JPM_Chinese_consumer_foc_2014-06-17_1420423

www.jpmorganmarkets.com

Asia Pacific Equity Research17 June 2014

Chinese consumer focusing on health, newness & convenienceKey takeaways from China Summit 2014

Consumer

Ebru Sener Kurumlu AC

(852) 2800-8521

[email protected]

Bloomberg JPMA KURUMLU <GO>

Shen Li, CFA AC

(852) 2800 8523

[email protected]

Bloomberg JPMA SHLI <GO>

Henry Tan

(852) 2800-8559

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

See page 28 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Consumer preferences in the beverage market moving towards “healthy”. Our channel checks in Beijing suggest a trend that consumers are more focused on health and wellness and that is driving bottled water sales in place of flavored beverages. Coca Cola (who partners with China Foods in China) highlighted that the Chinese consumer is increasingly looking for functional benefits (“every Chinese teenage knows wolfberries are good for their eyes”). Beverage companies are also adding more varieties to their product portfolio. This is a focus for China Huiyuan Juiceas it adds more chilled products, sports drinks and plant based beverages.

Dairy companies focus on milk beverages; discussion on imported UHT milk. Mengniu notes milk beverages sales continue to be at decent levels which we think is likely to add pressure to Want Want. On competition posed by imported milk Mengniu notes the base is low for imported UHT milk (< 1% of total demand). They agree that current online prices are lower than milk deluxe but believe this is not sustainable.

Food retail traffic remains lackluster. Hypermarket operators have been negatively impacted by weak macro environment as well as increasing competition. Wumart noted that current trading remains challenging. Wumart is looking to reduce prices to attract customer traffic as they believe that a third of their products are priced higher than competitors. We believe lackluster SSSG trends for the industry is negative for Sun Art (UW).

Merchandising capability a differentiator for department stores. One consistent message from panel discussions was that consumers are evolving rapidly and looking for newness. Lane Crawford is able to respond faster to changes in consumer preferences through it’s “buyer’s” model. We believe building strong merchandising capability requires experience and it will take time for Chinese department stores to catch up though a few players such as Golden Eagle are working in the right direction.

E-commerce redefining distribution. Yihaodian, a relatively newcomer to Chinese e-commerce space has now 4m SKUs (v 3k SKUs 6 years ago) and recorded US$2bn in sales in FY13. It notes that penetration of e-commerce is now going deeper into lower tier cities. Kimberly Clarke had previously commented that the e-commerce platform in China is an efficient way for the company to grow given dense population in the cities, the lower cost of delivery, high internet and smart phone penetration. Lane Crawford noted that when you have customers who are engaged both online and offline, you then see the “real magic of retail” occurring, with increased spending, engagement and loyalty.

Top picks: With lackluster demand and continuing pressure from e-commerce we do not yet see sales recovering for discretionary names. We continue to be OW on CTF which is relatively immune from structural problems. On staples front our top picks are Mengniu and Hengan. We are UW on Sun Art and we are cautious on Want Want given that competitive pressure is building up.

Figure 1: China Retail Sales % y/y

Source: NBS

Figure 2: China Consumer Confidence Index

Source: NBS

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Ebru Sener Kurumlu(852) [email protected]

Table of ContentsSection 1: Key Takeaways.......................................................3

Consumer preferences in the beverage market moving towards “healthy”.................3

Dairy companies continue to focus on milk beverages; discussion on imported UHT milk. .......................................................................................................................3

Food retail traffic remains lackluster (-ve for Sun Art) .............................................3

Unique merchandising core as Chinese consumer looks for “newness”; Opportunity for department store in M&A...................................................................................5

E-commerce redefining distribution.........................................................................5

ML Chinese travel spending growth potential substantial but is tourist flow sustainable?.............................................................................................................7

Section 2: Industry Panel Discussion Takeaways.................9

CEO Dialogue – Luxury Brands: China Still Holds the Key.....................................9

Consumer Connections: Retail Trends in China .....................................................11

E-Commerce: Global Retail Revolutionized...........................................................12

Meeting China’s Food Demand .............................................................................13

The China Factor in Global Brands Success...........................................................14

China Travel Spending..........................................................................................16

Section 3: Company Meeting Takeaways.............................18

China Huiyuan (1886 HK, Not Covered) ...............................................................18

China Mengniu (2319 HK, OW)............................................................................19

Gome (493 HK, Not Covered)...............................................................................20

Trinity (891 HK, Neutral)......................................................................................21

Vipshop (VIP US, OW).........................................................................................22

Wumart (1025 HK, Not Covered)..........................................................................23

3



Section 1: Key Takeaways

Consumer preferences in the beverage market moving towards “healthy”

Our channel checks in Beijing suggest a trend that consumers are more focused on health and wellness and that is driving bottled water sales in place of flavored beverages. Interestingly, Coca Cola (which partners with China Foods in China) does highlight that the Chinese consumer is increasingly looking for functional benefits (“every Chinese teenage knows wolfberries are good for their eyes”). Beverage companies are also increasingly adding more varieties to their product portfolio to compete. This is a focus for China Huiyuan Juice in FY14 as the company adds more chilled products, sports/ functional drinks and plant based beverages.

Figure 3: Evolution of the beverage market

Source: J.P. Morgan.

Dairy companies continue to focus on milk beverages; discussion on imported UHT milk.

Mengniu management notes that milk beverages sales continue to be at decent levels which we think is likely to add pressure to Want Want.

In response to competition posed by imported milk Mengniu management notes that the base is very low for imported UHT milk, less than 1% of total demand. Growth for imported milk last year was 90% y/y, which could be due to raw milk crunch in China and growth this year has slowed down to 40%. Management does not believe imported UHT milk is taking share from Deluxe given the lack of investment in brands (vs. Deluxe which has brand recognition). They agree that current online prices are lower than milk deluxe but believe this is not sustainable.

Table 1: UHT Imported milk base still small

2012 2013Total dairy consumption volumes (in tons) 23,275,300 24,866,000Imported UHT milk (in tons) 80,000 200,000

As % of total 0.3% 0.8%

Source: Euromonitor, Beijing Shennong Kexin Argibusiness Consulting, JPM calculations

Food retail traffic remains lackluster (-ve for Sun Art)

Wumart notes current trading remains challenging. SSSG has slowed over recent quarters although the company has experienced some slight improvement in 2Q14.

Wumart will look to reduce prices to attract customer traffic. The company believes that one third of Wumart's products are currently higher than competitors. The

Pure Water Mineral WaterNatural Spring Water

Natural Mineral Water

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Gasey Coke Fruity Flavor Low Carbo Asian TasteCSD

10% orange Fruit BitsTraditional Chinese Fruit

100% orangeFruit Juice

Low sugarHigh sugar content

Fruit tea No sugarRTD Tea

Fruity milk Milk tea Yogurt drink Flavored milkMilk Beverage

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company is implementing a low price project. After the implementation of this project ~20% of product prices will be higher than competitors. Company will look to continuously reduce prices going forward.

We believe lackluster SSSG trends for the industry is negative for Sun Art (UW). Inthe medium term, we also note the following:

We worry about sales productivity. We see the following threats to store sales productivity: (1) Threat posed by the growth of e-commerce; (2) Emerging threat posed by growth of alternative formats. In turn, this creates risk for operating de-leverage and margins over the longer term. We note many hypermarket operators in more developed markets are faced with this issue.

Downside risk to rental income growth over longer term. Rental income represents a material proportion of Sun Art's earnings and has been growing strongly over recent years. Retail gallery space within an average Sun Art complex is ~4,000-6,000 sqm (v total shopping space ~15,000sqm). We see downside risk to rental revenue growth for the following reasons: (1) Hypermarkets generally have seen a consistent reduction in traffic over recent years as consumers are making fewer daily shopping trips; (2) Ongoing threats to hypermarket foot traffic posed by the growth of e-commerce.

Figure 4: China Hypermarket Operators - SSSG

Source: Company reports.

Figure 5: Sun Art - Trend in SSSG

Source: Company reports. December year end.

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Unique merchandising core as Chinese consumer looks for “newness”; Opportunity for department stores in M&A.

One consistent message from consumer track panel discussions was that Chinese consumers are evolving quickly and constantly looking for newness. We note Lane Crawford (a “buyers model” department store player which owns the entire inventory within its store) has been able to respond to the demand for newness as 50% of their products are unique to the market. Drawing from years of merchandising experience in HK, they see strong sales at both their psychical and online stores in China. We believe building strong merchandising capability requires experience and it will take time for Chinese department stores to catch up though a few players such as Golden Eagle are working in the right direction.

On M&A, panelists noted that over the past 10 years, department stores in China have performed relatively strongly. Hence, shareholders did not have a strong urge to engage in M&A discussions. However, with business becoming increasingly difficult over the past couple of years, this may be a catalyst in leading department

E-commerce redefining distribution

Yihaodian, a relatively newcomer to Chinese e-commerce space has now 4m SKUs (v 3k SKUs 6 years ago) and recorded US$2bn in sales in FY13. It notes three key trends in e-commerce: (1) E-commerce is moving towards mobile. By end of last year, mobile users reached 500m with PC users 590m; (2) Penetration of e-commerce in China is going deeper into lower tier cities. This is due to convenience of online payment, improvement of logistics and mobile penetration. (3) Platform strategy – large e-commerce players are launching marketplace and leverages their traffic and leverages their e-commerce solutions. Yihaodian doesn’t see a ceiling for e-commerce penetration and think the future will be one where the boundary of online and offline will be blurred.

Lane Crawford noted that when you have customers who are engaged both online and offline, you then see the “real magic of retail” occurring, with increased spending, engagement and loyalty.

At the Sanford C. Bernstein Strategic Decisions Conference, Kimberly-Clark(covered by J.P. Morgan Analyst John Faucher) management noted that the e-commerce platform in China is an efficient way for the company to grow given dense population in the cities, the lower cost of delivery, high internet and smart phone penetration. The company believes they are probably ahead in their online share versus their offline share because of the complexity of the China retail market.

