20110415 - A Forgotten China HK Fashion Apparel Play - CINDA

15 April 2011

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Email: [email protected] Website: www.cinda.com.hk

Initiation Report

A forgotten China/HK fashion apparel play

Rating BUY

Target Price $40.00

Stock price(14/04/2011) $17.36

Upside 130%

Bloomberg code 375.HK

Website http://www.ygmtrading.com

52-Wk Range (HK$) 7.02/24.65

52-Wk Avg. Daily Vol (m) 0.22

No. of Shares (m) 163

Market Cap (HK$m) 2,823

Major Shareholders (%)

The Chan Family 62%

NTA per share (HK$) 6.24

ROE (%) 31%

Net Cash per share (HK$) 1.04

Results Due

1H: Nov Final: Jun

Analyst:

Kenneth LI (李勇)

[email protected]

(852) 2235 7619

Company description

YGM Trading “YGM” is an old Hong Kong listed company focuses on apparel retail and wholesale business in Greater China. YGM’s brands include Acquascutum, Ashworth, J.Lindeberg, Guy Laroche and Michel Rene. The company own 21% stake in Hang Ten (448.HK).

Investment Summary

Luxury brand Acquascutum accounts for 80% of YGM net profit. Sales from Acquascutum accounted for 60% of total turnover and made up 80% of YGM total net profit in FY11 (excluding associate contribution). Such massive profit contribution of Acquascutum makes YGM a China luxury apparel play.

Capturing the rising purchsing power in lower tier cities. YGM will further penetrate into tier 3 and tier 4 cities by opening 50 new outlets in China to capture the rising purchasing power in lower tier cities. The new store openings will be mainly focus on Aquascutum, J.Lindeberg and Ashworth, as Aquascutum is YGM’s own brand with higher margin and J.Lindeberg will be a key new brand promotion for YGM.

Key new brand promotion – J.Lindeberg. It will be the key brand to introduce and promote in the Greater China region as YGM plans to open 10 stores in China and Taiwan by the end of 2012. J.Lindeberg targets high end young menswear market which is an ideal brand to supplement Aquascutum that targets luxury mature menswear market.

Re-rating on the horizon. FY11 results announcement in June will set the stage for re-rating of YGM as strong results will attract market interest of the stock. In addition, management plans share split after results to improve the trading liquidity and reduce trading spread. Successful investment property disposal will also yield special dividend.

Under-valued China/Hong Kong fashion apparel play. We apply the average China/Hong Kong fashion retailers PE of 19.3x to derive our target price of HK$40 for YGM. Such valuation is consevative as YGM derives 80% of its net profit from its luxury brand Acquascutum, Trinity (891 HK) is trading at 27x PE as both companies derive majority of their net profits from selling luxury apparels with strong European heritage.

YGM Trading (375 HK) BUY

Year to Turnover EBITDA Net Profit EPS EPS Growth PE EV/ EBITDA Dividend 31 Mar (HK$m) (HK$m) (HK$m) (HK¢) (%) (x) (x) Yield %)

2009 972 119 80 0.52 (53%) 33.3 20.9 2.2%

2010 991 197 197 1.28 145% 13.6 13.0 3.2%

2011E 1,288 301 270 1.66 30% 10.5 8.8 5.7%

2012E 1,520 378 337 2.07 25% 8.4 6.8 7.2%

2013E 1,764 451 401 2.47 19% 7.0 5.5 8.5%

Consensus net profit – FY11: n.a

-- FY12: n.a

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Contents

Executive Summary..................................................... 3 Valuation.......................................................................... 4 Investment Highlights................................................... 7 Earnings Outlook.......................................................... 23 Financials ...................................................................... 25 Risk Factors .................................................................. 26 Appendix ........................................................................ 27 Financial Statements .................................................... 29

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Executive Summary

Luxury brand Acquascutum accounts for 80% of YGM net profit. Sales from Acquascutum accounted for approximately 60% of total turnover for FY11, while net profit contribution from Acquascutum accounted for approximately 80% of total YGM net profit for FY11 (excluding associate contribution). Such massive profit contribution of Acquascutum makes YGM a China luxury apparel play, the remaining net profit contribution mainly come from its leading international golf apparel brand Ashworth.

Key new brand promotion – J.Lindeberg. YGM introduced the J.Lindeberg brand in Hong Kong in 2010 and has achieved encouraging results since then. Lindeberg will be the key brand to introduce and promote in the Greater China region as YGM plans to open 10 stores in China and Taiwan by the end of 2012. YGM will expand the brand coverage into China by opening flagship stores in tier one cities and penetrate into lower tier cities through wholesale. We believe J.Lindeberg which targets high end young menswear market is an ideal brand to supplement Aquascutum that targets luxury mature menswear market. Furthermore, we believe J.Lindeberg will serve as another future growth driver for YGM when it penetrates into China.

Capturing the rising purchsing power in lower tier cities. 69% of YGM stores are located in tier 1 and tier 2 cities, tier 3 and tier 4 cities made up of 21% and 10% of total stores in China. The store spread among city tiers is similar to Trinity where 63% stores are situated in tier 1 and tier 2 cities, tier 3 and tier 4 cities made up of 26% and 11% respectively. YGM will further penetrate into tier 3 and tier 4 cities by opening 50 new outlets in China to capture the rising purchasing power in lower tier cities. The new store openings will be mainly focus on Aquascutum, J.Lindeberg, and Ashworth given that Aquascutum is YGM’s own brand with higher margin and J.Lindeberg will be a key new brand promotion for YGM in next two years.

Re-rating on the horizon. We believe the upcoming announcement of YGM’s FY11 results in June will set the stage for re-rating as strong results will attract market interest of the stock. In addition, management plans share split after results to improve trading liquidity and reduce trading spread. Furthermore, YGM management is starting to become more active in marketing and roadshow. YGM has recently appointed an IR company for investor relation and management recently attended access day with a leading European broker in Europe and the US.

