China / Hong Kong Industry Focus

Hong Kong Retail Sector

Refer to important disclosures at the end of this report

DBS Group Research . Equity 13 Apr 2018

Blue skies
 St ronger Mainland tourist consumption in HK/Macau HSI : 30,831
should linger through the year on weak HK Dollar and
bet ter transport links with China.
A N ALYST
 St ringent cost control coupled with improving operating Mavis HUI+852 2863 8879
lev erage should also pay off. mavis_hui@dbs.com

 We are now more confident for a better retail prospect.

We raise our TP of Sa Sa (178.HK) to HK$5.11, along with
Recommendation & valuation
higher earnings projections and a roll-over to benchmark
4% F Y20 yield, and upgrade Luk Fook (590.HK) to BUY T arget 18F Mkt
f ollowing an ov ersold.
Company Pric e Pric e Rec om PE Y ield Cap
T ourists matter. According to channel checks and official data Name HK $ HK $ x % US$m
from selected operators, key retailers in HK/Macau have staged
J ew elleries
a revival and achieved double-digit y -o-y same-store sales
Chow Sang Sang* 16.56 20.65 BUY 12.1 3.2 1,441
growth (“SSSG”) in 1Q18. Aside from supportive local
116 HK
demand, we have seen better PRC tourist arrival numbers
Luk F ook Hdg*# 28.65 37.32 BUY 12.7 3.9 2,163
(2M18: +13.6%) and a stronger consumption ahead of major
590 HK
infrastructural improv ements (e.g. Express Rail Link, HK-Zhuhai-
Sa Sa Intl.Hdg.*# 4.33 5.11 BUY 24.4 4.1 1,691
Macau Bridge). As the HK Dollar (-4% YTD) stays weak in near-
178 HK
term, coupled with a fairly low base effect versus 3 years ago,
Chow Tai F ook# 9.82 n.a. NR 20.8 3.1 12,619
HK retailers should remain in a good position to post better
1929 HK
performance. Our sensitivity analysis also suggests, under
Emperor Watch 0.475 n.a. NR 20.7 n.a. 420
normal conditions, the Express Rail Link that connects HK to
887 HK
China’s High-Speed Railway could bring >5m additional
Oriental Watch# 2.28 n.a. NR n.a. n.a. 167
Mainland v isitors in its first year of operation upon
398 HK
inauguration by Sep 2018.
# FY17: FY18; FY18: FY19
Cost pressure – just a laggard. Stronger SSSG should better
dilute fixed overheads in retail store operations. Coupled with Source: Thomson Reuters, *DBS Vickers
room for further savings from rental cuts on lease renewals this
y ear, we are more convinced that leading retailers with good
bargaining and pricing powers should be able to lift their
profitability and earnings performance.

St ronger conviction. We have raised our earnings estimates for

Sa Sa by 5%/18% for FY18/FY19, especially given its higher
correlation to tourist consumption as affordable cosmetics
more easily prompt impulse buying. We have also become
more confident on the performance of hard luxuries retailers,
particularly for jewellery plays with mass-market positioning
that could book additional gains from gold product sales along
with an uptrend in gold prices. We upgrade Luk Fook from
HOLD to BUY especially following its >15% share price
correction over the past 3 months.

sa- AH
Industry Focus
Hong Kong Retail Sector

RMB vs. HKD

Strong 1Q18 performance in HK & Macau

1.3
Our channel checks have pointed to robust same-store sales
growth (“SSSG”) across key retailers in HK/Macau. Luxury 1.3
watch retailers including Emperor Watch and Oriental Watch
achieved >40% y -o-y SSSG; leading jewellery retailers like 1.2
Chow Tai Fook, Chow Sang Sang and Luk Fook were seeing a
1.2
teens’ SSSG; cosmetics retailer Sa Sa also just reported a 15%
SSSG for its core HK/Macau markets in 1Q18. Stronger top-line
1.1
growth should also help beefing up operating leverage and
profitability. 1.1

Estimated 1Q18 SSSG in HK/Macau 1.0

Apr/12
Sep/12

Apr/17
Sep/17
Nov/11

Jul/13

Jan/16

Nov/16
Feb/13

Feb/18
Oct/14

Aug/15
Dec/13

Mar/15

Jun/16
May/14
60%
50%
40% Source: Bloomberg Finance L.P.
30%
20%
10%
0% Renew ed rents still see some room t o fall
-10%
While there has been 3 consecutive years of rental correction
Oriental Watch^

Sa Sa
Luk Fook*
Emperor Watch

Chow Sang Sang

Lifestyle (Flagship CWB

Chow Tai Fook^

across street-level stores in the major shopping districts of HK,

we still see some room for rent cuts on lease renewals in 2018.
Store, HK)

Given a normal 3-year term, this year, retailers seek to re-

negotiate for shop rentals that they have anchored in 2015,
which was still generally much higher than the current market
level. Besides, amongst key retail chains that we have talked to,
2017 1Q18E all of them are looking for, at least, a single-digit to 20%+
rental cut upon lease renewals this year, and would be well-
^ Only for 2M18 prepared for store relocation should landlords refuse to reduce
their rent payments.
* Only for like-to-like SSSG in Chinese New Year
Source: DBS Vickers
Against this backdrop, we should be able to see a further trim
in total local rent expenses for 2018 despite some recent signs
of higher asking rents. In the next 2-3 years, even should the
HK retail market rebound further from rising Mainland tourist
A w eak HK Dollar attracts Mainland tourist consumption consumption, we expect any rental hikes to merely cast a
laggard impact on operating costs. Better sales momentum
The sound 1Q18 sales momentum was driven by strengthened along with rising shoppers’ traffic should also enhance
tourist consumption and decent local demand, and should be a operating leverage and safeguard profitability of key retailers.
good indicator for positive business prospects. This is especially
the case given lingering weakness in the HKD to attract more
tourist purchases, as tourist spending accounts for 40-50% of
HK/Macau revenue across key local retailers, and even more for
cosmetics retailers like Sa Sa (69% in FY3/17).

