Retailing：We like department stores and brands

Produced by: The Royal Bank of Scotland N.V., (Hong Kong) Branch Equity | ChinaImportant disclosures can be found in the Disclosures Appendix. Retailing We like department stores and brands We prefer dept stores over sportswear retailers. Big stores/malls will be keygrowth driver in 3-5 years. Dept stores will lead in the interim. Retain Neutralsector weighting on valuation reasons, and positive surprises seem priced in.Top picks: Intime, GE and Belle. Buy China Dongxiang on valuation grounds. Key recommendations & forecasts Reuters Year end Recom Price Targetprice EPS1fcst PE1fcst Belle Int'l¹ 1880.HK Dec 2010 Buy HK$10.80 HK$12.40 0.4421.3 China Dongxiang¹ 3818.HK Dec 2010 Buy HK$4.96 HK$6.30 0.3 14.5 Golden Eagle¹ 3308.HK Dec 2010 Buy HK$16.28 HK$18.70 0.3722.7 Intime¹ 1833.HK Dec 2010 Buy HK$7.69 HK$8.80 0.28 23.9 New World Dept Store¹ 0825.HK Jun 2010 Sell HK$6.71 HK$6.20 0.33 20.2 Parkson¹ 3368.HK Dec 2010 Buy HK$13.04 HK$14.00 0.4 28.2 1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items Source: Company data, RBS forecasts Department stores and brands favoured over sportswear for three reasons 1) Dept store space offers higher earnings growth; we project average growth for the four stores under our coverage to be 25% in 2010 and 23% in 2011, vs 20% and 19% for the sportswear sector. 2) Dept store space is less crowded, with lower downside risk on margins. Recent IPOs of sportswear companies could hurt margins, though we think strong brands like Kappa, Anta and Li Ning will survive. 3) Inventory risk is almost zero for dept stores. Malls should be key growth drivers in 3-5 years; dept stores to lead in the interim In our view, dept stores will likely remain the core retail format in next 3-5 years due to the lack of good shopping malls. We heard from experts about why there is the ‘dilemma of passive and active mall construction’ (details below). In the long run, we think dept stores will increasingly become more thematic and sales efficient. Malls/large stores with leisure facilities could raise sales by lengthening customer stay. In our view, ‘natural urbanisation’ (expansion of local communities) will raise demand for malls/dept stores. Top picks: Intime, GE (TP upgrade) and Belle (TP upgrade); Buy DX – a valuation call We upgrade our earnings estimates for Belle (Buy, new TP: HK$12.40) and slightly tweak our earnings for GE (Buy, new TP: HK$18.70). For Intime, we stay at Buy with a HK$8.80 TP, implying 27.5x FY10 PE, with a roll forward of the forecast period to Jun-11F implying an unstressed fair value of HK$10. China Dongxiang (DX) trades at 15x FY10F and 12x FY11F earnings, vs the sector average of 20x and 16x, respectively. We think DX’s discounted valuation is unjustified, as it has the highest margins of both its local and global peers, which could offset its mono-brand risk. Our HK$6.30 TP implies 16x FY11F EPS, below Li Ning and Anta’s 18-19x, and the sector average (17x), on Bloomberg consensus estimates. Maintain Neutral sector weighting – prospect of positive surprises seems priced in While we do prefer dept stores, some offsetting factors include: 1)consensus earnings upgrades have likely ended as we think 1H10 results will likely be in line with Bloomberg consensus and our estimates; 2) companies with strong brands like Belle have garnered more favourable commission rates as dept stores have expanded rapidly, thus hurting their margins; and 3) dept stores have become richer vs historical valuations. The MSCI-China retail stocks now stand at about one standard deviation above the 10-year mean on PE. 8 July 2010 Analyst Katherine Chan Hong Kong +852 3988 7204 katherine.chan@rbs.com 38/F Cheung Kong Center, 2 Queen's Road Central, Hong Kong http://research.rbsm.com HSCEI: 11305.18 BBG AP Gen Retailers: 115.77 Source: Bloomberg Neutral Sector performance (1M)(3M)(12M)Absolute 5.1-8.619.8Absolute (%) 4.6-6.920.6Rel market (%) 2.67.013.9 Retailing | Table of Contents | 8 July 2010 2 Contents We prefer department stores and pure retailers 3 We like department stores and brands for the following reasons: 1) better earnings growth potential for 2010-11 than sportswear retailers; 2) less competitive space, hence lower downside risk on margins; and 3) inventory risk is almost zero for China dept stores. 3Department stores and brands favoured over sportswear 3 Top picks: Intime, GE and Belle 6 Intime and Golden Eagle will be the likely winners, in our view. Belle is all about scale. It carries over 20 brands. A department store operator could risk losing a brand that generates Rmb2m revenue a year, but it can't lose one generating 20x 6 Company profiles 9 China retailing – Wage hike implications 10Belle International 14Golden Eagle Retail 24Intime Department Store 33China Dongxia