Sa Sa Initiation

RetailHONG KONG
May 8, 2013
Sa Sa International Holdings
178 HK / 0178.HK Current HK$8.40 HK$9.50 N/A 13.1%
Conviction| |
COMPANY NOTE
SHORT TERM(3 MTH) LONG TERM
Market Cap
AvgDaily Turnover
Free Float
Target Previous Target Up/downside
US$3,059m
HK$23,746m
US$4.98m
HK$38.49m
35.0%
2,809 m shares
Notes from the Field
A quality staple; resilient growth

Sa Sa is the largest cosmetics retailer in Asia in sales terms. We have seen resilient sales growth, market share gains and margin expansion in 2007-12 and believe these will continue. Growth in mainland day trippers and changes in the tourist profile are earnings drivers.
Sa Sa delivered mid-teens sales growth and mid-single-digit SSSG, even in 2008-09. For FY13 and FY14, we forecast 15% SSSG p.a. and 20% earnings growth p.a. (20% FY12-16 CAGR). It is smaller than global peers but its forecast FY13-15 47-50% ROE beats the high-teens global average. Initiate with Outperform and target price of HK$9.50, pegged to 23x CY14 P/E, staple companies average. beefs up its scale in China, 2) there is more room for expansion given POS additions and an enlarged merchandise portfolio, even for HK, and 3) another 200m+ tourists have yet to visit HK while the number of day trippers is growing. Sa Sa has been gaining market share in Hong Kong, from 15% in 2002 to 38% in 2011 vs. 18% for its closest peer, Bonjour. We expect its gross margin to expand from 45.2% in FY12 to 46.6% in FY15 due to higher house brand sales. The shift in sales channel from department stores to specialty stores in China will benefit Sa Sa.
Katherine CHAN
T(852) 2539 1322 Ekatherine.chan@cimb.com
Chris WONG
T (852) 2532 1128 E chris.c.wong@cimb.com
Company Visit Channel Check
Expert Opinion Customer Views
By building on our strengths, leveraging our brand reputation and growing our brand recognition, we will continue to add chapter after chapter to our growth story
Dr. Simon Kwok, JP, Chairman and CEO
Tourist profile change drives sales further

We think Sa Sa will benefit from the rise in visitors from non-tier 1 cities (65% of the total) and day-trippers, who have lower shopping budgets (a third of that for overnight visitors) and shop for daily necessities, including skincare and personal care products. Sa Sa has a much lower sales ticket size than the luxury names (~HK$600 in 1HFY13). Cosmetics and skincare ranked second on the shopping lists of mainland tourists in 2011.
Growth is not cheap

Sa Sas average forward P/E for 2005-10 was just 12x while that for 2010 until now stands at 20x. In 2010, Sa Sa expanded its China sales network from just a handful of POS to 17. We think re-rating should continue as it aims to add 20 or so new stores p.a., in addition to the above catalysts. Sa Sas share price rose 16% in the past three months, outperforming the HSI by 16%.
Three re-rating factors:

1) Operating leverage and long-term profitability should improve as Sa Sa
Price Close 9.5 8.5 7.5 6.5 5.5 4.5 25 3.5 20 15 10 5
May-12 Aug-12 Source: Bloomberg Nov-12 Feb-13
Relative to HSI (RHS) 173 158 143 128 113 98 83
Financial Summary
Revenue (HK$m) Operating EBITDA (HK$m) Net Profit (HK$m) Core EPS (HK$) Core EPS Growth FD Core P/E (x) DPS (HK$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) Recurring ROE % Change In Core EPS Estimates CIMB/consensus EPS (x) Mar-11A 4,901 676 509 0.18 (0.7%) 46.18 0.14 1.67% 33.86 49.17 (45.7%) 17.47 40.1% Mar-12A 6,405 945 690 0.24 34.5% 34.33 0.18 2.08% 24.41 51.77 (36.7%) 14.55 46.2% Mar-13F 7,723 1,143 821 0.29 18.7% 28.91 0.20 2.42% 20.25 42.55 (31.4%) 12.58 46.7% 1.00 Mar-14F 9,369 1,382 984 0.35 19.6% 24.17 0.24 2.89% 16.75 32.95 (29.0%) 10.86 48.2% 0.97 Mar-15F 11,071 1,666 1,189 0.42 20.5% 20.06 0.29 3.48% 13.87 25.66 (29.0%) 9.33 50.0% 0.98
52-week share price range

8.40
4.04 8.69
Vol m
9.50
Current Target
SOURCES: CIMB, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA
May 8, 2013
PEER COMPARISON
Research Coverage
Dairy Farm Int'l Hengan Intl Group Sa Sa International Holdings Tingyi (Cayman Islands) Want Want China Bloomberg Code DFI SP 1044 HK 178 HK 322 HK 151 HK Market SG HK HK HK HK Recommendation OUTPERFORM OUTPERFORM OUTPERFORM NEUTRAL OUTPERFORM Mkt Cap US$m 17,171 12,779 3,059 14,450 20,587 Price 12.70 80.6 8.40 20.05 12.08 Target Price 13.62 84.4 9.50 21.70 12.70 Upside 7.2% 4.8% 13.1% 8.2% 5.1%
Rolling P/BV (x)

25 20
Rolling FD P/E (x)

45
40
35 30
15
10 5 0 Jan-09
25
20 15
10
5
Jan-10
Jan-11
Jan-12
Jan-13
Hengan Intl Group Tingyi (Cayman Islands)
0 Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Hengan Intl Group Tingyi (Cayman Islands)
Dairy Farm Int'l Sa Sa International Holdings Want Want China
Dairy Farm Int'l Sa Sa International Holdings Want Want China
Peer Aggregate: P/BV vs Recurring ROE

12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jan-09 50% 42% 33% 25%
Peer Aggregate: FD P/E vs FD EPS Growth

35 30 40% 34%
25
20 15
29%
23% 17% 11% 6% 0%
17% 8% 0%
10 5 0 Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Rolling P/BV (x) (lhs)
Recurring ROE (rhs)
Rolling FD P/E (x) (lhs)
Fully Diluted EPS Growth (rhs)
Valuation
P/E (FD) (x) Dec-12 Dec-13 38.09 30.88 28.13 24.11 30.03 25.19 31.85 28.00 37.17 29.00 Dec-14 26.63 19.47 20.94 23.21 23.90 Dec-12 14.38 7.03 13.02 5.66 12.83 P/BV (x) Dec-13 12.15 6.15 11.24 5.00 10.63 Dec-14 10.32 5.29 9.67 4.37 8.89 Dec-12 24.18 19.37 21.10 15.81 25.71 EV/EBITDA (x) Dec-13 20.00 16.55 17.49 11.00 20.25 Dec-14 17.17 13.52 14.48 9.24 16.41
Dairy Farm Int'l Hengan Intl Group Sa Sa International Holdings Tingyi (Cayman Islands) Want Want China
Growth and Returns

Fully Diluted EPS Growth Dec-12 Dec-13 Dec-14 -7.1% 23.3% 16.0% 32.8% 16.7% 23.8% 22.3% 19.2% 20.3% 8.5% 13.7% 20.6% 32.0% 28.2% 21.3% Recurring ROE Dec-12 Dec-13 42.3% 42.6% 26.6% 27.2% 46.7% 47.9% 15.5% 19.0% 37.6% 40.1% Dec-14 41.9% 29.2% 49.6% 20.1% 40.5% Dividend Yield Dec-12 Dec-13 1.81% 2.20% 2.11% 2.49% 2.34% 2.78% 1.25% 1.41% 1.82% 2.33% Dec-14 2.52% 3.08% 3.34% 1.70% 2.82%
Dairy Farm Int'l Hengan Intl Group Sa Sa International Holdings Tingyi (Cayman Islands) Want Want China
SOURCES: CIMB, COMPANY REPORTS Calculations are performed using EFA Monthly Interpolated Annualisation and Aggregation algorithms to December year ends
May 8, 2013
BY THE NUMBERS
Share price info

Share pxperf. (%) Relative Absolute Major shareholders Dr Kwok (chairman) and wife (vice chairman) William Blair & Co Invesco 1M 10.3 17.3 3M 16.2 16.3 12M 60.8 74.3 % held 65.0 3.0 1.5
P/BV vs Recurring ROE

14 12 60% 51%
FD Core P/E vs FD Core EPS Growth

35 30 40% 30%
10
8
43%
34%
25
20
20%
10%
6
4 2 0 Jan-09
26%
17% 9% 0%
15
10 5 0 Jan-09
0%
-10% -20% -30%
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Rolling P/BV (x) (lhs)
Recurring ROE (rhs)
Rolling FD Core P/E (x) (lhs)
FD Core EPS Growth (rhs)
Profit & Loss

