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Luxury goods
2 [email protected] 19 January 2011
Contents Executive summary .......................................................................... 3
The Red Eight and the Chinese customer........................................... 4
From head to toe ............................................................................36
European brands dominate ..............................................................71
Getting exposed ...............................................................................79
Company profiles
Belle ......................................... 85
Chow Sang Sang ........................ 87
Emperor Watch & Jewellery .......... 89
Evergreen .................................. 91
Golden Eagle Retail ..................... 93
Hengdeli .................................... 95
HK Resources ............................. 97
I.T. ........................................... 99
Lifestyle .................................. 101
L’Occitane ............................... 103
Luk Fook ................................. 105
Oriental Watch ......................... 107
Parkson Retail .......................... 109
Ports Design ............................ 111
Sa Sa International ................... 127
Trinity ..................................... 129
Appendix: International peer group ............................................... 131
All prices quoted herein are as at close of business 13 January 2011, unless otherwise stated
Related consumer research
Aaron Fischer, CFA Regional Head of Consumer and Gaming Research [email protected] (852) 26008256
Mariana Kou (852) 26008190
Executive summary Luxury goods
19 January 2011 [email protected] 3
Dipped in gold Luxury goods look set to be the fastest-growing consumer category in China over the next five years, with a 25% Cagr against general consumption at 11%. Luxury sales in Greater China represent 10% of the global market. If we include sales to Chinese tourists abroad, we estimate Greater Chinese consumers to account for 15% of global sales. But we are only at the start of this golden opportunity. Given rising incomes and supportive social factors, we expect Greater Chinese customers to account for 44% of global luxury sales by 2020. Our top picks are Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli.
The Chinese luxury customer is unique in many ways and, in this report, we identify eight differences between the wealthy Chinese and their overseas counterparts. Not surprisingly, they largely have the same tastes in brands as the rest of the world with Louis Vuitton, Hermes, Chanel, Gucci, Rolex, Prada and Cartier being the most desirable. Men’s brands such as Zegna and Dunhill also score well in our China Reality Research proprietary luxury-goods survey.
Luxury-goods companies are expanding rapidly in the Middle Kingdom as China will account for half of global growth over the next 10 years. We expect handbags, leather goods, watches and jewellery to see the fastest growth. Strong demand is already reflected in higher prices with fine wines increasing by 40% in 2010 and waiting lists are growing for many exclusive items.
It is only a matter of time before Chinese luxury brands are established at home. However, we expect this to happen in product categories where China has a perceived fundamental advantage, primarily in the use of materials such as jade, porcelain or precious woods that can be used in jewellery, homeware and furniture. In the meantime, we expect Asian companies to look to acquire European brands and build up manufacturing expertise.
Exposure can be gained via the brand owners listed in Europe and the USA. However, these companies only generate about 10-30% of sales to Chinese customers. We therefore recommend obtaining 100% pure-play exposure to Chinese luxury demand via the Asian-listed high-end companies. These stocks have rerated by 57% during 2010 but we believe valuation is still attractive at an average PE of 22x and PE/G of 1x. Of the stocks we cover, our top picks are Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli. We also like Trinity, Lifestyle, I.T, Emperor Watch & Jewellery and Sa Sa International. Strong sales over the December period will be the necessary catalyst for earnings upgrades and share-price outperformance.
Luxury market size
0
50
100
150
200
250
300
350
400
450
10CL 11CL 12CL 13CL 14CL 15CL 16CL 17CL 18CL 19CL 20CL
% of total
Others56%
GreaterChinese44%
(€bn)% of total
Others85%
GreaterChinese15%
Source: CLSA Asia-Pacific Markets
China should be world’s largest luxury-goods
market by 20CL
Chinese luxury brands to come
Fastest-growing segment
China to account for half of global luxury-
goods growth
Asian pure plays
Eight key differences
Section 1: The Red Eight and the Chinese customer Luxury goods
4 [email protected] 19 January 2011
The Red Eight and the Chinese customer Before we get into the detail of the report, we identify eight differences between wealthy Chinese and their counterparts overseas. Generally, the affluent Chinese are younger with a greater desire to display their wealth and success. They enjoy being given special treatment and have no hesitation in paying a bit more for that privilege. They love to travel overseas and are willing to splash out for their friends and family, with watches and jewellery being the most popular purchases.
1. Younger and richer customers Hurun Research shows that mainland Chinese millionaires are 15 years younger than their overseas peers. As expected, the vast majority live in the coastal regions and top-tier cities. Beijing, Guangdong and Shanghai are home to 48% of China’s millionaires. The number of individuals with more than Rmb1,000m has increased at a 50% annual rate from 24 in 2000 to 1,363 in 2010.
Figure 1
Profile of millionaires in China
Average age 39 Male-female ratio 7:3 Industry Service, property, manufacturing Collections 3 cars and 4.4 luxury watches Geographic distribution Beijing (17%), Guangdong (17%), Shanghai (14%), Zhejiang
(13%), Jiangsu (7%), Others (32%) Favourite brands Fashion: Giorgio Armani, Gucci, Boss
Jewellery: Cartier, Bulgari, Montblanc Overall luxury: Louis Vuitton, Chanel, Hermes, Cartier, Gucci
Hobbies Travel, golf, swimming Favourite destinations International: US, France, Canada
Domestic: Hong Kong, Yunnan, Sanya Number of holidays 16 days a year Drinking and smoking 1/3 don’t drink, about 1/2 don't smoke Source: Hurun Research Institute
Our CLSA proprietary luxury-goods survey shows that people in the 30-40 age group are the drivers of accessories and skincare demand. While for luxury cars, consumers in the 40-50 age group are more dominant.
Figure 2
Luxury customers by age
22
1486
38
44
14
75
7
100
0 20 40 60 80 100
Luxury skincare &makeup
Luxury handbag,clothing, watch &
jewellery
Luxury car
(% of stores)
Above 50
40-50
30-40
20-30
Source: China Reality Research
The rich Chinese are younger and many live
in top-tier cities
The 30-50-year-olds drive luxury demand
Wealthy Chinese differ from overseas
counterparts
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 5
2. Display of success and being a VIP Success is highly regarded, so is being rich and famous. It is important that the luxury goods they buy convey that message and show that they are sophisticated and have good taste. Driving a Mercedes Benz and carrying a large Louis Vuitton monogram bag can be one way while wearing a four-carat diamond ring and ordering Rmb10,000 bottles of wine is another. Unlike in the USA and Europe, people in Asia do not show off their houses, which tend to be relatively small on a global basis. It is a lot more important to dress well and enjoy a luxurious life when you are out in public. Watches, jewellery, apparel, cars and wine are good ways to show off and gain respect. Some 24% of people we surveyed that earn around Rmb41,976 per year said they would be willing to spend more than Rmb50,000 on a watch.
It is not enough to be rich. Being a VIP and having the owner of the most expensive restaurant in town serving you personally is just as valuable. Chinese customers like to receive gifts from luxury boutiques. It is not about the gift, but about how important you are, even to luxury companies that are already serving the most elite. Receiving birthday gifts and hand-written cards, attending invitation-only events, and being recognised by the sales staff in luxury stores are especially appreciated. More effort is required by luxury stores in China but the payoff can also be worth it.
3. Luxury “more” for him . . . The luxury market in mainland China is still largely male-dominated given the gifting culture and workforce demographics. Menswear, suitcases, watches and cars are key segments in China. As Leo Lui, president of Hermes China, has said: “Men’s ready-to-wear is […] a top seller, which is quite unusual. In most other markets, it’s women’s ready-to-wear that sells. China is still a men’s market, and more traditional.” However, he sees a shift towards a more balanced demographic combination as successful career women increasingly shop at Hermes to show that they have good taste. Big brands in China include Zegna and Dunhill.
4. . . . and more for others Some luxury brands have also opened more stores in Beijing than other first-tier cities, primarily to cater for the huge demand for gifting and relationship building. For example, Emperor Watch & Jewellery has 15 stores in Beijing compared with five in Shanghai and five in Guangzhou.
Our CRR survey estimates that 16-17% of Chinese consumers bought luxury goods as gifts. Luxury handbags, clothing, watches and jewellery are the most popular gift items. Within the accessories segment, 37% of purchases was for gifting. However, we expect this percentage to come down as the personal-use segment grows.
Figure 3 Figure 4
Consumers said they shopped for . . . Store managers said their customers shopped for . . .
6
16
17
93
0 20 40 60 80 100
Investment/collection
Gifts for businesscontacts
Friends & family
Yourself
(% of consumers who bought luxury goods in the past 12 months)
9875
59
2437
21 51
0
20
40
60
80
100
Luxury car Luxury skincare &makeup
Luxury handbag,clothing, watch &
jewellery
Own-use by buyers Gifts Investment purpose
(Average composition %)
Source: China Reality Research
Luxury market in China is male-dominated
Living it up to show off and gain respect
Make Chinese consumers feel special
Section 1: The Red Eight and the Chinese customer Luxury goods
6 [email protected] 19 January 2011
5. Watches and jewellery top luxury wish list Chinese consumers love watches and jewellery for their intrinsic value and accessories are great vehicles to display wealth and success. Gold and jade are the most popular jewellery items. Brand-name watches are also a Chinese favourite for personal use, gifting and collection. Hong Kong is the largest Swiss watch export market in the world. China and Hong Kong together account for 26% for Swiss watch exports in January-November 2010, according to the Federation of the Swiss Watch Industry. There is a robust second-hand market for brand-name watches, especially Rolex, thus some aspirational shoppers also view watches as an inflation hedge/investment. With “girl power” also growing, luxury handbags are rapidly catching up. This is a big positive for top players including watch and jewellery retailers from Hong Kong as well as global brand names such as Hermes, Louis Vuitton, Prada and Gucci.
Figure 5
World distribution of Swiss watch exports (January-November 2010)
France 7%
Italy 6%
United Kingdom 4%
Germany 5%
Japan 5%
Singapore 6%
Hong Kong 19%
Others31% China
7%
USA 10%
Hong Kong/China togeter is 26%
Source: Federation of the Swiss Watch Industry (Nov 2010), CLSA Asia-Pacific Markets
6. Overseas purchases Shopping overseas can be cheaper because of the higher import duties and other taxes in China (see Section 2 for more). It also comes with the luxurious feeling of travelling to shop. It is well-appreciated and will strengthen relationships if you bring home luxury goods for your friends and professional contacts. There may be wider offerings in the country of origin and sometimes there may be limited editions overseas for special occasions. Hermes in China, for example, does not have a central buyer, so the product offering is different for each store. While for cosmetics, because of the time it takes to get import approvals, mainlanders can always buy the newer collections in Hong Kong.
Figure 6
Chinese luxury sales: Domestic versus overseas spend
Overseas56%
Domestic44%
Source: CLSA Asia-Pacific Markets
Watches and jewellery are great for displaying
wealth, gifting, and collection
Hong Kong is the world’s largest Swiss
watch market
Travel and shop
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 7
7. Willingness to pay a big premium Chinese consumers are willing to pay extra for luxury. As one businessman said, “A price tag of more than one million yuan a bottle - that does more than show off your wealth, it shows you have good taste.” Not everyone may agree with this. The businessman often pays more than Rmb30,000 for a bottle of wine to entertain guests. In October 2010, three bottles of Chateau Lafite’s 1869 vintage sold for a record US$230,000 each in Hong Kong, at 28x Sotheby’s top estimate. Fine wine prices increased 40% during 2010.
Figure 7
Liv-ex Fine Wine 100 Index
80
120
160
200
240
280
320
360
400
Dec 05 Oct 06 Aug 07 May 08 Mar 09 Jan 10 Nov 10
Note: the index is production and supply weighted. Based at 100 in January 2004. Source: Liv-ex.com
8. Local tastes Chinese affluent like famous brands. Expensive brand-name products are oftentimes perceived as of higher quality. Signature collections and large logos that can be easily recognised are also popular. Chinese consumers also love craftsmanship. This is a tradition that the Chinese highly value and at the same time it also says how unique you are. Leather goods, watches, jewellery, porcelain and glassware are a lot more popular and precious if they are hand-made and Chinese consumers are happy to pay a large premium.
There are some luxury products that Chinese customers are very interested in and that are not as popular among the rich in other countries. For example, a pack of premium puerh tea from the 1980s sold for Rmb13,440 in an 2009 auction, which is almost Rmb40 per gram. Another pack that was ultra premium and believed to be more than 80 years old sold for Rmb504,000, or Rmb1800 per gram. Antique furniture is also popular among the Chinese rich. Hainan rosewood, in particular, is very prestigious and a set of four chairs recently sold for Rmb17.7m and a six-column bed frame fetched a record Rmb43.1m.
Figure 8 Figure 9
A set of four Hainan rosewood chairs
Hainan rosewood bed frame
Source: China Guardian Auctions website
Money is not always a key factor
Bigger brands, large logos, hand-made products
Unique product categories like tea and furniture
Fine wine prices keep rising
Section 1: The Red Eight and the Chinese customer Luxury goods
8 [email protected] 19 January 2011
Luxury boom Growth rates within the consumer sector in mainland China vary across product categories. We expect luxury goods to lead with a 25% Cagr over 09-14CL, ahead of gaming at 20% followed by 17% for communications and 16% for education. Staple products, including alcohol, tobacco, food and beverages lag behind - although at 5-6% growth - this is significantly higher than rate in developed markets, which is in the very low single digits.
Figure 10
China consumer expenditure Cagr growth (2010-15CL)
0 5 10 15 20 25 30
Alcohol and tobaccoFood and beverages
Clothing and footwearHousehold care
Leisure and recreationTotal consumer expenditure
HousingHotels and catering
CosmeticsTransport
HealthcareEducation
CommunicationsGaming
Luxury goods
(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
Luxury goods in China: €9bn market The global luxury-goods market includes items such as apparel (about 25% of the total), prestige cosmetics (about 25%), “hard luxury” items which includes watches and jewellery (about 25%), with accessories, leather goods and others making up the remaining 25%. Consulting firm Bain estimates that China’s domestic luxury market in 2009 was at Rmb68bn, or €9.2bn, which is about 5% of the global market. However, if we add Hong Kong, Macau and Taiwan, the Greater China market is estimated to be about €18bn, which is about 10% of the total global market. Europe makes up 37% of the market, Americas 30%, Japan 11%, Asia Pacific ex-Japan and China 17% and Rest of the World at 5%. If we include travel, Greater Chinese customers should account for about 15% of the global market. Louis Vuitton’s biggest customers are already Chinese buyers.
Figure 11 Figure 12
Geographic breakdown
Category breakdown - global
Taiwan1.9%
Europe 37%Rest of Asia
6.6%
Rest of World5.0%
Rest of Americas
2.6%
Japan 11.0%
Mainland China5.5%
Macau0.4%
HK 2.6%
USA27.4%
Greater China10%
Hard luxury25%
Others25%
Prestige cosmetics
25%
Apparel25%
Source: CLSA Asia-Pacific Markets
Fastest growing segment in China
Gambling and shopping lead the way
Dissecting the market
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 9
Greater China represents 28% of sales for Swatch, 22% for Richemont, 18% for Gucci, 14% for Bulgari and 11% for Hermes.
Figure 13
Sales exposure to Greater China
0 5 10 15 20 25 30
Tod's
Hermes
Bulgari
Gucci brand
Richemont
Swatch Group
(%)
Source: Cheuvreux, CLSA Asia-Pacific Markets
The luxury-goods sector will focus on China. We estimate that the Chinese luxury market can continue to grow at about 25% per annum for the next five years, followed by about 22% thereafter. This implies a market size of €74bn by 2020, making China the largest domestic market in the world. Including travel spend, we expect Greater Chinese demand will account for 44% of the global luxury-goods market. Underpinning our forecasts for other markets, our economics team expects real GDP growth in the EU to largely stay flat in the next two years, while the USA and Japan should grow at 1.1-1.8% per year.
Figure 14
Luxury market size and growth – by domestic spend
0
50
100
150
200
250
300
350
400
450
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2010-20 Cagr
Rest of World 11%
Europe7%
Americas 5%
Japan 3%
China23%
(€bn)
Source: CLSA Asia-Pacific Markets
We believe the size of Greater Chinese luxury-goods demand in 2020 will be around the same size of the existing global luxury-goods market.
China to be world’s largest luxury goods
market by 20CL
Section 1: The Red Eight and the Chinese customer Luxury goods
10 [email protected] 19 January 2011
Figure 15
Figure 16
Luxury market comparison
Real GDP growth
050
100150200250300350400450
2010 2020
Others
Greater Chinese demand
(€bn)
0
2
4
6
8
10
12
US EU Japan China
(%) 10CL 11CL 12CL
Source: CLSA Asia-Pacific Markets, Bain
We believe that the domestic mainland China market is well on track to surpass Japan’s luxury market by 2014. Japan’s economy has been stagnant since the early 1990s with YoY GDP growth eventually turning negative in 1998. This contrasts with China’s hyper GDP per capita growth.
Figure 17
Figure 18
Japan’s stagnant economy
GDP per capita growth
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1980 1984 1988 1992 1996 2000 2004 2008
(¥bn)
(8)(6)(4)(2)024681012GDP
YoY growth (RHS)(%)
(20)
(10)
0
10
20
30
40
1990 1996 2002 2008
Japan China(%)
Source: CEIC, CLSA Asia-Pacific Markets
To confirm that the forecasts are reasonable, we also performed a luxury market/GDP comparison for the key countries and regions. Based on our forecast of €74bn in 2020, China’s luxury market should be about 0.6% the size of the country’s total GDP, roughly in line with Japan’s.
Figure 19
Sanity check
(€bn) GDP 2009 GDP 2020 Luxury market 2009
Luxury market 2020
Luxury/GDP 2009 (%)
Luxury/GDP 2020 (%)
China 3,533 12,340 9 74 0.26 0.60
Japan 3,649 4,529 18 26 0.51 0.58
Europe 14,002 23,425 62 121 0.44 0.52
Americas 14,110 28,123 50 82 0.36 0.29
Source: Euromonitor, CLSA Asia-Pacific Markets
We made forecasts for each domestic market based on growth for locals, mainland tourists, and others. We expect to see very strong demand from Greater Chinese in the next 10 years.
China leading the game
Japan falling behind
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 11
Figure 20
Luxury-goods market estimates
(€bn) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cagr10-20 (%)
China 9 12 14 18 22 28 34 41 50 61 74 23
% of total 5 6 7 9 10 12 13 14 16 18 19
Japan 18 19 20 20 21 22 22 23 24 25 26 3
% of total 11 11 10 10 9 9 8 8 8 7 7
Japanese 16 17 17 17 17 17 17 18 18 18 18 1
Mainland tourists 1 1 1 2 2 2 3 3 3 4 5 16
Others 1 1 1 2 2 2 2 2 3 3 3 12
Americas 50 53 55 57 60 63 66 70 73 78 82 5
% of total 30 29 28 28 27 26 25 24 23 22 21
Americans 44 45 47 48 50 51 53 54 56 58 59 3
Mainland tourists 1 2 2 3 4 5 6 7 8 10 12 25
Others 5 5 6 6 7 7 8 9 9 10 11 8
Europe 62 66 69 74 78 84 89 96 103 112 121 7
% of total 37 36 36 36 35 34 34 33 33 32 31
Europeans 47 48 50 51 53 54 56 57 59 61 63 3
Mainland tourists 6 7 8 10 12 15 18 21 26 31 37 21
Others 10 11 12 13 14 15 16 17 19 20 22 8
Hong Kong 4 5 6 7 8 10 12 14 16 19 23 18
% of total 3 3 3 3 4 4 4 5 5 6 6
HK locals 2 2 2 3 3 3 3 3 4 4 4 8
Mainland tourists 2 3 3 4 5 7 8 10 12 15 18 23
Others 0 0 0 0 0 0 0 0 0 0 0 7
Taiwan 3 3 4 4 4 4 5 5 5 5 6 6
% of total 2 2 2 2 2 2 2 2 2 2 2
Taiwan locals 3 3 3 3 4 4 4 4 4 4 5 5
Mainland tourists 0 0 0 0 1 1 1 1 1 1 1 13
Others - - - - - - - - - - - -
Macau 1 1 1 1 2 2 3 4 5 6 7 27
% of total 0 0 1 1 1 1 1 1 1 2 2
Macau locals 0 0 0 0 0 0 0 0 0 0 0 5
Mainland tourists 1 1 1 1 2 2 3 4 5 6 7 27
Others - - - - - - - - - - - -
South Korea 6 6 7 7 8 9 9 10 11 12 13 8
% of total 3 3 4 4 4 4 4 4 3 3 3
Korea locals 5 6 6 6 7 7 8 8 9 10 10 7
Mainland tourists 1 1 1 1 1 1 1 2 2 2 3 17
Others 0 0 0 0 0 0 0 0 0 0 0 10
Singapore 3 3 4 4 5 6 6 7 8 9 10 13
% of total 2 2 2 2 2 2 2 2 3 3 3
Singapore locals 3 3 3 4 4 4 5 6 6 7 8 12
Mainland tourists 0 0 0 1 1 1 1 1 2 2 2 22
Others 0 0 0 0 0 0 0 0 0 0 0 8
Thailand 1 1 1 1 1 2 2 2 2 2 3 11
% of total 1 1 1 1 1 1 1 1 1 1 1
Thailand locals 1 1 1 1 1 1 1 1 1 2 2 8
Mainland tourists 0 0 0 0 0 0 0 0 1 1 1 22
Others 0 0 0 0 0 0 0 0 0 0 0 10
India 1 1 1 1 1 2 2 2 2 3 3 15
% of total 0 1 1 1 1 1 1 1 1 1 1
India locals 1 1 1 1 1 2 2 2 2 3 3 15
Mainland tourists - - - - - - - - - - - -
Others - - - - - - - - - - - -
Others 10 10 11 11 12 13 13 14 15 15 16 5
% of total 6 6 6 6 5 5 5 5 5 4 4
Global luxury market 168 180 193 207 224 243 264 288 316 348 385 9
Source: CLSA Asia-Pacific Markets
Section 1: The Red Eight and the Chinese customer Luxury goods
12 [email protected] 19 January 2011
Figure 21
Greater Chinese demand (€bn) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cagr10-20
(%)Domestic market 9 12 14 18 22 28 34 41 50 61 74 23Mainland tourists 12 15 18 22 28 34 41 49 59 71 86 22Mainland Chinese demand 21 26 32 40 50 62 75 91 110 132 160 22% of global luxury market 13 15 17 19 22 26 28 31 35 38 42China 9 12 14 18 22 28 34 41 50 61 74 23Hong Kong 4 5 6 7 8 10 12 14 16 19 23 18Taiwan 3 3 4 4 4 4 5 5 5 5 6 6Macau 1 1 1 1 2 2 3 4 5 6 7 27Greater China domestic markets 18 21 25 30 37 45 53 64 76 92 110 20% of global luxury market 10 12 13 15 16 18 20 22 24 26 29Domestic market 9 12 14 18 22 28 34 41 50 61 74 23Mainland tourists 12 15 18 22 28 34 41 49 59 71 86 22HK locals 2 2 2 3 3 3 3 3 4 4 4 8Taiwan locals 3 3 3 3 4 4 4 4 4 4 5 5Macau locals 0 0 0 0 0 0 0 0 0 0 0 5Greater Chinese demand 26 31 38 46 56 69 82 98 118 141 169 21% of global luxury market 15 17 20 22 25 28 31 34 37 41 44
Source: CLSA Asia-Pacific Markets
China is the world’s growth driver We estimate that mainland Chinese will represent half of the growth in the global luxury-goods market over the next 10 years. The mainland China market is only about 5% of the total and we expect that to increase to 19%. As the mainland market expands, its superior growth has an increasing impact on total growth of the luxury-goods sector.
