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Luxury goods
Aaron Fischer, CFA
Regional Head of Consumer
and Gaming Research
[email protected]
(852) 26008256
Mariana Kou
(852) 26008190
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
Lifestyle .................................. 101
Chow Sang Sang ........................ 87
L’Occitane ............................... 103
Emperor Watch & Jewellery .......... 89
Luk Fook ................................. 105
Evergreen.................................. 91
Oriental Watch ......................... 107
Golden Eagle Retail ..................... 93
Parkson Retail .......................... 109
Hengdeli .................................... 95
Ports Design ............................ 111
HK Resources ............................. 97
Sa Sa International ................... 127
I.T. ........................................... 99
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
2
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19 January 2011
Executive summary
Luxury goods
Dipped in gold
Fastest-growing segment
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.
Eight key differences
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.
China to account for
half of global luxurygoods growth
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.
Chinese luxury brands
to come
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.
Asian pure plays
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.
China should be world’s
largest luxury-goods
market by 20CL
Luxury market size
% of total
450
(€bn)
% of total
400
350
300
250
Others
56%
200
150
Others
85%
Greater
Chinese
15%
100
50
Greater
Chinese
44%
0
10CL 11CL 12CL 13CL 14CL 15CL 16CL 17CL 18CL 19CL 20CL
Source: CLSA Asia-Pacific Markets
19 January 2011
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3
Section 1: The Red Eight and the Chinese customer
Luxury goods
The Red Eight and the Chinese customer
Wealthy Chinese
differ from overseas
counterparts
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
The rich Chinese are
younger and many live
in top-tier cities
Profile of millionaires in China
Average age
Male-female ratio
Industry
Collections
Geographic distribution
39
7:3
Service, property, manufacturing
3 cars and 4.4 luxury watches
Beijing (17%), Guangdong (17%), Shanghai (14%), Zhejiang
(13%), Jiangsu (7%), Others (32%)
Fashion: Giorgio Armani, Gucci, Boss
Jewellery: Cartier, Bulgari, Montblanc
Overall luxury: Louis Vuitton, Chanel, Hermes, Cartier, Gucci
Travel, golf, swimming
International: US, France, Canada
Domestic: Hong Kong, Yunnan, Sanya
16 days a year
1/3 don’t drink, about 1/2 don't smoke
Favourite brands
Hobbies
Favourite destinations
Number of holidays
Drinking and smoking
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
The 30-50-year-olds drive
luxury demand
Luxury customers by age
Above 50
75
Luxury car
38
40-50
30-40
20-30
7
Luxury handbag,
clothing, watch &
jewellery
14
86
14
Luxury skincare &
makeup
44
100
22
0
20
40
60
80
100
(% of stores)
Source: China Reality Research
4
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19 January 2011
Luxury goods
Living it up to show off
and gain respect
Make Chinese consumers
feel special
Luxury market in China is
male-dominated
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 firsttier 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 . . .
Yourself
Own-use by buyers
93
100
Friends & family
60
Gifts for business
contacts
1
2
80
17
40
16
Gifts
Investment purpose
(Average composition %)
1
24
98
75
20
Investment/collection
6
0
(% of consumers who bought
luxury goods in the past 12 months)
20
40
60
80
100
5
37
59
0
Luxury car
Luxury skincare &
makeup
Luxury handbag,
clothing, watch &
jewellery
19 January 2011
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5
Luxury goods
Watches and jewellery
are great for displaying
wealth, gifting,
and collection
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
Hong Kong is the
world’s largest Swiss
watch market
World distribution of Swiss watch exports (January-November 2010)
Hong Kong
19%
United Kingdom
4%
Others
31%
Hong Kong/
China togeter is 26%
China
7%
USA
10%
Germany
5%
France
7%
Japan
5%
Singapore
6%
Italy
6%
Source: Federation of the Swiss Watch Industry (Nov 2010), CLSA Asia-Pacific Markets
Travel and shop
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
Overseas
56%
Domestic
44%
6
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19 January 2011
Money is not always
a key factor
Luxury goods
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
Fine wine prices
keep rising
Liv-ex Fine Wine 100 Index
400
360
320
280
240
200
160
120
80
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
Bigger brands, large logos,
hand-made products
Unique product categories
like tea and furniture
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
19 January 2011
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7
Luxury goods
Luxury boom
Fastest growing segment
in China
Growth rates within the consumer sector in mainland China vary across
product categories. We expect luxury goods to lead with a 25% Cagr over 0914CL, 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
Gambling and shopping
lead the way
China consumer expenditure Cagr growth (2010-15CL)
Luxury goods
Gaming
Communications
Education
Healthcare
Transport
Cosmetics
Hotels and catering
Housing
Total consumer expenditure
Leisure and recreation
Household care
Clothing and footwear
Food and beverages
Alcohol and tobacco
(%)
0
5
10
15
20
25
30
Source: Euromonitor, CLSA Asia-Pacific Markets
Luxury goods in China: €9bn market
Dissecting the 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
USA
27.4%
Japan
11.0%
Mainland
China
5.5%
HK
2.6%
Rest of World
5.0%
Rest of Asia
6.6%
Rest of
Americas
2.6%
Europe
37%
Taiwan
1.9%
Macau
0.4%
Greater
China
10%
Others
25%
Hard luxury
25%
Apparel
25%
Prestige
cosmetics
25%
8
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19 January 2011
Luxury goods
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
Swatch Group
Richemont
Gucci brand
Bulgari
Hermes
Tod's
(%)
0
5
10
15
20
25
30
Source: Cheuvreux, CLSA Asia-Pacific Markets
China to be world’s
largest luxury goods
market by 20CL
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 luxurygoods 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
450
(€bn)
2010-20 Cagr
400
Rest of World 11%
350
300
250
Europe
7%
200
150
Americas 5%
100
Japan 3%
China
23%
50
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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.
19 January 2011
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9
Luxury goods
China leading the game
Figure 15
Figure 16
Luxury market comparison
Real GDP growth
450
400
350
300
250
200
150
100
50
0
12
(€bn)
(%)
10CL
11CL
12CL
10
Others
Greater Chinese demand
8
6
4
2
0
2010
US
2020
EU
Japan
China
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.
Japan falling behind
Figure 17
Figure 18
Japan’s stagnant economy
GDP per capita growth
700,000
(¥bn)
600,000
GDP
YoY growth (RHS)
(%)
500,000
400,000
300,000
200,000
100,000
0
12
10
8
6
4
2
0
(2)
(4)
(6)
(8)
40
Japan
(%)
China
30
20
10
0
(10)
(20)
1990
1980 1984 1988 1992 1996 2000 2004 2008
1996
2002
2008
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
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.
10
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19 January 2011
Luxury goods
Figure 20
Luxury-goods market estimates
(€bn)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
China
9
12
14
18
22
28
34
41
50
61
2020 Cagr10-20 (%)
74
% of total
5
6
7
9
10
12
13
14
16
18
19
23
Japan
18
19
20
20
21
22
22
23
24
25
26
% 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
1
1
1
2
2
2
3
3
3
4
5
16
Mainland tourists
Others
3
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
1
2
2
3
4
5
6
7
8
10
12
25
Mainland tourists
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
6
7
8
10
12
15
18
21
26
31
37
21
Mainland tourists
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
-
-
-
-
-
-
-
-
-
-
-
-
10
10
11
11
12
13
13
14
15
15
16
5
Others
% of total
Global luxury market
6
6
6
6
5
5
5
5
5
4
4
168
180
193
207
224
243
264
288
316
348
385
9
19 January 2011
[email protected]
11
Luxury goods
Figure 21
(€bn)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
9
12
21
13
9
4
3
1
18
10
9
12
2
3
0
26
15
12
15
26
15
12
5
3
1
21
12
12
15
2
3
0
31
17
14
18
32
17
14
6
4
1
25
13
14
18
2
3
0
38
20
18
22
40
19
18
7
4
1
30
15
18
22
3
3
0
46
22
22
28
50
22
22
8
4
2
37
16
22
28
3
4
0
56
25
28
34
62
26
28
10
4
2
45
18
28
34
3
4
0
69
28
34
41
75
28
34
12
5
3
53
20
34
41
3
4
0
82
31
41
49
91
31
41
14
5
4
64
22
41
49
3
4
0
98
34
50
59
110
35
50
16
5
5
76
24
50
59
4
4
0
118
37
61
71
132
38
61
19
5
6
92
26
61
71
4
4
0
141
41
Domestic market
Mainland tourists
Mainland Chinese demand
% of global luxury market
China
Hong Kong
Taiwan
Macau
Greater China domestic markets
Domestic market
Mainland tourists
HK locals
Taiwan locals
Macau locals
2020 Cagr10-20
(%)
74
23
86
22
160
22
42
74
23
23
18
6
6
7
27
110
20
29
74
23
86
22
4
8
5
5
0
5
169
21
44
China is the world’s growth driver
Growing from 5% to 19%
of the global market
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.