Page 2
 Industry Focus
Hong Kong Retail Sector

High street shop rental growth (core areas; accumulative) Gold price trend (US$ per gram)

1420
1400
1380
1360
1340
1320
1300
1280
1260
1240
1220

May-18

May-19
Oct-18
Nov-18

Feb-19
Jul-18
Jun-18

Aug-18

Dec-18

Jun-19
Sep-18
Apr-18

Jan-19

Apr-19
Mar-19
Source: CBRE Research, 4Q17 Source: The Economy Forecast Agency

Impact s from inflation? Impending catalyst: “Express Rail Link”

While trade tension between China and the US seems to be
easing lately and more in the market are expecting an ultimate
negotiated settlement, inflation could remain on an upward
trend given economic growth expansion (e.g. US economy). As
such, average gold prices are anticipated to stay on a gradual
upward trend, and this should also benefit leading gold
jewellery retailers including Chow Tai Fook, Chow Sang Sang
and Luk Fook. Among the three of them, Luk Fook sustains the
lowest gold hedging ratio. Given a FIFO inventory accounting
treatment, this could translate into relatively higher unit gains
from its gold product sales along with rising gold prices.
Additionally, an inflationary market would mean more room
for higher average selling prices, which should directly benefit
discretionary plays.
Gold hedging policy
60%
50%
40%
30%
20%
10%
0%
Luk Fook Chow Sang Sang Chow Tai Fook
(blended)
The 26-km long HK section of the Guangzhou-Shenzhen-HK
Express Rail Link runs from West Kowloon in HK to the
boundary of HK and Shenzhen, and should inaugurate by Sep
2018. Aside from shortening the travel time between HK and
Shenzhen (Futian) to only 14 minutes (versus 45-60 minutes
using existing facilities: e.g. train, bus or private car), the
Express Rail Link will also connect with the 25,000-km National
High-speed Railway Network in Mainland China, thus
significantly reducing transportation time between HK and the
major cities of China.
Take Guangzhou as an example, travel time between HK and
Guangzhou on the Express Rail Link will be 48 minutes (to
Guangzhou South Station), as compared to c.2 hours via the
current train service of Guangzhou-Kowloon Through Train
between HK and the Guangzhou East Station. While the drive
time between Guangzhou South Station and Guangzhou East
Station takes nearly 1 hour, we believe the upcoming Express
Rail Link could potentially bring an additional group of
frequent travellers who reside closer to the Guangzhou South
Station. As transportation time between major cities of China
and HK will be shortened, this could also enhance the number
of day trippers from the Guangdong Province (e.g. from
Shantou and Xiamen).

Source: DBS Vickers

Page 3
Industry Focus
Hong Kong Retail Sector

Travel time between HK and major cities of China upon

the launch of Express Rail Link
Cit y T ransport at ion t ime
Shantou 汕頭 2.5 hrs
Xiamen 廈門 3.5 hrs
Nanning 南寧 4 hrs
Changsha 長沙 4 hrs
Wuhan 武漢 5 hrs
Nanchang 南昌 4.5 hrs
F uzhou 福州 5 hrs
Kunming 昆明 6.5 hrs
Hangzhou 杭州 7 hrs
Zhengzhou 鄭州 7 hrs
Shanghai 上海 8 hrs
Nanjing 南京 8 hrs
Beijing 北京 9 hrs
Xi'an 西安 9 hrs
Chongqing 重慶 11.5 hrs
Chengdu 成都 12 hrs

Source: News Reports

Page 4
 Industry Focus
Hong Kong Retail Sector

The Express Rail Link to connect with the National High-Speed Railway Network in China

Beijing
(9 hrs)

Z hengzhou
X i'an (7 hrs)
(9 hrs)
Nanjing
(8 hrs)

Wuhan Shanghai
Chengdu (5 hrs) Hangzhou (8 hrs)
(12 hrs) (7 hrs)

Changsha
(4 hrs)
Chongqing
Nanchang
(11.5 hrs)
(4.5 hrs)
F uzhou
(5 hrs)
K unming X iamen
(6.5 hrs) Guangzhou (3.5 hrs)
Nanning
(4 hrs)
Shantou
Hong Kong (2.5 hrs)

Source: DBS Vickers

Page 5
Industry Focus
Hong Kong Retail Sector

In our sensitivity analysis, we have prudently assumed a base Sensitivity analyses: Visitors to HK following the
case scenario of 1.4% organic CAGR in tourist arrival numbers inauguration of Express Rail Link
to HK for 2017-21. With expected commencement of the
Express Rail Link by Sep 2018, total Mainland visitor numbers to 70 M
HK should be higher. Based on estimates provided by the MTR,
and by further assuming e.g. 70% of Chinese visitors using the 60 M 10.3% CAGR 18F -21F
new Express Rail Link to be migrated users of the existing 7.9% CAGR 18F - 21F
transport facilities, total visitor numbers could post a 5.4% 50 M 5.4% CAGR 18F -21F
CAGR for 2017-21.
40 M
With a higher amount of Mainland tourists visiting HK, local
retailers should benefit to a good extent. Many visitors will
30 M
somehow ride on HK’s tax-free shopping and purchase some
merchandises, be it a lip stick, or more expensive products such
20 M
as luxury bags, jewelleries & watches for more tax savings.
2H18F 2019F 2020F 2021F
30% overlap with existing tourist
50% overlap with existing tourist
70% overlap with existing tourist
Base Case : 1.4% CAGR