The drivers We discuss the drivers in three segments: a) economic, b) social, and c). supply factors.
a) Economic drivers Mainland China has seen a booming population of high net worth individuals. The Hurun Research Institute estimates that the number of individuals with personal wealth of more than Rmb10m in China has increased 6.1% YoY in 2010 to 875,000 and the “super-rich” group with more than Rmb100m was up 7.8% to 55,000 individuals. Average wealth of the top 1,000 rich individuals in China grew 64% over the past two years and 26% in the past year.
Figure 22 Figure 23
China’s pyramid of wealth (2010)
Much wealth is “hidden” in China
875,000 with Rmb10m
55,000 with Rmb100m
4,000 with Rmb1,000m
700 with Rmb5,000m
200 with Rmb10,000m
875,000 with Rmb10m
55,000 with Rmb100m
4,000 with Rmb1,000m
700 with Rmb5,000m
200 with Rmb10,000m
2,600 with Rmb1,000mn
1,363 with Rmb1,000mn
"Known" wealth 281 with Rmb5,000m
97 with Rmb10,000m
420 with Rmb5,000m
100 with Rmb10,000m
“Hidden" wealth
2,600 with Rmb1,000mn
1,363 with Rmb1,000mn
"Known" wealth 281 with Rmb5,000m
97 with Rmb10,000m
420 with Rmb5,000m
100 with Rmb10,000m
“Hidden" wealth
Source: Hurun Research Institute
The rich are getting richer
Growing from 5% to 19% of the global market
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 13
In the past 10 years, the population of ultra affluent individuals with more than Rmb1,000m of wealth in mainland China has skyrocketed, at an annual rate of 50-58%, and so has their wealth. The 50th richest person in China in 1999 had wealth of Rmb50m while the 50th richest in 2010 has Rmb15,500m.
Figure 24 Figure 25
Individuals with Rmb1,000m
Individuals with Rmb10,000m
24
1,363
0
200
400
600
800
1,000
1,200
1,400
1,600
2000 2010
50% Cagr
1
97
0
20
40
60
80
100
120
2000 2010
58% Cagr
Source: Hurun Research Institute
Meanwhile, the middle class in China is enjoying increasing salaries and a higher standard of living, especially in the coastal cities. Average remuneration has been growing at 12-19% YoY each quarter for the past 10 years.
Figure 26
Strong GDP and income growth
0
5
10
15
20
25
30
Mar 01 Oct 02 Apr 04 Nov 05 May 07 Dec 08 Jun 10
GDP YoY Avg remuneration YoY(%)
Source: CEIC, CLSA Asia-Pacific Markets
The future remains rosy Mainland China’s per-capita disposable income will grow 11% annually in the next five years, according to Euromonitor estimates. This compares to the world average of 5% and Asia Pacific average of 7%.
The average Mr Chan is also going well
Income growth of 11% in China
Very significant growth in past ten years
Section 1: The Red Eight and the Chinese customer Luxury goods
14 [email protected] 19 January 2011
Figure 27
Per capita disposable income growth 09-14CL
1
3
3
3
4
5
6
6
6
6
7
7
7
11
11
14
0 2 4 6 8 10 12 14 16
Japan
Germany
France
United Kingdom
USA
World
Singapore
Hong Kong
Thailand
Malaysia
Taiwan
South Korea
Asia Pacific
Indonesia
China
India
(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
The percentage of households with income of more than US$10,000 has increased from 3.1% in 2000 to 17.2% in 2009, or a 21% Cagr, which is much faster than the lower-income categories. We expect the wealthy group with household income of more than US$10,000 to continue to grow at double-digits in the next eight years, representing 51% of the total in 2020.
Figure 28
Mainland China income distribution
0102030405060708090
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
10CL
11CL
12CL
13CL
14Cl
15CL
16CL
17CL
18CL
19CL
20CL
> US$10,000 US$7,500-10,000 US$5,000-7,500US$2,500-5,000 US$500-2,500 < US$500(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
The rapid urbanisation in China also gives another boost to the luxury-goods market. A larger workforce with growing income will benefit the many high-end brands that are expanding their presence in first and second-tier cities.
Fourfold jump in households earning over
US$10,000 per annum
Chinese people getting wealthier
Outperforming the crowd
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 15
Figure 29 Figure 30
Urbanisation in China
Average household income growth (2000-09)
0
20
40
60
80
100
1990 1995 2000 2005 2010 2015 2020
Urban Population Rural Population(%)
0
2
4
6
8
10
12
14
Urban Rural
(%)
Source: CEIC, CLSA Asia-Pacific Markets
We also conducted a detailed proprietary luxury study in the mainland, surveying more than 340 consumers in 65 Tier 1-3 cities and 31 luxury store managers. We found that 53% of consumers surveyed in Tier 1-2 cities spent Rmb10,000 or more on luxury goods in the past 12 months, compared with 39% in Tier-3 cities. On average, among all the consumers we surveyed who have made luxury purchases in the past 12 months, each spent Rmb16,674. On average, they spent an average of 10-12% of their total household income on these items. This underlines the high propensity to spend on luxury goods in China.
While the shoppers in Tier 1-2 cities tame their budgets on luxury purchases, Tier-3 city consumers plan to keep their luxury spending budget at about the same level. We are not concerned about respondents’ desire to spend less on luxury goods next year as we believe that most respondents would typically end up spending more on luxury goods than is planned each year, given the somewhat impulsive nature of this type of purchases.
Figure 31 Figure 32
To those who made luxury purchases: How much did you spend on luxury goods (excluding autos)?
How much do you plan to spend on luxury goods in the next 12 months? (excluding autos)
3
1922
28
36
5339
010
203040
50607080
90100
Tier 1-2 cities Tier-3 cities
Below Rmb1,000 Rmb1,000-4,999
Rmb5,000-10,000 Above Rmb10,000(% of consumers)
16,674
18,543
15,78815,975
16,19615,879
14,000
15,000
16,000
17,000
18,000
19,000
20,000
Overall Tier 1-2 cities Tier-3 cities
Spending in the past 12 months
Budget for the next 12 months
(Rmb/per person)
Source: China Reality Research
CLSA proprietary survey
Section 1: The Red Eight and the Chinese customer Luxury goods
16 [email protected] 19 January 2011
The 31 store managers that we surveyed remain very upbeat and expect overall sales to enjoy a 20% Cagr in the next three years. Luxury auto managers see growth in 2010 as extraordinary and expect a more normalised, yet still very high growth rate of 26%.
Figure 33
Estimated sales growth at luxury stores surveyed
33
48
14
2020
26
1214
0
5
10
15
20
25
30
35
40
45
50
Overall Luxury car Luxury handbag,clothing, watch &
jewellery
Luxury skincare &makeup
YoY growth in 2010
Annual average in the next three years
(%)
Source: China Reality Research
Falling savings rate In 2009, mainland Chinese people saved 37% of their disposable income, almost doubled the Asia Pacific average of 20% and more than tripled the world average of 9.8%, according to Euromonitor. Although savings rates remained high in the past five years, we believe that it may have already peaked. Government policies in China actively encourage household consumption to create sustainable growth in the country.
Figure 34 Figure 35
Savings as % of disposable income
China’s savings ratio
(20) (10) 0 10 20 30 40
TaiwanUK
USAIndonesia
JapanWorld
GermanyMalaysia
FranceThailand
South KoreaAsia Pacific
IndiaHong KongSingapore
China
(%)
0
5
10
15
20
25
30
35
40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
Consumer confidence has made a solid comeback after the financial crisis. Retail sales growth has picked up, particularly robust at 32% in February 2010 and stabilised at 22-24% in March-November 2010.
Government encouraging spending
Store managers are bullish
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 17
Figure 36
China consumer confidence and retail sales growth
95
100
105
110
115
120
125
Jan 00 Oct 01 Aug 03 May 05 Mar 07 Jan 09 Oct 10
0
5
10
15
20
25
30
35Consumer Confidence Index Retail sales YoY (RHS) (%)
Source: CEIC, CLSA Asia-Pacific Markets
More consumer credit Another driving force in consumer expenditure is the growing credit in the market. Penetration of credit cards in the cities has increased fourfold since 2005 to 5.4% in 2009, with the number of credit cards in circulation in China skyrocketing to 221 million as of September 2010. MasterCard estimates that there may be about 800-900 million credit cards in circulation in 2020, surpassing the United States, which currently has 700 million. Compared with other Asian countries, China still has a relatively low consumer credit/GDP ratio. We expect further easing of consumer credit as the recovery grows more robust and as more Chinese consumers adopt credit cards.
Figure 37 Figure 38
Number of credit cards issued
Credit card/urban population
0
50
100
150
200
250
2005 2006 2007 2008 2009 Mar10 Jun10 Sep10
(m)
1.31.5
2.7
4.2
5.4
0
1
2
3
4
5
6
2005 2006 2007 2008 2009
(%)
Figure 39
Consumer credit/GDP
0 10 20 30 40 50 60 70 80 90
PhilippinesIndonesia
IndiaChina
ThailandJapanKorea
SingaporeTaiwan
Hong KongMalaysiaAustralia
(%)
Source: CEIC, CLSA Asia-Pacific Markets
Credit cards stimulate luxury sales
A long way to catch up
Chinese out shopping
Section 1: The Red Eight and the Chinese customer Luxury goods
18 [email protected] 19 January 2011
More aspirational shoppers Growing consumer credit also encourages the middle-income class to make luxury purchases more often than they can afford. Banks in China have been raising credit limits, but payable credit in the country grew even faster. Part of the reason could be consumers getting more comfortable carrying a larger balance on their cards. However, credit card balance outstanding for over six months almost quadrupled since March 2008 to Rmb7.9bn in September 2010, which translates into an average of Rmb36,000 for each issued card. We believe that some Chinese aspirational shoppers are trying hard to match the lifestyles of the newly rich.
Figure 40 Figure 41
Average credit limit per card
Credit limit and payable credit YoY gwth
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10
(Rmb)
0
20
40
60
80
100
120
Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10
Credit limit Payable credit(%)
Source: CEIC, CLSA Asia-Pacific Markets
Figure 42
Average balance outstanding for six months and over
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10
(Rmb)
Source: CEIC, Wind, CLSA Asia-Pacific Markets
b) Social drivers Love for luxury With growing disposable income, Chinese consumers have developed a growing appetite for brands. Some 75% of Chinese consumers we surveyed are interested in luxury goods. Although 22% are not able to afford them yet, rising income in China should continue to move consumers into the luxury shopper category. As a proxy to get a sense of how much Chinese love luxury goods, we asked how much they would be willing to spend on a luxury watch. Of our respondents, 12% said they are willing to pay Rmb50,000 and 12%
Growing more comfortable with debt
Some 75% are interested in luxury goods . . .
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 19
said Rmb100,000 and above, ie 24% of the people surveyed earning an average of RMB41,976 per year said they would spend more than Rmb50,000 on a watch.
Figure 43 Figure 44
Which category do you fall into?
What's the most you will pay for a watch?
% of CRR Consumer Panel
I have bought/plan to buy
luxury goods53%
I want to buy luxury goods
but can'tafford them
22%
I don't want to buy luxury goods
25%
% of CRR Consumer Panel
Rmb1K39%
Rmb50K12%
Rmb100K4%
No upper limit6%
Zero7%
Rmb200K1%
More than Rmb200K
1%
Rmb10K30%
Source: China Reality Research
About 77% of Chinese luxury shoppers believe that high-end goods are of superior quality. Luxury goods are a symbol of success and status. Some 64% of consumers see these purchases as a way to reward themselves, while only 48% confess that they take this as a way to show off to friends and family.
Figure 45
To those that have bought/plan to buy luxury goods: Do you agree with the following?
48
49
58
60
64
64
77
52
51
42
40
36
36
23
0 20 40 60 80 100
I buy luxury goods to give as gifts
I buy luxury goods because people in my social and work circle own them
I buy luxury goods because they are fashionable
I buy luxury goods because they are superior in design
I buy luxury goods to reward myself
Owning luxury goods is a symbol of success and status
I buy luxury brands because they are superior in quality
(% of consumers who have bought or plan to buy luxury goods)
Yes No
Source: China Reality Research
Whether it is just to reward themselves or dressing up for friends, luxury store managers confirm that their customers highly value their brands and enjoy the social status their goods convey.
Reasons why Chinese buy luxury goods
Chinese love brands
. . . and willing to spend
Section 1: The Red Eight and the Chinese customer Luxury goods
20 [email protected] 19 January 2011
Figure 46
To store managers: What are the reasons why consumers buy your brand?
0
0
11
0
0
22
25
21
22
0
7
22
13
57
33
25
7
33
88
93
33
88
86
100
0 20 40 60 80 100
Luxury car
Luxury handbag,clothing, watch &
jewellery
Luxury skincare & makeup
(% of stores)
High acceptence among customers High price
Best design Best quality
Fashion Shop environment & service
Social status & high profile High brand name
Source: China Reality Research
For those who can afford but decide that luxury goods are not for them, a whopping 97% say they are just being practical. We wonder if these are the same people that spend all their money at Macau’s gaming tables.
Figure 47
To consumers that do not buy luxury goods: Do you agree with the following?
97
52
34
3
48
66
0 20 40 60 80 100
I'm practical and don't want to pay the highprice for luxury goods
Luxury goods are superficial, so I don't wantto buy them
I don't buy luxury goods because there aretoo many fakes for luxury brands in the
Chinese market
(% of consumers who will not buy luxury goods)
Yes No
Source: China Reality Research
Some people are practical
Brands drive purchases
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 21
Wealth and status are highly valued in Asian culture. Success is often times measured by net worth and social status, and therefore it is important to polish your image - dress well for your social status and better yet dress up to the next level.
Girl power The role of women in China is an increasingly important driver to the luxury-goods market. According to a 2010 MasterCard report, 75% of Chinese women say that they are the ones who control the family purse strings, compared with the Asia-Pacific average of 65%. Meanwhile, women’s labour force participation rate is at 67% in 2010, compared to the Asia-Pacific average of 51%, and 32% of these Chinese working women plan to spend more in the next six months.
Clothing and cosmetics are likely to be the major growth areas. The Women of China magazine’s 2009-10 survey reveals that the top three categories where urban women plan to spend in 2010 are:
Clothing and accessories (62.7%)
Cosmetics (40.7%)
Cell phone (22.0%)
Our survey found that 50% of store managers in the luxury handbag, clothing, watches and jewellery segment said their customers are female and 43% said it was an even mix. Meanwhile, luxury cars are still male-dominated.
Figure 48
Luxury customers by gender
7
88
100
50 43
13
0 20 40 60 80 100
Luxury skincare &makeup
Luxury handbag,clothing, watch &
jewellery
Luxury car
(% of stores)
Male Female 50-50
Source: China Reality Research
c) Supply We argue that store expansion by luxury-goods companies will also drive demand. As one top executive of a Hong Kong-based luxury retailer said, demand from mainland consumers is only capped by supply. As of now, most luxury stores are still concentrated in Tier-1 and Tier-2 cities in China, based on our review of 24 luxury brands network. We expect the market to continue expanding, not only due to the demand drivers we discussed above, but also from further penetration of luxury brands into Tier-3 cities in China. As mentioned above, we expect mainland Chinese to represent half of global luxury-goods growth over the next 10 years.
Dressed for success
About 75% of Chinese women take care of
household finance
Shopping for nice clothes and cosmetics
Women dominate accessories and
cosmetics segments
Section 1: The Red Eight and the Chinese customer Luxury goods
22 [email protected] 19 January 2011
As shown in Figure 49, there are still some cities with disposable income per capita above Rmb20,000, but only a handful of luxury brand stores, presenting huge potential for penetration. We expect the data set to move towards the upper right as consumers get richer and luxury brands open more outlets.
Figure 49 Figure 50
Luxury store locations
Store counts vs disposable income (ex Beijing, Shanghai)
17171718192021212223232526283032
39394141
125131
0 20 40 60 80 100 120 140
ChongqingNingbo
ZhengzhouWenzhou
WuxiWuhan
ChangshaXian
NanjingKunming
SuzhouHarbinTianjin
QingdaoDalian
GuangzhouHangzhouShenyangChengdu
ShenzhenShanghai
Beijing
0
5
10
15
20
25
30
35
40
45
0 10,000 20,000 30,000 40,000
(Store count)
Disposable incomeper capita (Rmb)
Source: Company websites, CLSA Asia-Pacific Markets. Brands include Cartier, Alfred Dunhill, Hugo Boss, Cerruti, Ermenegildo Zegna, Salvatore Ferragamo, Canali, Giorgio Armani, Burberry, Coach, Louis Vuitton, Escada, Gucci, Tod’s, Hermes, Bulgari, Versace, Givenchy, Celine, Fendi, Prada, Tiffany, Chanel, and Lanvin.
Unlike most other markets, luxury stores in China are primarily located in department stores, since it is still the preferred method of shopping in the country. For example, we estimate that only about 20% of Ports Design’s more than 300 stores are standalone stores. As such, investors can also get exposure to the luxury-goods sector via mainland department stores such as PCD Stores (331 HK - HK$2.44 - U-PF) and Golden Eagle Retail (3308 HK - HK$21.75 - O-PF) as well as commercial landlords such as Hang Lung Prop (101 HK - HK$36.00 - U-PF) and Kerry Properties (683 HK - HK$43.25 - O-PF).
Domestic versus total demand Luxury goods feature high on the shopping list for Chinese travellers. and total demand is highly geared to tourism. The World Travel & Tourism Council estimates that mainland China’s travel demand in 2010 is the second largest in the world at US$587bn. The council expects demand to increase rapidly at a 9% Cagr in the next 10 years to US$2,304bn in 2020, catching up with the US.
Figure 51 Figure 52
Total travel and tourism demand 2010
Total travel and tourism demand 2020
0 500 1,000 1,500 2,000
AustraliaCanada
SpainItaly
United KingdomFrance
GermanyJapanChina
United States
(US$bn)
0 1,000 2,000 3,000 4,000
Russian FederationItalyIndiaSpain
FranceUnited Kingdom
GermanyJapanChina
United States
(US$bn)
Source: World Travel & Tourism Council, CLSA Asia-Pacific Markets
Further penetration
Department stores dominate in China
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 23
Total departures from the mainland for private purpose have been enjoying a Cagr 25% since 2000. We expect outbound travel growth to remain very robust over the coming decade. The government expects that 100 million people will travel abroad by 2015, up from 47 million in 2009.
