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Hong Kong Cosmetics Retailers 28 April 2011
Table of Contents
SWOT analysis.......................................................................................................................................18
2
Hong Kong Cosmetics Retailers 28 April 2011
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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.
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.
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Hong Kong Cosmetics Retailers 28 April 2011
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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
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Hong Kong Cosmetics Retailers 28 April 2011
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.
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
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.
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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
Oct-09
Oct-07
Oct-09
Jan & Feb-07
Apr-07
Jun-07
Aug-07
Dec-07
Mar-08
Jul-08
Sep-08
Dec-09
Mar-10
Jul-10
Sep-10
Dec-07
Mar-08
Jul-08
Sep-08
Dec-09
Mar-10
Jul-10
Sep-10
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)
Cosmetics products are often at the top of the shopping lists of mainland tourists for
several compelling reasons:
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Hong Kong Cosmetics Retailers 28 April 2011
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.
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Hong Kong Cosmetics Retailers 28 April 2011
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)
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.
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.
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Hong Kong Cosmetics Retailers 28 April 2011
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
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.
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Hong Kong Cosmetics Retailers 28 April 2011
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)
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
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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.
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Hong Kong Cosmetics Retailers 28 April 2011
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 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.
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Hong Kong Cosmetics Retailers 28 April 2011
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
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.
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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.
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.
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%.
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.
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Hong Kong Cosmetics Retailers 28 April 2011
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
Long established industry leaders with strong bargaining power with landlords
and brand distributors
Weaknesses
Opportunities
Threats
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Hong Kong Cosmetics Retailers 28 April 2011
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Hong Kong Cosmetics Retailers 28 April 2011
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.
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.
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
Beauty
Source: Bonjour
Retail stores
100%
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
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
“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.
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.
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.
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.
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
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.
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
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.
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%.
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
100%
9% 11% 12%
5% 6%
5% 6%
80% 6% 5%
11% 10% 10%
40%
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.
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
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
Marketing
Staff
10%
10.39%
Others
Utility &
4%
building
management Staff
Marketing 0.65% 51%
Others 0.93%
2.54%
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.
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)
27
Hong Kong Cosmetics Retailers 28 April 2011
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.
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.
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
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
29
Hong Kong Cosmetics Retailers 28 April 2011
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.
Bonjour sits on a hefty cash position of over HK$200m in net cash. Its sound financials
with projected ROE of 100% in FY11F should support the company’s attractiveness.
5.9%
5.4%
4.9%
4.4%
3.9%
3.4%
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11
30
Hong Kong Cosmetics Retailers 28 April 2011
31
Hong Kong Cosmetics Retailers 28 April 2011
32
Hong Kong Cosmetics Retailers 28 April 2011
Cashflow projections
Year to end-December (HK$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
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
33
Hong Kong Cosmetics Retailers 28 April 2011
Products from parallel imports Products from Hong Kong sole agents
34
Hong Kong Cosmetics Retailers 28 April 2011
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
64.81% 35.19%
36
Hong Kong Cosmetics Retailers 28 April 2011
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.
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.
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.
38
Hong Kong Cosmetics Retailers 28 April 2011
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.
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
15% 13%
10%
5%
0%
Hong Kong & China Taiwan Singapore Malaysia Sasa.com
Macau
Source: Sa Sa Source: Sa Sa
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.
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)
40
Hong Kong Cosmetics Retailers 28 April 2011
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)
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.
41
Hong Kong Cosmetics Retailers 28 April 2011
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
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.
42
Hong Kong Cosmetics Retailers 28 April 2011
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
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.
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
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.
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.
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
44
Hong Kong Cosmetics Retailers 28 April 2011
300
273 272
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
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 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.
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.
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
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.
47.1%
47%
46.0%
46%
45.0%
45%
44.1%
44% 43.7%
43.1%
43%
2008 2009 2010 2011F 2012F 2013F
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
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
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
47
Hong Kong Cosmetics Retailers 28 April 2011
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.
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$600m, we
expect over 90% dividend payout in the next three years, indicating dividend yield of
4-7% for FY11-13F. We believe that Sa Sa is one of the most attractive picks for
investors to park their capital.
5.9%
5.4%
4.9%
4.4%
3.9%
3.4%
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11
Sa Sa has undergone a mild de-rating over the past few months on worries over the
removal of import tax restrictions as well as the general de-rating of retail stocks. We
believe the potential for a further de-rating is minimal given the compelling dividend
payout and attractive ROE compared with peers. These factors should support
Sa Sa’s share price. Our target CY12F PE of 21x is conservative and based on an
earnings CAGR of 25% of 0.9x PE/G.
48
Hong Kong Cosmetics Retailers 28 April 2011
Revenue (YoY, %) 20 12 14 16 15 14
Hong Kong, Macau and China 19 13 11 17 16 15
Taiwan 31 (48) 12 11 7 8
Singapore 9 0 16 24 17 15
Malaysia 10 4 24 19 14 14
Sasa.com 65 36 57 – 5 6
Other gains/losses 20 26 26 30 34 37
49
Hong Kong Cosmetics Retailers 28 April 2011
Interest income 25 13 6 6 9 9
Exceptional 76 2 (2) – – –
50
Hong Kong Cosmetics Retailers 28 April 2011
Trade and bill payables 178 144 176 215 243 272
Other payables 114 111 156 179 203 227
Tax payable 33 22 35 53 67 82
Short-term loan 0 0 0 0 0 0
Receipts in advance 0 0 0 0 0 0
Current liabilities – total 325 278 368 448 512 580
Long-term loan 0 0 0 0 0 0
Receipts in advance 0 0 0 0 0 0
Other non-current liabilities 10 15 19 19 19 19
Minority interest 0 0 0 0 0 0
Non-current liabilities – total 10 15 19 19 19 19
51
Hong Kong Cosmetics Retailers 28 April 2011
Cashflow projections
Year to March (HK$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
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
52
Hong Kong Cosmetics Retailers 28 April 2011
In-house brands
Source: Sa Sa
53
Hong Kong Cosmetics Retailers 28 April 2011
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
65.65% 34.35%
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
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