Chow Tai Fook Jewellery 120202

Retailing / Hong Kong
2 February 2012
Target price: HK$11.20

Chow Tai Fook Jewellery Up/downside: -19.1%
1929 HK Share price (2 Feb): HK$13.84
Initiation: Is bigger better?

• We show that CTF has inferior sales-per-square metre to its HK-
listed peers, begging the question 'Is bigger better?'
• We see execution risk to the aggressive PRC expansion plan; CTF
already has more stores than McDonald's
• Our analysis supports a PER premium of 34% to HK-listed peers,
which yields a target of HK$11.20, representing 19% downside
How do we justify our view?
retail environment combined with a shows that previous listings from

flat or declining gold price, and we Chow Tai Fook Holdings do not
see real risk to more bullish market always have a good track record of
forecasts. generating long-term outperformance
for equity investors. Of the nine
Matthew Marsden What we recommend companies listed by CTF’s controlling
(852) 2848 4963
matthew.marsden@hk.daiwacm.com Bulls on CTF use DCF with a low shareholder over the past 40 years,
WACC to justify high valuations. As only three have outperformed the HSI.
Bing Zhou we expect its FCF to be restrained by
(852) 2773 8782
bing.zhou@hk.daiwacm.com expansion until FY15E, we think the Share price performance
validity of this methodology is (HK$) (%)
debateable. 16 120
15 110
What's new
Our sales-per-square-metre analysis Our analysis implies that the closest 14 100
suggests Chow Tai Fook Jewellery’s peers are direct competitors with 13 90
(CTF) stores are less efficient than very similar business models listed 12 80
14-Dec-11 27-Dec-11 9-Jan-12 22-Jan-12
those of Luk Fook in Hong Kong and in Hong Kong, while a ‘sub-sector Chow Tai Fook Jewellery (LHS)
Relative to HSI (RHS)
Chow Sang Sang in the PRC. leader’ PER premium of 34% is
appropriate. Applying a 14.2x PER 12-month range 13.62-15.14
Moreover, we see execution risk to to our CY12E EPS results in a street- Market cap (US$bn) 17.79
the company’s aggressive growth low target of HK$11.20, which Average daily turnover (US$m) 38.78
plan. Our channel checks reveal that represents 19% downside. Shares outstanding (m) 10,000
PRC retailers are struggling to Moreover, we think there is Major shareholder Chow Tai Fook Hldgs (89.3%)
recruit and retain the right staff, significant risk to the shares near-
which may be an impediment to term, as CTF became eligible for Financial summary (HK$)
expansion. We are mindful that CTF short-selling on 2 February. Year to 31 Mar 12E 13E 14E
Revenue (m) 52,300 70,315 90,045
already has more stores than Operating profit (m) 8,444 10,998 14,361
McDonald’s in China, and plans to We would remind investors that
Net profit (m) 6,422 8,339 10,816
open more than one store every there are options; CTF isn’t the only
Core EPS 0.642 0.834 1.082
working day in FY13. Hong Kong-listed luxury play with a EPS change (%) 62.5 29.9 29.7
compelling China story and decent Daiwa vs Cons. EPS (%) -1.3 -8.2 -11.4
What's the impact trading liquidity. PER (x) 21.6 16.6 12.8
After a very strong IPO year in FY12 Dividend yield (%) 2.0 1.2 1.6
(78% YoY net profit gain given by How we differ DPS 0.278 0.167 0.216
the company in the IPO prospectus), Ours is the only published sales-per- PBR (x) 3.8 3.6 2.9
the FY13 YoY comparison will likely square-metre analysis in the market. EV/EBITDA (x) 13.8 12.2 9.5
be very tough. Add to this a slowing Our contrarian Sell call is also ROE (%) 29.5 23.6 25.1
supported by our research which Source: Bloomberg, Daiwa forecasts
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
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2 February 2012
Table of contents
The counter-argument ..................................................................................................................... 6

Bigger isn’t necessarily better ....................................................................................................... 6
Execution risk: more stores than McDonald’s ............................................................................. 7
Consensus forecasts look at risk ................................................................................................... 7
Cashing out ................................................................................................................................. 10
Not the only company with a strong heritage ............................................................................ 10
Valuation ......................................................................................................................................... 11
Finding the closest comparables ................................................................................................. 11
Why DCF is not appropriate ........................................................................................................ 11
Finding a sensible premium ....................................................................................................... 12
PER-based fair value of HK$11.20 ............................................................................................. 13
Risks ............................................................................................................................................ 13
Company profile ............................................................................................................................. 15
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2 February 2012
How do we justify our view?

Growth outlook
Valuation
Earnings revisions
Growth outlook CTF: YoY revenue and same-store-sales growth
After a very strong IPO year in FY12, with a 78% YoY net 60%
profit rise given by the company in the prospectus, we
think earnings growth must slow. 50%
40%
FY13 brings new risks as CTF faces:
30%
• Flattish or slightly depreciating gold prices after
27% appreciation in 2011. 20%
• A slowing retail sales environment. 10%
• Execution risk as new store openings accelerate.
0%
• A very high base of comparison. 2010 2011 2012E 2013E 2014E 2015E 2016E
Total sales growth Total SSS growth
This calls for prudent forecasting. Our revenue forecasts
of HK$70.3bn for FY13E and HK$90.0bn for FY14E are Source: Company, Daiwa forecasts
11.9% and 14.5%, respectively, below the consensus.
Valuation CTF: valuation based on FY13E PER
To justify high target prices, we believe the market uses Daiwa CY12E diluted EPS (HK$) 0.786
DCF, which we think is inappropriate. CTF has had Daiwa target PER 14.2x
Daiwa calendar 2012E PER-based target price (HK$) 11.20
erratic FCF over FY10-1H FY11, and we expect its FCF to Share price on 02-Feb-12 (HK$) 13.84
be depressed until FY15E due to expansion costs. Daiwa downside potential (%) (19.1)
Consensus calendar 2012E diluted EPS (HK$) 0.844
We also reject the notion that highly rated international Consensus target price (HK$) 17.25
Implied consensus upside (%) 24.6
luxury brands are relevant comparables. We believe that
Implied consensus calendar 2012E target PER 20.4x
the relevant peers are Hong Kong-listed Luk Fook and Source:, Bloomberg, Daiwa forecasts
Chow Sang Sang (both not rated), which both have very
similar operations. Our analysis also implies that a PER
premium of 34% is justified due to CTF’s greater scale.
This results in a target PER of 14.2x, which applied to

our CY12E EPS gives a target price of HK$11.20.
Earnings revisions Chow Tai Fook: Daiwa vs. consensus forecasts
Our EPS numbers are 8.2% and 11.4% below the (HK$ bn) Consensus FY13E Daiwa FY13E Difference (%)
Revenue 79.8 70.3 (11.9)
Bloomberg consensus forecasts for FY13E and FY14E,
Gross profit 23.8 20.3 (14.5)
respectively. EBIT 12.3 11.0 (10.6)
Net profit 9.1 8.3 (8.7)
Our FY13 forecasts may even be at downside risk if CTF EPS (HK$) 0.908 0.834 (8.2)
fails to open 276 points of sale (POS), if new stores fail Dividend yield (%) 1.2 1.2
Consensus FY14E Daiwa FY14E Difference (%)
to mature at our predicted rate, or if same-store-sales
Revenue 105.3 90.0 (14.5)
(SSS) growth falls below the high-teens. Gross profit 31.5 26.2 (16.8)
EBIT 16.7 14.4 (14.1)
We think that downward revisions to the Bloomberg Net profit 12.3 10.8 (12.1)
consensus earnings forecasts are likely. EPS (HK$) 1.221 1.082 (11.4)
Dividend yield (%) 1.6 1.6
Source: Bloomberg, Daiwa forecasts
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2 February 2012
Financial summary
Key assumptions
Year to 31 Mar 2009 2010 2011 2012E 2013E 2014E
Store count 965 1,179 1,358 1,629 1,905 2,138
Total SSS growth (%) 0.0 16.0 34.0 51.0 17.6 12.6
PRC SSS growth (%) 0.0 15.0 35.0 49.0 14.7 13.2
HK SSS growth (%) 0.0 16.0 32.0 51.2 17.9 12.5
Gross margin (%) 28.9 28.6 28.3 28.7 28.9 29.1
EBIT margin (%) 12.4 11.8 13.3 16.1 15.6 15.9
Capex per store (HK$ m) 0.6 0.4 0.6 0.5 0.6 0.6
No.self-operated/total stores (%) 70.8 70.8 67.6 68.6 69.6 70.6
Profit and loss (HK$m)

Year to 31 Mar 2009 2010 2011 2012E 2013E 2014E
Gem-set jewellery 5,489 6,626 8,963 13,900 19,391 25,732
Platinum/k-gold products 2,688 3,575 4,869 6,483 7,661 8,460
Others 10,234 12,733 21,210 31,917 43,263 55,852
Total revenue 18,411 22,934 35,043 52,300 70,315 90,045
Other income 72 98 164 120 88 110
COGS (13,085) (16,379) (25,115) (37,271) (49,989) (63,844)
SG&A (2,783) (3,615) (5,059) (6,416) (9,017) (11,434)
Other op. expenses (324) (343) (377) (289) (398) (517)
Operating profit 2,291 2,695 4,656 8,444 10,998 14,361
Net-interest inc./(exp.) (69) 15 (32) (82) (55) (89)
Assoc/forex/extraord./others 1 9 (5) 0 0 0
Pre-tax profit 2,224 2,719 4,620 8,362 10,943 14,272
Tax (309) (512) (947) (1,715) (2,299) (3,069)
Min. int./pref. div./others (18) (68) (135) (225) (305) (387)
Net profit (reported) 1,897 2,139 3,538 6,422 8,339 10,816
Net profit (adjusted) 1,897 2,139 3,538 6,422 8,339 10,816
EPS (reported) (HK$) 0.212 0.239 0.395 0.642 0.834 1.082
EPS (adjusted) (HK$) 0.212 0.239 0.395 0.642 0.834 1.082
EPS (adjusted fully-diluted) (HK$) 0.212 0.239 0.395 0.642 0.834 1.082
DPS (HK$) 0.000 0.000 0.000 0.278 0.167 0.216
EBIT 2,291 2,695 4,656 8,444 10,998 14,361
EBITDA 2,451 2,921 4,911 8,582 11,185 14,609
Cash flow (HK$m)