Figure 53
Chinese outbound travel
0
10
20
30
40
50
60
1994 1996 1998 2000 2002 2004 2006 2008
Departure for private purpose Total departures
Private trips at a 25% Cagr
(m person-time m)
Source: CEIC, CLSA Asia-Pacific Markets
The huge travel demand led Airbus to raise its forecast for aircraft sales over the next 20 years. The jet maker’s COO John Leahy said that demand for travel is doubling every 15 years, but in places like India and China, they expect to double in the next six years.
Shorter term, we see growing travelling appetite as 24% of our CRR consumer panel is planning to take a trip in the next 12 months, up from the 16% who travelled in the past year.
Figure 54
Overseas travel aspirations
1624
48
8374
50
1 11
0
10
20
30
40
50
60
70
80
90
100
Past 12 months Plan to in next 12 months Plan to in next three years
Yes No No reply
+52%
+96%
(% of CRR Consumer Panel)
Source: China Reality Research
More planning to travel
Mainlanders on vacations
Let’s go abroad
Section 1: The Red Eight and the Chinese customer Luxury goods
24 [email protected] 19 January 2011
The 31 store managers we surveyed also named overseas demand as the top competitive force in luxury skincare and accessories. The strong demand intensifies competition in the luxury space more than domestic expansion of competitive brands.
Figure 55
Score the following competition your store faces: 0 = not at all, 5 = highly competitive
0.5
2.1
2.2
0.6
1.4
0.8
2.0
3.7
3.6
3.1
2.6
3.2
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Luxury car
Luxury handbag,clothing, watch &
jewellery
Luxury skincare &makeup
(Average score)
Consumers shopping online Counterfeits
Consumers shopping abroad Store opening of other luxury brands
Source: China Reality Research
Some 65% of the Chinese customers surveyed bought luxury goods during their last trips abroad. On average, these consumers spent Rmb8,338 during their last trip. This is 50% of the total Rmb16,674 that those who shopped for luxury goods have spent in the past 12 months.
Figure 56
Overseas luxury spending during last trip abroad
(% of consumers who travelled abroad)
0 2 4 6 8 10 12 14
Less than Rmb5,000
Rmb5,000-9,999
Rmb10,000-19,999
Rmb20,000 and more
Source: China Reality Research
Overseas luxury-goods market size Mainland Chinese demand for luxury goods overseas is nowhere close to peak. China travel is still very low compared with neighbouring North Asian countries. While the Chinese government puts greater emphasis on developing tourism and relaxing travel policies, foreign countries are also giving warm welcomes to these affluent Chinese travellers. The level of Chinese departures as a percentage of the population is the same as Japan and Taiwan in 1984 and Korea in 1991.
Travel is key threat for retailers
On the cusp of a sustained Chinese
travel boom
Big spenders when travelling
Competing against shops overseas
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 25
Figure 57
Departures as a percentage of total population
0
5
10
15
20
25
30
35
40
45
1964 1972 1979 1987 1995 2002 2010
Japan Taiwan Korea China(%)
Source: CEIC, CLSA Asia-Pacific Markets
China’s GDP per capita is comparable to Japan’s in the 1960s and one could argue that the potential of Chinese consumer’s spending power and their tourism demand can be huge.
Figure 58
Comparison of GDP per capita of Japan 1964-2000 and China 2000-2009
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1964 1969 1975 1981 1987 1993 1999
(US$) Japan (1964-2000) China (2000-2009)
China in 2009
Source: CEIC, CLSA Asia-Pacific Markets. Assume 1971 JPY:USD exchange rate of 315:1 for 1964-1970.
Bain estimates the Chinese overseas luxury market at Rmb87bn, which is 27% larger than the Rmb68bn spend domestically. Many large department stores in Japan, Europe and the US have hired Mandarin speakers to ride on this trend. Estee Lauder said airport-related sales rose about 24% in the first nine months of 2010. While Salvatore Ferragamo saw sales doubling forecasts at its new store at Beijing airport.
Hong Kong and Europe are the core luxury overseas market for mainland Chinese.
China’s GDP per capita in 2009 is comparable to
Japan’s in 1973
Ready to boom
Mandarin speakers in demand
Section 1: The Red Eight and the Chinese customer Luxury goods
26 [email protected] 19 January 2011
Figure 59
Total Chinese luxury demand breakdown by purchase location
Japan5%
US6%
Europe26%
Macau3% HK
10%
Domestic45%
Taiwan1%
Others4%
Source: CLSA Asia-Pacific Markets
Reasons for luxury shopping overseas We believe the core reason that drives mainland tourists to purchase luxury goods while travelling is taxes. Import duties are relatively high in China and the government also imposes a consumption tax and the typical VAT.
Figure 60
Taxes on imported luxury goods
Customs duty (Most favoured nation rate) (%)
Perfume and cosmetics 10-18
Jewellery 20-35
Handbags, briefcases, purses, wallets 10-20
Watches 11-23
Whiskey, tequila, vodka, liqueur, rum 10
Consumption tax
Cigars 25-45
Alcohol 5-20
Cosmetics 30
Valuable jewellery and ornaments 5-10
Golf and golfing equipment 10
Yachts 10
High-end watches 20
Standard VAT 17
Source: CMS Legal Services (October 2009)
We have reviewed 10 luxury watches and found the price difference between Hong Kong and mainland China ranges from 12-33%.
High taxes/duties in China
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 27
Figure 61
Price comparison between Hong Kong and China
HK$ RMB % difference in HKPatek Philippe Nautilus Stainless Steel Watch model#: 5712/1A 233,000 280,700 (29)
Panerai Men's Radiomir Black Seal Ceramic 45mm Watch model#: PAM 292
58,400 57,200 (12)
Audemars Piguet Men's Royal Oak Offshore Chronograph Steel Watch model#: 26020ST.OO.D001IN.01.A
163,000 171,000 (18)
Lange & Söhne Men's Zerwierk White Gold Watch model#: 140.029 415,400 475,000 (25)
Patek Philippe Men's Calatrava World Timer White Gold Watch model#: 5130G
294,000 354,800 (29)
Patek Philippe Gondolo Serata White Gold Watch model#: 4972G 243,500 293,700 (29)
Cartier Tank Francaise Stainless Steel Watch model#: W51008Q3 28,000 29,800 (19)
Audemars Piguet Women's Dream Watch model#: 67496BC.ZZ.A066SU.01
309,000 323,000 (18)
Rolex Datejust 36mm Diamonds & White Gold Watch model#: 116244-63600
87,000 112,200 (33)
Cartier Ballon Bleu Medium Rose Gold Watch model#: WE9005Z3 285,000 305,000 (20)
Source: Companies, Emperor Watch & Jewellery, CLSA Asia-Pacific Markets
Section 1: The Red Eight and the Chinese customer Luxury goods
28 [email protected] 19 January 2011
According to LVMH, prices in Shanghai are 35% higher than in Paris.
Figure 62
Price index for Louis Vuitton
0
20
40
60
80
100
120
140
160
Paris NYC Hong Kong Shanghai Tokyo
(Price Index)
Source: LVMH
The secondary effect of this is the re-sale market and gifting culture. Some mainland tourists would shop for luxury items overseas and resell when they return to China at a slight mark-up to subsidise their trips. Getting small gifts for family and friends from foreign countries has also become part of the Asian culture. Accessories like handbags, briefcases and watches and cosmetics are popular items on “friend’s shopping list”. They are easily identifiable by model numbers and colour codes and hence it is also common to ask friends who are going to travel to shop for you. Lastly, consumers just generally have higher propensity to spend while travelling on vacation and during holiday seasons.
Shopping destinations Our proprietary survey found that Hong Kong, Macau, and Taiwan dominate the overseas luxury-goods market.
Figure 63
For those who shopped overseas: where did you make the luxury purchases?
1
8
11
12
67
0 10 20 30 40 50 60 70 80
U.S./Canada
Elsewhere in Asia
Japan/Korea
Europe
HK/Macau/Taiwan
(% of consumers who bought luxury goods overseas in the past 12 months)
Source: China Reality Research
Re-sale market and gifting culture
Hong Kong, Macau and Taiwan are the popular
destinations
Substantial price difference
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 29
Hong Kong Hong Kong and Macau are the top destinations for Chinese tourists. In 2009, 39% of all departures went to Hong Kong while 32% went to Macau, according to tourism statistics.
Figure 64
Mainland Chinese travelling destinations (2009)
Others14%
Taiwan2%
Macau32%
Thailand1%
Malaysia1%
Russia1%
USA2%
Singapore1%
Korea3%
Hong Kong39%
Japan3%
Source: CEIC, CLSA Asia-Pacific Markets
While Macau continues to be mainlanders’ most favourite destination for gaming, its luxury market is growing rapidly from a small base. As Jimmy Mak, vice-president of Omega for Hong Kong, Macau, and Taiwan pointed out, incremental sales growth is greater in Macau despite Hong Kong being the leading Swiss watch exports market. At about HK1.9bn’s worth in 3Q10, or 25% of total retail sales, watches and jewellery now dominate the retail market in Macau, even greater than clothing (8%), supermarket goods (8%), and motor vehicles (8%) combined. Rolex (Hong Kong) is the second-largest supplier to high-end casino operator Wynn Macau, only after its construction contractor.
However, according to Bain estimates, Hong Kong’s luxury market size is still more than 6x that of Macau. Although the proportion of mainland tourists should be lower in Hong Kong, we estimate that mainlanders still spend 4-5x more in Hong Kong than Macau.
Luxury shopping heavenChinese consumers prefer European brands when it comes to luxury goods. Given the close proximity and its fame as a shopping heaven, Hong Kong still attracts many luxury shoppers. Hong Kong tops the
lists for purchases of luxury cosmetics, jewellery and watches and fashion and accessories, with Japan and Europe as the much weaker competitors on these fronts.
Where to buy luxury cosmetics . . . . . . jewellery and watches . . . . . . fashion and accessories
0 10 20 30 40 50 60
MacauGuangzhouSingaporeT-2 cities
BeijingShanghai
USAS. Korea
EuropeJapan
Hong Kong
(%)
0 10 20 30 40 50 60
South KoreaTier-2 cities
SingaporeGuangzhou
MacauUSA
JapanShanghai
BeijingEurope
Hong Kong
(%)
0 10 20 30 40 50 60
MacauSingapore
South KoreaTier-2 citiesGuangzhou
USAJapan
BeijingEurope
ShanghaiHong Kong
(%)
Source: Albatross/Ruder Finn Asia
Macau is growing fast, but Hong Kong is still the
top overseas luxury market for Chinese
Some 71% of tourists went to Hong Kong
and Macau
Section 1: The Red Eight and the Chinese customer Luxury goods
30 [email protected] 19 January 2011
Oriental Watch, a large dealer of Rolex and Tudor in Hong Kong, believes that Chinese customers accounted for about 50% of its FY10 HK$3bn group turnover. At Emperor Watch & Jewellery’ flagship store in Tsim Sha Tsui, more than 85% of customers are from mainland China and even in the Central business district, the company estimates 70% of customers are mainlanders. Luk Fook believes 50-60% of its business in Hong Kong comes from Chinese tourists and the jeweller plans to open new shops in Hong Kong in early 2011.
Trinity, which operates luxury menswear brands including Cerruti 1881 and Gieves & Hawkes, also finds 60% of its customers in Hong Kong coming from China.
Figure 65
Revenue contribution by mainlanders for Hong Kong stores
0 10 20 30 40 50 60 70 80 90
Oriental Watch group
Luk Fook (Hong Kong)
Trinity (Hong Kong)
Emperor W&J Central
Emperor W&J TST
(%)
Source: Company estimates, CLSA Asia-Pacific Markets
In 2009, overnight mainland visitors spent HK$2,417 on shopping per capita in Macau, compared with HK$5,051 in Hong Kong. In Hong Kong, mainland tourists spend 76% of their total spending for the trip on shopping, up from 60% in 2002. They spend HK$6,620 per capita in total during their visit, or 15% above average of HK$5,770 and a 66% more than Japanese.
Figure 66 Figure 67
Chinese overnight visitor spending in Hong Kong
Total spend per overnight visitor in Hong Kong
6068 68 65 68
73 7176
14
12 11 1112
11 12914
12 12 13 1210 10 8
127 9 10 9 7 7 7
0
10
20
30
40
50
60
70
80
90
100
2002 2003 2004 2005 2006 2007 2008 2009
Shopping Hotel bills Meals outside hotel Others(%)
3,069
3,733
3,923
3,976
4,040
4,211
4,350
4,592
4,620
4,872
4,875
4,902
5,090
5,117
5,533
5,770
6,620
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
MacauSouth Korea
IndiaJapan
MalaysiaPhilippinesIndonesiaGermany
FranceUSA
ThailandUnited Kingdom
SingaporeTaiwan
AustraliaAverage
Mainland China
(HK$)
Source: CEIC, CLSA Asia-Pacific Markets
Mainlanders account for 50-85% of revenue at Hong Kong watch and
jewellery shops
Significant contribution from mainlanders at
stores in tourist areas
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 31
Mainland tourists allocate a large portion of their spending on shopping, much higher than other tourists in Hong Kong. Interestingly, they only allocate 9% of their spending on hotels, compared to an average of 17% in Hong Kong.
Figure 68
Spending allocation patterns
0% 20% 40% 60% 80% 100%
United KingdomUSA
FranceGermany
IndiaJapan
AustraliaSingapore
South KoreaMalaysia
PhilippinesMacau
IndonesiaThailand
TaiwanAverage
Mainland ChinaShopping Hotel bills Meals outside hotels Others
(%)
0 20 40 60 80 100
Source: CEIC, CLSA Asia-Pacific Markets
An average mainland tourist spends HK$5,051 on shopping, 73% more than the average Taiwan visitor, in second place.
Figure 69
Average spend on shopping by country
903
1,121
1,240
1,254
1,296
1,529
1,569
1,634
1,856
1,968
2,149
2,161
2,232
2,758
2,923
3,6675,051
0 1,000 2,000 3,000 4,000 5,000 6,000
United KingdomUSA
FranceGermany
IndiaJapanMacau
South KoreaMalaysia
PhilippinesAustralia
SingaporeIndonesiaThailand
TaiwanAverage
Mainland China
(HK$)
Source: CEIC, CLSA Asia-Pacific Markets
Japan Some 1.4 million mainland tourists visited Japan in November YTD 2010, accounting for 17% of total tourist arrivals, after South Korea’s 28%. The Japanese government relaxed tourist visa rules for Chinese nationals in July 2010, lowering the income requirement from Rmb250,000 per year to Rmb60,000 per year, in an effort to attract tourists who would prefer not to join a tourist group.
Japan welcomes Chinese tourists
Chinese tourists like shopping in Hong Kong much more than other
tourists
Mainlanders don’t spend much on hotels
Section 1: The Red Eight and the Chinese customer Luxury goods
32 [email protected] 19 January 2011
Figure 70
Breakdown of tourist arrivals in Japan 2009
Hong Kong7%
Thailand3%
Rest of Asia6%
Singapore2%
South Korea23%North America
13%
Oceania & others4%
China15%
Taiwan15%
Europe12%
Source: CEIC, CLSA Asia-Pacific Markets
Japan Tourism Agency (JTA) expects 1.5 million mainland tourists for this year and aims to more than triple the number of Chinese tourists to 3.9 million by 2013 from 1.01 million in 2009, overtaking South Koreans as the top nationality of tourists to Japan.
Figure 71
Mainland tourist flows to Japan
1.0
1.5
3.9
15.014.8
26.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2009 2010F 2013F
(m)
0
5
10
15
20
25
30Number of mainland Chinese touristsMainland tourists as % of total (RHS)
(%)
Source: JTA, CLSA Asia-Pacific Markets
According to JTA, 93% of mainland Chinese tourists shopped in Japan in April-June 2010. About 70% of them purchased cosmetics, medicine and toiletries, spending an average of ¥37,995 per capita (HK$3,591). And 33% of them bought Western clothing, bags and shoes, spending an average of ¥46,978 per capita (HK$4,440). Japan National Tourism Organization found in 2008 that 50.9% of Chinese tourists went to Japan with shopping in mind.
Union Pay, a Chinese debt care payment service, has seen transactions in Japan rise by nearly 90% YoY to ¥20bn in 2009. According to electronic retailer Bic Camera, the average spending of Chinese tourists is ¥50,000, five times larger than Japanese customers. The overall average spending per tourist at
Chinese tourists spent 5x more than locals
at Bic Camera
South Korea was the largest tourist source . . .
. . . but that may change soon
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 33
department stores is nearly ¥60,000 and Chinese tourists top the ranking. The department store association reported that women’s accessories/apparel, luxury brands, and cosmetics top the ranking of popular items.
Figure 72
Popular items among tourists at department stores
Popular categories Items
1 Women’s accessories Handkerchief, accessories, Agnes b, Burberry Blue Label, boots
2 Luxury brands Bulgari, Armani, Prada, Gucci, Louis Vuitton, Hermes
3 Women’s apparel Burberry Blue Label, dress, jacket, sleepwear
4 Cosmetics Shiseido, SK-II, Albion, Fancl
5 Fine arts and jewellery Jewellery, watches, painting
Source: Department store association, CLSA Asia-Pacific Markets
The West The richer Chinese consumers become, the more likely they are to fly to Europe for luxury shopping, especially for clothing, jewellery and watches. Luxury brand Burberry estimates that 30% of its business in the United Kingdom is to a Chinese consumer. At Gucci, in the first nine months of 2010, the number of Chinese customers nearly doubled from a year earlier to almost 22% of sales in Europe. French luxury store chain Galeries Lafayette also received a lot of Chinese customers at its store in Paris, accounting for about one in seven of its visitors with a per-capita spending of about €800. Tax-free shopping specialist Global Blue estimates Chinese tourists spent 99% more in Europe in the first 10 months of 2010, compared to a year ago. The average transaction is €718 at high-end stores that provide tax-refund facilities.
The UK, however, is facing challenges attracting mainland tourists. The country is not part of the Schengen visa system, which gives Chinese tourists access to 25 European countries on one visa including France, Germany, Italy and Spain. As such, the number of Chinese tourists to the UK has only increased by a 3% Cagr since 2003 and is 28% off the peak in 2007.
Figure 73 Figure 74
Asia ex Japan tourist inflow to France
Chinese tourists visiting UK
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2003 2004 2005 2006 2007 2008
('000)
0
50
100
150
200
2003 2004 2005 2006 2007 2008 2009
('000)
Source: CEIC, CLSA Asia-Pacific Markets
Tourist flows to the US saw negative YoY growth in February-July 2009, but has since then been growing at 10-82% YoY each month. The last cycle was similar. There were nine consecutive months of negative tourist inflow growth
Fly to the country of origin
Resilient tourist flow
Section 1: The Red Eight and the Chinese customer Luxury goods
34 [email protected] 19 January 2011
from China and Hong Kong in 2003 and the flow strongly rebounded soon after. The tourism office in the US only started breaking out mainland tourists this year. For the first three quarters of 2010, 619,865 tourists from China visited the US, or 3% of total overseas tourist arrivals.
Figure 75
US visitor arrivals from China and Hong Kong
(100)
(50)
0
50
100
150
Jan 00 Sep 01 Jun 03 Mar 05 Dec 06 Sep 08 Jun 10
(%)
Source: CEIC, CLSA Asia-Pacific Markets
Very volatile demand component We estimate that 56% of Chinese total demand comes from overseas – this creates great volatility in spending. Specifically, back in the early 2000s, there was as a series of attacks, civil unrest, disease and natural disasters that negatively affected tourism. Sars in 2003, tsunami in 2004, terrorist attack in the UK in 2005 and civil unrest in France in the same year all had an impact on Chinese outbound travel. As an example, we saw a significant decrease and subsequent volatility in mainland tourist flows after the tsunami in 2004 in Thailand and the military recoup there in 2006. Chinese people seem to be more averse to negative events, with tourist flows from the mainland dropping significantly more than average.
Figure 76 Figure 77
Thailand visitor arrivals from China during 2004 tsunami
Thailand visitor arrivals from China during 2006 coup
(80)
(60)
(40)
(20)
0
20
40
Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05
Mainland Chinese Total(%)
(40)
(30)
(20)
(10)
0
10
20
30
40
50
Jul 06 Oct 06 Jan 07 May 07 Aug 07 Nov 07
Mainland Chinese Total(%)
Source: CEIC, CLSA Asia-Pacific Markets
Sars and financial crisis
More risk-averse than average
Section 1: The Red Eight and the Chinese customer Luxury goods
19 January 2011 [email protected] 35
These events had a significant impact on luxury-goods sales and stocks. September 11 in 2001, in particular, weighed on leisure travel and overseas luxury demand.
