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sa- DL

BUY HK$21.55 HSI : 23,092 (Initiate coverage)

Price Target: 12-Month HK$ 27.47 Potential Catalyst: Influx of more Mainland Chinese tourists into HK; faster expansion pace in China DBSV vs Consensus: Our FY12/FY13/FY14 net profit estimates are 1%/2%/2% below Bloomberg consensus

Analysts Mavis HUI +852 2863 8879 mavis_hui@hk.dbsvickers.com

Mark LI +852 2971 1935 mark_li@hk.dbsvickers.com

Price Relative

3.7

8.7

13.7

18.7

23.7

28.7

33.7

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

HK$

77

127

177

227

277

327

377

427

477

Relative Index

Chow Sang Sang (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (HK$ m) 2011A 2012E 2013F 2014F Turnover 17,158 19,162 22,137 25,051 EBITDA 1,515 1,431 1,804 2,110 Pre-tax Profit 1,419 1,255 1,609 1,902 Net Profit 1,094 967 1,240 1,465 Net Pft (Pre Ex.) 1,050 967 1,240 1,465 EPS (HK$) 1.62 1.43 1.83 2.16 EPS Gth (%) 39.0 (11.6) 28.2 18.2 DPS (HK$) 0.46 0.43 0.55 0.65 BV Per Share (HK$) 9.36 10.36 11.65 13.16 PE (X) 13.3 15.1 11.8 10.0 P/Cash Flow (X) 444.7 87.6 34.1 20.3 P/Free CF (X) nm nm 66.9 29.3 EV/EBITDA (X) 10.4 11.5 9.2 7.9 Net Div Yield (%) 2.1 2.0 2.5 3.0 P/Book Value (X) 2.3 2.1 1.9 1.6 Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 18.2 14.5 16.6 17.4 Earnings Rev (%): New New New Consensus EPS (HK$) 1.48 1.90 2.26 Other Broker Recs: B: 10 S: 1 H: 4

ICB Industry: Consumer Services ICB Sector: General Retailers Principal Business: Chow Sang Sang is among the leading jewellery retailers in Greater China. Source of all data: Company, DBSV, Bloomberg, HKEX

A better 2013

• Chow Sang Sang is one of the leading jewellery retailers in Hong Kong & China. Its 100% self-operated store model and long track record reinforces strong confidence level on business quality.

• The company’s mid- to higher-end positioning benefits from rising middle class affluence and sound jewellery demand in the PRC.

• Coupled with gentler performance base from 2012, we project respectable earnings CAGR of 23% for 2012-14F. Trading at merely 10.4x 12-mth rolling PE, <0.5x PEG and c.30% below its 2-year peak, we initiate coverage with BUY.

THE BUSINESS

Chow Sang Sang (“CSS”) is among the leading jewellery retailers in the Greater China Region that first got listed on the Hong Kong Stock Exchange in 1973. The company currently operates over 350 points of sales, all being self-managed in nature to ensure sound store-level management and excellent service offered.

THE STOCK

CSS should announce its FY12 results on Mar 22. We anticipate an 11.7% y-o-y top-line growth to HK$19bn but 11.6% decline in net profit to HK$967m, attributable to higher demand for low-margin gold jewelleries during the Chinese Dragon Year of 2012. As we estimate the company to have seen c.10% same-store sales growth (SSSG) in HK and a mid single-digit SSSG in China for 2012, against robust overall SSSG of 37% for 2011, such relatively more moderate base-effect should provide easier comparables for better performance this year. Besides, the gradual recovery of demand for higher-margin gem-sets versus gold jewelleries should also help to revive 2013 profitability to some extent.

The market seems to be worried about gifting sales following recent government campaign to crackdown on corruption. Year-to-date, we have seen more slowdown in wine & dine than luxury sales. Afterall, gem-set jewellery consumption should generally be more personalized than standardized luxury merchandises. CSS’ focus on the mid- to higher-end jewellery segment also means relatively more resilient demand vs. premium / global jewellery retailers.

Overall, we project 14% revenue CAGR and 23% earnings CAGR for 2012-14F on improving consumer sentiment and strengthening demand for hard luxuries as household affluence ascends. Our target price of HK$27.47 benchmarks 15x 2013 PE, offering 34% upside from the current price level. BUY

At A Glance Issued Capital (m shrs) 677 Mkt. Cap (HK$m/US$m) 14,588 / 1,881 Major Shareholders

Chow family (%) 56.0 Capital Group Companies (%) 9.0

Free Float (%) 35.0 Avg. Daily Vol.(‘000) 896

DBS Group Research . Equity 11 March 2013

China / Hong Kong Company Focus

Chow Sang Sang Bloomberg: 116 HK EQUITY | Reuters: 0116.HK Refer to important disclosures at the end of this report

Company Focus

Chow Sang Sang

Page 2

Table of Contents

Investment Summary 3

SWOT Analysis 4

Company Background 5

Business Development 7

Growth Prospects 12

Valuation 15

Risk Assessment 15

Key Risks & Concerns 17

Management Profile 19

Appendix 26

Company Focus

Chow Sang Sang

Page 3

Investment Summary

Prospering China fuels growth. CSS is among the leading jewellery retailers in the Greater China Region with a long track record of nearly 80 years. Building on its well-established sales network and branding, coupled with a growing appetite for jewelleries amid rising affluence in China and further RMB appreciation to strengthen their purchasing power, the company should be well-poised to benefit substantially from growing jewellery consumption in the region over the medium-term.

100% self-operated network raises overall quality. Unlike major peers in the region that normally expand in the PRC market via a combination of self-managed and franchised / licensed stores, CSS consistently focuses on self-operation of all its stores. Despite relatively slower expansion pace against a franchising model that requires minimal investments, CSS could then ensure better store management to safeguard itself from risks of thefts or damages of its brand by any misbehaved franchisees.

Successful dual-brand business model. CSS stands as one of the few jewellery retailers that has successfully established a strong second brand “Emphasis Jewellery” along with its core brand “Chow Sang Sang” , effectively enlarging its overall customer spectrum. At present, it operates a total of over 350 stores across Mainland China, Hong Kong, Macau and Taiwan, comprising over 320 “Chow Sang Sang” stores and about 30 “Emphasis Jewellery” stores. Such strategy has also helped increasing proportionate sales of branded products that offer higher margins.