Year to 31 Mar 2009 2010 2011 2012E 2013E 2014E
Profit before tax 2,224 2,719 4,620 8,362 10,943 14,272
Depreciation and amortisation 161 226 255 139 187 248
Tax paid (366) (399) (730) (1,715) (2,299) (3,069)
Change in working capital (1,030) (1,764) (7,507) (6,892) (8,827) (10,822)
Other operational CF items 115 443 749 83 55 89
Cash flow from operations 1,103 1,224 (2,612) (24) 59 718
Capex (485) (320) (824) (850) (723) (919)
Net (acquisitions)/disposals 1 7 5 0 0 0
Other investing CF items (2,367) 621 743 1,338 52 54
Cash flow from investing (2,851) 308 (76) 488 (671) (865)
Change in debt 1,326 2,597 4,279 0 0 0
Net share issues/(repurchases) 0 0 0 0 0 0
Dividends paid 0 (7) (9) (1,200) (2,090) (1,668)
Other financing CF items (109) (3,306) 1,838 6,798 1,849 2,620
Cash flow from financing 1,217 (716) 6,107 5,598 (241) 953
Forex effect/others 0 0 0 0 0 0
Change in cash (530) 817 3,419 6,062 (853) 806
Free cash flow 619 904 (3,436) (874) (664) (201)
Source: Company, Daiwa forecasts
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2 February 2012
Financial summary continued …
Balance sheet (HK$m)

As at 31 Mar 2009 2010 2011 2012E 2013E 2014E
Cash & short-term investment 1,758 2,333 5,761 11,823 10,970 11,776
Inventory 8,094 9,275 17,101 23,222 31,324 41,346
Accounts receivable 1,502 2,572 3,363 4,537 6,100 7,811
Other current assets 2,151 1,782 1,278 0 0 0
Total current assets 13,504 15,962 27,503 39,583 48,394 60,933
Fixed assets 715 835 1,253 1,963 2,499 3,169
Goodwill & intangibles 151 166 248 248 248 248
Other non-current assets 39 48 45 45 45 45
Total assets 14,410 17,010 29,049 41,838 51,185 64,395
Short-term debt 2,174 2,350 6,813 6,000 7,956 10,719
Accounts payable 816 1,307 2,050 2,453 3,290 4,201
Other current liabilities 4,794 4,855 8,351 353 353 353
Total current liabilities 7,784 8,511 17,213 8,806 11,598 15,274
Long-term debt 0 0 0 0 0 0
Other non-current liabilities 184 164 163 163 163 163
Total liabilities 7,968 8,675 17,376 8,968 11,761 15,436
Share capital 693 698 700 700 700 700
Reserves/R.E./others 5,650 7,459 10,607 31,579 37,828 46,976
Shareholders' equity 6,343 8,157 11,307 32,279 38,528 47,676
Minority interests 99 179 366 591 896 1,283
Total equity & liabilities
14,410 17,010 29,049 41,838 51,185 64,395
EV 124,345 124,016 125,240 118,590 136,236 138,581
Net debt/(cash) 417 17 1,052 (5,823) (3,014) (1,056)
BVPS (HK$) 0.709 0.911 1.263 3.607 3.853 4.768
Key ratios (%)

Year to 31 Mar 2009 2010 2011 2012E 2013E 2014E
Sales (YoY) n.a. 24.6 52.8 49.2 34.4 28.1
EBITDA (YoY) n.a. 19.2 68.1 74.8 30.3 30.6
Operating profit (YoY) n.a. 17.7 72.8 81.3 30.3 30.6
Net profit (YoY) n.a. 12.8 65.4 81.5 29.9 29.7
EPS (YoY) n.a. 12.8 65.4 62.5 29.9 29.7
Gross-profit margin 28.9 28.6 28.3 28.7 28.9 29.1
EBITDA margin 13.3 12.7 14.0 16.4 15.9 16.2
Operating-profit margin 12.4 11.8 13.3 16.1 15.6 15.9
ROAE 29.9 29.5 36.4 29.5 23.6 25.1
ROAA 13.2 13.6 15.4 18.1 17.9 18.7
ROCE 26.6 27.9 31.9 29.4 25.5 26.8
ROIC 28.8 28.8 35.1 33.8 27.4 26.7
Net debt to equity 6.6 0.2 9.3 net cash net cash net cash
Effective tax rate 13.9 18.8 20.5 20.5 21.0 21.5
Accounts receivable (days) 29.8 32.4 30.9 27.6 27.6 28.2
Payables (days) 16.2 16.9 17.5 15.7 14.9 15.2
Net interest cover (x) 33.4 n.a. 146.0 102.9 198.5 161.2
Net dividend payout 0.0 0.0 0.0 43.2 20.0 20.0
Company profile
Chow Tai Fook Jewellery Group is the leading jeweller in the PRC and also in Hong Kong, Macau and jewellery markets of other
Asian countries. Its principal products are mass-luxury and high-end luxury jewellery products, including gem-set jewellery,
platinum/karat gold products, gold products and watches. Chow Tai Fook Jewellery has 1,421 jewellery points of sale and 85
watch points of sale including self-operating stores and franchised stores.
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2 February 2012
• Valuation premium debateable. We reject the

arguments that the stock should be valued on a DCF
basis, or compared to international luxury goods
brands – China gold retailers have limited pricing
power for starters. The stock currently trades at a
The counter-argument 66% calendar 2012E PER premium to the closest
Hong Kong-listed peers, Luk Fook and Chow Sang
Sang. We believe that a 34% PER premium is more
We see risks to the bull case for CTF in appropriate (please see our valuation chapter for
details).
that its execution may fall short of
expectations, earnings may disappoint, • Cashing out. CTF seems to have listed right at the
top of the retail cycle. Previous listings by its
and the market may not award an controlling shareholder, Chow Tai Fook Holdings,
international valuation premium to CTF. do not have a good track record of generating long-
term outperformance for equity investors.
There is a wealth of sell-side research (over 350 pages
• Investors have options. CTF isn’t the only Hong
have been published on CTF in January 2012 alone),
Kong-listed jewellery company with a strong
mostly extolling the company’s virtues and describing
heritage (we note that the first Chow Tai Fook
its operations in detail.
branded store did not enter Beijing until 1998).
In this report, we assess the bull and bear arguments
Moreover, the stock became eligible for short selling
on CTF. The bulls argue that:
from 2 February. As such, we see significant downside
• Bigger is better. CTF is the market leader with a risk for the share price in the near term.
market share of 20% in Hong Kong and Macau and
13% in the PRC. CTF has the largest store count with CTF: new store build-out forecasts
the widest geographical reach of any jewellery player 3,000
in China.
2,500
• Ambitious build-out plan. The IPO prospectus
2,000
states that CTF plans to add at least 200 stores per
year to reach 2,000 POS by 2016. Management’s 1,500
guidance is more ambitious. 1,000
• Fast earnings growth. The Bloomberg consensus 500
is forecasting net profit growth of 42% YoY for FY13
and 36% YoY for FY14. 0
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
• Strong heritage. The company has a history Total self-operated Total franchised Total stores
spanning back to 1929 and is a trusted retailer with Source: Company, Daiwa forecasts
wide brand recognition.
• Valuation premium. CTF deserves a valuation
premium over its peer group due to the above points. Bigger isn’t necessarily better
However, we think that there is a powerful counter-
We think that a sales per-square-metre (psm) analysis,
argument to the consensus Buy call on this stock:
removing franchised, wholesale and licensing revenues
• Bigger isn’t necessarily better. Our sales per- and non-self-operated stores, can provide a good steer
square-metre (psm) analysis shows that CTF is less of underlying operational efficiency for retailers.
efficient than its competitors, Luk Fook in Hong
Kong, and Chow Sang Sang in the PRC. Our analysis of the Hong Kong-listed gold jewellery
names shows that Luk Fook has superior sales psm in
• Execution risk. Its aggressive expansion plan
Hong Kong, while Chow Sang Sang has superior sales
means that the company intends to open around one
psm in the PRC:
store per working day in FY13.
• We use revenue for the last reported fiscal year, ie,
• Consensus earnings forecasts look at risk.
FY11 for CTF and Luk Fook (ending March 2011),
Our forecasts are below those of the Bloomberg
2010 for Chow Sang Sang (ending December 2010).
consensus by 8.2% for FY13E and 11.4% for FY14E.
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2 February 2012
Hong Kong-listed jewellery players

Hong Kong Effective number of stores Sq m per store Total sq m FY11 revenue HK$m Sales/sq m (HK$'000)
Chow Tai Fook (HK, Macau & Others) 83.0 166.4 13,811 15,438 1,118
Luk Fook (HK) 31.0 130.0 4,030 6,200 1,539
Chow Sang Sang (HK, Macau, ex Taiwan) 60.0 250.0 15,000 5,502 367
PRC Effective number of stores Sq m per store Total sq m FY11 revenue HK$m Sales/sq m (HK$'000)
Chow Tai Fook 837.5 76.9 64,404 14,595 227
Luk Fook 46.5 70.0 3,255 455 140
Chow Sang Sang 170.5 70.0 11,935 2,763 232
Source: Company reports, Daiwa
Note: Annual revenue figures are for FY2011 (ending March 2011) for CTF and Luk Fook, and FY2010 (ending December 2010) for Chow Sang Sang.
For CTF’s watch only outlets we assume 85 sqm in HK and 40 sqm in the PRC.
Our channel checks with retailers in the PRC indicate