Under-valued China/Hong Kong fashion apparel play. We use the average China/Hong Kong fashion retailers forward PE of 19.3x to derive our target price for YGM, which is equivalent to HK$40. We believe such valuation is consevative given that YGM is a luxury apparel play that derives 80% of its net profit from luxury brand Acquascutum (excluding associate contribution). We believe YGM should deserve to trade close to the PE multiples of 27x for Trinity (891 HK) as both companies derived majority of their net profits from selling luxury apparels with strong European heritage.

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ValuationValuationValuationValuation

Given that YGM’s financial year is March year-end, YGM’s FY2012 is effectively FY2011 in comparing to other December year end companies. We use the average China/Hong Kong fashion retailers forward PE of 19.3x to derive our target price for YGM, which is equivalent to HK$40. We believe such valuation is consevative given that YGM is a luxury apparel play that derives 80% of its net profit from luxury brand Acquascutum (excluding associate contribution). We believe YGM should deserve to trade close to the PE multiples of Trinity (891 HK) at 27x as both companies derive majority of their net profits from selling luxury apparels with strong European heritage.

The current large valuation cap between YGM and other China/Hong Kong listed fashion apparel plays is due to a number of reasons. 1) No analyst coverage of the stock, 2) low trading liquidity, the stock traded at an average daily volume of 219k, 3) high trading spread, 4) Unawareness of the stock in the market, 5) inactive investor relation.

We believe the upcoming announcement of YGM’s FY2011 results in June will set the stage for re-rating as strong results will attract market interest of the stock. In addition, management plans share split after results to improve the trading liquidity and reduce trading spread. Furthermore, YGM management is starting to become more active in marketing and roadshow. YGM has recently appointed an IR company for investor relation and management recently attended access day with a leading European broker in Europe and the US.

Figure 1: 1-Year Share Price Performance of YGM

5

7

9

11

13

15

17

19

21

23

25

Apr10 May10 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11

HK$

Sources: Companies, CIRL

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Figure 2: Peer Comparison in Valuation I

Sources: Bloomberg

* YGM’s financial year is March year-end, YGM’s FY2012 is effectively FY2011 in comparing to other December year end

companies.

Ticker Company Price Market cap PE(x) PB(x) ROE

LC (US$m) 11F 12F 11F 12F %

China/HK fashion retailers

375 HK YGM Trading 17.36 363 8.4* 7.0* 2.2* 2.0* 30.5*

891 HK Trinity 8.09 1,763 28.5 21.5 4.8 4.4 18.6

1234 HK China Lilang 11.32 1,748 20.7 16.5 5.1 4.3 26.9

238 HK Evergreen 4.10 518 16.4 13.0 2.1 1.8 13.4

589 HK Ports Design 20.65 1,509 17.1 14.2 5.1 4.4 31.7

210 HK Daphne 6.57 1,384 13.9 11.6 3.1 2.6 23.8

Average 19.3 15.4 4.0 3.5 22.9

China/HK department stores

3368 HK Parkson 11.80 4,265 23.3 19.1 5.2 4.5 24.4

331 HK PCD Stores 2.19 1,190 18.4 14.4 3.0 2.6 17.0

1212 HK Lifestyle 20.40 4,408 22.9 20.1 4.2 3.8 19.2

3308 HK Golden Eagle 21.90 5,472 29.4 23.1 8.1 6.5 30.0

1833 HK Intime Dep 12.28 3,017 26.6 20.9 3.6 3.3 14.0

825 HK New World Dep 6.32 1,370 17.5 14.9 2.0 1.9 12.6

Average 23.0 18.7 4.4 3.8 19.5

China/HK sportswear

2331 HK Li Ning 14.50 1,964 14.2 12.7 3.3 2.8 24.4

3818 HK Dongxiang 2.61 1,902 9.6 9.3 1.4 1.3 16.3

2020 HK Anta Sports 12.48 4,003 14.5 12.4 4.1 3.6 29.0

1968 HK Peak Sports 5.89 1,589 10.2 8.8 2.6 2.2 25.4

1361 HK 361 Degree 5.32 1,415 9.1 8.0 2.2 1.9 27.8

1368 HK Xstep 5.73 1,603 10.8 9.1 2.6 2.3 25.9

Average 11.4 10.0 2.7 2.4 24.8

China/HK supermarkets

291 HK CRE 32.45 10,009 29.8 23.9 2.4 2.3 8.2

8277 HK Wumart 4.77 n.a 7.6 6.3 1.3 1.2 19.6

980 HK Lianhua 35.15 2,812 24.5 20.6 5.4 4.7 23.7

814 HK Jingkelong 10.44 553 17.1 14.5 2.1 2.0 12.4

Average 19.8 16.3 2.8 2.6 16.0

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Figure 3: Peer Comparison in Valuation II

YGM Trading Trinity Ports Design China Lilang Evergreen

Stock code 375 HK* 891 HK 589 HK 1234 HK 238 HK

Market cap (HK$ m) 2823 13,706 11,737 13,590 4,027

Brand positioning International high end

luxury/ mainstream

International High end

luxury

International High end

luxury Mainstream Mainstream

Target customer Affluent/Aspirant Affluent Affluent Aspirant Aspirant

Product range Men & women

business casual

Men business formal,

business casual

Ladieswear, men

casual wear Men business casual Men business casual

Year of establishment 1976 2006 1990 1995 2000

Brand names Acquascutum Kent & Curwen Ports 1961 LILANZ V.E. Delure

Ashworth Cerruti 1881 Ports International L2 Testantin

J.Lindeberg D'urban BMW Lifestyle

Guy Laroche Gieves & Hawkes Ferrari

Michel Rene Intermezzo

Business model Retail & Wholesale Retail Retail Wholesale Retail & Wholesale

Total store network 295 451 353 2,805 328

Key financials for FY10E

Total revenue (HK$ m) 1288 2011 1718 2503 600

YoY (%) 30% 22% 12% 32% 47%

Gross margin (%) 66% 77% 79% 38% 64%

Net profit (HK$ m) 270 341 556 493 180

Net profit margin (%) 21% 17% 32% 20% 30%

Net cash on hand (HK$) 169 -65 -8 847 1,138

FY 10 PE 10.5 40.2 21.1 27.6 22.4

FY 11 PE 8.4 28.5 17.1 20.7 16.4

Sources: Companies, CIRL estimates

* YGM’s financial year is March year-end, YGM’s FY2012 is effectively FY2011 in comparing to other December year end companies.