JPM Views

We have written a report detailing our views about the longer term threats posed by the growth of e-commerce for Chinese retailers in September 2013 (see Reviewing Longer Term Threats Posed by the Growth of E-Commerce dated 24 September 2013).

As we noted in that report, e-commerce has gained significant market share over recent years in China. By our calculations, e-commerce penetration has reached ~10% of total retail sales in China in 4Q13.

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Figure 6: China E-Commerce Sales as % Corresponding Retail Sales

Source: J.P. Morgan estimates, iResearch, National Bureau of Statistics. Numerator = total e-commerce sales as estimated by

iResearch. Denominator = Total China retail sales less automobile and petroleum sales for designated entities as estimated by

National Bureau of Statistics. The NBS data only disclose sales by category for designated entities. Designated entities are defined

as those entities with annual sales over RMB5m or with over 60 employees.

As a comparison, e-commerce penetration in the US is estimated to be ~10-11% (after excluding categories where a majority of product sold is done offline such as food, petrol, motor vehicles). However, it has taken China ~4 years to move from ~2% e-commerce penetration to ~10% e-commerce penetration, something that took the US over 10 years to achieve.

Figure 7: US E-Commerce Sales as % Corresponding Retail Sales

Source: US Census Bureau. E-commerce sales as a proportion of total retail sales excluding sales for the following categories: Motor

Vehicle & Parts Dealers, Food & Beverage Stores, Gasoline Stores, Food Services & Drinking Places and Fuel Dealers.

From a sales perspective, we believe e-commerce growth is having a negative impact on offline retail in two ways:

Reducing sales by taking volumes away from physical retail.

Reducing sales by placing pricing pressure on physical retail given online prices are generally lower than offline prices.

E-commerce penetration has grown significantly in certain categories such as apparel & footwear and consumer electronics. We estimate that e-commerce penetration is ~25-30% for both categories.

Moreover, we note that e-commerce penetration in some food and household goods categories has also increased dramatically over recent years. For example, industry sources indicate that e-commerce penetration for infant baby formula and diapers has

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reached ~20%. We believe international brands will utilize this channel to grow their presence in China given the complexities of the traditional distribution market.

ML Chinese travel spending growth potential substantial but is tourist flow sustainable?

In 2013, the Mainland Chinese traveller spent US$130.6bn globally (+28% yoy). Currently there are c40mn of valid passports in China which represents c5% penetration vs. 37% in the US and 75% in Japan.

Tourists curbs are harmful for HK which has a heavy dependence on the ML Chinese in its retail sector. Instead of discouraging demand, the panel believes focus should be on making sure the supply side infrastructure keeps up with the traffic volume growth. Countries that are pro-active in solving supply side infrastructure issues will be able to capture a disproportionate share of traveler spending.

Figure 8: Summary Statistics of HK Tourists Arrivals

Source: Hong Kong Tourism Board

Table 2: HK Retail Sensitivities – Potential Impact from decline in ML Chinese tourist arrivals

HK sales exposure to ML tourists

Group sales exposure to ML

tourists

1% reduction in HK sales impact on group

EBIT

1% reduction in HK sales impact on

group NPAT

Assuming 15% decline in ML tourist arrivals and

similar impact on revenue generated from

ML tourists impact on group EBIT

Assuming 15% decline in ML tourist arrivals

and similar impact on revenue generated from

ML tourists impact on group NPAT

CTF 59.7% 29.0% -0.5% -0.5% -4.5% -4.5%Lifestyle 25.0%* 18.0% -0.9% -0.7% -3.4% -2.6%Giordano 35.0%* 7.0% -0.7% -0.7% -4.2% -4.2%I.T 40.0%* 20.0% -4.8% -5.8% -28.8% -34.8%Sa Sa 70.0% 56.0% -2.5% -2.5% -26.3% -26.3%Trinity 40.0%* 15.0% -2.5% -2.3% -16.9% -15.5%

Source: J.P. Morgan estimates, Company data. * Estimates only

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Other visitors Chinese visitors % of Chinese travellers under Individual Visitor scheme

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Table 3: HK Retail Sensitivities – Potential impact from reduction in rentals

Group rental as % group sales (LFY)

HK rental as % HK sales (LFY where available)

1% reduction in HK rental

expenses impact on group EBIT

1% reduction in HK rental expenses

impact on group NPAT

Assuming 10% reduction in HK rentals

impact on group EBIT

Assuming 10% reduction in HK

rentals impact on group NPAT

CTF 5.4% 3.20% 0.1% 0.1% 1.0% 1.0%Lifestyle 2.0% No rental cost in HK No impact No impact No impact No impactGiordano 20.9% Over 30% 0.5% 0.5% 5.0% 5.0%I.T 21.2% Assume over group ave 2.0% 2.4% 20.0% 24.0%Sa Sa 10.1% 10.30% 0.7% 0.7% 7.0% 7.0%Trinity 22.8% Assume similar to group ave 0.8% 0.7% 8.0% 7.0%Source: J.P. Morgan estimates, Company data.

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Section 2: Industry Panel Discussion Takeaways

CEO Dialogue – Luxury Brands: China Still Holds the Key

We attended a panel discussion on China luxury trends in China during the J.P. Morgan China Summit 2014. Panelists included: Victor Luis, Coach CEO and Michele Norsa, Salvatore Ferragamo CEO. Our key takeaways are as follows.

Chinese consumers changing rapidly but luxury companies still see China as the most important market globally. China is the fastest changing environment for Ferragamo and there are challenges in keeping pace with this fast changing market. Ferragamo believes it is important to keep consistent with its roots and believes heritage is important in Asian more than anything else. In this regard, there are very few home-grown luxury brands from Asia which can go global given the difficulties of building a brand from scratch and competition from existing brands which have that heritage legacy. Coach is also seeking to transform itself towards more a lifestyle brand and providing that retail experience. For Coach, China represents the largest single most important geographic opportunity over the long term. It estimates the China luxury handbag accessories market now at US$4.6bn (13% of global markets), and expects this to grow to US$10bn in five years (20% of global market). Ferragamo has been growing in excess of 20% for four years except last year. Still growing double digit in retail business recently.

Price gap is too high now in China. For first time, people are travelling to Japan to shop. There is some expectation that the Chinese government will try to take steps to reduce the price premium of luxury goods in China (c40-50% premium vs. HK/ Europe) to retain consumption in-country.

Rents are unsustainable. Leases have become “unreasonable” in China. The time of the lease is the first thing that Ferragamo wants to change (needs longer lease). However, cost is also too high.

Capturing the Chinese traveler consumer at the airports. The ML Chinese traveler remains the largest driver of luxury sales worldwide. Hence the airport becomes an important branding and marketing channel. Ferragamo is marketing its brand with 17 billboard locations at airport in China (80+ airports globally as the ML Chinese increasingly travel to other parts of the world other than just Hong Kong). It is using famous celebrities / models to market the brand and note that Chinese people are “passionate over celebrities in a way you do not see in other parts of the world”. The Korean market is also seeing larger inbound flows from China in recent markets.

E-commerce is a big opportunity. Coach is incredibly excited in the digital space and within the mobile space. For now, e-commerce is still at its infancy for luxury brands in China. Coach launched its e-commerce website in Nov 2012 and has delivered in over 280 cities. Nevertheless, Coach thinks it will be difficult to have just internet only luxury brand. Luxury is very retail orientated business and need solid retail experience that is both seamless online and offline

Tier 2 or 3 cities are becoming credible opportunities for luxury companies.While the vast majority of the wallet spend has been in tier 1/2 cities to date,

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companies are now looking beyond to tier 3 cities. Coach is still opening 30+ stores in China and looking at tier 3 and 4 opportunities. For now, exclusive luxury malls/ bridge fashion malls (i.e. department stores, shopping malls) are the core channels and e-commerce is still in its infancy. Coach was one of the first to be online, with its ecommerce site launched in Nov-12. It is already delivering to 286 cities while they only have a presence in 52 cities. Ferragamo believes there are 38 Tier 2 and 3 cities which now present credible opportunities for luxury players.

Impact of gifting. Ferragamo notes that menswear has comprised 46% of total sales in China (vs. 40% globally). With the clampdown on gifting, the women mix has increased by 1ppt every other month recently, and become more important in China (and increasingly more aligned with other parts of the world). Gifting remains an Asian/ Chinese culture and will not disappear in its entirety in China where it is legal to do so.

Exclusivity vs. accessibility. Coach takes a modern view of luxury and believes that it’s not only about the logo, but about product and value. Coach consumers are looking at "more intrinsic" value in brands and Coach’s DNA will be to focus on “approachable” or “accessible luxury". They hence view the expanding middle class as the core opportunity target group for them.

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Consumer Connections: Retail Trends in China

We attended a panel discussion on retail trends in China during the J.P. Morgan China Summit 2014. Panelists included: Andrew Keith, President of Lane Crawford Joyce, Mark Israel, CEO of Value Retail China and Francis Belin, Senior Vice President of Swarovski Asia-Pacific. Our key takeaways are as follows.

Chinese consumers are evolving quickly and constantly looking for newness. Lane Crawford runs a “buyers model”, unlike many department store peers in China. The company has 85 buyers and owns all of the inventory within its store. This model has allowed the company to be closer to the consumer and provides the company flexibility and speed to be able to tailor to changing consumer preferences. Lane Crawford has noticed the speed with which Chinese consumers are evolving. Moreover, Chinese consumers are very responsive to newness and freshness within Lane Crawford stores. To this end, newness is not simply about bringing new products to the Chinese market but also includes the need to bring relevant products into the Chinese market, as well as newness from the perspective of a holistic shopping experience (e.g. concierge services, spa treatment, European travel for VIP customers, 360 degree beauty service).