Figure 78
LVMH stock price
0
20
40
60
80
100
120
140
Jan 01 Sep 02 May 04 Dec 05 Aug 07 Apr 09 Dec 10
Sep 11SARS
Global financial crisis
(€)
Source: Bloomberg, CLSA Asia-Pacific Markets
Sensitive to negative events
Section 2: From head to toe Luxury goods
36 [email protected] 19 January 2011
From head to toe The global luxury-goods market is evenly split among apparel, prestige cosmetics, “hard luxury” items which includes watches and jewellery, and others including accessories and leather goods. China’s market, however, leans more towards hard luxury and accessories, at the expense of apparel. As we previously discussed, watches and jewellery top China’s luxury shopping list and accessories are great for displaying success and wealth.
Figure 79
Luxury market category breakdown
1425
25
25
29
25
3225
0102030405060708090
100
China World
Others, incl. accessories and leather goodsHard luxuryPrestige cosmeticsApparel
(%)
Source: Bain, CLSA Asia-Pacific Markets
We believe hard luxury should continue to lead growth of the luxury-goods market for cultural reasons, although apparel and prestige cosmetics would still expand at very impressive rates.
Figure 80
Luxury segment growth
0
10
20
30
40
50
60
70
80
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Apparel
Prestige cosmetics
Hard luxury
Others (incl. accessories and leather goods)
2010-20Cagr20%
14%
27%
25%
(€bn)
Source: CLSA Asia-Pacific Markets
Jewellery Jewellery retail sales in China reached Rmb113.6bn in the first 11 months of 2010, up 56% YoY, according to the National Bureau of Statistics of China. Momentum has been very strong with YoY growth accelerating to 23-82%. Gold prices have increased in the past 10 years, jumping from US$272/oz in 2000 to more than US$1,421/oz in December 2010. Jewellery sales, however, have outpaced the gold price increase.
More hard luxury and accessories for Chinese
Hard luxury and accessories continue to
lead growth
Strong momentum
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 37
Figure 81
China jewellery sales (retail value)
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized10CL
(Rmbbn)
Source: Wind, CLSA Asia-Pacific Markets
Figure 82
Jewellery sales versus gold prices
(10)
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007 2008 2009 Annualized10CL
Jewellery sales YoY Gold prices(%)
Source: Wind, Bloomberg, CLSA Asia-Pacific Markets
Gold is popular among Chinese consumers for its intrinsic value and as a symbol of wealth and social status. Gold accessories are often purchased as gifts for special occasions, especially weddings, baby showers and birthdays. The World Gold Council reports that mainland Chinese demand for gold in the 12 months ended 3Q10 reached 526.8 tonnes, up 21% YoY, compared with the global average of 8% YoY. The increase was driven by 70% YoY growth in net retail investment and an 8% YoY rise in jewellery demand. In Hong Kong, demand for gold jewellery supported by mainland tourists jumped by 17% in the same period.
The council estimates in the past five years about 60% of gold demand from China was bought for jewellery. In the past 12 months, 71% of the demand was for jewellery. Nevertheless, our CRR middle-class panel still believes that gold is a good investment option, only after property and domestic stocks. The council expects gold demand in China may double within a decade.
Shining gold
Gold demand may double within a decade
Accelerating growth
Jewellery sales growing faster than gold prices
Section 2: From head to toe Luxury goods
38 [email protected] 19 January 2011
India continues to dominate world demand for gold. Although India is not a key luxury-goods market, gold demand is very strong so this segment could be one way to play the rising income and consumption story there.
Japan, on the other hand, sees dishoarding gathering pace. As gold prices skyrocket, Japanese investors sold back 68 tonnes of gold in the past 12 months, offsetting the 21 tonnes demanded for jewellery consumption.
Figure 83
Gold consumption demand in value (3Q09-10), including jewellery & retail investment
(1,711)
18
67
591
770
1,118
1,287
1,381
1,631
2,543
2,776
2,801
2,934
4,127
4,197
9,168
9,553
19,616
31,807
(5,000) 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
JapanFranceTaiwan
South KoreaHong Kong
UKIndonesia
ItalyOther Europe
RussiaVietnam
SwitzerlandThailand
GermanyTurkey
Middle EastUSA
ChinaIndia
(US$m)
Figure 84
Breakdown of consumption demand
820
5667697177
919592
80
4433312923
95
0
10
20
30
40
50
60
70
80
90
100
HongKong
MiddleEast
India China World Turkey USA Vietnam Thailand
Jewellery Net retail investment(%)
Source: World Gold Council, CLSA Asia-Pacific Markets
According to discussions with management of a few large players, rose gold is the new favourite among Chinese consumers. The growing popularity of gemstones and diamond rings in a country that was traditionally more interested in gold and jade also adds to the strong jewellery sales. According to the Ministry of Civil Affairs, more than 11 million couples tied the knot in the mainland in 2009. Industry leader De Beers estimates that nearly half of the couples getting married in Beijing, Shanghai, and Guangzhou are now
Some 71% of Chinese gold demand for jewellery
Indian demand for gold is very strong
Rose gold is the new favourite
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 39
buying diamond engagement rings. With the 20-34 age group expected to stay at around 30% of total Chinese population in the next decade, demand for valuable jewellery should continue to be robust.
The jewellery companies we surveyed also said mainland tourists are increasingly looking for larger diamonds. One company said they just recently had a customer asking for a HK$4m pure jade bangle and another one buying a HK$10m diamond. Another large retailer also said mainlanders like to buy two to three-carat diamonds for investment. In 2009, the US accounted for about 40% of global consumer diamond demand.
Figure 85
Diamond demand based on polished wholesale price (2008)
China5%
Gulf8%
USA41%
India8%
Hong Kong2%
Taiwan2%
Italy4%
Rest of world19%
Japan11%
Source: De Beers, CLSA Asia-Pacific Markets
As the world’s largest diamond producer, De Beers forecasts China’s diamond demand to grow from 6-7% of global demand to 16% by 2016 (15% cagr).
Figure 86
Chinese diamond demand as percentage of global demand
16
6
0
2
4
6
8
10
12
14
16
18
2009 2016
(%)
Source: De Beers, CLSA Asia-Pacific Markets
According to Euromonitor data, Chinese consumers have a strong preference for rings, contributing to almost 50% of jewellery sales.
Chinese diamond demand to rise rapidly
Jewellery also good for investment
Section 2: From head to toe Luxury goods
40 [email protected] 19 January 2011
Figure 87
Sale of jewellery in China by type (2009)
Rings50%
Wristwear8%
Neckwear19%
Earrings23%
Source: De Beers, CLSA Asia-Pacific Markets
There are a handful of big players in the jewellery industry in China, with the big three taking up 32% of real jewellery shares. A number of the top players are listed in Hong Kong, including Luk Fook (590 HK), Chow Sang Sang (116 HK), TSL Jewellery (417 HK) and 3D-Gold (870 HK). Euromonitor estimates that 99.5% of jewellery sales in China were made in retail stores.
Figure 88 Figure 89
3D-Gold’s corporate gift collection
Jewellery and decor designed to cater to Chinese
Source: Company website Source: Chow Tai Fook’s online product catalogue
This strong demand is driving retailers to expand aggressively. Privately-held Chow Tai Fook, for example, is looking to open 1,000 additional outlets on the mainland, doubling its existing network by 2020. It will also add more production lines to its two jewellery processing plants in Guangdong and Shenzhen. Half of the investment planned for the next decade will go to third and fourth-tier cities in rural areas, where management sees enormous potential. Kent Wong, managing director at Chow Tai Fook, said in an interview with a Hong Kong journal, “Consumers in big cities like Beijing and Shanghai now buy jewellery casually when they do their weekend shopping. We expect that will be happening in smaller cities as well in 10 years’ time.”
Few dominant players
Aggressive expansion to capture segment
growth potential
Chinese love rings
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 41
The jewellery market is considerably more consolidated than other segments like clothing and drinks. We believe this is partially due to the high inventory that needs to be held on hand, thus creating a high barrier to entry for smaller players. More importantly, Chinese consumers highly value jewellery brands and retailer reputation. News of low-quality gold being sold in the market often encourages consumers to shop at big brand-name stores, which they believe should have a better-developed quality control system. The Chinese Gold & Silver Exchange Society recently said that at least 200 ounces of fake gold was discovered on the Hong Kong gold market and president Haywood Cheung estimates 10x that amount might have infiltrated the retail market.
Figure 90
Real jewellery company shares in China
% retail value (retail selling price) 2005 2006 2007 2008 2009
Company
Chow Tai Fook Jewellery 10.5 10.7 10.9 11.3 11.6
Luk Fook Holdings (International) 9.5 9.6 9.7 9.9 10.1
Chow Sang Sang Holdings International 9.8 9.8 9.8 9.9 10.0
Gallop Jewellery 9.3 9.2 9.2 9.1 8.9
Shanghai Laofengxiang 7.6 7.6 7.7 7.8 7.9
TSL Jewellery (Macau) 5.8 5.8 5.9 6.0 6.2
Chow Tai Seng Jewellery 5.1 5.3 5.5 5.7 6.0
Fujian Fuhui Jewelry 4.3 4.3 4.4 4.5 4.5
3D-Gold Jewellery Holdings 3.6 3.7 3.9 4.1 4.3
Zhejiang Yuewang Jewellery 4.0 4.1 4.1 4.1 4.1
Others 30.6 29.9 29.0 27.5 26.4
Total 100.0 100.0 100.0 100.0 100.0
Source: Euromonitor
Our CRR survey shows that Chow Tai Fook is a brand leader in the jewellery segment in China.
Figure 91
CRR survey: Which jewellery brand did you buy?
1
1
1
2
2
3
3
4
14
0 2 4 6 8 10 12 14 16
Cartier
Hermes
Tiffany
Laofengxiang
Jinboli
King Liu Fook
Chow Sang Sang
Swarovski
Chow Tai Fook
(No. of mentions)
Source: China Reality Research
Jewellery market more consolidated than
other sectors
Leading by a wide margin
Section 2: From head to toe Luxury goods
42 [email protected] 19 January 2011
Figure 92
Chinese millionaires’ favourite jewellery brands
2006 2007 2008 2009 2010
Cartier Cartier Cartier Cartier Cartier
Chanel Bulgari Chanel Van Cleef & Arpels
Bvlgari
Piaget Piaget Tiffany Tiffany Montblanc
Tiffany Dior Van Cleef & Arpels
Bvlgari Tiffany
Bulgari Chanel Piaget Chanel Chanel
Dior Tiffany Bvlgari Piaget Piaget
Van Cleef & Arpels
Adler Mikimoto Mikimoto Van Cleef & Arpels
Adler Van Cleef & Arpels
Harry Winston Harry Winston Mikimoto
na Mikimoto Adler Adler Adler
na na Dior Chaumet Chaumet
Source: Hurun Research Institute
Watches The Swiss watch industry is worth SFr15.7bn (US$14.9bn). The industry did contract in 2009 due to the global financial crisis, by 22.8%, the first contraction after five consecutive years of growth. This year so far has been one of growth, up 21.8% to November. The largest buyer of Swiss watches in the world is Hong Kong, accounting for 19% of total Swiss watch exports by value. Hong Kong superseded the US as the largest Swiss watch importer from mid-2007, spurred on by a combination of a healthy financial and property markets (prior to the crisis) and the influx of mainland Chinese tourists. It is also well accepted (without official estimates though) that Hong Kong does serve as a re-export hub, hence some of the direct intake into Hong Kong does find its way to other parts of Asia, including China. As of November 2010, China is currently ranked the fourth-biggest buyer of Swiss watches, up from 10th place in November 2006.
Figure 93
Largest buyers of Swiss watches
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Hong K
ong
USA
Fran
ce
Chin
a
Ital
y
Sin
gap
ore
Ger
man
y
Japan UK
UAE
Spai
n
Tai
wan
Sau
di Ara
bia
Russ
ia
Thai
land
2006 2010(CHF)
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers. Data is annualised to November 2010
China is currently the fourth-largest imported
Swiss watches
Cartier is the beloved jewellery brand
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 43
Figure 94 Figure 95
Swiss watch exports Jan-Nov 2010
Jan-Nov 2010 YoY growth of top-10 export markets
China 7%
USA 10%
Others31%
France 7%
Italy 6%
United Kingdom
4%
Germany 5%
Japan 5%
Singapore 6%
Hong Kong 19%
Hong Kong/China together
is 26%
(10) 0 10 20 30 40 50 60
Germany
Italy
Japan
United Kingdom
USA
France
United Arab Emirates
Singapore
Hong Kong
China
(%)
Source: CLSA Asia-Pacific Markets, Federation of the Swiss Watch Industry (November 2010)
We believe a per-capita comparison is the ideal way to illustrate the significant growth potential of Swiss-watch consumption in China. In doing so, a number of adjustments were needed. Firstly, we assume that 50% of what goes to Hong Kong finds its way to China. As mentioned, there are no official estimates to support this, but an adjustment of size is a reasonable place to start. It is a meaningful adjustment as Hong Kong is the largest Swiss watch importer in the world. Secondly, we assume only the urban population of China are “realistic” consumers. Hence, we assume a population of 594 million.
Figure 96
Global comparison of Swiss watch imports per capita
Consumption per capita (US$)1.4
1.6
4.0
5.0
5.8
5.8
6.9
8.7
8.9
8.7
12.2
14.3
16.8
103.0
183.2
201.5
403.0
2.7
0 50 100 150 200 250 300 350 400 450
Russia
China (unadjusted)
Thailand
China
USA
South Korea
Japan
Spain
Saudi Arabia
UK
Germany
Taiwan
Italy
France
UAE
Singapore
Hong Kong
Hong Kong (unadjusted)
12 mths to 11/2010
See footnote below for adjustmentsmade to China and Hong Kong
Note: Assuming 50% of exports to HK are re-exported to China. This is a meaningful adjustment for the purpose of achieving as conservative a result as possible, as Hong Kong is the largest importer of Swiss made watches in the world (imports are 3x larger than China). We also base our China per capita calculation on an urban population of 594m (not 1.3bn). The data is based on annual data, collected monthly. Source: CLSA Asia-Pacific Markets
Hong Kong (despite the adjustment), Singapore and the UAE significantly lead on a consumption per capita basis, reflecting the “trading hub” nature of these economies, the former two at a staggering US$180 and above. “Old world” economies such as France, Italy, Germany and the UK are between
China’s consumption per capita is low, at only a
third of Europe or Taiwan
China should close much of the gap
Section 2: From head to toe Luxury goods
44 [email protected] 19 January 2011
US$8.90 and US$17. With the exception of France, the consumption in these economies has been stable for the past five years. The major decline is seen in the US, unsurprisingly, now consuming US$5.0 per capita, compared to US$6.2 five years ago. On the flipside, China is accelerating. Its per-capita consumption of Swiss watches increased by 117% between 2005 and 2010. However, at US$4.0 currently, China still significantly lags more developed (and higher GDP) economies. We believe China should close much of the gap in Swiss watch consumption per capita over the medium to longer term.
Figure 97
China accounts for a 7% share of Swiss watch exports, up from 3% in 2005
0
1
2
3
4
5
6
7
8
9
2004 2005 2006 2007 2008 2009 2010
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000China's share of Top 15 export destinations
Top 15 export value, CHFm (RHS)
(%)
Figure 98
Asia ex-Japan leading the recovery in Swiss watch exports (YoY growth, quarterly)
(60)
(40)
(20)
0
20
40
60
80
100
120
Jun 05 Apr 06 Mar 07 Feb 08 Jan 09 Dec 09 Oct 10
China Asia ex-J Europe USA(%)
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers (November 2010)
In terms of preferences, Chinese consumers like mechanical watches and also unique watches that require specific craftsmanship, such as enamel, mother-of-pearl engraving. Rolex is almost synonymous with luxury watches in China. When asked what brands come to mind when thinking about luxury watches, 48% of those surveyed in China said Rolex. That is far greater than the second brand Omega at 14%, followed by Vacheron, Cartier, and Longines.
China’s share of Swiss watch exports has
doubled in past five years
China was the quickest to recover from the
financial crisis
Rolex, Rolex, Rolex
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 45
Figure 99 Figure 100
Which luxury brand would you like to own?
Which luxury brands did you buy?
Watch
1
1
1
1
4
4
4
5
10
21
0 5 10 15 20 25
Rado
Swatch
Piaget
Tissot
Patek Philippe
Longines
Cartier
Vacheron
Omega
Rolex
(% of consumers)
Watch
1
1
1
2
2
3
3
5
6
7
9
0 2 4 6 8 10
Casio
Calvin Klein
Enigma
Citizen
Tudor
Cartier
Rado
Rolex
Longines
Tissot
Omega
(No. of mentions)
Source: China Reality Research
Executives from top luxury watch retailers told us that part of the reason Rolex is so popular is because Chinese consumers view it as almost hard cash given the liquid second-hand market. Its signature crown logo and easy to pronounce name have helped the brand gain recognition in the early days in China.
A lot of mainland customers also pay high regards to the Omega brand thanks to its association with the first moon landing. Trendy designs also help to attract younger customers. Longines is popular for its more affordable price points and it sells very well on the mainland.
The limited supply for some models generates much excitement among the wealthy and it serves as an effective way to display success and power. For example, the market price for the Rolex Daytona watch can reach HK$85,000-90,000, despite a list price at HK$75,000, due to limited supply. Getting one of these limited models is a way to show your influence and connections. “It is about face, not the money (the premium you are paying),” the executive said.
When it comes to picking watch retailers, Chinese consumers are looking for a good selection and a reputable store.
Long waitlist Apply to spend more than HK$1m on a watch We asked management at Emperor Watch & Jewellery, one of the world’s largest buyers at the annual industry fair Baselworld, where we can buy a Patek Philippe minute repeater, one of the hottest collections that is in limited supply. Demand is so strong and the collection is so rare that we learnt each interested buyer would have to file an application form listing his personal information and occupation. To be considered, chances are you would have to be a frequent shopper (ie, have bought more than 10 Patek Philippe watches). Being a professional with a number of certificates may help push your application to the top of the pile as well.
Patek Philippe minute repeater
Source: Company website
Limited editions are even more popular
Retailer reputation is also a key factor
Section 2: From head to toe Luxury goods
46 [email protected] 19 January 2011
Figure 101
How do you decide which watch retailer to purchase from?
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Staff knowledge
Brand selections
Staff friendliness
After sales service
Store reputation/image
Model selection
5 is very important
Source: Hengdeli
Clothing Based on Bain’s estimate, the luxury apparel market in the mainland is worth Rmb9.8bn. The potential is huge given that wealthy consumers spend more on clothing as income rises. As consumers get wealthier in China, we expect to see more trading up.
Figure 102
Clothing and footwear spending as percentage of total expenditure
3.7
5.1
5.7
6.26.6
7.07.3
7.68.0
8.5
3
4
5
6
7
8
9
1 2 3 4 5 6 7 8 9 10
(%)
(income by decile)
Source: Euromonitor, CLSA Asia-Pacific Markets
Menswear is the key component of this market segment. As the luxury market booms, leaders in luxury menswear are aggressively expanding. Trinity, which manages Altea, Cerruti 1881, D'urban, Gieves & Hawkes, Intermezzo and Kent & Curmen, said in April 2010 that it would add 50 or more stores in smaller Chinese cities to its 272-store network on the mainland. Evergreen, which owns V.E. DELURE and TESTANTIN and which went public recently, planned to add 63 new retail stores in China in 2010 and 172 in 2011 to bring total mainland store count to 491.
To accelerate expansion in China, global brands have come up with a variety of strategies. Hugo Boss started a joint venture with local fashion retailer Rainbow Group in July 2010 and planned to open as many as 20 stores in
Spend more on clothing as income rises
Menswear is a key component
Players trying different strategies
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 47
China during the remainder of 2010, compared with a worldwide total of 50 additional outlets for the year. Meanwhile, Polo Ralph Lauren took back its Asian distribution rights and Burberry bought back its 50 franchise stores in China. In November 2010, Emporio Armani became the first Western fashion brand to debut on the online China market.
Figure 103 Figure 104
Emporio Armani Online Store, China
Ports Design overcoat selling at Rmb8,999
Source: Company website
Being one of the early entrants into the luxury market in China, Ports Design is well-regarded in China as a top female luxury clothing brand. Many surveys in the past have named Ports as a top-five luxury apparel brand in China alongside names such as Chanel, Louis Vuitton, and Christian Dior. Our recent CRR survey found that Ports holds a strong brand presence on the mainland. However, note that there are numerous other strong brands that are not mentioned here - that include Prada, Bottega Veneta, Fendi etc.
With a pair of over-the-knee boots selling at about US$2,500, French shoemaker Christian Louboutin is also eyeing the luxury market in China and plans to operate as many as five stores in China in the next three years. Meanwhile, Salvatore Ferragamo expected its store count in China to reach 44 by the end of 2010, up from nine in 2008. The Italian shoemaker may open as many as eight new stores this year in the country.