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Company informationCompany informationCompany informationCompany information

YGM Trading “YGM” is an old Hong Kong listed company focuses on apparel retailing and wholesaling both in Hong Kong and China. YGM’s brand portfolio includes Acquascutum, Ashworth, J.Lindeberg, Guy Laroche and Michel Rene. The company also own 21% stake in Hang Ten (448.HK). YGM derives approximately 80% of its net profits (excluding associate contribution) from its own luxury brand Acquascutum and the remaining profit contribution mainly comes from the other leading international golf brand Ashworth.

Figure 4: YGM Brand Portfolio

Brand History Country of

Origin Relationship Ownership Licensing

Terms

Aquascutum 1851 UK Since 1998

Intellectual property right in 42 Asia

Pacific countries -

Ashworth 1987 USA Since 1998 License right 30 Years

J.Lindeberg 1996 Sweden Since 2010

License right: Exclusive distribution in

the Greater China 10 Years

Michel Rene 1976 In-house Since 1976 Global ownership -

Guy Laroche 1956 France Since 2004 Global ownership -

Hang Ten 1960 USA Since 1996 Global ownership -

Sources: Company, CIRL

Figure 5: Wide Range of Fashion Brands


Luxury European Brands

International fashion

& sports apparel

Mainstream

fashion

A wide spectrum of fashion brands

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Figure 6: Brand Profile

Brand Brand Profile Website

Aquascutum

British label founded in 1851 with iconic tailoring heritage and house

check designs from the world of authentic quality and fine

craftsmanship. A popular choice of wear by British royalty, politicians

& celebrities including Queen Elizabeth, the Queen Mother, Margaret

Thatcher and Pierce Brosnan. www.aquascutum.com

Ashworth

Ashworth is an international golf label, well-known among golf

players, the brand markets a full line of quality men's and women's

golf apparel and casual merchandises. www.ashworthgolf.com

J.Lindeberg

Established in Sweden in 1997, the brand combines with fashion and

sportswear, targeting high end young menswear market. J.Lindeberg is

sold in more than 30 countries with flagship stores located in

Stockholm, Copenhagen, Los Angeles, New York. www.jlindeberg.com

Michel Rene

The brand founded by YGM, carries a full line of men's and women's

executive and city wear. Michel Rene has a high reputation for its

detailed tailoring and quality fabrics of its formal wears while the

casual wear collection provides more trendy and comfortable choices

for customers. www.ygmtrading.com

Guy Laroche

A renowned French brand that has long been recognised by its

signature elegant style. Popular choice of fashion for Hollywood

actresses. www.guylaroche.com


Figure 7: Gross Margin by Brand

83%

67%75%

50%

75%

50%

0%

30%

60%

90%

Acquascutum

(Self-operating

store)

Acquascutum

(Wholesale)

Ashworth (Self-

operating store)

Ashworth

(Wholesale)

J.Lindeberg (Self

operating store)

J.Lindeberg

(Wholesale)

Sources: Company, CIRL estimates

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Acquascutum accounts for 80% of YGM net profitAcquascutum accounts for 80% of YGM net profitAcquascutum accounts for 80% of YGM net profitAcquascutum accounts for 80% of YGM net profit

Acquascutum is a luxurious British label founded in 1851. It is a popular choice of wear by British royalty, politicians and celebrities including Queen Elizabeth, the Queen Mother, Margaret Thatcher and movie star Pierce Brosnan.

Sales from Acquascutum accounted for approximately 60% of total turnover for FY11, while net profit contribution from Acquascutum accounted for approximately 80% of total net profit for FY11 (excluding associate contribution). Thus, such massive profit contribution of Acquascutum makes YGM a China luxury apparel play, the remaining net profit contribution mainly come from the Ashworth brand.

YGM first obtained the licensing right of Aquascutum for the Greater China region in 1998. During the financial crisis in 2009, the Japanese company Renown which held the global IP right of Acquascutum was in financial trouble. In September 2009, YGM successfully acquired the Asia Pacific intellectual property rights of Acquacutum from Renown for HK$174m.

Figure 8: Sales by Brand in 1H2011

Aquascutum - 56% Ashworth - 14% Michel Rene - 11%

Guy Laroche - 6% J.Lindeberg - 0% Export - 9%

Others - 4%


Benefits of obtaining Acquascutum IP rights

There are numerous advantages in obtaining the IP right of Acquascutum rather than operating through licensing rights. Firstly, obtaining the IP right eliminates the uncertainty in terminating licensing rights by the holder. This will help to enhance future operational certainties and turnover visibilities. Secondly, obtaining the IP rights will also generate an addition income source in the form of royalty income to YGM. In 1H2011, licensing of trademarks from the Aquascutum brand accounted for 3.7% of total turnover or HK$17.5m.

Thirdly, obtaining the IP right enables YGM to expand to other new Asia Pacific countries either through opening self-operating stores, wholesale or licensing. Currently, YGM is in final stage of negotiation for opening Acquascusum stores for the Korean market. Given the Acquascutum brand performs exceptionally well in Hong Kong, China and Japan, we believe expanding into Korea is suitable for YGM given consumers in the region have similar preferences on luxury items. We expect the Korean market will have a meaningful contribution to YGM by FY2013. Fourthly,

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IP rights also enables YGM to introduce new product lines including high margin accessory items such as belt, handbags and cufflinks as well as developing golf collections that can enhance their profitability under the brand name.