Page 6
 Industry Focus
Hong Kong Retail Sector

A ppendix
HK/Macau same-store sales growth (%)

30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
-60.0%
1Q14

2Q14

3Q14

4Q14

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17
1Q15

2Q15

3Q15

4Q15

1Q16

4Q17

1Q18
Sa Sa Chow Sang Sang Chow Tai Fook Luk Fook

Source: DBS Vickers (Es timated numbers for Chow Sang Sang as the company does not report quarterly data.)

Hong Kong retail sales (monthly) Hong Kong retail sales (annual)

HKD bn % HKD bn
100,000 35 600 30%
28 24.9%
80,000 494 493 475 25%
21 500 18.3% 445 437 446
60,000 14 406 20%
7 400
325 15%
40,000 0
300 275 10%
(7)
20,000 9.8% -0.2% 2.2% 5%
(14) 11.0%
200 0.6%
0 (21) -3.7% 0%
Dec-11

Dec-16
Jun-12

Jun-17
Mar-15
May-13

Apr-14
Sep-14
Nov-12

Nov-17
Jan-Feb 11

Jan-Feb 16
Jul-11

Aug-15

Jul-16
Oct-13

100 -8.1% -5%

0 -10%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Hong Kong Retail Sales (LHS) YoY growth (RHS) Hong Kong Retail Sales (LHS) YoY growth (RHS)

Source: CEIC Source: CEIC

Page 7
Industry Focus
Hong Kong Retail Sector

Hong Kong retail sales breakdown

Ret ail sales grow t h (Y oY , %)

Cat egories 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 2M 18

J ewellery, Watches, Clocks &

50.4 43.3 11.8 3.9 32.6 13.5 (16.7) (10.2) (15.9) (15.2) (21.1) (13.2) 0.8 9.3 21.0
V aluable Gift
Clothing, Footwear & Allied Products 27.8 28.2 11.5 4.1 9.8 6.8 8.1 0.1 (3.6) (10.1) (7.8) (0.9) (2.4) 3.0 19.3
Consumer Durable Goods 26.7 30.2 27.7 12.7 10.9 (3.8) (3.5) 8.6 12.3 (0.1) (24.1) (17.4) (8.9) 2.8 24.2
Department Stores 20.3 22.8 10.8 8.7 19.9 15.9 3.0 (0.2) (1.0) (7.0) (9.0) (3.4) 0.8 5.9 10.9
Other Consumer Goods 17.1 18.0 10.6 7.4 10.4 8.2 6.6 6.1 (0.8) (5.0) (2.1) 1.5 3.8 7.2 16.9
Fuels 15.1 14.4 6.0 0.9 1.5 (1.2) (0.9) (1.9) (12.5) (8.5) (1.6) 0.7 3.9 4.1 4.4
Supermarkets 10.9 13.9 12.6 8.1 7.2 6.4 6.0 3.2 1.1 1.5 1.0 0.6 (1.2) 0.7 1.0
Food, Alcoholic Drinks & Tobacco 5.8 8.6 3.1 2.6 2.4 4.5 7.1 6.1 7.9 4.0 1.2 2.2 2.4 3.9 10.5
Medicines & Cosmetics 22.3 20.8 17.0 13.1 13.2 10.6 8.4 10.2 0.9 (4.9) (1.6) 1.7 2.7 8.6 17.4

Ret ail Sales V alue 24.4 25.3 13.1 6.8 15.0 7.1 (1.3) 0.8 (1.6) (5.8) # # # (5.5) (0.6) 5.0 15.6

Hong Kong retail sales breakdown (monthly)

Ret ail sales grow t h (Y oY , %)
2017 2018
J an- J an-
Cat egories F eb M ar A pr M ay J un J ul A ug Sep Oct Nov Dec F eb
J ewellery, Watches, Clocks & V aluable Gift (1.2) 8.3 0.2 1.0 (0.8) 13.3 7.4 14.8 8.5 7.8 2.5 21.0
Clothing, Footwear & Allied Products (6.6) 1.2 1.8 (0.8) (1.9) 0.5 (1.4) 1.6 6.3 3.8 (10.1) 19.3
Consumer Durable Goods (15.5) (1.4) (12.7) (6.2) 0.2 (0.9) 4.3 (5.3) (8.4) 14.8 (12.8) 24.2
Department Stores (1.7) 0.1 3.9 3.6 0.8 5.5 5.2 9.4 6.2 5.7 (7.0) 10.9
Other Consumer Goods 3.9 5.3 5.7 3.0 0.7 4.5 2.5 8.9 8.0 11.2 1.5 16.9
Fuels 6.4 9.1 2.9 0.6 (0.8) 1.4 3.3 6.5 8.2 4.0 5.2 4.4
Supermarkets (3.9) 2.6 (0.5) (1.3) 0.4 0.0 2.3 2.7 0.7 1.5 (14.1) 1.0
Food, Alcoholic Drinks & Tobacco 1.5 2.8 3.1 3.1 2.6 4.5 (3.9) 9.2 8.9 3.6 (7.4) 10.5
Medicines & Cosmetics 3.0 3.4 4.8 2.4 (0.5) 2.6 2.3 12.8 10.0 13.6 3.2 17.4