• We adjust the number of stores to account for
that currently, the most meaningful impediment to
seasonality of opening across the period.
expansion is recruiting and retaining the right staff
• We use management guidance for square metres per (rather than rental pressure or finding new locations).
store in Hong Kong, Macau and the PRC, as shown For an industry analysis, please refer to Roy’s
in the table above. Roundtable. China retail property: From oversupply
to opportunity, published in October 2011.
• We only include self-operated stores for a like-for-
like comparison.
Seventy-eighty percent of CTF’s new stores will be self-
operated, ie, the company cannot depend on
We find that CTF is beaten by Luk Fook in Hong Kong
franchisees to recruit and train personnel.
by 38%, and by Chow Sang Sang in the PRC by 2%, in
terms of sales-per-square-meter efficiency, despite
We note that Sa Sa (Not rated) reported declining SSS
CTF’s overall larger revenue and store network.
growth in the PRC as the company just couldn’t get the
staff. Sa Sa moved 15 experienced store managers to
This suggests to us that bigger isn’t always better, and
operate new stores, resulting in a deteriorating
that CTF may have sacrificed quality for quantity in its
performance of mature stores. Sa Sa reported a 3% YoY
race for expansion.
decline in SSS for 1H FY12.
Execution risk: more stores than CTF has been opening new stores at an annualised run
McDonald’s rate of 208 across FY09-1H FY12 (141 in FY09, 214 in
FY10, 179 in FY11 and 148 in 1H FY12), so we believe
that it can hit its target of 200 per year going forward.
CTF already has the largest store base in China
amongst jewellery and gold retailers, yet also has the
Our analysis shows that CTF’s stores are already less
most aggressive expansion plan. Management guides
sales efficient than Hong Kong-listed peers – we worry
that it aims to open 220-260 net new stores per annum
that the continued rapid pace of expansion for CTF
with 200 locations already secured for FY13 (we
may lead to deteriorating store quality in the short
forecast 276 net new POS in FY13).
term.
To put this into perspective:
Moreover, working-capital requirements may become
• CTF plans to open around one new store every stretched if new stores fail to perform, especially given
working day in FY13. the demands of expansion, which in turn could lead to
disappointing FCF generation.
• CTF currently has more stores than McDonald’s in
the PRC (CTF had 1,417 POS on the mainland at the
end of September 2011, versus 1,300 for Consensus forecasts look at risk
MacDonald’s at the end of 2011).
We believe that CTF will hit its prospectus net profit
CTF has gone through a period of aggressive expansion
forecast for FY12 of HK$6.3bn. However, we are
in its store base prior to its IPO; the company almost
uneasy with the consensus EPS forecasts for FY13 and
doubled its POS from 821 at the end of FY08 to 1,506
beyond.
at the end of 1H FY12.
We think the CTF IPO came right at the top of the retail
cycle. 2011 was an exceptionally strong year for the
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2 February 2012
watch and jewellery industry in Greater China, with This is unlikely to be repeated in 2012. Daiwa’s
Hong Kong recording 49% YoY growth for watch and Materials & Commodities Team forecasts the gold price
jewellery sales from January-November. to decline to US$1,650/oz by December 2012, -5% from
the December 2011 level, and to US$1,500/oz by
China and HK: YoY watch and jewellery sales growth December 2013.
65% Daiwa’s call for gold prices to be relatively supported

over the next six months reflects the view that market
45%
anxiety will remain high due to EU uncertainty and
25%
rising tensions in the Middle East.
5% Longer term, Daiwa’s Materials & Commodities Team

sees the gold price easing lower due to a more stable
(15% ) US Dollar vs. Euro, and as business conditions and
10/2004 09/2005 08/2006 07/2007 06/2008 05/2009 04/2010 03/2011
interest rates rise to more sustainable levels.
YOY China retail Sales in Gold/Jewellery
YOY Hong Kong retail sales in Jewellery and Watches
If the former factors remain in place longer, and the US
Source: Bloomberg Dollar is weaker, then gold prices will likely remain
higher for longer. But in either scenario, Daiwa does
Note that industry YoY growth rates in both Hong not see the price of gold exceeding the prior high of
Kong and the PRC have been coming off their highs, over US$2,000/oz.
showing sharply decreasing growth in 4Q11.
As CTF is fully hedged against falling gold prices by
We won’t have a real idea of how industry growth rates gold loans and futures contracts, a falling gold price
are fairing in 2012 until the end of 1Q. The effect of the will not hit margins.
early CNY this year will likely be to lift YoY sales in
January, but dampen sales in February. Therefore, we But, we think that if gold undergoes a period of flattish
think that we’ll have to wait until March to get a good or even declining price performance in 2012, this
handle on underlying sales trends. would dampen the Chinese appetite for gold
purchases/investment and act as a drag on SSS growth
Gold losing its lustre? rates for gold retailers.
Same-store-sales (SSS) growth for gold retailers was
helped by a surge in gold prices. Gold increased from Slowing retail environment
US$1,363/oz in January 2011 to US$1,735/oz in As China’s economy cools, retail sales growth for
December 2011, +27%. consumer discretionary items is likely to slow:
Gold price Jan 2010 - Dec 2013E

• Indeed, we are seeing signs of PRC retailers
reporting decelerating sales growth right across the
1,900
board, eg, Belle (Not rated) reported 4Q11 SSS
1,800
growth of 8.2%, versus 18.5% for 3Q11 and 21.0% for
1,700
1H11.
1,600
1,500 • We are mindful that YoY comps from summer 2011
1,400 will be very high for the entire watch & jewellery
1,300 industry, which would suggest slowing growth in
1,200 2012.
1,100
1,000
• While we still expect watch and jewellery industry
May-…
May-…
growth in 2012, we think a normalised YoY growth

Jul-12E
Jul-13E
Sep-10
Nov-10
Sep-11
Nov-11
Jan-12E
Jan-13E
Jul-10
Jul-11
Jan-10
Jan-11
May-10
May-11
Mar-12E
Mar-13E
Sep-12E
Nov-12E
Sep-13E
Nov-13E
Mar-10
Mar-11
rate of around 15-20% is realistic.

Source: Bloomberg, Daiwa forecasts
Very strong FY12 gives high base
As gold products make up over 60% of CTF’s sales FY12 is shaping up to be a very strong year for CTF:
(53% pure gold products, plus K-gold), and ticket
• The 1H FY12 results were spectacular, in our view,
prices are based on weight, the increase in gold price
showing growth of 79% YoY for the top line, 62%
will likely have helped CTF’s SSS growth over the past
SSS growth and 129% YoY bottom line growth.
three years.
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2 February 2012
• We predict an FY12 net margin of 12.3%, +2.2pp vs. Chow Tai Fook: POS and revenue forecasts
FY11’s 10.1%. 140,000 3,000
120,000
• CTF’s FY12 net profit forecast of HK$6.3bn (from 2,500
the prospectus) represents 78% YoY growth. 100,000
2,000
80,000
1,500
We note that the net profit growth recorded in 1H FY12, 60,000
just before the IPO, was the fastest growth recorded in 1,000
40,000
CTF’s track record period from FY09-1H FY12.
20,000 500
We are cognisant that this gives a very high base for 0 0

FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E
comparison for FY13, which calls for prudent
forecasting, in our view. Total POS (LHS) Total Sales (HK$m, RHS)

Consensus SSS growth assumptions at risk
We therefore believe the market’s SSS growth We forecast a FY11-14 EPS CAGR of 39%. Yet, our EPS
assumption for FY13 of between +25% and 35% is at forecasts emerge at 8.2% below the consensus mean for
risk. FY13 and 11.4% for FY14.
Note that our revenue forecasts are 11.9% below the Daiwa forecasts vs. Bloomberg Consensus FY12-14E
FY12E (HK$bn) Consensus FY12E Daiwa FY12E Difference (%)
consensus for FY13 and 14.5% below in FY14.
Revenue 57.5 52.3 (9.1 )
Gross profit 17.1 15.0 (12.4 )
Our EPS is below consensus EBIT 8.7 8.4 (2.9 )
Net profit 6.5 6.4 (0.1 )
In our forecasts, we believe that we have given the
EPS (HK$) 0.65 0.6 (1.3 )
benefit of the doubt to CTF in several areas, while Dividend Yield 2.2 2.0
remaining prudent overall: FY13E (HK$bn) Consensus FY13E Daiwa FY13E Difference (%)
Revenue 79.8 70.3 (11.9 )
• We assume 18% SSS growth for FY13, which is Gross profit 23.8 20.3 (14.5 )
within the range of management guidance of 15-30%, EBIT 12.3 11.0 (10.6 )
followed by 13% for FY14 and 12% for FY15. Net profit 9.2 8.3 (8.7 )
EPS (HK$) 0.91 0.83 (8.2 )
• We assume new store buildout of 271 in FY12, 276 in Dividend Yield 1.2 1.2
FY13, 233 in FY14, 210 in FY15 and 206 in 2016. We FY14E (HK$bn) Consensus FY14E Daiwa FY14E Difference (%)
believe this is generally in line with management Revenue 105.3 90.0 (14.5 )
Gross profit 31.5 26.2 (16.8 )
guidance of net new store additions of 220-260 per EBIT 16.7 14.4 (14.1 )
year. Net profit 12.5 10.8 (12.1 )
EPS (HK$) 1.22 1.08 (11.4 )
• Our forecasting mechanism assumes that new stores Dividend Yield 1.6 1.6
have 50% of the sales efficiency of mature stores, Source: Daiwa forecasts, Bloomberg
and take four years to mature.
• We predict gross profit margins to benefit from We believe that we will see consensus earnings
product mix improvements (shifting sales mix downgrades for CTF going forward.
towards higher margin gemset jewellery). We
forecast the gross profit margin to improve from
28.3% in FY11 to 29.3% by FY16.
• However, we assume gentle pressure on the net
margin in the near term, as we believe the overall
effective tax rate should increase, plus expansion
costs next year. We assume the net margin rises to
12.3% in FY12 (the highest ever level), from 10.1% in
FY11, and then lapses to 11.9% in FY13, then gently
recovers to 12.0% in FY14, 12.2% in FY15 and 12.3%
in FY16.
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2 February 2012
Chow Tai Fook Holdings: IPO track record