Some companies are beginning to think about e-commerce and digital holistically. Value Retail believes the internet and digital space can help retailers to understand their customers better. Value Retail is trying to understand its guests better and continuing to tailor its shopping villages to those needs. Lane Crawford believes that its digital/e-commerce site allows it to be able to have a singular view of the customer. It allows Lane Crawford to have a personal relationship with its customers and builds customer engagement. Lane Crawford noted that when you have customers who are engaged both online and offline, you then see the real magic of retail occurring, with increased spending, engagement and loyalty.

Opportunity for department store M&A. Panelists noted that over the past 10years, department stores in China have performed relatively strongly. Hence, shareholders did not have a strong urge to engage in M&A discussions. However, with business becoming increasingly difficult over the past couple of years, this may be a catalyst in leading department store shareholders to be more willing to engage in M&A discussions.

Key trends that will define retail over the coming years. Panelists highlighted a number of trends that they thought would define retail over the coming years: 1) The move towards individuality and individual expression, away from mass broad fashion; 2) The tailoring of individual experiences, connectivity across various channels to the customer (online and offline) and its complexity; and 3) The growth and proliferation of the internet and its impact on marketing and how retailers will advertise and promote to consumers.

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E-Commerce: Global Retail Revolutionized

We attended a panel discussion on e-commerce trends in China during the J.P. Morgan China Summit 2014. Panelists included: Ming Mei, Co-Founder and CEO of Global Logistics Properties, Yu Gang, Co-Founder and Chairman of Yihaodian, Diane Wang, Founder and CEO of DHgate, Peggy YU, Co-Founder and Executive Chairwoman of E-Commerce China Dangdang Inc, Josh Perlman, Managing Director, Branded Retail, Tristate Holdings. Our key takeaways are as follows.

E-commerce is growing fast and re-defining distribution. Yihaodian, a relatively newcomer to Chinese e-commerce space has now 4m SKUs (v 3k SKUs 6 years ago) and recorded US$2bn in sales in FY13. Global Logistics Properties’s (GLP) business has grown from 0% e-commerce exposure to 25% to e-commerce companies directly while another 5-10% dedicated to logistics companies services e-commerce. For Tristate, current online sales account for 12.5% of total and they expect to grow this to over 20%.

Yihaodian founder notes three key trends in e-commerce: (1) E-commerce is moving towards mobile. By end of last year, mobile users reached 500m with PC users 590m; (2) Penetration of e-commerce in China is going deeper into lower tier cities. This is due to convenience of online payment, improvement of logistics and mobile penetration. (3) Platform strategy – large e-commerce players are launching marketplace and leverages their traffic and leverages their e-commerce solutions. Yihaodian doesn’t see ceiling for e-commerce and think in future that boundary will be blurred.

Innovation happening on many fronts:

(1) GLP: GLP is focusing on how to reduce costs for customers. Total logistics costs transportation makes up ~50% of cost. GLP’s infrastructure network now covers most cities within China and looking to help truck drivers to match return routes. In any given time, 40% of trucks are empty b/c 70% of trucks are owned by individuals. GLP recently invested in platform for truck hubs. Right now e-commerce is cheap, fast but not making money. One way to do that is that efficiency – GLP working on how to be cost efficient.

(2) DHgate: DHgate is using cross-border transactional data to help SMEs access micro-financing. It is also helping SMEs to build global brands.

(3) Yihaodian: The Company has an innovation platform called idea.yihaodian.com.. It incubates 30 projects a year. One example of is a price system that grabs prices from ~70 different websites (+ traffic information etc). The system then sets the real time online prices for Yihaodian. Yihaodian is also innovating in the supply chain area. Only few years ago, Yihaodian’s inventory turnover days was ~50 days. It started to manage by many different models (e.g self owned, consignment, drop ship etc) and has reduced inventory This year goal the goal is to get down to ~15 days. Yihaodian receives lots of pallets from different suppliers every day. It is now working with suppliers to create a common pool of pallets, and returns common pallets within the pool.

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Meeting China’s Food Demand

We attended a panel discussion on food demand trends in China during the J.P. Morgan China Summit 2014. Panelists included: Paul Fribourg, Chairman and CEO, Continental Grain Company, Sunny Verghese, CEO of Olam, Pedro Faria, CEO of BRF, Scott Sindelar, Agricultural Minister Counselor of USDA Beijing, and Bryan Lohmar, China Director of U.S Grains Council. Our key takeaways are as follows.

China is at an inflection point, moving from self-sufficiency to being an importer of food. China consumption has grown very quickly in the last decade but various challenges (food safety, water scarcity/ security, climate change etc) means China is now faced with the issue of securing food supplies overseas. For instance, the panel noted that China needs to produce 15m more tons of grain in the next 6 years, and to do that, will need to increase arable land, which is already in short supply in China. Given low expectations of yield gains, increasing supply in huge volumes in a sustainable way (with lower costs to the environment) will be a challenge. For instance, a large percentage of dairy farms in China are still small scale farms (<1000 cows). While there is a notion that the Chinese can increase efficiency, this is not going to grow overnight. To build large scale farms, “you need land and you can’t grow land”.

China as the world’s largest consumer represents opportunities for US/ Brazil as the world’s food/ protein producers. 32% of China CPI basket relates to the food basket and 95% of CPI inflation in last three years has been driven byfood. There is a big arbitrage opportunity for exporters to China (given large price gaps between China prices and international given a variety of reasons). In China, there is a general lack of trust on the safety and quality of locally made food and Chinese consumers have more confidence in imported products. BRF notes that meat consumption in China is still under-penetrated, providing opportunities for meat producing countries such as US and Brazil. China will move up the value chain to import higher end processed food and this will reshape global trade patterns in food. There is no global food player that exists in a major way currently (perhaps with the exception of WH group) and a key reason for this is that taste remains a local factor, and the food business is a highly complicated business to manage effectively on a global perspective (with varying business and commodity risks).

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The China Factor in Global Brands Success

We attended a panel discussion on how global brands have managed to succeedin China during the J.P. Morgan China Summit 2014. Panelists included: Tom Doctoroff APAC CEO, JWT Asia Pacific, Karsten Engel, President and CEO, BMW Group China, David Brooks, Chairman, Coca Coca Greater China and Korea, and Alain Li, Regional Chief Executive, Regional Chief Executive, Richemont Asia Pacific. Our key takeaways are as follows.

Companies are spending more time communicating their brand story to an increasingly well-informed and inquisitive Chinese consumer. Richemont believes the thirst for authenticity is increasing for the Chinese consumer. In China, there is a more open community where people discuss brands and products in great depth. As a result, Richemont has to tell the heritage story very clearly, and there's much more communication with Chinese consumers relative to other markets (even in the pre-purchase stage of the transaction life cycle). Coca Cola agrees that the Chinese consumer is very knowledgeable and looking for functional benefits more than ever (“every Chinese teenage knows wolfberries are good for their eyes”) and now even a Coca Cola has to prove that as “Chinese consumers are not going to just accept what is presented to them”. BMW notes that “consumers come to the showroom excellently informed, sometimes better informed than the sales rep”. They are informed by chat groups/ forums in social media. As a result, people do not come to showrooms as frequently as in the past. China customers are more demanding than consumers in other markets that BMW operate in. Chinese consumers demand the best quality and when served well, could be a powerful “word of mouth” for the market. Conversely, if they are unsatisfied with the service/ product, negative press could spread very quickly through social media.

There is operational diversity across regions but companies look to ensure a cohesive branding effort across the nation.

(1) Coca Cola sells 140m drinks a day and produces drinks in 43 factories currently (+30% CAGR for past 25 years; vs 1 factory in 1981 which produced for the whole of China). China is their 3rd largest business globally by volume. While there are regional taste differences and operational diversity across China, the company notes that they do not develop local brands in every region given the importance of economies of scale in a beverage production business. Having said that, they do operate an R&D technical centre in Shanghai which produces localized flavors for certain markets.

(2) For BMW (which sells 400k cars per annum in China vs. 20k in 2003), there was a need to set up a dealer network that is of the same quality and consistent throughout the country hence they invest heavily in training (270k man hours of training a year). They do have to adapt to some important consumer differencesacross regions nevertheless. For instance, in Western China, experimental driving is important (getting customers in the car) but relatively less important in othersparts.

(3) Richemont notes that for a luxury brand, it was more about bringing their own brand DNA into the market and educating the Chinese consumer about their heritage. However to preserve that brand equity, picking the right locations and understanding the consumer preferences in varying city clusters in China is important. When malls were once very bullish on China, they presented Richemont with floor plans that looked “very similar” with “similar brands" that they planned to onboard - that would have been excessive if Richemont were to

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participate in every proposal. The brand had to put a lot of investment into the front line and it has also put watch making schools in Shanghai and Hong Kong.

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China Travel Spending

We attended a panel discussion on China travel spending in China during the J.P. Morgan China Summit 2014. Panelists included: Tan Hee Teck, COO and President of Genting Singapore, Simon Cooper, President Asia Pacific of Marriott International, Matthew Driver, President, Southeast Asia, MasterCard Worldwide, and Andrew Wu, Group President, Greater China of LVMH. Our key takeaways are as follows.

Growth potential remains substantial. In 2013, the Mainland Chinese traveller spent US$130.6bn (+28% yoy vs. +40% in 2012). There is more potential for this to grow as families continue to accumulate wealth. From 1949-1978, only 2,10lpassports were issued in China. Currently there are now c40mn valid passportswhich represents only 5% penetration vs. 37% in the US and 75% in Japan. US, France, Italy is top of the aspirational list outside travel within Asia. In Asia,Macau, HK and the rest of SE Asia are key destinations.

Is the flow of tourist sustainable? The panel discussed potential curbs in Hong Kong and Singapore to some extent. Overall, they believe such curbs are harmful for the economy particularly in HK which has a heavy dependence on the ML Chinese in its retail sector. Instead of discouraging demand, the panel believes focus should be on improving supply side infrastructure. Countries that are pro-active in solving supply side infrastructure issues will be able to capture a disproportionate share of traveler spending.

