relationships with international brand agents.

 Upscale department stores such as Sogo and Lane Crawford mainly source
products through local agents or overseas private brands, which focus on
mid-to-high end labels at relatively high prices. Parallel products are not
available in these stores, making product assortment in department stores
relatively restricted compared with Sa Sa.

 Sa Sa’s private labels and exclusive products are not sold outside of Sa Sa
stores. As Sa Sa’s products have widespread and growing recognition from
customers, they function as an inducement, luring customers to Sa Sa’s doors.
These customers know that Sa Sa stores are the only place they can find
Sa Sa’s exclusive products.

Sales breakdown from products in 1HFY11


Sourcing Sales contribution (%)
Private label 15
Exclusive products 25
Products sourced from local suppliers 34
Parallel trade 26
Source: Sa Sa

38
Hong Kong Cosmetics Retailers 28 April 2011

Self-owned brands gain weight in the market

Sa Sa owns seven brands, all developed and manufactured by cosmetics


manufacturers abroad. This category accounted for 40% of the group’s total sales in
1HFY11, up from 38% in FY10. Average gross margin was over 80%.

Sa Sa in-house brands portfolio

Source: Sa Sa

Sa Sa acts as the sole agent/distributor for more than 100 international brands, for
which it is responsible for brand building, marketing, sales and distribution. Sa Sa
purchases products from these brand names at wholesale prices and then resells
them to customers at a mark-up.

In-house brands are gaining Sa Sa’s in-house brands have begun to see handsome returns. The success of these
popularity brands has encouraged the company to continue to develop its own products. Sales
from in-house products rose 24% YoY in 1HFY11 and we expect strong growth
momentum going forward, given that recently launched exclusive products have
earned good word-of-mouth and repeat purchases.

Serving ladies from across Asia

Wide exposure to overseas Sa Sa owns the most extensive network among Hong Kong-based cosmetics retailers
market with shops covering Hong Kong, Macau, China, Taiwan, Malaysia and Singapore. The
company’s widely-recognized brand name is key to its development and expansion
into overseas markets.

39
Hong Kong Cosmetics Retailers 28 April 2011

Sales breakdown by region or business segment in YoY sales growth by region or business segment in
1HFY11 1HFY11

Sasa.com 45% 42%


Malaysia 7%
40%
5% Hong Kong &
Singapore Macau 35%
4% 77%
Taiwan
30% 27%
4%
24%
25% 22%
China
3% 20% 18%

15% 13%

10%

5%

0%
Hong Kong & China Taiwan Singapore Malaysia Sasa.com
Macau

Source: Sa Sa Source: Sa Sa

Hong Kong and Macau sustaining steady growth

Hong Kong and Macau remain Hong Kong and Macau remain Sa Sa’s primary markets, contributing approximately
Sa Sa’s core contributors 77% of total sales or HK$1.6b in 1HFY11. Sa Sa was operating 74 retail stores or
cosmetics counters in 1HFY11, one-third located in prime tourist areas. We estimate
its store count in Hong Kong and Macau will grow to 81 stores by FY11F.

Number of Sa Sa stores in Hong Kong in FY08-13F

110 16.5%
16% 100
100
90
90 81 14.5%
80
70
70 62
58 13% 12.5%
60 11% 11%
50
10.5%
40 9%
30
20 8.5%
7%
10
0 6.5%
2008 2009 2010 2011F 2012F 2013F
No. of stores (LHS) YoY (RHS)

Source: Sa Sa, CCBIS estimates

40
Hong Kong Cosmetics Retailers 28 April 2011

Major drivers of the Hong Kong business:

 A variety of cosmetics offerings, easy access to its shops and the one-stop
shopping store format will draw traffic to Sa Sa. It also helps that consumer
sentiment is still high, sustained by Hong Kong’s healthy economic
environment.

 With 50% of its Hong Kong sales deriving from mainland visitors, Sa Sa is more
leveraged to these big spenders than most other local cosmetics retailers.
Greater numbers of mainland tourists will raise Sa Sa's average transaction
value. Average spending per ticket reached HK$600 in the first two months of
2011. Riding on the rapid economic development in China, mainland visitor
spending power is anticipated to further strengthen and support Sa Sa’s sales
growth.

We estimate FY11F same-store sales to surge 8% YoY and expect FY11F to register
16% YoY sales growth.