Furthermore, YGM will also aim to increase the square footage of existing stores by splitting menswear and ladieswear into two separate stores inside one department store. The company achieved great success by having two separate menswear and ladieswear stores in Sogo department store in Causeway Bay Hong Kong. However, such strategy cannot be implemented widely in Hong Kong given high store rental rates and scarcity of good store locations. Management is confident such strategy will be suitable in China given store rental rate are much cheap in department stores in China and there are more store locations to select. We recently visited Aquascutum stores in Friendship department store in Guangzhou which is famous for selling high end items. The store split strategy was implemented in the department store where menswear Acquascutum store was located in the menswear level next to Trinity’s Kent & Curwen and opposite of D’URBAN. The Aquascutum ladieswear store is situated in the ladieswear level next to brands such as Max Mara, Moiselle and Kookai. We believe by splitting into menswear and ladyswear in the same department store will help to enhance brand exclusivity and free up more selling space for additional product lines.

Figure 9: Acquascutum Menswear Store in Friendship Department Store Guangzhou

Sources: CIRL

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Figure 10: Acquascutum Ladieswear Store in Friendship Department Store Guangzhou

Sources: CIRL

Figure 11: Acquascutum Store in Harbour City Hong Kong

Sources: CIRL

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Figure 12: Acquascutum Store in Time Square, Causeway Bay Hong Kong

Sources: CIRL

Key Key Key Key new new new new brand promotion brand promotion brand promotion brand promotion –––– J.Lindeberg J.Lindeberg J.Lindeberg J.Lindeberg

J.Lindeberg was established in Sweden in 1997, the brand combines with fashion and sportswear, targeting high end young menswear market. J.Lindeberg is sold in more than 30 countries worldwide with flagship stores located in Stockholm, Copenhagen, Los Angeles, New York.

YGM obtained 10 years exclusive distribution right of J.Lindeberg for the greater China market in 2010. So far, YGM has opened up 3 stores in Hong Kong, all in prime high end locations of The Landmark in Central, Times Square in Causeway Bay and Harbour City in Tsim Sha Tsui. Management commented the J.Lindeberg brand has achieved encouraging results given such short operating period in Hong Kong.

J.Lindeberg will be the key brand to introduce and promote in the Greater China region in the next two years as YGM plans to open 10 stores in China and Taiwan by the end of 2012. YGM will expand the brand coverage into China by opening flagship stores in tier one cities and penetrate into lower tier cities through wholesale. We believe J.Lindeberg which targets high end young menswear market is an ideal brand to supplement Aquascutum that targets mature luxury menswear market. Furthermore, we believe J.Lindeberg will serve as another future growth driver for YGM when it penetrates into China.

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Figure 13: J.Lindeberg Store in Harbour City, TST Hong Kong

Sources: CIRL

Figure 14: J.Lindeberg Store in Time Square, Causeway Bay Hong Kong

Sources: CIRL

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Solid pSolid pSolid pSolid performance from Ashwortherformance from Ashwortherformance from Ashwortherformance from Ashworth

Ashworth was established in the USA in 1987, the brand is well-known among golf players and markets a full line of quality men’s and women’s golf apparel and casual merchandises.

YGM obtained a 30 years licensing right of Ashworth for the greater China market back in 1998. Currently, Ashworth has 58 stores in the Greater China region with all situated in prime high end locations.

Ashworth sales accounted for 14.4% of YGM’s total turnover in 1H2011. Given that Aquascutum accounted for approximately 80% of net profit contribution, the remaining 20% net profit contribution mainly comes from Ashworth (excluding associate contribution). YGM will continue to expand Ashworth distribution network in China and Taiwan in near future.

Figure 15: Ashworth Store in Harbour City Hong Kong

Sources: CIRL

Valuable brand portfolioValuable brand portfolioValuable brand portfolioValuable brand portfolio

Guy Laroche is a renown French brand established since 1956 that has long been recognised by its signature elegant style. It is a popular choice of fashon for Hollywood actresses. YGM acquired Guy Laroche world wide IP in 2004 and after consolidated its operations by closing down its high cost factories in Europe. At present, Guy Laroche has one flagship store in Paris for branding purpose. Given its rich history and fine cutting of its fashion, YGM is looking for possible ways to introduce Guy Laroche into the China market. On the other hand, Michel Rene is an in-house brand, found by YGM in 1976. The brand carries a full line of men’s and women’s executive and city wear.

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Turnover from Guy Laroche accounted for 5.6% of total YGM turnover. However, 95% of Guy Laroche turnover is made up of licensing of trademarks. Michel Rene accounted for 11.3% of YGM’s total turnover in 1H2011. Although both Guy Laroche and Michel Rene do not make meaningful net profit contribution, they constitute valuable assets to YGM. Our channel check with apparel retailers in Hong Kong and China indicate that apparel retailers often looking for acquisition of other brands to expand their existing business and product line. However, such suitable target is often hard to find due to favourable retail operating environment in Hong Kong and China as well as high asking price.

We believe YGM has under utilised the Guy Laroche and Michel Rene brands as Michel Rene is well known in the Hong Kong market and Guy Laroche has rich European history and high publicity in Hollywood. Brand ownship by YGM of these two brands will definitely help in future market expansion.

Figure 16: Michel Rene Store in Tsim Sha Tsui Hong Kong

Sources: CIRL

No provision for Guy Laroche litigation

YGM announced the Guy Laroche litigation case in late Jaunary 2011. The case involved Guy Laroche’s former licensee in France, GTM initiated counter-claim against YGM for damage from early termination of the licensing contract for approximately 2.78m Euro. YGM management has consulted lawyers and auditors on the lawsuit. Lawyers commented YGM has really high chance on winning the case and YGM’s auditor decided there is no need to make any provisions for the lawsuit.

According to the announcement, the case is not expected to be heard before 2012. However, such lawsuit has certainly affected YGM’s share price which dropped from HK$19.30 right after the announcement to lows of HK$13.00 in March.

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New store expansion focus on Aquascutum and New store expansion focus on Aquascutum and New store expansion focus on Aquascutum and New store expansion focus on Aquascutum and

J.LindebergJ.LindebergJ.LindebergJ.Lindeberg

At the end of 1H2011, YGM’s total number of stores stood at 295. The total number of stores decreased from 321 in 2009 to 295, mainly due to consolidation in Michel Rene stores as YGM closed down 30 non-performing stores between FY2009 and 1H2011. Over the period, the number of Aquascutum and Ashworth stores has been gradually increasing, Acquascutum stores increased from 149 in FY2008 to 159 stores in 1H2011, and Ashworth stores increased from 72 in FY2008 to 75 in 1H2011. This move indicates the company will put more resource on the brand which can enhance their turnover and create extra value for shareholders.