Figure 105
Chinese millionaires’ favourite fashion labels
2006 2007 2008 2009 2010 Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Louis Vuitton Louis Vuitton Dunhill Louis Vuitton BOSS
Boss Dunhill Valentino Dunhill Versace Dunhill Versace Burberry Zegna Burberry Hermes Hermes Chanel Hermès Zegna
Prada Ports Versace Versace Dior Zegna Hugo Boss Louis Vuitton Dior Louis Vuitton Chanel Montblanc Hermès Givenchy Chanel
Gucci Givenchy Burberry Ports Prada Ports Gucci Givenchy Ermenegildo Zegna Zegna Prada
Gucci Chanel Dior Ports Source: Hurun Research Institute
Luxury shoe brands are also expanding presence
Section 2: From head to toe Luxury goods
48 [email protected] 19 January 2011
Menswear According to research firm Frost & Sullivan, retail sales of menswear in China increased at a 13.4% Cagr between 2006 and 2009 with sales reaching Rmb300bn (or US$44.2bn) in 2009. Frost & Sullivan expects sales to achieve a 15.8% Cagr over 2009-13.
Figure 106
Retail sales of menswear in China
205.7228.9
262.6
300.3
345.4
399.3
539.9
464.5
11.3
16.315.615.0
14.414.7 16.2
0
100
200
300
400
500
600
2006 2007 2008 2009 10F 11F 12F 13F
(Rmbbn)
0
2
4
6
8
10
12
14
16
18
20(%)Retail value Growth rate (RHS)
Source: Frost & Sullivan
We believe that the increase in disposable income, accelerated urbanisation, a demographic shift in the male population towards the young and middle-aged, rising brand awareness as well as improved product design and quality have and will continue to underpin industry growth.
More importantly, China menswear consumption per capita in urban areas is only about 25% of that in the USA and 20% of European countries.
Figure 107 Figure 108
Menswear consumption per capita in urban areas, 2008
Menswear consumption per capita, 2008
291
1,175
1,489
0
200
400
600
800
1,000
1,200
1,400
1,600
China USA Europeancountries
(US$)
US$15.4bn40.7%
US$10.3bn27.3%
US$5.4bn14.3%
US$6.7 bn17.7%
0
100
200
300
400
500
0 1 2 3 4 5
(US$) First-tier cities
Second-tier citiesThird-tier cities
Fourth-tier cities
US$240
US$378
US$318
US$77
PRC average
(US$bn)
Note: “European countries” refers to 15 countries within European Union as of 1 May 2004. Source: Frost & Sullivan
The consumption behaviour of male consumers in China differs significantly from that of their female counterparts. This results in substantially different operating metrics for menswear versus ladieswear.
We see strong growth in the menswear
market in China
Urbanisation and rising incomes are key drivers
Low menswear consumption per
capita in China
Menswear has different operating metrics from
ladieswear
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 49
Figure 109
Comparison of China’s menswear versus ladieswear markets
Menswear business Ladieswear business Brand loyalty High Low Consumers’ price sensitiveness Low High Product ASPs for similar market positioning High Relatively low Average ticket size per purchase High Relatively Low Stay-and-buy ratio High Low Consumers’ purchase frequency Low High Potential for ASP increase High Limited Purchase target More intentional purchases with clear
brand targets in most circumstances More impulse purchases with no clear brand targets in most circumstances
Purchase intention Less show-off factor More show-off factor Retail inventory risk Relatively low Relatively high Fashion risk Low High Product cycle Relatively long Short Market segmentation Relatively broad More defined Consumers’ product focus Product quality, fabrics and functionality Design, colour and trendiness Requirement for raw material procurement High Relatively low Requirements for accessories Low High Number of product SKUs Relatively low High Number of product collections Relatively low High Corporate sales More corporate sales Minimum corporate sales Source: CLSA Asia-Pacific Markets
As shown in our analysis in Figure 109, menswear brands should enjoy more resilient gross margins and more sustainable same-store sales (SSS) growth compared with ladieswear brands.
According to Frost & Sullivan, the business formal (including business suits, shirts and trousers) and smart casual (including casual suits, shirts, jackets and trousers) market accounts for 60.6% of the overall menswear apparel market in China.
Figure 110
China’s menswear market by product, 2009
Accessories4.3%
Business formal and smart casual
60.6%
Fashion casual35.1%
Source: Frost & Sullivan
Within the business-formal and smart-casual menswear market, Frost & Sullivan expects the high-end segment (which is defined as a suit retailing for Rmb5,000-15,000) to enjoy slightly higher growth rates (ie, a 17.5% 2009-13F Cagr) than other segments.
Business and smart casual represent 61% of
total menswear market
High-end segment expected to outgrow
other segments
Menswear brands should enjoy more resilient gross
margins and SSS growth
Section 2: From head to toe Luxury goods
50 [email protected] 19 January 2011
Figure 111
Breakdown and growth of business-formal and smart-casual menswear segment
(Rmbbn) 2006 2007 2008 2009 10F 11F 12F 13F Cagr 06-09
Cagr 09-13F
Luxury-end 13 14 17 19 22 26 31 36
Growth (%) 12.6 15.4 15.8 16.2 17.1 17.7 17.3 14.7 17.1
High-end 9 10 11 13 15 18 21 25
Growth (%) 12.4 15.9 16.0 16.7 17.3 18.0 18.1 14.7 17.5
Mid-to-low-end 100 112 130 150 174 203 238 280
Growth (%) 12.4 15.8 15.4 16.2 16.7 17.4 17.3 14.6 16.9
Total 121 136 158 182 211 247 290 340
Growth (%) 12.5 15.7 15.5 16.2 16.7 17.5 17.3 14.6 17.0
Note: Market segmentation is defined by ASP of a suit: luxury=above Rmb15,000; high-end=Rmb5,000-15,000; low-end=below Rmb5,000. Source: Frost & Sullivan
It should be noted that China’s high-end business-formal and smart-casual menswear market is extremely fragmented, with the top-five brands commanding only a 22% market share (versus 45% for the sportswear sector). As such, we see huge potential for market consolidation in favour of companies with strong brand equity and well-established retail networks such as Evergreen. See our 8 December 2010 report Tailored for success.
Figure 112
Market share of top-five players in China consumer space, 2009
95
75
67
66
65
58
57
50
49
45
45
37
22
0 20 40 60 80 100
Carbonated drinks
Ready-to-drink (RTD) tea
Instant noodles
RTD coffee
Hair care
Beer
Milk
Bottled water
Down apparel
Sportswear
Bath and shower products
Fruit/vegetable juice
High-end business formal & casual menswear (%)
Note: Market share by retail sales value for carbonated drinks, RTD tea, instant noodles, hair care, RTD coffee, milk, bottled water, down apparel, fruit/vegetable juice, bath and shower products and bedding products; by total sales volume for beer, wine and spirits; by wholesale value for sportswear. Source: CLSA Asia-Pacific Markets (milk, down apparel and sportswear), Euromonitor (all others)
Only Satchi and VASTO have 5% or more of the high-end business-formal and smart-casual menswear market. However, Satchi has almost 2x as many stores in the mainland.
Highly fragmented high-end formal business and smart-casual menswear
Lowest concentration in high-end formal business
and smart-casual menswear segment
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 51
Figure 113 Figure 114
Market share in terms of retail sales, 1H10
China store networks, 1H10
VSKONNE2%
Auta Son2%Aquascutum
1%
Didiboy3%
Lampo3%
BONI3%
S.D. Spontini4%
V.E. DELURE4%
VASTO5%
Other brands67%
Satchi6%
332
201
180
178
170
168
131
100
100
82
0 50 100 150 200 250 300 350
Satchi
V.E. DELURE
BONI
DIDIBOY
VASTO
Lampo
Aquascutum
S.D. Spontini
VSKONNE
Auta Son (No. of outlets)
V.E. DELURE
Source: Frost & Sullivan
The degree of concentration in the high-end business-formal and smart-casual menswear market segment is substantially below that of the China sportswear market.
Figure 115
China high-end business-formal and smart-casual menswear vs sportswear, 2009
6
15
22
33
13
33
45
62
0
10
20
30
40
50
60
70
Top 1 Top 3 Top 5 Top 10
(%) High-end business formal & smart casual menswear
Sportswear
Source: Frost & Sullivan (menswear), CLSA Asia-Pacific Markets (sportswear)
Within the casual fashion menswear market, the middle-upper segment (ie, a jacket together with a pair of trousers retailing for Rmb2,000-5,000) is expected to enjoy a higher growth rate (ie, 16.5% 2009-13F Cagr) than other segments.
Figure 116
Breakdown and growth of casual fashion menswear segment
(Rmbbn) 2006 2007 2008 2009 2010F 2011F 2012F 2013F Cagr 06-09
Cagr 09-13F
High to luxury end 6 7 8 9 10 12 13 15
Growth (%) 11.1 14.3 12.5 14.4 13.6 14.5 14.9 12.5 14.3
Middle upper end 6 7 8 9 10 12 14 16
Growth (%) 12.1 15.6 15.2 15.8 16.2 17.0 16.9 14.3 16.5
Mid to low end 64 70 78 88 99 112 127 144
Growth (%) 9.1 12.4 12.0 12.7 13.0 13.8 13.7 11.2 13.3
Total 76 83 94 105 119 135 154 176
Growth (%) 9.6 12.7 12.3 13.1 13.4 14.1 14.1 11.5 13.7
Note: Market segmentation is defined by ASP of a jacket and a pair of trousers: High to luxury-end=Above Rmb5,000; Middle-upper end=Rmb2,000 to Rmb5,000; Mid to low-end=Below Rmb2,000. Source: Frost & Sullivan
Middle-upper segment outgrows others in casual
fashion menswear
Market concentration below that of China sportswear market
Market share
Section 2: From head to toe Luxury goods
52 [email protected] 19 January 2011
Handbags and briefcases According to Hurun’s Best of the Best survey, men’s luxury brands dominated the accessory segment in 2008, but the same survey in 2010 shows that there is a shift towards a more balanced list.
Figure 117
Chinese millionaires’ favourite accessory brands
2008 2010 Dior Hermès Emporio Armani Armani BOSS Chanel Montblanc Louis Vuitton Louis Vuitton Dior Chanel Cartier Bally Gucci Dunhill na Source: Hurun Research Institute
Figure 118 Figure 119
Louis Vuitton’s world-class craftsmanship
Dunhill’s leather collection
Source: Company website
As we mentioned before, girl power should be growing in China and we expect global premium luxury brands like Prada, Fendi and Tod’s to catch up very quickly. Burberry recently bought back 50 franchise stores in China to take control of its positioning in this key luxury market. Meanwhile, Coach recently made a number of senior appointments and expects its business in China to reach US$250m by FY12 and double by FY15.
Figure 120
Points of sale in China
0 50 100 150 200 250 300 350
LanvinChanel¹TiffanyPradaFendi
CelineGivenchy
VersaceBulgariHermes
Tod'sGucci
EscadaLouis Vuitton
CoachBurberry
Giorgio ArmaniCanali
Salvatore FerragamoErmenegildo Zegna
CerrutiHugo Boss
Alfred DunhillCartier
Ports
¹ Only fashion/accessories. Source: Company websites, CLSA Asia-Pacific Markets
Not as male-dominant
Mens’ brands have a wider store network
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 53
Luxury cars Dressed up in luxury clothing with a gold watch and a huge diamond ring, wealthy Chinese consumers are ready to hop into a vehicle to go out - a luxury car with a starting price of about Rmb850,000. Luxury car sales in China are on fire. The Big 3 in China have all recorded impressive growth rates this year, despite high mainland taxes. Sparkle Roll Group (970 HK), which operates Bentley, Rolls-Royce and Lamborghini showrooms in Beijing, estimates that for a car with an engine bigger than four litres, the combined import duties, value-added taxes and consumption taxes add up to more than 140%, compared with about 105% in Hong Kong and 60% in Macau.
Figure 121
Luxury car sales in China
Top brands 2010 YoY (%)
Volkswagen's Audi 227,938 43
BMW 168,998 87
Mercedes-Benz 147,670 115
Source: Company data
Figure 122
Mercedes-Benz is the fastest-growing major luxury brand
115
87
43
820,000
840,000
860,000
880,000
900,000
920,000
940,000
Audi BMW Mercedes-Benz
(Rmb)
0
20
40
60
80
100
120
140Starting price YoY growth (RHS)
A8L
7 Series
S-Class
(%)
Source: Company data, CLSA Asia-Pacific Markets
The Volkswagen China Group sold 1.92 million cars in 2010, up 37% YoY. Audi sold 227,938 cars in 2010, more than the 200,000 units previously forecasted and up 43% YoY. The company plans to sell another one million vehicles there within the next three years. Audi has sold more than one million vehicles in China to date, thanks to an early entry of its parent firm Volkswagen in the 1980s. Audi is also the biggest supplier of official cars in China.
However, BMW and Daimler’s Mercedes-Benz are quickly catching up as Chinese consumers’ appetite for luxury cars continues to grow. BMW’s sales in China almost doubled to September YTD and China is now the BMW Group’s third-largest market.
Meanwhile, Mercedes-Benz is the fastest-growing major luxury auto brand, with sales up 115% yoy in 2010 at 147,670 units, exceeding expectations of 120,000 units. Its parent Daimler expects China to become Mercedes-Benz’ largest market by 2014-16, aiming to sell 300,000 vehicles in China in 2015.
Not discouraged at all by the high taxes and duties
Audi is the largest supplier of official cars
BMW and Mercedes-Benz are catching up
More expensive cars enjoying higher growth
Section 2: From head to toe Luxury goods
54 [email protected] 19 January 2011
As mentioned before, high-end market leader Audi sold one million units in China to date. We estimate that about 20% of Audi sales in China were from the government. Taking this into account and the Hurun Research Institute’s study which says Chinese millionaires on average own three cars, we believe China’s luxury car market has huge potential.
The super-luxury segment, where executive limousines generally retail at Rmb3,000,000-9,000,000 after taxes, shows strong demand. Volkswagen’s Bentley, BMW’s Rolls-Royce and Daimler’s Maybach are the top choices for these ultra-wealthy individuals.
Bentley China chairman Peter Mak is amazed by the huge demand and rapid income growth on the mainland, since some of these buyers might not even have a car 15 years ago. Unlike buyers in the early days who would have bodyguards bringing in large travel bags filled with cash, buyers today usually pay a 10% deposit with a debit card and settle the balance with a bank transfer.
Figure 123
Super-luxury car sales in China
Top brands October YTD YoY (%)Bentley 569 71Rolls-Royce 156 438Source: SCMP
Our CRR survey shows strong brand preference for BMW and Mercedes-Benz, which we believe explains the impressive September YTD growth of 89% and 98% the carmakers enjoyed.
Figure 124
Which luxury car brands would you like to own?
13
12
10
8
6
6
4
3
2
2
0 2 4 6 8 10 12 14 16
Land Rover
Maybach
Hummer
Bentley
Audi
Porche
Rolls-Royce
Ferrari
Mercedes-Benz
BMW
(% of consumers)
Source: China Reality Research
Rich individuals from China also prefer longer cars that appear more extravagant and easier for those who would like to be chauffeured. This demand drove Audi to introduce an extended A6 sedan (13cm longer) in China back in 2000 and an extended A4 last year. BMW and Mercedes-Benz also introduced extended versions, adding 14cm to the BMW 5-Series and Mercedes E-Class sedans.
Volvo, which was purchased by China’s Geely Holding Group last year, plans to hire a team of Chinese designers to cater to local tastes. Rolls-Royce has also outfitted vehicles with options such as gold-plated Spirit of Ecstasy hood
Bentley, Rolls-Royce and Maybach are the top three
for super luxury
Chinese wealthy like longer cars
Gold-plated Spirit of Ecstasy
BMW is the winning brand
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 55
ornaments and starlight roofliners that depict astrological signs. Some customers choose red, which is considered to be the lucky colour, and many like to get vehicle identification numbers that contain lucky numbers, with the most popular being “8”. BMW has also offered a Chinese version of its M3 sports car called the Tiger M3, for the year of Tiger (2010), with each of the headrests embroidered with an orange tiger’s head.
Figure 125 Figure 126
Extended A6 exclusively for Chinese consumers
Rolls-Royce’s Spirit of Ecstasy
Source: Company website
Premium drinks Euromonitor estimates that the Chinese alcohol market is at 53 billion litres in 2010, compared with 30 billion litres in the US, and expects the overall alcohol market to enjoy a 7% Cagr to 70bn litres by 2014. Consumption of alcoholic drinks per capita (at legal drinking age) has increased by 64% in 2000-10 in China. Beer remains the preferred drink, with each person consuming 38.7 litres in 2009 while the total alcohol consumption per capita in China was 45 litres.
Figure 127 Figure 128
Chinese alcohol market size and growth
Consumption per capita (2009)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1998 2002 2006 2010 2014
0
2
4
6
8
10
12
14
16Alcoholic drinks
YoY growth (RHS)(%)(m litres)
3.6 2.7
38.7
05
1015202530354045
Beer Wine Spirits
(litres)
Source: Euromonitor, CLSA Asia-Pacific Markets
We expect whiskey to lead growth in the drinks segment at 17% annual growth, followed by grape wine at 12% in 2009-14. Sparkling wine is also expanding quickly, but so far China is still a relatively small market for champagne. Despite being the dominant alcohol in the market, beer has been growing only moderately at a 6% Cagr in the past 10 years and we expect this level of growth to continue.
Beer is the dominant alcohol, but the slow
growth segment
Whiskey and grape wine should lead growth at
double digits
Section 2: From head to toe Luxury goods
56 [email protected] 19 January 2011
Figure 129
Alcohol market growth 09-14CL
17
12
10
10
9
7
7
5
4
0 2 4 6 8 10 12 14 16 18
Brandy and Cognac
Non-grape wine
Average
Beer
Rum
White Spirits
Sparkling wine
Grape wine
Whiskey
(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
Figure 130
Champagne market breakdown
Other emerging markets
5%
Other mature markets
4%
Mainland China0%
Japan2%
US6%
EU1583%
Source: Cheuvreux
Chinese alcohol consumption is still relatively low compared with the rest of the world and therefore we expect much potential in the drinks segment. As expected, Chinese wine consumption per capita ranks much lower than European counterparts, and spirit consumption per capita much lower than Japanese and Koreans who are big fans of shochu/soju (a very popular distilled beverage in the region).
Figure 131
Beer consumption per capita (2009)
0 20 40 60 80 100 120 140
SingaporeTaiwan
ItalyFranceChina
South KoreaJapan
CanadaUnited Kingdom
USAGermany
Source: Euromonitor, CLSA Asia-Pacific Markets
Chinese alcohol consumption still low
Still a moderate drinker
About 50% of the EU15’s share is from France
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 57
Figure 132 Figure 133
Wine consumption per capita (2009)
Spirits consumption per capita (2009)
0 10 20 30 40 50 60
SingaporeChina
TaiwanJapan
South KoreaUSA
CanadaUnited Kingdom
GermanyFrance
Italy
(litres)
0 10 20 30 40
SingaporeTaiwan
ItalyChina
CanadaUnited Kingdom
GermanyUSA
FranceJapan
South Korea
(litres)
Source: Euromonitor, CLSA Asia-Pacific Markets
In terms of channels, restaurants are more important in southern China and bars in the north. Because of the cold weather in the north, Chinese consumers there in general prefer stronger alcohol.
As income rises, we expect consumers to trade up to premium alcohol and this should drive growth in the prestige local spirits and the more expensive wine and spirit segments in general. Also, as economic activities continue to grow in the mainland, local spirits popular among businessmen and government officials should see strong growth. Gifting accounts for about 65% of the market, according to an executive from a premium alcohol company.
We believe this is also a segment where local brands can potentially develop into premium players. According to the executive, China is already in the top 10 globally in terms of wineries and plantation.
Figure 134
Wine consumption and income per capita (2010)
(20)
(10)
0
10
20
30
40
50
60
70
0 20,000 40,000 60,000 80,000 100,000 120,000
Wine consumption (litre per capita)
(US$ per capita)
Correlation = 0.69
Luxembourg
Norway
SwitzerlandDenmarkAustria
FranceItaly
Portugal
Greece
SpainUK
Germany Belgium
Netherlands
Belgium Ireland
USA
FinlandCanada
Japan
SingaporeHong Kong
Sourth Korea
Taiwan
Russia
TurkeyMalaysiaPhils
China
Source: CLSA Asia-Pacific Markets
More trading up
Wine consumption should rise as income grows
Just the beginning
Section 2: From head to toe Luxury goods
58 [email protected] 19 January 2011
Figure 135
Average retail selling price in China
2009 Rmb per litre Taobao Beer 7 Non-grape wine 40 Grape wine 57 Premium local spirits 295
Kweichow Moutai 500ml Rmb115 (US$17)
Rum 402
Bacardi black rum 750ml Rmb97 (US$15)
White Spirits 405
Grey Goose 700ml Rmb370 (US$56)
Brandy and Cognac 464
Hennessy VSOP 750ml Rmb293 (US$44)
Sparkling wine 538
Moet & Chandon NV 750ml Rmb340 (US$52)
Whiskey 727
Chivas Regal 700ml 18 years old Rmb425 (US$64)
Source: Euromonitor, Taobao.com, CLSA Asia-Pacific Markets
Premium local spirits Unlike other luxury segments, premium local spirits brands have a significant presence in China, accounting for 6% of the total spirits market in China. Brands like Jian Nan Chun, Moutai and Wu Liang Ye are very popular nationwide. Together these three brands account for more than 27% of the premium local spirits segment. Average unit price in this segment is almost Rmb300 per litre, with the ultra premium ones priced much higher than top whiskey.