(HK$m) Total Net Revenues Gross Profit Operating EBITDA Depreciation And Amortisation Operating EBIT Total Financial Income/(Expense) Total Pretax Income/(Loss) from Assoc. Total Non-Operating Income/(Expense) Profit Before Tax (pre-EI) Exceptional Items Pre-tax Profit Taxation Exceptional Income - post-tax Profit After Tax Minority Interests Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit Recurring Net Profit Fully Diluted Recurring Net Profit Mar-11A 4,901 2,212 676 (79) 597 5 0 11 614 614 (104) 0 509 Mar-12A 6,405 2,897 945 (117) 828 6 0 0 835 835 (145) 0 690 Mar-13F 7,723 3,545 1,143 (147) 996 5 0 0 1,001 1,001 (180) 0 821 Mar-14F 9,369 4,338 1,382 (187) 1,195 5 0 0 1,200 1,200 (216) 0 984 Mar-15F 11,071 5,159 1,666 (221) 1,445 5 0 0 1,450 1,450 (261) 0 1,189
Gross margin continued to improve from a better product mix. The breakeven of its China business should raise profitability too.
509 509 509
690 690 690
821 821 821
984 984 984
1,189 1,189 1,189
Cash Flow
(HK$m) EBITDA Cash Flow from Invt. & Assoc. Change In Working Capital (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow Net Interest (Paid)/Received Tax Paid Cashflow From Operations Capex Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow Cash Flow From Investing Debt Raised/(repaid) Proceeds From Issue Of Shares Shares Repurchased Dividends Paid Preferred Dividends Other Financing Cashflow Cash Flow From Financing Mar-11A 676 (156) 10 0 (92) 438 (137) 1 12 163 40 Mar-12A 945 (190) 8 0 (124) 639 (247) 2 0 63 (182) Mar-13F 1,143 (144) 0 0 (180) 819 (266) 0 0 5 (261) Mar-14F 1,382 (180) 0 0 (216) 986 (270) 0 0 5 (265) Mar-15F 1,666 (186) 0 0 (261) 1,219 (295) 0 0 5 (290)
A dividend payout of 70% should be sustainable, on the back of strong operating cashflow.
28 (391)
14 (436)
10 (575)
10 (689)
10 (832)
(363)
(422)
(565)
(679)
(822)
SOURCES: CIMB, COMPANY REPORTS
May 8, 2013
BY THE NUMBERS
Balance Sheet
(HK$m) Total Cash And Equivalents Total Debtors Inventories Total Other Current Assets Total Current Assets Fixed Assets Total Investments Intangible Assets Total Other Non-Current Assets Total Non-current Assets Short-term Debt Current Portion of Long-Term Debt Total Creditors Other Current Liabilities Total Current Liabilities Total Long-term Debt Hybrid Debt - Debt Component Total Other Non-Current Liabilities Total Non-current Liabilities Total Provisions Total Liabilities Shareholders' Equity Minority Interests Total Equity Mar-11A 618 140 802 0 1,560 205 0 0 111 316 Mar-12A 599 206 1,191 0 1,996 333 0 0 138 471 Mar-13F 592 248 1,436 0 2,276 452 0 0 166 618 Mar-14F 635 301 1,742 0 2,679 534 0 0 202 736 Mar-15F 742 356 2,059 0 3,157 608 0 0 238 846
Sa Sa has been operating consistently with zero debt and a net cash position.
455 51 506
740 68 808
892 82 974
1,082 99 1,182
1,279 117 1,396
14 14 4 524 1,353 1,353
21 21 7 836 1,631 1,631
25 25 9 1,008 1,887 1,887
30 30 11 1,222 2,192 2,192
35 35 13 1,444 2,559 2,559
Key Ratios
Revenue Growth Operating EBITDA Growth Operating EBITDA Margin Net Cash Per Share (HK$) BVPS (HK$) Gross Interest Cover Effective Tax Rate Net Dividend Payout Ratio Accounts Receivables Days Inventory Days Accounts Payables Days ROIC (%) ROCE (%) Mar-11A 19.2% 29.2% 13.8% 0.22 0.48 N/A 17.0% 76.8% 3.23 92.6 29.20 89.8% 47.3% Mar-12A 30.7% 39.8% 14.8% 0.21 0.58 N/A 17.4% 71.3% 3.39 104.0 36.78 91.9% 55.7% Mar-13F 20.6% 20.9% 14.8% 0.21 0.67 N/A 18.0% 69.8% 3.67 114.8 43.42 78.5% 56.7% Mar-14F 21.3% 20.9% 14.8% 0.22 0.77 N/A 18.0% 69.9% 3.66 115.3 43.62 75.0% 58.5% Mar-15F 18.2% 20.6% 15.1% 0.26 0.90 N/A 18.0% 69.9% 3.71 117.3 44.40 75.5% 60.7%
Key Drivers
ASP (% chg, main prod./serv.) Unit sales grth (%, main prod./serv.) No. of POS (main prod/serv) SSS grth (%, main prod/serv) ASP (% chg, 2ndary prod./serv.) Unit sales grth (%,2ndary prod/serv) No. of POS (2ndary prod/serv) SSS grth (%, 2ndary prrod/serv) Mar-11A N/A N/A 78 9.3% N/A N/A 26 -1.7% Mar-12A N/A N/A 87 22.2% N/A N/A 48 0.5% Mar-13F N/A N/A 104 15.0% N/A N/A 68 1.5% Mar-14F N/A N/A 114 15.0% N/A N/A 88 3.0% Mar-15F N/A N/A 124 14.0% N/A N/A 108 5.0%
May 8, 2013
A quality staple name

Table of Contents
1. BACKGROUND 2. OUTLOOK 3. RISKS 4. FINANCIALS 5. VALUATION AND RECOMMENDATION 6. APPENDIX p.5 p.6 p.18 p.19 p.25 p.27
1. BACKGROUND 1.1 Investment thesis

We initiate coverage on Sa Sa with an Outperform rating and target price of HK$9.50, pegged at 23x CY14 P/E which is in line with the global peer average (Figure 47). While Sa Sas scale is smaller than its global peers, its solid ROE of 47-50% forecasted for FY13-15 beat the global average ROE that is in the high teens. We think Sa Sa is a staple play. Its growth profile for the past 5-10 years has been very resilient amid a turbulent macroeconomic environment. Sa Sa was still enjoying low- to mid-teens sales growth and mid-single digit SSSG in the post-GFC year of 2009 when a lot of other retailers saw their sales decline. We believe there are three re-rating factors: (i) Improving operating leverage and long-term profitability. As Sa Sa beefs up its scale in China, negotiating with brand owners for expansion will become easier. While its China business is still loss-making, the magnitude of losses seems manageable at HK$30m-40m a year (below 5% earnings). Sa Sa targets to break even by end-FY15 (Mar 2015). Sa Sa has undergone a re-rating considering that its average forward P/E multiple from 2005-2010 was just 11.8x, while that from 2010 until now stands at 19.7x. In 2010, Sa Sa expanded its sales network in China from just a handful to 17. We think that the re-rating has legs as it aims to add 20 or so new stores p.a. It has 53 stores in 28 cities currently. (ii) More room for expansion from POS additions and enlarged merchandise portfolio, even for Hong Kong. Sa Sa currently has about 100 stores in Hong Kong and Macau. We think that there is still room to expand if we benchmark it to Watsons and Mannings that have 200 and 300 point-of-sales (POS), respectively, in Hong Kong. Sa Sa generates 10-15% of its sales from non-cosmetics/skincare categories, covering baby, personal care and health care products (medicines, supplements, equipment), etc. We think that future revenue drivers could come from expanding its non-skincare products. (iii) Another 200m+ mainland tourists have yet to visit HK and we expect the number of day trippers to grow. The individual visit scheme (IVS) covers 49 Chinese cities with a total population of about 351m. Since the launch of the IVS in 2003, only about 100m mainland tourists have visited Hong Kong. We think that the increasing number of IVS tourists will remain an earnings driver for Sa Sa. The increasing number of day trippers that have lower spending power should also benefit Sa Sa, which has a lower sales ticket size of ~HK$600 in 1HFY13 for Hong Kong and Macau. Cosmetics and skincare products ranked second on the shopping list of both day trippers and overnight tourists in 2011, according to the Hong Kong Tourism Board. What is good about SaSa? (i) Sa Sais currently the largest cosmetics retail chain in Asia in sales terms. (ii) Sa Sa has been gaining market share consistently in the Hong Kong cosmetics market. Euromonitor estimated that Sa Sas market share in Hong Kong increased from 15% in 2002 to 38% in 2011, more than double that of its closest peer Bonjour with 18%. (iii) The increasing number of day trippers and tourists from lower tier cities should benefit Sa Sa in view of their smaller shopping budget. (iv) Continuous margin expansion from rising house bands sales. (v) The shift in sales channel from department stores to specialty stores in China will likely benefit Sa Sa. (vi) Cosmetics sales seem more resilient and less volatile.
5
May 8, 2013
2. OUTLOOK 2.1 The largest cosmetic retailer in Asia

Sa Sa is currently the largest cosmetics retail chain in Asia in terms of revenue, with emphasis on cosmetics retail and brand management. It has over 260 retail outlets in Hong Kong, Macau, China, Taiwan, Singapore and Malaysia, selling over 600 brands that cover skincare, fragrance, make-up, personal care as well as health and beauty supplements (including own-brands and exclusive products). Hong Kong and Macau represent about 80% of the total revenue and profit of Sa Sa (Figure 1) but mainland Chinese visitors travelling to Hong Kong have been the key earnings driver for the company with 65% of its current sales in Hong Kong and Macau coming from mainlanders, compared to 31% from local Hong Kong residents (Figure 2). Sa Sa stores have become a must-see for mainland shoppers in Hong Kong, given its strong reputation for price discount, product quality (even for parallel imports), large product and brand assortment, and having knowledgeable salespeople. It was founded in 1978 by Chairman and CEO, Dr. Simon Kwok, and his wife (Vice Chairman Dr. Eleanor Kwok). It was subsequently listed on the Stock Exchange of Hong Kong in 1997.
Figure 1: Breakdown of Sa Sa's essential numbers, 1HFY13
HK$m HK & Macau Mainland China Singapore, Malaysia, Taiwan sasa.com Total Turnover 2,630 168 396 183 3,378 % total 78% 5% 12% 5% 100% Profit 283 -20 13 6 282 % total 100% -7% 5% 2% 100% Net margin 11% -12% 3% 3% 8%
Figure 2: Breakdown of Sa Sas retail sales in HK and Macau, 1HFY13

Asia tourists, 2% Other tourists, 2%
Figure 3: Breakdown by transactions in HK and Macau, 1HFY13

Asia tourists, 2% Other tourists, 2%
Title: Source:
Please fill in the values above to have them entered in yo
PRC Tourists, 38% Local residents, 31%
PRC Tourists, 65%
Local residents, 59%
2.2 Continuous market share gain

Sa Sa has been consistently gaining share in Hong Kongs cosmetics market (see Figure 4), and we think that it will continue to outgrow the market over the next two to three years, driven by a strong flow of same-day visitors from China who budget more for smaller ticket daily necessity items including skincare, cosmetics and personal care products and groceries, compared to the past 5-10 years. According to Euromonitor, the Hong Kong beauty and personal care markets total retail value was HK$12bn as at the end of 2011. Sa Sa accounted for 38% of the market share for the same period, more than twice its closest
May 8, 2013
peer, Bonjour, with 18%. Sa Sas market share increased from 15% in 2002 to 38% in 2011, representing a CAGR of 11% for the period.
Figure 4: HK cosmetics and medicines annual sales vs. Sa Sas HK/Macau sales
Figure 5: HK cosmetics and medicines monthly sales
SOURCES: CIMB, HONG KONG CENSUS AND STATISTICS DEPARTMENT
SOURCES: CIMB, HONG KONG CENSUS AND STATISTICS DEPARTMENT
2.3 Mainland visitors will continue to drive earnings

Sa Sa has been a beneficiary of tourist flows from Mainland China since 2003 when the individual visit scheme (IVS) started, allowing mainland tourists to visit Hong Kong individually instead of in groups. Sales growth picked up noticeably from flattish growth before FY03 to double digits thereafter, as mainland shoppers have been loading up their cosmetics purchases in Hong Kong given (i) quality assurances, (ii) the wide selection, (iii) availability of the latest products, and (iv) lower prices compared to those in China due to lower import and consumption duties and a stronger Rmb. Sa Sa has a strong reputation in Hong Kong and China because of its competitive prices (especially branded products that may be sold at lower prices overseas which are then imported by Sa Sa into Hong Kong), wide brand and product varieties of (prices range from mass market to premium, brands range from premium, mass, professional salon, cosmeceutical, natural to spa brands), and open-shelves store format and contemporary store image.
Figure 6: Cosmetics / fragrances sold at 30-70% premium in mainland vs. Hong Kong
SOURCE: CIMB
The IVS covers 49 cities with a total population of about 351m mainland Chinese, representing only about 20% of Chinas total population. Since the launch of the scheme in 2003, only about 100m mainland tourists have visited Hong Kong. Given that a large number of tourists have yet to visit Hong Kong, we think the increasing number of Chinese tourists will remain the earnings driver for Sa Sa, as long as Hong Kong has the capacity to cater to those tourists.
May 8, 2013
Figure 7: Individual visit scheme for Hong Kong