Ret ail Sales V alue (3.2) 3.0 0.1 0.4 0.1 4.0 2.7 5.7 3.9 7.5 (5.8) 15.6
Source: CEIC

Page 8
 Industry Focus
Hong Kong Retail Sector

Chow Sang Sang PE Band Chow Sang Sang PB Band

x x
18 2.5
16
14 2.0
12
1.5
10 +1SD: 1.6x
+1SD: 13.5x
8
1.0
6 Avg: 12.2x Avg: 1.3x
4 -1SD: 11x 0.5 -1SD: 1x
2
0 0.0

Dec-14

Jun-17
Mar-16
May-15
Dec-14

Sep-13

Sep-18
Apr-13

Apr-18
Nov-17
Mar-16

Jul-14

Jan-17
May-15

Jun-17

Feb-14

Oct-15

Aug-16
Apr-13
Sep-13

Apr-18
Sep-18
Nov-17
Jul-14

Jan-17
Oct-15
Feb-14

Aug-16

Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

Luk Fook PE Band Luk Fook PB Band

x x
18 2.5
16
+1SD: 13.7x +1SD: 1.9x
14 2.0
12 Av g: 11.2x Av g: 1.6x
1.5
10
8 -1SD: 1.3x
-1SD: 8.7x 1.0
6
4 0.5
2
0 0.0
Dec-14

Jun-17
Mar-16
May-15
Sep-13

Sep-18
Apr-13

Apr-18
Nov-17
Jul-14

Jan-17
Feb-14

Oct-15

Aug-16
Dec-14

Mar-16

Jun-17
May-15
Apr-13
Sep-13

Apr-18
Sep-18
Nov-17
Jan-17
Jul-14

Aug-16
Oct-15
Feb-14

Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

SASA PE Band SASA PB Band

x x
35 12.0

30 10.0
25 +1SD: 28.3x
8.0 +1SD: 8x
20 Av g: 24.5x
6.0
15 Avg: 5.7x
-1SD: 20.8x 4.0
10
-1SD: 3.5x
5 2.0

0 0.0
May-…

May-…
Dec-14

Dec-14
Mar-16

Mar-16
Jun-17

Jun-17
Apr-13
Sep-13

Apr-18
Sep-18

Apr-13
Sep-13

Apr-18
Sep-18
Jul-14

Jul-14
Jan-17

Nov-17

Jan-17

Nov-17
Feb-14

Aug-16

Feb-14

Aug-16
Oct-15

Oct-15

Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

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Industry Focus
Hong Kong Retail Sector

Chow Tai Fook PE Band Chow Tai Fook PB Band

x x
40 4.0

35 3.5

30 +1SD: 25.1x 3.0 +1SD: 2.9x

25 2.5 Avg: 2.4x
20 2.0
Av g: 20.4x
15 1.5

10 1.0 -1SD: 1.9x

5 -1SD: 15.7x 0.5

0 0.0

Apr-13

Jan-17
Jul-14

Oct-15
Apr-13

Jul-14

Jan-17
Oct-15

Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers

Page 10
 Industry Focus
Hong Kong Retail Sector

Chow Sang Sang (116 HK EQUITY, HK$16.56, BUY, Target Price 12-mth HK$ 20.65)
F o r ecast & Valuation Ge n eral Data
FY Dec (HK$ m) 2016A 2017A 2018F 2019F At A Glance
Turnover 16,093 16,633 17,916 19,357 Is s ued Capital (m shrs) 677
EBITDA 1,163 1,165 1,380 1,608
Mkt. Cap (HK$m/US$m) 11,210 / 1,428
Pre -tax Profit 1,000 1,137 1,200 1,395
Net Profit 742 876 924 1,075 Major Shareholders
Net Profit Gth (%) (10.0) 2.6 21.1 16.3 Chow family (%) 58.1
EPS (HK$) 1.10 1.29 1.37 1.59
EPS Gth (%) (34.3) 18.1 5.5 16.3 The Capital Group Companies, Inc. (%) 11.0
Diluted EPS (HK$) 1.10 1.29 1.37 1.59 Schroders Plc (%) 8.0
DPS (HK$) 0.43 0.51 0.54 0.63 Free Float (%) 22.9
BV Per Share (HK$) 13.35 14.96 15.78 16.75
PE (X) 15.1 12.8 12.1 10.4 3m Avg. Daily Val. (US$m) 0.6
P/Cas h Flow (X) 34.3 nm 20.7 17.6
P/Free CF (X) 85.9 nm 46.6 33.2
EV/EBITDA (X) 10.1 10.4 8.8 7.6
Net Div Yield (%) 2.6 3.1 3.2 3.8
P/Book Value (X) 1.2 1.1 1.0 1.0
Net Debt/Equity (X) 0.1 0.1 0.1 0.1
ROAE (%) 8.2 9.1 8.9 9.8
Earnings Rev (%): Nil Nil
Cons ensus EPS (HK$) 1.41 1.57
Other Broker Recs: B: 6 S: 0 H: 5

I n co me Statement (H K$ m) B a lance Sheet (HK$ m)