Low jewellery penetration implies vast potentials. According to Hejun Consulting, China’s jewellery sector currently remains in the growth phase in which jewellery players continue to introduce new products and broaden their market segments. Competition is seen while distribution channels are still decentralized across the country and operators should see room to advance further. As such, we believe that the jewellery brand retailers, particularly key players that already secured good customer loyalty and operating scale across the region, should stay in sound position to sustain decent growth over the medium-term.

Vertical integration enhances quality control. CSS is expanding its jewellery production plant in Shunde of China, with the new factory to triple production capacity in due course to better support on-going retail expansion. The company also strengthens its research and development capacity (R&D) recently to develop more in-house brands and gold gifts. Product collections include La Pelle Pearl, Yú Yú signature diamond product lines and fine jewellery development of jade, semi-precious stones and carat plus diamonds.

Low base for 2013. We estimate that CSS should be registering y-o-y same-store sales growth (SSSG) of c.10% in Hong Kong and a mid-single digit rate in China for 2012, as compared to an overall 37% SSSG in 2011. Riding on the much slower growth pace last year, and coupled with a good start to see c.20% SSSG during Chinese New Year holidays (CNY) in 2013 against last CNY, we believe the company could achieve better sales momentum of an overall mid-teens SSSG in 2013. More importantly, a gradual shift in growth towards higher margin gem set jewelleries should favour its earnings trend.

Value emerges along with gradual recovery. CSS’ share price dipped >30% from its 2-year peak, attributable to the volatile consumer sentiment on global economic concerns and a high base impact across the jewellery sector. Looking ahead, we believe CSS’ growth prospects should stay attractive over the medium-term, with our projection of 23% earnings CAGR for FY12-14F and our target price of HK$27.47 on 15x 2013 PE. Trading at merely 10.4x 12-month rolling PE, the lower end of its 2-year PE range of 10-20x, we anticipate the counter to be re-rated on its gradually recovering performance this year.

Key risks and concerns. Apart from any possible economic downturns that could affect consumer sentiment, CSS’ operations could also be affected by price volatility of raw materials. Any major and prolonged fluctuation in gold prices could impact its sales volume of gold jewelleries. Besides, rising rental costs especially for prime locations in Hong Kong, as well as intensifying competition among industry players could also affect performance.

Company Focus

Chow Sang Sang

Page 4

SWOT Analysis

Strengths Weakness

• Among leading jewellery retailers in Greater China

• 100% self-operated store model could help operational management and risk control

• Dual-brand strategy broadens consumer range

• Addition of flagship stores enhances brand visibility

• Vertical integration for better control on product quality

• Significant cash outlay on investment of inventories, including gold and gem-set jewelleries

• Rental pressure amid fierce competition for prime retail locations

Opportunities Threats

• Rising demand for jewellery in Greater China along with improving disposable income of Mainland Chinese

• Further RMB appreciation strengthens purchasing power of outbound Mainland tourists to Hong Kong, Macau and Taiwan

• Vast medium-term market potentials in China given low jewellery penetration

• Sales of value-preserving jewellery products should benefit from an inflationary environment, particularly on potential enhancement of sales volume, gross margin and overall operating leverage

• Expansion of research and production facilities lifts growth prospects

• Intensifying competition from local and international peers

• Gold price volatility might affect revenue and profitability

• Potential macroeconomic slowdown on global uncertainties could affect demand for jewelleries, especially for high-ticket items

Source: DBS Vickers

Company Focus

Chow Sang Sang

Page 5

Company Background

Long-established jewellery play in Greater China. Chow Sang Sang (CSS) is among the leading jewellery retailers and manufacturers in the Greater China Region that has marked its presence as a goldsmith in Guangdong since the 1930’s. The company started to set up stores in Hong Kong & Macau in 1948, and became the first jewellery retailer listed on the Hong Kong Stock Exchange in 1973. During 1995, CSS also rolled out its retail chain into Taiwan.

Over the years, CSS’ factory base in Guangdong has supported its in-house jewellery design and production, aiming to uphold sound quality standards. The company’s precious metal laboratory also specializes in quality testing of gold and platinum, and has been providing accredited services to the precious metal industry for >20 years.

Successful dual-brand strategy & prudent model. CSS stands as one of the few jewellery retailers that successfully establish a strong second brand “Emphasis Jewellery” along with its core brand “Chow Sang Sang” , effectively enlarging its overall customer spectrum. At present, it operates a total of over 350 stores, of which over 280 are in Mainland China, >55 in Hong Kong & Macau, and 20 in Taiwan. These comprise >320 “Chow Sang Sang” stores and about 30 “Emphasis Jewellery” stores, all of which being self-operated in nature to minimize overall risk exposure.

Other non-core businesses. CSS also wholesales precious metals including bullion trading, and runs boutique house on futures & securities broking. These high volume businesses operate on commission basis and no proprietary trading will be offe.red on their platforms.

Jewellery retail: revenue breakdown by region (1H12)

Revenue breakdown by segments (1H12)

HK & Macau29%

HK & Macau (PRC

customers)31%

Others *1%

China39%

Overall PRC customer sales = 70%

Other businesses *

1%

Securities & futures broking

0.2%

Jewellery retail80%

Wholesale of precious metals19%

* Mainly include sales in Taiwan.

Source: Company, DBS Vickers

* Mainly include rental income and other jewellery-related businesses.

Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 6

Historical developments

1948 1973 1994 1998 2001 2003 2005

Started operations in Hong Kong and Macau.

Became the first jewelleryretailer listed on Hong Kong Stock Exchange.

Introduced "Emphasis Jewellery".

Re-enter into the Mainland Chinese market; received ISO 9002 in retail management.

Started to operate online sales platform eshop.chowsangsang.com.

Sep: Placed 62m shares (12% stake) at HK$2.28ps to raise HK$138m.

Apr: Placed 75m shares (11% stake) at HK$13.30 psto raise HK$971m.

20061934

Launched brand revamp campaign and introduced international jewellery brands (eg. Forevermark & Hodel).

Chow Sang SangGoldsmith was established in Guangdong.

2010

Feb: Became sightholder of Diamond Trading Company (DTC) under DeBeers; Nov: Opened flagship store in Tsim Sha Tsui, HK.

Source: Company, DBS Vickers

Shareholding structure

6.20%

Chow Sang Sang (116 HK)

5.96% 0.20%20.13% 9.75% 7.96% 6.02% 9.01% 34.77%

Happy Family

Winston CHOW

Wun SingPublic

Gerald CHOW

King Sing

Top Fit Invest-ments

Happy Inc.