The rich are getting richer
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
97 with Rmb10,000m
200 with Rmb10,000m
"Known" wealth
281 with Rmb5,000m
700 with Rmb5,000m
4,000 with Rmb1,000m
1,363 with Rmb1,000mn
55,000 with Rmb100m
2,600 with Rmb1,000mn
“Hidden" wealth
875,000 with Rmb10m
420 with Rmb5,000m
100 with Rmb10,000m
12
[email protected]
19 January 2011
Very significant growth in
past ten years
Luxury goods
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
120
1,600
1,363
1,400
97
100
1,200
80
1,000
50% Cagr
58% Cagr
60
800
600
40
400
200
20
24
1
0
0
2000
2000
2010
2010
The average Mr Chan is
also going well
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
30
GDP YoY
(%)
Avg remuneration YoY
25
20
15
10
5
0
Mar 01
Oct 02
Apr 04
Nov 05
May 07
Dec 08
Jun 10
Income growth of 11%
in China
19 January 2011
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%.
[email protected]
13
Luxury goods
Figure 27
Outperforming the crowd
Per capita disposable income growth 09-14CL
India
14
China
11
Indonesia
11
Asia Pacific
7
South Korea
7
Taiwan
7
Malaysia
6
Thailand
6
Hong Kong
6
Singapore
6
World
5
USA
4
United Kingdom
3
France
3
Germany
3
Japan
(%)
1
0
2
4
6
8
10
12
14
16
Fourfold jump in
households earning over
US$10,000 per annum
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
Chinese people
getting wealthier
Mainland China income distribution
> US$10,000
US$2,500-5,000
(%)
US$7,500-10,000
US$500-2,500
US$5,000-7,500
< US$500
20CL
19CL
18CL
17CL
16CL
15CL
14Cl
13CL
12CL
11CL
10CL
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
100
90
80
70
60
50
40
30
20
10
0
The rapid urbanisation in China also gives another boost to the luxury-goods
market. A larger workforce with growing income will benefit the many highend brands that are expanding their presence in first and second-tier cities.
14
[email protected]
19 January 2011
Luxury goods
Figure 29
Figure 30
Urbanisation in China
Average household income growth (2000-09)
Urban Population
(%)
Rural Population
14
100
(%)
12
80
10
8
60
6
40
4
20
2
0
0
1990
1995
2000
2005
2010
2015
Urban
2020
Rural
CLSA proprietary survey
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)
(% of consumers)
Below Rmb1,000
Rmb1,000-4,999
Rmb5,000-10,000
Above Rmb10,000
100
90
80
70
60
50
40
30
20
10
0
20,000
(Rmb/per person)
Budget for the next 12 months
19,000
39
53
28
19
22
3
Tier 1-2 cities
Tier-3 cities
18,543
18,000
17,000
36
Spending in the past 12 months
16,000
16,674
15,975
16,196
15,788 15,879
15,000
14,000
Overall
Tier 1-2 cities
Tier-3 cities
19 January 2011
[email protected]
15
Luxury goods
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
Store managers
are bullish
Estimated sales growth at luxury stores surveyed
50
48
(%)
YoY growth in 2010
45
Annual average in the next three years
40
33
35
30
26
25
20
20
20
14
15
14
12
10
5
0
Overall
Luxury car
Luxury handbag,
clothing, watch &
jewellery
Luxury skincare &
makeup
Government encouraging
spending
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
China
Singapore
Hong Kong
India
Asia Pacific
South Korea
Thailand
France
Malaysia
Germany
World
Japan
Indonesia
USA
UK
Taiwan
(%)
35
30
25
20
15
10
5
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
40
1996
30
1995
20
1994
10
1993
0
1992
(10)
0
1991
(%)
1990
(20)
40
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.
16
[email protected]
19 January 2011
Luxury goods
Figure 36
Chinese out shopping
China consumer confidence and retail sales growth
125
Consumer Confidence Index
Retail sales YoY (RHS)
(%)
35
30
120
25
115
20
110
15
105
10
100
5
95
0
Jan 00
Oct 01
Aug 03
May 05
Mar 07
Jan 09
Oct 10
Credit cards stimulate
luxury sales
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
250
6
(m)
(%)
5.4
5
200
4.2
4
150
2.7
3
100
2
50
1.3
1.5
1
0
0
2005
2005 2006 2007 2008 2009 Mar10 Jun10 Sep10
2006
2007
2008
2009
Figure 39
A long way to catch up
Consumer credit/GDP
Australia
Malaysia
Hong Kong
Taiwan
Singapore
Korea
Japan
Thailand
China
India
Indonesia
Philippines
(%)
0
10
20
30
40
50
60
70
80
90
19 January 2011
[email protected]
17
Luxury goods
Growing more
comfortable with debt
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
9,000
120
(Rmb)
8,500
Credit limit
(%)
Payable credit
100
8,000
80
7,500
7,000
60
6,500
40
6,000
5,500
20
5,000
4,500
0
Mar 08
Sep 08
Mar 09
Sep 09
Mar 10
Sep 10
Mar 09
Jun 09
Sep 09
Dec 09
Mar 10
Jun 10
Sep 10
Figure 42
Average balance outstanding for six months and over
45,000
(Rmb)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Mar 08
Sep 08
Mar 09
Sep 09
Mar 10
Sep 10
Source: CEIC, Wind, CLSA Asia-Pacific Markets
Some 75% are interested
in luxury goods . . .
18
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%
[email protected]
19 January 2011
Luxury goods
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.
. . . and willing to spend
Figure 43
Figure 44
Which category do you fall into?
What's the most you will pay for a watch?
% of CRR Consumer Panel
% of CRR Consumer Panel
I don't want to
buy luxury goods
25%
More than
Rmb200K
1%
I have bought/
plan to buy
luxury goods
53%
No upper
limit
6%
Zero
7%
Rmb200K
1%
Rmb100K
4%
I want to buy
luxury goods
but can't
afford them
22%
Rmb10K
30%
Rmb50K
12%
Rmb1K
39%
Reasons why Chinese buy
luxury goods
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?
Yes
I buy luxury brands because they are
superior in quality
No
77
23
Owning luxury goods is a symbol of
success and status
64
36
I buy luxury goods to reward myself
64
36
I buy luxury goods because they are
superior in design
60
I buy luxury goods because they are fashionable
40
58
I buy luxury goods because people in
my social and work circle own them
42
49
I buy luxury goods to give as gifts
51
48
0
20
52
40
60
80
100
(% of consumers who have bought or plan to buy luxury goods)
Chinese love brands
19 January 2011
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.
[email protected]
19
Luxury goods
Figure 46
Brands drive purchases
To store managers: What are the reasons why consumers buy your brand?
High acceptence among customers
High price
Best design
Best quality
Fashion
Shop environment & service
Social status & high profile
High brand name
100
33
33
Luxury skincare
& makeup
33
22
22
22
11
86
93
7
Luxury handbag,
clothing, watch &
jewellery
57
7
21
0
0
88
88
25
13
Luxury car
0
25
0
0
0
(% of stores)
20
40
60
80
100
Some people are practical
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?
I don't buy luxury goods because there are
too many fakes for luxury brands in the
Chinese market
34
66
Yes
Luxury goods are superficial, so I don't want
to buy them
52
48
I'm practical and don't want to pay the high
price for luxury goods
97
0
20
No
40
3
60
80
100
(% of consumers who will not buy luxury goods)
20
[email protected]
19 January 2011
Dressed for success
About 75% of Chinese
women take care of
household finance
Shopping for nice clothes
and cosmetics
Luxury goods
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 luxurygoods 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
Women dominate
accessories and
cosmetics segments
Luxury customers by gender
Luxury car
88
13
Male
Luxury handbag,
clothing, watch &
jewellery
7
Female
50
50-50
43
Luxury skincare &
makeup
100
0
20
40
60
80
100
(% of stores)
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.
19 January 2011
[email protected]
21
Further penetration
Luxury goods
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)
Beijing
Shanghai
Shenzhen
Chengdu
Shenyang
Hangzhou
Guangzhou
Dalian
Qingdao
Tianjin
Harbin
Suzhou
Kunming
Nanjing
Xian
Changsha
Wuhan
Wuxi
Wenzhou
Zhengzhou
Ningbo
Chongqing
131
125
45
41
41
39
39
40
35
32
30
28
26
25
23
23
22
21
21
20
19
18
17
17
17
0
20
40
(Store count)
30
25
20
15
10
Disposable income
per capita (Rmb)
5
0
60
80
100
120
140
0
10,000
20,000
30,000
40,000
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.
Department stores
dominate in China
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$2,304bn in 2020, catching up with the US.
Figure 51
Figure 52
Total travel and tourism demand 2010
Total travel and tourism demand 2020
United States
China
Japan
Germany
France
United Kingdom
Italy
Spain
Canada
Australia
(US$bn)
0
500
1,000
1,500
United States
China
Japan
Germany
United Kingdom
France
Spain
India
Italy
Russian Federation
2,000
(US$bn)
0
1,000
2,000
3,000
4,000
Source: World Travel & Tourism Council, CLSA Asia-Pacific Markets
22
[email protected]
19 January 2011
Luxury goods
Mainlanders on vacations
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
Let’s go abroad
Chinese outbound travel
60
Departure for private purpose
(m person-time m)
Total departures
50
40
Private trips at a 25% Cagr
30
20
10
0
1994
1996
1998
2000
2002
2004
2006
2008
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.