F Y D ec 2016A 2017A 2018F 2019F F Y D ec 2016A 2017A 2018F 2019F

Turnover 16,093 16,633 17,916 19,357 Net Fixed Assets 1,000 1,084 1,141 1,207
Cost of Goods Sold (12,042) (12,643) (13,573) (14,621) I nvts in Assocs & JVs 28 32 32 32
Gr o ss Profit 4 , 0 50 3 , 9 91 4 , 3 43 4 , 7 36 Other LT Assets 1,029 1,119 1,140 1,163
Other Opg (Exp)/I nc (3,097) (3,036) (3,200) (3,386) Cash & ST I nvts 1,316 1,217 913 660
O p e rating Profit 954 955 1 , 1 44 1 , 3 50 I nventory 6,558 7,490 8,004 8,581
Other Non Opg (Exp)/I nc 0 0 0 0 Debtors 1,842 2,212 2,383 2,574
Associates & JV I nc 4 5 5 5 Other Current Assets 429 516 516 516
Net I nterest (Exp)/I nc 21 44 31 20 T o t al Assets 1 2 , 20 1 1 3 , 67 0 1 4 , 12 9 1 4 , 73 4
Dividend I ncome 23 20 20 20
Exceptional Gain/(Loss) (1) 113 0 0 ST Debt 1,483 1,618 1,404 1,233
Pr e - tax Profi t 1 , 0 00 1 , 1 37 1 , 2 00 1 , 3 95 Other Current Liab 1,123 1,258 1,349 1,452
Tax (258) (261) (275) (320) LT Debt 360 454 454 454
M inority I nterest 0 0 0 0 Other LT Liabilities 197 215 236 260
Pref erence Dividend 0 0 0 0 Shareholder’s Equity 9,038 10,125 10,685 11,336
N e t Pr ofit 742 876 924 1 , 0 75 M inority I nterests 0 0 0 0
Net prof it bef ore Except. 744 763 924 1,075 T o t al Cap. & Liab. 1 2 , 20 1 1 3 , 67 0 1 4 , 12 9 1 4 , 73 4
EB I TDA 1,163 1,165 1,380 1,608
Sales Gth (%) (15.6) 3.4 7.7 8.0 Non-Cash Wkg. Cap 7,706 8,959 9,553 10,220
EB I TDA Gth (%) (6.4) 0.2 18.4 16.5 Net Cash/(Debt) (527) (855) (945) (1,026)
Opg Prof it Gth (%) (7.6) 0.2 19.7 18.0
Ef f ective Tax R ate (%) 25.8 23.0 23.0 23.0
C a s h F low Statement (H K$ m) S e gmental Breakd own (HK$ m) / Key Assu mptions

F Y D ec 2016A 2017A 2018F 2019F F Y D ec 2016A 2017A 2018F 2019F

Pre-Tax Prof it 1,000 1,137 1,200 1,395 R e venues (HK$ m)
Dep. & Amort. 182 185 211 232 M anuf acture & retail of 14,045 14,516 15,695 17,025
Tax Paid (234) (261) (275) (320) jewellery
Wholesale of precious metals 1,908 2,033 2,134 2,241
Assoc. & JV I nc/(loss) (4) (5) (5) (5) Securities & f utures broking 26 34 36 39
(Pf t)/ Loss on disposal of FAs 239 0 0 0 Other businesses 113 50 51 52
FAFAsiaries/I
Chg in Wkg.Cap.
nvestments (-/+) (854) (1,168) (599) (673) T o t al 1 6 , 09 3 1 6 , 63 3 1 7 , 91 6 1 9 , 35 7
Other Operating CF (3) 9 9 9 S e gmental prof it (HK$ m)
N e t Operatin g CF 327 ( 1 0 1) 540 638 M anuf acture & retail of 947 902 1,022 1,160
Capital Exp.(net) (196) (216) (300) (300) jewellery
Wholesale of precious metals 14 15 15 16
Other I nvts.(net) 0 0 0 0 Securities & f utures broking 6 48 51 54
I nvts in Assoc. & JV 3 0 0 0 Other businesses 7 34 35 36
Div f rom Assoc & JV 24 20 20 20 T o t al 974 999 1 , 1 24 1 , 2 66
Other I nvesting CF (1) 30 (21) (23) S e gmental prof it M ar gins (%)
N e t Investing CF ( 1 7 1) ( 1 6 6) ( 3 0 1) ( 3 0 3) M anuf acture & retail of 6.7 6.2 6.5 6.8
Div Paid (393) (345) (364) (424) Wholesale of precious metals
jewellery 0.7 0.7 0.7 0.7
Chg in Gross Debt 126 86 0 0 Securities & f utures broking 24.1 139.8 139.8 139.8
Capital I ssues 0 0 0 0 Other businesses 6.6 68.9 68.9 68.9
Other Financing CF (174) 444 (179) (163) T o t al 6. 1 6. 0 6. 3 6. 5
N e t Financin g C F ( 4 4 0) 185 ( 5 4 3) ( 5 8 7) Ke y Assumptio ns
Currency Adjustments (54) 0 0 0 Hong Kong and M acau 74.0 72.0 73.0 74.0
Chg in Cash (338) (83) (304) (252) China 374.0 422.0 467.0 507.0
50
Taiwan 24.0 25.0 26.0 27.0