Everwin& Golden

Court

Capital Group

Companies

CHAN Bing Fun

Note: Everwin & Golden Court are owned by a discretionary trust of which Dr. CHOW Kwen Lim and Mr. Vincent CHOW Wing Shing are beneficiaries; Happy Inc. is 70% owned by family members of Mr. CHOW Kwen Ling; Happy Family is 40% owned by Mr. CHOW Kwen Ling and his spouse; Top Fit Investments is owned by a discretionary trust of which Dr. Gerald CHOW King Sing and Mr. Winston CHOW Wun Sing are beneficiaries.

Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 7

Business Development

A) Jewellery retail division

CSS has been a long-standing player in the jewellery industry, with nearly 80 years of history and sound presence in the Greater China Region. The company currently runs over 350 stores in China, HK, Macau and Taiwan, sourcing c.50% of its diamond supplies from renowned groups including DeBeers, with the Diamond Trading Company’s (DTC) granting of sightholder status in 2005.

Mainland tourists’ sales ramped up in HK/Macau. Like most peer operators in the region, CSS has increasingly captured more jewellery demand from Mainland visitors. Specifically, HK/Macau offers tax free shopping, while RMB also continues to strengthen over the years to translate into even better prices for Mainland tourists. Coupled with the fact that products sold in HK/Macau are normally genuine in nature, CSS has seen a significant surge in PRC visitor contributions, taking up 31% of its HK/Macau jewellery sales in 2008 to >50% in 2012 with further room to expand.

Proportion of HK/Macau revenue contributed by PRC customers

31%

37%42%

48%52%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 1H12

2008-11 CAGR = 49%

Source: Company, DBS Vickers

Dual-brand format expands customer profile. CSS has introduced its second brand “Emphasis Jewellery” to the market since 1994 and continues to fine-tune the operation. Currently, the company successfully runs 2 branded chain stores, with the core “Chow Sang Sang” retail chain offering mainstream products while “Emphasis Jewellery” stores providing fashionable and trendy designs at a different market positioning.

Besides, CSS has placed strong efforts to bring in selected foreign brands such as Gucci, Hodel, Kashikey, etc. to its stores since 2006. This has helped to beef up its jewellery portfolio further with innovative designs and distinctive workmanship, thus strengthening brand images of the company’s retail operations.

Comparison between “Chow Sang Sang” & “Emphasis Jewellery”

Chow Sang Sang Emphasis Jewellery

- Affordable luxury for mid-to-high-end markets

- Creative jewelleries focused on market trend, design and taste

- Good balance between gold and gemsets

- Focused on gemsets

- 294 stores in HK, Macau & China as of Jun 2012

- 33 stores in HK, Macau & Taiwan as of Jun 2012

Source: Company, DBS Vickers

Flagship stores improve brand visibility. In recent years, CSS has added some flagship stores in prime shopping districts to enhance its brand building strategy and to cater to rising demand of product variety and quality services. Specifically, the company’s Hong Kong flagship stores could provide a convenient and effective showcase to Mainland tourists and reinforce its PRC operations. Aside from bigger store size, CSS also increases fine jewellery segments and upgrades shop design & service support, so that each flagship store offers better customer experience and provides a suitable venue for VIP events to strengthen relationship with customers.

Company Focus

Chow Sang Sang

Page 8

Details of selected flagship stores

Hong Kong:Park Lane Mega Store

Area (sq.ft.): >5,000Commence date: Dec 2008

Hong Kong:Central Flagship Store

Area (sq.ft.): 5,000Commence date: Apr 2009

Beijing: Sanlitun Flagship Store

Area (sq.ft.): c.7,000Commence date: Feb 2009

Hong Kong:Mongkok Mega Store

Area (sq.ft.): >5,000Commence date: Dec 2008

Shanghai Mega Store

Commence date: Sep 2009

"Emphasis Jewellery"Taipei Flagship Store

Area (sq.ft.): c.1,000Commence date: Nov 2011

Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 9

100% self-operated stores. Over the past 3 years, CSS has altogether added >150 stores across Greater China, with c.95% of these new additions happening in China to capture strong demand from Mainlanders. Unlike major peers in the region that normally expand in the PRC market via a combination of self-managed and franchised / licensed stores, CSS consistently focuses on self-operation of all its stores. Despite relatively slower expansion pace against a franchising model that requires minimal investments, CSS could then ensure better store management to safeguard itself from risks of thefts or damages of its brand by any misbehaved franchisees.

Store breakdown by numbers (1H12)

HK & Macau, 57,

17%

Taiwan, 21, 6%

China, 249, 76%

Source: Company, DBS Vickers

Online sales platform. CSS has operated its own B2C platform, eshop.chowsangsang.com, since 2001, which mainly caters for demand of younger customers in the Greater China Region. Over the years, the company has continued to improve logistics efficiency to support such online development. Its internet expansion plans also include strategic alliance with influential internet portals including Taobao – Tmall, 360buy.com and amazon.com.

Emphasis on customer relationship. CSS has increasingly targeted to further enhance customer services and brand loyalty. Comprehensive marketing initiatives, VIP membership program enhancement with special focus on fine jewellery marketing could help reinforcing good bonding with key customers. Its recent offerings of less common semi-precious stones and jadeites that offer lower ticket sizes and more trendy designs also help expanding customer base, including new and younger shoppers.

Marketing initiatives adopted by Chow Sang Sang

Comprehensive marketing initiatives

International Initiatives

- Leverage on partnership with Antwerp Diamond Museum (the largest diamond museum in the world)

Greater China Initiatives

- Continue to market the international perspective via print and TV commercials

- Target Mainland Chinese visiting HK & Macau

Regional Initiatives

- Sponsorship of cultural events

- Customized consumer events to raise awareness

- Utilize local marketing expertise to support regional centers

Source: Company, DBS Vickers

Vertical integration enhances R&D and efficiency. CSS is expanding its jewellery production plant in Shunde of China, with the new factory to triple production capacity in due course to better support on-going retail expansion. The company also strengthens its research and development capacity (R&D) recently to develop more in-house brands and gold gifts. Product collections include La Pelle Pearl, Yú Yú signature diamond product lines and fine jewellery development of jade, semi-precious stones and carat plus diamonds.