More planning to travel
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
(% of CRR Consumer Panel)
100
1
Yes
1
No
No reply
1
90
80
50
70
60
74
83
50
40
+96%
30
10
48
+52%
20
16
24
0
Past 12 months
Plan to in next 12 months
Plan to in next three years
19 January 2011
[email protected]
23
Luxury goods
Travel is key threat
for retailers
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
Competing against
shops overseas
Score the following competition your store faces: 0 = not at all, 5 = highly competitive
Consumers shopping online
Counterfeits
Consumers shopping abroad
Store opening of other luxury brands
3.2
Luxury skincare &
makeup
3.6
0.8
2.2
2.6
Luxury handbag,
clothing, watch &
jewellery
3.7
1.4
2.1
3.1
2.0
Luxury car
0.6
0.5
0.0
0.5
(Average score)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Big spenders when
travelling
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
Rmb20,000 and more
Rmb10,000-19,999
Rmb5,000-9,999
Less than Rmb5,000
0
2
4
6
8
10
12
14
(% of consumers who travelled abroad)
On the cusp of a
sustained Chinese
travel boom
24
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.
[email protected]
19 January 2011
Luxury goods
Figure 57
Ready to boom
Departures as a percentage of total population
45
(%)
Japan
Taiwan
Korea
China
40
35
30
25
20
15
10
5
0
1964
1972
1979
1987
1995
2002
2010
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
China’s GDP per capita in
2009 is comparable to
Japan’s in 1973
Comparison of GDP per capita of Japan 1964-2000 and China 2000-2009
45,000
(US$)
Japan (1964-2000)
China (2000-2009)
40,000
35,000
30,000
25,000
20,000
15,000
China in 2009
10,000
5,000
0
1964
1969
1975
1981
1987
1993
1999
Source: CEIC, CLSA Asia-Pacific Markets. Assume 1971 JPY:USD exchange rate of 315:1 for 1964-1970.
Mandarin speakers
in demand
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.
19 January 2011
[email protected]
25
Luxury goods
Figure 59
Total Chinese luxury demand breakdown by purchase location
Taiwan
1%
Macau
3%
Others
4%
HK
10%
Europe
26%
US
6%
Domestic
45%
Japan
5%
High taxes/duties
in China
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
Alcohol
Cosmetics
Valuable jewellery and ornaments
25-45
5-20
30
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%.
26
[email protected]
19 January 2011
Luxury goods
Figure 61
Price comparison between Hong Kong and China
Patek Philippe Nautilus Stainless Steel Watch model#: 5712/1A
Panerai Men's Radiomir Black Seal Ceramic 45mm
Watch model#: PAM 292
HK$
233,000
RMB % difference in HK
280,700
(29)
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)
309,000
323,000
(18)
87,000
112,200
(33)
285,000
305,000
(20)
Audemars Piguet Women's Dream Watch model#:
67496BC.ZZ.A066SU.01
Rolex Datejust 36mm Diamonds & White Gold Watch model#:
116244-63600
Cartier Ballon Bleu Medium Rose Gold Watch model#: WE9005Z3
Source: Companies, Emperor Watch & Jewellery, CLSA Asia-Pacific Markets
19 January 2011
[email protected]
27
Luxury goods
According to LVMH, prices in Shanghai are 35% higher than in Paris.
Figure 62
Substantial price
difference
Price index for Louis Vuitton
160
(Price Index)
140
120
100
80
60
40
20
0
Paris
NYC
Hong Kong
Shanghai
Tokyo
Source: LVMH
Re-sale market and
gifting culture
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
Hong Kong, Macau and
Taiwan are the popular
destinations
For those who shopped overseas: where did you make the luxury purchases?
HK/Macau/Taiwan
67
Europe
12
Japan/Korea
11
Elsewhere in Asia
8
U.S./Canada
1
0
10
20
30
40
50
60
70
80
(% of consumers who bought luxury goods overseas in the past 12 months)
28
[email protected]
19 January 2011
Luxury goods
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.
Macau is growing fast,
but Hong Kong is still the
top overseas luxury
market for Chinese
Figure 64
Mainland Chinese travelling destinations (2009)
Some 71% of tourists
went to Hong Kong
and Macau
Singapore
1%
Russia
1%
USA
2%
Korea
3%
Thailand
1%
Malaysia
1%
Japan
3%
Hong Kong
39%
Others
14%
Macau
32%
Taiwan
2%
While Macau continues to be mainlanders’ most favourite destination for gaming,
its luxury market is growing rapidly from a small base. As Jimmy Mak, vicepresident 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 heaven
Chinese 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
Where to buy luxury cosmetics . . .
Hong Kong
Japan
Europe
S. Korea
USA
Shanghai
Beijing
T-2 cities
Singapore
Guangzhou
Macau
. . . jewellery and watches . . .
(%)
0
10
20
30
40
50
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.
60
. . . fashion and accessories
Hong Kong
Europe
Beijing
Shanghai
Japan
USA
Macau
Guangzhou
Singapore
Tier-2 cities
South Korea
(%)
0
10
20
30
40
50
60
Hong Kong
Shanghai
Europe
Beijing
Japan
USA
Guangzhou
Tier-2 cities
South Korea
Singapore
Macau
(%)
0
10
20
30
40
50
60
Source: Albatross/Ruder Finn Asia
19 January 2011
[email protected]
29
Luxury goods
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.
Mainlanders account for
50-85% of revenue at
Hong Kong watch and
jewellery shops
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
Significant contribution
from mainlanders at
stores in tourist areas
Emperor W&J TST
Emperor W&J Central
Trinity (Hong Kong)
Luk Fook (Hong Kong)
Oriental Watch group
(%)
0
10
20
30
40
50
60
70
80
90
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$5,770 and a 66% more than Japanese.
Figure 66
Figure 67
Chinese overnight visitor spending in Hong Kong
Total spend per overnight visitor in Hong Kong
Shopping
(%)
100
90
80
70
12
7
Hotel bills
9
12
12
12
11
14
Meals outside hotel
9
10
13
11
12
12
Others
7
7
7
10
10
8
11
12
9
14
60
50
40
30
60
68
68
65
68
73
71
76
20
10
0
2002
2003
2004
2005
2006
2007
2008
2009
Mainland China
Average
Australia
Taiwan
Singapore
United Kingdom
Thailand
USA
France
Germany
Indonesia
Philippines
Malaysia
Japan
India
South Korea
Macau
6,620
5,770
5,533
5,117
5,090
4,902
4,875
4,872
4,620
4,592
4,350
4,211
4,040
3,976
3,923
3,733
3,069
0
(HK$)
1,000 2,000 3,000 4,000 5,000 6,000 7,000
30
[email protected]
19 January 2011
Luxury goods
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
Mainlanders don’t spend
much on hotels
Spending allocation patterns
Shopping
Hotel bills
Meals outside hotels
Others
Mainland China
Average
Taiwan
Thailand
Indonesia
Macau
Philippines
Malaysia
South Korea
Singapore
Australia
Japan
India
Germany
France
USA
United Kingdom
(%)
0%
0
20%
20
40%
40
60%
60
80%
80
100%
100
An average mainland tourist spends HK$5,051 on shopping, 73% more than
the average Taiwan visitor, in second place.
Figure 69
Chinese tourists like
shopping in Hong Kong
much more than other
tourists
Average spend on shopping by country
Mainland China
Average
Taiwan
Thailand
Indonesia
Singapore
Australia
Philippines
Malaysia
South Korea
Macau
Japan
India
Germany
France
USA
United Kingdom
5,051
3,667
2,923
2,758
2,232
2,161
2,149
1,968
1,856
1,634
1,569
1,529
1,296
1,254
1,240
1,121
(HK$)
903
0
1,000
2,000
3,000
4,000
5,000
6,000
Japan welcomes
Chinese tourists
19 January 2011
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.
[email protected]
31
Luxury goods
Figure 70
South Korea was the
largest tourist source . . .
Breakdown of tourist arrivals in Japan 2009
Oceania & others
4%
South Korea
23%
North America
13%
Europe
12%
Rest of Asia
6%
China
15%
Singapore
2%
Thailand
3%
Taiwan
15%
Hong Kong
7%
. . . but that may
change soon
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
4.5
Number of mainland Chinese tourists
Mainland tourists as % of total (RHS)
(m)
4.0
(%)
26.0
3.5
14.8
15
15.0
2.0
1.5
1.5
1.0
25
20
3.0
2.5
30
3.9
10
1.0
5
0.5
0.0
0
2009
2010F
2013F
Source: JTA, CLSA Asia-Pacific Markets
According to JTA, 93% of mainland Chinese tourists shopped in Japan in AprilJune 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.
Chinese tourists spent
5x more than locals
at Bic Camera
32
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
[email protected]
19 January 2011
Luxury goods
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
Fly to the country
of origin
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
3,500
200
('000)
('000)
3,000
150
2,500
2,000
100
1,500
1,000
50
500
0
0
2003
2004
2005
2006
2007
2008
2003
2004
2005
2006
2007
2008
2009
Resilient tourist flow
19 January 2011
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
[email protected]
33
Luxury goods
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
Sars and financial crisis
150
(%)
100
50
0
(50)
(100)
Jan 00
Sep 01
Jun 03
Mar 05
Dec 06
Sep 08
Jun 10
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.