Source: Company, DBS Vickers

Page 11
Industry Focus
Hong Kong Retail Sector

Luk Fook Holdings (590 HK EQUITY, HK$29.10, BUY, Target Price 12-mth HK$ 37.32)
F o r ecast & Valuation Ge n eral Data
FY Mar (HK$ m) 2017A 2018F 2019F 2020F
Turnover 12,807 14,134 15,428 16,712 At A Glance
EBITDA 1,369 1,558 1,762 1,963 I ssued Capital (m shrs) 587
Pre -tax Profit 1,250 1,440 1,637 1,831
Net Profit 1,017 1,165 1,323 1,476 M kt. Cap (HK$m/US$m) 17,085 / 2,176
Net Profit Gth (%) 6.1 14.6 13.6 11.5 M ajor Shareholders
EPS (HK$) 1.73 1.98 2.25 2.51 Wong Wai Sheung (%) 42.0
EPS Gth (%) 6.3 14.6 13.6 11.5
Diluted EPS (HK$) 1.73 1.98 2.25 2.51 Silchester I nternational I nvestors LLP (%) 11.0
DPS (HK$) 1.10 1.10 1.10 1.23 B randes I nvestment Partners, L.P. (%) 6.0
BV Per Share (HK$) 15.11 15.45 16.60 17.88 41.0
Free Float (%)
PE (X) 16.8 14.7 12.9 11.6
P/Cas h Flow (X) 30.8 41.4 18.1 15.0 3m Avg. Daily Val. (US$m) 4.5
P/Free CF (X) 43.0 58.8 21.1 17.3
EV/EBITDA (X) 11.5 10.3 9.1 8.0
Net Div Yield (%) 3.8 3.8 3.8 4.2
P/Book Value (X) 1.9 1.9 1.8 1.6
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 11.6 13.0 14.1 14.6
Earnings Rev (%): Nil Nil Nil
Cons ensus EPS (HK$) 1.99 2.26 2.45
Other Broker Recs: B: 7 S: 1 H: 9
I n co me Statement (H K$ m) B a lance Sheet (HK$ m)

F Y M ar 2017A 2018F 2019F 2020F F Y M ar 2017A 2018F 2019F 2020F

Turnover 12,807 14,134 15,428 16,712 Net Fixed Assets 812 840 870 901
Cost of Goods Sold (9,530) (10,599) (11,557) (12,510) I nvts in Assocs & JVs 176 176 176 176
Gr o ss Profit 3 , 2 77 3 , 5 35 3 , 8 71 4 , 2 02 Other LT Assets 260 260 260 260
Other Opg (Exp)/I nc (1,988) (2,085) (2,249) (2,392) Cash & ST I nvts 1,862 1,537 1,730 2,029
O p e rating Profit 1 , 2 89 1 , 4 50 1 , 6 22 1 , 8 09 I nventory 6,973 7,464 7,980 8,467
Other Non Opg (Exp)/I nc 0 0 0 0 Debtors 541 597 651 705
Associates & JV I nc (54) (33) (8) (1) Other Current Assets 56 56 56 56
Net I nterest (Exp)/I nc 15 22 23 23 T o t al Assets 1 0 , 67 9 1 0 , 93 0 1 1 , 72 3 1 2 , 59 5
Dividend I ncome 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 437 446 455 464
Pr e - tax Profi t 1 , 2 50 1 , 4 40 1 , 6 37 1 , 8 31 Other Current Liab 1,157 1,200 1,295 1,389
Tax (223) (260) (297) (337) LT Debt 0 0 0 0
M inority I nterest (10) (15) (17) (19) Other LT Liabilities 105 96 96 96
Pref erence Dividend 0 0 0 0 Shareholder’s Equity 8,873 9,069 9,744 10,496
N e t Pr ofit 1 , 0 17 1 , 1 65 1 , 3 23 1 , 4 76 M inority I nterests 107 119 134 150
Net prof it bef ore Except. 1,017 1,165 1,323 1,476 T o t al Cap. & Liab. 1 0 , 67 9 1 0 , 93 0 1 1 , 72 3 1 2 , 59 5
EB I TDA 1,369 1,558 1,762 1,963
Sales Gth (%) (8.7) 10.4 9.2 8.3 Non-Cash Wkg. Cap 6,413 6,917 7,393 7,840
EB I TDA Gth (%) 7.9 13.8 13.1 11.4 Net Cash/(Debt) 1,425 1,091 1,275 1,565
Opg Prof it Gth (%) 6.4 12.5 11.9 11.5
Ef f ective Tax R ate (%) 17.8 18.0 18.1 18.4
C a s h F low Statement (H K$ m) S e gmental Breakd own (HK$ m) / Key Assu mptions