Date Jul-03 City Dongguan Jiangmen Foshan Zhongshan Aug-03 Guangzhou Shenzhen Zhuhai Huizhou Sep-03 Jan-04 Beijing (permanent) Shanghai (permanent) Shantou Chaozhou Qingyuan Meizhou Zhaoqing Yunfu May-04 Shaoguan Heyuan Shanwei Yangjiang Zhanjiang Maoming Jieyang Jul-04 Nanjing Wuxi Suzhou Hangzhou Ningbo Taizhou Fuzhou Quanzhou Xiamen Mar-05 Nov-05 Tianjin (permanent) Chongqing (permanent) Jinan Chengdu Dalian Shenyang May-06 Nanning Haikou Kunming Guiyang Changsha Nanchang Jan-07 Wuhan Shijiazhuang Zhengzhou Hefei Changchun Total
Note: Population for Shenyang, Dalian, and Zhengzhou are 2010 figures
Population in 2011 (m) 8.3 4.5 7.2 3.1 12.8 10.5 1.6 4.6 20.2 23.5 5.4 2.7 3.7 4.3 4.0 2.4 2.9 3.0 3.0 2.4 7.1 5.9 5.9 6.4 4.7 6.4 7.0 5.8 5.9 6.5 6.9 1.9 13.5 29.2 6.1 14.1 5.9 7.2 6.9 1.6 6.5 4.4 7.1 5.1 10.0 10.3 9.6 5.5 7.6 350.6
SOURCES: CIMB, COMPANY REPORTS, CEIC
May 8, 2013
Figure 8: Sa Sas revenue and growth
Figure 9: PRC tourist arrivals to Hong Kong & Sa Sas SSSG are correlating
30 50%
25
40%
20
30%
millions
15
20%
10
10%
0%
0 FY04 FY05 FY06 FY07 FY08 FY09 yoy growth FY10 FY11 SSSG FY12
-10%
Visitor Arrivals
SOURCES: CIMB, COMPANY REPORTS, HONG KONG TOURISM BOARD
2.4 Change in tourist profile drives sales further

Sa Sa is also a beneficiary of the growing trend of lower-spending visitors from the mainland. Before 2009, the IVS was only open to permanent residents (PRs) in different Chinese cities. Since 2009, it has been broadened to non-permanent residents in a few major Chinese cities, namely Shenzhen, Beijing, Shanghai, Tianjin, Chongqing and Guangzhou. As many of the non-PRs are actually rural residents working in the cities, the mix of lower income spenders has increased. They shop for mass/middle-class market products (as opposed to high-end/luxury ones) including cosmetics and skincare. More so, the mix of visitors from the non-tier-1 cities has also increased, as a Nielsen study found that they made up 65% of overnight mainland visitors, and they grew 43% yoy in 2011 outpacing 24% growth in the number of overnight mainland visitors. The average spending per trip of the visitors from non-tier-1 cities is estimated at HK$22,000 or just about 60% of those from tier-1 cities. These trends are reflected in the declining growth in mainlanders per capita spending compared with that in their arrivals (Figure 10).
Figure 10: Mainland tourist arrivals vs. per capita spending
50% 40% 30% 20%
yoy chg
10% 0% -10% -20% -30% 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mainland tourist arrivals
Mainland tourist per capita spending
SOURCES: CIMB, HONG KONG TOURISM BOARD
May 8, 2013
2.5 Growth of day trippers has positive impact on Sa Sa

A related phenomenon is the growth in day trippers from China (Figure 13), who would buy daily necessities in Hong Kong, including cosmetics and skincare products. Day trippers have lower spending budgets, about a third of that for overnight visitors. The increasing number of day trippers has dragged luxury sales growth, but should have benefitted Sa Sa which has a much lower sales ticket size than the luxury names (about HK$600 in 1HFY13 for Hong Kong and Macau). Cosmetics and skincare ranked second on the shopping lists of both day and overnight tourists in 2011, according to the Hong Kong Tourism Board.
Figure 11: Ticket size comparison, 1HFY13
Tourist category Mainland tourists EU and US tourists Southeast Asian tourists Local residents Amount (HK$) 603 330 290 186
Figure 12: Ranking of mainlanders' shopping lists 2011

Overnight Mainland Tourists Rank 1 2 3 4 5 Shopping items Bought % Rank Cosmetics & Skin Care / Perfume 44% 1 Garments / Fabrics 44% 2 Foodstuff, Alcohol and Tabacco 36% 3 Misc. Consumer Goods 29% 4 Leather / Synthetic Goods 28% 5 Same Day Mainland Tourists Shopping items Bought % Foodstuff, Alcohol and Tabacco 44% Cosmetics & Skin Care / Perfume 25% Personal Care (Shampoo, diapers etc.) 23% Misc. Consumer Goods 20% Garments / Fabrics 19%
SOURCES:COMPANY REPORTS, HONG KONG TOURISM BOARD
Figure 13: Day trippers arriving in HK per month, 2011-12
Figure 14: Overnight visitors to HK per month, 2011-12
SOURCES: CIMB, Hong Kong Tourism Board
SOURCES: CIMB, CEIC, Hong Kong Tourism Board
10
May 8, 2013
Figure 15: Number of day trippers, 2002-12
Figure 16: Number of overnight visitors, 2002-12
2.6 House brands lift gross margins

Sa Sa positions itself as a one-stop cosmetics specialty store and offers over 600 brands from around the world, including more than 100 exclusive brands. Whereas historically the company was known for its discounted, parallel imported products, gross margins have been increasing because of the rising share of higher-margin exclusive brands, which could be either private label or house brands. For example, Suisse Programme, Mthode Swiss, sasatinnie, Cyber Colors, or brands for which Sa Sa has exclusive distribution rights, such as Elizabeth Arden, La Colline, Caudale and Cellex C. Distribution licences have a three-year term in general and most of the existing distribution brands have long established relationships with Sa Sa. For instance, Elizabeth Arden started its partnership with Sa Sa in 2002. House brands contribute about 42.5% of the total revenue at present. The company hopes to raise this to 50% eventually. We project contributions from house brands to increase 60-80bp p.a. to 44.9% in FY16. We look for gross margin expansion to continue at a rate of 20-70bp each year till FY17 as exclusive brands continue to lead overall sales growth.
Figure 17: Gross margins by product category, FY12 Figure 18: Gross margin and % share of house brands FY06-FY16F
48% 46% 44% 42% 40% 38%
36%
34% 32% 30% FY06 FY07 FY08 FY09 GM FY10 FY11 FY12 FY13F FY14F FY15F FY16F
% share of house brands
SOURCE: CIMB
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2.7 China turned the corner

Sa Sa entered China in 2005, opening its first store in Shanghai. Network expansion was conservative until FY11 when the pace picked up and the company increased the number of Sa Sa stores from 17 in FY10 to 53 at the end of Sep 2012, increasing the number of cities it was in from four in 2007 to 28. The China business is still loss-making with an immaterial amount of HK$30m-40m in losses a year since 2009, representing less than 5% of the total earnings. But, on a store-basis (i.e., before the corporate overhead), its multi-brand Sa Sa stores turned around in 1HFY13 (Rmb1.6m profit vs. Rmb3.6m loss in 1HFY12) and SSSG went from a decline of 3.0% to an increase of 5.9%. Management targets breakeven by the end of FY15. The loss seemed manageable at around HK$20m in 1HFY13. The company is trying to open smaller stores in tier-3 cities and below as the size of the brand portfolio in China stores is much smaller than those in Hong Kong. Sa Sa has started to control discounting to protect margins and carry more house brands in China and, as a result, retail sales growth in China for 3MCY13 was down double digits.
Figure 19: Mainland China network
80
70
10 20 13
60 50 40 21 30 18 20 10 0 1 Mar-05 2 Mar-06 6 5 Mar-07 12 4 Mar-08 10 Mar-09 Mar-10 Mar-11 23 26 17
62 48 53
Mar-12
Sep-12
Mar-13
Multi-brand Sasa Stores
Single-brand counters
Note: Estimated number for Mar-13
We agree with management that continuous expansion in China to reach a critical mass is vital to attract more global brand partnerships for expansion, therefore improving longer term profitability in the country. The Singapore and Malaysia markets were set as benchmarks where Estee Lauder started supplying products to Sa Sa as its scale expanded. Euromonitor estimated that Chinas cosmetics market was 18x larger than Hong Kongs in terms of retail sales. Personal care and beauty product sales in China have been resilient, achieving CAGR growth of 11.8% for 2001-11. We expect this strong trend to continue as Chinas per capita spending on personal and beauty product s is still low compared to other countries.
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Figure 20: Per capita spending on beauty and personal care products in 2011
400
368.1
350 300 250
219.9 202.6 202.5 166.6 156.1
US$
200
150
100 50 0 Japan Hong Kong Singapore USA South Korea Taiwan China
23.3
SOURCES: CIMB, COMPANY REPORTS, CEIC, WORLD BANK, BLOOMBERG
Some of the drivers for the turnaround include: (i) (ii) a faster pace of network expansion which has attracted more brand partnerships (e.g., LOreal, Maybelline); launching more made for China products that would n ot require import licences and that can be brought to the market quickly (in a few months vs. 9-12 months for imported products). Sa Sas focus here is on domestically-made but exclusive brands that have lower price points to cater to the mass market; clustering of stores in nearby cities to leverage regional administrative resources. The companys stores are currently grouped in four clusters (Northern, covering 25 stores in 10 cities around Beijing/Tianjin/Shenyang; Eastern, covering 15 stores in 10 cities around Shanghai; Central, with eight stores in four cities around Wuhan; and Southern, with stores in four cities around Guangzhou), each with an operating manager and a handful of district managers; improving the training and development of front-line sales staff, which helped raise sales productivity by 30% in 1HFY13. China does not allow parallel imports, thus limiting the availability of discounted products at a brand best known among its mainland customers for its bargain prices and wide product selection; obtaining import licences in China is a time-consuming and difficult process, thus slowing product introductions and further limiting product selection that is key to Sa Sas success in Hong Kong; brand partnerships have been difficult to come by as Sa Sa had been operating in China without a sizable national network; staff productivity it takes a year to get a new salesperson up to full speed so for the first few years, Sa Sa suffered from a lack of experienced staff to build its business.
(iii)
(iv)
Operating in China has been an uphill battle because: (i)
(ii)
(iii) (iv)
2.8 A beneficiary of continuous shift in sales channel