B) Precious metal wholesaling

Economies of scale. The precious metal wholesale division mainly sells gold and platinum bullions to small players in the industry. Given that such business leverages on CSS’ scalability, it involves minimal addition costs. Gross margin is normally <1% but the operation helps provide valuable knowledge about outlook of the industry. Besides, without engaging in any proprietary trading while payments are based on cash on delivery terms (COD), working capital and operational risks could be minimized.

C) Securities brokerage

Peripheral business with limited risk entailed. CSS runs 8 offices in HK in addition to an internet platform for its non-core brokerage division. With a commission based business model and no proprietary trading offered, any potential risks related to this business should be minimized.

Company Focus

Chow Sang Sang

Page 10

Retail network in China (1H12)

Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 11

Brand portfolio of Chow Sang Sang

Source: Company

Company Focus

Chow Sang Sang

Page 12

Growth Prospects

Low base for 2013. We estimate that CSS should be registering y-o-y same-store sales growth (SSSG) of c.10% in Hong Kong and a mid-single digit rate in China for 2012, as compared to an overall 37% SSSG in 2011. Riding on the much slower growth pace last year, and coupled with a good start to see c.20% SSSG during Chinese New Year holidays (CNY) in 2013 against last CNY, we believe the company could achieve better sales momentum in 2013, likely at an overall mid-teens SSSG.

Robust jewellery demand fuelled by rising affluence. China’s middle class population is set to reach 40% of the total by 2020 from c.10% in 2009 (source: Wolfensohn Center of Development). PRC per capita disposable income is also expected to grow at 12.2% CAGR for 2010-15F to stand as the fastest income growth country across Asia. Together with improving urbanization & favourable government policies to encourage domestic consumption, as well as Mainlanders’ aspiration for luxuries in which Euromonitor forecasts a 19% CAGR on PRC demand of luxury merchandise for 2010-15F , CSS should be well-poised to benefit from strong sector growth.

Per capita disposable income CAGR, 2010-15F

12.2

10.0

8.06.7

5.5 5.04.1 4.1 4.0

3.0

0

2

4

6

8

10

12

14

Ch

ina

Ind

ia

Ind

on

esia

Taiw

an

Phili

pp

ines

Ko

rea

Sin

gap

ore

Ho

ng

Ko

ng

Mal

aysi

a

Thai

lan

d

%

Source: World Bank, Euromonitor

Projected sales CAGR of consumer categories in China (2010-15F)

13.0%

13.0%

13.6%

13.8%

15.3%

16.6%

19.0%

0% 5% 10% 15% 20%

Home appliances

Food retail

Department stores

Furnitures

Cosmetics

Casualwear & footwear

Luxuries

Source: Euromonitor

Low jewellery penetration implies vast potentials. According to Hejun Consulting which endeavours to highlight the life cycle for the PRC jewellery sector, China currently remains in the growth phase in which jewellery players continue to introduce new products and broaden their market segments. Competition is seen while distribution channels are still decentralized across the country and operators should see room to advance further. As such, we believe that the jewellery brand retailers, particularly key players that already secured good customer loyalty and operating scale across the region, should stay in sound position to sustain decent growth over the medium-term.

Company Focus

Chow Sang Sang

Page 13

Development of jewellery market in China

Opportunity

Challenge

Current stage for domestic

jewellerymarket

Survival

Winning

Market stage Emergence Growth Elimination Maturity

Characteristics - Create demand- Single product line- Narrow market positioning- Dispersed distribution channels

- Robust market growth- Intensified competition- Introduce new products- Expand to broader market segments- Customer demand driven by price- Price wars- Distribution channels still decentralised

- Stable market growth- Integration of suppliers- Greater focus on product development- Competition in quality & value-added services in addition to prices- Centralised management on distribution channels- Customer demand driven by value- Focus on specific market segment- Earnings stablised as market consolidation proceeds

- Stable growth with GDP- Diverse product lines- Competition in distribution, value-added services & product development- Centralised distribution channels- Competitive landscape is established, each player has specific customer group- Most suppliers are profitable

Source: Hejun Consulting, companies, DBS Vickers

Flourishing tourist spending in Hong Kong. As a tax-free shopping paradise, Hong Kong continues to stand as an ideal shopping destination amid its wide merchandise range, sound product quality and good customer services. According to recent consultant reports, a majority of 59% of Chinese luxury spending would be made abroad by 2015F, and Hong Kong should benefit the most due to its close proximity to Mainland China. As tourist spending rises in tandem with the number of inbound visitors, major jewellery retail chains like CSS that possess strong retail networks in Hong Kong & Macau should see plenty of opportunities to expand along with a growing pie.

Company Focus

Chow Sang Sang

Page 14

Total luxury spending of Mainland Chinese

0

100

200

300

400

500

2008A 2009A 2010A 2015F

Domestic consumption Overseas consumption

RMB bn

57% 56%57%

59%

43% 44% 43%41%

Source: Bain & Co., McKinsey & Co., Ministry of Commerce, DBS Vickers

Tourist arrivals & spending per capita in Hong Kong

0

10

20

30

40

50

60

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

2,000

4,000

6,000

8,000

Tourist arrivals to HK (LHS)Overnight visitor spending per capita (RHS)

m HK$

Note: Overnight visitor spending data for 2012 is not available.

Source: HK Tourism Board, CEIC, DBS Vickers

RMB appreciation lifts Mainlanders’ purchase power. Reminbi has appreciated substantially by c.30% over the last 6 years to currently stand at USD0.16 per RMB. The market expects such an upward trend to sustain over the medium-term. Our economist currently projects the exchange rate to strengthen by another 2% in the coming months, reaching USD0.163 per RMB by 3Q13 and rising gradually further ahead. The strengthening RMB will continue to help lifting purchasing power of Mainland tourists in Hong Kong, Macau and Taiwan. Such a trend should continue to help supporting jewellery sales of CSS’ respective store operations.

RMB exchange rate

0.125

0.130

0.135

0.140

0.145

0.150

0.155

0.160

0.165

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

USD per RMB

Feb

-13

Source: Bloomberg

Inflationary environment benefits luxury retailers. With gold and diamond merchandises being regarded as media for storages of value; especially in the eyes of Chinese customers, strong demand for such jewellery items could be seen particularly during inflation times. At present, DBS economics team forecasts a 3.5% CPI inflation for both China and Hong Kong, suggesting potentially a firm support for jewellery demand this year.