Figure 17: Number of Store by Brand

Brand FY2008 FY2009 FY2010 1H2011

Aquascutum 149 153 163 159

Ashworth 72 78 75 75

Michel Rene 91 89 64 59

Guy Laroche 1 1 1 1

J.Lindeberg - - - 1

Total 313 321 303 295 Sources: Company, CIRL

In terms of market coverage, YGM’s Aquascutum has wider market coverage with 159 stores located in Greater China, compared to Trinity’s Kent & Curwen of 117 stores, 103 stores for Cerruti 1881, 92 stores for Gieves & Hawkes and 76 stores for D’URBAN.

Figure 18: Comparison of Sales Network in Greater China by Brand

159

117103

9276

58

19

0

40

80

120

160

Aquascutum

(YGM)

Kent &

Curwen

(Trinity)

Cerruti 1881

(Trinity)

Gieves &

Hawkes

(Trinity)

D'URBAN

(Trinity)

Ashworth

(YGM)

Intermezzo

(Trinity)


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Out of the 295 total stores in 1H2011, China accounted for 194 stores or 66% of total stores. Hong Kong and Macau account for 56 stores while Taiwan accounted for 32 stores. YGM targets to increase the number of stores to 378 by 1H2014, which implies 9% growth rate per year. The new store openings will be mainly focus on Aquascutum and J.Lindeberg, given that Aquascutum is YGM’s own brand with higher margin and J.Lindeberg will be a key new brand promotion for YGM.

Figure 19: Number store by location

Location Sept 2009 Mar 2010 Sept 2010 Sept 2013

China 215 198 194 250

HK & Macau 43 53 56 65

Taiwan 49 39 32 40

SE Asia 13 12 12 22

Europe 1 1 1 1

Total 321 303 295 378 Sources: Company, CIRL

Capturing the rising purchasing power in lowerCapturing the rising purchasing power in lowerCapturing the rising purchasing power in lowerCapturing the rising purchasing power in lower----tier citiestier citiestier citiestier cities

According to McKinsey, the number of Chinese wealthy households with annual household income in excess of Rmb250,000 reached 1.6m in 2008, and it is expected this number to increase to more than 4.4m households by 2015. In addition, more wealthy Chinese consumers are expected to come from lower tier cities. The number of wealthy households in tier 1 cities should increase from 0.5m in 2008 to 1.2m in 2015. The number of wealthy households in tier 2 and other lower tier cities should increase from 0.5m and 0.6m in 2008, to 1.4m and 1.8m in 2015.

Figure 20: Number of Wealthy Households in China

1.20.50.5

1.4

1.8

0.6

0

1

2

3

4

5

2008 2015E

m

Tier 1 cities Tier 2 cities Other cities

Sources: McKinsey, CIRL

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Wealthy households in lower tier cities will account for 41% of total wealthy households in China compared to 38% in 2008. In addition, 75% of wealthy consumers will inhabit lower tier cities like Chengdu and Wenzhou by 2015 as wealthy trickles down into China’s interior according to McKinsey.

Figure 21: Consumption Pattern in China

Apparel, shoes and

accessories - 16%

Apparel, shoes and

accessories - 31% Apparel, shoes and

accessories - 11%

Dining Out - 17%

Dining Out - 12%Dining out - 7%

Basic food - 13%

Basic food - 36% Basic food - 53%

Others - 39% Others - 36%Others - 29%

0

20

40

60

80

100

Wealthy Mass affluent Mainstream

%

Sources: McKinsey, CIRL

In addition, wealthy people in China also spend much more of their income in apparel, shoes and accessories. According to McKinsey, Wealthy people spend about 31% of their disposable income on apparel, shoes and accessories, compared to 16% for the mass affluent and 11% for mainstream people.

At the end of February 2011, 69% of YGM stores are in tier 1 and tier 2 cities, tier 3 and tier 4 cities made up of 21% and 10% of total stores in China. The proportion of cities is similar to Trinity in which 63% stores are situated in tier 1 and tier 2 cities, tier 3 and tier 4 cities made up of 26% and 11% respectively. YGM will further penetrate into tier 3 and tier 4 cities by opening 50 new outlets in China to capture the rising purchasing power in lower tier cities.

Figure 22: Location of Stores in Percentage (YGM) Figure 23: Location of Stores in Percentage (Trinity)

1st & 2nd tier cities - 69% 3rd tier cities - 21% 4th tier cities - 10%

1st & 2nd tier cities - 63% 3rd tier cities - 26% 4th tier cities - 11%

Sources: Company, Trinity, CIRL Sources: Company, Trinity, CIRL

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Mainland tourist factorMainland tourist factorMainland tourist factorMainland tourist factor

Retail sales in Hong Kong accounted for 50% of YGM’s turnover in 1H2011. However, management guided that 60%-70% of Acquascutum sales in Hong Kong derived from mainland tourist. Mainland tourists tend to purchase luxury goods in Hong Kong due to huge savings on the price difference. There is a 20-30% price gap for luxury menswear between Mainland China and Hong Kong. In addition, YGM’s presence in Hong Kong, Macau and Taiwan markets also enhance the international brand image and keep brand aspiration among Chinese consumers. Mainland tourist arrival in Hong Kong grew by 26% yoy in 2010 and 15% yoy on average for January and February 2011.

Figure 24: Mainland Tourists to Hong Kong & Growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan0

6

Apr

06

Jul0

6

Oct

06

Jan0

7

Apr

07

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7

Oct

07

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8

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(m)

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60%

Number of mainland tourist (LHS) Growth - YoY (RHS)

Sources: Hong Kong Tourism Board, CIRL

According to Hong Kong Census and Statistic Department, wearing apparel retail sales in Hong Kong recorded 20.1% yoy growth in 2010 and such growth momentum remain into the beginning of 2011 as wearing apparel retail sales grew by 20.4% yoy in the first 2 months of 2011.