Total sales and same-store sales growth in Hong Kong and Macau in FY08-13F

HK$m
5,500 20%
18.7% 5,008
5,000
4,371 18%
4,500
4,000 3,795 15.2% 16%
14.6%
3,500 3,288 15.4%
12.8% 2,981 14%
3,000
2,643 12%
2,500 12.8% 10.3%
2,000 10%
1,500 7.6%
7.1% 6.8% 8%
1,000 6.3%
4.5% 6%
500
0 4%
2008 2009 2010 2011F 2012F 2013F
Sales (LHS) YoY (RHS) SSSG (RHS)

Source: Sa Sa, CCBIS estimates

Investing for the future, patience needed for China

Sa Sa began its China operations in 2002 despite several obstacles, including the
unresolved cumbersome product registration issue, which resulted in an insufficient
number of SKUs carried in its stores.

Sa Sa currently has 19 conventional outlets and 19 beauty counters under its


self-owned brand “Suisse Programme” in China, mainly in tier-one and tier-two cities.
These accounted for 3% of total sales in 1HFY11.

41
Hong Kong Cosmetics Retailers 28 April 2011

Retail outlets within the mainland China market

Shenyang

2 1
1
1 Anshan
Beijing 10 5
1 2 Tianjin
1 Qingdao

Nanjing
1 1 Suzhou
Yichang Hangzhou 8 2 Shanghai
2 2 1
3 1
Chengdu Wuhan 1 1 Ningbo
2 Shaoxing
Changsha
“Sa Sa” store

Suisse Programme counters

Upcoming new stores

Source: Sa Sa, CCBIS

Narrowing losses from China Although Sa Sa’s China operation is still loss-making, the situation has improved. The
company went from a HK$10.9m loss in 1HFY10 to a HK$10.7m loss in 1HFY11. The
operation has already reached breakeven at the operating level while losses were
mainly from warehouse and office expenses. At the same time, demand for quality
cosmetics in China is still high, evidenced by the 41% YoY sales surged in 1HFY11.

Sa Sa is currently focusing on store productivity in China. It has committed to add


resources, with one team designated for store openings and a separate team for store
operations. Sa Sa’s business plan in China revolves around the following strategies:

 Network expansion. Management will accelerate the expansion of its retail


network in China, seeking sites with high traffic. The group separated its retail
shops into two regional markets – northern and eastern China – and assigned
separate management teams to supervise their daily operation. In order to
manage its outlets more effectively, Sa Sa plans to open additional stores in
existing cities to increase market penetration or enter into new cities within the
existing focus markets.

From a long-term point of view, management is planning to add three more


focus markets with the target to directly own 100 stores by 2013.

42
Hong Kong Cosmetics Retailers 28 April 2011

Number of stores in China in FY08-13F

65
58

52
45

39
32
28
26 23 24
21
17 18
12
13 10
4

0
2008 2009 2010 2011F 2012F 2013F
No. of stores No. of counters

Source: Sa Sa, CCBIS estimates

 Improve product offerings. This strategy, aligned with Hong Kong’s strategy,
involves placing more emphasis on growing the private label brand business to
achieve better margins. At the conventional Sa Sa stores, a more selective
approach will be adopted in terms of product inclusion. This will hopefully
shorten the product registration process. Management will also fine-tune its
product mix to accommodate different climates, cultures, customer spending
patterns and market trends in different cities.

 Adjust store mix. To match customer shopping habits in different regions,


management’s future strategy is to increase single-brand stores/beauty
counters within department stores under its exclusive brands – Suisse
Programme, Methode Swiss and Sa Sa – in northern China and roll out
standalone stores in southern China.

Sa Sa will scale down each store to 2,000 sq ft on average in order to enhance


operating efficiency and to maintain a tighter grip over headcount and rental
expenses. Staff and rental costs account for approximately 14-18% of sales.

 Shop productivity improvement. Management has noticed that high customer


service quality is essential to improving sales growth. Hence the company will
continue to enhance staff training and increase retention rates to lift overall
service standards. Management will also implement standardized pricing
policies, procedures and logistic systems to enhance the scalability of the
business.

Business expected to be We believe the new initiatives listed above are positive for Sa Sa’s long-term
profitable by FY13F development in China. Management does not expect to break even anytime before
FY13F as the operation needs critical mass and scale to cover total fixed costs.
Continuing losses from its China business will remain a major overhang for Sa Sa, and
there is no guarantee it will achieve profit breakeven by its own schedule, an outcome
that could lead to additional losses. That said, we anticipate losses in China will
narrow over time and sales will grow 57% YoY in FY11F and 36% YoY in FY12F.