Inflation versus discretionary sales in Hong Kong

(6)(4)(2)

0246

810

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

(40)(30)(20)(10)0102030405060

CPI (LHS)Discretionary sales growth (RHS)

% %

Dec

-12

Source: CEIC

Company Focus

Chow Sang Sang

Page 15

Valuation

Value emerges along with a gradual recovery. CSS’ share price dipped >30% from its 2-year peak, attributable to the volatile consumer sentiment on global economic concerns as well as a high base impact on the jewellery sector. Looking ahead, with (i) strong growth expected for Mainland visitors’ spending in Hong Kong and Macau along with their growing affluence and RMB appreciation, (ii) rising demand for jewellery merchandises in the region, and (iii) an easier base for comparison amid a significantly slower growth pace in 2012, we believe CSS’ growth prospects should stay attractive over the medium-term. We project the company to achieve 23% earnings CAGR for FY12-14F to reach a net profit of HK$1.47bn by FY14F.

In terms of valuation, our target price of HK$27.47 benchmarks 15x 2013 PE. Considering expectations of 28% y-o-y net profit growth for 2013 subsequent to an estimate of 11% earnings dip last year, our valuation basis translates into 0.5x PEG, which we believe to be reasonable even without fully normalized global market conditions. Trading at merely 10.4x 12-month rolling PE, the lower end of its 2-year PE range of 10-20x, with a solid 2% yield, we anticipate the counter to be re-rated on its gradually recovering performance this year. We recommend BUY.

Risk Assessment

Visibility of earnings. Riding on the burgeoning regional jewellery market in the medium-term and CSS’ extensive and scalable sales network, the company is well-poised to sustain decent earnings growth momentum. Key risks include a possible prolong downward trend in gold prices. Rising cost pressure such as rental hikes in Hong Kong could also affect its performance, although CSS has a good exposure in key local shopping malls that mainly collect turnover based rents.

Financials. CSS maintains positive operating cash inflows and c.20% net gearing. Its gold holdings account for >30% of inventory that is easy to liquidate should there be funding needs. Riding on better operating efficiency as its business scale continues to expand, margins could also see room for enhancement over the medium-term that in turn helps strengthening its financial position.

Shareholdings. CSS is the first jewellery retail listed in Hong Kong during 1973 and possesses a long track record of prudently running its business. Aside from the founding family that holds 56% stake, the Capital Group has also recently raised its CSS shareholding to reach 9% stake. We believe that the Chow family should continue to maintain as the major shareholder of CSS.

Qualitative Risk Assessment: Low

Risk Rating Category

1 (Low) - 3 (High)

Weight Weighted Score

Earnings 1 40% 0.4

Financials 1 20% 0.2

Shareholdings 2 40% 0.8

Overall 1.4

Company Focus

Chow Sang Sang

Page 16

PE band chart

PB band chart

0

10

20

30

40

50

60

70

80

Jan

-99

Jan

-01

Jan

-03

Jan

-05

Jan

-07

Jan

-09

Jan

-11

Jan

-13

Share Price (HK$)

3x

11x

19x

27x

35x

0

5

10

15

20

25

30

35

40

45

Jan

-99

Jan

-01

Jan

-03

Jan

-05

Jan

-07

Jan

-09

Jan

-11

Jan

-13

Share Price (HK$)

0.3x

1.0x

1.7x

2.4x

3.1x

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

Peers valuation

Mkt 12F 13FPrice Cap Fiscal PE P/Sales Yield P/Bk ROE PE P/Sales Yield P/Bk ROE

Company Name Code HK$ HK$m Yr x x % x % x x % x %

Chow Sang Sang* 116 HK 21.55 14,588 Dec 15.1 0.8 2.0 2.1 14.5 11.8 0.7 2.5 1.9 16.6

Emperor Watch 887 HK 0.89 6,125 Dec 12.7 0.9 2.2 1.4 13.0 11.1 0.8 3.4 1.3 14.6

Hengdeli Holdings*~ 3389 HK 2.36 10,322 Dec 11.7 0.7 3.8 1.4 17.0 9.8 0.6 3.8 1.2 14.6

Luk Fook Hdg*# 590 HK 24.6 14,492 Mar 11.3 1.1 3.5 2.3 21.4 10.1 0.9 4.0 2.0 21.1

Oriental Watch*^# 398 HK 2.86 1,632 Mar 11.3 0.4 3.4 0.7 10.2 9.7 0.4 2.6 0.7 7.3

Chow Tai Fook# 1929 HK 11.14 111,400 Mar 19.2 1.8 1.3 3.3 20.1 15.1 1.5 1.7 2.8 20.6

13.6 1.0 2.7 1.9 16.0 11.2 0.8 3.0 1.6 15.8

^ Core EPS

~ Fully diluted core EPS

# FY12: FY13; FY13: FY14

Source: Thomson Reuters, *DBS Vickers

Company Focus

Chow Sang Sang

Page 17

Key Risks & Concerns

Intensified local competition. In view of rising jewellery demand from Mainland tourists, the local jewellery retail industry has attracted operators to add increasingly more stores in Hong Kong, especially along the tourist areas and prime shopping locations. Intense competition will not only affect sales performance of individual outlets, but could also result in rising costs such as marketing and rental expenses.

Number of outlets of major jewellery retailers in Hong Kong

Company Outlet No.

Remarks

Chow Tai Fook 65 Chow Tai Fook Jewellery only

Chow Sang Sang 51 42 Chow Sang Sang outlets & 9 Emphasis Jewellery outlets

Luk Fook 36TSL Jewellery 23 19 TSL & 4 Saxx

Prince Jewellery & Watch

14 Excluded watch outlets

Emperor Watch & Jewellery

13 Excluded watch outlets

King Fook 12

Tiffany & Co. 9

3D Gold 8

DeBeers 2

Graff Diamonds 2

Harry Winston 1

Source: Companies, DBS Vickers

Rising rental expenses. CSS’ rental expenses in Hong Kong account for c.4% of its local revenue. Any increase in rents could affect profit margins. With most of its outlets located in the prime shopping areas, CSS could be prone to future rental hikes, unless its top-line growth could sustain at a sound level and offset the impact. Its strong exposure in shopping malls that usually charge a turnover based rental should also help mitigating any rental hike impacts to some extent. Our sensitivity analysis suggests that any 0.1% increase in rentals (as % of revenue) could reduce group earnings by <1.5%.