Figure 25: Hong Kong’s Wearing Apparel Retail Sales & Growth

0

1,000

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HK wearing apparel retail sales (LHS) Growth - YoY (RHS)

Sources: Hong Kong Census and Statistic Deparment, CIRL

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15 April 2011

Hotline: (852)2235 7789


Fast growing menswear Fast growing menswear Fast growing menswear Fast growing menswear marketmarketmarketmarket in China in China in China in China

According to Frost & Sullivan, total retail sales of menswear in China surged by a CAGR of 18% in 2001-2008. This is due to rising disposable income led to modern Chinese men becoming more attentive to their appearance. Frost & Sullivan forecasts that menswear sales in China will rise at a similar CAGR annually between 2010 and 2013. In addition, the growing size and affluence of China’s middle-class has contributed significantly to higher luxury items and branded foreign products. YGM is benefiting from this change as more Chinese consumers purchase for higher quality apparel products. And there remains plenty of headroom to grow in our view, given the country’s growing enthusiasm for quality menswear and the fact that per capita annual spending on menswear is still relatively low.

Figure 26: Menswear Market in China

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201

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1E

201

2E

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0%5%10%15%

20%25%30%

Menswear market Growth rate yoy

2010-2013 menswear market CAGR 18%

Sources: Frost & Sullivan, CIRL

Figure 27: Retail Sales of Luxury Menswear in China

28

36

4451

60

73

20

30

40

50

60

70

80

2006 2007 2008 2009E 2010E 2011E

Rmb b

2006-2011E CAGR 21%

Sources: Frost & Sullivan, CIRL

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15 April 2011

Hotline: (852)2235 7789


The latest China Union Pay’s Bankcard Consumer Confidence Index climbed to a 13-month high in March 2011. This implies strong consumption sentiment in middle-to-high consumer group in both tier 1 and tier 2 cities.

Figure 28: Bankcard Consumer Confidence Index gradually increased in 1Q2011

84

85

86

87

Jan-1

0

Mar

-10

Apr-

10

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-10

Jun-1

0

Jul-

10

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0

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-10

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-10

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-11

Mar

-11

-1.0%

-0.5%

0.0%

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BCCI (LHS) Growth - MoM (RHS)

Sources: China Union Pay, CIRL

Luxury item purchase is all about branding

Chinese consumers are becoming increasingly sophisticated and knowledgeable about foreign brands. Wealthy consumers are willing to pay premium prices for well-known foreign brands and they demonstrate strong preference for international luxury brands. Wealthy consumers pursue brands that convey status and bring recognition.

In addition, it is extremely difficult for new entrants to join the top-tier of luxury brands as it takes years for a brand to establish its market position and network. Mainland customers still favor European brands the most. The leading players in the luxury goods market contain the same brand names that were around many years ago.

Strong Share Purchase by Controlling ShareholderStrong Share Purchase by Controlling ShareholderStrong Share Purchase by Controlling ShareholderStrong Share Purchase by Controlling Shareholder

YGM is a family run business, in which the Chan family members collectively hold about 62% interest in YGM shares. According to Hong Kong Stock Exchange, the Chan Family Investment Corporation, purchased over 3m shares of YGM shares in the market with an average cost of HK$15.57 or a total consideration over HK$47m. The highest price paid was HK$21.19 in December 2010 and the lowest price paid was HK$10.64 back on July 2010. We believe the consistent purchase by the Chan Family demonstrates the Chan family’s confidence on YGM’s business and outlook.

We believe the Chan Family will stop buying shares of YGM starting April 2011 due to results blackout. YGM will be announcing its FY2011 results in June 2011.

Page 22

15 April 2011

Hotline: (852)2235 7789


Figure 29: Consistent Share Purchase by the Chan Family Investment Corporation

020,00040,00060,00080,000100,000120,000140,000160,000180,000

11/04

/201

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/2011

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22HK$

Volune Share price

Sources: HKEX, CIRL

Share split likely to occur after June 2011Share split likely to occur after June 2011Share split likely to occur after June 2011Share split likely to occur after June 2011

Management is planning a share split for YGM shares to improve liquidity and narrow the bid-ask spread. We believe share split is really important for the re-rating of YGM as institutional investors are concern on the liquidity of the stock which only traded 219k shares on average daily for the past year. The share split is likely to occur after the final results announcement in June 2011. Furthermore, management is also thinking of changing the name of the company to company names relating to Aquascutum as the brand accounts for approximately 80% of its net profit (excluding associate contribution) to better reflect the nature of its business.

Properties disposal enhance hidden valueProperties disposal enhance hidden valueProperties disposal enhance hidden valueProperties disposal enhance hidden value

YGM announced the potential disposal of two investment properties in Park Lane Shopper’s Boulevard in Tsim Sha Tsui, Hong Kong by way of public tendering. According to management, the market value of the two properties is estimated to be around HK$400m, and the company has already received bids close to HK350m.

Looking back at YGM’s track record, the company disposed of another investment property in 2008, the realized disposal gain of HK46.6m was returned to shareholders through special dividend. We believe once the sale of two investment properties is completed, YGM is likely to distribute the profits in the form of special dividend.

Page 23

15 April 2011

Hotline: (852)2235 7789


Earnings OutlookEarnings OutlookEarnings OutlookEarnings Outlook

YGM reported 1H2011 turnover of HK$475m, or 15% YoY growth. We forecast FY11 turnover to reach HK$1,288m or 30% YoY growth. Second half of YGM’s financial year is peak season due to more holiday breaks such as October Golden week, Christmas in December and Chinese New Year in February. YGM usually generates about 55-60% of its sales in second half of the year. YGM’s FY2011 is a little bit different than previous years due to colder winter weather, and winter items have higher ASP than summer items. We forecast higher sales contribution in 2H2011 and sales split will reach 63%. We are comfortable forecasting sales growth of 18% YoY for FY2012 and 16% YoY growth for FY2013. Management commented that the Aquascutum’s trade fair for winter collection for FY2012 is very encouraging and anecdotal evidence suggested that sales for the trade fair grew by high 20% YoY.