Company BBG ticker IPO date Market Cap at IPO (HK$m) Market Cap (HK$m) HSI at IPO HSI current Performance vs. HSI (%)
New World Development 17 HK 23-Nov-72 3,080 52,600 686 20,502 -1,281%
Kwoon Chung Bus Hldgs Ltd 306 HK 25-Sep-96 555 698 11,604 20,502 -51%
NWS Holdings Ltd 659 HK 25-Apr-97 2,643 43,613 12,646 20,502 +1,488%
New World China Land Ltd 917 HK 16-Jul-99 12,369 16,166 13,545 20,502 -21%
International Entertainment 1009 HK 31-Jul-00 775 2,028 16,841 20,502 +140%
Lifestyle Intl Hldgs Ltd 1212 HK 15-Apr-04 5,976 30,117 12,479 20,502 +340%
New Environmental Energy Ltd 3989 HK 13-Jul-06 451 481 16,306 20,502 -19%
New World Dept Store China 825 HK 12-Jul-07 9,670 7,807 22,809 20,502 -9%
Newton Resources Ltd 1231 HK 4-Jul-11 6,920 3,480 22,771 20,502 -40%
Source: Bloomberg, Daiwa. Prices as of the close on 31 January 2012
Cashing out Not the only company with a

strong heritage
The controlling shareholder’s previous listings do not
have a good track record of generating returns for CTF is the market leader in Hong Kong and the PRC
equity investors. Of the nine companies listed by the and has an undeniably strong heritage. However, CTF
controlling shareholder over the past 40 years, only 3 is not the only company with an impressive legacy:
have outperformed the HSI (NWS, International
Entertainment and Lifestyle). • Luk Fook has 20 years of history, yet already has
higher sales psm than CTF in Hong Kong, and a
Cynics may say that the controlling shareholder has network of 780 stores in Greater China as at the end
very good timing when it comes to maximising value of September 2011.
from the equity market. • Chow Sang Sang, established in 1934, has arguably
as long a heritage as CTF. However, Chow Sang Sang
has a lower store count with a network of 419 stores
at the end of June 2011 – although the company
does have higher sales psm in the PRC than CTF at
end 2010.
• Emperor Watches & Jewelry (Not rated) opened its
first store in 1942, and had a network of 73
upmarket stores in Hong Kong and the PRC as of the
end of June 2011.
We note that CTF trades at a significant premium to its

two closest (but smaller) peers, Luk Fook and Chow
Sang Sang. On our 2012E EPS of HK$0.79, CTF trades
at a 17.6x PER, representing a 66% premium to Luk
Fook and Chow Sang Sang’s average PER of 10.6x.
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1929 HK
2 February 2012
• There are small differences, eg, CTF is the only

player to 100% hedge against gold prices using gold
loans and futures, Luk Fook has a greater proportion
of franchised stores in the PRC, but their business
models are almost exactly the same.
Valuation There are more Hong Kong-listed watch jewellery plays,
eg, Emperor Watches (Not Rated) and Hengdeli (Not
rated), but these have a bias towards watch retailing, so
Hong Kong-listed gold retailers are it can be argued that their business models are not
exactly the same. Moreover, with the exception of
clearly the closest peer group, in our view. Hengdeli, they all have a market cap of under US$1bn.
Even with a PER premium applied, CTF
looks overvalued. We therefore take Luk Fook and Chow Sang Sang as
our comparables.
Finding the closest comparables

Why DCF is not appropriate
Bulls like to compare CTF to international luxury goods
stocks like LVMH or Hermes, but we think that these Bulls on the stock use a DCF valuation, usually with a
comparisons, at best, are dubious: low WACC, to justify a high valuation.
• The international peer group has very different We think that this valuation methodology is
business models, eg, LVMH has a portfolio of over inappropriate because CTF’s FCF has been erratic over
60 brands of wines & spirits, fashion & leather goods, the past 18 months, and we think FCF will be depressed
perfumes & cosmetics, as well as watches & jewellery. by the working capital demands of expansion until
Hermes sells leather goods, accessories, perfumery, FY15.
ready-to-wear apparel, as well as jewellery.
Chow Tai Fook: FCF comparison with peers (2010-1H11)
• We believe that there is little real differentiation
Chow Sang Sang FY end-Dec FY10 1H10 1H11
amongst the leading gold retailers in China. Our on- Pre-tax Income 973 410 670
the-ground research in Hong Kong and Beijing Income tax Expense (206) (108) (163)
confirms that gold products are primarily sold by PAT 767 302 507
weight. The mark-up for brand/design is limited, ie, D&A 102 53 51
Cash from operation 869 355 558
brands have little pricing power. Therefore, the
Change in working cap (1,807) (1,260) (1,787)
comparison to international luxury brands is bogus, Net cash from operations (938) (905) (1,229)
in our view. Capex (123) (38) (51)
FCF (1,061) (943) (1,280)
• The international peer group, with the exception of Luk Fook FY end March FY11 1H FY11 1H FY12
Prada, is listed in the US or on European bourses. Pre-tax Income 1,029 378 848
Income tax Expense (152) (54) (120)
• The geographical exposure of the international PAT 877 324 728
luxury goods peer group is very different, eg, both D&A 51 24 33
LVMH and Hermes derive over 50% of revenue Cash from operation 928 348 761
Change in working cap (747) (167) (348)
outside of Asia.
Net cash from operations 181 181 413
• It can be argued that the international peer group Capex (101) (32) (82)
FCF 80 149 331
has world-wide recognition and brand equity, Chow Tai Fook FY end March FY11 1H FY11 1H FY12
whereas CTF is only really recognised in China. Pre-tax Income 4,620 1,562 3,618
Income tax Expense (947) (339) (797)
We think that there are more appropriate comparables PAT 3,673 1,223 2,821
much closer to home, eg, Luk Fook and Chow Sang D&A 255 115 158
Cash from operation 3,928 1,338 2,979
Sang: Change in working cap (7,507) - (2,691)
Net cash from operations (3,579) 1,338 288
• Both are listed in Hong Kong.
Capex (824) (505) (410)
• They are direct competitors, with almost 100% of FCF (4,402) 833 (122)
revenues in Greater China. Source: Company Reports, Daiwa
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1929 HK
2 February 2012
Chow Tai Fook Dragon Year products Very similar to Chow Sang Sang Dragon Year products
Source: Daiwa Source: Daiwa
Moreover, we believe that bulls tend to use a Beta of We have examined the 2012E PER premium of
1.00 in their calculations, leading to a low WACC and established market leading consumer stocks. The
hence a high DCF valuation. We think that this is following names are ‘sub-sector leaders’ in terms of
inappropriate as CTF has an extremely short trading market cap, market share or operations, with a listing
history, and that the average Beta of Luk Fook and track record of three years or more:
Chow Sang Sang of 1.9 is more appropriate.
• Golden Eagle (Not rated) commands a 39%
premium to the department store sector.
Finding a sensible premium • Tingyi (Not rated) and Want Want (Not rated) are
both sector leaders with an average 2012 PER of
Bulls on the stock argue that CTF should command a 25.7x, representing a 45% premium to the food &
‘best in class’ valuation premium: beverage sector.
• Market leading position, CTF has a 20% market • Hengan (Not rated) commands a 45% premium to
share in Hong Kong and a 13% share in the PRC, the household & personal care sector.
according to Frost & Sullivan.
• Belle (Not rated) commands an 8% premium to the
• Large market cap of US$17.8bn versus the closest fashion footwear sector.
peer, Luk Fook with a cap of US$2.0bn.
• Anta (Not rated) commands a 35% premium to the
• Average normalised liquidity of around US$25m sportswear sector.
(excluding the two days following listing) versus the
next most liquid Hong Kong peer, Luk Fook at We have excluded Hong Kong-listed apparel stocks for
US$15m (excluding the recent placement on 19 want of a clear sector leader and also Li & Fung (494
January). HK, HK$16.66, Buy [1]), as we do not believe that Li &
Fung’s asset light business model is comparable to
• There is no doubt that CTF owns a great franchise
Hong Kong-listed manufacturer exporters.
with strong brand recognition, and has the widest
jewellery network in the PRC.
Our analysis indicates that the average ‘sub-sector
• Good long-term growth prospects. CTF is leader’ 2012E PER premium for Hong Kong-listed
determined to extend its reach into lower tier cities consumer stocks is 34%.
and seems well-placed to benefit from long-term
consumption growth in China.
• Vertically integrated business model leads to high
gross profit margins (but also higher inventory days)
and should enable surety of supply.
We agree that a premium is deserved.
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1929 HK
2 February 2012
Luk Fook and Chow Sang Sang are the closest Hong Kong-listed comparables to Chow Tai Fook
Company BBG code Mkt cap Free float 3m trading Share price PER (x) Sales growth YoY (%) EPS growth YoY (%) ROE (%) Div yield (%) PBR (x)
(US$m) (%) (US$m) (HK$) CY11e CY12e CY11e CY12e CY11e CY12e CY11e CY11e CY11e
Chow Tai Fook 1929 HK 17,789 10.7 37.2 13.84 23.1 17.6 52.8 49.2 63.0 35.4 30.5 n.a. 3.3
Luk Fook 590 HK 2,031 51.0 19.4 29.05 13.0 11.0 50.2 20.0 38.6 18.4 31.9 3.0 3.6
Chow Sang Sang 116 HK 1,688 43.8 5.3 19.34 12.0 10.1 42.5 20.6 64.9 45.7 17.1 2.8 2.0
Emperor Watch and Jewellery 887 HK 883 45.5 6.6 1.02 11.7 9.0 42.7 29.1 45.9 18.2 18.8 2.5 1.9
Hengdeli 3389 HK 1,780 48.4 5.1 3.14 14.7 11.9 34.5 24.0 30.8 23.0 16.8 2.1 2.2
China Haidian 256 HK 406 34.9 0.2 0.76 n.a. n.a. n.a. n.a. 612.6 -43.7 N/A n.a. n.a.
Oriental Watch 398 HK 267 70.4 2.5 3.63 7.1 6.1 17.3 15.1 36.5 16.4 14.5 3.3 1.0
Samsonite International 1910 HK 2,322 95.0 3.2 12.80 19.2 13.5 27.8 12.6 -51.7 41.9 12.3 1.0 2.4
Prada Spa 1913 HK 13,045 19.0 14.9 39.55 24.6 19.4 24.6 20.1 65.5 26.4 27.3 1.1 6.1
Source: Daiwa estimates for Chow Tai Fook, Bloomberg consensus. All numbers calendarised
Note: based on share prices of 2 February 2012
PER-based fair value of HK$11.20 Risks