Figure 136 Figure 137
Moutai (500ml) gift set selling at Rmb1,588 on Taobao
500ml of Wu Liang Ye’s 68% selling at Rmb888
Source: Company website, Taobao.com Source: Taobao.com
Premium local spirits are popular
Many premium options
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 59
Figure 138
Premium local spirits market in China
50
70
90
110
130
150
170
190
210
230
250
2001 2002 2003 2004 2005 2006 2007 2008 2009(8)
(6)
(4)
(2)
0
2
4
6
8
10Volume YoY (RHS) (%)(m litres)
Source: Euromonitor, CLSA Asia-Pacific Markets
Imports and global players While beer consumed in China is mostly produced locally with only 28 million litres imported out of the 40.7 billion litres consumed in 2008, imported wine and spirits are common. About 6% of wine and 1.4% of spirits was imported from overseas in 2008. The import share of wine has been growing rapidly. In total, 18% of the wine and 31% of the spirits imported came from France.
Figure 139
Imports as a percentage of total volume
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008
Wine Spirits(%)
Figure 140 Figure 141
Wine imports in volume (2008)
Spirits imports in volume (2008)
Spain9%
Australia9%
France18%
Chile32%
Argentina16%
Italy6%
Others5%
United States
5%
United Kingdom
33%
Spain10%
France31%
Others9% Japan
2%
Sweden2%
United States
3%
Korea10%
Source: Euromonitor, CLSA Asia-Pacific Markets
Alcohol imports growing
Steadily growing
France has a large share
Section 2: From head to toe Luxury goods
60 [email protected] 19 January 2011
These fast-expanding segments together with their growing imports component are driving up sales at global producers. Pernod-Ricard reported 1Q (ended September 2010) sales growth that beat consensus estimates. The company recorded more than 30% YoY growth in China on the back of wholesalers’ restocking on Martell. Its Chivas Regal holds a dominant 33% brand share in the whiskey segment. Absolut is the leader in white spirits and Martell is No.3 among brandy and cognac brands in China.
Diageo is also upbeat about China’s market outlook and sees consumers trading up in general. Its Johnnie Walker brand holds 23% share in the whiskey segment while the Smirnoff brand has 22.5% of the white spirits share in China.
Barcardi & Co’s Barcardi rum significantly dominates this segment with a whopping 72% share.
The surging whiskey demand in China inspired the Royal Salute Whisky group to launch the 62 Gun Salute in the Chinese market. The company said the whiskey tastes rich and complex and it is exactly what Chinese consumers like. Bottled in a hand-crafted decanter made by Dartington Crystal, the whiskey features a Royal Salute crest painted in liquid 24-carat gold, along with a 24-carat gold-plated collar and a crystal stopper set with a 24-carat gold-plated crown. Each bottle sells for Rmb18,000.
Meanwhile, to endear itself to Chinese consumers, Château Lafite-Rothschild also decided to feature an embossed red character for the lucky “eight” on every bottle of its 2008 vintage. According to the online fine-wine exchange LivEx, the price of a case of 2008 Lafite jumped 17% in just 48 hours after the announcement. Similarly, Château Mouton Rothschild also features art work by famous Chinese artists while vodka brand Absolut puts Chinese literary figures on its labels to attract Chinese consumers.
Figure 142 Figure 143
62 Gun Salute at Rmb18,000
Chateau Lafite Rothschild 2008
Source: Company
LVMH has a very strong market presence in the sparkling-wine segment with its Moët & Chandon brand. Its market share is tied with Yantai Changyu Group’s Changyu brand at 19% as the top two players in sparkling wine. Seeing such a strong presence that premium local spirits have in China, LVMH has also started building an Asian luxury spirits brand, Wenjun. The pricing is very much in line with top players Moutai and Wu Liang Ye.
Pernod-Ricard holds a number of high-
ranking brands
Catering to locals
Prices jumped 17% with an embossed red eight
LVMH setting up luxury white spirits brand
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 61
Figure 144 Figure 145
Wenjun by LVMH at Rmb600
Special collection at Rmb1,600
Source: Company website, Taobao.com
Figure 146
Top alcoholic drinks brands in China
Brand Company Share (%)Premium local spirits Jian Nan Chun Sichuan Jian Nan Chun (Group) 10.6Moutai Kweichow Moutai 9.9Wu Liang Ye Sichuan Yibin Wuliangye Distillery 6.9Luzhou Lao Jiao Luzhou Lao Jiao 2.5Xiao Hu Tu Xian Guangzhou Pearl River Yunfeng Winery 1.9Grape wine Great Wall China National Cereals, Oils & Foodstuffs Imp & Exp 10.6Changyu Yantai Changyu Group 8.8Weilong Yantai Weilong Grape Wine 4.6Dynasty Dynasty Winery 4.0Suntime Vinisuntime International 3.3Sparkling wine Changyu Yantai Changyu Group 18.9Moët & Chandon LVMH Moët Hennessy Louis Vuitton 18.9Dynasty Dynasty Winery 8.6Piper Heidsieck Rémy Cointreau Group 8.1Weilong Yantai Weilong Grape Wine 7.0Whiskey Chivas Regal Pernod-Ricard Groupe 33.1Johnnie Walker Diageo 23.1Jack Daniel's Brown-Forman Corp 6.1Jim Beam Fortune Brands 3.3Ballantine's Pernod Ricard Groupe 2.0Brandy/Cognac Changyu Yantai Changyu Group 57.1Hennessy LVMH Moët Hennessy Louis Vuitton 14.1Martell Pernod-Ricard Groupe 7.5Rémy Martin Rémy Cointreau Group 6.1Courvoisier Fortune Brands 1.0White Spirits Absolut Pernod-Ricard Groupe 28.1Smirnoff Diageo 22.5Gordon's Diageo 10.6Eristoff Bacardi & Co 5.4Skyy Campari Milano SpA, Davide 4.4Rum Bacardi Bacardi & Co 72.4Havana Club Pernod-Ricard Groupe 6.4Captain Morgan Diageo 3.8
Source: Euromonitor
LVMH’s Asian luxury spirits
Section 2: From head to toe Luxury goods
62 [email protected] 19 January 2011
Figure 147
Chinese millionaires’ favourite drinks
2008 2009 2010 Best Luxury Imported Drinks Brand Royal Salute Royal Salute Louis XIII Hennessy Hennessy Hennessy Johnnie Walker Louis XIII Royal Salute Rémy Martin Rémy Martin Ballantine Chivas Chivas Rémy Martin Best Super Luxury Whiskey Royal Salute 21 Years Old Royal Salute 21 Years Old Royal Salute 21 Years OldJohnnie Walker Blue Label Johnnie Walker Blue Label Johnnie Walker Blue Label Macallan 40 Years Old Ballantine's 30 Years Old Ballantine's 30 Years Old Royal Salute 38 Years Old Macallan 40 Years Old Best Ultra Luxury Cognac Louis XIII Louis XIII Louis XIII L'Age d'Or de Rémy Martin Richard Hennessy Richard Hennessy Richard Hennessy Best Premium Cognac Hennessy XO Hennessy XO Hennessy X.O Martell XO Rémy Martin XO Martell Cordon Bleu Rémy Martin XO Martell XO Rémy Martin X.O Best Chinese Spirits Moutai Moutai Moutai Wuliangye Wuliangye Wuliangye Luzhou Laojiao Luzhou Laojiao Luzhou Laojiao Best Premium Champagne Veuve Clicquot La Grande Dame Veuve Clicquot La Grande Dame Moět & Chandon Dom Pérignon Moět & Chandon Brut Imperial Vintage Dom Pérignon Moět & Chandon Brut Imperial Vintage Dom Pérignon Veuve Clicquot Piper- Heidsieck Brut Cuvée Rare Piper-Heidsieck Brut Cuvée Rare
Source: Hurun Research Institute
Prestige cosmetics We believe China will have the fastest-growing premium cosmetics market in the world over the next four years - we expect a 14% Cagr compared with the global average of 5%. Slowing/declining growth in the cosmetics market in Western economies will largely be offset by expansion in emerging markets, particularly Russia, India, China of what we estimate will be 14-17% per annum. The USA and Japan remain the largest premium cosmetics markets in the world, and sales in these countries are expected to remain flat/slightly decline in 2010-14. We estimate that the Chinese premium cosmetics market will grow from US$3.5bn to US$6bn in 14CL.
Figure 148
Cosmetics and toiletries market 2009-14 Cagr
(5) 0 5 10 15 20
JapanUSA
FranceItaly
United KingdomSpain
CanadaWorldBrazilChinaIndia
Russia
(%)
Source: Euromonitor, CLSA Asia-Pacific markets
Rising demand from emerging economies
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 63
Figure 149
Brics market size and growth
(US$m) 2010 % of global 2014 % of global Cagr (%) 10-14
China 3,514 4 5,992 6 14
India 521 1 979 1 17
Russia 1,266 2 2,409 3 17
Brazil 430 1 624 1 10
Total 5,730 7 10,004 10 15
Source: Euromonitor, CLSA Asia-Pacific Markets
Key trends In China, pale skin traditionally represents feminine beauty, which explains the large sums of money spent on whitening as well as sunscreen products. As people get richer, they are moving from “needs” to “wants”, and women want clean, white skin. As such, cosmetics sales are outstripping GDP growth.
Skincare accounts for 58% of the premium cosmetics market in China, only slightly lower than Japan, where pale skin is also highly valued. Unlike other Western markets, fragrances are not a major segment in China. Fragrances, however, make up 62-76% of the Brazil and Russia markets.
Figure 150
China’s premium cosmetics market breakdown (2010)
Skin care 58%
Sun care 3%
Bath and shower 4%
Hair care 5%
Sets/Kits 8%
Colour cosmetics 10%
Fragrances 11%
Deodorants 0%
Baby care 1%
Figure 151 Figure 152
Skincare as % of premium cosmetics
Fragrance as % of premium cosmetics
0 20 40 60 80
Brazil
India
Russia
USA
UK
Canada
Spain
World
France
Italy
China
Japan
(%)
0 20 40 60 80
Japan
China
India
Canada
World
USA
Italy
UK
France
Spain
Russia
Brazil
(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
In China, pale skin traditionally represents
feminine beauty
About 58% of market is skincare
Fragrances is a relatively small segment in China
Section 2: From head to toe Luxury goods
64 [email protected] 19 January 2011
China’s premium cosmetics market enjoyed a strong 24% Cagr over 2000-10, especially in premium skincare, as consumers’ discretionary income rises. But it remains highly fragmented and the lack of premium local Chinese brands creates a tremendous opportunity for foreign companies. China’s premium skincare market is valued at US$2bn, still a fraction of Japan’s US$9bn market but growing very rapidly.
Figure 153
China premium cosmetics segment growth rates (10-14CL)
0 5 10 15 20
Bath and shower
Hair care
Fragrances
Skin care
Sets/Kits
Sun care
Baby care
Colour cosmetics
(%)
Source: Euromonitor, CLSA Asia-Pacific Markets
Foreign brands are doing well in cosmetics. For example, our US analyst Caroline Levy projects that China would grow to 10% of total Ebit for Estée Lauder by 2020 from 4.5% today. This translates to US$1.6bn of sales and US$273m of Ebit. As we should expect in this fast-growing market, investment levels are high, channels are segmenting, brands are innovating, and distribution is evolving fast. Geographical differences play a role: for example, the drier northern region has a stronger bias towards moisturising products.
Global cosmetics giant Amway Corp holds a dominant share in China with its direct selling and retailing strategy in the country. However, in terms of brand recognition, ultra-premium brands Chanel, Dior, Shiseido, L’Oreal, and Hugo Boss are still the top five that mainland millionaires like. Although domestic firms, like Shanghai Jahwa, are trying to break into the premium segment, their success so far is still primarily coming from the mid-market.
Figure 154
Premium cosmetics brand shares in China
Brand (%) Company 2005 2006 2007 2008 2009Amway Amway Corp 28.9 23.8 22.7 24.9 23.0Shiseido Shiseido 2.9 4.1 4.4 5.1 7.3Lancôme L'Oréal 4.5 5.4 5.5 6.0 6.9Estée Lauder Estée Lauder 2.9 3.8 4.4 4.7 5.0Fancl Fancl Corp 0.3 1.0 2.0 2.9 3.3Clinique Estée Lauder 1.8 2.2 2.3 2.4 2.5Kosé Kosé Corp 2.3 2.6 2.4 2.3 2.3Chanel Chanel SA 1.3 1.7 2.0 2.1 2.2Christian Dior LVMH Moët Hennessy Louis Vuitton 1.6 1.8 1.9 2.0 2.0Biotherm L'Oréal 1.3 1.5 1.6 1.6 1.7Guerlain LVMH Moët Hennessy Louis Vuitton 1.0 1.1 1.3 1.4 1.5SK-II Procter & Gamble 4.2 2.2 1.4 1.1 0.9Others Others 47.1 48.9 48.3 43.6 41.4Total Total 100.0 100.0 100.0 100.0 100.0
Source: Euromonitor
US$2bn premium skincare market
Still a foreign brands’ market
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 65
Figure 155
Chinese millionaires’ favourite skincare brands
2008 2009 2010
Shiseido Shiseido Chanel
HUGO BOSS Lancome Dior
Lancôme HUGO BOSS Shiseido
Biotherm Chanel L' Oréal
Chanel Biotherm HUGO BOSS
Shu Uemura L' Oréal La Mer
La Mer Shu Uemura
L' Oréal La Mer Source: Hurun Research Institute
Our proprietary survey’s results also confirm that global foreign brands dominate the prestigious cosmetics market in the mainland.
Figure 156 Figure 157
Which luxury brands would you like to own?
Which luxury brands did you buy?
Skincare & Cosmetics15
8
6
5
5
1
1
1
1
1
0 5 10 15 20
Marubi
VICHY
Clinique
Olay
L'Oreal
Dior
Shiseido
Chanel
Lancome
Estee Lauder
(% of consumers)
Skincare & Cosmetics
2
2
2
3
3
4
4
6
11
14
0 5 10 15
Biotherm
Nivea
Sisley
L'Oreal
Olay
Clinique
Dior
Lancome
Shiseido
Estee Lauder
(No. of mentions)
Perfume
16
15
7
3
2
1
1
1
0
0
0 5 10 15 20
Hermes
Davidoff
Prairie
AnnaSui
Guerlain
Calvin Klein
Lancome
Dior
Chanel
Estee Lauder
(% of consumers)
Perfume
1
1
1
2
2
2
2
4
4
12
0 5 10 15
Hermes
Kenzo
Issey Miyake
Adidas
Burberry
Calvin Klein
Estee Lauder
Dior
Lancome
Chanel
(No. of mentions)
Source: CLSA Asia-Pacific Markets
Cosmetics are characterised by high brand loyalty, as our recent China Brands Index report confirms.
Another trend in the cosmetics space in China is the rapid growth of the men’s grooming market. Euromonitor expects the market Cagr for male-grooming products in 2010-14 to be more than double that of the overall beauty and personal care market at 22%, compared with 10%. Unilever and L’Oreal have both invested heavily in this segment in the past four years and built a 32% and 11% market share in men’s toiletries. As the men’s market continues to develop, we expect high-end brands to tap into this fast-growing segment as well.
Foreign brands well-recognised
Men’s grooming market may be the next luxury segment
Everyone likes foreign names
Section 2: From head to toe Luxury goods
66 [email protected] 19 January 2011
Figure 158
Brand loyalty across sectors
0 20 40 60 80 100
Mobile service
Supermarket
Cosmetics
Insurance
Dept store
Skin care
Camera
Aircon
Wine
Washing machine
Online travel
PC
Instant messaging
Instant noodles
Juice
Refrigerator
Dairy
Mobile handset
Tea beverages
Shampoo
CSD drinks
Beer
Bottled water
TV
Car
Banking
Search engine
Sportswear
Shoes (non-sports)
Clothing (non-sports)(%)
Source: CLSA Asia-Pacific Markets
Figure 159
Men’s grooming market growth vs overall beauty and personal-care market
9101011109
1214
1820
2426
2727
38
22
0
5
10
15
20
25
30
35
40
45
2007 2008 2009 2010 2011 2012 2013 2014
(%) Men's grooming market
Beauty and personal care market
Source: Euromonitor, CLSA Asia-Pacific Markets
Our China Brands Index shows high loyalty for
cosmetics and skincare
Growing at double-digits
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 67
Luxury services As the Chinese saying goes, daily life is all about clothes, food, accommodation and travel. Luxury goods, therefore, are only part of the equation. Chinese affluent are also willing to pay to get the best out of other elements of life, including eating, sleeping, and even match-making.
Restaurants Mainland Chinese enjoy high-end services, ranging from gourmet restaurants to match-making services. In Hong Kong, overnight visitors from China spent HK$561 per capita on meals outside hotel, or 8% of their total spending in Hong Kong. However, affluent mainland tourists are spending much more than this average during their trips to Hong Kong.
Miramar group in Hong Kong said they often see travellers walk in to their upmarket Cantonese restaurant with their shopping bags and walk out with a HK$100,000 bill for dinner. A classic lunch party would be a table of 10 mainland travellers washing down a menu of abalone and shark’s fin soup with half a dozen bottles of Chateau Lafite Rothschild. The restaurant’s dinner sets range from HK$8,880-13,880.
With strong brand recognition, Miramar is planning to expand into China. It is aiming to open 20 restaurants by 2017 at a total cost of HK$400m. The company estimates that in Beijing, where its first outlet will open by mid-2011, wealthy Chinese would spend about Rmb1,200 per head. It aims to recover the HK$30m investment cost in two years.
The imperial four In China, the four most prestigious food ingredients are abalone, sea cucumber, shark’s fin, and fish maw. These items are believed to be imperial food ingredients only served at the emperor’s table. Time has changed, however, and the affluent individuals in the mainland
now frequently visit luxury restaurants and order these items for dining along with other delicacies such as bird’s nest, snake soup and hairy crabs. In recent years, Western favourites such as lobsters and truffle are also appearing more often on Chinese menus.
Sample full dinner menus
Chinese French
Roasted whole crispy suckling pig Fresh and smoked salmon tartare
Stir-fried prawns braised with crab roe sauce Chestnut soup with praline cream and chicken mousse dumpling
Braised seasonal green with bamboo fungus and Yunnan ham Seared sea bass with steamed zucchini, tomato, basil and truffle
Braised whole conpoy stuffed in turnip ring Duck breast fillet with caramelized autumn fruit and fig reduction
Braised superior shark’s fin with Chinese cabbage in brown sauce Dessert
Steamed fresh spotted garoupa Coffee or tea
Braised abalone and sea cucumber with premium oyster cause
Deep-fried crispy chicken with osmanthus sauce
Fried rice with dried conpoy, dried fish and roasted duck
Braised e-fu noodles with wild mushrooms
Double-boiled sweetened lotus seed with red dates and dried longans
Chinese petits four
Source: Cuisine Cuisine, Le Jardin de Joel Robuchon
Abalone and shark’s fin soup
Rmb1,200 per head
Section 2: From head to toe Luxury goods
68 [email protected] 19 January 2011
Figure 160 Figure 161
Shark’s fin and imperial bird’s nest (HK$720 per bowl)
Braised assorted snake soup (HK$880 per bowl)
Source: Company website
With more than 50 outlets nationwide, mainland restaurant chain South Beauty Group has also introduced the Lan Club in Beijing and Shanghai to target affluent individuals in the mainland. Bringing in world-class professionals who have designed New York’s Buddakan and the W Hotel Pudong in Shanghai, South Beauty Group feels that the Chinese elite demands sophistication and taste in their dining experience. Meanwhile, one of the world’s most famous chefs Jean-Georges Vongerichten also opened a restaurant in Shanghai featuring appetizers starting from Rmb118-198 and dinner entrees from Rmb248-348.
Hotels Chinese affluent like to maintain their luxurious lifestyle when they are on the road. According to Hurun’s Best of the Best survey, Shangri-La is the top hotel brand among Chinese millionaires. Grand Hyatt, Hyatt Regency and Hilton have also consistently been ranked among the top five.
Figure 162
Chinese millionaires’ favourite hotels
2006 2007 2008 2009 2010
Shangri-La Shangri-La Shangri-La Shangri-La Shangri-La
Grand Hyatt Grand Hyatt Hyatt Regency Grand Hyatt Grand Hyatt
Hyatt Regency Hyatt Regency Grand Hyatt Hyatt Regency Hilton
Hilton Hilton Kempinski Hilton Sheraton
Sheraton Sheraton Sheraton Kempinski Hyatt Regency
JW Marriott Marriott
Kempinski Kempinski
Source: Hurun Research Institute
High-end hotel chains have ramped up their expansion plans in China to capture opportunities in this luxury segment. Starwood expects to add 86 hotels to its current network of 62 in China.
