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1、24,HK$ 18,Asia Pacific Equity Research 17 March 2011 Corrected Note Initiation,LOccitane International SA Best of both worlds Initiate coverage with OW, Mar-12 PT of HK$24, based on 1.1x PEG on a 24% two-year EPS CAGR, equating to 26x FY12E P/E. LOccitane is a leading natural ingredient cosmetics an
2、d personal care product retailer (Asia-ex, Japan, Americas, Europe account for 25%, 24%, 20%, and 31% of sales, respectively). Our earnings outlook has the company achieving a 24% ROE by FY14E on the back of its unique vertically integrated retailing model, profit-oriented expansion strategy, and pr
3、emium brand positioning. Profitable growth model in DMs and EMs: LOccitane intends to double its direct retailing network, adding 650 stores over FY11-15E, with approximately one-third of the new stores in its top four developed markets, where LOccitane should benefit from steady retail recoveries a
4、nd further penetration, and another,Overweight 0973.HK, 973 HK Price: HK$17.30 Price Target: HK$24.00 Luxembourg Specialty Retailing AC Elsa Yang (852) 2800-8523 J.P. Morgan Securities (Asia Pacific) Limited Price Performance,one-third in BRIC (of which 40% in China), where sales should enjoy start-
5、up type growth. Margins and ROE have risen in tandem with the enlarged network and have outperformed many global peers. We expect further margin upside on,12 Mar-10,Jun-10,Sep-10,Dec-10,Mar-11,production and operating leverage, thus driving two-fold increase in earnings over FY11-14E.,0973.HK share
6、price (HK$ HSI (rebased), We anticipate further re-rating, on the back of better-than-expected China expansion. LOccitane should report nearly a 5% sales contribution from China in FY11, making the combined market of HK and China the companys second- largest market (at c.14% of sales). Rising luxury
7、 consumption should drive,Abs Rel,YTD -21.4% -21.0%,1m -12.1% -13.1%,3m -17.0% -16.6%,12m 15.6% 4.8%,HK/China sales to reach 20% of sales by FY15. FY11 results, due to be reported in June, are a possible near-term catalyst. Price target, key risks: Our target 1.1x PEG ratio represents a 20% discount
8、 to global peers and a 10% discount to HK-listed consumer discretionaries. The discounts reflect LOccitanes smaller scale versus global peers and shorter trading track record. Key risks include any abrupt change in euro exposure and A sell-out segment (i.e. retail business) accounted for c.74% of to
9、tal revenue. The products include face care, body care, hair care, fragrances, toiletries, Mens grooming, and home fragrances. FY10 revenue breakdown,Source: J.P. Morgan estimates. Price target and valuation analysis Our Mar-12 price target is based on a 24% two-year EPS CAGR over FY12-14E and a 1.1
10、x PEG ratio, at a 20% discount to the global peer average of 1.4x and almost a 10% discount to the HK-listed consumer discretionary sector average of 1.2x. Our PT corresponds to 26x FY12E P/E. The premium is justified by the companys superior growth profile and profitability compared with its global
11、 peers, in our view. On a PEG basis, LOccitane trades at 1x, still at a discount to global and regional comparables.,Brazil, 4.2%,Other countries, 27.2%,Japan, 24.1% Hong Kong, 8.1%,USA, 14.6%,France, 12.7%,Taiwan, 4.0%,Key downside risks to our PT are any abrupt change in euro exposure,and A profit
12、ability should also benefit from the increasing contribution of higher-margin face-care products and travel-retail business; operational efficiency should improve on the application of SAP in FY12E; the vertically integrated retailing model further consolidates margins along the value chain. Therefo
13、re, EBIT margins should rise to above 21% by FY14E, staying among the top of the industry. Well-positioned in a sweet spot: LOccitane is the beneficiary of: (1) rising demand for natural and organic products due to the trend towards LOHAS (lifestyles of health and sustainability); (2) fast-growing s
14、kincare segment, driven by the aging population in mature markets and rising income in emerging markets; (3) shifting shopping behavior towards beauty-specialty retailers; and (4) rising aspirational consumption. An increasingly notable PRC luxury play: In our view, LOccitane will benefit from the r