Over the past few years, Chinese department stores had lost revenue share to health/beauty specialists and online retailers while hypermarkets and supermarkets seemed to have maintained their shares (Figure 21). We think the sales-channel shift will likely continue, mirroring the case of the South Korean market (over 20% sales from specialty shops in 2011). We believe Sa Sa would
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be a beneficiary of this continuous channel shift while its presence in e-commerce should position it for future gains in that channel. Sephora and Watsons are the current leaders of the Chinese beauty-product specialty segment with over 100 and 1,000 stores in China, respectively. Sa Sa is much less penetrated, with less than 60 stores as at end-Mar 13, implying more room for growth.
Figure 21: Beauty and personal care products retail sales by channel in China
2006 Hypermkts/supermkts Dept stores Direct selling/home shopping Health and beauty stores/pharmacies Internet retailing Smaller grocers Convenience stores 35.0% 33.1% 14.4% 11.5% 0.7% 3.3% 1.8% 2007 35.6% 33.2% 13.9% 14.6% 0.8% 2.8% 1.7% 2008 35.5% 33.1% 13.6% 12.6% 0.8% 2.5% 1.7% 2009 35.7% 32.8% 13.5% 12.9% 0.9% 2.3% 1.7% 2010 35.3% 30.3% 13.9% 13.5% 3.1% 2.1% 1.6% 2011 34.0% 28.7% 14.7% 14.0% 5.0% 1.9% 1.7% 5-yr chg -1.0% -4.4% 0.3% 2.5% 4.3% -1.4% -0.1%
SOURCES: CIMB, EUROMONITOR
2.9 Cushioning rental pressure in three main ways

Rental pressure will likely cap its margins. Hong Kong has the worlds most expensive prime retail market (according to a CBRE survey), beating even New York, the second most expensive, by almost 48% per sf p.a., after its rents surged 48% in 2011 and another 27% yoy in 3Q12. About 20 of Sa Sas lease renewals were signed in FY03/13 with an average rental increment of over 30%. Sa Sa cushions its rental pressure in Hong Kong in three ways: (i) (ii) Higher contributions from more profitable house brands, from 42% of total revenue to 50% ultimately (42% in FY12 to 45% in FY16); improving profitability for its China business on the back of economies of scale and enhanced operating leverage which make negotiation with brand owners for expansion easier; and the opening of more stores in non-touristy areas in Hong Kong, where rents are lower but retail footfall is acceptable.
(iii)
More stores in New Territories to tap the influx of day trippers Sa Sa previously focused more on touristy areas such as Causeway Bay and Tsim Sha Tsui. Since 2009, it has been feeling the pinch of increasing rental pressure in touristy areas while simultaneously noticing that more local residents are moving to the New Territories. As a result, it started to open more stores in the New Territories, along MTR lines. That move coincided with a growing flux of same-day visitors from the mainland to Hong Kong to buy foodstuffs, and skin-care and personal-care products. Sa Sa has been stepping up its New Territories stores in the past 18 months, recharging the SSSG of its Hong Kong stores. At present, over 50% of the population in Hong Kong resides in the New Territories (source: The Census Department). Although the average size of purchases is smaller there, the total number of sales transactions by local residents in Hong Kong and Macau accounted for 59% of its total in 1H13. As such, local residents form a clientele that Sa Sa cannot afford to ignore. Plenty of room for expansion in New Territories There are now 29 Sa Sa stores in the New Territories, against 151 for Mannings and 72 for Watsons. Although they do not carry identical merchandise portfolio, they have personal-care and skin-care products that overlap. We therefore think that there is still room for Sa Sa to add more stores.
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Lease terms and renewals in Hong Kong and China Leases in Hong Kong generally stretch for three years, some with a fixed percentage rental increase each year and others with a set increase at the end of three years. Rents are usually fixed, although some malls may have rent pegged to store turnover. Leases in China have similar terms, although rents are more often based on turnover. While Sa Sa has been opening bigger flagship stores in Hong Kong to accommodate high customer traffic and a larger number of SKUs (14,000-15,000), it found that in China, smaller stores work better as stores in China can offer only about half of Hong Kongs SKUs and roughly 300 brands, and there is lower traffic.
Figure 22: Global prime retail rent ranking, 3Q12 Figure 23: Prime retail rent index and yoy change
SOURCE: CBRE
SOURCES: CIMB, COLLIERS HONG KONG
2.10 Cosmetics sales seem more resilient and less volatile

Cosmetics and related sales seem to be more resilient and less volatile than other macro indicators. The figures below show the respective growth in the sales of beauty and personal-care products vs. GDP in different countries
Figure 24: China GDP growth vs beauty and personal care market sales growth
14% 12% 10% 4% 8% 6% 4% 2% 0% 2008 2009 2010 2011 -4% Beauty and personal care market growth GDP growth -2% Beauty and personal care market growth GDP growth 2% 6% 0%
2008 2009 2010 2011
Figure 25: HK GDP growth vs beauty and personal care market sales growth
8%
Figure 26: SG GDP growth vs beauty and personal care market sales growth
16% 14%
Title: Source:
Title: Source:
6%
12% Please fill in the values above to have them entered in Please your report fill in the values abov 10% 8%
4% 2%
-2% 0% 2008 2009 2010 2011
Beauty and personal care market growth GDP growth
SOURCES: CIMB, EUROMONITOR, CEIC
SOURCES: CIMB, EUROMONITOR, CEIC
SOURCES: CIMB, EUROMONITOR, WORLD BANK
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Figure 27: South Korea GDP growth vs beauty and personal care market sales growth
9% 8%
Figure 28: Japan GDP growth vs beauty and personal care market sales growth
Figure 29: USA GDP growth vs beauty and personal care market sales growth
6%
Title: Source:
5% 4%
Title: Source:
4% 7% 6% 5% 4% 3% 2% -2% 1% 0% 2008 2009 2010 2011 -6% Beauty and personal care market growth GDP growth -4% Beauty and personal care market growth GDP growth -4% -3% 0% 2008 -2% 2009 2010 2011 0% 2008 -1% 2009 2010 2011 2%
Please fill in the values3% above to have them entered in Please your report fill in the values abov
2% 1%
Beauty and personal care market growth GDP growth
2.11 E-commerce: fragmentation, with competition bringing opportunities

Online retailers do compete directly with Sa Sas retail stores (more so on the mainland than in Hong Kong). Beauty and personal-care products represented 8% of the sales of the top 50 B2C online retailers in 2011 and were the fourth most popular type of products purchased online by consumers. The segments growth is projected at a 35% CAGR through 2015 (by iResearch) and products can be bought at every one of the top 10 online retailers as well as several upcoming specialty stores, including Lefang, Jumei and Tiantian (Figure 32). Sa Sas brick-and-mortar stores have in their favour an established and trusted brand, which is important in a country rife with product-safety and -quality issues and consumers who prefer to try out products on the spot (especially important for a category that offers a constant stream of new products). It also has sasa.com to capture some of the online buyers. Most importantly, given its market share of less than 0.15% of the Chinese cosmetics industry, there is still room to grow its network and be a consolidator in a highly-fragmented industry.
Figure 30: iResearchs top 50 online B2C retail survey 2010
Maternity / Baby, 3% Health & Beauty, 7% Music / Books, 3% Alcohol, 2% Music / Books, 4%
Figure 31: iResearchs top 50 online B2C retail survey 2011

Maternity / Baby, 2%
Food, 2%
Title: Source:

Apparel, 47% Luxury, 8% Apparel, 40% Health & Beauty, 8% General Merchandise, 17%
Consumer Electronics, 23%
General Merchandise, 14%
Consumer Electronics, 20%
SOURCES: CIMB, IRESEARCH
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Figure 32: 2011 top B2C online retailers
Figure 33: sasa.coms sales, FY08-16F

800
700
Figure 34: sasa.coms EBIT and EBIT margins, FY10-16F

70%
60%
60
Title: Source:
14% 12% 10%
50 600 500 50% 40 40% 30% 20%

20
HK$ m
400 300 200 100 0 FY08 FY09 FY10 FY11 Sales FY12 FY13F FY14F FY15F FY16F
HK$ m
8%
30 6% 4% 10 2% 0% FY10 FY11 FY12 EBIT FY13F FY14F EBIT margin FY15F FY16F
10% 0% -10% 0
yoy growth
2.12 Any succession plans? Yes

Dr. Simon Kwok and Mrs Eleanor Kwok have been instrumental in building Sa Sa. At the age of 60, Dr. Simon Kwok is still energetic and very much involved in its day-to-day operations. The company has a CFO but not a COO or a regional manager for Hong Kong/China. Our conversations with management suggest that Dr. Kwok is looking to hire someone in the 40s with vast experience in the beauty sector. The second generation of the Kwok family is still too young (early 20s to 30s) to be involved full-time in the business.
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3. RISKS 3.1 Intense competition

Cosmetics retailing is a highly competitive industry. Offline competitors include department stores (mostly premium brands), supermarkets and hypermarkets (mostly mass-market brands), professional stores (e.g. Watsons, Sephora, Gialen [] and Cosmart []), specialty stores (mostly mono-brand stores e.g. Koreas Skin Food, Etude House, Missha , H2O), pharmacies (especially for cosmeceutical brands such as Boots, Vichy, La Roche-Posay) and beauty parlours (more niche products such as organic facial bars, bath salts).
3.2 Execution risks in China

We see the increasing importance of a China presence for Sa Sa as China could fuel its earnings growth in the long term. The company has accelerated its expansion in the last couple of years after developing a business model that it thinks would suit China. We think that China remains a work-in-progress as the company would need to show that its operations can be scaled up there significantly.
3.3 Disruptions to visits to Hong Kong

A tightening of restrictions on visits by mainland Chinese to Hong Kong (e.g. from multiple- to single-entry permits, reducing the scope of the existing IVS), the stricter implementation of customs regulations in China (currently, levies on the purchase of cosmetics and luxury products abroad are usually not strictly enforced) or another SARS-like breakout that could affect tourist flows into Hong Kong could all hurt Sa Sas business.
Figure 35: Customs duties on mainlanders purchases abroad
SOURCE: GENERAL ADMINISTRATION OF CUSTOMS OF THE PRC
3.4 China cutting taxes on cosmetics

One key impetus for mainlanders to buy cosmetics in Hong Kong is the price differential, which is partly a function of taxes in China: a 6.5-15% customs duty, a 30% consumption tax and a 17% VAT. There has been occasional chatter about China cutting its customs and/or luxury taxes to stimulate domestic consumption. Our view is that given the 30-70% price differences, even if those taxes were reduced or cut, cosmetics would still be cheaper in Hong Kong than on the mainland. Moreover, in terms of product selection, newness and safety, Hong Kong will likely still be more attractive to mainland shoppers.
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3.5 SWOT analysis