The tourist profile is transiting: from government-led to individual-led. 30 years ago, the government was the “only customer” for hotels. The governmentwas a sizable chunk of spend through gifting (and self-gifting) and also training for conferences etc. While “government sponsored” travel consumption remains a significant proportion, it is now “retreating” and the individual consumer which is a more “sustainable source of growth” has evolved quickly. We are now into a new era where “gifting has gone forever”. The individual traveler is young (92% of Chinese travelers are under the age of 42) and growing significantly. Of this group, 60% of Gen Y travelers have more in common with their peers around the world than they do with their parents at home. The ML China tourist also travels more with families/ in groups compared with peers.

The internet and social media have a disproportionate impact on Chinesetravelers (or consumers) and have a credibility that you cannot find in traditional media. c43% of the Chinese population was born after 1980 (this is the year after economic reforms where prior to this you had 3 decades of revolution). This group is engaged in social media - they share pictures through social media of the places they visit and seek out aspirational pictures of places they want to visit through the internet they want to go. Designing a unique travel experience hence becomes important as you want to make sure that the tourist gets to capture a “unique sight” to post and share on social media – social media then becomes a natural showcasing mechanism (e.g. Resorts World Singapore designed the world’s largest aquarium in Sentosa with this in mind). Chinese traveller are increasingly seeking uniqueness (beyond scenery and shopping to adventure e.g bungee jumping). Total travel bookings from internet now forms c30% of total bookings (vs. nil three years ago). Bookings are made not only through CTRIP but also non-traditional portals. WeChat is frequently used as a source to find good deals or opinions on destinations or attractions.

Spending patterns dissected. Based on a Singapore Tourism Board study, the travelers book their low cost carrier flight, book at cheap hotels because they

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don’t want to spend on flight or accommodations and rather spend in stores, entertainment or restaurants. 40% of spend is spent on retail for the Chinese travelers. This is similar to the Taiwanese traveler trends in the 80’s where they would buy luxury handbags and staying in cheap hotels and eating instant noodles in Paris. Having said that, there remain segments that are more affluent and are more willing to pay to have a “high touch experience”. Genting Singapore is one such company that caters to this – they own private jets that serve high spenders. The company is also about to open its first casino in Jeju in South Korea, a visa free destination for China and are targeting the Northern Chinese travelers for resort travel to Jeju (believes Macau mainly sees Southern Chinese travelers).

Forms of tourism now include educational, medical etc. Prior to 2013, in the last 20 years, 400k ML Chinese studied overseas (a lot of them on one way visa). This figure is increasing at a very fast pace as younger students apply for scholarship to go abroad. More family travel now to do school inspection tours now. There is now also medical tourism where the affluent are travelling for. There are also more ML Chinese travelling domestically, with 350m people who travel twice a year domestically (and are wearing out the steps of the Great Wall).

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Section 3: Company Meeting Takeaways

China Huiyuan (1886 HK, Not Covered)

Focusing on products. One key focus for 2014 will be new product launches, according to management. The company is introducing more natural/ less concentrated fruit juice products, more chilled products and looking to launch more sports/ functional drinks. A new batch of products will be out in late June (originally planned for May-14, but delayed due to coordination issues in production and supply chain according to management). Longer term, it is also looking at the potential of plant based beverages (e.g. walnut, almond, coconut. Huiyuan already have some products in this space) and is studying differences in consumer preferences across region. For instance, Southern China provinces are more receptive to acceptable to plant based soy beverage which is sold at room temperature. Certain beverages such as Bing tang hu lu (traditional Chinese candied fruits and a food embedded in north China culture) flavored drinks do well in North China but are relatively less popular in South China.

Looking to address low capacity utilization. Management noted that capacity utilization is low at 30%. To raise utilization rates, they are looking to 1) dispose of 9 factories in FY14; 2) Explore potential opportunities to do OEM business for international partners (selling raw materials etc).

Pricing changes in FY14. Huiyuan has raised ASPs by 5% in FY14 and note their overall ASPs remain lower than industry (The company counts Huiquan and Nongfu as main competitors in 100% concentrated juice segment).

Vertical integration strategy to drive margin expansion. GPM expanded in FY13from favorable product mix and the company expects further expansion as it is now consolidating packaging plants upstream and will be doing more packaging internally. The company expects most of the GPM improvement to carry forward to the EBIT margin level as it is not seeing significant increases in selling and G&A expenses.

Channel, marketing and branding strategy. F&B channel traditionally formed7% to 8% of total sales. This channel has never been a focus hence sales have slipped here according to management; hence, it is trying to do more here by improving packaging and introducing dedicated products for F&B. The sales force is now organized by channel categories compared to product previously. Management believes that marketing and branding has been a key area where Huiyuan was lagging in the past. An executive from Lee Kum Kee has been brought in to lead and boost marketing efforts. It is also changing the channels through which they advertise. In the past, advertising was focused on TV (CCTV) and it is now switching efforts to advertise in social media and also trade fair sales marketing

Suntory acquisition should be completed Oct-14. Going forward, Suntory products will be produced and sold by Huiyuan. i.e. Suntory will not have any more production in China. As part of the deal, Suntory will get equity in Huiyuan and also investments in convertible bonds.

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China Mengniu (2319 HK, OW)

Targets for FY14 and long term: Looking for close to mid teens top line growth in FY14 for core business. Expecting some GPM expansion as well. In the long run target GPM in the range of 28%-30% largely driven by product mix shift. There is potential to lift up yogurt business margins and contribution of infant formula will help margin profile as well.

Competition posed by imported UHT milk: Management notes that the base is very low for imported UHT, less than 1% of total demand. Growth last year was 90% y/y, which could be due to the raw milk crunch in China, which this year has slowed down to 40% growth. Management does not believe imported UHT milk is taking share from Deluxe as they have no investment in brand. Deluxe has brand recognition. They agree that currently online prices are lower than milk deluxe but noted that these are not sustainable.

Expect strong growth to continue in milk beverages: Banana milk and probiotics milk beverage is growing very well for Mengniu. Expect teens growth in the next 3 to 5 years. Mengniu is probably gaining market share but not that fast.

Raw milk price trends: Raw milk prices increased 18% y/y last year. Prices have peaked in Jan and started trending down this year. Mengniu has negotiated some downward revision in its raw milk sourcing price for the rest of this year. On average expect to see c12% y/y increase in raw milk price this year. Do notexpect any shortage of volume this year. In addition due to raw milk price hike, a lot of capital went into upstream recently so in about 2 years expect to see pick up in supply. Management notes that c25% of raw milk comes from upstream farms where they have financial interest (such as Modern Dairy). From these farms they tend to get favourable volumes but not necessarily favourable pricing.

Thoughts on JVs: On White wave, they see big potential in plant based beverages given a lactose intolerant population in China. First product will be soy milk, also planning almond milk. They do not expect meaningful contribution in the next two years. On Danone JV, no contribution for this year. The current market share of Mengniu plus Danone yogurt product is 19%. Expect to reach c30% market share in 5 years with this JV.

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Gome (493 HK, Not Covered)

Aiming to double both sales and profit from 2013 to 2017. The company believes this will come from: (1) SSSG, with the company reporting 8.1% SSSG in 1Q14. (2) New stores, with the company planning to open ~50-100 stores p.a. in tier 2 markets while closing ~30-50 stores p.a. in tier 2 markets (leaving store space roughly in line). (3) E-commerce growth. (4) Third-party business, With Gome having opportunity to now consolidate market share by co-operating with third parties.

Third-party business represents interesting opportunity. With the rise of e-commerce, Gome believes there is a significant opportunity to consolidate market share in home appliances and consumer electronics by co-operating with third parties. For example, Gome recently took over Wumart’s home appliances business. As part of this deal, Gome pays Wumart ~3-4% of total revenues to operate the consumer electronics section within Wumart’s stores.

E-commerce GMV forecast could triple by 2017. Gome forecasts total GMV for its e-commerce business to be ~RMB5-6bn in FY14 and expects this number to increase to ~10-15bn by 2017. Gross margins for e-commerce were 2.7% in FY14. In 1Q14, this number increased to 7.2%. The company has been able to increase gross margins through the integration of online/offline procurement as well as the introduction of higher margin products online.

Differentiated product currently represents ~30% of sales, with company forecasting this will increase to ~50% over time. Gome does not take inventory risk for the regular products that its sells (~70% of sales currently) but does take inventory risk for differentiated product. Differentiated products currently consist of high margin products (~20% of total sales with gross margins ~23-25%) and regular products (~10% of total sales with gross margins ~13-14%). The company believes differentiated products will eventually be ~50% of total sales.

Looking to build omni-channel retailer. Following a very tough 2012, Gome has wanted to transform its business away from being a property manager to being a supply chain specialty/retailer. The company terms this as being an omni-channel retailer. We note that in more developed markets such as the US, the term omni-channel retailer refers to a retailer that integrates both the online and offline shopping experience. Gome is trailing online/offline integration in some stores but have not yet implemented this initiative across its own network.

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Trinity (891 HK, Neutral)

We hosted Trinity during our China Summit. Trinity also hosted a lunch with the CEO later in the week. Our takeaways of the CEO lunch are summarized as follows (see here for our earlier note):

We attended a lunch event hosted by Trinity. Richard Cohen, Trinity's new CEO, was in attendance. Cohen provided some initial remarks following ~4 weeks inthe job. Overall, we believe Cohen will instill a disciplined approach at Trinity, with the company seeing significant growth opportunities in international markets.

Initial focus on reducing inventory. Cohen emphasised the need to be disciplined and do more with less throughout his presentation. In the short term, the company plans to reduce inventory turnover days to ~300 days. Cohen has started to introduce some US retail management practices in the business. We expect the reduction of inventory would also entail: (1) inventory clearance in the short term; (2) ongoing change with respect to the company’s supply chain; (3) focus on reducing SKUs; (4) different way to running outlet stores.