We expect gross margin of YGM to remain at around 66%-67% for FY2011 to FY2013. We forecast net profit to reach HK$270m in FY2011, We believe the seasonal net profit split has been neglected by investors which led to share price selling down after 1H2011 results announcement. We forecast net profit of HK$337m in FY2012 and over HK$400m by FY2013.

Figure 30: YGM Turnover Forecast

972 991

1,2881,520

1,764

0

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2,000

2009 2010 2011E 2012E 2013E

HK$ m

CAGR 2 1 %CAGR 2 1 %CAGR 2 1 %CAGR 2 1 %

Sources:Company, CIRL estimates

Figure 31: YGM Net Profit Forecast

80

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270

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050

100150200250300350400450

2009 2010 2011E 2012E 2013E

HK$ m

CAGR 2 7 %CAGR 2 7 %CAGR 2 7 %CAGR 2 7 %


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15 April 2011

Hotline: (852)2235 7789


Figure 32: YGM Gross Margin Forecast

61.0%61.0%61.0%61.0%

66.5%66.5%66.5%66.5%66.2%66.2%66.2%66.2%

66.0%66.0%66.0%66.0%

64.6%64.6%64.6%64.6%

60%

61%

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2009 2010 2011E 2012E 2013E


Figure 33: YGM EBIT Margin Forecast

8. 9%8. 9%8. 9%8. 9%

23. 8%23. 8%23. 8%23. 8%23. 0%23. 0%23. 0%23. 0%

21. 3%21. 3%21. 3%21. 3%

17. 3%17. 3%17. 3%17. 3%

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2009 2010 2011E 2012E 2013E


Figure 34: ROE

10. 3%10. 3%10. 3%10. 3%

21. 3%21. 3%21. 3%21. 3%26. 6%26. 6%26. 6%26. 6%

30. 5%30. 5%30. 5%30. 5%32. 8%32. 8%32. 8%32. 8%

0%

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10%

15%

20%

25%

30%

35%

2009 2010 2011E 2012E 2013E


Page 25

15 April 2011

Hotline: (852)2235 7789


FinancialsFinancialsFinancialsFinancials

YGM seemed to have reported fluctuating financial results for the past three years. This is mainly due to revaluation of property assets in Hong Kong. Without the exceptional items, net profits were HK$112m FY08, HK$93m in FY09, HK$168m in FY10 and HK$90m in 1H11.

FY08 results. YGM recorded a turnover of HK$1,110m, representing an increase of 9% yoy. Core net profit increased by 13% yoy to HK$112m. Gross margin as 60.5% in FY08 compared to 61.8% in FY07.

FY09 results. YGM recorded a turnover of HK$972m, representing a decrease of 12% yoy as a result of the financial tsunami in Asia The company recorded core net profit of HK$93m for the year, which declined by 17%. Gross margin improved from 60% in FY08 to 61% in FY09 due to the cost control program implementation. However, net profit declined more than gross profit due to higher effective tax rate which increased from 8% in FY08 to 13% in FY09 as well as less contribution from Hang Ten which decreased from HK$34m in FY08 to HK$17m in FY09.

FY10 results. YGM’s turnover increased by 2% yoy to HK$991m. As a result of the acquisition of Acquascutum Asia Pacific License, total royalty and related income from external customers increase from HK$60m in FY08 to HK$76m in FY09. Core net profit was up 80% yoy to HK$168m. Gross margin improved from 61% in FY09 to 65% in FY10. Profit contribution from Hang Ten increased from HK$17m in FY09 to HK$29m in FY10.

1H11 results. For 1H11, YGM’s turnover increased by 15% yoy to HK$475m. Turnover from sales of garment increased by 13% yoy to HK412m while royalty income increased by 38% due to increased contribution from the Aquascutum trademark which YGM acquired in September 2009. Core net profit was up by 116% yoy to HK$90m. Overall gross margin was up by 2.7 ppt to 65.9% due to limited markdowns on sales of garments and savings from royalty expenses.

Figure 35: Financial Review

Year ended 31 Mar FY08 FY09 FY10 FY11E FY12E FY13E

Revenue 1,110 972 991 1,288 1,520 1,764

Growth - YoY 8.5% -12.4% 2.0% 30.0% 18.0% 16.0%

Gross profit 671 593 641 850 1,006 1,173

Gross margin (%) 60.5% 61.0% 64.6% 66.0% 66.2% 66.5%

Net profit 171 80 197 270 337 401

Growth - YoY 44.8% -53.1% 145.2% 37.2% 25.1% 18.9%

Net margin – % 15.4% 8.3% 19.8% 20.9% 22.2% 22.7% Sources: Company, CIRL estimates

Page 26

15 April 2011

Hotline: (852)2235 7789


Risk FactorsRisk FactorsRisk FactorsRisk Factors

Management risk – YGM will expand the Aquascutum brand into the Korean market in 2011, any brand mismanagement could affect sales in China given close proximity to Korea.

Lawsuit risk – YGM announced that it is involved in a lawsuit with its former Guy Laroche franchisee in France. The chance of winning the case is really high according to lawyers. However, if the final judgment is against YGM, then YGM to subject to damage payment of 2.78m Euro.

New product launch risk – YGM will speed up the roll-out of the J.Lindeberg brand in China in 2011 by opening flagship stores in top tier cities and through franchise network in other cities. Negative reception of the brand in China will affect YGM earnings.

Macro risk – Higher inflation rate in China will erode purchasing power of consumers and will ultimately affect YGM sales.

Page 27

15 April 2011

Hotline: (852)2235 7789


APPENDIXAPPENDIXAPPENDIXAPPENDIX

Figure 36: Shareholding Structure

Figure 37: Profiles of Key Management

Name Position Profile

Mr. Chan Wing Fui, Peter

((陳永奎) Chairman

Join the group in 1969, he was appointed as the Vice Chairman in 1987 and Chairman in 2010. Mr. Chan has rich experience in garment manufacturing and marketing in the Far East and in the US for over 30 years.