15、ising luxury consumption in China. We expect the China store counts to jump from FY10s 47 to 74 in FY11 and then to almost 130 stores by FY15. In the FY11 annual results, we expect the company to disclose China sales separately, with about a 5% contribution to total revenue. Since Hong Kong is gener
16、ally regarded as an integral part of the PRC luxury consumption story, these two markets combined sales should contribute nearly 14% of total sales in FY11 and reach 20% by FY15, from FY10s 11%. This would make them the second-largest market for LOccitane. Risks to our view Currency risks: LOccitane
17、 generates sales revenue in over 15 different currencies and reports its results in euro. Around 46% of the total costs (cost of good sold and operating expenses) were denominated in euro, while approximately 27% of sales were denominated in euro. Therefore, the company benefits from weakness in the
18、 euro, and suffers when the euro strengthens. Based on our sensitivity analysis (details below), every 10% drop in the euro vs. the yen (other assumptions held equal) should lead to 4% upside in FY12E earnings, and every 10% drop in the euro vs. the US$ (other assumptions held equal) should lead to
19、2% upside in FY12E earnings. Regulation risks: LOccitane operates in different countries and faces various industry regulations. Changes in existing laws and regulations are likely to raise entry barriers and lead to additional costs. For instance, in 2010, the company faced a supply shortage of som
20、e best-selling items in China for six months due to the change in regulations in the country. This discounted the companys fast growth in the country to some extent. Execution risks: Some of the markets are highly competitive, with well established international competitors armed with greater resour
21、ces. New local entrants would also stir up competition. The rapidly changing competitive landscape, therefore, is likely to increase execution risks, especially in emerging markets. Supply risks: Nearly all the natural and organic ingredients used in LOccitanes products are derived from plants and o
22、ther natural produce grown in or around 5,Elsa Yang (852) 2800-8523,Asia Pacific Equity Research 17 March 2011, Provence. The company also sources most of the shea butter from Burkina Faso in Africa. In addition, it sources all the packaging materials from a large number of third-party suppliers. Th
23、erefore, an abrupt shortage in supply or delays in delivery due to natural disasters, adverse weather conditions or other inclement factors would negatively affect the business. Quality risks: Quality control is critical in the cosmetics and personal-care industry. Any contamination, product safety
24、or other quality incidents could cause serious damage to the brand and long-term development. 6,Elsa Yang (852) 2800-8523,Asia Pacific Equity Research 17 March 2011, Valuation and share price analysis PEG is our main valuation methodology Our Mar-12 price target of HK$ 24 is based on a 24% earnings
25、CAGR over FY12- 14E and a PEG of 1.1x, a 20% discount to the global peer average of 1.4x and almost a 10% discount to the HK-listed consumer discretionary sector average of 1.2x. The discounts mainly reflect LOccitanes smaller scale compared with its global peers as well as its shorter trading track
26、 record. LOccitane was listed in May 2010 with an IPO price of HK$15.08. The share price has appreciated by around 15% since its IPO. Our price target corresponds to 26x FY12E P/E, suggesting another c.40% upside. Compared to the global cosmetic brands, we believe the below factors should be taken i
27、nto account for the premium valuation of LOccitane in terms of P/E multiples: Sustainable higher growth: Well balanced exposure to both DMs and EMs suggests the company should benefit the best from both the worlds in terms of high growth leverage on economic recovery of DMs, greater penetration as w