43
Hong Kong Cosmetics Retailers 28 April 2011

Sales for China in FY08-13F


HK$m
270 247.8 70%
60% 57%
60%
240
207.2 50%
210 40%
31%
180 36% 20% 30%
151.9
20%
150
115.5 10%
120 97.0 0%
90 (10)%
60.6
60 (20)%
(30)%
30 (48)%
(40)%
0 (50)%
2008 2009 2010 2011F 2012F 2013F
Sales (LHS) YoY (RHS)

Source: Sa Sa, CCBIS estimates

Healthy improvement in overseas markets

Maintaining sound sales growth Other businesses and geographic markets, including Singapore, Malaysia and Taiwan,
in overseas business accounted for 12% of the total sales in 1HFY11 and reported improvement in turnover
and profitability.

Singapore: Massive investment in new retail space in the country that began in 2009
will continue to contribute to network expansion and market penetration opportunities
for Sa Sa. We look for steady sales growth of 24% on the back of 7% SSSG and 17%
YoY growth in net store openings in FY11F.

Malaysia: The Malaysian business continues to leverage on Sa Sa’s growing market


status and strong brand equity to achieve sales growth. Management targets adding
eight stores in FY11F and we forecast 19% sales growth for the market in FY11F.

Taiwan: Taiwan market growth is relatively sluggish compared with the Malaysia and
Singapore markets, with sales increases of only 9% YoY in 1HFY11. We believe the
gradual resurgence of Taiwan’s economy and the development of an individual visit
scheme for mainland tourists to Taiwan will bring more traffic to Sa Sa’s stores.

Overseas market store numbers in FY08-13F


60
52
50
45

40 38

30
30 26 27
24 25
21 21 22
18 19
20 15
14 13 13 14

10

0
2008 2009 2010 2011F 2012F 2013F
Taiwan Singapore Malaysia

Source: Sa Sa, CCBIS estimates

44
Hong Kong Cosmetics Retailers 28 April 2011

Overseas market sales in FY08-13F

300
273 272

250 237 238

201 209
200 188
176 174
162 163
140 142 147
150 131 135 132
104
100

50

0
2008 2009 2010 2011F 2012F 2013F
Taiwan Singapore Malaysia

Source: Sa Sa, CCBIS estimates

Challenges for e-commerce

Change in government custom Sa Sa’s e-commerce revenue saw growth of 22% YoY in 1HFY11. It has increased its
duty and logistical problems contribution to total group sales to 7% in 1HFY11. However, we expect growth from
represent hurdles for Sa Sa’s e-commerce to slow due to government policy and inadequate logistic support. More
online business specifically:

 The Chinese government lowered the custom duty exemption limit in


September 2010, which has had a detrimental effect on online sales. New
custom regulations require adjustments to Sa Sa’s online strategy and resource
allocation.

 The new warehouse was initially unable to handle the quantity of orders given
the breadth of products on offer. As a result, 3QFY11 sales deliveries were
severely affected.

Management normalized warehouse operations and efficiency has greatly improved.


Sa Sa has set aside a team to expand the local online business in China and
co-operates closely with high-traffic online portals, e.g. Taobao, to distribute its
products.

Given the adjustments being made, we anticipate online sales growth to be flat in
FY11F. However, we expect a gradual increase in online business in the coming years,
given the rising popularity of online shopping and the adjusted marketing strategy.

Gross margin enhancement through increased private label


distribution

Rising GPM, supported by Thanks to the rebalanced product offering, sales contributions from exclusive
increased contribution from products continued to rise in 1HFY11 to 40% of the group’s retail business from 32%
higher margin in-house labels the year before. Driven by successful new brands and product launches, sales growth
of in-house brand products experienced strong growth of 24% YoY in 1HFY11. In light
of improving market conditions, the company intends to expand its own brand’s share
within its sales mix.

45
Hong Kong Cosmetics Retailers 28 April 2011

Gross margin for Sa Sa products


Sourcing Gross profit margin (%)
Private label 80
Exclusive products 65 – 70
Products sourced from local suppliers 35 – 40
Parallel trade 10 – 15
Source: Sa Sa

At the group level, we estimate gross margin expansion of 0.9ppt in FY11F, followed
by 1.0ppt in FY12F and 1.1ppt in FY13F. The ultimate goal of the company is to
increase the contribution from exclusive products to 50% of sales. This implies gross
margin of 50% for the group by FY16F.