Trinity will solidify China and expand internationally. Unlike international menswear brands that initially started with developing an international presence before turning to China, Trinity's brand portfolio managed to develop a presence in China first and is now looking to expand globally. Cohen sees significant opportunity to move Europe to profitability as well as expand Trinity’s brands into North America.

Focus on improving story-telling for each brand. From a brand marketing perspective, Cohen will focus on telling the Trinity brand portfolio story in a more effective, precise and disciplined way. From a brand segmentation perspective, Cohen's initial impression is that Kent & Curwen is a sportswear/casual story, Cerruti has a similar brand position to Hugo Boss and Gieves & Hawkes is a sartorial story. Cohen also believes D’Urban could be an entry price point for young men.

We expect ongoing weakness in the short term. Our channel checks indicate ongoing weakness for high-end menswear. For Trinity, we expect weakness in sales to cause operating de-leverage. Furthermore, efforts to reduce inventory could also have a negative impact on margins. We reduce our earnings forecasts significant to reflect continued weakness in the sales environment.

https://jpmm.com/research/content/GPS-1418667-0

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Vipshop (VIP US, OW)

Vipshop is covered by JP Morgan China Internet Analyst Alex Yao. We provide below extracts of Alex’s notes from the conference regarding Vipshop (see here for his recently published note).

“We met with Vipshop management last week during J.P. Morgan’s China Summit. We believe the strong growth outlook of Vipshop remains intact. Key takeaways are as follows:

Strong growth outlook intact. Management remains confident on the growth prospect of Vipshop and believes Vipshop’s value proposition to both brand partners and consumers remains intact. In addition to liquidating excess inventories through Vipshop, certain brands started to supply exclusive products to Vipshop. To meet the strong demand from brands, we expect Vipshop to continue to expand its merchandising team this year.

Cosmetics is the key focal category this year. Management noted that cosmetics would be the key focal product category for 2014, post the acquisition of Lefeng. Combined cosmetic GMV of Vipshop and Lefeng reached USD167m in 1Q14, with revenue from cosmetics growing at three-digits YoY. Management expects the momentum to continue into 2Q14. According to management, integration with Lefeng is progressing well and Vipshop is working on the back-end system integration of the two platforms, which would enable cross-selling opportunities. Management expects Vipshop to continue to take market share in the online cosmetics market.

Mobile remains a strategic focus. Mobile revenue has been ramping up significantly contributing 36% of total revenue in 1Q and management expects it to reach 50% by end of 2014. Mobile is suitable for a flash sales model especially for certain categories such as cosmetics and baby/maternity products. Vipshop is differentiating SKUs offered on mobile and PC to target different users. One of the initiatives on mobile is to develop personalized recommendations for targeted consumers, which will require user data accumulation as well as strong data mining capability. We believe Vipshop will continue to invest in IT capability to drive mobile monetization. Management expects to expand R&D personnel from current ~800 to 1500 by end of 2014.

Expecting steady gross margin improvement. Partially helped by the marketplace revenue, gross margin already reach 24.9% in 1Q. Management noted that gross margin of its core business is around 24% and expects it to improve gradually to reach mid-to-long term target of 25%. However, management stressed that, as compared to continuing to grab more market share, margin expansion is less of a focus this year. Currently, gross margin of cosmetics is slightly lower vs overall gross margin, while management expects cosmetics to be margin accretive in the mid-to-longer term.”



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Wumart (1025 HK, Not Covered)

Current trading remains challenging. Wumart has experienced fierce competition within the industry since 2011, according to management. SSSG has slowed over recent quarters although the company has experienced some slight improvement in 2Q14.

Wumart will look to reduce prices to attract customer traffic. The company believes that one third of Wumart's products are currently higher than competitors. The company is implementing a low price project. After the implementation of this project ~20% of product prices will be higher than competitors. Company will look to continuously reduce prices going forward.

Operating cost pressures remain. Net profit margins reduced from 3.5% in FY12 to 2.4% in FY13. One of the key reasons for this was increase in operating costs. In FY12, rental costs represented 4.3% of sales, while staff costs represented 5.4% of sales. In FY13, rental costs represented 4.9% of sales while staff expenses represented 6.2% of sales.

Thoughts on e-commerce. The category currently most immune from e-commerce is fresh food and Wumart plans to focus on improving its fresh offering. Wumart does currently employ a team investigating e-commerce but does not believe now is the right time to roll out e-commerce.

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Company BBG Ticker RTG PT Price Mkt CapEPS

CAGR P/E EV/EBITDA Dividend Yield FCF Yield ROE P/BV(LC) USD mlns 2013-15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E

CHINA Department StoresGolden Eagle 3308 HK OW 13.0 9.3 2,167 5.6% 11.4x 11.3x 10.2x 11.5x 10.7x 9.6x 2.5% 4.4% 4.9% -3.6% 1.4% 2.7% 21.5% 22.4% 22.2% 2.7x 2.4x 2.2xParkson Retail 3368 HK UW 1.6 2.2 778 -0.7% 13.9x 15.6x 14.1x 8.9x 9.6x 8.8x 3.4% 3.0% 3.3% -7.7% 2.3% 9.6% 6.3% 5.5% 6.0% 0.9x 0.9x 0.8xNWDS*^ 825 HK NC NA 3.1 683 NA 8.6x 7.9x 7.3x 3.4x 3.3x 3.1x 0.0% 0.0% 0.0% -6.6% -6.6% -6.6% 10.0% 9.9% 10.4% 0.8x 0.8x 0.7xMaoye International Hldgs^ 848 HK NC NA 1.2 795 11.0% 7.1x 6.3x 5.8x 7.8x 8.1x 7.3x 4.8% 4.8% 4.8% 3.5% 3.5% 3.5% 12.9% 13.0% 12.9% 0.8x 0.8x 0.7xAverage 10.7x 10.5x 9.5x 8.2x 7.9x 7.2x 2.9% 3.2% 3.4% -5.0% -2.0% -0.3% 12.8% 12.5% 12.6% 1.3x 1.2x 1.1x

Fashionwear/footwear RetailBelle International 1880 HK N 7.0 8.2 8,911 0.3% 12.1x 12.3x 12.0x 9.9x 9.9x 9.9x 3.1% 2.6% 2.8% 6.1% -0.5% 4.3% 17.2% 15.5% 14.8% 2.1x 2.1x 1.9xPorts Design 589 HK UW 4.0 3.5 248 10.0% 4.8x 4.4x 4.0x 3.8x 3.5x 2.9x 9.0% 9.4% 10.1% 17.3% 16.8% 18.2% 16.8% 16.7% 16.8% 0.8x 0.7x 0.6xDaphne International 210 HK UW 2.9 2.8 589 20.3% 14.2x 12.3x 9.8x 6.2x 6.6x 5.4x 2.9% 2.5% 3.3% 4.2% 0.5% 4.2% 6.4% 7.0% 8.3% 0.9x 0.8x 0.8xTrinity Limited 891 HK N 1.9 1.8 402 -20.4% 10.3x 19.1x 16.2x 9.7x 13.9x 13.2x 7.1% 3.8% 4.4% 2.0% 17.4% 1.4% 8.9% 4.8% 5.7% 0.9x 0.9x 0.9xChina Lilang 1234 HK N 5.0 5.0 778 6.9% 9.5x 9.0x 8.3x 7.5x 6.5x 5.8x 7.6% 6.6% 6.6% 12.7% 13.0% 8.7% 21.1% 20.9% 20.8% 1.9x 1.8x 1.7xAverage 10.2x 11.4x 10.1x 7.4x 8.1x 7.4x 6.0% 5.0% 5.4% 8.5% 9.4% 7.4% 14.1% 13.0% 13.3% 1.3x 1.3x 1.2x

Jewellery & Watch RetailXinyu Hengdeli^ 3389 HK NC NA 1.3 830 -3.1% 7.3x 8.8x 7.8x 4.9x 5.8x 5.1x 2.3% 2.3% 2.3% -23.8% -23.8% -23.8% 11.1% 9.8% 10.0% 0.9x 0.8x 0.8xChow Sang Sang^ 116 HK NC NA 19.4 1,696 10.6% 10.8x 10.3x 8.8x 8.3x 8.0x 6.8x 3.5% 3.5% 3.5% 3.7% 3.7% 3.7% 16.4% 15.2% 15.6% 1.7x 1.5x 1.3xLuk Fook*^ 590 HK NC NA 19.4 1,474 16.5% 9.6x 7.2x 7.1x 6.5x 5.3x 5.0x 5.7% 5.7% 5.7% 0.8% 0.8% 0.8% 19.8% 22.5% 20.4% 1.8x 1.5x 1.3xChow Tai Fook* 1929 HK OW 13.5 11.1 14,319 25.9% 19.8x 13.8x 12.5x 14.8x 11.6x 10.1x 1.5% 2.9% 3.2% 8.4% -5.4% 3.3% 17.8% 22.3% 21.7% 3.3x 2.9x 2.5xAverage 11.9x 10.0x 9.0x 8.6x 7.7x 6.7x 3.3% 3.6% 3.7% -2.7% -6.1% -4.0% 16.3% 17.5% 16.9% 1.9x 1.7x 1.5x