28、ell as start-up type of high growth in EMs. Premium brand positioning: We positioned to capture a global and China luxury market rebound. Higher ROE and higher margins: LOccitane generates superior profitability and returns compared with its global peers, on the back of its unique vertically integra
29、ted business model. Comparable analysis Beauty and skin care We include major players in the segment across the countries for our analysis. Some industry heavyweights such as Estee Lauder and LOreal have acquired natural and organic-based cosmetics brands. Although they are not clear-cut comparables
30、, their valuations should shed some light on LOccitane in terms of global brand recognition and market presence as well as overall cosmetic market growth prospects. Although global peers trade at lower P/Es than LOccitane, this reflects their lower growth prospects, in our view. On a PEG basis, the
31、group trades at around 1.4x on average, much higher than LOccitanes 0.9x. Personal care Global personal care companies are expected to grow at half of the growth rate of LOccitane. Therefore, similar to the beauty and skin-care comparables, this groups average PEG is around 2.2x over two years of ea
32、rnings, despite the lower P/E multiples. Specialty retailers Sa Sa and Dairy Farms Mannings are the two closest comparables in terms of specialty retailing formats. Nevertheless, self-owned branded products are insignificant contributors to the companies. They also trade at a premium to LOccitane in
33、 terms of both absolute P/Es and PEG ratios. 7,Elsa Yang (852) 2800-8523,Asia Pacific Equity Research 17 March 2011, International luxury brands In our view, the global luxury brand growth profiles and brand values should also serve as a good reference point, considering LOccitanes brand recognition
34、 as affordable luxury items and comparable promising growth outlook in the Greater China region. We reckon that the premium of luxury brands reflects their stronger brand equity. China and Hong Kong high-end to luxury retailers We put this group as a comparable, as the valuations reflect one of the
35、most important growth markets for LOccitane. This group of comparables currently offers a similar growth profile, yet trades at a premium to LOccitane. 8,10/14/2010,10/21/2010,10/28/2010,11/11/2010,11/18/2010,11/25/2010,12/16/2010,12/23/2010,12/30/2010,5/6/2010,6/3/2010,7/1/2010,7/8/2010,8/5/2010,9/
36、2/2010,9/9/2010,1/6/2011,2/3/2011,5/13/2010,5/20/2010,5/27/2010,6/10/2010,6/17/2010,6/24/2010,7/15/2010,7/22/2010,7/29/2010,8/12/2010,8/19/2010,8/26/2010,9/16/2010,9/23/2010,9/30/2010,10/7/2010,11/4/2010,12/2/2010,12/9/2010,1/13/2011,1/20/2011,1/27/2011,2/10/2011,2/17/2011,2/24/2011,3/3/2011,3/10/20
37、11,24,Elsa Yang (852) 2800-8523,Asia Pacific Equity Research 17 March 2011, Share price performance The share price had a near-30% appreciation following its IPO, peaking in late October at HK$24. Following that the shares experienced a steady and moderate de- rating along with many other consumer d
38、iscretionary names in China, falling by 15% up until the sell-off corresponding with the recent earthquake in Japan. Figure 1: Share price performance 26 1H FY11,results announcement,Share placement,Japans earthquake 22 FY10 results,20,announcement,Bought back,18,Clarins shares,16 14 Source: Bloombe
39、rg, J.P. Morgan 9,Elsa Yang (852) 2800-8523 Table 1: Valuation comparison,Asia Pacific Equity Research 17 March 2011,Ticker,Mkt cap,P/E (x),EPS CAGR,PEG (x),P/BV (x),Div yield,EV/EBITDA (x),ROE (%),(US$MM),2010E,2011E,2012E 2010E-12E 2010E-12E,2010E,2011E,2012E,2010E,2011E,2012E,2010E 2011E 2012E,20
40、10E,2011E,2012E,LOccitane*,973 HK,3,277,23.6,18.8,14.9,26.0%,0.9,4.8,4.0,3.3,0.8%,1.1%,1.3%,12.7,10.4,8.4,30.9,23.2,24.0,Beauty and skin care,Amorepacific Avon Products Estee Lauder* Fancl Corp* Kose* Limited brands* LOreal Natura Revlon Shiseido* Average Market cap weighted average,090430 KS AVP US
41、 EL US 4921 JP 4922 JP LTD US OR FP NATU3 BZ REV US 4911 JP,5,155 11,501 17,660 901 1,653 9,854 65,420 11,904 717 7,338,23.6 14.3 23.4 25.7 20.7 15.0 19.5 26.6 13.2 29.6 21.1 20.6,18.7 13.3 20.2 21.7 18.7 13.1 17.7 22.6 10.6 18.3 17.5 17.8,16.1 11.9 NA 20.8 16.9 11.7 16.0 19.4 9.9 16.0 15.4 13.5,20.