Hong Kong private retail rental index

100

110

120

130

140

150

160

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan 1999 = 100

Dec

-12

Source: Rating & Valuation Dept. of HKSAR Government

Gold price volatility could affect margins. Gold takes up about 55% of CSS’ COGS and stands among an important raw material cost for the company. Despite hedging c.40% of its gold inventory, CSS could still see margin fluctuation should gold price swings significantly. Based on our estimates, a 10% annualized decline in the price of gold could potentially lower the company’s gross margin by 0.7ppt. Current market expectations of supportive gold prices and an inflationary Asian environment over the medium-term could probably help to alleviate concerns on such respect.

Macroeconomic conditions. Like its close peers, CSS mainly sells hard luxury items that could normally be influenced more by changes in global economic environment and consumer sentiment than day-to-day merchandises. Given its relatively more cyclical business nature, any slow down across the Chinese economy to weaken desire for consumption could affect CSS’ performance in the Greater China region.

Company Focus

Chow Sang Sang

Page 18

Scenario analysis of revenue revision (2013F)

Revenue revision (2012F) -20% -10% -5% 0 5% 10% 20%

Implied revenue growth y-o-y -8% 4% 10% 16% 21% 27% 39%

EPS (HKD) 1.41 1.59 1.68 1.83 1.97 2.07 2.26Implied EPS revision -22.9% -13.2% -8.4% - 7.8% 12.9% 23.2%

Base case assumptions:

Net margin 5.6%

Store numbers 407Gold price change y-o-y -

Source: DBS Vickers

Scenario analysis of cost ratio’s impact on EPS (2013F) *

HKD Selling & distribution costs8.4% 8.9% 9.4% 9.9% 10.4%

2.6% 1.98 1.86 1.73 1.60 1.47

2.4% 2.04 1.91 1.78 1.65 1.52

2.2% 2.09 1.96 1.83 1.70 1.57

2.0% 2.14 2.01 1.88 1.75 1.63

1.8% 2.19 2.06 1.93 1.81 1.68Ad

min

exp

ense

s

* Cost ratio defined as expense as percentage of revenue.

Source: DBS Vickers

Sensitivity test of gold price volatility (2013F)

Annualised gold price change -30% -20% -10% 0 10% 20% 30%

Gross margin 16.4% 17.3% 18.1% 18.8% 19.4% 20.0% 20.5%

Net margin 3.8% 4.4% 5.0% 5.6% 6.1% 6.6% 7.0%

Assumptions:Gold as % of COGS 55%

Gold inventory turnover days 3mths

% of gold inventory hedged 40%

Source: DBS Vickers

Company Focus

Chow Sang Sang

Page 19

Management Profile

Experienced management with proven track record. At present, CSS’ management team possesses an average of over 25 years of experience in jewellery retailing business across Hong Kong and China. Its success of being one of the few jewellery retailers that could establish a strong second brand “Emphasis Jewellery” along with its core

brand “Chow Sang Sang” to broaden customer base reinstates management competence in the industry. Performance-based bonuses have been used to incentivize management and sales force. The company has also adopted a share option scheme in Dec 2010 while no options have yet to be granted.

Key management team Name Age Current

AppointmentPrevious Experience Education / Honours

Mr. CHOW Kwen Ling

88 Non-executive Director and

Honorary Chairman of the

Group

Founder of the Group; was Group General Manager from 1973 to 1986,

and Group Chairman from 1973 to 1990.

Elected as the Honorary Chairman upon retiring as Chairman.

Dr. CHOW Kwen Lim

85 Executive Director and Group Chairman

Founder of the Group; was Group General Manager from 1986 to 1997;

over 60 years of experience in the jewellery business.

Awarded Doctor of Social Science, Honoris Causa by the Chinese University

of Hong Kong.

Dr. CHAN Bing Fun

78 Independent Non-executive Director

Medical doctor in private practice; has been with the Group for over 35 years.

n.a.

Mr. Vincent CHOW Wing Shing

65 Executive Director and Group

General Manager

Has been with the Group for over 25 years.

Member of the Shunde People's Political Consultative Committee.

Dr. Gerald CHOW King Sing

55 Executive Director Has been with the Group for over 25 years.

A former member of the Central Policy Unit of the Hong Kong Government (2009-

2011).

Mr. Stephen TING Leung Huel

58 Non-executive Director

Managing Partner of Ting Ho Kwan & Chan, Certified Public Accountants; over

30 years of experience in Accounting.

Member of the 9th & 10th Chinese People's Political Consultative Conference,

Fujian.

Mr. CHUNG Pui Lam

71 Non-executive Director

Has been a solicitor in practice. Currently a member on several advisory committees of the Hong Kong

Government.

Mr. Winston CHOW Wun Sing

54 Executive Director and Group

Deputy General Manager

Has been with the Group for over 20 years; key responsibilities include

marketing of the Group's jewellery business in Greater China.

Member of the Guangzhou Municipal Tianhe District People's Political

Consultative Committee.

Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 20

Key management team (continued) Name Age Current

AppointmentPrevious Experience Education / Honours

Mr. LEE Ka Lun

57 Independent Non-executive Director

Has been an accountant and has over 25 years of experience in banking and

auditing.

n.a.

Mr. LO King Man

74 Independent Non-executive Director

Appointed as Director of the Hong Kong Academy for Performing Arts

from 1993 to 2004.

Was Vice Chairman of the former Urban Council and member of the Hong Kong Special Administrative Region Basic Law

Consultative Committee.

Mr. Theodore TAM Shing Chi

53 Company Secretary and

Chief Financial Officer

Joined the Group in 2009 and has over 25 years of experience in Finance,

Accounting and Management.

Holds a Master Degree in Business Administration from the Melbourne

University, Australia.

Ms. Susan MAK Wei Yee

55 General Manager of Chow Sang

Sang Securities Ltd.

Joined the Group in 2001 and has over 30 years of experience in accounting,

banking and finance.

Member of the Hong Kong Institute of Certified Public Accountants and the

Association of Chartered Certified Accountants.

Mr. LAU Hak Bun

59 Director of Sales Operations

Has been with the Group for over 40 years; responsible for managing the

sales operations in Hong Kong, Macau and Mainland China.

Serves as the Group's representative in the executive committees of several trade

associations.

Ms. Emily LI Yin Ming

52 Brand General Manager for "Chow Sang

Sang"

Joined the Company in 2005; responsible for development of

branding, new business and marketing.

Awarded the "China 100 Outstanding Women Entrepreneur" in 2007.

Ms. Carol WONG May Chun

48 Brand Director for "Emphasis Jewellery"

Joined the Group in 2004; responsible for total branding including product

development, marketing, channel development and management.

n.a.

Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 21

Key Assumptions – Number of stores Sensitivity Analysis

FY Dec 2009A 2010A 2011A 2012E 2013F 2014F

Hong Kong and Macau 50 51 56 57 58 59 2013F

China 143 181 232 282 327 367 Staff cost +/- 1% Net Profit -/+ 1% Taiwan 21 22 22 21 22 23 Rental cost +/- 1% Net Profit -/+ 0.5% Total 214 254 310 360 407 449

Segmental Breakdown (HK$ m) FY Dec 2009A 2010A 2011A 2012E 2013F 2014F Revenues (HK$ m) Manufacture & retail of jewellery

5,923 8,265 12,645 14,506 17,021 19,427 Wholesale of precious metals

3,410 3,313 4,341 4,471 4,918 5,410 Securities & futures broking

85 67 48 48 48 48 Other businesses 46 60 124 137 150 165 Total 9,463 11,705 17,158 19,162 22,137 25,051 Segmental profit (HK$ m)

Manufacture & retail of jewellery

662 865 1,325 1,302 1,562 1,821 Wholesale of precious metals

28 17 28 20 22 24 Securities & futures broking

54 44 17 14 14 14 Other businesses 7 25 25 20 22 25 Total 752 951 1,395 1,357 1,621 1,885 Segmental profit Margins (%)

Manufacture & retail of jewellery

11.2 10.5 10.5 9.0 9.2 9.4

Wholesale of precious metals 0.8 0.5 0.6 0.4 0.4 0.4

Securities & futures broking

63.2 66.2 35.0 30.0 30.0 30.0 Other businesses 15.4 41.7 20.0 15.0 15.0 15.0 Total 7.9 8.1 8.1 7.1 7.3 7.5

Company Focus

Chow Sang Sang

Page 22

Income Statement (HK$ m) Margins Trend

FY Dec 2009A 2010A 2011A 2012E 2013F 2014FRevenue 9,463 11,705 17,158 19,162 22,137 25,051 Cost of Goods Sold (7,576) (9,403) (13,904

)(15,604

)(17,983

)(20,324

)

Gross Profit 1,887 2,302 3,254 3,558 4,155 4,726 Other Opng (Exp)/Inc (1,136) (1,382) (1,872) (2,277) (2,515) (2,794) Operating Profit 751 920 1,383 1,281 1,639 1,932 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 1 3 2 2 2 2 Net Interest (Exp)/Inc (6) (4) (32) (51) (56) (56) Exceptional Gain/(Loss) 6 35 43 0 0 0 Pre-tax Profit 771 973 1,419 1,255 1,609 1,902 Tax (183) (206) (308) (272) (349) (412) Minority Interest (14) (10) (18) (16) (21) (25) Preference Dividend 0 0 0 0 0 0

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2010A 2011A 2012F 2013F 2014F

Operating Margin % Net Income Margin %

Net Profit 574 757 1,094 967 1,240 1,465 Net Profit before Except. 568 722 1,050 967 1,240 1,465 EBITDA 853 1,045 1,515 1,431 1,804 2,110 Growth Revenue Gth (%) (4.2) 23.7 46.6 11.7 15.5 13.2 EBITDA Gth (%) 30.3 22.5 45.0 (5.5) 26.0 17.0 Opg Profit Gth (%) 34.2 22.5 50.4 (7.4) 28.0 17.9 Net Profit Gth (%) 22.2 31.9 44.4 (11.6) 28.2 18.2 Margins & Ratio Gross Margins (%) 19.9 19.7 19.0 18.6 18.8 18.9 Opg Profit Margin (%) 7.9 7.9 8.1 6.7 7.4 7.7 Net Profit Margin (%) 6.1 6.5 6.4 5.0 5.6 5.8 ROAE (%) 16.1 15.8 18.2 14.5 16.6 17.4 ROA (%) 11.0 10.8 12.4 9.4 10.8 11.4

ROCE (%) 13.7 12.9 14.6 11.2 12.5 13.2

Div Payout Ratio (%) 31.5 30.4 28.5 30.0 30.0 30.0

Net Interest Cover (x) 126.2 232.1 43.2 25.1 29.2 34.3 Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 23

Interim Income Statement (HK$ m) FY Dec 2H2009 1H2010 2H2010 1H2011 2H2011 1H2012

Revenue 4,854 5,244 6,462 8,280 8,878 9,096 Cost of Goods Sold (3,800) (4,154) (5,249) (6,755) (7,149) (7,498) Gross Profit 1,053 1,089 1,213 1,525 1,729 1,597 Other Oper. (Exp)/Inc (598) (656) (706) (842) (962) (1,043) Operating Profit 456 433 507 683 767 555 Other Non Opg (Exp)/Inc 0 0 0 0 0 0

Associates & JV Inc 1 0 3 0 2 0 Net Interest (Exp)/Inc (2) (5) 2 (13) (19) (18) Exceptional Gain/(Loss) 8 (17) 52 (11) (32) 2 Pre-tax Profit 464 410 563 659 717 538 Tax (123) (108) (98) (163) (145) (94) Minority Interest (8) (5) (5) (11) (7) (3) Net Profit 333 298 460 485 565 441

Net profit bef Except. 325 315 407 496 597 439 Growth Revenue Gth (%) (4.6) 13.7 33.1 57.9 37.4 9.8 Opg Profit Gth (%) 140.0 38.1 11.1 57.6 51.3 (18.8) Net Profit Gth (%) 90.3 23.5 38.0 62.9 23.0 (9.0) Margins Gross Margins (%) 21.7 20.8 18.8 18.4 19.5 17.6 Opg Profit Margins (%) 9.4 8.3 7.8 8.2 8.6 6.1 Net Profit Margins (%) 6.9 5.7 7.1 5.9 6.4 4.8 Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 24

Balance Sheet (HK$ m) Asset Breakdown

FY Dec 2009A 2010A 2011A 2012E 2013F 2014F

Net Fixed Assets 579 618 718 790 858 923 Invts in Associates & JVs 12 14 15 15 15 15 Other LT Assets 787 1,013 803 817 832 848 Cash & ST Invts 387 285 651 619 706 910 Inventory 3,228 4,898 6,214 7,188 8,185 9,139 Debtors 612 881 973 1,087 1,256 1,421 Other Current Assets 389 308 302 302 302 302