Gross profit margin trends in FY08-13F


48%

47.1%
47%

46.0%
46%

45.0%
45%

44.1%
44% 43.7%

43.1%
43%
2008 2009 2010 2011F 2012F 2013F

Source: Sa Sa, CCBIS estimates

Prudent cost control measures

Major costs remain Rental cost. Partly on account of its well-known brand name, Sa Sa has considerable
well-controlled bargaining power with landlords and in many cases is invited to be an anchor tenant
with favorable rental rates. Sa Sa also has a great deal of flexibility to relocate its
stores given its established clientele.

Currently, one-third of the stores are located in tourist areas. Management is planning
to increase shop openings in non-tourist areas in light of rising rental pressure.
One-third of Sa Sa’s outlets are up for renewal every year and management estimates
an average rental hike by 19% for leases being renewed in FY11F, an estimate that
seems low compared to peers, in our view. We believe management is able to control
rental costs within 11% of total sales in FY11F-13F.

Staff cost. Staff cost in the retail business accounts for approximately 14% of total
retail sales. We expect staff cost to maintain at the reasonable level of 14% of total
sales in FY11-13F, since frontline salesladies’ compensation is largely turnover-based.

Advertising and promotion cost. Sa Sa has paid for several celebrity sponsorships
in Hong Kong as well as organized joint promotions and partnerships with local
suppliers and international beauty brands. Despite the large amount of advertising
activity conducted by Sa Sa, advertising and promotion costs were well contained
within 2% of total sales for the group in FY11-13F.

46
Hong Kong Cosmetics Retailers 28 April 2011

Key assumptions
Year to end-March (HK$m) 2008 2009 2010 2011F 2012F 2013F
Sales by region 3,221 3,609 4,111 4,761 5,481 6,257
Hong Kong & Macau 2,643 2,981 3,288 3,795 4,371 5,008
China 116 61 97 152 207 248
Taiwan 131 132 147 163 174 188
Singapore 135 140 162 201 237 273
Malaysia 104 142 176 209 238 272
Sasa.com 93 154 241 241 253 268

Revenue (YoY, %) 20 12 14 16 15 14
Hong Kong & Macau 19 13 10 15 15 15
China 31 (48) 60 57 36 20
Taiwan 9 0 12 11 7 8
Singapore 10 4 16 24 17 15
Malaysia 65 36 24 19 14 14
Sasa.com 63 66 57 0 5 6

Sales breakdown by region and business segment (%)


Hong Kong & Macau 82 83 80 80 80 80
China 4 2 2 3 4 4
Taiwan 4 4 4 3 3 3
Singapore 4 4 4 4 4 4
Malaysia 3 4 4 4 4 4
Sasa.com 3 4 6 5 5 4

Number of stores 110 125 150 191 226 262


Hong Kong and Macau 58 62 70 81 90 100
China 4 10 17 32 45 58
Taiwan 14 13 15 19 22 25
Singapore 13 14 18 21 24 27
Malaysia 21 26 30 38 45 52

Net additions of stores 14 15 25 41 35 36


Hong Kong and Macau 5 4 8 11 9 10
China (1) 6 7 15 13 13
Taiwan 3 (1) 2 4 3 3
Singapore 0 1 4 3 3 3
Malaysia 7 5 4 8 7 7

Number of counters 14 25 21 25 28 32
Hong Kong and Macau 2 2 3 3 3 3
China 12 23 18 21 24 28
Taiwan 0 0 0 1 1 1
Singapore 0 0 0 0 0 0
Malaysia 0 0 0 0 0 0

Same-store sales growth (%)


Hong Kong & Macau 13 5 7 8 7 6
Taiwan (9) (3) 9 3 3 5
Singapore (1) (2) (2) 7 6 6
Malaysia 17 14 10 5 6 8

Gross profit margin (%) 43.1 43.7 44.1 45.0 46.0 47.1
YoY (ppt) 0.6 0.5 0.9 1.0 1.1