Figure 36: SWOT analysis
Strengths Well-known brand with regional retail footprint One-stop destination shopping for cosmetics and personal care products Wide selection of products, brands and price points Key beneficiary of trend of mainlanders doing mass market shopping in HK (product quality, selection, competitive prices) Strong balance sheet and cash flow Weaknesses Still heavily dependent on HK market which drives >90% of profits Challenges in broadening merchandise selection and raising sales staff productivity in China Reputation for price discounts in HK cannot be used to draw in traffic in China due to import restrictions and duties there Opportunities Network expansion in New Territories in HK to cater for demand from same-day visitors from mainland Improving operations and profitability in China Network expansion in China Introduction of more "Made for China" products in China GM improvement from favorable mix shift towards house brands and exclusive products Threats Rising rental costs in HK Intense online competition especially in China Successsion Possibility of Chinese government lowering taxes on imported cosmetics and personal care products thus reducing price gap with HK An unexpected event (e.g., SARS, severe tension in mainland-HK relations) that hurts mainland tourism to HK
SOURCE: CIMB
4. FINANCIALS 4.1 Topline: all eyes on Hong Kongs new stores and SSSG
Sa Sas P&L should remain driven by its performance in Hong Kong, which represents about 80% of its sales and more than 90% of its EBIT. We expect topline growth in Hong Kong to be spurred by both new store additions and SSSG. We anticipate the opening of 17 new stores in FY13 (87 in all in FY12) and about 10 in each of the following years to reach 114 by FY15 as penetration in the New Territories deepens to accommodate increased demand from day trippers from China. We project that SSSG will reach 15% in FY13 (1H13: 16.8%) despite a high base from last year, followed by another 15% in FY14 and very low teens each year until FY16. Hong Kong revenue is expected to grow 21-23% in FY13 and FY14, 19% in FY15, and 15-17% each year thereafter.
4.2 Topline and SSSG: regional and segmental overview

Mainland China For mainland China, we estimate that Sa Sa will open 20 new stores a year (store base of 48 in FY12), mostly in or around cities where it already has a presence, to increase its regional clustering and operating leverage. Our SSSG assumptions are 2% for FY13 and 3-5% for FY14 and beyond, which would be just about enough for SSSG to catch up with inflation. Currently at 5% of total sales, Chinas share should climb to 6 -7% in the next few years. Singapore Sa Sas SSSG declined by low single digits in FY08-12, except in FY11 when it achieved SSSG of 5.2%. There have been staffing issues in Singapore as the country continues to experience labour shortages; this has affected operational efficiency at its stores. Local Singaporeans do not prefer working in the retailing industry because that generally entails working on holidays. In addition, a weak economy in Singapore continues to affect consumer sentiment. Despite these issues, Sa Sas SSSG was 6.6% in 1H13. We think expansion in Singapore will be somewhat limited by its high labour costs. Although the business is still profitable, we assume just 2-3 new stores a year to its existing 20-store base.
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Taiwan Sa Sa operates in a very competitive landscape in Taiwan, competing head-on with Watsons, the leader in store count (about 500 POS), and Cosmed, the leader in the mid-mass market. Sa Sas sales had been mixed in the past few years. SSSG had fluctuated between high single digits to declines of a similar magnitude in FY08-12. Similarly, Taiwans consumer sentiment remains mediocre (1H13 SSSG down 0.8% following two consecutive years of just 2%). We have assumed the opening of 2-3 new stores a year to its existing 27. Still, we believe Sa Sa has good growth potential in Taiwan as the number of individual tourists from mainland China should increase in the coming years. Malaysia In Malaysia, Sa Sa benefits from strong brand awareness among the younger population, booking positive SSSG every year in FY08-12 (1H13: 4.1%). We believe Malaysia will be more promising with a capacity for 7-10 new stores a year on its existing 49-store base. sasa.com sasa.coms sales grew by a 25% CAGR over the past three years, which we think can be sustained as its sales base remains modest while e-commerce sales should continue to grow. All in all, we project a 24% sales CAGR through to FY16, including 30% in FY13 and 25% in FY14.
Figure 37: Store count and SSSG by country
FY09 Standalone "Sasa" stores HK & Macau China Singapore Malaysia Taiwan Total Single-brand stores/counters HK & Macau China Singapore Malaysia Taiwan Total yoy % chg - Standalone "Sasa" stores HK & Macau China Singapore Malaysia Taiwan Total SSSG HK & Macau China Singapore Malaysia Taiwan 4.5% na -1.6% 13.5% -2.6% 7.1% 13.0% -1.5% 9.5% 8.6% 9.3% -1.7% 5.2% 4.6% 2.0% 22.2% 0.5% -1.5% 0.7% 2.1% 15.0% 1.5% 1.0% 1.0% 2.0% 15.0% 3.0% 2.0% 3.0% 2.0% 14.0% 5.0% 3.0% 4.0% 3.0% 13.0% 5.5% 3.5% 5.0% 3.0% 16.8% 5.9% 6.6% 4.1% -0.8% 13.2% -2.9% -4.6% -2.1% 4.8% 7% 150% 8% 24% -7% 14% 13% 70% 29% 15% 15% 20% 11% 53% 11% 27% 27% 21% 12% 85% 5% 18% 37% 25% 20% 42% 14% 20% 12% 23% 10% 29% 8% 15% 10% 15% 9% 23% 8% 13% 9% 13% 6% 19% 7% 10% 9% 11% 12% 36% 0% 26% 29% 20% 20% 42% 14% 20% 12% 23% 3 18 0 0 2 23 2 21 0 0 1 24 2 21 0 0 1 24 2 20 0 0 0 22 2 15 0 0 0 17 2 17 0 0 0 19 2 18 0 0 0 20 2 20 0 0 0 22 2 13 0 0 0 15 2 15 0 0 0 17 62 10 14 26 13 125 70 17 18 30 15 150 78 26 20 38 19 181 87 48 21 45 26 227 104 68 24 54 29 279 114 88 26 62 32 322 124 108 28 70 35 365 132 128 30 77 38 405 94 53 20 49 27 243 104 68 24 54 29 279 FY10 FY11 FY12 FY13F FY14F FY15F FY16F 1HFY13 2HFY13
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Figure 38: Turnover by country

FY09 Turnover HK & Macau Mainland China All other segments Singapore Malaysia Taiwan sasa.com Total Sales Turnover yoy chg HK & Macau Mainland China All other segments Singapore Malaysia Taiwan sasa.com Total Sales Turnover as % total HK & Macau Mainland China All other segments Singapore Malaysia Taiwan sasa.com Total Sales 16% 4% 4% 4% 4% 100% 83% 80% 2% 18% 4% 4% 4% 6% 100% 80% 3% 17% 4% 5% 4% 5% 100% 80% 5% 16% 4% 4% 4% 5% 100% 80% 5% 16% 4% 4% 4% 5% 100% 80% 4% 15% 4% 4% 4% 5% 100% 81% 5% 15% 4% 4% 4% 5% 100% 81% 5% 14% 4% 4% 4% 5% 100% 78% 5% 17% 4% 5% 4% 5% 100% 81% 4% 15% 4% 5% 4% 5% 100% 8% nm 23% 4% 36% 0% 66% 12% 10% 61% 28% 16% 24% 12% 57% 14% 19% 50% 15% 27% 25% 17% -2% 19% 30% 100% 23% 18% 16% 32% 26% 31% 21% 24% 19% 12% 16% 17% 30% 21% 23% 16% 16% 9% 19% 8% 25% 21% 19% 21% 14% 9% 16% 9% 20% 18% 17% 18% 14% 9% 15% 8% 20% 17% 19% 55% 23% 8% 24% 16% 40% 21% 22% 5% 17% 17% 9% 18% 22% 20% 2,981 60 568 140 142 132 154 3,609 3,288 97 726 162 176 147 241 4,111 3,923 145 833 206 221 172 235 4,901 5,093 291 1,022 242 257 226 297 6,405 6,143 360 1,220 272 297 264 386 7,723 7,534 418 1,417 296 353 285 483 9,369 8,944 506 1,621 323 409 309 580 11,071 10,492 594 1,855 353 472 335 695 12,942 2,630 168 579 126 146 124 183 3,377 3,513 192 641 146 151 140 203 4,345 FY10 FY11 FY12 FY13F FY14F FY15F FY16F 1HFY13 2HFY13
4.3 EBIT margins still have room to improve, driven by GM

We expect EBIT margins to dip 3-18bps to 12.9% and 12.8% in FY13 and FY14 respectively, due to staff and rental cost pressures, before improving by 30bp per year beginning in FY15 as rent growth should have passed its peak by then and as SG&A comes under greater control. Gross margins, on the other hand, should inch up by 30-40bp each year to 46.3% in FY14 and 46.8% by FY17, led by 60-80bp annual increases in its mix of house-brand products.
Figure 39: Ratio analysis (as % sales)
FY09 COGS Gross margins Staff costs Occupancy costs Ad exp's Depreciation Other opex Total SG&A EBIT margin EBITDA margin Tax rate Net profit margin Core net profit margin -56.3% 43.7% -13.7% -9.7% -1.9% -1.8% -7.1% -34.2% 10.2% 12.0% 17.6% 8.8% 8.7% FY10 -55.9% 44.1% -13.5% -9.7% -2.0% -1.5% -6.9% -33.6% 11.2% 12.7% 18.0% 9.3% 9.3% FY11 -54.9% 45.1% -13.4% -9.9% -1.9% -1.6% -6.8% -33.6% 12.2% 13.8% 17.0% 10.4% 10.2% FY12 -54.8% 45.2% -12.7% -9.8% -1.8% -1.8% -6.8% -32.9% 12.9% 14.8% 17.4% 10.8% 10.8% FY13F -54.1% 45.9% -13.2% -9.9% -1.8% -1.9% -6.9% -33.6% 12.9% 14.8% 18.0% 10.6% 10.6% FY14F -53.7% 46.3% -13.2% -10.0% -1.8% -2.0% -7.2% -34.2% 12.8% 14.8% 18.0% 10.5% 10.5% FY15F -53.4% 46.6% -13.2% -10.0% -1.8% -2.0% -7.2% -34.2% 13.1% 15.1% 18.0% 10.7% 10.7% FY16F -53.2% 46.8% -13.1% -10.0% -1.8% -2.0% -7.2% -34.1% 13.4% 15.4% 18.0% 11.0% 11.0% 1HFY13 -54.3% 45.7% -14.0% -10.8% -1.6% -2.4% -7.5% -36.4% 10.1% 12.5% 19.0% 8.4% 8.3% 2HFY13 -53.9% 46.1% -12.5% -9.2% -1.9% -1.5% -6.3% -31.4% 15.1% 16.6% 17.5% 12.4% 12.5%
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Figure 40: EBIT and EBIT margins by country