Our peers, Luk Fook and Chow Sang Sang, are trading In our view, the main risks to our Sell rating are:
at an average 2012E PER of 10.6x.
• If the Chinese market for jewellery and gold
products continues to grow at 35%+, and CTF’s SSS
We apply a valuation premium of 34% to arrive at a
growth can maintain impressive momentum at over
target PER of 14.2x.
35% in FY13, then our sales assumptions would be at
risk to the upside.
Applying this to our calendar 2012 EPS of HK$0.786
for CTF, and rounding to the nearest HK10 cents, gives • If CTF gains operational leverage due to surging
a target price of HK$11.20. revenue, despite the cost of aggressive expansion,
then our margin assumptions would be at risk to the
Our PER-based target price represents 19% downside upside.
potential on a six-month view. We therefore initiate
• If the market moves away from PER-based
coverage with a Sell (5) rating.
valuations for Hong Kong-listed consumer
discretionary stocks, towards DCF based fair values,
We note that we have the lowest target price in the
then our target price would be at risk to the upside.
market.
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1929 HK
2 February 2012
Determining ‘best in sub-sector’ premium for Hong Kong-listed consumer stocks

Subsector / Company BBG code Mkt cap Free float 3m trading Last price PER Sales growth YoY EPS growth YoY ROE EBIT margin Dividend yield PBR
(US$m) (%) (US$m) (HK$) 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2010 2011e 2011e 2011e
Department stores
Golden Eagle 3308 HK 4,476 31.6 10.2 17.86 23.3x 18.7x 33.7% 30.0% 26.3% 24.2% 29.7% 52.0% 48.7% 1.4% 6.3x
Parkson 3368 HK 3,652 48.4 4.7 10.08 20.0x 17.1x 28.8% 18.5% 16.1% 16.6% 23.8% 36.6% 31.6% 2.2% 4.4x
NWDS 825 HK 1,026 22.6 0.6 4.72 10.6x 11.0x 44.1% 24.3% 26.9% -4.0% 14.1% 26.6% 23.3% 3.3% 1.4x
Lifestyle 1212 HK 3,878 27.9 3.0 18.04 18.2x 15.7x 17.9% 11.6% 18.1% 15.6% 21.1% 36.4% 39.8% 2.2% 3.7x
Intime 1833 HK 2,436 57.7 9.9 9.48 18.5x 14.8x 39.3% 32.3% 26.4% 24.7% 14.6% 28.3% 28.4% 2.2% 2.5x
Maoye 848 HK 1,386 20.9 2.2 2.00 13.6x 9.6x 64.9% 40.5% 7.1% 40.8% 12.9% 40.8% 32.1% 1.7% 1.7x
Springland 1700 HK 1,411 28.8 0.6 4.38 15.3x 12.6x 25.8% 25.2% 28.9% 22.0% 14.5% 19.7% 17.8% 2.3% 2.1x
Department stores average ex Golden Eagle 16.0x 13.5x 36.8% 25.4% 20.6% 19.3% 16.8% 31.4% 28.8% 2.3% 2.6x
Golden Eagle's premium vs Department Stores 45% 39%
Food, Beverage (F&B)
Tingyi 322 HK 16,429 33.3 24.4 22.80 35.8x 27.0x 21.7% 23.6% -3.5% 32.9% 23.1% 10.4% 8.9% 1.4% 7.9x
Want Want 151 HK 12,610 42.4 18.5 7.40 31.8x 24.5x 28.3% 24.3% 11.1% 30.0% 34.4% 19.6% 16.7% 2.1% 10.6x
Uni-President China 220 HK 2,144 26.3 1.4 4.62 32.1x 21.1x 40.5% 30.3% -18.8% 52.1% 6.1% 3.9% 2.3% 0.9% 1.9x
Yurun Food 1068 HK 3,158 74.2 13.9 13.44 10.1x 9.1x 48.7% 14.2% -15.2% 11.0% 16.8% 12.9% 8.6% 2.8% 1.5x
Mengniu Dairy 2319 HK 4,762 67.9 27.3 20.90 18.3x 16.5x 24.9% 13.4% 30.1% 11.4% 15.8% 4.6% 5.3% 1.3% 2.7x
China Foods 506 HK 2,167 25.8 1.1 6.02 25.2x 19.4x 36.9% 20.2% 56.2% 30.1% 10.6% 3.5% 4.2% 1.4% 2.7x
Tsingtao Brewery 168 HK 7,078 43.6 7.2 41.75 27.3x 22.8x NA 13.8% NA 19.8% 16.2% NA 10.0% 0.8% 4.0x
F&B average excluding Want Want & Tingyi 22.6x 17.8x 37.8% 18.4% 13.1% 24.9% 13.1% 6.2% 6.1% 1.4% 2.6x
Tingyi / Want Want premium vs F&B Sector 50% 45%
Household & Personal Care (HPC)
Hengan 1044 HK 11,002 58.2 18.5 69.45 32.3x 24.7x 28.1% 26.2% 7.6% 30.8% 23.8% 21.0% 18.7% 1.9% 7.4x
Vinda 3331 HK 1,157 44.2 2.8 9.57 21.7x 13.6x 32.3% 27.2% 9.4% 59.0% 14.9% 12.6% 11.9% 1.3% 3.0x
L’Occitane 973 HK 3,080 30.7 3.4 16.18 21.6x 18.7x 15.8% 16.3% 10.2% 15.7% 20.5% 17.1% 16.5% 1.0% 3.7x
Sa Sa 178 HK 1,800 34.5 4.8 4.96 27.2x 18.7x 26.5% 19.6% 32.7% 45.2% 44.4% 11.9% 12.3% 1.8% 9.4x
HPC average ex Hengan 23.5x 17.0x 24.9% 21.0% 17.4% 40.0% 26.6% 13.9% 13.6% 1.4% 5.4x
Hengan premium vs HPC Sector 38% 45%
Fashion Footwear
Belle 1880 HK 13,438 53.3 38.4 12.36 19.9x 17.0x 24.5% 18.9% 24.1% 17.3% 23.2% 16.7% 17.9% 1.8% 4.4x
Daphne 210 HK 2,094 53.1 5.9 9.90 19.5x 15.7x 24.8% 19.7% 39.6% 23.8% 25.4% 13.9% 14.9% 1.6% 4.4x
Belles premium vs Daphne 2% 8%
Sportswear brands / retailers
Anta 2020 HK 2,755 30.5 5.4 8.57 9.9x 10.1x 21.1% 8.0% 13.2% -2.4% 28.9% 23.5% 23.1% 6.0% 2.7x
Li Ning 2331 HK 1,108 65.8 3.6 8.14 14.6x 13.1x -6.9% 5.4% -57.1% 11.7% 13.2% 16.4% 7.8% 2.5% 1.9x
China Dongxiang 3818 HK 1,017 47.5 1.5 1.40 13.9x 12.1x -41.6% 5.5% -68.2% 14.6% 6.1% 38.7% 19.9% 4.8% 0.8x
Xtep 1368 HK 724 39.4 1.1 2.58 4.8x 4.9x 21.2% 6.1% 17.4% -2.5% 25.3% 21.9% 21.0% 10.1% 1.2x
361 Degrees 1361 HK 850 38.0 1.4 3.19 4.4x 4.1x 21.3% 20.1% 24.9% 7.1% 28.9% 23.3% 23.9% 9.7% 1.1x
Peak Sport 1968 HK 492 28.9 1.2 1.82 3.5x 3.5x 16.2% 7.4% 8.2% -1.2% 23.1% 23.5% 23.9% 6.1% 0.7x
Sportswear average ex Anta 8.2x 7.5x 2.0% 8.9% -15.0% 6.0% 19.3% 24.8% 19.3% 6.6% 1.2x
Anta's premium vs Sportswear 20% 35%
Sector leaders average PER premium 31% 34%
Source: Bloomberg, Daiwa
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1929 HK
2 February 2012
Products, revenue and market share