More risk-averse
than average
Figure 76
Figure 77
Thailand visitor arrivals from China during 2004 tsunami
Thailand visitor arrivals from China during 2006 coup
40
Mainland Chinese
(%)
Total
50
20
Total
30
20
0
10
(20)
0
(10)
(40)
(20)
(60)
(80)
Sep 04
Mainland Chinese
(%)
40
(30)
Dec 04
Mar 05
Jun 05
Sep 05
Dec 05
(40)
Jul 06
Oct 06
Jan 07
May 07
Aug 07
Nov 07
34
[email protected]
19 January 2011
Luxury goods
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
Sensitive to
negative events
LVMH stock price
140
(€)
120
Global financial crisis
100
80
Sep 11
SARS
60
40
20
0
Jan 01
Sep 02
May 04
Dec 05
Aug 07
Apr 09
Dec 10
Source: Bloomberg, CLSA Asia-Pacific Markets
19 January 2011
[email protected]
35
Luxury goods
Section 2: From head to toe
From head to toe
More hard luxury and
accessories for Chinese
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
100
90
80
70
60
50
40
30
20
10
0
Others, incl. accessories and leather goods
Hard luxury
Prestige cosmetics
25
Apparel
(%)
32
25
29
25
25
25
14
China
World
Source: Bain, CLSA Asia-Pacific Markets
Hard luxury and
accessories continue to
lead growth
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
80
(€bn)
2010-20
Cagr
20%
70
Apparel
60
Prestige cosmetics
50
14%
Hard luxury
Others (incl. accessories and leather goods)
27%
40
30
20
25%
10
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Jewellery
Strong momentum
36
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.
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19 January 2011
Luxury goods
Figure 81
Accelerating growth
China jewellery sales (retail value)
140
(Rmbbn)
120
100
80
60
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009 Annualized
10CL
Source: Wind, CLSA Asia-Pacific Markets
Figure 82
Jewellery sales growing
faster than gold prices
Jewellery sales versus gold prices
60
Jewellery sales YoY
(%)
Gold prices
50
40
30
20
10
0
(10)
2001
2002
2003
2004
2005
2006
2007
2008
2009
Annualized
10CL
Source: Wind, Bloomberg, CLSA Asia-Pacific Markets
Shining gold
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.
Gold demand may double
within a decade
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.
19 January 2011
[email protected]
37
Luxury goods
Indian demand for gold is
very strong
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
India
China
USA
Middle East
Turkey
Germany
Thailand
Switzerland
Vietnam
Russia
Other Europe
Italy
Indonesia
UK
Hong Kong
South Korea
Taiwan
France
Japan (1,711)
31,807
19,616
9,553
9,168
4,197
4,127
2,934
2,801
2,776
2,543
1,631
1,381
1,287
1,118
770
591
67
18
(5,000)
0
(US$m)
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Figure 84
Some 71% of Chinese
gold demand for jewellery
Breakdown of consumption demand
Jewellery
(%)
100
5
90
Net retail investment
9
23
80
29
31
33
44
70
60
50
80
92
95
40
91
77
30
71
69
67
56
20
10
20
8
0
Hong
Kong
Middle
East
India
China
World
Turkey
USA
Vietnam Thailand
Source: World Gold Council, CLSA Asia-Pacific Markets
Rose gold is the
new favourite
38
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
[email protected]
19 January 2011
Luxury goods
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.
Jewellery also good
for investment
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)
Rest of world
19%
Italy
4%
Hong Kong
2%
USA
41%
Taiwan
2%
India
8%
Japan
11%
China
5%
Gulf
8%
Source: De Beers, CLSA Asia-Pacific Markets
Chinese diamond demand
to rise rapidly
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
18
(%)
16
16
14
12
10
8
6
6
4
2
0
2009
2016
According to Euromonitor data, Chinese consumers have a strong preference
for rings, contributing to almost 50% of jewellery sales.
19 January 2011
[email protected]
39
Luxury goods
Figure 87
Chinese love rings
Sale of jewellery in China by type (2009)
Wristwear
8%
Earrings
23%
Rings
50%
Neckwear
19%
Few dominant players
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
Aggressive expansion
to capture segment
growth potential
40
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.”
[email protected]
19 January 2011
Luxury goods
Jewellery market more
consolidated than
other sectors
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
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
30.6
29.9
29.0
27.5
26.4
100.0
100.0
100.0
100.0
100.0
Company
Chow Tai Fook Jewellery
Others
Total
Source: Euromonitor
Our CRR survey shows that Chow Tai Fook is a brand leader in the jewellery
segment in China.
Figure 91
Leading by a wide margin
CRR survey: Which jewellery brand did you buy?
Chow Tai Fook
14
Swarovski
4
Chow Sang Sang
3
King Liu Fook
3
Jinboli
2
Laofengxiang
2
Tiffany
1
Hermes
1
Cartier
1
0
(No. of mentions)
2
4
6
8
10
12
14
16
19 January 2011
[email protected]
41
Luxury goods
Figure 92
Cartier is the beloved
jewellery brand
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
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
China is currently the
fourth-largest imported
Swiss watches
Largest buyers of Swiss watches
3,500
2006
(CHF)
2010
3,000
2,500
2,000
1,500
1,000
500
Thailand
Russia
Saudi Arabia
Taiwan
Spain
UAE
UK
Japan
Germany
Singapore
Italy
China
France
USA
Hong Kong
0
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers. Data is annualised to
November 2010
42
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19 January 2011
Luxury goods
Figure 94
Figure 95
Swiss watch exports Jan-Nov 2010
Jan-Nov 2010 YoY growth of top-10 export markets
China
United
Kingdom
4%
Others
31%
Hong Kong
Hong Kong/
China together
is 26%
Hong Kong
19%
Singapore
United Arab Emirates
France
China
7%
Germany
5%
USA
USA
10%
Japan
5%
United Kingdom
Japan
Italy
France
7%
Singapore
6%
Germany
Italy
6%
(%)
(10)
0
10
20
30
40
50
60
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
China’s consumption per
capita is low, at only a
third of Europe or Taiwan
Global comparison of Swiss watch imports per capita
Hong Kong (unadjusted)
403.0
Hong Kong
201.5
Singapore
183.2
UAE
103.0
France
16.8
Italy
14.3
Taiwan
12.2
Germany
8.7
UK
8.9
Saudi Arabia
8.7
Spain
6.9
Japan
5.8
South Korea
5.8
USA
5.0
China
4.0
Thailand
12 mths to 11/2010
See footnote below for adjustments
made to China and Hong Kong
2.7
1.6
China (unadjusted)
Russia
Consumption per capita (US$)
1.4
0
50
100
150
200
250
300
350
400
450
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
China should close much
of the gap
19 January 2011
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
[email protected]
43
Luxury goods
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’s share of Swiss
watch exports has
doubled in past five years
China accounts for a 7% share of Swiss watch exports, up from 3% in 2005
9
(%)
8
China's share of Top 15 export destinations
16,000
Top 15 export value, CHFm (RHS)
14,000
7
12,000
6
10,000
5
8,000
4
6,000
3
2
4,000
1
2,000
0
0
2004
2005
2006
2007
2008
2009
2010
Figure 98
China was the quickest
to recover from the
financial crisis
Asia ex-Japan leading the recovery in Swiss watch exports (YoY growth, quarterly)
120
China
(%)
Asia ex-J
Europe
USA
100
80
60
40
20
0
(20)
(40)
(60)
Jun 05
Apr 06
Mar 07
Feb 08
Jan 09
Dec 09
Oct 10
Source: CLSA Asia-Pacific Markets, Federation of Swiss Watch Manufacturers (November 2010)
Rolex, Rolex, Rolex
44
In terms of preferences, Chinese consumers like mechanical watches and also
unique watches that require specific craftsmanship, such as enamel, motherof-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.
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19 January 2011
Luxury goods
Figure 99
Figure 100
Which luxury brand would you like to own?
Which luxury brands did you buy?
Watch
Watch
Rolex
Omega
21
Omega
Vacheron
Longines
5
Cartier
Longines
Tissot
1
1
0
3
Tudor
1
Rado
3
Cartier
2
Citizen
1
Swatch
5
Rado
4
4
Piaget
6
Rolex
4
Patek Philippe
9
7
Tissot
10
(% of consumers)
5
10
15
20
2
Enigma
1
Calvin Klein
1
Casio
1
25
0
(No. of mentions)
2
4
6
8
10
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.
Limited editions are even
more popular
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.
Retailer reputation is also
a key factor
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.
19 January 2011
[email protected]
Patek Philippe minute repeater
45
Luxury goods
Figure 101
How do you decide which watch retailer to purchase from?