FY09 EBIT HK & Macau Mainland China All other segments Singapore, Malaysia, Taiwan sasa.com Total EBIT EBIT margin HK & Macau Mainland China All other segments Singapore, Malaysia, Taiwan sasa.com total EBIT yoy chg HK & Macau Mainland China All other segments Singapore, Malaysia, Taiwan sasa.com total EBIT as % total HK & Macau Mainland China All other segments Singapore, Malaysia, Taiwan sasa.com Total Sales 101% -9% 8% 7% 1% 100% 91% -5% 14% 6% 7% 100% 93% -4% 11% 8% 3% 100% 98% -6% 8% 5% 3% 100% 98% -4% 6% 4% 2% 100% 96% -3% 7% 4% 3% 100% 94% -1% 7% 4% 3% 100% 93% 0% 7% 4% 3% 100% 100% -7% 7% 5% 2% 100% 97% -3% 6% 4% 3% 100% 9% -32% 113% 17% 652% 21% 37% 21% 7% 67% -46% 33% 42% 70% -5% -17% 27% 35% 20% -6% -2% -3% 1% 20% 23% n.m. 30% 26% 38% 25% 21% n.m. 22% 24% 20% 23% 18% -159% 19% 11% 31% 20% 27% 0% -14% -4% -29% 26% 17% -12% 7% -2% 21% 17% 10.7% -45.3% 4.4% 5.1% 2.4% 8.8% 10.6% -19.2% 7.3% 5.1% 11.7% 9.3% 12.1% -15.5% 6.8% 6.9% 6.4% 10.4% 13.2% -13.1% 5.2% 4.7% 6.5% 10.8% 13.2% -10.0% 4.3% 4.0% 5.0% 10.7% 13.2% -7.0% 4.8% 4.5% 5.5% 11.0% 13.4% -2.0% 5.2% 5.0% 5.5% 11.5% 13.5% 1.0% 5.4% 5.0% 6.0% 11.8% 10.8% -0.8% 3.3% 3.4% 3.0% 8.4% 15.0% -0.5% 5.3% 4.6% 6.8% 12.6% 318 (27) 25 21 4 316 348 (19) 53 25 28 382 475 (22) 56 41 15 509 674 (38) 54 34 19 690 811 (36) 53 33 19 828 994 (29) 69 42 27 1,034 1,198 (10) 84 52 32 1,272 1,416 6 100 58 42 1,522 283 (20) 19 13 6 282 528 (16) 34 20 14 545 FY10 FY11 FY12 FY13F FY14F FY15F FY16F 1HFY13 2HFY13
4.4 Two largest cost items: rent and labour

The company has been nimble in managing its rental costs. Rent as a percentage of sales had climbed by only 10bp from 9.7% in FY09 to 9.8% in FY12. Management did this by relocating stores facing unreasonably large rent increases (e.g. more than double) to sites nearby and opening more stores in the New Territories where rents are more modest. We think rents will continue to be a pressure point although their growth has at least been decelerating. We expect rents to inch up by about 10bps p.a. as a percentage of sales over the next several years. Staff costs should remain a pressure point for the company. Although their growth has been accelerating, we believe they will remain fairly stable as a percentage of sales in the coming years.
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Figure 41: Income statement projections

HK$m Turnover y/y % chg HK/Macau SSSG COGS Gross profit GP Other income (slide disaplay/rental inc) % sales Staff costs Occupancy costs Ad exp's Depreciation Other opex Total SG&A Operating profit (EBIT) EBIT as % sales EBIT y/y % chg EBITDA EBITDA as % sales Finance income Gains/losses/extraordinaries Profit before taxation Inc tax expense Reported profit Discontinued Operations Profit for the year Reported EPS (HK$) Core profit for the year Core EPS (HK$) y/y % chg Exchg translation Total comprehensive income for company owners Basic share count Fully diluted Wt. Shares (m) Dividend per share (HK$) FY09 3,609 12.0% 4.5% (2,032) 1,577 43.7% 26 0.7% (493) (350) (69) (65) (257) (1,235) 368 10.2% 15% 433 12.0% 13 2 383 (67) 316 316 $0.23 314 $0.23 15% (17) 298 1,381 1,382 0.230 FY10 4,111 13.9% 7.1% (2,296) 1,815 44.1% 26 0.6% (555) (397) (83) (62) (283) (1,380) 461 11.2% 25% 523 12.7% 6 (2) 466 (84) 382 382 $0.14 383 $0.14 -40% 15 397 2,768 2,786 0.140 FY11 4,901 19.2% 9.3% (2,689) 2,212 45.1% 30 0.6% (657) (484) (93) (79) (332) (1,645) 597 12.2% 30% 676 13.8% 5 11 614 (104) 509 509 $0.18 500 $0.18 29% 19 528 2,792 2,813 0.140 FY12 6,405 30.7% 22.2% (3,508) 2,897 45.2% 40 0.6% (816) (625) (114) (117) (436) (2,108) 828 12.9% 39% 945 14.8% 6 0 835 (145) 690 690 $0.24 690 $0.24 37% 4 693 2,809 2,824 0.175 FY13F 7,723 20.6% 15.0% (4,178) 3,545 45.9% 46 0.6% (1,016) (765) (139) (147) (529) (2,595) 996 12.9% 20% 1,143 14.8% 5 0 1,001 (180) 821 821 $0.29 821 $0.29 19% 1 822 2,819 2,827 0.203 FY14F 9,369 21.3% 15.0% (5,031) 4,338 46.3% 56 0.6% (1,232) (937) (169) (187) (675) (3,200) 1,195 12.8% 20% 1,382 14.8% 5 0 1,200 (216) 984 984 $0.35 984 $0.35 19% 1 985 2,831 2,835 0.243 FY15F 11,071 18.2% 14.0% (5,912) 5,159 46.6% 66 0.6% (1,456) (1,107) (199) (221) (797) (3,781) 1,445 13.1% 21% 1,666 15.1% 5 0 1,450 (261) 1,189 1,189 $0.42 1,189 $0.42 21% 1 1,190 2,839 2,843 0.293 FY16F 12,942 16.9% 13.0% (6,885) 6,057 46.8% 78 0.6% (1,695) (1,294) (233) (259) (925) (4,407) 1,728 13.4% 20% 1,987 15.4% 5 0 1,733 (312) 1,421 1,421 $0.50 1,421 $0.50 19% 1 1,422 2,847 2,851 0.349 1HFY13 3,377 21.2% 16.8% (1,834) 1,544 45.7% 28 0.8% (474) (364) (55) (82) (255) (1,230) 341 10.1% 22% 423 12.5% 4 3 348 (66) 282 282 $0.10 279 $0.10 20% 1 283 2,818 2,831 0.070 2HFY13 4,345 20.1% 13.2% (2,344) 2,001 46.1% 18 0.4% (542) (400) (84) (65) (274) (1,365) 655 15.1% 19% 720 16.6% 1 (3) 653 (114) 539 539 $0.19 542 $0.19 18% 0 539 2,819 2,827 0.133
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May 8, 2013
Figure 42: Yoy changes

FY09 Revenue COGS Staff costs Occupancy costs Ad exp's Depn Other opex Total SG&A EBIT EBITDA PBT Reported profit Core net profit Reported EPS Core EPS DPS 12% 11% 9% 14% 27% 0% 23% 13% 15% 13% 10% 14% 15% 14% 15% 10% FY10 14% 13% 13% 13% 19% -4% 10% 12% 25% 21% 22% 21% 22% -40% -40% -39% FY11 19% 17% 18% 22% 12% 27% 17% 19% 30% 29% 32% 33% 30% 32% -1% 0% FY12 31% 30% 24% 29% 23% 48% 31% 28% 39% 40% 36% 35% 38% 35% 35% 25% FY13F 21% 19% 24% 22% 22% 25% 21% 23% 20% 21% 20% 19% 19% 19% 19% 16% FY14F 21% 20% 21% 23% 21% 28% 28% 23% 20% 21% 20% 20% 20% 19% 19% 19% FY15F 18% 18% 18% 18% 18% 18% 18% 18% 21% 21% 21% 21% 21% 21% 21% 21% FY16F 17% 16% 16% 17% 17% 17% 16% 17% 20% 19% 20% 20% 20% 19% 19% 19% 1HFY13 21% 17% 26% 24% 16% 63% 28% 28% 22% 29% 28% 26% 20% 26% 20% 17% 2HFY13 20% 20% 23% 20% 27% -3% 16% 19% 19% 17% 16% 16% 18% 16% 18% 16%
4.5 Attractive ROEs and cash flow generation

Sa Sa had an enviable 46% ROE in FY12 as a solid conversion from EBIT to net income (net income/PBT and PBT/EBIT) and steady EBIT margins (EBIT/sales) were combined with very high sales efficiency (sales/assets) and modest leverage ratios (assets/equity). We think such high ROEs are sustainable for at least 3-5 years given the high sales productivity of its stores in Hong Kong while dilution from store expansion in China is likely to be limited as China contributions will likely remain below 10% of its total turnover in the next few years.
4.6 High earnings quality and sustainable high payouts

Sa Sa is able to convert close to 100% of its net profit into cash from operations. Free cash flow amounted to HK$392m in FY12 (1HFY13: HK$121m) and should top HK$900m by FY15. Management has budgeted HK$250m-260m p.a. for capex from 2013 onwards. We factor in 70% dividend payouts, in line with its historical practice and guidance.
Figure 43: Annual sales per store (latest available annual data)
70
60.3
60
50
57.4
HK$ m
40 30 20 11.8 10 0 5.1 6.2 9.8 9.4
12.2 7.4 2.6 2.8 3.4
11.9 5.0
9.1 1.7
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May 8, 2013
Figure 44: Cash flow and net cash projections

FY07 Cash Flow Net profit Depreciation Change in working capital Other operating activities Cash from operations as % net profit Capex FCF Dividends FCF post dividends Cash Debt Net cash Net cash per share (HK$) 220.5 77.9 (52.3) (12.9) 233.2 106% (57.8) 175.4 (230.0) (54.6) 570.0 570.0 $0.21 276.3 75.5 (12.4) (82.8) 256.6 93% (59.0) 197.6 (233.9) (36.3) 424.4 424.4 $0.15 316.0 65.3 (28.2) (18.5) 334.5 106% (75.1) 259.4 (290.1) (30.6) 584.6 584.6 $0.21 381.9 62.4 (40.7) 11.0 414.7 109% (74.1) 340.5 (360.0) (19.4) 392.6 392.6 $0.14 509.3 79.2 (156.1) 10.8 443.1 87% (136.7) 306.4 (391.3) (84.9) 524.3 524.3 $0.19 689.7 117.1 (190.3) 22.8 639.3 93% (247.2) 392.1 (435.7) (43.6) 563.0 563.0 $0.20 821.0 146.7 (143.8) (5.1) 818.9 100% (266.0) 552.8 (574.7) (21.9) 556.1 556.1 $0.20 983.6 187.4 (179.7) (5.1) 986.2 100% (269.5) 716.7 (688.6) 28.2 599.2 599.2 $0.21 1,188.8 221.4 (185.7) (5.1) 1,219.4 103% (295.1) 924.3 (832.2) 92.1 706.4 706.4 $0.25 1,420.8 258.8 (204.1) (5.1) 1,470.4 103% (314.1) 1,156.3 (994.6) 161.7 883.1 883.1 $0.31 FY08 FY09 FY10 FY11 FY12 FY13F FY14F FY15F FY16F
Figure 45: ROE projections