F Y M ar 2017A 2018F 2019F 2020F F Y M ar 2017A 2018F 2019F 2020F

Pre-Tax Prof it 1,250 1,440 1,637 1,831 R e venues (HK$ m)
Dep. & Amort. 134 141 148 155 R etailing - HK, M acau & 7,959 8,627 9,165 9,932
Tax Paid (223) (260) (297) (337) R etailing - PR C
overseas 1,659 2,184 2,692 3,063
Assoc. & JV I nc/(loss) 0 0 0 0 Wholesaling (incl 2,672 2,809 3,042 3,192
(Pf t)/ Loss on disposal of FAs 0 0 0 0 manuf
Licensing
acturing) 516 514 527 524
FAFAsiaries/I
Chg in Wkg.Cap.
nvestments (-/+) (567) (861) (497) (463) Others 0 0 0 0
Other Operating CF (39) (47) (48) (49) T o t al 1 2 , 80 7 1 4 , 13 4 1 5 , 42 8 1 6 , 71 2
N e t Operatin g CF 555 413 942 1 , 1 38 S e gmental prof it (HK$ m)
Capital Exp.(net) (158) (122) (134) (148) R etailing - HK, M acau & 512 555 590 639
Other I nvts.(net) 0 0 0 0 R etailing - PR C
overseas 178 234 288 328
I nvts in Assoc. & JV 0 0 0 0 Wholesaling (incl 439 461 500 524
Div f rom Assoc & JV 1 1 1 1 manuf
Licensing
acturing) 290 289 297 295
Other I nvesting CF 24 24 25 25 Others 0 0 0 0
N e t Investing CF ( 1 3 3) ( 97) ( 1 0 8) ( 1 2 1) T o t al 1 , 4 19 1 , 5 40 1 , 6 75 1 , 7 86
Div Paid (646) (647) (648) (723) S e gmental prof it M ar gins (%)
Chg in Gross Debt (274) 9 9 9 R etailing - HK, M acau & 6.4 6.4 6.4 6.4
Capital I ssues 0 0 0 0 overseas
R etailing - PR C 10.7 10.7 10.7 10.7
Other Financing CF (2) (2) (2) (2) Wholesaling (incl 16.4 16.4 16.4 16.4
N e t Financin g C F ( 9 2 2) ( 6 4 0) ( 6 4 2) ( 7 1 6) manuf
Licensing
acturing) 56.3 56.3 56.3 56.3
Currency Adjustments 0 0 0 0 T o t al 11. 1 10. 9 10. 9 10. 7
Chg in Cash (500) (324) 192 300 Ke y Assumptio ns
HK & M acau - Self -operated 57.0 55.0 55.0 55.0
HK & M acau - Licensee 0.0 0.0 0.0 0.0
China - Self -operated 133.0 153.0 163.0 173.0
China - Licensee 1,296.0 1,376.0 1,416.0 1,456.0
Overseas 10.0 13.0 14.0 15.0
Source: Company, DBS Vickers

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 Industry Focus
Hong Kong Retail Sector

Sa Sa (178 HK EQUITY, HK$4.65, BUY, Target Price 12-mth HK$ 5.11)

F o r ecast & Valuation Ge n eral Data
FY Mar (HK$ m) 2017A 2018F 2019F 2020F At A Glance
Turnover 7,746 8,231 8,633 9,165 Is s ued Capital (m shrs) 3,039
EBITDA 498 612 781 891
Mkt. Cap (HK$m/US$m) 13,158 / 1,676
Pre -tax Profit 405 499 658 759
Net Profit 327 402 530 612 Major Shareholders
Net Profit Gth (%) (14.8) 23.2 31.8 15.4 Kwok Family (%) 65.0
EPS (HK$) 0.11 0.13 0.18 0.20
Free Float (%) 35.0
EPS Gth (%) (16.9) 20.4 31.8 15.4
Diluted EPS (HK$) 0.11 0.13 0.18 0.20 3m Avg. Daily Val. (US$m) 3.9
DPS (HK$) 0.17 0.13 0.18 0.20
BV Per Share (HK$) 0.74 0.74 0.74 0.74
PE (X) 41.7 34.6 26.3 22.8
P/Cas h Flow (X) 38.2 37.4 27.2 24.6
P/Free CF (X) 53.0 84.0 33.9 29.8
EV/EBITDA (X) 25.4 21.4 16.8 14.7
Net Div Yield (%) 3.6 2.9 3.8 4.4
P/Book Value (X) 6.3 6.3 6.3 6.3
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 14.5 18.1 23.9 27.6
Earnings Rev (%): 6 19 NEW
Cons ensus EPS (HK$) 0.14 0.18 0.21
Other Broker Recs: B: 12 S: 2 H: 2

I n co me Statement (H K$ m) B a lance Sheet (HK$ m)

F Y M ar 2017A 2018F 2019F 2020F F Y M ar 2017A 2018F 2019F 2020F

Turnover 7,746 8,231 8,633 9,165 Net Fixed Assets 284 368 334 290
Cost of Goods Sold (4,517) (4,991) (5,213) (5,511) I nvts in Assocs & JVs 0 0 0 0
Gr o ss Profit 3 , 2 29 3 , 2 40 3 , 4 20 3 , 6 54 Other LT Assets 164 181 199 219
Other Opg (Exp)/I nc (2,834) (2,752) (2,773) (2,906) Cash & ST I nvts 969 824 808 786
O p e rating Profit 395 489 647 748 I nventory 1,222 1,295 1,353 1,430
Other Non Opg (Exp)/I nc 0 0 0 0 Debtors 67 31 32 34
Associates & JV I nc 0 0 0 0 Other Current Assets 223 277 291 309
Net I nterest (Exp)/I nc 10 11 11 12 T o t al Assets 2 , 9 29 2 , 9 76 3 , 0 16 3 , 0 68
Dividend I ncome 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 0 0 0
Pr e - tax Profi t 405 499 658 759 Other Current Liab 651 691 725 770
Tax (79) (97) (128) (147) LT Debt 0 0 0 0
M inority I nterest 0 0 0 0 Other LT Liabilities 59 65 72 79
Pref erence Dividend 0 0 0 0 Shareholder’s Equity 2,219 2,219 2,219 2,219
N e t Pr ofit 327 402 530 612 M inority I nterests 0 0 0 0
Net prof it bef ore Except. 327 402 530 612 T o t al Cap. & Liab. 2 , 9 29 2 , 9 76 3 , 0 16 3 , 0 68
EB I TDA 498 612 781 891
Sales Gth (%) (1.3) 6.3 4.9 6.2 Non-Cash Wkg. Cap 861 912 951 1,003
EB I TDA Gth (%) (14.7) 22.9 27.5 14.2 Net Cash/(Debt) 969 824 808 786
Opg Prof it Gth (%) (14.3) 23.6 32.4 15.5
Ef f ective Tax R ate (%) 19.4 19.4 19.4 19.4
C a s h F low Statement (H K$ m) S e gmental Breakd own (HK$ m) / Key Assu mptions