Rental expense 338 350 397 472 555 641


Rental expense as % of sales 11 10 10 10 11 11
Staff expense 566 493 555 649 753 873
Staff expense as % of sales 18 14 13 14 14 14
A&P expense 67 69 83 93 108 124
A&P expense as % of sales 2 2 2 2 2 2
Source: Sa Sa data, CCBIS estimates

47
Hong Kong Cosmetics Retailers 28 April 2011

Decent earnings outlook

Growing scale and growing contribution from private labels should drive gross margin
expansion and sustain sales growth. We expect the company to achieve a 25% EPS
CAGR in FY10-13F, based on a 15% CAGR in sales growth. Other costs are
expected to remain well contained given Sa Sa’s stringent cost measures. With such
a strong growth profile and projected margin enhancement, we believe Sa Sa
deserves to trade at a premium to peers, supported by its market leadership,
extensive network across Asia, high-quality operations and seasoned management.

Trading at dividend yield premium to peers

We estimate over 90% dividend Sa Sa has a dividend payout ratio of up to 100% for FY07-09, implying a dividend
payout in FY11-13F yield of 3-4% on average at the current price. Sa Sa’s dividend yield is relatively high
compared to the sector. Supported by the rich cash position of over HK$600m, we
expect over 90% dividend payout in the next three years, indicating dividend yield of
4-7% for FY11-13F. We believe that Sa Sa is one of the most attractive picks for
investors to park their capital.

Sa Sa’s 12-month forward rolling yield

5.9%

5.4%

4.9%

4.4%

3.9%

3.4%
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11

Source: Bloomberg, Sa Sa, CCBIS estimates

Initiate with Outperform rating and target price of HK$5.45

Sa Sa has undergone a mild de-rating over the past few months on worries over the
removal of import tax restrictions as well as the general de-rating of retail stocks. We
believe the potential for a further de-rating is minimal given the compelling dividend
payout and attractive ROE compared with peers. These factors should support
Sa Sa’s share price. Our target CY12F PE of 21x is conservative and based on an
earnings CAGR of 25% of 0.9x PE/G.

48
Hong Kong Cosmetics Retailers 28 April 2011

Group profit and loss


Year to end-March (HK$m) 2008 2009 2010 2011F 2012F 2013F
Revenue 3,221 3,609 4,111 4,761 5,481 6,257
Hong Kong, Macau and China 2,759 3,042 3,385 3,947 4,578 5,256
Taiwan 131 132 147 163 174 188
Singapore 135 140 162 201 237 273
Malaysia 104 142 176 209 238 272
Sasa.com 93 154 241 241 253 268

Revenue (YoY, %) 20 12 14 16 15 14
Hong Kong, Macau and China 19 13 11 17 16 15
Taiwan 31 (48) 12 11 7 8
Singapore 9 0 16 24 17 15
Malaysia 10 4 24 19 14 14
Sasa.com 65 36 57 – 5 6

COGS (1,832) (2,032) (2,296) (2,617) (2,957) (3,308)

Gross profit 1,389 1,577 1,815 2,145 2,523 2,950


YoY (%) 22 13 15 18 18 17

Gross margin (%) 43.1% 43.7% 44.1% 45.0% 46.0% 47.1%

Other gains/losses 20 26 26 30 34 37

Rental expense 338 350 397 472 555 641


YoY (%) 18 4 13 19 17 16
As % of retail sales 10.8 10.1 10.3 10.5 10.6 10.7

Staff expense 566 493 555 649 753 873


YoY (%) 17 (13) 13 17 16 16
As % of sales 17.6 13.7 13.5 13.6 13.7 14.0

Advertising and promotional expense 67 69 83 93 108 124


YoY (%) 47 4 19 13 16 15
As % of sales 2.1 1.9 2.0 2.0 2.0 2.0

Other SG&A expense 119 322 347 376 408 449


YoY (%) 18 13 19 5 5 5
As % of sales 3.7 8.9 8.4 7.9 7.4 7.2

Total SG&A expense 1,090 1,235 1,381 1,590 1,824 2,088


YoY (%) 17 13 12 15 15 15
As % of sales 33.8 34.2 33.6 33.4 33.3 33.4

EBIT 320 372 457 585 734 899


YoY (%) 31 16 23 28 25 22

EBIT margin (%) 9.9 10.3 11.1 12.3 13.4 14.4

Depreciation and amortization 66 64 62 71 72 74


YoY (%) (16) (2) (3) 14 2 2
(to be continued)