Meanwhile, InterContinental aims to double its number of rooms in the Greater China region in the next five years. The company expects China to overtake the US as the world’s largest hotel market by 2025 and become twice the size of the current US market by 2039.
Shangri-La is the top brand
High-end dining taking off in the mainland
Section 2: From head to toe Luxury goods
19 January 2011 [email protected] 69
Figure 163
Hotel growth rate in mainland China (number of hotels)
(40)
(30)
(20)
(10)
0
10
20
30
40
50
60
1995 1997 1999 2001 2003 2005 2007 2009
Total hotels 5-star hotels(%)
Source: CEIC, CLSA Asia-Pacific Markets
Some luxury hotels in Shanghai are already at a price range comparable with those in financial hubs such as New York and London.
Figure 164
Luxury hotel price comparison
0 100 200 300 400 500 600 700
Intercontinental Beijing Beichen Hotel
St. Regis Shanghai
Westin, Bund Center Shanghai
The Westin Beijing Chaoyang
The Peninsula Beijing
Hilton New York
Grand Hyatt Shenzhen
Sheraton Shenzhen Futian Hotel
Grand Hyatt Shanghai
Grand Hyatt Beijing
Shangri-La China World Hotel, Beijing
JW Marriott Hotel Beijing
Four Seasons London Canary Wharf
Four Seasons Shanghai
Pudong Shangri-La Shanghai
Trump Soho New York
The New York Palace
The Ritz-Carlton Shanghai, Pudong
The Peninsula Shanghai
Mandarin Oriental Hyde Park, London
The Ritz London
Ritz-Carlton New York, Central Park
(US$)
Source: Expedia, CLSA Asia-Pacific Markets
Not only are these hotel chains aggressively building up in major cities, they are also targeting popular tourist spots in China. In November 2010, St. Regis opened the first international luxury hotels in Lhasa, the capital of Tibet. Shangri-La Asia is also targeting to develop one there in 2012 and InterContinental is planning a 2,000-room hotel within three years.
Luxury five-star hotels booming
Hotel prices catching up with global peers . . .
.. . . primarily in Tier-1 cities
Section 2: From head to toe Luxury goods
70 [email protected] 19 January 2011
Match-making The rapid rise of these Chinese affluent has created a new challenge for themselves and a business opportunity for some. The Chinese Academy of Social Sciences forecasts that by 2020, 24 million Chinese men of marrying age could see a shortage of brides, partly because of the one-child policy.
Figure 165
Mainland population aged 18-34
145
150
155
160
165
170
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Male aged 18-34 Female aged 18-34(m)
Source: Euromonitor, CLSA Asia-Pacific Markets
Coupled with this macro trend, wealthy Chinese are moving into circles that make it hard for them to find partners, said the founder of a match-making company in China, Diamond Bachelor. Diamond Bachelor, which claims that it has five million clients and a success rate, defined as clients falling in love with their recommendations, of at least 80%, sends “love hunters” out to restaurants and malls to scour for the right women. The company then categorises women based on age, education, height, and looks. According to its website (915915.com, which is a homonym for “just want me, just want me”), the company’s definition for a “diamond bachelor” is an individual with net worth of more than Rmb2m or with “extremely outstanding” profiles.
In 2009, a group of 21 single billionaires and 22 single women attended a match-making ball in Beijing with tickets costing Rmb100,000 a head. In June 2010, jiayuan.com, a large online-dating agency, even held a competition to find the perfect match for 18 of its millionaire members. It was reported that the competition drew 50,000 Chinese applicants including girls from Vancouver, Singapore, New York and Paris.
Figure 166
Diamond Bachelor website featuring its “love hunters”
Source: 915915.com.cn
Rmb100,000 for a match-making ball ticket
VIP match-making service
Hard time finding a bride
Claiming an 80% success rate
Section 3 : European brands dominate Luxury goods
19 January 2011 [email protected] 71
European brands dominate The luxury-goods sector globally has long been dominated by European brands. They are names that have been popular among elites in the West and have for many years been favourites of royal families and tycoons. Over time we expect the emergence of Chinese luxury brands in the product categories, where China has fundamental advantage, primarily from expertise developed over a long period in some product materials such as jade, porcelain or cashmere.
Figure 167
Chinese millionaires’ most favourite luxury brands
2008 2009 2010
BMW Louis Vuitton Louis Vuitton
Louis Vuitton BMW Cartier
Mercedes-Benz Mercedes-Benz Chanel
Cartier Rolls-Royce Hermès
Chanel Rolex Gucci
Rolex Ferrari BMW
Ferrari Cartier Mercedes-Benz
Giorgio Armani Chanel Patek Philippe
Gucci Bentley Montblanc
Vacheron Constantin Porsche Armani
Source: Hurun Research Institute
We believe that these successful brands in China still have huge growth potential.
Figure 168
Luxury brands with huge potential in China
Cosmetics Watches
Estee Lauder Rolex
Lancome Omega
Chanel Cartier
Dior Longines
Shiseido Patek Philippe
Handbags Shoes
Louis Vuitton Gucci
Gucci Louis Vuitton
Hermes Tod's
Chanel Prada
Prada Belle
Women's Apparel Men's Apparel
Armani Zegna
Prada Armani
Chanel Dunhill
Ports Design Hugo Boss
Gucci Prada
Source: CLSA Asia-Pacific Markets
Chinese look for better product quality and brand image when selecting luxury-goods brands.
Quality and brand image are key
Luxury from the West
Best of the best for Chinese
Brands ready to grab shares
Section 3 : European brands dominate Luxury goods
72 [email protected] 19 January 2011
Figure 169
Reasons why people buy luxury goods
0 5 10 15 20 25 30
Friends' recommendation
Customer service
Innovation
Convenience/location
Price/value
Performance
Brand image/design
Quality & reliability
(% of total votes cast)
Source: CLSA Asia-Pacific Markets
Product quality The “Made in China” stigma still sticks in some Chinese consumers’ mind. They still remember the days when most operations were state-owned and quality was not well-controlled. Even now, the country is still fine-tuning its quality control systems in categories from food to cosmetics to toys.
In contrast, European products are known to be elegant and carefully hand-crafted. The royal families that are still in place in some countries in Europe also add some spice to the fairy tale. In reality, it does take a long time to finish luxury goods. It takes 18 hours to make a Hermes Birkin bag and four years to train a leather craftsman. Since the company only takes the best part of the crocodile, ie the belly, three different crocodiles are needed for one bag and it takes four years to raise one crocodile.
Brand image The CRR brand survey we conducted in 2009 shows that quality and image determine brand decision making in China. This is what European luxury brands offer - brand image and world-class designers that translate into supreme quality and fashion.
The European luxury brands often come with similar stories and ingredients.
A humble background in the 17-19th century in Europe
Very high-quality products, some of which eventually turn into a signature collection
Talented designers who are frequently publicised in the press
The brand becomes a favourite among celebrities, royal families and other influential figures
Wealthy individuals and aspirational shoppers flock to their boutiques
Brands such as Prada, Hermes, Louis Vuitton, Chanel and Cartier all fit into this storyline. At the end, heritage is a key part of what is so attractive about these luxury brands.
Made in Europe is still more desirable
Section 3 : European brands dominate Luxury goods
19 January 2011 [email protected] 73
Catering to Asian tastes Most luxury-goods companies offer the same product range globally and there is not much tailoring to specific markets. This would affect the perceived authenticity of the product - as each product needs to reflect the heritage of that brand including the input of the designers to account for current fashion trends. The product range, however, should account for specific weather conditions in that market.
There are some product categories that need to be localised, for example, cars. Chinese affluent like to be chauffeured and therefore luxury brands Audi, BMW and Mercedes have all introduced extended versions. However, while the products are not dramatically altered, marketing plans are. Early this year, fashion house Christian Dior introduced a limited blue collection in Shanghai. In celebration of the Shanghai Expo, Chanel created accessories with Chinese elements. This year, Ermenegildo Zegna celebrated its 100th anniversary in Shanghai. Anna Wintour, US Vogue editor, also made her first visit to China recently and the prominent fashion magazine featured eight Asian models in its December issue.
As the affluent Chinese may still be new to the world of luxury, brands have recruited celebrities to wear their products at events or simply show up to show support for the brands. A brand consultant estimates that it may cost as much as HK$1m plus gifts to attract an A-list star. Oftentimes, there may be dozens of celebrities from A-list to C-list at one event. The more traditional way of signing up celebrities as spokespersons, however, is still common.
Luxury brands are also increasingly featuring Asian models to build a connection with Chinese consumers. Asian models broke records this season, accounting for 7.1% of all models at New York Fashion Week, according to a seasonal survey by a Jezebel.com. Liu Wen, widely considered to be China’s top model and known as the first Asian model joining the Victoria’s Secret Fashion Show, is working with Estée Lauder to promote its exclusive product line in China.
Figure 170 Figure 171
Asian model Liu Wen
US Vogue December issue featuring eight Asian models
Source: Estee Lauder
Source: Vogue.com
Global collections
Some localisation but depends on product
category
Rise in Asian models
Section 3 : European brands dominate Luxury goods
74 [email protected] 19 January 2011
Asian luxury brands The rise of Asian luxury-goods brands is inevitable but we believe the product category will need to be closely aligned to specific areas where there exists some fundamental advantage. We expect this would be traditional crafts, which are associated with the rural past.
This view is echoed by Matthew Crabbe, co-founder of consultancy Access Asia. He believes that local materials and local crafts have an appeal to Chinese consumers. “Chinese [consumers] are increasingly exploring their roots and crafts and bringing them up to date. [Middle and upper-class Chinese] have a romantic view of the rural past and rural culture, and crafts. There is a growing interest. For example, top-notch luxury tea. This fits in with that trend.”
However, one of the challenges is that there is fast becoming a shortage of craftsmen that can produce these various products. According to a 2009 report by the China Arts and Crafts Association, 42% of the 1,865 officially recognised traditional crafts are struggling or in danger of dying out and 6% of those are already lost.
The suggested solution is to upgrade the role of craftsman in society to encourage people into these professions rather than work in less-skilful positions but initially higher-paid jobs. Switzerland faced a similar problem during the 1980s and 1990s when there was a sharp drop in the number of watchmakers and other personnel involved in the watch-making process.
But India might have a solution. In India, Titan Industries, now one of the top-10 watchmakers in the world by volume, overcame the problem in the 1980s. The company recruited boys who had left school with top marks and it provided housing and meals along with “foster fathers” to teach these young men about life. It then provided training by master craftsmen, who also served as foremen once production began. No longer did this help develop the watch-making industry in India, but it also transformed the lives of these boys and helped their families.
Shang Xia by Hermes In September 2010, Hermes launched a Chinese brand, Shang Xia, which means “up-down” in Mandarin. According to their website, Shang Xia offers Chinese and Asian heritage created for a contemporary lifestyle. The brand opened its first store in Shanghai in September.
Figure 172
Shang Xia store in Shanghai
Source: Company
Leveraging product material expertise
Shortage of craftsman
Unique solution in India
The first luxury Chinese brand
Section 3 : European brands dominate Luxury goods
19 January 2011 [email protected] 75
The initial product offering includes around 200 designs of furniture, tea and dishware, apparel, jewellery, accessories with price points ranging from Rmb180-50,000. Lynn Zhou, our consumer analyst based in Shanghai, visited the store. According to the salesperson, the best-selling products are jewellery and clothing. One piece of sterling silver bangle bracelet with the “Shang Xia” logo pattern, which costs Rmb3,000, was almost sold out of stock. Their products are not only Chinese. For example, cashmere products are made in Mongolia or Nepal. They try to promote the best craftsmanship of both China and other countries. We liked their eggshell porcelain bowls and cashmere coats. The brand is not doing much advertising in China for now and we do not see much comment in local media or internet communities. But because of its connections with Hermes, they have more media coverage in the West. As a result, a majority of the purchases in this store were made by foreign shoppers. As far as we could see, the people that visited the store were all impressed, by its decoration and delicateness, as well as price tags.
Figure 173 Figure 174
A popular silver bangle bracelet
Lynn’s favourite eggshell porcelain
Source: Shang Xia company website
Potential categories for Asian luxury brands Hermes seems to have recognised that the starting point to develop credibility is to leverage China’s perceived (and actual) expertise in a number of core materials and therefore it is offering five collections featuring the best of these materials.
Figure 175
Materials expertise drives product offerings
Teaware
JewelleryApparel
Zitan Wood
Bamboo
Felt
Cashmere
Eggshell Procelain
Jade & Agate
HomewareFurniture
Source: CLSA Asia-Pacific Markets, Hermes
We believe that Asia has a long history and expertise in areas like porcelain, silk, embroidery and paper, while leather craftsmanship and watch-making skills are very refined in the West. It is the abundance of these materials in the region that has driven the development of expertise. For apparel, furniture, and cosmetics, we would argue that neither region has any fundamental advantage and they don’t require very advanced skills or technology.
Lifestyle product offering
Opportunities for Eastern brands
Leveraging off China’s best
Impressive store and products
Section 3 : European brands dominate Luxury goods
76 [email protected] 19 January 2011
In terms of potential for Asia, we believe it is very challenging for China to develop the technology and catch up with automakers in the West and Swiss watch-making professionals. However, with handbags, jewellery and alcohol, China may have a better chance.
Figure 176
Expertise in the East and West
Handbags
Alcohol
Watches
Cars
Jewellery
Furniture
Apparel
Cosmetics
Porcelain
EmbroiderySilk
Paper
HandbagsJewellery
Alcohol(spirits)
West East
Handbags
Alcohol
Watches
Cars
Jewellery
Furniture
Apparel
Cosmetics
Porcelain
EmbroiderySilk
Paper
HandbagsJewellery
Alcohol(spirits)
Handbags
Alcohol
Watches
Cars
Jewellery
Handbags
Alcohol
Watches
Cars
Jewellery
Furniture
Apparel
Cosmetics
Furniture
Apparel
Cosmetics
Porcelain
EmbroiderySilk
Paper
Porcelain
EmbroiderySilk
Paper
HandbagsJewellery
Alcohol(spirits)
HandbagsJewellery
Alcohol(spirits)
West East
Source: CLSA Asia-Pacific Markets
The following categories offer good prospects in China:
Alcohol - premium local spirits such as Moutai and Wu Liang Ye are successful examples. The patriotic element makes these good corporate gifts.
Furniture - rare materials coupled with craftsmanship can be a great brand story. Premium wood, bamboo or even cane can link the brand to Chinese heritage.
Porcelain - in China, Jingdezhen is known as the “porcelain capital” thanks to its high-quality porcelain. Shang Xia already has a collection that is affiliated with porcelain techniques from Jingdezhen.
Silk and embroidery - silk was used to make robes for the upper class and sometimes even shoes and embroidery on garment used to show wealth and status. This can be used in both clothing and accessories. Hand-made products and display of success are top priorities for Chinese affluent.
Jewellery - locals are at an advantage in terms of design preferences and product knowledge, especially with gold and jade. This category is currently dominated by Hong Kong jewellers.
Paper - with a rich literary culture and being the origin of paper, China could possibly introduce a luxury brand in this category.
Use of premium woods and bamboo
Long history with jade
Section 3 : European brands dominate Luxury goods
19 January 2011 [email protected] 77
Apparel in general - there is no fundamental reason why Chinese apparel cannot be luxury goods. Much of the apparel even for luxury brands is manufactured in China and manufacturing expertise is built up there. The question is how to transfer the design and create a brand. 3.1 Phillip Lim, for example, may be able to leverage its Asian heritage and introduce new collections catering to mainlanders.
Some examples A number of companies have already been trying to establish their brands as an Asian luxury brand.
Shanghai Tang owned by Richemont is known as a niche luxury brand for silk apparel and Chinese-inspired accessories, as well as its made-to-measure service known as “imperial tailoring”.
As an early entrant in the luxury market in China, Ports Design has successfully established itself as a high-end womenswear brand in China. It has consistently been ranked along brands like Chanel and Louis Vuitton.
Taiwan’s Shiatzy Chen is aiming to take Eastern aesthetic to a contemporary era by incorporating poetic design and Suzhou embroidery.
Hong Kong’s Blanc de Chine also tries to redefine Chinese aesthetics: its Blanc de Chine collection focuses on the tranquil and spiritual characteristics in Chinese culture; while its bleu de chine collection is inspired by Chinese martial arts.
Founded by a Hong Kong designer and a French entrepreneur, Qeelin was launched in Paris and the jeweller builds on a similar philosophy of merging East and West. With Maggie Cheung, a popular Chinese actress who has won the Cannes Best Actress and Berlin Best Actress awards, as its face, Qeelin has gained much publicity.
Figure 177 Figure 178
Chinese-inspired jackets by Shanghai Tang
Qeelin’s Wulu¹ collection
Source: Company website
¹ A water container in China in the old days. Source: Company website
With communist leaders Mao Zedong, Deng Xiaoping, and Zhou Enlai reportedly having worn its watches, Shanghai Watch has built up brand recognition on the mainland. Management has been repositioning the company to target the luxury segment in the past few years. The company’s gold watches with alligator leather straps retail for about US$17,800 and unlike most luxury watches that are powered by Swiss movements, Shanghai Watches’ timepieces are made entirely in China.
Chinese apparel on the rise
Ports Design - a leading luxury brand in China
Section 3 : European brands dominate Luxury goods
78 [email protected] 19 January 2011
Figure 179
Only 100 were produced for each of these five designs
Source: Company website
Times are changing and we expect Asian companies will continue to acquire international luxury brands as well as create their own brands.
Trinity has acquired a number of overseas higher-end brands including Cerutti and Kent & Curwen.
Megha Mittal of the Indian Mittal group of companies acquired Escada.
These Asian companies have developed the manufacturing or sourcing expertise for some of these items (not all) so it would seem natural to integrate or acquire brands. This has occurred in many lower or mid-priced segments where the OEM manufacturer transformed into the brand owner. Examples include Daphne and Belle in footwear and Anta in sporting goods. According to a BBC news report, Chinese factories are increasing their manufacturing presence in Italy - they estimate that there are up 5,000 Chinese factories in Prato, Italy. Chinese imported fabrics costs 10% of Italian, which is resulting in much lower sourcing costs for Italian brands. Products are still Made in Italy, but by Chinese factories.
Figure 180
The possible trend
Bought in China Made in China Owned in ChinaBought in China Made in China Owned in China
Source: CLSA Asia-Pacific Markets
We do not believe the corporate ownership of brands has any negative implications for consumers. Most consumers recognise that large corporations own a range of brands and that only a few of the larger luxury brands are owned independently. Examples of multibrand groups include LVMH, Richemont, PPR and Swatch. For the mostly mono-brand companies, examples include Bulgari, Hermes, Tod’s, Burberry for the listed companies and then Prada, Rolex, Chanel, Armani and Dolce & Gabbana for the private companies.
We also believe it does not matter where companies are listed. In fact, we would argue there are strong commercial reasons for branded consumer goods to be listed where they generate a significant part of their business – as this will help improve the brand awareness. L’Occitane, which was recently listed in Hong Kong, saw a significant increase in sales in Hong Kong and in Asia around the time of their IPO. Sands China and Wynn Macau recently listed their Asian operations in Hong Kong. We expect a growing trend towards more global consumer companies listing in Asia all or part of their business.
Acquiring luxury brands
More Asian listings
Ownership doesn't impact brand prestige
Section 4 : Getting exposed Luxury goods
19 January 2011 [email protected] 79
Getting exposed In our ideal world, the perfect luxury-goods investment would be one of the major European brands listing their Chinese business on the Hong Kong Stock Exchange - for example Chanel China or LVMH Asia. Back in the real world we need to trade off a number of factors when determining the best way to get exposure to rising luxury good demand by the Chinese.
Key factors include a) percentage of earnings derived by the Chinese (including overseas demand) - as this is the fastest-growth segment; b) brand owner versus distributor - which has an impact on long-term earnings sustainability; c) product mix - weighting to mid- to high-end price points, which will grow faster; d) valuation - determining whether all the good news is priced in; and e) investability - market cap and average trading volume.
Geographic mix: Exposure to Greater China customers Nearly all the leading luxury brands mentioned in the previous section are listed in Europe or the US or form part of private companies. However. most of these brands derive around 10-20% of their sales from Greater China. Swatch and Richemont have the greater China exposure of these names with 22-28% of sales.
The Asian-listed names derive close to 100% of earnings from Greater China, which enjoys the highest growth rates globally. L’Occitane is the exception as the company is currently deriving 17% of sales and about 20-25% of earnings from Greater China.
Product mix: Exposure to the high end Most of the European and US-listed brand owners generate the majority of their earnings (not necessarily sales) from the luxury segment. The larger conglomerates such as LVMH also sell premium drinks and cosmetics, which are exposed to the same drivers. PPR (owner of the Gucci brands) has a general retail business.