Total Assets 5,994 8,016 9,677 10,817 12,153 13,559 ST Debt 598 726 1,329 1,849 2,031 2,131 Other Current Liab 1,329 1,425 1,390 1,119 1,275 1,430 LT Debt 0 0 393 551 606 636 Other LT Liabilities 91 125 144 172 207 248

Shareholder’s Equity 3,929 5,681 6,339 7,016 7,884 8,909 Minority Interests 48 60 81 110 150 204 Total Cap. & Liab. 5,994 8,016 9,677 10,817 12,153 13,559 Non-Cash Wkg. Capital 2,901 4,662 6,099 7,458 8,467 9,432 Net Cash/(Debt) (211) (441) (1,071) (1,781) (1,931) (1,857) Debtors Turn (avg days) 19.9 23.3 19.7 19.6 19.3 19.5 Creditors Turn (avg days) 39.6 36.9 23.7 21.6 21.3 21.5 Inventory Turn (avg days) 140.2 159.4 147.0 158.0 157.2 156.7 Asset Turnover (x) 1.8 1.7 1.9 1.9 1.9 1.9 Current Ratio (x) 2.4 3.0 3.0 3.1 3.2 3.3 Quick Ratio (x) 0.5 0.5 0.6 0.6 0.6 0.7 Net Debt/Equity (X) 0.1 0.1 0.2 0.2 0.2 0.2 Net Debt/Equity ex MI (X) 0.1 0.1 0.2 0.0 0.2 0.2 Capex to Debt (%) 12.8 15.0 10.3 8.3 7.9 7.9 Z-Score (X) NA NA NA NA NA NA Source: Company, DBS Vickers

Net Fixed Assets -8.2%

Assocs'/JVs - 0.2%

Bank, Cash and Liquid

Assets - 6.2%

Inventory -74.3%

Debtors - 11.2%

Mainly consist of AFS investment and deferred tax assets

Company Focus

Chow Sang Sang

Page 25

Cash Flow Statement (HK$ m) Capital Expenditure FY Dec 2009A 2010A 2011A 2012E 2013F 2014F

Pre-Tax Profit 771 973 1,419 1,255 1,609 1,902Dep. & Amort. 82 102 107 125 139 152Tax Paid (144) (173) (236) (272) (349) (412)Assoc. & JV Inc/(loss) (1) (3) (2) (2) (2) (2)(Pft)/ Loss on disposal of FAs 33 146 102 0 0 0Chg in Wkg.Cap. (443) (1,918) (1,405) (982) (1,018) (975)Other Operating CF 1 0 47 42 48 52Net Operating CF 299 (873) 33 166 427 717

Capital Exp.(net) (77) (109) (177) (199) (209) (219)Other Invts.(net) 0 0 0 0 0 0Invts in Assoc. & JV 0 0 0 0 0 0Div from Assoc & JV 19 21 24 24 24 24Other Investing CF (3) (31) (43) (14) (15) (17)Net Investing CF (60) (119) (195) (189) (201) (213)

0

50

100

150

200

250

2010A 2011A 2012F 2013F 2014F

Capital Expenditure (-)

Div Paid (181) (230) (311) (290) (372) (440)Chg in Gross Debt 110 109 1,141 677 237 130Capital Issues 0 971 0 0 0 0Other Financing CF (30) 11 (171) (226) 165 180Net Financing CF (101) 861 659 161 30 (129)Currency Adjustments (1) 0 0 0 0 0Chg in Cash 136 (131) 496 139 257 376Opg CFPS (HK$) 1.23 1.60 2.12 1.70 2.14 2.50Free CFPS (HK$) 0.37 (1.51) (0.21) (0.05) 0.32 0.73 Source: Company, DBS Vickers

Company Focus

Chow Sang Sang

Page 26

Appendix

Retail sales of jewelleries in China

Retail sales of jewelleries & watches in HK

4664

81

126

183

219

39%

27%

56%

19%

46%

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012E0%

10%

20%

30%

40%

50%

60%

Jewellery sales (LHS) Growth y-o-y (RHS)

RMB bn

3843 45

61

8996

5%

8%

47%36%

13%

0

20

40

60

80

100

2007 2008 2009 2010 2011 20120%

10%

20%

30%

40%

50%

Retail sales (LHS) Growth y-o-y (RHS)

HKD bn

Source: CEIC, Tianto Info Consulting, DBS Vickers Source: CEIC, DBS Vickers

2010-15F CAGR of urban household numbers by annual income in China

The booming middle class in China

20%

42%

-1%-4%-10%

0%

10%

20%

30%

40%

50%

>RMB200k RMB100-200k

RMB55-100k

<RMB55k

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Poor Middle clas s Rich

Sha

re o

f pop

ulat

ion

2009 2020F 2030F

Source: McKinsey & Co., DBS Vickers Source: Wolfensohn Center for Development

Company Focus

Chow Sang Sang

Page 27

Consumption of overnight tourists in Hong Kong (2008-11 CAGR)

Prices of luxuries outperformed overall CPI

36%

24%27%

24%27% 28%

30%

21% 19% 18%21%23%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jew

elle

ry&

wat

ch

Co

smet

ics

& s

kin

care

Gar

men

ts&

leat

her

go

od

s

Elec

tric

alg

oo

ds

Oth

ers

*

Ove

rall

spen

din

g

Chinese tourists Overall tourists

* ‘Others’ include food & beverages, personal care and non-shopping spending.

0100200300400500600700800900

1,000

1976 1981 1986 1991 1996 2001 2006 2011

Forbes Cost of Living Extremely Well Index

US Overall CPI

1976 level = 100

Source: HK Tourism Board, DBS Vickers Source: Forbes, DBS Vickers

Company Focus

Chow Sang Sang

Page 28

Hong Kong consumer confidence index

China consumer confidence index

60

70

80

90

100

110

120

Jan

-07

Sep

-07

May

-08

Jan

-09

Sep

-09

May

-10

Jan

-11

Sep

-11

May

-12

Dec

-12

90

95

100

105

110

115

120

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Dec

-12

Source: CEIC Source: CEIC

Gold spot price trend

Polished diamond overall price index

US$ per ounce

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Feb

-13

0

20

40

60

80

100

120

140

160

180

200

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Feb

-13

Source: Bloomberg Source: Bloomberg

Company Focus

Chow Sang Sang

Page 29

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

* Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (“DBSVUSA”) directly and not its affiliate. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVHK accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVHK and/or DBSVH (and/or any persons associated with the aforesaid entities), that:

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Company Focus

Chow Sang Sang

Page 30

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the

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