At the end of 1H FY12, CFT’s network consisted of:
• 864 self-operated owned POS.
• 453 franchisee POS (451 jewellery POS in China, one
Company profile in Singapore and one in Malaysia).
• 189 joint ventures operated POS (all in China).
Legacy • Of the 1,053 self-operated stores, 862 (82%) were
The business was established in 1929 in Guangzhou, department store concessions.
and extended to Macau in 1938 and Hong Kong in
1939. The company is positioned in the mass luxury market,
with an average ticket size of HK$18,000-20,000 for
In 1973, Zlotowski, a DTC sightholder in South Africa, gemset and around HK$6,000 for gold products in
became a related party. Hong Kong.
In 1988, CTF became vertically integrated, by acquiring By product, gold products accounted for 53% of total
Foshan Yushunfu Jewellery and Diamond Co., a sales in 1H FY12, while gemset jewellery,
jewellery manufacturer. platinum/karat gold products and watches accounted
for 23%, 16% and 8%, respectively.
In 1993, CTF was able to source rough diamonds
directly from DTC as it became a qualified DTC NB CTF operates 85 watch only POS, of which 82 are
sightholder. located in Mainland China and three in Hong
Kong/Macau. The company distributes for brands such
In 1998, the first Chow Tai Fook branded jewellery as LVMH, Rolex and Swatch, and as such, complies
store was opened in Beijing. with the brand owner’s pricing policies, stock
requirements, etc.
In 2008, the company entered the watch business.
The PRC contributed 56% of sales in 1H FY12, with
Hong Kong Macau and other Asian markets making up
the remaining 44%. We note that Mainland tourists
accounted for around 50% of the company’s revenue in
Hong Kong.
Chow Tai Fook: sales by geography (1H FY12) Chow Tai Fook: sales by segment (1H FY12)
Watches
7.7%
Platinum karat
gold products
15.6%
Hong Kong
44.0%
China Gold products

56.0% 53.1%
Gem-set
jewellery
23.6%
Source: Company Source: Company
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1929 HK
2 February 2012
Operational comparison of Hong Kong-listed gold jewellery plays

Company Chow Tai Fook Chow Sang Sang Luk Fook
Key markets PRC, HK/Macau, and other Asian countries PRC, HK/Macau China, HK/Macau
Other markets Malaysia, Singapore, and Taiwan NA NA
Business model China expansion, focused on self-operated stores China expansion self-operated stores only China expansion mainly through franchises
Self-operated 100% self-operated in HK/Macau .PRC: 71% of stores, 100% self-operated 100% self-operated in HK/Macau. 6% self-
self-owned + JVs operated in PRC
Franchised PRC: 29% of stores are franchisees NA PRC: 94% of stores
Other Young line focusing on silver and K-gold CSS has bullion trading and brokerage business. CSS also has an Young line focusing on silver and K-gold
emphasis on higher-end stores
Self-production vs. 50% in-house production, including 80% of gemset c. 30% in-house production; mainly gemset products 50% in-house production of gemsets
outsourced products
Source: Companies
Franchisees
At the end of 1H FY11, CTF had 159 franchisees The group has two procurement departments, one for
operating 453 POS. The franchise agreements typically diamonds and another for gemstones, which help to
have a two-year term and a renewal option by mutual maintain a stable raw material supply.
agreement.
CTF has had long-term relationships with suppliers
CTF carefully selects franchisees, which are expected to such as DTC and Rio Tinto, but does not have long-
follow company specifications, policies and guidelines, term future contracts with any supplier.
participate in promotional and marketing activities
organised by CTF, and put employees through the At the end of 1H FY12, CTF owned 12 factories with
company training programme. over 3,500 employees. Around 80% of gemset products
are produced in-house. Including other non gemset
Franchisees are responsible for site selection, rent, products, overall outsourced production is around
utilities, management fees and other operational costs. 50%.
They are required to pay a royalty to CTF, a start-up
The production lead time from the ordering of raw
cost and a security deposit. The franchisees purchase
materials to POS delivery is typically 30-50 days.
goods from CTF at wholesale prices on a no return
basis (defective goods can be returned).
Inventories
Joint ventures At the end of 1H FY12, raw materials/finished goods
accounted for 38%/62% of total inventories.
At the end of 1H FY12, CTF had 25 joint-venture
partners, operating 189 joint-venture POS. Gemset accounted for 76% of raw materials and 45% of
finished goods inventories.
The agreement period generally ranges from 10-30
years and may be extended by mutual agreement 6 Gold products accounted for 23%/33% of raw
months before expiry. materials/finished goods inventories.
All aspects of the joint-venture stores are controlled by Chow Tai Fook: raw-material breakdown
CTF with respect to design, strategy, product mix,
inventory levels, daily operations, and branding and Gold products
marketing activities. 22.5%
The staff at JV stores are CTF’s employees and the

Platinum/karat
products are provided exclusively by the company. The gold products
joint-venture partners are mainly involved with the 1.9%
site-selection process and initial start-up logistics, but
are not involved with daily operations.
Gem-Set
Vertical integration jewellery
75.6%
The company is vertically integrated in its jewellery
business, from raw material procurement, design and Source: Company
production to marketing and sales. CTF employs over

6,000 staff in design, procurement and production.
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2 February 2012
Chow Tai Fook: profit & loss (FY09-17E)

HK$m, FY ending March 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E
Total Revenue 18,411 22,934 35,043 52,300 70,315 90,045 111,274 136,133 162,094
YoY growth 24.6% 52.8% 49.2% 34.4% 28.1% 23.6% 22.3% 19.1%
Cost of sales and service (13,085) (16,379) (25,115) (37,271) (49,989) (63,844) (78,661) (95,920) (113,807)
YoY growth 25.2% 53.3% 48.4% 34.1% 27.7% 23.2% 21.9% 18.6%
Gross profit 5,326 6,555 9,928 15,029 20,326 26,201 32,613 40,213 48,288
YoY growth 23.1% 51.4% 51.4% 35.2% 28.9% 24.5% 23.3% 20.1%
Gross profit margin 28.9% 28.6% 28.3% 28.7% 28.9% 29.1% 29.3% 29.5% 29.8%
Change in pp -0.3% -0.3% 0.4% 0.2% 0.2% 0.2% 0.2% 0.3%
Total other income 72 99 124 120 88 110 137 165 196
Other gains (losses) (0.4) (1.1) 39.9 - - - - - -
Total operating expense -3,107 -3,958 -5,435 -6,705 -9,415 -11,950 -14,661 -17,830 -21,139
YoY growth 27.4% 37.3% 23.4% 40.4% 26.9% 22.7% 21.6% 18.6%
Selling and distribution costs (2,435) (3,198) (4,402) (5,430) (7,625) (9,678) (11,874) (14,440) (17,119)
Admin expenses (509) (643) (911) (1,124) (1,579) (2,004) (2,458) (2,990) (3,544)
Other operating expenses (164) (117) (122) (151) (212) (268) (329) (401) (475)
% of total revenue
Total operating expense 16.9% 17.3% 15.5% 12.8% 13.4% 13.3% 13.2% 13.1% 13.0%
Operating Profit (EBIT) 2,291 2,695 4,656 8,444 10,998 14,361 18,088 22,547 27,345
YoY growth N.A. 17.7% 72.8% 81.3% 30.3% 30.6% 26.0% 24.7% 21.3%
EBIT margin 12.4% 11.8% 13.3% 16.1% 15.6% 15.9% 16.3% 16.6% 16.9%
Change in pp N.A. -0.7% 1.5% 2.9% -0.5% 0.3% 0.3% 0.3% 0.3%
Depreciation + Amortization (161) (226) (255) (139) (187) (248) (323) (413) (521)
EBITDA 2,451 2,921 4,911 8,582 11,185 14,609 18,412 22,961 27,866
YoY growth N.A. N.A. 68.1% 74.8% 30.3% 30.6% 26.0% 24.7% 21.4%
EBITDA margin 13.3% 12.7% 14.0% 16.4% 15.9% 16.2% 16.5% 16.9% 17.2%
Change in pp N.A. -0.58% 1.28% 2.40% -0.50% 0.32% 0.32% 0.32% 0.32%
Interest expense (finance cost) (157) (62) (102) (142) (107) (143) (185) (229) (278)
Interest income 89 77 70 60 52 54 66 84 111
Net interest income (expense) (69) 15 (32) (82) (55) (89) (120) (145) (167)
Share of results from an associate 1 9 (5) - - - - - -
PBT 2,224 2,719 4,620 8,362 10,943 14,272 17,968 22,402 27,178
YoY growth N.A. N.A. 69.9% 81.0% 30.9% 30.4% 25.9% 24.7% 21.3%
PBT margin 12.08% 11.85% 13.2% 16.0% 15.6% 15.8% 16.1% 16.5% 16.8%
Change in pp N.A. N.A. 1.33% 2.80% -0.43% 0.29% 0.30% 0.31% 0.31%
Income tax (309) (512) (947) (1,715) (2,299) (3,069) (3,954) (5,042) (6,252)
Effective tax rate 13.9% 18.8% 20.5% 20.5% 21.0% 21.5% 22.0% 22.5% 23.0%
Profit from continuing operations 1,914 2,207 3,672 6,647 8,644 11,203 14,014 17,361 20,926
Non-controlling interests (18) (68) (135) (225) (305) (387) (489) (603) (729)
as a % of profit -0.9% -3.1% -3.7% -3.4% -3.5% -3.5% -3.5% -3.5% -3.5%
Net profit 1,897 2,139 3,538 6,422 8,339 10,816 13,525 16,758 20,197
YoY growth NA 12.8% 65.4% 81.5% 29.9% 29.7% 25.1% 23.9% 20.5%
Net margin 10.3% 9.3% 10.1% 12.3% 11.9% 12.0% 12.2% 12.3% 12.5%
Change in pp -1.0% 0.8% 2.2% -0.4% 0.2% 0.1% 0.2% 0.2%
Dividends 0 0 0 2,484 1,668 2,163 2,705 3,352 4,039
Interim Dividend 0 0 0 1,200 806 806 806 806 806
Final Dividend 0 0 0 1,284 862 1,358 1,899 2,546 3,234
Dividend Payout Ratio 0.0% 0.0% 0.0% 38.7% 20.0% 20.0% 20.0% 20.0% 20.0%
Retained earnings 1,897 2,139 3,538 3,938 6,671 8,652 10,820 13,406 16,158
Weighted avg. no shares - basic 8,950 8,950 8,950 8,950 10,000 10,000 10,000 10,000 10,000
Share options - - - 1,050 0 0 0 0 0
Weighted avg. no. shares - diluted 8,950 8,950 8,950 10,000 10,000 10,000 10,000 10,000 10,000
Basic EPS (HK$) 0.212 0.239 0.395 0.718 0.834 1.082 1.353 1.676 2.020
YoY growth 12.8% 65.4% 81.5% 16.2% 29.7% 25.1% 23.9% 20.5%
Diluted EPS (HK$) 0.212 0.239 0.395 0.642 0.834 1.082 1.353 1.676 2.020
YoY growth NA NA 65.4% 62.5% 29.9% 29.7% 25.1% 23.9% 20.5%
DPS (HK$) 0.000 0.000 0.000 0.278 0.167 0.216 0.271 0.335 0.404
- 17 -
1929 HK
2 February 2012
Chow Tai Fook: balance sheet (FY09-17E)