F Y M ar 2017A 2018F 2019F 2020F F Y M ar 2017A 2018F 2019F 2020F

Pre-Tax Prof it 405 499 658 759 R e venues (HK$ m)
Dep. & Amort. 103 124 134 144 R etail sales of beauty products 7,271 7,637 7,891 8,237
Tax Paid (47) (58) (77) (88) Sasa.com 475 594 743 928
Assoc. & JV I nc/(loss) 0 0 0 0 T o t al 7 , 7 46 8 , 2 31 8 , 6 33 9 , 1 65
(Pf t)/ Loss on disposal of FAs 0 0 0 0 Ke y Assumptio ns
FAFAsiaries/I
Chg in Wkg.Cap.
nvestments (-/+) (22) (91) (73) (97) HK & M acau 115.0 118.0 120.0 122.0
Other Operating CF (82) (101) (131) (151) China 56.0 55.0 57.0 59.0
N e t Operatin g CF 357 373 511 567 Singapore & M alaysia 90.0 92.0 94.0 96.0
Capital Exp.(net) (100) (207) (100) (100) Taiwan 25.0 10.0 0.0 0.0
Other I nvts.(net) 0 0 0 0 Total no. of stores 286.0 275.0 271.0 277.0
I nvts in Assoc. & JV 0 0 0 0
Div f rom Assoc & JV 0 0 0 0
Other I nvesting CF 10 11 11 12
N e t Investing CF ( 90) ( 1 9 6) ( 89) ( 88)
Div Paid (506) (402) (530) (612)
Chg in Gross Debt 0 0 0 0
Capital I ssues 0 0 0 0
Other Financing CF 129 81 92 112
N e t Financin g C F ( 3 7 7) ( 3 2 1) ( 4 3 9) ( 5 0 0)
Currency Adjustments 0 0 0 0
Chg in Cash (110) (145) (16) (22)

Source: Company, DBS Vickers

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Industry Focus
Hong Kong Retail Sector

DBSVHK recommendations are based an Absolute Total Return* Rating s ystem, defined as follows:

S TRONG BUY (>20% total return over the next 3 months, with identifiable s hare price catalysts within this time frame)

B U Y (>15% total return over the next 12 months for s mall caps, >10% for large caps)
H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FU LLY VALUED (negative total return i.e. > -10% over the next 12 months)
S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 13 Apr 2018 16:29:38 (HKT)

Dis s emination Date: 13 Apr 2018 19:40:14 (HKT)
Sources for all charts and tables are DBS Vickers unless otherwise s pecified.
GEN ERAL DISCLOSURE/DISCLAIMER
Th is report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is s olely intended for the clients of DBS Bank Ltd., DBS Bank
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offering of s ecurities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.

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 Industry Focus
Hong Kong Retail Sector

A N ALYST CERTIFICATION
The res earch analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his /her
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C O MPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their s ubsidiaries and/or other affiliates do not have a proprietary position in the s ecurities
recommended in this report as of 06 Apr 2018.

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Res earch Report.

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4. D is closure of previous investment recommendation produced:

DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment
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1
An as s ociate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
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2
Financial interest is defined as interests that are commonly known financial interest, s uch as investment in th e s ecurities in respect of an issuer or a
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lis ting applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new lis ting applicant.

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Industry Focus
Hong Kong Retail Sector

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C entre profes sional clients (as defined in the DFSA rulebook) and no other person may act upon it.

Page 16
 Industry Focus
Hong Kong Retail Sector

U nited Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined
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th
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Tel: (852) 2820-4888, Fax: (852) 2868-1523
Company Regn. No. 31758

Page 17
Industry Focus
Hong Kong Retail Sector

D BS Regional Research Offices

H O NG KONG M A LAYSIA S INGAPORE

D BS Vickers (Hong Kong) Ltd A llianceDBS Research Sdn Bhd D BS Bank Ltd
C o ntact: Carol Wu C o ntact: Wong Ming Tek (128540 U) C o ntact: Janice Chua
18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard,
68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3
Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982
Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888
Fax: 852 2863 1523 Tel.: 603 2604 3333 Fax: 65 65353 418
e-mail: dbsvhk@dbs.com Fax: 603 2604 3921 e -mail: equityresearch@dbs.com
Participant of the Stock Exchange of Hong Kong Ltd e -mail: general@alliancedbs.com Company Regn. No. 196800306E

I N DONESIA TH AILAND
PT DBS Vickers Sekuritas (Indonesia) D BS Vickers Securities (Thailand) Co Ltd
C o ntact: Maynard Priajaya Arif C o ntact: Chanpen Sirithanarattanakul
DBS Bank Tower 989 Siam Piwat Tower Building,
Ciputra World 1, 32/F 9th, 14th-15th Floor
Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan,
Jakarta 12940, Indonesia Bangkok Thailand 10330
Tel: 62 21 3003 4900 Tel. 66 2 857 7831
Fax: 6221 3003 4943 Fax: 66 2 658 1269
e-mail: research@id.dbsvickers.com e -mail: research@th.dbs.com
Company Regn. No 0105539127012
Securities and Exchange Commission, Thailand

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