Model selection
Store reputation/image
After sales service
Staff friendliness
Brand selections
Staff knowledge
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5 is very important
Source: Hengdeli
Clothing
Spend more on clothing
as income rises
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
9
(%)
8.5
8.0
8
7.6
7.3
7.0
7
6.6
6.2
6
5.7
5.1
5
4
3.7
3
1
2
3
4
5
6
7
8
9
10
(income by decile)
46
Menswear is a key
component
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.
Players trying different
strategies
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
[email protected]
19 January 2011
Luxury goods
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
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.
Luxury shoe brands are
also expanding presence
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
19 January 2011
[email protected]
47
Luxury goods
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$44.2bn) in 2009. Frost & Sullivan expects sales to achieve
a 15.8% Cagr over 2009-13.
We see strong growth
in the menswear
market in China
Figure 106
Retail sales of menswear in China
600
Retail value
(Rmbbn)
Growth rate (RHS)
(%)
20
539.9
500
14.7
15.0
14.4
11.3
16
16.2
464.5
399.3
400
18
16.3
15.6
14
345.4
12
300.3
300
10
262.6
205.7
228.9
8
200
6
4
100
2
0
0
2006
2007
2008
2009
10F
11F
12F
13F
Source: Frost & Sullivan
Urbanisation and rising
incomes are key drivers
We believe that the increase in disposable income, accelerated urbanisation, a
demographic shift in the male population towards the young and middleaged, rising brand awareness as well as improved product design and quality
have and will continue to underpin industry growth.
Low menswear
consumption per
capita in China
More importantly, China menswear consumption per capita in urban areas is
only about 25% of that in the USA and 20% of European countries.
Figure 107
Figure 108
Menswear consumption per capita in urban areas, 2008
Menswear consumption per capita, 2008
1,600
(US$)
1,489
500
First-tier cities
(US$)
1,400
400
1,175
1,200
1,000
US$5.4bn
14.3%
300
800
600
400
Second-tier cities
Third-tier cities
US$378
US$318
Fourth-tier cities
US$10.3bn
27.3%
PRC average
US$15.4bn
40.7%
200
291
US$240
200
100
US$77
0
China
USA
European
countries
US$6.7 bn
17.7%
(US$bn)
0
0
1
2
3
4
5
Note: “European countries” refers to 15 countries within European Union as of 1 May 2004. Source: Frost & Sullivan
Menswear has different
operating metrics from
ladieswear
48
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.
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19 January 2011
Luxury goods
Figure 109
Comparison of China’s menswear versus ladieswear markets
Brand loyalty
Consumers’ price sensitiveness
Product ASPs for similar market positioning
Average ticket size per purchase
Stay-and-buy ratio
Consumers’ purchase frequency
Potential for ASP increase
Purchase target
Purchase intention
Retail inventory risk
Fashion risk
Product cycle
Market segmentation
Consumers’ product focus
Requirement for raw material procurement
Requirements for accessories
Number of product SKUs
Number of product collections
Corporate sales
Menswear business
High
Low
High
High
High
Low
High
More intentional purchases with clear
brand targets in most circumstances
Less show-off factor
Relatively low
Low
Relatively long
Relatively broad
Product quality, fabrics and functionality
High
Low
Relatively low
Relatively low
More corporate sales
Ladieswear business
Low
High
Relatively low
Relatively Low
Low
High
Limited
More impulse purchases with no clear
brand targets in most circumstances
More show-off factor
Relatively high
High
Short
More defined
Design, colour and trendiness
Relatively low
High
High
High
Minimum corporate sales
Menswear brands should
enjoy more resilient gross
margins and SSS growth
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.
Business and smart
casual represent 61% of
total menswear market
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
Accessories
4.3%
Fashion
casual
35.1%
Business formal
and smart casual
60.6%
High-end segment
expected to outgrow
other segments
19 January 2011
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% 200913F Cagr) than other segments.
[email protected]
49
Luxury goods
Figure 111
Breakdown and growth of business-formal and smart-casual menswear segment
(Rmbbn)
Luxury-end
2006 2007 2008 2009
13
Growth (%)
High-end
9
Growth (%)
Mid-to-low-end
100
Growth (%)
Total
Growth (%)
121
10F
11F
12F
13F
14
17
19
22
26
31
36
12.6
15.4
15.8
16.2
17.1
17.7
17.3
10
11
13
15
18
21
25
12.4
15.9
16.0
16.7
17.3
18.0
18.1
112
130
150
174
203
238
280
12.4
15.8
15.4
16.2
16.7
17.4
17.3
136
158
182
211
247
290
340
12.5
15.7
15.5
16.2
16.7
17.5
17.3
Cagr
Cagr
06-09 09-13F
14.7
17.1
14.7
17.5
14.6
16.9
14.6
17.0
Note: Market segmentation is defined by ASP of a suit: luxury=above Rmb15,000; high-end=Rmb5,00015,000; low-end=below Rmb5,000. Source: Frost & Sullivan
Highly fragmented highend formal business and
smart-casual menswear
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
Lowest concentration in
high-end formal business
and smart-casual
menswear segment
Market share of top-five players in China consumer space, 2009
Carbonated drinks
95
Ready-to-drink (RTD) tea
75
Instant noodles
67
RTD coffee
66
Hair care
65
Beer
58
Milk
57
Bottled water
50
Down apparel
49
Sportswear
45
Bath and shower products
45
Fruit/vegetable juice
37
High-end business formal & casual menswear
(%)
22
0
20
40
60
80
100
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.
50
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19 January 2011
Luxury goods
Figure 113
Figure 114
Market share in terms of retail sales, 1H10
China store networks, 1H10
Satchi
6%
VASTO
5%
V.E. DELURE
4%
S.D. Spontini
4%
BONI
3%
Lampo
3%
Satchi
V.E. DELURE
Didiboy
3%
201
BONI
180
DIDIBOY
178
VASTO
170
Lampo
168
Aquascutum
VSKONNE
2%
S.D. Spontini
Auta Son
2%
Aquascutum
Auta Son
Other brands
67%
332
131
100
VSKONNE
100
0
1%
(No. of outlets)
82
50
100
150
200
250
300
350
Market concentration
below that of China
sportswear market
The degree of concentration in the high-end business-formal and smartcasual menswear market segment is substantially below that of the China
sportswear market.
Figure 115
Market share
China high-end business-formal and smart-casual menswear vs sportswear, 2009
70
(%)
High-end business formal & smart casual menswear
50
45
40
33
33
30
22
20
10
62
Sportswear
60
15
13
6
0
Top 1
Top 3
Top 5
Top 10
Source: Frost & Sullivan (menswear), CLSA Asia-Pacific Markets (sportswear)
Middle-upper segment
outgrows others in casual
fashion menswear
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)
High to luxury end
2006 2007 2008 2009 2010F 2011F 2012F 2013F
6
Growth (%)
Middle upper end
8
9
10
12
13
15
14.3
12.5
14.4
13.6
14.5
14.9
7
8
9
10
12
14
16
12.1
15.6
15.2
15.8
16.2
17.0
16.9
70
78
88
99
112
127
144
9.1
12.4
12.0
12.7
13.0
13.8
13.7
83
94
105
119
135
154
176
9.6
12.7
12.3
13.1
13.4
14.1
14.1
6
Growth (%)
Mid to low end
7
11.1
64
Growth (%)
Total
76
Growth (%)
Cagr
Cagr
06-09 09-13F
12.5
14.3
14.3
16.5
11.2
13.3
11.5
13.7
Note: Market segmentation is defined by ASP of a jacket and a pair of trousers: High to luxuryend=Above Rmb5,000; Middle-upper end=Rmb2,000 to Rmb5,000; Mid to low-end=Below Rmb2,000.
19 January 2011
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51
Luxury goods
Handbags and briefcases
Not as male-dominant
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
Dior
Emporio Armani
BOSS
Montblanc
Louis Vuitton
Chanel
Bally
Dunhill
2010
Hermès
Armani
Chanel
Louis Vuitton
Dior
Cartier
Gucci
na
Figure 118
Figure 119
Louis Vuitton’s world-class craftsmanship
Dunhill’s leather collection
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
Mens’ brands have a
wider store network
Points of sale in China
Ports
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
Chanel¹
Lanvin
0
50
100
150
200
250
300
350
¹ Only fashion/accessories. Source: Company websites, CLSA Asia-Pacific Markets
52
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19 January 2011
Luxury goods
Luxury cars
Not discouraged at all by
the high taxes and duties
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
More expensive cars
enjoying higher growth
Mercedes-Benz is the fastest-growing major luxury brand
940,000
Starting price
(Rmb)
YoY growth (RHS)
(%)
140
120
920,000
115
900,000
100
80
87
880,000
S-Class
860,000
7 Series
40
43
840,000
60
20
A8L
820,000
0
Audi
BMW
Mercedes-Benz
Source: Company data, CLSA Asia-Pacific Markets
Audi is the largest
supplier of official cars
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.
BMW and Mercedes-Benz
are catching up
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.
19 January 2011
[email protected]
53
Luxury goods
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.
Bentley, Rolls-Royce and
Maybach are the top three
for super luxury
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
Bentley
Rolls-Royce
October YTD
569
156
YoY (%)
71
438
Source: 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
BMW is the winning brand
Which luxury car brands would you like to own?