Cash 1,289 2,106 5,604 11,667 10,814 11,619 15,863 20,060 26,913
ST Investment 467 225 156 156 156 156 156 156 156
Pledged bank deposits 467 225 156 156 156 156 156 156 156
Derivative financial instruments - - - - - - - - -
Total receivables 1,501 2,571 3,363 4,537 6,099 7,811 9,652 11,809 14,061
Inventories 8,094 9,274 17,100 23,222 31,323 41,345 50,023 61,450 73,489
as a % of sales 0.4 0.4 0.5 0.4 0.4 0.5 0.4 0.5 0.5
Other current assets 2,150 1,782 1,278 - - - - - -
Amounts due from related companies 2,134 1,782 1,278 - - - - - -
Tax recoverable 16 - - - - - - - -
Current assets 13,504 15,961 27,503 39,583 48,394 60,933 75,696 93,477 114,621
Fixed assets 714 834 1,252 1,962 2,498 3,169 3,972 4,911 5,999
Property, plant and equipment 714 834 1,165 1,879 2,420 3,095 3,903 4,846 5,938
Prepaid lease payments - - 87 82 78 74 69 65 61
Deposits 86 51 231 231 231 231 231 231 231
Other assets 104 163 61 61. 61 61 61 61 61
Amounts due from related companies 30 80 - - - - - - -
Interest in an associate 39 47 45 45 45 45. 45 45 45
Loan receivables 35 35 16 16 16 16 16 16 16
Non-current assets 905 1,048 1,545. 2,256 2,792 3,462 4,266 5,205 6,293
TOTAL ASSETS 14,410 17,010 29,049 41,838 51,185 64,395 79,962 98,681 120,914
Trade and other payables 815 1,306 2,049 2,452 3,289 4,201 5,176 6,312 7,489
Taxation payable 39 130 353 353 353 353 353. 353 353
Amounts due to related parties 4,726 4,639 7,833 - - - - - -
Amounts due to non-controlling shareholder of subsidies 28 84 164 - - - - - -
Interest-bearing loans 2,174 2,349 6,812 6,000 7,955 10,719 13,459 16,387 19,868
Bank borrowings 113 160 2,881 - - - - - -
Gold loans 2,060 2,189 3,931 6,000 7,955 10,719 13,459 16,387 19,868
Current liabilities 7,783 8,510 17,213 8,805 11,598 15,274 18,989 23,053 27,711
Retirement benefit obligations 1838 164 162 162 162 162 162 162 162
Non-current liabilities 183 164 162 162 162 162 162 162 162
Share capital 692 698 700 700 700 700 700 700 700
Reserves 5,650 7,458 10,606 30,295 36,966 45,618 56,439 69,845 86,003
Proposed final dividend - - - 1,284 862 1,358 1,899 2,546 3,234
Minority interests 99 178 366 591 896 1,283 1,772 2,375 3,104
Total shareholders' equity 6,441 8,335 11,672 32,870 39,424 48,959 60,810 75,466 93,040
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 14,410 17,010 29,049 41,838 51,185 64,395 79,962 98,681 120,914
- 18 -
1929 HK
2 February 2012
Chow Tai Fook: cash flow (FY09-17E)

PBT 2,223 2,718 4,619 8,361 10,942 14,271 17,968 22,402 27,178
Adjustments for:
Net interest income (expense) 68 (15) 32 82 55 89 112 145 167
gains/losses on disposals of PPE 16 2 6 1 - - - - -
Share of profits in an associate (1) (8.5) 4.7 - - - - - -
Depreciation and amortization 161 226 255 139 187 248 323 413 521
Fair value change of gold loans 18 484 726 - - - - - -
Discount on acquisition of a subsidiary - - (17) - - - - - -
Provision/reversal of defined benefit obligations 20 (13) 6 - - - - - -
Working capital changes (1,029) (1,764) (7,506) (6,892) (8,827) (10,822) (9,545) (12,447) (13,114)
+/- in inventories (821) (1,185) (7,507) - - - - - -
+/- in receivables 177 (1,069) (675) - - - - - -
+/- in payables (385) 490 677 - - - - - -
Other non-cash items (defined benefits paid) (7) (6) (24) - - - - - -
Cash used in operations 1,469 1,623 (1,882) 1,691 2,357 3,787 8,866 10,513 14,751
Total tax paid (365) (399) (729) (1,715) (2,298) (3,069) (3,954) (5,041) (6,252)
Net cash flow in operating activities 1,103 1,224 (2,612) (24) 59 718 4,913 5,472 8,499
Proceeds from disposal of fixed assets 1 7 2 - - - - - -

Total capital expenditure (484) (319) (823) (850) (722) (919) (1,127) (1,352) (1,608)
+/- decrease in pledged bank deposits (390) 242 68 - - - - - -
Advances to related companies (2,143) (253) (108) - - - - - -
Repayment from related companies 701 555 692 1,278 - - - - -
Loans advanced by the Group (6) (6) (6) - - - - - -
Repayment of loan to the Group 13 6 26 - - - - - -
Net cash inflow from acquisition of subsidiaries - - 3 - - - - - -
Interest received 89 77 70 59 52 54 66 83 110
Net cash used in investing activities (2,851) 308 (76) 488 (671) (865) (1,061) (1,268) (1,498)
New bank loans raised 1,326 2,596 4,278 - - - - - -