The Asian-listed names can be split into a five broad categories:
Apparel brand owners - Ports Design, Trinity and Evergreen. The first two operate in the luxury segment while Evergreen has about 75% of sales in the high end.
Watch and jewellery retailers - Hengdeli, Luk Fook, Chow Sang Sang, Emperor Watch & Jewellery; Oriental Watch and HK Resources (3D Gold), Each of these operators are operating at mid to high price points.
Department stores and fashion retailing - Parkson, Golden Eagle, Lifestyle and I.T. More than half of the sales for these companies are derived from apparel, accessories and prestige cosmetics.
Cosmetics - Sa Sa and L’Occitane.
Footwear specialists - Belle and Daphne, although Daphne is not featured in this report as prices points are more mid end. Belle generates about 50% of sales in high end.
European owned and listed
Picking names to get exposure
Five key categories for Asian-listed names
Section 4 : Getting exposed Luxury goods
80 [email protected] 19 January 2011
Business model: Brand owner versus distributor We typically have a preference for brand owners versus retailers as brand owners have better earnings sustainability over the longer run as it is difficult to establish new luxury brands given the brand heritage and positioning. Retailers are subject to greater competitive pressures from other retailers (pricing, store footprint) and may not be able to maintain relationships with key luxury suppliers. Note that the brand owners mostly operate a retail-intensive distribution model (average sales via retail is 60% depending on product category ie watches is more wholesale) so the capital intensity is similar - manufacturing does not always represent the complicated aspect of the value chain and is commonly outsourced.
There are two large listed brand owners - Ports Design and Trinity plus Evergreen which sells at slightly lower price points. I.T Limited is both a retailer and brand owner in the fashion segment.
Luxury exposure via retailers is easier to attain in China as the majority of luxury brands are sold in department stores as against free-standing flagship stores in other markets.
Earnings growth and valuation The European/US luxury-goods names are trading on the same PE multiple as the Asian listed names - about 22x 2011 earnings. Consensus expects around 22% EPS growth for the Asian names against 15% for the US/European names, which implies a lower PE multiple on 2012 earnings and a lower PE/G multiple of 1x for Asian names vs 1.6x for international names.
Invest-ability: Size and liquidity Clearly the European and US names are much larger in market-cap terms and also have greater liquidity. However, we note that the Asian listed names are growing quickly and since 2001 or their IPO, these stocks have shown an average annual share price appreciation of 35%
Figure 181
Average annual share price performance since 2001 or IPO
(20) 0 20 40 60 80 100
Evergreen
Belle
HK Resources (3D Gold)
I.T Limited
Oriental Watch
Ports Design
Lifestyle
Sasa
Parkson
Average
Chow Sang Sang Jewellery
L'Occitane
Emperor Watch & Jewellery
Golden Eagle
Luk Fook
Hengdeli
Trinity
(%)
Source: China Reality Research
Brand owners offer better earnings visibility
Department stores are still popular in China for
luxury goods
Asian plays are much cheaper on a PEG basis
Section 4 : Getting exposed Luxury goods
19 January 2011 [email protected] 81
Snapshot of Asian-listed names We have written up 16 Asian-listed high-end companies in this report. Of which, CLSA covers and has price targets on seven of the names. We see the most upside for Ports Design, Evergreen, L’Occitane and Parkson. We currently rate Golden Eagle as O-PF. Hengdeli has increased 57% during 2010 and we currently see less upside to our price target. Nonetheless, we have a very positive medium-term view on organic growth and acquisition opportunities.
We also have a positive view on Trinity, Lifestyle, Emperor Watch and Jewellery, I.T Limited and Sa Sa International.
Figure 182
Asian-listed high-end companies
Stock Bbg Rec Price Jan13
Target Upside (%)
Ports Design 589 HK BUY 21.9 29.0 33Evergreen 238 HK BUY 5.3 7.0 31L'Occitane 973 HK BUY 20.5 26.0 27Parkson 3368 HK BUY 13.0 15.9 22Belle 1880 HK BUY 14.0 15.6 11Hengdeli 3389 HK BUY 4.8 5.3 10Golden Eagle 3308 HK O-PF 21.8 22.3 3Source: Bloomberg, CLSA Asia-Pacific Markets
Quick summary of each of the names
Belle: Leading high-end footwear player in China and vertically integrated business model enables better inventory management and full priced sales.
Chow Sang Sang: Top-three jewellery retailer in China trading on only 12x 2011 consensus earnings.
Emperor Watch & Jewellery: One of the biggest watch retailers in Hong Kong with strong relationships with Rolex, LVMH and Patek. Opportunities to grow in China and also in jewellery. Trading on 0.4x PEG.
Evergreen: Targeting more mid-end men’s apparel, which will grow quickly especially in lower-tier cities. We see 31% upside to our price target.
Golden Eagle: Regional department store specialist in lower-tier cities. Good execution track record but valuation looking pricey.
Hengdeli: Largest watch distributor in China with 30% market shares. Plans to more than double its store network to 800-1,000 from 302 now via acquisitions.
HK Resources (3D Gold): Known as the gold boutique. The company is planning to aggressively grow from 300-odd stores to 500 by 2012.
I.T: The fashion specialist in Greater China with extensive experience with more than 300 international brands. Trading on 20x consensus earnings and suspect huge room for further upgrades.
Lifestyle: Operator of SOGO Causeway and five other department stores/malls in Greater China. We expect very strong December Hong Kong retail sales and believe the company will beat consensus estimates.
Hong Kong icon
Well-heeled
Affordable jewellery
Its time has come
Men’s business
Region al specialist
Quality is timeless
Golden grow
Looking good
Section 4 : Getting exposed Luxury goods
82 [email protected] 19 January 2011
L’Occitane: One of the few true high-end brands listed in Asia with a global presence. Store expansion globally should drive strong earnings growth. We see 27% upside to our price target.
Luk Fook: Leading jewellery retailer in China with a preference for third-party operators stores under license agreement. Consensus is expecting around 30% earnings growth over the coming years.
Oriental Watch: Leading watch retailer in Hong Kong. Looking to acquire wholesale customers and trading on 11x 2011 earnings. Looks interesting.
Parkson: Largest listed department store operator in China with 83% of sales from high-priced products. We see 22% upside. BUY.
Ports Design: Leading luxury womenswear brand in China ready for a new phase of store growth. An upcoming younger product line may well be a strong catalyst. We see 33% upside. BUY.
Sa Sa International: No.1 cosmetics retailer for Greater China, with more than 34% of the key Hong Kong market. Generates about 40% of sales from its house brands. A tad pricey at 26x.
Trinity: Positive on product category (men’s); brand ownership (Kent & Curwen and Cerruti) and exclusive distributor for Gieves & Hawkes and D’URBAN and potential for more license deals and acquisitions
Figure 183
Luxury companies comparison Stock Bbg Country Industry Brand
owner Greater
China % sales
High-end % sales
Rec Mkt cap
(€m)
PE 11 (x)
PE 12 (x)
EPS gr 11-12
(%)
PE/G 11 (x)
LVMH MC FP France Diversified Yes 15 100 N-R 58,637 19.7 17.4 13.5 1.5Burberry BRBY LN UK Apparel Yes 10 100 N-R 5,704 25.4 20.7 22.3 1.1Swatch UHR VX Switzerland Watches Yes 28 90 N-R 16,827 18.1 15.9 13.6 1.3PPR PP FP France Diversified Yes 6 50% of OP N-R 15,135 13.3 11.9 11.9 1.1Richemont CFR VX Switzerland Watches & jewellery Yes 22 100 N-R 25,688 22.1 19.0 16.5 1.3Hermes RMS FP France Leather goods Yes 11 100 N-R 16,701 35.7 32.2 10.8 3.3Bulgari BUL IM Italy Watches & jewellery Yes 14 100 N-R 2,411 27.4 21.5 27.4 1.0Coach COH US US Leather goods Yes <5 100 N-R 12,217 18.7 16.6 12.6 1.5Tiffany TIF US US Jewellery Yes <5 100 N-R 5,851 21.4 18.8 14.0 1.5Tods TOD IM Italy Shoes & leather goods Yes 3 100 N-R 2,418 19.7 17.9 10.6 1.9Average 22.1 19.2 15.3 1.6Belle 1880 HK HK Footwear Yes 100 50 BUY 11,536 25.0 21.4 17.0 1.5Golden Eagle 3308 HK HK Dept store No 100 75 O-PF 4,122 28.7 22.8 25.4 1.1Parkson 3368 HK HK Dept store No 100 65 BUY 3,570 22.6 17.5 29.1 0.8Lifestyle 1212 HK HK Dept store No 100 50 N-R 3,317 24.2 22.2 9.1 2.7L'Occitane 973 HK HK Cosmetics Yes 17 100 BUY 2,954 27.8 20.8 33.8 0.8Hengdeli 3389 HK HK Watches Exclusive 100 100 BUY 2,063 27.7 23.6 17.2 1.6Luk Fook 590 HK HK Jewellery Yes 100 100 N-R 1,530 20.5 16.7 22.7 0.9Sasa 178 HK HK Cosmetics 40% 100 80 N-R 1,270 26.6 21.1 25.7 1.0Chow Sang Sang 116 HK HK Jewellery Yes 100 100 N-R 1,224 16.3 13.6 19.3 0.8Trinity 891 HK HK Apparel 54% 100 90 N-R 1,137 26.8 20.5 30.3 0.9Ports Design 589 HK HK Apparel Yes 93 100 BUY 1,211 18.0 15.2 18.6 1.0I.T 999 HK HK Apparel 50% 100 100 N-R 725 21.3 17.3 22.6 0.9Emperor W&J 887 HK HK Watches & jewellery 14% 100 100 N-R 640 15.3 10.6 43.4 0.4Evergreen 238 HK HK Apparel Yes 100 75 BUY 512 20.3 15.1 34.4 0.6Oriental Watch 398 HK HK Watches No 100 100 N-R 199 12.8 17.2 (25.6) (0.5)HK Resources (3D Gold) 2882 HK HK Jewellery Yes 100 100 N-R 182 na na na naAverage 22.2 18.4 21.5 1.0Notes LVMH to Greater Chinese customers 18% LV to Greater Chinese customers is 22% with 11% in China and 11% overseas Gucci brand 10% for mainland and 8% in HK etc so 18% for Greater China Richemont is 8% on mainland and 14% in HK etc for 22% in total for Greater China Bulgari is 8% for mainland plus 6% for HK for a total of 14%
Source: Bloomberg, CLSA Asia-Pacific Markets
A natural beauty
Jewellery specialist
Time for a change
Best of luxe
Ready to grow
Pretty in pink
Go your own way
Appendix Luxury goods
19 January 2011 [email protected] 131
Appendix: International peer group LVMH 1H10 sales breakdown by geography and segment
Leading luxury-goods giant holding a portfolio of more than 60 prestigious brands in wines and spirits, fashion and leather goods, cosmetics, watches and jewellery, and retailing.
Brands include Moët & Chandon, Dom Pérignon, Hennessy, Louis Vuitton, Fendi, Donna Karan, Loewe, Marc Jacobs, Céline, Kenzo, Givenchy, Christian Dior, Guerlain, TAG Heuer, Hublot, Zenith, DFS, Sephora, and many others. We estimate that Louis Vuitton contributes to 55% of group Ebit.
Watches and jewellery is the fastest-growing segment at 22% organic growth for 9MFY10, although the segment currently only contributes to about 5% of group sales. This is followed by wines and spirits and fashion and leather goods at 17% and 14%, respectively.
As at June 2010, LVMH had a network of 2,468 stores worldwide. Europe and Asia each accounts for 33-35% of sales. We understand that the Chinese represent about 22% of sales for the Louis Vuitton brand, which is 11% domestic with 35 stores in the mainland and 11% overseas. This is matching the Japanese for the first time this year as the co-No. 1 client base.
LVMH also holds 20.2% of Hermes, but the company said it is not seeking control or a seat on the Hermes board.
Japan9%
Rest of Asia26%
Other markets
9%
United States23%
Rest of Europe19%
France14%
Fashionand leather
goods38%
Selective retailing
27%
Wines and spirits14%
Perfumes and
cosmetics16%
Watches and jewellery
5%
Richemont 1H11 sales breakdown by geography and segment
Richemont owns a number of luxury names including Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC, Panerai and Montblanc.
Richemont is a direct luxury play, with watches and jewellery accounting for 74% of sales. Watches contribute to more than half of sales.
Hong Kong is the largest single market worldwide for Richemont. China and Hong Kong account for 22% of sales. We estimate that exposure to mainland China is at 8%.
As at September 2010, Richemont had 855 directly operated outlets. The company also runs the luxury online shop NET-A-PORTER.COM.
Some 47% of revenue comes from retail.
China/Hong Kong
22%
Japan11%
Other Asia13%
France9%
Other Americas
4%USA11% Germany,
Italy and Spain9%
Other Europe17%
Switzerland4%
Leather goods8%
Jewellery23%
Watches51%
Writing instruments
5%
Clothing & other13%
Source: Company data, Cheuvreux, CLSA Asia-Pacific Markets
Appendix Luxury goods
132 [email protected] 19 January 2011
Hermes 1H10 sales breakdown by geography and segment
Hermes is known for its top-notch craftsmanship. Its Birkin and Kelly bags and high-quality silk scarves, in particular, are hot items for ladies around the world.
Asia accounts for 46% of the sales with Japan at 19%, while Europe is at 37%. We estimate that exposure to mainland China is at 6% and Greater China is at 11%.
More than 50% of revenue comes from its highly-regarded leather goods.
As of December 2009, the company had 325 retail outlets, of which 304 are exclusive Hermes stores. There are 16 stores in China, eight in Hong Kong, seven in Taiwan and four in Macau.
LVMH holds 20.2% of Hermes, but the company said it is not seeking control or a seat on the Hermes board. Some Hermes family members proposed setting up a holding company to bolster defense. The proposed holding company should have 50.2% of Hermes share and at least as many voting rights, coupled with the first right of refusal on another 12.6% of shares. However, it was reported that some family members opted against this proposal.
Rest of Europe19%
Other2%
Rest ofAsia Pacific
27%
Americas15%
Japan19%
France18%
Other4%
Watches4%
Perfumes6%
Tableware2%
Ready-to-wear and fashion
accessories19%
Other Hermes sectors
3%
Leather goods and saddlery
51%
Silk and textiles11%
Source: Company data, Bloomberg, Cheuvreux, CLSA Asia-Pacific Markets
Bulgari 1H10 sales breakdown by geography and segment
Bulgari is an Italian luxury company focusing on watch, jewellery, and perfumes and cosmetics. Together, these three segments contribute to 89% of sales. Jewellery accounts for the largest portion at 46%.
Asia accounts for 45% of the sales for Bulgari with Japan at 18%, while Europe is at 34%. We estimate that exposure to mainland China is at 8% and Greater China is at 14%.
As of December 2009, the company had 273 stores, of which 166 are company-owned.
Japan18%
America14%
Rest of Europe23%
Italy11%
Other2%Middle East
5%
Rest of Asia27%
Watches20%
Jewellery46%
Accessories8%
Hotel and catering activities
2%
Perfumes and
cosmetics23%
Royalties and other1%
Source: Company data, Cheuvreux, CLSA Asia-Pacific Markets
Appendix Luxury goods
19 January 2011 [email protected] 133
PPR 1H10 sales breakdown by geography and segment
PPR holds a portfolio of luxury brands but also a number of retailers in home furnishings and computers and books.
Its core luxury brand Gucci accounts for 15% of group revenue. Gucci Group, which includes, Gucci, Bottega Veneta, Yves Saint Laurent, and other brands, contribute to 22% of sales.
The other major businesses include sports brand Puma, diversified retailer Fnac and home-furnishing retailers Redcats and Conforma.
PPR generates 66% of sales from Western Europe, but for the luxury Gucci Group, the breakdown shifts towards Asia.
For Gucci Group, Western Europe leads at 33%, followed by Asia ex-Japan at 31% and North America at 18%. Japan contributes to 13% of Gucci Group sales. We estimate that Gucci brand’s exposure to mainland China is at 10% and Greater China is at 18%.
Gucci Group had 639 directly operated stores at June 2010, of which 190 are in Japan.
PUMA16%
Conforama17%
Redcats21%
Gucci Division
15%
Bottega Veneta
3%
Yves Saint Laurent
1%
Other brands3%
Fnac24%
South America 3%
EEMEA 4%
Japan 5%
North America 14%
Western Europe 65%
Asia Pacific (excl. Japan)
9%
Tod’s 1H10 sales breakdown by geography and segment
Tod’s generates 52% of sales from its core Tod’s brand. The second key brand is Hogan, which sells premium shoes and bags. FAY generates 9.1% and the remaining 2.5% comes from Roger Vivier.
Some 75% of sales comes from shoes and 15% from leather goods.
Italy is the dominant revenue source, contributing to 54% of sales.
As of June 2010, the company had a portfolio of 222 stores, of which 151 are directly owned. The company has 24 stores in China, 14 in Taiwan, nine in Hong Kong and two in Macau. We estimate that exposure to mainland China is at 2% and Greater China is at 3%.
North America
7%
Europe21%
Rest of world18%
Italy54%
Leather goods15%
Apparel10%
Shoes75%
Source: Company data, CLSA Asia-Pacific Markets
Appendix Luxury goods
134 [email protected] 19 January 2011
Burberry FY09/10 sales breakdown by geography and segment
Renowned for its trench coats and British origin, Burberry generates 35% of sales from Europe and 24% from Asia Pacific.
The company generates a greater share of sales from apparel at 64% compared with other luxury peers that tend to focus more on leather goods or hard luxury items.
The company amended its apparel license with Sanyo Shokai and Mitsui in Japan in October 2009. The license now ends in June 2015, which was previously at 2020. With better controls on production, inventory and distribution, the company expects profits from licensing to step up going forward.
In China, the company recently acquired 50 franchise stores.
As at June 2010, Burberry had 207 stores in Asia Pacific and 420 globally (excluding Spain which is undergoing restructuring).
Spain9%
Asia Pacific24%
Rest of World5%
Americas27%
Europe35%
Non-apparel36%
Childrens5%
Menswear24%
Womenswear35%
Coach FY09/10 sales breakdown by geography and segment
Coach’s business primarily comes from the US and Japan. About 70% of Coach’s sales comes from the US and 20% from Japan.
However, the company has made several senior appointments and aims to quickly expand in China. Including Hong Kong and Macau, Coach has 41 stores in China.
The company holds 342 retail stores and 121 factory outlets in North America.
Coach also runs an indirect channel (13% of sales) with a network of about 940 wholesale locations in the US and 182 international outlets.
Handbags are the key product line for Coach.
Other
international10%
Japan20%
United States70%
Accessories28%
All other products
9%
Handbags63%
Source: Company data, CLSA Asia-Pacific Markets
Appendix Luxury goods
19 January 2011 [email protected] 135
Tiffany FY09 sales breakdown by geography and segment
Tiffany is a US-based luxury company famous for its elegant jewellery design and its signature blue box.
The company generates 52% of sales from the US, with 9% coming from its New York flagship store. Its branch stores in the US contribute to 32% of revenue, with the rest from Canada, Latin America, internet and catalogue, and B2B.
According to its 1H10 interim report, Tiffany has invested in and operates more than 20 stores in Hong Kong, Macau, and mainland China.
Globally, the firm generates 31% of revenue from sterling silver jewellery, 27% from gemstone jewellery excluding engagement jewellery, and 21% from diamond rings/wedding bands.
In Asia Pacific, the sales breakdown is tilted towards the higher-priced gemstone jewellery, with 31% each in engagement and other gemstone jewellery.
Other1%Europe
12%
Japan19%
Asia Pacific16%
Americas52%
All other9%
Non-gemstone,
sterling silver jewellery
31%
Non-gemstone,
gold or platinum jewellery
12%
Diamond rings and wedding bands21%
Gemstone jewellery and band rings,
excl. engagement
jewellery27%
Swatch 1H10 sales by segment and Swiss watch exports data
Swatch owns a number of watch brands with a wide range of price points, including Breguet, Blancpain, Glashütte Original, Jaquet Droz, Léon Hatot, Omega, Longines, Rado, Tissot and Swatch.
Swatch has also formed a strategic alliance with luxury jewellery brand Tiffany.
In the mass market, the company is known for its fashionable design branded under the Swatch name.
The company is a key player in the watch industry. We estimate that sales exposure to Greater China at 28% and mainland China at 15%, in line with the Swiss watch exports data.
Electronic Systems
6%
Production 22%
Watches & Jewellery
72%
China 7%
USA 10%
Others31%
France 7%
Italy 6%
United Kingdom
4%
Germany 5%
Japan 5%
Singapore 6%
Hong Kong 19% Hong Kong/
China togetheris 26%
Source: Company data, CLSA Asia-Pacific Markets
Important notices
© 2011 CLSA Asia-Pacific Markets ("CLSA").
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01/01/2011
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© 2011 CLSA Asia-Pacific Markets ("CLSA"). Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends). 01/01/2011