BMW
13
Mercedes-Benz
12
Ferrari
10
Rolls-Royce
8
Porche
6
Audi
6
Bentley
4
Hummer
3
Maybach
2
Land Rover
2
0
2
(% of consumers)
4
6
8
10
12
14
16
54
Chinese wealthy like
longer cars
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.
Gold-plated
Spirit of Ecstasy
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
[email protected]
19 January 2011
Luxury goods
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
Premium drinks
Beer is the dominant
alcohol, but the slow
growth segment
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)
80,000
(m litres)
Alcoholic drinks
(%)
YoY growth (RHS)
70,000
16
14
60,000
12
50,000
10
40,000
8
30,000
6
20,000
4
10,000
2
0
0
1998
2002
2006
2010
2014
45
40
35
30
25
20
15
10
5
0
(litres)
38.7
Beer
3.6
2.7
Wine
Spirits
Whiskey and grape wine
should lead growth at
double digits
19 January 2011
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.
[email protected]
55
Luxury goods
Figure 129
Alcohol market growth 09-14CL
Whiskey
17
Grape wine
12
Sparkling wine
10
White Spirits
10
Rum
9
Beer
7
Average
7
Non-grape wine
5
Brandy and Cognac
(%)
4
0
2
4
6
8
10
12
14
16
18
Figure 130
About 50% of the EU15’s
share is from France
Champagne market breakdown
Other emerging
markets
5%
US
6%
Mainland China
0%
Other mature
markets
4%
Japan
2%
EU15
83%
Source: Cheuvreux
Chinese alcohol
consumption still low
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
Still a moderate drinker
Beer consumption per capita (2009)
Germany
USA
United Kingdom
Canada
Japan
South Korea
China
France
Italy
Taiwan
Singapore
0
20
40
60
80
100
120
140
56
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19 January 2011
Luxury goods
Just the beginning
Figure 132
Figure 133
Wine consumption per capita (2009)
Spirits consumption per capita (2009)
Italy
France
Germany
United Kingdom
Canada
USA
South Korea
Japan
Taiwan
China
Singapore
(litres)
0
10
20
30
40
50
South Korea
Japan
France
USA
Germany
United Kingdom
Canada
China
Italy
Taiwan
Singapore
60
(litres)
0
10
20
30
40
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.
More trading up
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 should
rise as income grows
Wine consumption and income per capita (2010)
70
Wine consumption (litre per capita)
Luxembourg
60
50
Portugal
France
Italy
40
30
Greece
20
Spain
Germany
UK
Taiwan
0
Turkey
Phils
Malaysia
(10)
Norway
Finland
Japan
Hong Kong
Correlation = 0.69
Switzerland
Netherlands
Ireland
Canada
Sourth Korea
China
Denmark
Belgium
Belgium
Russia
10
Austria
(US$ per capita)
USA
Singapore
(20)
0
20,000
40,000
60,000
80,000
100,000
120,000
19 January 2011
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57
Luxury goods
Figure 135
Many premium options
Average retail selling price in China
2009
Beer
Non-grape wine
Grape wine
Premium local spirits
Rmb per litre
7
40
57
295
Taobao
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
are popular
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
58
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19 January 2011
Luxury goods
Figure 138
Steadily growing
Premium local spirits market in China
250
(m litres)
Volume
10
(%)
YoY (RHS)
230
8
210
6
190
4
170
2
150
0
130
(2)
110
90
(4)
70
(6)
50
(8)
2001
2002
2003
2004
2005
2006
2007
2008
2009
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
Alcohol imports growing
Imports as a percentage of total volume
7
Wine
(%)
Spirits
6
5
4
3
2
1
0
2000
France has a large share
2001
2002
2003
2004
2005
2006
2007
2008
Figure 140
Figure 141
Wine imports in volume (2008)
Spirits imports in volume (2008)
United
States
5%
Others
5%
Italy
6%
Chile
32%
France
18%
United
Kingdom
33%
Others
9%
Japan
2%
United
States
3%
Spain
9%
Australia
9%
Argentina
16%
Sweden
2%
France
31%
Korea
10%
Spain
10%
19 January 2011
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59
Luxury goods
Pernod-Ricard holds
a number of highranking brands
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.
Catering to locals
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.
Prices jumped 17% with
an embossed red eight
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 setting up luxury
white spirits brand
60
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.
[email protected]
19 January 2011
Luxury goods
LVMH’s Asian
luxury spirits
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 (%)
Jian Nan Chun
Moutai
Wu Liang Ye
Luzhou Lao Jiao
Xiao Hu Tu Xian
Grape wine
Great Wall
Changyu
Weilong
Dynasty
Suntime
Sparkling wine
Changyu
Sichuan Jian Nan Chun (Group)
Kweichow Moutai
Sichuan Yibin Wuliangye Distillery
Luzhou Lao Jiao
Guangzhou Pearl River Yunfeng Winery
10.6
9.9
6.9
2.5
1.9
China National Cereals, Oils & Foodstuffs Imp & Exp
Yantai Changyu Group
Yantai Weilong Grape Wine
Dynasty Winery
Vinisuntime International
10.6
8.8
4.6
4.0
3.3
18.9
Moët & Chandon
Dynasty
Piper Heidsieck
Weilong
Whiskey
Chivas Regal
Johnnie Walker
Jack Daniel's
Jim Beam
Ballantine's
Brandy/Cognac
Changyu
LVMH Moët Hennessy Louis Vuitton
Dynasty Winery
Rémy Cointreau Group
Yantai Weilong Grape Wine
18.9
8.6
8.1
7.0
Pernod-Ricard Groupe
Diageo
Brown-Forman Corp
Fortune Brands
Pernod Ricard Groupe
33.1
23.1
6.1
3.3
2.0
57.1
Hennessy
Martell
Rémy Martin
Courvoisier
White Spirits
Absolut
Smirnoff
Gordon's
Eristoff
Skyy
Rum
Bacardi
Rémy Cointreau Group
Fortune Brands
14.1
7.5
6.1
1.0
Diageo
Diageo
Bacardi & Co
Campari Milano SpA, Davide
28.1
22.5
10.6
5.4
4.4
Bacardi & Co
72.4
Havana Club
Captain Morgan
Diageo
6.4
3.8
Source: Euromonitor
19 January 2011
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61
Luxury goods
Figure 147
Chinese millionaires’ favourite drinks
2008
2009
Best Luxury Imported Drinks Brand
Royal Salute
Royal Salute
Hennessy
Hennessy
Johnnie Walker
Louis XIII
Rémy Martin
Rémy Martin
Chivas
Chivas
Best Super Luxury Whiskey
Royal Salute 21 Years Old
Johnnie Walker Blue Label
Macallan 40 Years Old
Ballantine's 30 Years Old
Ballantine's 30 Years Old
Macallan 40 Years Old
Best Ultra Luxury Cognac
Louis XIII
Louis XIII
L'Age d'Or de Rémy Martin
Richard Hennessy
Richard Hennessy
Best Premium Cognac
Hennessy XO
Hennessy XO
Martell XO
Rémy Martin XO
Rémy Martin XO
Martell XO
Best Chinese Spirits
Moutai
Moutai
Wuliangye
Wuliangye
Luzhou Laojiao
Luzhou Laojiao
Best Premium Champagne
Veuve Clicquot La Grande Dame
Veuve Clicquot La Grande Dame
Dom Pérignon
Moět & Chandon Brut Imperial Vintage
Moět & Chandon Brut Imperial Vintage Dom Pérignon
Piper- Heidsieck Brut Cuvée Rare
Piper-Heidsieck Brut Cuvée Rare
2010
Louis XIII
Hennessy
Royal Salute
Ballantine
Rémy Martin
Louis XIII
Richard Hennessy
Hennessy X.O
Martell Cordon Bleu
Rémy Martin X.O
Moutai
Wuliangye
Luzhou Laojiao
Moět & Chandon
Dom Pérignon
Veuve Clicquot
Prestige cosmetics
Rising demand from
emerging economies
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$6bn in 14CL.
Figure 148
Cosmetics and toiletries market 2009-14 Cagr
Russia
India
China
Brazil
World
Canada
Spain
United Kingdom
Italy
France
USA
Japan
(%)
(5)
0
5
10
15
20
Source: Euromonitor, CLSA Asia-Pacific markets
62
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19 January 2011
Luxury goods
Figure 149
Brics market size and growth
(US$m)
2010
% of global
2014
% of global
Cagr (%) 10-14
China
3,514
4
5,992
6
14
India
521
1
979
1
17
1,266
2
2,409
3
17
Brazil
430
1
624
1
10
Total
5,730
7
10,004
10
15
Russia
In China, pale skin
traditionally represents
feminine beauty
About 58% of market
is skincare
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
Fragrances is a relatively
small segment in China
China’s premium cosmetics market breakdown (2010)
Sun care 3%
Baby care 1%
Bath and shower
4%
Deodorants 0%
Hair care 5%
Sets/Kits 8%
Colour cosmetics
10%
Skin care 58%
Fragrances 11%
Figure 151
Figure 152
Skincare as % of premium cosmetics
Fragrance as % of premium cosmetics
Japan
Brazil
China
Russia
Italy
Spain
France
France
World
UK
Spain
Italy
Canada
USA
UK
World
USA
Canada
Russia
India
India
China
(%)
Brazil
0
20
40
60
80
(%)
Japan
0
20
40
60
80
19 January 2011
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63
Luxury goods
US$2bn premium
skincare market
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)
Colour cosmetics
Baby care
Sun care
Sets/Kits
Skin care
Fragrances
Hair care
(%)
Bath and shower
0
5
10
15
20
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.