Gold loans raised 1,084 1,615 2,436 2,069 1,956 2,764 2,740 2,928 3,481
Repayment of bank loans (4,727) (2,549) (1,601) (2,881) - - - - -
Repayment of gold loans (761) (1,970) (1,452) - - - - - -
Net advances from related companies 4,416 (414) 2,461 (7,833) - - - - -
Net advances from non-controlling shareholders 25 56 74 (165) - - - - -
Dividends paid - (7) (9) (1,200) (2,090) (1,668) (2,163) (2,705) (3,352)
Interest paid (157) (62) (102) (142) (107) (143) (185) (229) (278)
Capital raised 5 5 2 15,750 - - - - -
Others 6 14 19 - - - - - -
Net cash used in financing activities 1,217 (715) 6,107 5,598 (241) 953 392 (6) (149)
NET INCREASE CASH AND CASH EQUIVALENTS (530) 816 3,419 6,062 (853) 806 4,244 4,197 6,853
Cash at the beginning of the year 1,802 1,290 2,107 5,605 11,667 10,814 11,619 15,863 20,060
Effect of foreign exchange rates changes 178 1 79 - - - - -
Cash at the end of the year 1,289. 2,107 5,604 11,667 10,814 11,619 15,863 20,060 26,913
- 19 -
Daiwa’s Asia Pacific Research Directory
Hong Kong
Regional Research Head Nagahisa MIYABE (852) 2848 4971 nagahisa.miyabe@hk.daiwacm.com
Regional Research Co-head Christopher LOBELLO (852) 2848 4916 christopher.lobello@hk.daiwacm.com
Head of Product Management John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com
Head of Thematic Research; Product Management Tathagata Guha ROY (852) 2773 8731 tathagata.guharoy@hk.daiwacm.com
Head of China Research, Chief Economist (Regional) Mingchun SUN (852) 2773 8751 mingchun.sun@hk.daiwacm.com
Macro Economics (Regional) Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com
Regional Chief Strategist; Strategy (Regional) Colin BRADBURY (852) 2848 4983 colin.bradbury@hk.daiwacm.com
Head of Hong Kong Research; Regional Property Coordinator; Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com
Co-head of Hong Kong and China Property; Property Developers (Hong Kong)
Automobiles and Components (China) Jeff CHUNG (852) 2773 8783 jeff.chung@hk.daiwacm.com
Head of Greater China FIG; Banking (Hong Kong, China) Grace WU (852) 2532 4383 grace.wu@hk.daiwacm.com
Banking (Hong Kong, China) Queenie POON (852) 2532 4381 queenie.poon@hk.daiwacm.com
Insurance Jennifer LAW (852) 2773 8745 jennifer.law@hk.daiwacm.com
Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Joseph HO (852) 2848 4443 joseph.ho@hk.daiwacm.com
Consumer, Pharmaceuticals and Healthcare (China) Hongxia ZHU (852) 2848 4460 hongxia.zhu@hk.daiwacm.com
Conglomerate (Hong Kong, China) Peter CHU (852) 2848 4430 peter.chu@hk.daiwacm.com
Consumer/Retail (Hong Kong, China) Matthew MARSDEN (852) 2848 4963 matthew.marsden@hk.daiwacm.com
Head of HK and China Gaming and Leisure; Hotels, Restaurants and Leisure – Casinos Gavin HO (852) 2532 4384 gavin.ho@hk.daiwacm.com
and Gaming (Hong Kong); Capital Goods – Conglomerate (Hong Kong)
Internet (Hong Kong, China) Alicia HU (852) 2532 4180 alicia.hu@hk.daiwacm.com
Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Eric CHEN (852) 2773 8702 eric.chen@hk.daiwacm.com
IT/Electronics - Semiconductor/IC Design (Taiwan) Ashley CHUNG (852) 2848 4431 ashley.chung@hk.daiwacm.com
Regional Head of Materials; Materials/Energy (Regional) Alexander LATZER (852) 2848 4463 alexander.latzer@hk.daiwacm.com
Materials (China) Felix LAM (852) 2532 4341 felix.lam@hk.daiwacm.com
Head of Hong Kong and China Property; Property Developers (Hong Kong, China) Danny BAO (852) 2773 8715 danny.bao@hk.daiwacm.com
Property (Hong Kong, China) Yannis KUO (852) 2773 8735 yannis.kuo@hk.daiwacm.com
Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Mark CHANG (852) 2773 8729 mark.chang@hk.daiwacm.com
Small/Medium Cap (Regional) John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com
Head of Solar Pranab Kumar SARMAH (852) 2848 4441 pranab.sarmah@hk.daiwacm.com
Telecommunications (Greater China) Alan KAM (852) 2848 4978 alan.kam@hk.daiwacm.com
Transportation – Aviation, Land and Transportation Infrastructure (Regional) Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com
Transportation –Transportation Infrastructure; Capital Goods – Construction and Edwin LEE (852) 2532 4349 edwin.lee@hk.daiwacm.com
Engineering (China)
Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Dave DAI (852) 2848 4068 dave.dai@hk.daiwacm.com
Renewables (Hong Kong, China)
Head of Custom Products Group; Custom Products Group Justin LAU (852) 2773 8741 justin.lau@hk.daiwacm.com
Custom Products Group Philip LO (852) 2773 8714 philip.lo@hk.daiwacm.com
Custom Products Group Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com
Custom Products Group Kenji SERIZAWA (852) 2532 4159 kenji.serizawa@hk.daiwacm.com
South Korea
Head of Research; Strategy; Banking/Finance Chang H LEE (82) 2 787 9177 chlee@kr.daiwacm.com
Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com
Banking/Finance Anderson CHA (82) 2 787 9185 anderson.cha@kr.daiwacm.com
Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com
Consumer/Retail Sang Hee PARK (82) 2 787 9165 sanghee.park@kr.daiwacm.com
IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com
Materials (Chemicals); Oil and Gas Jihye CHOI (82) 2 787 9121 jihye.choi@kr.daiwacm.com
Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com
Custom Products Group Shannen PARK (82) 2 787 9184 shannen.park@kr.daiwacm.com
- 20 -
Taiwan
Head of Taiwan Research; Strategy Alex YANG (886) 2 8758 6245 alex.yang@daiwacm-cathay.com.tw
Banking/Diversified Financials Jerry YANG (886) 2 8758 6252 jerry.yang@daiwacm-cathay.com.tw
Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8758 6247 y.kawashima@daiwacm-cathay.com.tw
IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw
IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8758 6248 alex.chang@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8758 6251 chris.lin@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Components) Jenny SHIH (886) 2 8758 6250 jenny.shih@daiwacm-cathay.com.tw
Materials; Conglomerates Albert HSU (886) 2 8758 6246 albert.hsu@daiwacm-cathay.com.tw
India
Head of India Research; Pharmaceuticals and Healthcare Kartik A. MEHTA (91) 22 6622 1012 kartik.mehta@in.daiwacm.com
Deputy Head of Research; Strategy; Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com
All Industries Fumio YOKOMICHI (91) 22 6622 1003 fumio.yokomichi@in.daiwacm.com
Automobiles and Components Ambrish MISHRA (91) 22 6622 1060 ambrish.mishra@in.daiwacm.com
Capital Goods/Utilities Saurabh MEHTA (91) 22 6622 1009 saurabh.mehta@in.daiwacm.com
FMCG; Consumer Percy PANTHAKI (91) 22 6622 1063 percy.panthaki@in.daiwacm.com
Singapore
Head of Singapore Research Tony DARWELL (65) 6321 3050 tony.darwell@sg.daiwacm.com
Quantitative Research Josh CHERIAN (65) 6499 6549 josh.cherian@sg.daiwacm.com
Quantitative Research Suzanne HO (65) 6499 6545 suzanne.ho@sg.daiwacm.com
Banking (ASEAN) Srikanth VADLAMANI (65) 6499 6570 srikanth.vadlamani@sg.daiwacm.com
Consumer; Food and Beverage; Small/Medium Cap (ASEAN) Pyari MENON (65) 6499 6566 pyari.menon@sg.daiwacm.com
Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH (65) 6499 6548 adrian.loh@sg.daiwacm.com
Property and REITs David LUM (65) 6329 2102 david.lum@sg.daiwacm.com
Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com
Thematic Research Amy CHEW (65) 6321 3085 amy.chew@sg.daiwacm.com
Australia
Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 david.brennan@au.daiwacm.com
The Philippines
Head of the Philippines Research; Strategy; Capital Goods; Materials Rommel RODRIGO (63) 2 813 7344 ext 302 rommel.rodrigo@dbpdaiwacm.com.ph
Economy; Consumer; Power and Utilities; Transportation – Aviation Alvin AROGO (63) 2 813 7344 ext 301 alvin.arogo@dbpdaiwacm.com.ph
Property; Banking; Transportation – Port Danielo PICACHE (63) 2 813 7344 ext 293 danielo.picache@dbpdaiwacm.com.ph
- 21 -
Daiwa’s Office
Office / Branch / Affiliate Address Tel Fax
DAIWA SECURITIES GROUP INC
HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661
Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726
Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129
Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469
DAIWA CAPITAL MARKETS LIMITED

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661
Tokyo, 100-6753
Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100
Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935
Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600
Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, (49) 69 717 080 (49) 69 723 340
Federal Republic of Germany
Daiwa Capital Markets Europe Limited, Paris Branch 127, Avenue des Champs-Elysées, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808
Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441
Daiwa Capital Markets Europe Limited, Milan Branch Via Senato 14/16, 20121 Milan, Italy (39) 02 763 271 (39) 02 763 27250
Daiwa Capital Markets Europe Limited, 25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation (7) 495 617 1960 (7) 495 244 1977
Moscow Representative Office
Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113
Manama, Bahrain
Daiwa Capital Markets Europe Limited, Dubai Branch The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, (971) 47 090 401 (971) 43 230 332
Dubai, UAE.
Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621
Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, (65) 6220 3666 (65) 6223 6198
Republic of Singapore
Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330
Victoria 3000, Australia
DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105
Makati City, Republic of the Philippines
Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638
Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191
Seoul, 150-876, Korea
Daiwa Securities Capital Markets Co Ltd, Room 3503/3504, SK Tower, (86) 10 6500 6688 (86) 10 6500 3594
Beijing Representative Office No.6 Jia Jianguomen Wai Avenue, Chaoyang District,
Beijing 100022, People’s Republic of China
Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, (86) 21 3858 2000 (86) 21 3858 2111
Pudong, Shanghai 200120, People’s Republic of China
Daiwa Securities Capital Markets Co. Ltd, Level 8 Zuellig House, 1 Sliom Road, (66) 2 231 8381 (66) 2 231 8121
Bangkok Representative Office Bangkok 10500, Thailand
Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019
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Daiwa Securities Capital Markets Co. Ltd
Daiwa Securities Capital Markets Co. Ltd is a subsidiary of Daiwa Securities Group Inc.
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United Kingdom
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The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report.
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Corporate Name: Daiwa Securities Capital Markets Co. Ltd.

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Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan
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Chow Tai Fook Jewellery 120202

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Retailing / Hong Kong

Target price: HK$11.20

Initiation: Is bigger better?

How do we justify our view?

retail environment combined with a shows that previous listings from

The counter-argument ..................................................................................................................... 6

How do we justify our view?

Growth outlook CTF: YoY revenue and same-store-sales growth

11.9% and 14.5%, respectively, below the consensus.

Valuation CTF: valuation based on FY13E PER

This results in a target PER of 14.2x, which applied to

Earnings revisions Chow Tai Fook: Daiwa vs. consensus forecasts

Profit and loss (HK$m)

Cash flow (HK$m)

Source: Company, Daiwa forecasts

Financial summary continued …

Balance sheet (HK$m)

Key ratios (%)

• Valuation premium debateable. We reject the

Hong Kong-listed jewellery players

Our channel checks with retailers in the PRC indicate

65% Daiwa’s call for gold prices to be relatively supported

5% Longer term, Daiwa’s Materials & Commodities Team

 Gold price Jan 2010 - Dec 2013E

growth in 2012, we think a normalised YoY growth

rate of around 15-20% is realistic.

We are cognisant that this gives a very high base for 0 0

Source: Company, Daiwa forecasts

Chow Tai Fook Holdings: IPO track record

Cashing out Not the only company with a

We note that CTF trades at a significant premium to its

• There are small differences, eg, CTF is the only

Finding the closest comparables

Source: Daiwa Source: Daiwa

We agree that a premium is deserved.

PER-based fair value of HK$11.20 Risks

Determining ‘best in sub-sector’ premium for Hong Kong-listed consumer stocks

Products, revenue and market share

China Gold products

Source: Company Source: Company

Operational comparison of Hong Kong-listed gold jewellery plays

The staff at JV stores are CTF’s employees and the

production to marketing and sales. CTF employs over

Chow Tai Fook: profit & loss (FY09-17E)

Chow Tai Fook: balance sheet (FY09-17E)

Chow Tai Fook: cash flow (FY09-17E)

Proceeds from disposal of fixed assets 1 7 2 - - - - - -

New bank loans raised 1,326 2,596 4,278 - - - - - -

DAIWA CAPITAL MARKETS LIMITED

DAIWA INSTITUTE OF RESEARCH LTD

Investment Banking Relationships

DCMA Market Making

Research Analyst Conflicts

Research Analyst Certification

Additional information may be available upon request.

Corporate Name: Daiwa Securities Capital Markets Co. Ltd.

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Gold price Jan 2010 - Dec 2013E