Sportswear BrandsAnta 2020 HK N 11.8 11.4 3,677 10.9% 17.1x 15.5x 13.9x 11.5x 10.4x 9.4x 4.4% 4.9% 5.5% 3.6% 4.1% 4.2% 18.4% 19.2% 20.2% 3.1x 2.9x 2.7xChina Dongxiang^ 3818 HK NC NA 1.4 1,021 15.5% 32.0x 27.4x 24.0x 8.9x 26.9x 19.7x 1.0% 1.0% 1.0% 5.2% 5.2% 5.2% 2.8% 2.7% 2.9% 0.9x 0.7x 0.7xLi Ning 2331 HK N 5.4 5.9 1,034 NA -15.7x -302.4x 30.4x -671.1x 26.3x 12.1x 0.0% 0.0% 1.9% -1.0% -1.6% 2.1% -16.6% -0.7% 7.2% 2.2x 2.2x 2.2xXtep 1368 HK N 3.9 3.4 949 3.0% 9.6x 9.7x 9.0x 7.5x 7.5x 6.9x 5.6% 5.7% 6.1% 6.5% 7.9% 6.2% 13.8% 12.8% 13.0% 1.3x 1.2x 1.1x361 Degrees^ 1361 HK NC NA 1.9 515 19.1% 12.2x 9.7x 8.6x 4.9x 3.1x 2.1x 7.1% 7.1% 7.1% 10.0% 10.0% 10.0% 5.4% 6.8% 8.2% 0.7x 0.7x 0.6xPeak Sports^ 1968 HK NC NA 2.1 571 23.2% 14.9x 11.3x 9.8x 3.8x 3.8% 3.8% 3.8% 15.1% 15.1% 15.1% 4.8% 7.1% 8.3% 0.9x 0.8x 0.8xAverage 17.1x 14.7x 13.1x 7.3x 12.0x 9.5x 4.4% 4.5% 4.7% 8.1% 8.5% 8.1% 9.0% 9.7% 10.5% 1.4x 1.3x 1.2x

Electrical ApplianceGome Electrical Appliances^ 493 HK NC NA 1.3 2,735 33.9% 20.9x 13.8x 11.7x 9.5x 5.3x 4.0x 1.6% 1.6% 1.6% 8.4% 8.4% 8.4% 5.1% 7.6% 8.6% 1.1x 1.0x 1.0xSuning^ 002024 CH NC NA 7.1 8,418 NA 104.6x 18.2x 48.6x 21.3x NA NA NA -4.1% -4.1% -4.1% 1.8% -2.2% -2.6% 1.8x 1.8x 1.8xAverage 62.8x 13.8x 11.7x 13.9x 26.9x 12.7x 1.6% 1.6% 1.6% 2.2% 2.2% 2.2% 3.4% 2.7% 3.0% 1.5x 1.4x 1.4x

Supermarkets, Hypermarkets, Convenience Stores Beijing Jingkelong^ 814 HK NC NA 1.9 99 6.5% 10.0x 10.3x 8.8x NA NA NA 0.0% 0.0% 0.0% -13.8% -13.8% -13.8% 3.7% 3.6% 4.1% 0.4x 0.4x 0.4xSun Art 6808 HK UW 8.6 9.2 11,274 13.1% 25.2x 22.5x 19.7x 14.2x 12.7x 10.8x 3.8% 2.3% 2.7% 0.3% 1.2% 3.2% 15.6% 16.2% 17.0% 3.7x 3.6x 3.2xLianhua^ 980 HK NC NA 4.5 649 4.9% 19.9x 21.7x 18.1x NA NA NA NA NA NA 28.5% 28.5% 28.5% 5.8% 5.4% 6.8% 1.2x 1.2x 1.1xWumart Stores^ 1025 HK NC NA 6.4 1,079 -0.7% 10.9x 12.3x 10.8x 4.2x 4.1x 3.2x 4.9% 4.9% 4.9% 6.1% 6.1% 6.1% 16.5% 14.2% 14.7% 1.7x 1.7x 1.5xAverage 16.5x 16.7x 14.4x 9.2x 8.4x 7.0x 2.9% 2.4% 2.5% 5.3% 5.5% 6.0% 10.4% 9.8% 10.7% 1.7x 1.7x 1.5x

China Average 17.2x 12.7x 11.2x 8.5x 10.4x 8.1x 3.9% 3.8% 4.0% 2.9% 3.3% 3.5% 11.7% 11.6% 11.9% 1.5x 1.4x 1.3x

Prices as of June 16, 2014, ^ Consensus estimates used for the company. * Values for next FY taken since FY ends in Jan-May period.

25



CompanyBBG

Ticker RTG PT Price Mkt CapEPS


HONG KONGApparelEsprit Holdings 330 HK UW 11.3 11.4 2,851 NA -4.9x 194.4x 40.8x -4.3x 12.3x 8.6x 0.0% 0.3% 1.5% -8.6% 1.0% 1.5% -10.1% 0.7% 3.2% 1.3x 1.3x 1.3xGiordano 709 HK N 4.2 4.6 934 -13.1% 10.9x 14.2x 14.5x 7.4x 9.2x 9.4x 8.7% 6.6% 6.1% 8.0% 5.4% 4.8% 21.8% 16.7% 16.4% 2.3x 2.4x 2.3xI.T* 999 HK OW 2.8 2.8 444 -8.2% 9.2x 12.6x 10.9x 3.5x 3.1x 2.5x 1.1% 3.6% 3.9% 6.9% 12.2% 10.3% 15.9% 10.5% 11.1% 1.3x 1.2x 1.2x

Jewelry RetailChow Sang Sang^ 116 HK NC NA 19.4 1,696 10.6% 10.8x 10.3x 8.8x 8.3x 8.0x 6.8x 3.5% 3.5% 3.5% 3.7% 3.7% 3.7% 16.4% 15.2% 15.6% 1.7x 1.5x 1.3xLuk Fook*^ 590 HK NC NA 19.4 1,474 16.5% 9.6x 7.2x 7.1x 6.5x 5.3x 5.0x 5.7% 5.7% 5.7% 0.8% 0.8% 0.8% 19.8% 22.5% 20.4% 1.8x 1.5x 1.3x

Department StoresLifestyle 1212 HK OW 19.0 14.9 3,142 -3.6% 10.2x 12.5x 11.0x 11.4x 10.6x 9.2x 5.2% 3.2% 3.7% 8.4% 8.5% 9.2% 19.8% 17.5% 17.1% 2.4x 2.0x 1.7x

Supermarkets, Hypermarkets, Convenience Stores Convenience Retail Asia^ 831 HK NC NA 5.2 504 9.1% 24.9x 26.1x 20.9x 12.8x 13.5x 11.2x 2.4% 2.4% 2.4% 3.5% 3.5% 3.5% 14.6% 19.5% 21.9% 3.6x 4.8x 4.5xSun Art 6808 HK NC NA 9.2 11,274 12.8% 25.4x 23.0x 20.1x 10.8x 9.5x 8.2x 3.0% 3.0% 3.0% 0.6% 0.6% 0.6% 15.6% 16.0% 16.8% 3.7x 3.5x 3.2xDairy Farm DFI SP N 9.0 10.5 14,170 6.8% 28.3x 27.4x 24.8x 15.9x 14.3x 13.0x 2.2% 2.2% 2.4% 2.9% 5.3% 5.6% 38.8% 37.3% 35.3% 11.1x 9.5x 8.1x

Cosmetics & Healthcare GoodsBonjour^ 653 HK NC NA 1.2 532 15.8% 14.8x 12.1x 11.0x 9.7x 8.3x 7.2x 4.0% 4.0% 4.0% 5.2% 5.2% 5.2% 76.2% 69.0% 63.0% 10.1x 6.9x 5.9xL'Occitane International SA* 973 HK N 18.2 17.5 3,342 -5.1% 19.9x 27.3x 22.1x 11.3x 12.4x 11.6x 1.8% 1.3% 1.8% 2.6% 2.2% 4.3% 17.8% 12.0% 13.8% 3.3x 3.2x 2.9xSa Sa International* 178 HK N 6.8 5.2 1,900 7.0% 18.3x 16.9x 16.0x 18.0x 16.4x 15.5x 3.9% 4.3% 4.5% 4.3% 5.1% 4.9% 45.8% 42.7% 39.8% 7.7x 6.8x 6.0xHK Average 14.8x 32.0x 17.3x 9.3x 10.2x 9.0x 3.5% 3.3% 3.5% 3.2% 4.5% 4.5% 24.4% 23.3% 22.9% 4.2x 3.7x 3.3x