49
Hong Kong Cosmetics Retailers 28 April 2011

Group profit and loss (continued)


Year to end-March (HK$m) 2008 2009 2010 2011F 2012F 2013F
EBITDA 385 436 519 656 806 973
YoY (%) 19 13 19 26 23 21
EBITDA margin (%) 12.0 12.1 12.6 13.8 14.7 15.5

Interest income 25 13 6 6 9 9

Profit before tax 420 383 465 591 742 908


YoY (%) 54 (9) 21 27 26 22
PBT margin (%) 13.0 10.6 11.3 12.4 13.5 14.5

Income tax (71.3) (67.4) (83.8) (106.4) (133.6) (163.4)


Effective tax rate (%) 17.0 17.6 18.0 18.0 18.0 18.0

Net profit 348 316 381 485 609 744


YoY (%) 57 (9) 21 27 26 22
Net margin (%) 3.2 3.9 4.3 4.4 4.3 4.4

Exceptional 76 2 (2) – – –

Normalized net profit 272 314 383 485 609 744


YoY (%) 36 15 22 27 26 22
Normalized net margin (%) 8.5 8.7 9.3 10.2 11.1 11.9

EPS (HK$) 0.126 0.114 0.137 0.173 0.217 0.265


YoY (9) 20 26 26 22
Core EPS (HK$) 0.099 0.114 0.138 0.173 0.217 0.265
YoY 15 21 26 26 22
DPS (HK$) 0.105 0.115 0.140 0.170 0.220 0.270
Source: Sa Sa data, CCBIS estimates

50
Hong Kong Cosmetics Retailers 28 April 2011

Balance sheet projections


Year to end-March (HK$m) 2008 2009 2010 2011F 2012F 2013F
Property, plant & equipment 150 115 134 139 145 151
Investment securities 0 0 0 0 0 0
Other assets 73 105 135 135 135 135
Non-current assets – total 222 219 268 273 279 285

Inventories 471 469 563 595 681 770


Trade receivables 28 25 39 39 45 51
Investment securities 0 0 0 0 0 0
Cash and bank 652 620 646 783 827 920
Other current assets 70 81 66 66 66 66
Current assets – total 1,221 1,196 1,314 1,483 1,618 1,807

Trade and bill payables 178 144 176 215 243 272
Other payables 114 111 156 179 203 227
Tax payable 33 22 35 53 67 82
Short-term loan 0 0 0 0 0 0
Receipts in advance 0 0 0 0 0 0
Current liabilities – total 325 278 368 448 512 580

Long-term loan 0 0 0 0 0 0
Receipts in advance 0 0 0 0 0 0
Other non-current liabilities 10 15 19 19 19 19
Minority interest 0 0 0 0 0 0
Non-current liabilities – total 10 15 19 19 19 19

Equity 1,108 1,123 1,196 1,290 1,366 1,494

Total assets 1,443 1,415 1,582 1,757 1,897 2,092


Total liabilities and equities 1,443 1,415 1,582 1,757 1,897 2,092

Net debt (cash) (642) (606) (628) (764) (808) (901)


Net gearing (%) Net cash Net cash Net cash Net cash Net cash Net cash
Source: Sa Sa data, CCBIS estimates

51
Hong Kong Cosmetics Retailers 28 April 2011

Cashflow projections
Year to March (HK$m) 2008 2009 2010 2011F 2012F 2013F
EBIT 320 372 457 585 734 899
D&A (66) (64) (62) (71) (72) (74)
EBITDA 385 436 519 656 806 973
Operating cash flow before changes in working capital 640 743 914 1,170 1,468 1,798

Working capital changes:


Inventories (87) 2 (94) (32) (86) (90)
Trade and other receivables 3 3 (13) (1) (6) (6)
Trade and other payables 57 (34) 31 39 28 29
Other payables 22 (3) 45 23 23 24
Total working capital changes (5) (32) (31) 30 (40) (43)

Interest received 25 13 6 6 9 9
Interest paid 0 0 0 0 0 0
Tax paid (64) (78) (70) (89) (120) (149)
Operating cash flow 328 334 415 597 646 781
Total capex (59) (75) (74) (76) (78) (80)
Free cash flow after CAPEX 269 259 341 521 568 701
Other investing cashflow (208) 201 (213) 6 9 9
Proceeds from issue of shares 17 4 27 0 0 0
Dividend paid (234) (290) (360) (390) (533) (617)
Other financing cashflow 0 0 0 0 0 0
Net cash flow (155) 174 (206) 137 44 93
Source: Sa Sa data, CCBIS estimates