Mr. Chan Wing Sun, Sammuel

(陳永燊) Executive Director

Join the group in 1974, he was the Managing Director of the company from 1987 to 2006 and CEO of the company form 2006 to 2010. Mr. Chan was appointed as Vice Chairman in 2010.

Ms. Chan Suk Ling, Shirley

(周陳淑玲) Executive Director

Join the group in 1973, Ms. Chan was the Managing Director from 2006 to 2010. She has extensive experience of management in the garment retail and wholesale business.

Mr. Fu Sing Yam, William

(傅承蔭) Executive Director

Joined the company in 1985, appointed as Managing Director in 2010. Mr.Fu has extensive experience in fashion retailing, marketing and merchandising.

Mr. Chan Wing

Kee (陳永棋) Executive Director

Joined the group in 1970, was appointed as director since 1977. Mr. Chan is independent non-executive director of a numerous companies.


The Chan Family Investment

Corp and family members Public Shareholders

62% 38%

Page 28

15 April 2011

Hotline: (852)2235 7789


Figure 38: Company History

Year Major Events

1976 - Established and launched own brand Michel Rene.

1988 - YGM Trading listed on Hong Kong Stock Exchange.

1996 - Acquired Hang Ten Worldwide.

1998

- Obtained licensing right of Aquascutum for the Greater China.

- Signed a 30 year licensing right of Ashworth.

2002 - Spun off Hang Ten Group (448 HK).

2004 - Acquired Guy Laroche worldwide.

2009 - Acquired all intellectual property right of Aquascutum in 42 Asia Pacific countries.

2010 - Obtained the exclusive distribution right of J.Lindeberg for the Greater China.

Source: The Company, CIRL

Page 29

15 April 2011

Hotline: (852)2235 7789


Figure 39: Profit and Loss Statement

Year ended 31 Mar, HK$ m FY09 FY10 FY11E FY12E FY13E

Revenue 972 991 1,288 1,520 1,764

Gross Profit 593 641 850 1,006 1,173

EBITDA 119 197 301 378 451

Depr/Amort (33) (25) (27) (29) (31)

Other revenues 18 6 8 9 11

Operating profit 86 172 274 349 420

Finance costs (2) (1) (2) (2) (2)

Share of profit from Hang Ten 17 29 38 44 50

Exceptional (13) 28 0 0 0

Pretax profit 91 229 314 394 472

Tax (12) (31) (44) (57) (71)

Minority Interests 1 (2) 0 0 0

Net profit 80 197 270 337 401

EPS - HK$ 0.52 1.28 1.66 2.07 2.47 Source: The Company, CIRL estimates

Figure 40: Balance Sheet


Cash and securities 226 205 251 326 427

Accounts receivables 107 125 163 192 223

Inventory 140 102 127 150 172

Other current assets 19 13 13 13 13

Total current assets 492 445 554 680 835

Net fixed assets 181 191 194 195 194

Other long-term assets 318 558 558 558 558

Total Non-current assets 499 749 752 753 752

Total assets 992 1,194 1,306 1,433 1,587

Short term debt 15 47 47 47 47

Accounts payable 155 168 211 247 284

Other current liabilities 9 18 18 18 18

Total current liabilities 179 234 276 312 349

Long term debt 3 2 2 2 2

Other long term liabilities 11 14 14 14 14

Total long term liabilities 15 16 16 16 16

Total liabilities 193 249 291 328 365

Shareholders equity 798 944 1,014 1,106 1,222

Total Equity and liabilities 992 1,194 1,306 1,433 1,587 Source: The Company, CIRL estimates

Page 30

15 April 2011

Hotline: (852)2235 7789


Figure 41: Cash Flow


OPERATING

EBIT 90 229 312 393 470

Depreciation/Amortisation 33 25 27 29 31

Change in working capital (4) 33 (21) (15) (16)

Others (17) (72) (80) (99) (119)

Net Operating Cash Flow 102 215 238 308 366

INVESTING

CAPEX (27) (14) (30) (30) (30)

Others 22 (188) 0 0 0

Net Cash Flow From Investment (4) (202) (30) (30) (30)

FINANCING

Dividends paid (111) (66) (162) (202) (241)

Change in debt (16) 32 0 0 0

Change in equity (0) 0 0 0 0

Others (2) (1) 0 0 0

Net Cash Flow from Financing (128) (35) (162) (202) (241)

Net change in cash flow (31) (21) 46 75 95 Source: The Company, CIRL estimates

Figure 42: Key Ratios

Year ended 31 Mar FY09 FY10 FY11E FY12E FY13E

Growth ratios

Revenue growth – % -12% 2% 30% 18% 16%

Operating profit growth – % -12% 99% 60% 27% 20%

Net-profit growth – % -53% 145% 37% 25% 19%

EPS growth – % -53% 145% 30% 25% 19%

Profitability ratios

Gross margin – % 61.0% 64.6% 66.0% 66.2% 66.5%

Operating margin – % 8.9% 17.3% 21.3% 23.0% 23.8%

Net margin – % 8.3% 19.8% 20.9% 22.2% 22.7%

ROA – % 8% 16% 21% 24% 25%

ROE – % 10% 21% 27% 31% 33%

Other ratios

Net debt/equity (net cash) – % -25% -15% -19% -24% -30%

Effective tax rate – % 13% 13% 14% 15% 15% Source: The Company and CIRL estimates

Page 31

15 April 2011

Hotline: (852)2235 7789


Rating Policy

Rating Rating Rating Rating DefinitionDefinitionDefinitionDefinition

Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI Stock Rating

Sell Underperform HSI by -15%

Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI Sector Rating

Reduce Underperform HSI by -10%

Analysts List

Castor Pang Research Director (852) 2235 7127 [email protected]

Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected]

Kenneth Li Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Research Analyst (852) 2235 7847 [email protected]

Analyst Certification

I, Kenneth Li hereby certify that all of the views expressed in this report accurately reflect my personal views about the

subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are

or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot

and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded

by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the

investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment

decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future

political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any

opinions expressed in this report are subject to change without notice. The report is published solely for information

purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda

International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the

materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report

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