26



Company BBG Ticker RTG PT Price Mkt CapEPS


Instant noodles & juicesTingyi 322 HK UW 18.5 21.3 15,347 18.4% 37.7x 30.7x 26.9x 15.0x 12.1x 10.9x 1.0% 1.3% 1.5% 2.8% 2.5% 3.7% 15.1% 16.4% 16.8% 5.3x 4.8x 4.3xUni-president China 220 HK UW 4.0 5.7 3,170 6.3% 32.7x 31.4x 28.9x 11.6x 14.6x 12.3x 1.1% 0.6% 0.7% -16.5% -13.6% -8.3% 6.2% 6.1% 6.3% 1.9x 1.9x 1.8xTibet 5100 Water Resources 1115 HK NR 0.0 2.7 891 13.3% 11.7x 10.4x 9.1x 7.5x 6.0x 4.7x 0.0% 0.0% 0.0% -2.4% 7.4% 8.7% 15.7% 15.5% 15.5% 2.2x 1.8x 1.6xAverage 27.4x 24.2x 21.6x 11.3x 10.9x 9.3x 0.7% 0.7% 0.7% -5.4% -1.3% 1.4% 12.3% 12.7% 12.9% 3.1x 2.8x 2.5xSnack manufacturersLabixiaoxin^ 1262 HK NC NA 3.0 438 13.8% 8.4x 7.9x 6.5x 4.8x 4.7x 3.8x 2.7% 2.7% 2.7% 4.8% 4.8% 4.8% 17.9% 16.2% 17.7% 1.4x 1.3x 1.1xWant Want 151 HK N 10.5 10.4 17,760 15.6% 25.9x 22.3x 19.3x 18.8x 16.2x 13.8x 2.6% 3.0% 3.5% 4.1% 2.7% 4.6% 38.8% 38.4% 39.0% 9.1x 8.1x 7.1xAverage 17.1x 15.1x 12.9x 11.8x 10.5x 8.8x 2.6% 2.8% 3.1% 4.4% 3.8% 4.7% 28.4% 27.3% 28.3% 5.3x 4.7x 4.1xPersonal CareHengan International 1044 HK OW 91.0 79.0 12,517 15.8% 26.1x 22.6x 19.5x 18.4x 15.9x 13.6x 2.3% 2.9% 3.3% 3.7% 2.5% 4.2% 24.3% 24.9% 26.4% 5.9x 5.4x 4.9xVinda^ 3331 HK NC NA 12.2 1,566 12.3% 23.0x 21.4x 18.3x 14.7x 13.4x 11.4x 1.3% 1.3% 1.3% -4.3% -4.3% -4.3% 12.3% 11.6% 12.7% 2.7x 2.4x 2.2xBawang^ 1338 HK NC NA 0.4 139 NA NA 99.2x 29.8x NA NA NA 0.0% 0.0% 0.0% -9.7% -9.7% -9.7% -31.3% 2.5% 9.2% NA NA NA Average 24.6x 47.8x 22.5x 16.5x 14.7x 12.5x 1.2% 1.4% 1.5% -3.4% -3.8% -3.2% 1.8% 13.0% 16.1% 4.3x 3.9x 3.6xBreweriesBeijing Yanjing Brewery^ 000729 CH NC NA 6.6 2,982 8.2% 22.6x 21.2x 19.3x NA NA NA NA NA NA 5.9% 5.9% 5.9% 7.8% 6.9% 7.4% 1.8x 1.5x 1.5xChina Resources Enterprise 291 HK N 20.0 21.4 6,637 7.0% 27.0x 28.5x 23.6x 8.3x 7.4x 5.9x 1.3% 1.2% 1.4% -2.8% 8.9% 10.6% 4.0% 3.5% 4.2% 1.2x 1.1x 1.1xTsingtao Brewery 168 HK UW 45.0 60.5 9,646 4.8% 33.0x 32.8x 30.0x 26.5x 24.2x 22.2x 0.8% 0.8% 0.9% 2.1% 0.5% 0.9% 13.6% 13.8% 13.6% 4.6x 4.2x 3.8xAverage 27.5x 27.5x 24.3x 17.4x 15.8x 14.1x 1.0% 1.0% 1.2% 1.7% 5.1% 5.8% 8.5% 8.1% 8.4% 2.5x 2.3x 2.1xLiquorKweichow Moutai^ 600519 CH NC NA 152.5 25,392 9.3% 10.7x 10.1x 9.0x 6.5x 5.7x 4.8x NA NA NA 4.9% 4.9% 4.9% 35.9% 30.8% 28.3% 3.7x 3.0x 2.5xLuzhou Laojiao^ 000568 CH NC NA 16.4 3,686 -10.5% 6.5x 8.7x 8.1x 3.0x 2.9x 2.1x NA NA NA 2.9% 2.9% 2.9% 37.6% 24.6% 23.0% 2.2x 2.0x 1.7xShanxi Fen Wine^ 600809 CH NC NA 13.1 1,823 -13.9% 8.5x 11.1x 11.5x 3.9x 7.6x 6.1x NA NA NA -4.9% -4.9% -4.9% 33.5% 21.6% 23.0% 2.8x 2.7x 2.5xWuliangye Yibin^ 000858 CH NC NA 17.1 10,410 -6.1% 7.7x 8.8x 8.8x 3.1x 3.3x 2.6x NA NA NA 1.3% 1.3% 1.3% 24.3% 17.5% 16.3% 1.8x 1.6x 1.4xAverage 8.4x 9.7x 9.3x 4.1x 4.9x 3.9x NA NA NA 1.0% 1.0% 1.0% 32.8% 23.6% 22.7% 2.6x 2.3x 2.0xWineriesChina Foods 506 HK N 2.7 2.8 996 NA -12.3x 86.2x 19.2x 23.0x 9.4x 6.9x 0.0% 0.5% 2.3% -0.8% -2.0% 7.7% -9.8% 1.4% 6.1% 1.3x 1.2x 1.1xDynasty Fine Wines^ 828 HK NC NA 1.4 232 NA 80.0x 30.0x #N/A N/A NA NA NA 0.0% 0.0% 0.0% -25.4% -25.4% -25.4% NA NA NA NA NA NAYantai Changyu Pioneer Wine^ 200869 CH NC NA 16.9 2,302 -6.2% 7.4x 8.2x 8.4x NA NA NA NA NA NA -1.5% -1.5% -1.5% 20.5% 17.3% 14.5% 1.4x 1.3x 1.2xAverage 25.0x 41.5x 13.8x 23.0x 9.4x 6.9x 0.0% 0.3% 1.2% -9.2% -9.6% -6.4% 5.3% 9.4% 10.3% 1.4x 1.3x 1.2x


27



Company BBG Ticker RTG PT Price Mkt Cap EPS CAGR P/E EV/EBITDA Dividend Yield FCF Yield ROE P/BV(LC) USD mlns 2013-15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E

DairiesBright Dairy^ 600597 CH NC NA 16.1 3,169 38.9% 42.0x 30.6x 21.8x NA NA NA NA NA NA 0.1% 0.1% 0.1% 10.8% 12.5% 15.7% 4.6x 4.2x 3.7xChina Mengniu Dairy 2319 HK OW 43.0 36.0 9,081 34.2% 32.5x 23.5x 18.0x 18.0x 11.4x 8.8x 0.7% 0.9% 1.1% -2.0% 3.3% 4.9% 11.5% 13.1% 13.9% 3.4x 2.7x 2.3xChina Modern Dairy^ 1117 HK NC NA 3.1 1,949 63.0% 28.0x 13.8x 10.5x 22.6x 11.8x 9.7x 0.0% 0.0% 0.0% -3.1% -3.1% -3.1% 8.0% 14.5% 16.1% 2.2x 1.8x 1.6xBiostime^ 1112 HK NC NA 47.0 3,661 16.8% 22.6x 20.7x 16.5x 15.0x 13.5x 10.5x NA NA NA 1.8% 1.8% 1.8% 38.4% 40.9% 43.4% 8.9x 7.7x 6.4xBeingimate^ 002570 CH NC NA 13.8 2,261 13.0% 19.2x 18.2x 15.0x 12.3x 11.9x 9.5x NA NA NA -0.8% -0.8% -0.8% 19.0% 16.8% 18.3% 3.3x 3.1x 2.7xHuishan^ 6863 HK NC NA 1.8 3,383 27.9% 19.8x 15.6x 12.1x 17.6x 11.1x 10.0x 1.5% 1.5% 1.5% NA NA NA 29.5% 13.0% 12.9% 3.2x 1.5x 1.5xYashili International^ 1230 HK NC NA 2.8 1,267 3.4% 15.4x 17.3x 14.4x 8.2x 10.6x 8.6x 1.7% 1.7% 1.7% -0.7% -0.7% -0.7% 14.1% 12.5% 14.6% 2.4x 2.4x 2.2xInner Mongolia Yili Industrial^ 600887 CH NC NA 32.9 10,779 23.2% 22.3x 17.9x 14.7x 17.0x 11.1x 8.7x NA NA NA 3.0% 3.0% 3.0% 21.4% 20.3% 20.7% 4.3x 3.6x 3.0xAverage 25.2x 19.7x 15.4x 15.8x 11.6x 9.4x 1.0% 1.0% 1.1% -0.2% 0.5% 0.7% 19.1% 18.0% 19.4% 4.0x 3.4x 2.9xFood retailersBeijing Jingkelong^ 814 HK NC NA 1.9 99 6.5% 10.0x 10.3x 8.8x NA NA NA 0.0% 0.0% 0.0% -13.8% -13.8% -13.8% 3.7% 3.6% 4.1% 0.4x 0.4x 0.4xSun Art^ 6808 HK NC NA 9.2 11,274 12.8% 25.4x 23.0x 20.1x 10.8x 9.5x 8.2x 3.0% 3.0% 3.0% 0.6% 0.6% 0.6% 15.6% 16.0% 16.8% 3.7x 3.5x 3.2xLianhua^ 980 HK NC NA 4.5 649 4.9% 19.9x 21.7x 18.1x NA NA NA 0.0% 0.0% 0.0% NA NA NA 5.8% 5.4% 6.8% 1.2x 1.2x 1.1xWumart Stores^ 1025 HK NC NA 6.4 1,079 -0.7% 10.9x 12.3x 10.8x 4.2x 4.1x 3.2x 4.9% 4.9% 4.9% 6.1% 6.1% 6.1% 16.5% 14.2% 14.7% 1.7x 1.7x 1.5xAverage 16.6x 16.8x 14.5x 7.5x 6.8x 5.7x 2.0% 2.0% 2.0% -2.4% -2.4% -2.4% 10.4% 9.8% 10.6% 1.7x 1.7x 1.5xChina RestaurantsCafé de Coral* 341 HK N 23.4 25.4 1,893 10.9% 26.5x 24.2x 21.6x 15.6x 14.0x 12.3x 3.6% 3.3% 3.7% 1.7% 3.8% 4.4% 12.8% 15.8% 17.2% 4.1x 3.9x 3.8xAjisen China Holdings Ltd. 538 HK N 6.5 6.1 853 13.6% 23.6x 21.0x 18.3x 11.7x 10.3x 8.9x 2.7% 3.0% 3.5% 3.6% 4.5% 5.8% 8.7% 9.2% 10.2% 2.0x 1.9x 1.8xGourmet Master^ 2723 TT NC NA 237.0 1,115 50.0% 48.3x 31.5x 21.5x NA NA NA NA NA NA NA NA NA 11.0% 16.0% NA NA NA NA Wowprime 2727 TT NC NA 447.0 1,147 11.3% NA NA NA NA NA NA NA NA NA 2.9% 2.9% 2.9% NA NA NA NA NA NA Tenfu 6868 HK NC NA 3.3 522 NA NA NA NA NA NA NA 5.9% 5.9% 5.9% 6.7% 6.7% 6.7% 12.5% 12.5% NA NA NA NA Average 32.8x 25.6x 20.4x 13.6x 12.1x 10.6x 4.0% 4.1% 4.3% 3.7% 4.5% 5.0% 11.3% 13.4% 13.7% 3.0x 2.9x 2.8xMeat ProcessorsChina Yurun 1068 HK NC NA 3.7 863 NA NA NA 42.7x 28.0x 11.6x 7.7x 0.0% 0.0% 0.0% -22.4% -22.4% -22.4% -1.1% 1.0% 3.2% 0.5x 0.4x 0.4xHenan Shuanghui^ 000895 CH NC NA 35.5 12,532 21.8% 20.0x 16.1x 13.5x 13.0x 10.4x 8.2x NA NA NA 2.1% 2.1% 2.1% 31.0% 29.8% 29.4% 4.1x 4.7x 3.8xAverage 20.0x 16.1x 28.1x 20.5x 11.0x 8.0x 0.0% 0.0% 0.0% -10.1% -10.1% -10.1% 14.9% 15.4% 16.3% 2.3x 2.6x 2.1xTobacco and Tobacco FlavourHuabao International 336 HK NC NA 4.0 1,612 8.6% 7.4x 6.7x 6.3x 5.0x 4.6x 3.8x 4.5% 4.5% 4.5% 12.3% 12.3% 12.3% 26.4% 24.4% 23.0% 1.6x 1.5x 1.3xAMVIG Holdings^ 2300 HK NC NA 3.0 353 4.8% 6.8x 6.5x 6.1x 3.9x 2.9x 2.4x 5.7% 5.7% 5.7% 23.2% 23.2% 23.2% 10.8% 10.2% 10.3% 0.7x 0.6x 0.6xAverage 7.1x 6.6x 6.2x 4.4x 3.8x 3.1x 5.1% 5.1% 5.1% 17.7% 17.7% 17.7% 18.6% 17.3% 16.7% 1.2x 1.1x 0.9xAgri-industrial companiesChina Agri-Industries 606 HK N 3.8 2.9 1,971 -13.5% 10.4x 23.2x 14.0x 10.8x 13.3x 11.1x 2.4% 1.1% 1.8% -5.0% -26.4% -14.8% 5.4% 2.4% 3.9% 0.5x 0.6x 0.5x