Key financial metrics


Year to end-March (HK$m) 2008 2009 2010 2011F 2012F 2013F
ROAE (%) 26 28 33 39 46 52
ROAA (%) 19 22 26 29 33 37
ROIC (%) 140 99 101 108 150 176
Average inventory days 85 84 82 83 84 85
Average receivable days 3 3 3 3 3 3
Average payable days 30 29 25 30 30 30
Cash conversion cycle (days) 59 58 59 56 57 58
Net gearing (%) Net cash Net cash Net cash Net cash Net cash Net cash
Gross gearing (%) 0 0 0 0 0 0
Source: Sa Sa data, CCBIS estimates

52
Hong Kong Cosmetics Retailers 28 April 2011

In-house brands

Source: Sa Sa

53
Hong Kong Cosmetics Retailers 28 April 2011

Sa Sa’s management biography and shareholding structure

Executive directors

 Dr. Kwok Siu Ming, Simon, 57, co-founder, chairman and CEO of Sa Sa
International. Dr. Kwok has expanded Sa Sa’s footprint from one outlet in 1978
to an expansive network across many countries in Asia. Dr. Kwok is a
committee member of the Chinese People’s Political Consultative Conference
of Hubei Province, honorary life president and a councilor of the Cosmetics &
Perfumery Association of Hong Kong, honorary president of the Federation of
Beauty Industry (Hong Kong), vice-chairman of the Quality Tourism Services
Association Governing Council, honorary founding president of the Professional
Validation Center of the Hong Kong Business Sector, and honorary life
president of the Hong Kong Brands Protection Alliance. Dr. Kwok was awarded
the “Owner-Operator Award” at the DHL/SCMP Hong Kong Business Awards
2007.

 Dr. Kwok Law Kwai Chun, Eleanor, 56, founder of the group and a member of
the executive committee, compensation committee, nomination committee and
risk management committee. Dr. Kwok has more than 34 years of experience in
the sale and marketing of beauty products. With extensive professional
knowledge and many years of experience in cosmetics retailing, she pioneered
the unique operational concept of open-shelf displays of beauty products.
Dr. Kwok plays a leading role in the marketing, operations, human resources
and staff training functions of the group. She is currently the honorary president
of the Cosmetics & Perfumery Association of Hong Kong, an executive
committee member of the Guangdong Women’s Federation, honorary president
of the Hong Kong Federation of Women and a member of the HKFW
Entrepreneurs Committee.

 Mr. Look, Guy, 53, CFO and executive director of the group. Mr. Look assumed
the role of CFO in March 2002 and has accumulated over 28 years of
experience in local and overseas financial and general management. He has
previously served as the CFO and an executive director of Tom.com Limited. In
2009, Mr. Look became an independent non-executive director of Cafe de Coral
Holdings Limited. He holds a Bacehlor’s Degree in Commerce from the
University of Birmingham, England, membership with the Institute of Chartered
Accountants in England and Wales and with the Hong Kong Institute of Certified
Public Accountants.

Senior management

 Mr. Law Kin Ming, Peter, 54, was appointed senior vice-president, category
management & product development in January 2008. Mr. Law is the
brother-in-law of Dr. Kwok Siu Ming Simon. He has over 26 years experience in
the field of sales and marketing, 19 of which were in senior management
positions. He has a Bachelor’s Degree in Arts majoring in Communications
Studies from the University of Windsor, Ontario, Canada and is pursuing a
Bachelor’s Degree in Commerce.

 Ms Loi Wei Sin, Corina, 53, was appointed as the senior vice president/country
head of Malaysia since 2008. Ms. Loi has more than 27 years marketing and
retail experience encompassing everything from health food products to high
fashion. Ms. Loi was also an initial member of the Malaysian operation.

54
Hong Kong Cosmetics Retailers 28 April 2011

Shareholding structure

Kwok Siu Ming Public Shareholder

65.65% 34.35%

Sa Sa International Holdings Ltd.