FY07 ROE Net inc/PBT PBT/EBIT EBIT/Sales Sales/Assets Assets/Equity 21% 75% 1.19 8.5% 1.88 1.50 FY08 25% 79% 1.09 9.9% 2.25 1.39 FY09 28% 82% 1.04 10.2% 2.53 1.28 FY10 33% 82% 1.01 11.2% 2.76 1.29 FY11 39% 82% 1.03 12.2% 2.84 1.36 FY12 46% 83% 1.01 12.9% 2.95 1.46 FY13F 47% 82% 1.01 12.9% 2.88 1.52 FY14F 48% 82% 1.00 12.8% 2.97 1.55 FY15F 50% 82% 1.00 13.1% 2.98 1.56 FY16F 51% 82% 1.00 13.4% 2.98 1.56
5. VALUATION AND RECOMMENDATION 5.1 Not cheap but there are more catalysts
Rather than valuing Sa Sa as a discretionary retailer, we think it is in fact a staple retailer if we examine its growth profile in the past 5-10 years, which has been very resilient. Sa Sa was still able to enjoy low- to mid-teens topline growth and mid-single-digit SSSG during the 2009 crisis when many of the other retailers round the globe suffered revenue drops. To us, its earnings growth resembles that of an F&B/staple company. We initiate coverage with an Outperform rating and target price of HK$9.50, set at 23x CY14 P/E, in line with its global peer average. While Sa Sas scale is smaller than its global peers, its solid ROEs of 47-50% forecast for FY13-15 beat the global average of high teens by far. We foresee three re-rating catalysts: (i) (ii) (iii) Improving operating leverage and long-term profitability More room for expansion from POS additions and more merchandise, even for Hong Kong Another 200m+ mainland tourists have yet to visit HK under IVS and we expect the number of day trippers to grow
Consensus focuses on Sa Sas forward P/E (currently at 23x) vs. its historical (15x since 2005, 20x since 2010) and concludes that the stock is fully valued (average target price of HK$8.19 from 23 analysts). We think Sa Sa will continue to be re-rated, based on the above catalysts, and can trade up to HK$9.50.
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May 8, 2013
Figure 46: Sa Sas valuation

35
30
16 14 12 10
25 20
8 15 6 10 5 0 4 2
Figure 47: Sa Sa vs. best-in-class consumer staple stocks

Global cosm etics and staples peers Nam e Ticker Sa Sa International 178 HK Sun Art Retail 6808 HK Tingyi 322 HK Want Want China 151 HK Dairy Farm DFI SP L'Occitane * 973 HK Estee Lauder * EL US L'Oreal * OR FP Fancl Corp * 4921 JP Amorepacific Corp * 090430 KS Average PE (x) CY13 CY14 25.2 21.0 30.4 25.9 28.0 23.2 29.0 23.9 30.4 26.2 21.8 18.4 25.2 22.3 26.0 23.9 30.7 27.4 18.4 16.2 27.2 23.0 PEG (x) CY13 CY14 1.3 1.0 1.9 1.5 0.6 1.1 1.0 1.1 1.3 1.6 1.4 1.0 1.9 1.7 4.4 2.8 3.9 2.3 0.7 1.2 1.4 1.3 EPS grow th (%) EBIT m argin (%) CY13 CY14 CY13 CY14 19.4 20.3 12.8 13.0 15.7 17.4 4.4 4.5 43.2 20.6 7.6 8.2 28.2 21.3 22.3 22.8 24.1 16.0 6.3 6.5 15.5 18.7 16.6 17.0 13.2 13.1 15.5 16.2 5.9 8.6 16.9 17.2 7.9 11.9 0.0 0.0 25.1 13.7 12.8 12.7 22.8 18.2 12.2 12.6 Net m argin (%) CY13 CY14 10.5 10.7 3.1 3.1 4.8 5.1 17.4 17.6 5.1 5.3 12.7 13.0 10.3 10.9 13.2 13.5 2.6 2.9 9.8 10.0 9.1 9.4 ROAE (%) CY13 CY14 47.8 49.6 22.0 23.0 27.3 28.9 53.5 54.0 42.6 41.9 19.3 19.7 35.1 34.6 14.5 14.7 2.7 2.9 12.4 12.6 35.4 36.0
Ccy HKD HKD HKD HKD USD HKD USD EUR JPY KRW
Price 8.40 10.64 20.05 12.08 12.50 22.90 70.31 133.65 1,060.00 898,000.00
TP 9.50 9.60 21.70 12.70 13.62 N/A N/A N/A N/A N/A
Rating OUTPERFORM UNDERPERFORM NEUTRAL OUTPERFORM OUTPERFORM NR NR NR NR NR
Note: priced as of 8 May 2013; calendarised to Dec-end
1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 10/1/2012 1/1/2013 4/1/2013
Forward P/E (LHS) Stock price (RHS) Price/Book (RHS)
SOURCES: CIMB, BLOOMBERG
SOURCES: CIMB, COMPANY REPORTS, * BLOOMBERG
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May 8, 2013
6. APPENDIX 6.1 Sa Sas in-house brands

Figure 48: In-house brands
Brand Suisse Programme Methode Swiss Swiss Rituel Skin Peptoxyl Hadatuko Haruhada Orchid From Paradise Home Secrets Sasatinnie Cyber Colors Color Combos Description Premium Swiss made skincare treatment products Skincare products produced with advanced technologies of Switzerland and high quality natural ingredients Produced with natural ingredients from Switzerland. Suitable for all skin types including sensitive skin Cosmeceutical brand made in USA Japanese concept products made in Japan; products include beauty drinks Japanese brand; products formulated with various botanical extracts and hyaluronic acid or collagen Herbal skincare products made in Australia and France Skincare and haircare products Young and trendy beauty/personal care products Makeup products and tools; skincare and bodycare products Makeup, skincare and bodycare products
SOURCES: CIMB, COMPANY REPORTS AND WEBSITE
6.2 Sa Sas exclusive distribution brands

Figure 49: Exclusive distribution brands
Armand Basi Blumarine Britney Spears BRTC byblos Calotine Caudalie Cellex-C Collistar Disney Dsquared Perfumes Dr.G Dr.Jart+ Ed Hardy Elizabeth Arden Ferrari Gianfranco FERRE GoodSkin Labs Guess IN ESSENCE INSTITUT ESTHEDERM Jaguar Fragrances Katy Perry La Colline LALIQUE PARFUMS Mandarina Duck Masaki Paris Natio Neogence Nuxe Pal Zileri fragrances Paris Hilton Perry Ellis Police PUPA Salvatore Ferragamo Talika Tous Transvital United Colors of Benetton Victorinox
6.3 Sa Sa vs. Bonjour

Figure 50: HK/Macaus retail store count
100 90 80 70 70 60
51
Figure 51: Mainland Chinas retail store count

94 87 84 50 60
Title: Source:
48 39
53
78
Please fill in the values above to have them entered in your rep
40 48 40 34 47 49
58 53
62
50 40 31 30 20 10 0 2005 2006 2007 2008 Sasa 2009 2010 29 30 26
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0 2011 1H11 1H12 2005 2011 1H12
Bonjour
Bonjour
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May 8, 2013
Figure 52: Same-store sales growth

30% 25% 20% 15% 10% 5% 0% -5% -10% 2005 2006 2007 2008 Sasa 2009 2010 Bonjour 2011 1H11 1H12
Figure 53: Revenue and growth

Title: Source:
Figure 54: Gross and EBIT margins

50.0%
Figure 55: Rental as % sales

16% 14% 12%
Title: Source:
40.0%
30.0%
10% 20.0% 8% 6% 4%
0.0%
10.0%
2% -10.0% 2005 2006 Sa Sa GM Sa Sa EBIT margins 2007 2008 2009 2010 2011 1H12 0% 2008 2009 Sa Sa 2010 2011 1H12
Bonjour beauty products GM Bonjour EBIT margins Bonjour beauty products
SOURCES: CIMB, COMPANY REPORTS (Note: partly because of difference in stores distribution between the two)
Figure 56: Staff costs as % sales

16.0% 14.0%
Figure 57: Marketing costs as % sales

2.5%
Title: Source:
2.0% 12.0% 10.0% 8.0% 6.0% 4.0% 0.5% 2.0% 0.0% 2008 2009 Sa Sa 2010 2011 1H12 0.0% 2008 1.0% 1.5%
2009 Sa Sa
2010
2011
1H12
Bonjour beauty products
Bonjour beauty products
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May 8, 2013
Figure 58: EBIT
Figure 59: Net profits

800 700 600 500 100% 80% 60% 40% 20%
0%
HK$ m
400
300
200 100 0 2007 2008 2009 2010 2011 1H12
-20% -40% -60%
Sa Sa net profit Sa Sa net profit yoy chg (RHS)
Bonjour net profit Bonjour net profit yoy chg (RHS)
Figure 60: Cash and ROEs
Figure 61: Forward P/E

35 30 25 20 15 10 5 140% 120% 100% 80% 60% 40% 20%
7/1/2010 8/1/2010 9/1/2010 10/1/2010 11/1/2010 12/1/2010 1/1/2011 2/1/2011 3/1/2011 4/1/2011 5/1/2011 6/1/2011 7/1/2011 8/1/2011 9/1/2011 10/1/2011 11/1/2011 12/1/2011 1/1/2012 2/1/2012 3/1/2012 4/1/2012 5/1/2012 6/1/2012 7/1/2012 8/1/2012 9/1/2012 10/1/2012 11/1/2012 12/1/2012 1/1/2013 2/1/2013 3/1/2013 4/1/2013
Sa Sa fwd P/E (LHS) Avg Sa Sa premium/(discount) (RHS) Bonjour fwd P/E (LHS) Sa Sa premium/(discount) (RHS)
0%
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May 8, 2013
10
15
20
25
4/1/2005
7/1/2005
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Figure 62: Price to book
30
1/1/2007
4/1/2007
7/1/2007
10/1/2007
Sa Sa P/BV (LHS) Bonjour P/BV (LHS) Avg Sa Sa premium/(discount) (RHS)
1/1/2008
4/1/2008
7/1/2008
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Sa Sa premium/(discount) (RHS)
1/1/2009
4/1/2009
7/1/2009
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0%
50%
-50%
100%
150%
200%
-100%
May 8, 2013
6.4 Management biographies