Still a foreign
brands’ market
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 (%)
Amway
Shiseido
Lancôme
Estée Lauder
Fancl
Clinique
Kosé
Chanel
Christian Dior
Biotherm
Guerlain
Company
Amway Corp
Shiseido
L'Oréal
Estée Lauder
Fancl Corp
Estée Lauder
Kosé Corp
Chanel SA
L'Oréal
2005
28.9
2.9
4.5
2.9
0.3
1.8
2.3
1.3
1.6
1.3
1.0
2006
23.8
4.1
5.4
3.8
1.0
2.2
2.6
1.7
1.8
1.5
1.1
2007
22.7
4.4
5.5
4.4
2.0
2.3
2.4
2.0
1.9
1.6
1.3
2008
24.9
5.1
6.0
4.7
2.9
2.4
2.3
2.1
2.0
1.6
1.4
2009
23.0
7.3
6.9
5.0
3.3
2.5
2.3
2.2
2.0
1.7
1.5
SK-II
Others
Total
Procter & Gamble
Others
Total
4.2
47.1
100.0
2.2
48.9
100.0
1.4
48.3
100.0
1.1
43.6
100.0
0.9
41.4
100.0
Source: Euromonitor
64
[email protected]
19 January 2011
Luxury goods
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
Foreign brands
well-recognised
Everyone likes
foreign names
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 & Cosmetics
Estee Lauder
Skincare & Cosmetics
15
Estee Lauder
8
Lancome
6
Chanel
Shiseido
6
4
Dior
5
Dior
11
Lancome
5
4
Clinique
1
L'Oreal
14
Shiseido
Olay
3
Olay
1
L'Oreal
Clinique
1
Sisley
2
Nivea
2
Biotherm
2
VICHY
1
Marubi
1
(% of consumers)
0
5
10
15
20
3
(No. of mentions)
0
5
Perfume
16
Chanel
15
Dior
2
Guerlain
1
AnnaSui
1
Prairie
0
Hermes
0
0
4
Estee Lauder
2
Calvin Klein
2
Burberry
2
Adidas
1
Davidoff
4
Dior
3
Calvin Klein
12
Lancome
7
Lancome
(% of consumers)
5
10
15
Perfume
Estee Lauder
Chanel
10
15
20
2
Issey Miyake
1
Kenzo
1
Hermes
1
0
(No. of mentions)
5
10
15
Cosmetics are characterised by high brand loyalty, as our recent China Brands
Index report confirms.
Men’s grooming market
may be the next
luxury segment
19 January 2011
Another trend in the cosmetics space in China is the rapid growth of the
men’s grooming market. Euromonitor expects the market Cagr for malegrooming 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.
[email protected]
65
Luxury goods
Figure 158
Our China Brands Index
shows high loyalty for
cosmetics and skincare
Brand loyalty across sectors
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)
0
20
40
60
80
100
Figure 159
Growing at double-digits
Men’s grooming market growth vs overall beauty and personal-care market
45
Men's grooming market
(%)
40
Beauty and personal care market
38
35
30
27
27
25
26
24
22
20
20
15
18
14
12
9
10
10
11
10
10
2010
2011
2012
2013
9
5
0
2007
2008
2009
2014
66
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19 January 2011
Luxury goods
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.
Abalone and shark’s
fin soup
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.
Rmb1,200 per head
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 mid2011, 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
19 January 2011
[email protected]
67
Luxury goods
Figure 160
Figure 161
Shark’s fin and imperial bird’s nest (HK$720 per bowl)
Braised assorted snake soup (HK$880 per bowl)
High-end dining taking off
in the mainland
Shangri-La is the
top brand
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
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.
68
[email protected]
19 January 2011
Luxury goods
Figure 163
Luxury five-star
hotels booming
Hotel growth rate in mainland China (number of hotels)
60
Total hotels
(%)
5-star hotels
50
40
30
20
10
0
(10)
(20)
(30)
(40)
1995
1997
1999
2001
2003
2005
2007
2009
Hotel prices catching up
with global peers . . .
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
.. . . primarily in
Tier-1 cities
Luxury hotel price comparison
Ritz-Carlton New York, Central Park
The Ritz London
Mandarin Oriental Hyde Park, London
The Peninsula Shanghai
The Ritz-Carlton Shanghai, Pudong
The New York Palace
Trump Soho New York
Pudong Shangri-La Shanghai
Four Seasons Shanghai
Four Seasons London Canary Wharf
JW Marriott Hotel Beijing
Shangri-La China World Hotel, Beijing
Grand Hyatt Beijing
Grand Hyatt Shanghai
Sheraton Shenzhen Futian Hotel
Grand Hyatt Shenzhen
Hilton New York
The Peninsula Beijing
The Westin Beijing Chaoyang
Westin, Bund Center Shanghai
St. Regis Shanghai
(US$)
Intercontinental Beijing Beichen Hotel
0
100
200
300
400
500
600
700
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.
19 January 2011
[email protected]
69
Luxury goods
VIP match-making service
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
Hard time finding a bride
Mainland population aged 18-34
170
(m)
Male aged 18-34
Female aged 18-34
165
160
155
150
145
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Claiming an 80%
success rate
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.
Rmb100,000 for a
match-making ball ticket
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
70
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19 January 2011
Luxury goods
Section 3 : European brands dominate
European brands dominate
Luxury from the West
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
Best of the best
for Chinese
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
Brands ready to
grab shares
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
Quality and brand image
are key
19 January 2011
Chinese look for better product quality and brand image when selecting
luxury-goods brands.
[email protected]
71
Luxury goods
Figure 169
Reasons why people buy luxury goods
Quality & reliability
Brand image/design
Performance
Price/value
Convenience/location
Innovation
Customer service
(% of total votes cast)
Friends' recommendation
0
5
10
15
20
25
30
Made in Europe is still
more desirable
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 handcrafted. 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.
72
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19 January 2011
Luxury goods
Catering to Asian tastes
Global collections
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.
Some localisation but
depends on product
category
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.
Rise in Asian models
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
19 January 2011
[email protected]
73
Luxury goods
Asian luxury brands
Leveraging product
material expertise
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.”
Shortage of craftsman
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.
Unique solution in India
The first luxury
Chinese brand
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
74
[email protected]
19 January 2011
Luxury goods
Lifestyle product offering
Impressive store
and products
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
Leveraging off
China’s best
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
Felt
Eggshell
Procelain
Teaware
Zitan Wood
Furniture
Jade & Agate
Bamboo
Apparel
Homeware
Jewellery
Cashmere
Source: CLSA Asia-Pacific Markets, Hermes
Opportunities for
Eastern brands
19 January 2011
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.
[email protected]
75
Luxury goods
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
Porcelain
Silk
Embroidery
Watches
Paper
Apparel
Handbags
West
Cars
East
Furniture
Alcohol
Jewellery
Cosmetics
Handbags
Jewellery
Alcohol
(spirits)
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.
Use of premium woods
and bamboo
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. Handmade products and display of success are top priorities for Chinese affluent.
Long history with jade
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.
76
[email protected]
19 January 2011
Chinese apparel
on the rise
Luxury goods
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-tomeasure service known as “imperial tailoring”.
Ports Design - a leading
luxury brand in China
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
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.
19 January 2011
[email protected]
77
Luxury goods
Figure 179
Only 100 were produced for each of these five designs
Acquiring luxury brands
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 China
Ownership doesn't impact
brand prestige
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.
More Asian listings
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.
78
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19 January 2011
Luxury goods
Section 4 : Getting exposed
Getting exposed
Picking names to get
exposure
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
European owned
and listed
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.
Five key categories for
Asian-listed names
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.
19 January 2011
[email protected]
79
Luxury goods
Business model: Brand owner versus distributor
Brand owners offer better
earnings visibility
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.
Department stores are
still popular in China for
luxury goods
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
Asian plays are much
cheaper on a PEG basis
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
Trinity
Hengdeli
Luk Fook
Golden Eagle
Emperor Watch & Jewellery
L'Occitane
Chow Sang Sang Jewellery
Average
Parkson
Sasa
Lifestyle
Ports Design
Oriental Watch
I.T Limited
HK Resources (3D Gold)
Belle
(%)
Evergreen
(20)
0
20
40
60
80
100
80
[email protected]
19 January 2011
Luxury goods
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
Ports Design
Evergreen
L'Occitane
Parkson
Belle
Hengdeli
Golden Eagle
589 HK
238 HK
973 HK
3368 HK
1880 HK
3389 HK
3308 HK
BUY
BUY
BUY
BUY
BUY
BUY
O-PF
Price
Jan13
21.9
5.3
20.5
13.0
14.0
4.8
21.8
Target
29.0
7.0
26.0
15.9
15.6
5.3
22.3
Upside
(%)
33
31
27
22
11
10
3
Quick summary of each of the names
Well-heeled
Belle: Leading high-end footwear player in China and vertically integrated
business model enables better inventory management and full priced sales.