(178 HK)

Source: Bloomberg, HKEx

55
Hong Kong Cosmetics Retailers 28 April 2011

Rating definitions
Outperform (O) – expected return 10% over the next twelve months
Neutral (N) – expected return between -10% to 10% over the next twelve months
Underperform (U) – expected return < -10% over the next twelve months
Analyst Certification:
The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities
or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report;
and (iii) they receive no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations
made by them. The authors of this report further confirm that (i) neither they nor their respective associate(s) (as defined in the Code of Conduct issued by the Hong Kong
Securities and Futures Commission) has dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of the report; (ii)
neither they nor their respective associate(s) serves as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective
associate(s) has any financial interests in the securities covered in this report.
Disclaimers:
This report is prepared by CCB International Securities Limited. CCB International Securities Limited is a wholly owned subsidiary of CCB International (Holdings) Limited
(“CCBIH”) and China Construction Bank Corporation (“CCB”). Information herein has been obtained from sources believed to be reliable but CCB International Securities
Limited, its affiliates and/or subsidiaries (collectively “CCBIS”) do not warrant its completeness or accuracy or appropriateness for any purpose or any person whatsoever.
Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Investment involves risk and past performance is
not indicative of future results. Information in this report is not intended to constitute or be construed as legal, financial, business, tax or any professional advice for any
prospective investors and should not be relied upon in that regard. This report is for informational purposes only and should not be treated as an offer or solicitation for the
purchase or sale of any products, investments, securities, trading strategies or financial instruments of any kind. Neither CCBIS nor any other persons accept any liability
whatsoever for any loss arising from any use of this report or its contents or otherwise arising in connection therewith. Securities, financial instruments or strategies
mentioned herein may not be suitable for all investors. The opinions and recommendations herein do not take into account prospective investors circumstances, objectives,
or needs and are not intended as recommendations of particular securities, financial instruments or strategies to any prospective investors. The recipients of this report
shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this report.
Readers are cautioned that actual results may differ materially from those set forth in any forward-looking statements herein. While all reasonable care has been taken to
ensure that the facts stated herein are accurate and that the forward-looking statements, opinions and expectations contained herein are based on fair and reasonable
assumptions, CCBIS has not been able to verify independently such facts or assumptions and CCBIS shall not be liable for the accuracy, completeness or correctness
thereof and no representation or warranty is made, express or implied, in this regard. The recipients must make their own assessments of the relevance, accuracy and
adequacy of the information contained in this report and make such independent investigation as they may consider necessary or appropriate for such purpose. Recipients
should seek independent legal, financial, business and/or tax advice if they have any doubt about the contents of this report and satisfy themselves prior to making any
investment decision that such investment is in line with their own investment objectives and horizons.
The recipients should be aware that CCBIS may do business with the issuer(s) of the securities covered in this report or may hold interest in such securities for itself and/or
on behalf of its clients from time to time. As a result, investors should be aware that CCBIS may have a conflict of interest that could affect the objectivity of this report and
CCBIS will not assume any responsibility in respect thereof. Where applicable and required, any relationship CCBIS may have with the issuers(s) of the securities or
interests in such stocks(s) will be disclosed in this section of the report. The information contained herein may differ or be contrary to opinions expressed by other
associates of CCBIS or other members of the CCBIH group of companies.
This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all
jurisdictions or to certain categories of investors. This report is not directed at you if CCBIS is prohibited or restricted by any legislation or regulation in any jurisdiction from
making it available to you. You should satisfy yourself before reading it that CCBIS is permitted to provide research material concerning investments to you under relevant
legislation and regulations. In particular, this report is only distributed to certain US Persons to whom CCBIS is permitted to distribute according to US securities laws, but
cannot otherwise be distributed or transmitted, whether directly or indirectly, into the US or to any US person. This report also cannot be distributed or transmitted, whether
directly or indirectly, into Japan and Canada and not to the general public in the People’s Republic of China (for the purpose of this report, excluding Hong Kong, Macau
and Taiwan).
Any unauthorized redistribution by any means to any persons, in whole or in part of this research report is strictly prohibited and CCBIS accepts no liability whatsoever for
the actions of third parties in distributing this research report.
Copyright 2011 CCBIS. The signs, logos and insignia used in this research report and company name “CCB International Securities Limited” are the
trademarks of CCB and/or CCBIS. All rights are hereby reserved.

CCB International Securities Limited


34/F, Two Pacific Place, 88 Queensway, Admiralty, Hong Kong
Tel: (852) 2532 6100 / Fax: (852) 2537 0097

Você também pode gostar