Figure 63: Management biographies
Dr. Kwok Siu Ming, Simon Dr. Kwok, 60, together with his wife, Dr. Kwok Law Kwai Chun Eleanor, has run Sa Sa's operations since its early days. Over the past 35 years, he has played a leading role in transforming Sa Sa into a leading market player with a regional network of operations in Asia. Dr. Kwok is, among others, the President, Councillor and Honorary Life President of the Cosmetic & Perfumery Association of Hong Kong, the Honorary President of the Federation of Beauty Industry (HK), and the Honor President of International CICA Association of EstheticsCIDESCO Section China. Dr. Kwok received degrees of Doctor of Business Administration honoris causa from the Open University of Hong Kong in 2011 and from Lingnan University in 2008. Dr. Kwok is the brother-in-law of Mr Law Kin Ming Peter, SVP of Category Management and Product Development.
Chairman and Chief Executive Officer Dr. Kwok Law Kwai Chun, Eleanor Dr. Kwok, 59, is a founder of Sa Sa and has more than 37 years of experience in the sales and marketing of beauty products and is a pioneer of open-shelf display of beauty products. Dr. Kwok plays a leading role in the marketing, operations, human resources and staff training functions of the company. She is, among others, currently the Honorary President of the Cosmetic & Perfumery Association of Hong Kong, and received The Excellent Award in Hong Kong Beauty Industry 2012/13 from International CICA Association of EstheticCIDESCO Section China in 2012. She was conferred an Honorary Doctorate of Management by Morrison University, USA. Dr. Kwok is the wife of Dr Kwok Siu Ming Simon, and the sister of Mr Law Kin Ming Peter, SVP of Category Management and Product Development.
Vice Chairman Mr. Look Guy Mr. Look, 56, has over 30 years of experience in local and overseas financial and general management. Prior to joining Sa Sa in 2002, he was the CFO and an Executive Director of Tom.com Limited (renamed TOM Group Ltd.). Mr Look was appointed as an Independent Non-Executive Director of Cafe de Coral Holdings Limited in 2009. He holds a Bachelors degree in Commerce from the University of Birmingham, England, and is an associate member of the Institute of Chartered Accountants in England and Wales and the Hong Kong Institute of Certified Public Accountants ("HKICPA"). Mr. Look is also a member of the Professional Accountants in Business Leadership Panel of HKICPA, and the Vice Chairman of the Hong Kong Retail Management Association. He is the nephew of Mrs. Lee Look Ngan Kwan Christina, Non-Executive Director.
Chief Financial Officer and Executive Director Mr. Law Kin Ming Peter Mr. Law, 57, joined Sa Sa in 1996. He has more than 30 years of experience in the field of sales and marketing, 20 of which were in senior management positions. He is also responsible for the Groups acquisition of exclusive distribution rights of international brands and the development of the Groups house brand products. Mr. Law holds a Bachelors degree in Arts majoring in Communications Studies from the University of Windsor, Ontario, Canada and pursued a Bachelors degree in Commerce later. He is the brother of Dr Kwok Law Kwai Chun Eleanor and the brother-in law of Dr Kwok Siu Ming Simon.
SVP, Category Management & Product Development Ms. Loi Wei Sin Corina Ms. Loi, 53, joined Sa Sa in 1997, and became Senior Vice President and Country Head of Malaysia in 2008. She was a crucial member of the start-up team for the Malaysian operation. Ms Loi has over 30 years of marketing and retail experience ranging from health food products to high fashion. Prior to joining Sa Sa, she was with Dickson Trading (Malaysia).
SVP/Country Head of Malaysia Ms. Lu Szu-Jen Ms. Lu, 56, joined Sa Sa as SVP of Information Technology in 2004. She had held senior management positions with various multinational information technology corporations. Before joining Sa Sa, she was the Chief Technology Officer of Softbank Investment International (Strategic) Limited, a venture capital firm which focused on internet technology investment projects. Ms. Lu holds a Master of Science in Computer Science from the John Hopkins University, USA.
SOURCE: COMPANY REPORTS
SVP, Information Technology
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May 8, 2013
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(i) As of May 8, 2013CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report: (a) Hengan Intl Group, Want Want China (ii) As of May 8, 2013, the analyst(s) who prepared this report, has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report: (a) The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report. CIMB may or may not issue regular reports on the subject matter of this report at any frequency and may cease to do so or change the periodicity of reports at any time. CIMB is under no obligation to update this report in the event of a material change to the information contained in this report. This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affiliates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report. Neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof. This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments thereof. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors. Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB Securities (Australia) Limited (CSAL) (ABN 84 002 768 701, AFS Licence number 240 530). CSAL is a Market Participant of ASX Ltd, a Clearing Participant of ASX Clear Pty Ltd, a Settlement Participant of ASX Settlement Pty Ltd, and, a participant of Chi X Australia Pty Ltd.This research is only available in Australia to persons who are wholesale clients (within the meaning of the Corporations Act 2001 (Cth)) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. This research has been prepared without taking into account the objectives, financial situation or needs of the individual recipient. France: Only qualified investors within the meaning of French law shall have access to this report. This report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial instruments and it is not intended as a solicitation for the purchase of any financial instrument. Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (CHK) which is licensed in Hong Kong by the S ecurities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the
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If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBR.. As ofMay 8, 2013, CIMBR does not have a proprietary position in the recommended securities in this report. South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch ("CIMB Korea") which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea. The views and opinions in this research report are our own as of the date hereof and are subject to change, and this report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial investment instruments and it is not intended as a solicitation for the purchase of any financial investment instrument. This publication is strictly confidential and is for private circulation only, and no part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB Korea. Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden. Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China. Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (CIMBS). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBS has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of CIMBS. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBS. Corporate Governance Report: The disclosure of the survey result of the Thai Institute of Directors Association (IOD) regarding corporate governance is made pursuant to the policy o f the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result. Score Range 90 100 80 89 70 79 Below 70 or No Survey Result Description Excellent Very Good Good N/A United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates. United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (CIMB UK). CIMB UK is authorised and regulated by the Financial Services Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the Order); (c) are persons falling within
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Article 49 (2) (a) to (d) (high net worth companies, unincorporated associations etc) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as relevant persons). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investment research" under the applicable rules of the Financial Services Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, and is distributed solely to persons who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. Spitzer Chart for stock being researched ( 2 year data )
Price Close
9.4
8.4 7.4 6.4 5.4
4.4
3.4 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13
Distribution of stock ratings and investment banking clients for quarter ended on 31 March 2013 983 companies under coverage Rating Distribution (%) Outperform/Buy/Trading Buy Neutral Underperform/Sell/Trading Sell 50.8% 35.3% 13.9% Investment Banking clients (%) 8.1% 4.8% 5.9%
Recommendation Framework #1 *
Stock OUTPERFORM: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant benchmark's total return. UNDERPERFORM: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 3 months. Sector OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 3 months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Korea Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
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May 8, 2013
Recommendation Framework #2 **
Stock OUTPERFORM: Expected positive total returns of 10% or more over the next 12 months. NEUTRAL: Expected total returns of between -10% and +10% over the next 12 months. Sector OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +10% or better over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +10% (or better) or -10% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +10% to -10%; both over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -10% or worse over the next 12 months. TRADING BUY: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +10% or better over the next 3 months. TRADING SELL: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -10% or worse over the next 3 months.
UNDERPERFORM: Expected negative total returns of 10% or more over the next 12 months. TRADING BUY: Expected positive total returns of 10% or more over the next 3 months. TRADING SELL: Expected negative total returns of 10% or more over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2011. AAV not available, ADVANC - Excellent, AMATA - Very Good, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH - Good, BEC - Very Good, BECL - Very Good, BGH - not available, BH - Very Good, BIGC - Very Good, BTS - Very Good, CCET - Good, CK - Very Good, CPALL - Very Good, CPF - Very Good, CPN - Excellent, DELTA - Very Good, DTAC - Very Good, GLOBAL - not available, GLOW - Very Good, GRAMMY Excellent, HANA - Very Good, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH Very Good, ITD - Good, IVL - Very Good, JAS Very Good, KAMART not available, KBANK - Excellent, KK Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR - Very Good, MCOT - Excellent, MINT - Very Good, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - not available, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS Excellent, SC Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI - Very Good, SPALI - Very Good, STA - Very Good, STEC - Very Good, TCAP - Very Good, THAI - Very Good, THCOM Very Good, TICON Good, TISCO - Excellent, TMB - Excellent, TOP Excellent, TRUE - Very Good, TUF - Very Good, WORK Good.
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Sa Sa Initiation

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RetailHONG KONG

Target Previous Target Up/downside

Notes from the Field

A quality staple; resilient growth

Company Visit Channel Check

Expert Opinion Customer Views

Tourist profile change drives sales further

Growth is not cheap

Three re-rating factors:

Relative to HSI (RHS) 173 158 143 128 113 98 83

52-week share price range

Rolling P/BV (x)

Rolling FD P/E (x)

Dairy Farm Int'l Sa Sa International Holdings Want Want China

Dairy Farm Int'l Sa Sa International Holdings Want Want China

Peer Aggregate: P/BV vs Recurring ROE

Peer Aggregate: FD P/E vs FD EPS Growth

Rolling P/BV (x) (lhs)

Recurring ROE (rhs)

Rolling FD P/E (x) (lhs)

Fully Diluted EPS Growth (rhs)

Growth and Returns

Share price info

P/BV vs Recurring ROE

FD Core P/E vs FD Core EPS Growth

Rolling P/BV (x) (lhs)

Recurring ROE (rhs)

Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss

509 509 509

690 690 690

821 821 821

984 984 984

1,189 1,189 1,189

SOURCES: CIMB, COMPANY REPORTS

1,279 117 1,396

14 14 4 524 1,353 1,353

21 21 7 836 1,631 1,631

25 25 9 1,008 1,887 1,887

30 30 11 1,222 2,192 2,192

35 35 13 1,444 2,559 2,559

SOURCES: CIMB, COMPANY REPORTS

A quality staple name

1. BACKGROUND 1.1 Investment thesis

2. OUTLOOK 2.1 The largest cosmetic retailer in Asia

SOURCES: CIMB, COMPANY REPORTS

Figure 2: Breakdown of Sa Sas retail sales in HK and Macau, 1HFY13

Figure 3: Breakdown by transactions in HK and Macau, 1HFY13

Please fill in the values above to have them entered in yo

PRC Tourists, 38% Local residents, 31%

PRC Tourists, 65%

Local residents, 59%

SOURCES: CIMB, COMPANY REPORTS

SOURCES: CIMB, COMPANY REPORTS

2.2 Continuous market share gain

Figure 5: HK cosmetics and medicines monthly sales

SOURCES: CIMB, HONG KONG CENSUS AND STATISTICS DEPARTMENT

SOURCES: CIMB, HONG KONG CENSUS AND STATISTICS DEPARTMENT

2.3 Mainland visitors will continue to drive earnings

Figure 7: Individual visit scheme for Hong Kong

Figure 8: Sa Sas revenue and growth

SOURCES: CIMB, COMPANY REPORTS

SOURCES: CIMB, COMPANY REPORTS, HONG KONG TOURISM BOARD