Affordable jewellery
Chow Sang Sang: Top-three jewellery retailer in China trading on only 12x
2011 consensus earnings.
Its time has come
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.
Men’s business
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.
Region al specialist
Golden Eagle: Regional department store specialist in lower-tier cities. Good
execution track record but valuation looking pricey.
Quality is timeless
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.
Golden grow
HK Resources (3D Gold): Known as the gold boutique. The company is
planning to aggressively grow from 300-odd stores to 500 by 2012.
Looking good
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.
Hong Kong icon
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.
19 January 2011
[email protected]
81
Luxury goods
A natural beauty
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.
Jewellery specialist
Luk Fook: Leading jewellery retailer in China with a preference for thirdparty operators stores under license agreement. Consensus is expecting
around 30% earnings growth over the coming years.
Time for a change
Oriental Watch: Leading watch retailer in Hong Kong. Looking to acquire
wholesale customers and trading on 11x 2011 earnings. Looks interesting.
Best of luxe
Parkson: Largest listed department store operator in China with 83% of
sales from high-priced products. We see 22% upside. BUY.
Ready to grow
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.
Pretty in pink
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.
Go your own way
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
LVMH
MC FP
France
Diversified
Yes
Burberry
BRBY LN
UK
Apparel
Yes
Swatch
UHR VX
Switzerland Watches
Yes
PPR
PP FP
France
Diversified
Yes
Richemont
CFR VX
Switzerland Watches & jewellery
Yes
Hermes
RMS FP
France
Leather goods
Yes
Bulgari
BUL IM
Italy
Watches & jewellery
Yes
Coach
COH US
US
Leather goods
Yes
Tiffany
TIF US
US
Jewellery
Yes
Tods
TOD IM
Italy
Shoes & leather goods
Yes
Average
Belle
1880 HK
HK
Footwear
Yes
Golden Eagle
3308 HK
HK
Dept store
No
Parkson
3368 HK
HK
Dept store
No
Lifestyle
1212 HK
HK
Dept store
No
L'Occitane
973 HK
HK
Cosmetics
Yes
Hengdeli
3389 HK
HK
Watches
Exclusive
Luk Fook
590 HK
HK
Jewellery
Yes
Sasa
178 HK
HK
Cosmetics
40%
Chow Sang Sang
116 HK
HK
Jewellery
Yes
Trinity
891 HK
HK
Apparel
54%
Ports Design
589 HK
HK
Apparel
Yes
I.T
999 HK
HK
Apparel
50%
Emperor W&J
887 HK
HK
Watches & jewellery
14%
Evergreen
238 HK
HK
Apparel
Yes
Oriental Watch
398 HK
HK
Watches
No
HK Resources (3D Gold) 2882 HK
HK
Jewellery
Yes
Average
Notes
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%
Greater High-end
China %
% sales
sales
15
100
10
100
28
90
6 50% of OP
22
100
11
100
14
100
<5
100
<5
100
3
100
100
100
100
100
17
100
100
100
100
100
93
100
100
100
100
100
Rec
N-R
N-R
N-R
N-R
N-R
N-R
N-R
N-R
N-R
N-R
Mkt
cap
(€m)
58,637
5,704
16,827
15,135
25,688
16,701
2,411
12,217
5,851
2,418
50 BUY 11,536
75 O-PF 4,122
65 BUY 3,570
50 N-R 3,317
100 BUY 2,954
100 BUY 2,063
100 N-R 1,530
80 N-R 1,270
100 N-R 1,224
90 N-R 1,137
100 BUY 1,211
100 N-R
725
100 N-R
640
75 BUY
512
100 N-R
199
100 N-R
182
PE 11
(x)
19.7
25.4
18.1
13.3
22.1
35.7
27.4
18.7
21.4
19.7
22.1
25.0
28.7
22.6
24.2
27.8
27.7
20.5
26.6
16.3
26.8
18.0
21.3
15.3
20.3
12.8
na
22.2
PE 12 EPS gr PE/G
(x) 11-12 11 (x)
(%)
17.4
13.5
1.5
20.7
22.3
1.1
15.9
13.6
1.3
11.9
11.9
1.1
19.0
16.5
1.3
32.2
10.8
3.3
21.5
27.4
1.0
16.6
12.6
1.5
18.8
14.0
1.5
17.9
10.6
1.9
19.2
15.3
1.6
21.4
17.0
1.5
22.8
25.4
1.1
17.5
29.1
0.8
22.2
9.1
2.7
20.8
33.8
0.8
23.6
17.2
1.6
16.7
22.7
0.9
21.1
25.7
1.0
13.6
19.3
0.8
20.5
30.3
0.9
15.2
18.6
1.0
17.3
22.6
0.9
10.6
43.4
0.4
15.1
34.4
0.6
17.2 (25.6)
(0.5)
na
na
na
18.4
21.5
1.0
82
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19 January 2011
Luxury goods
Appendix
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.

Selective
retailing
27%
Rest of
Europe
19%
United
States
23%
Wines and
spirits
14%
Watches and
jewellery
5%
Perfumes
and
cosmetics
16%
LVMH also holds 20.2% of Hermes, but the company said
it is not seeking control or a seat on the Hermes board.
Fashion
and leather
goods
38%
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.

Japan
9%
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.

France
14%
Rest of Asia
26%
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.
Richemont

Other
markets
9%
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.
Other
Americas
4%
France
9%
USA
11%
Germany,
Italy and
Spain
9%
Other Asia
13%
Japan
11%
Switzerland
4%
Other Europe
17%
China/
Hong Kong
22%
Clothing &
other
13%
Writing
instruments
5%
Watches
51%
Leather
goods
8%
Jewellery
23%
Source: Company data, Cheuvreux, CLSA Asia-Pacific Markets
19 January 2011
[email protected]
131
Luxury goods
Appendix
Hermes

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 highlyregarded 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.

Americas
15%
Other
2%
France
18%
Rest of
Europe
19%
Rest of
Asia Pacific
27%
Japan
19%
Other
4%
Tableware
2%
Watches
4%
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.
Silk and
textiles
11%
Perfumes
6%
Other
Hermes
sectors
3%
Ready-towear and
fashion
accessories
19%
Leather
goods and
saddlery
51%
Source: Company data, Bloomberg, Cheuvreux, CLSA Asia-Pacific Markets
Bulgari

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.
Middle East
5%
Other
2%
Italy
11%
Rest of
Europe
23%
Rest of Asia
27%
Japan
18%
America
14%
Royalties and
other
1%
Hotel and
catering
activities
2%
Accessories
8%
Perfumes
and
cosmetics
23%
Jewellery
46%
Watches
20%
Source: Company data, Cheuvreux, CLSA Asia-Pacific Markets
132
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19 January 2011
Luxury goods
Appendix
PPR

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%.

Yves Saint
Laurent
1%
Bottega
Veneta
3%
Gucci
Division
15%
Fnac
24%
PUMA
16%
Asia Pacific
(excl. Japan)
9%
South
America 3%
EEMEA 4%
Japan 5%
North
America 14%

Redcats
21%
Conforama
17%
Gucci Group had 639 directly operated stores at June
2010, of which 190 are in Japan.
Tod’s
Other brands
3%
Western
Europe 65%
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%.
Rest of world
18%
North
America
7%
Europe
21%
Italy
54%
Apparel
10%
Leather
goods
15%
Shoes
75%
19 January 2011
[email protected]
133
Luxury goods
Appendix
Burberry

FY09/10 sales breakdown by geography and segment
Rest of World
5%
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).
Asia Pacific
24%
Europe
35%
Spain
9%
Americas
27%
Childrens
5%
Womenswear
35%
Non-apparel
36%
Menswear
24%
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
international
10%
Japan
20%
United
States
70%
All other
products
9%
Accessories
28%
Handbags
63%
134
[email protected]
19 January 2011
Luxury goods
Appendix
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.

Europe
12%
Other
1%
Japan
19%
According to its 1H10 interim report, Tiffany has invested
in and operates more than 20 stores in Hong Kong,
Macau, and mainland China.
Americas
52%
Asia Pacific
16%
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.
Nongemstone,
sterling silver
jewellery
31%
All other
9%
Gemstone
jewellery and
band rings,
excl.
engagement
jewellery
27%
Nongemstone,
gold or
platinum
jewellery
12%
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.

Diamond
rings and
wedding
bands
21%
Electronic
Systems
6%
Production
22%
Watches &
Jewellery
72%
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.
Hong Kong
19%
United
Kingdom
4%
Germany
5%
Hong Kong/
China together
is 26%
Others
31%
China
7%
USA
10%
Japan
5%
Singapore
6%
France
7%
Italy
6%
19 January 2011
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135
Luxury goods
Notes
136
[email protected]
19 January 2011
Luxury goods
Notes
19 January 2011
[email protected]
137
Luxury goods
Notes
138
[email protected]
19 January 2011
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