28



Companies Discussed in This Report (all prices in this report as of market close on 16 June 2014)China Mengniu Dairy Co. Ltd. (2319.HK/HK$35.50/Overweight), Hengan International Group Ltd (1044.HK/HK$79.00/Overweight), Sun Art Retail Group Limited (6808.HK/HK$9.16/Underweight), Want Want China Holdings Ltd (0151.HK/HK$10.42/Neutral)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: China Mengniu Dairy Co. Ltd., Hengan International Group Ltd, Want Want China Holdings Ltd.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Hengan International Group Ltd, Want Want China Holdings Ltd.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Want Want China Holdings Ltd.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Want Want China Holdings Ltd.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Hengan International Group Ltd, Want Want China Holdings Ltd.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Hengan International Group Ltd, Want Want China Holdings Ltd.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Want Want China Holdings Ltd.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

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https://jpmm.com/research/disclosures

29



Date Rating Share Price (HK$)

Price Target (HK$)

15-May-14 UW 9.93 8.60


Price Target (HK$)

10-Apr-08 UW 20.35 18.00

21-Sep-08 UW 20.00 3.80

17-Apr-09 UW 13.02 8.10

28-Jun-09 UW 18.60 14.50

09-Sep-09 OW 19.48 23.00

08-Dec-09 OW 28.80 32.00

29-Apr-10 OW 24.25 30.00

01-Sep-10 OW 22.30 26.00

02-May-11 OW 24.25 30.00

31-Aug-11 OW 26.60 35.00

12-Oct-11 OW 25.65 33.00

10-Jan-12 OW 19.74 24.00

10-Feb-12 OW 22.40 27.00

27-Mar-12 OW 20.90 26.00

02-Jul-12 OW 20.35 25.00

28-Aug-12 OW 23.10 28.00

13-Dec-12 OW 20.50 24.00

19-Jun-13 OW 26.85 30.50

29-Aug-13 OW 29.85 36.00

04-Nov-13 OW 33.00 38.10

26-Mar-14 OW 35.55 43.00

0

6

12

18

24

Price(HK$)

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Sun Art Retail Group Limited (6808.HK, 6808 HK) Price Chart

UW HK$8.6

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage May 15, 2014.

0

15

30

45

60

75

Price(HK$)

Oct06

Apr08

Oct09

Apr11

Oct12

Apr14

China Mengniu Dairy Co. Ltd. (2319.HK, 2319 HK) Price Chart

OW HK$23 OW HK$24OW HK$25 OW HK$38.1

UW HK$14.5 OW HK$33OW HK$26 OW HK$36

UW HK$18UW HK$3.8UW HK$8.1OW HK$32OW HK$30OW HK$26OW HK$30OW HK$35OW HK$27OW HK$28OW HK$24OW HK$30.5OW HK$43


Initiated coverage Apr 10, 2008.

30




Price Target (HK$)

13-Jun-07 N 27.65 25.90

23-Jul-07 OW 27.25 32.40

05-Sep-07 OW 25.15 33.60

30-Jan-08 OW 28.65 36.40

19-Mar-08 OW 25.40 31.50

18-Sep-08 N 20.30 19.00

08-Mar-09 N 27.15 30.00

16-Jun-09 N 36.50 39.00

03-Sep-09 N 41.70 43.00

26-Mar-10 N 58.00 60.00

30-Aug-10 N 68.55 65.00

22-Nov-10 N 68.75 70.00

25-Jan-11 OW 58.85 70.00

30-Mar-11 OW 59.75 67.00

27-Jul-11 N 67.45 67.00

12-Oct-11 UW 65.15 51.00

28-Mar-12 UW 70.85 53.00

30-Aug-12 UW 74.20 62.00

15-Sep-12 UW 75.60 61.00

16-Jan-13 N 73.55 66.00

27-Mar-13 N 76.70 64.00

01-May-13 N 77.80 73.00

27-Aug-13 N 84.80 82.00

28-Jan-14 OW 78.15 90.00

25-Mar-14 OW 81.25 91.00


Price Target (HK$)

09-Feb-10 N 5.08 5.20

10-Mar-10 N 5.86 5.40

28-Jun-10 N 6.50 5.80

25-Aug-10 N 6.06 5.80

04-Nov-10 OW 7.43 8.80

17-Jul-11 N 7.07 8.00

24-Aug-11 N 6.56 6.50

12-Oct-11 N 6.93 6.00

07-Mar-12 N 7.82 7.00

02-Jul-12 N 9.76 7.60

30-Aug-12 N 10.14 8.50

16-Jan-13 N 10.38 9.00

05-Mar-13 N 11.48 9.50

27-Aug-13 N 11.42 10.00

12-Mar-14 N 11.36 10.50

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of

0

30

60

90

120

150

Price(HK$)

Oct06

Apr08

Oct09

Apr11

Oct12

Apr14

Hengan International Group Ltd (1044.HK, 1044 HK) Price Chart

OW HK$33.6 OW HK$70 N HK$73

OW HK$32.4OW HK$31.5 N HK$43 N HK$70 UW HK$51 UW HK$61N HK$64 OW HK$91

N HK$25.9OW HK$36.4N HK$19N HK$30N HK$39 N HK$60N HK$65OW HK$67N HK$67UW HK$53UW HK$62N HK$66N HK$82OW HK$90


Initiated coverage Jun 13, 2007.

0

7

14

21

Price(HK$)

Mar08

Dec08

Sep09

Jun10

Mar11

Dec11

Sep12

Jun13

Mar14

Want Want China Holdings Ltd (0151.HK, 151 HK) Price Chart

OW HK$8.8 N HK$6

N HK$5.4N HK$5.8 N HK$6.5 N HK$8.5N HK$9.5

N HK$5.2N HK$5.8 N HK$8 N HK$7N HK$7.6N HK$9 N HK$10N HK$10.5


Initiated coverage Feb 09, 2010.

31



the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Sener, Kurumlu Ebru: Ajisen China Holdings Ltd (0538.HK), Belle International Holdings Ltd. (1880.HK), Cafe de Coral Holdings Ltd (0341.HK), China Foods Ltd (0506.HK), China Mengniu Dairy Co. Ltd. (2319.HK), China Resources Enterprise (0291.HK), Chow Tai Fook Jewellery Company Ltd. (1929.HK), Dairy Farm International Holdings Limited (DAIR.SI), Esprit Holdings (0330.HK), Golden Eagle Retail Group Ltd (3308.HK), Hengan International Group Ltd (1044.HK), Li & Fung (0494.HK), Lifestyle International Holdings (1212.HK), New World Department Stores Ltd (0825.HK), Parkson Retail Group Ltd (3368.HK), Prada S.P.A (1913.HK), Tibet 5100 Water Resources Holdings Ltd (1115.HK), Tingyi (Cayman Islands) Holding Corp (0322.HK), Tsingtao Brewery - A (600600.SS), Tsingtao Brewery - H (0168.HK), Uni-President China Holdings Ltd (0220.HK), Want Want China Holdings Ltd (0151.HK)

Li, Shen Wei: Anta Sports Products Ltd. (2020.HK), China Lilang Ltd. (1234.HK), Daphne International (0210.HK), Giordano (0709.HK), I.T Ltd. (0999.HK), L'Occitane International SA (0973.HK), Li Ning Co Ltd (2331.HK), Ports Design (0589.HK), Sa SaInternational Holdings Limited (0178.HK), Sun Art Retail Group Limited (6808.HK), Trinity Limited (0891.HK), Xtep International Holdings Limited (1368.HK)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 11%IB clients* 58% 49% 40%

JPMS Equity Research Coverage 45% 48% 7%IB clients* 78% 67% 60%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. U.K.: JPMorgan Chase N.A., London Branch, is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on

http://www.optionsclearing.com/publications/risks/riskstoc.pdf


http://www.jpmorganmarkets.com/

32



request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong and/or J.P. Morgan Broking (Hong Kong) Limited (CE number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. For non local research reports, thismaterial is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS)[MCI (P) 199/03/2014 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. This material is provided in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively,

33



pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised April 5, 2014.

Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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