42、8% 9.6% NA 11.2% 10.7% 13.3% 10.3% 17.1% 15.5% 36.1% 16.1% 11.6%,1.1 1.5 NA 2.3 1.9 1.1 1.9 1.6 0.9 0.8 1.5 1.4,4.6 7.1 7.6 0.9 1.2 8.8 3.1 16.2 NA 1.7 5.7 5.6,3.8 6.1 7.2 0.9 1.2 6.6 2.8 14.5 NA 1.6 5.0 4.9,3.6 4.6 NA 0.9 1.1 5.0 2.5 12.4 NA 1.6 4.0 3.4,0.5% 3.3% 0.8% 3.0% 1.8% 15.0% 2.3% 3.2% NA 3
43、.4% 3.7% 3.2%,0.7% 3.4% 0.9% 3.1% 1.9% 2.4% 2.4% 3.1% NA 3.4% 2.4% 2.3%,0.9% 3.6% NA 3.1% 2.0% 2.4% 2.7% 4.2% NA 3.5% 2.8% 2.5%,14.4 9.3 12.3 5.0 5.6 6.8 12.4 16.0 NA 9.0 10.1 11.7,11.6 8.5 11.1 4.8 5.3 6.4 11.3 13.6 7.1 7.7 8.7 10.6,10.0 7.7 NA 4.7 5.0 6.2 10.4 11.7 6.9 7.1 7.7 8.2,15.2 52.1 35.2 3
44、.9 6.1 38.1 16.3 63.2 NA 5.8 26.2 26.9,16.3 46.0 35.8 5.1 6.6 49.5 15.9 66.8 NA 9.4 27.9 27.7,19.0 40.2 NA 5.1 6.8 47.0 15.6 68.0 NA 10.4 26.5 22.3,Personal care,Johnson it is also one of the fastest growing categories among the cosmetics and personal care market, based on Euromonitor. Skin care and
45、 premium cosmetics recorded higher growth multiples of GDP across both developed and emerging markets, compared to the overall cosmetics and personal care markets growth (Figures 2 on average they buy nearly twice as many products as women under 25. We believe this is also applicable to other econom
46、ically mature markets, considering seniors demand more quality and result- driven products; therefore, they tend to spend more on premium products and facial products, especially anti-aging products. As of 2010, the average age of the population of developed countries such as Japan, the UK and Franc
47、e was 40-59 years, versus 25-39 in BRIC countries. 13,Elsa Yang (852) 2800-8523,Asia Pacific Equity Research 17 March 2011, Figure 4: Facial skincareAverage spending by age bracket Source: TNS Worldpanel France. #2: Diversifying beauty care routine Daily beauty routines have grown more elaborate in
48、both developed and emerging markets. LOreal cites that women in South Korea attach particular importance to “skin purity”, and use more than six products on average in the evening and morning. Brazilian women apply around five products to wash, style, and embellish their hair. In India, women wash t
49、heir faces in water up to eight times a day in the aim of keeping skin perfectly clean; these beauty routines are gradually incorporating cosmetics; some 78% of young urban women consumers already use creams to “unify the complexion”. The market has significant potential for facial skincare combinin
50、g anti-ageing and anti-blemish properties with sun protection. #3: Environmental-related demand Studies show that skin disorders resulting from sun over-exposure are more common in Asia and Latin America, UV radiation is considerably stronger in Asia than in Europe, solar radiation levels in Singapo