CLSA-Dipped in gold
         ----luxury lifestyles in china/HK

Aaron Fischer, CFA

Regional Head of Consumer

and Gaming Research

aaron.fischer@clsa.com

(852) 26008256

Mariana Kou

(852) 26008190

Summary:
Fastest-growing segment:
Luxury goods look set to be the fastest-growing consumer category in China
over the next five years, with a 25% Cagr against general consumption at 11%.
Luxury sales in Greater China represent 10% of the global market. If we include
sales to Chinese tourists abroad, we estimate Greater Chinese consumers to
account for 15% of global sales. But we are only at the start of this golden
opportunity. Given rising incomes and supportive social factors, we expect
Greater Chinese customers to account for 44% of global luxury sales by 2020.
Our top picks are Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli.


Eight key differences
The Chinese luxury customer is unique in many ways and, in this report, we
identify eight differences between the wealthy Chinese and their overseas
counterparts. Not surprisingly, they largely have the same tastes in brands as
the rest of the world with Louis Vuitton, Hermes, Chanel, Gucci, Rolex, Prada
and Cartier being the most desirable. Men’s brands such as Zegna and Dunhill
also score well in our China Reality Research proprietary luxury-goods survey.


China to account for half of global luxury goods growth

Luxury-goods companies are expanding rapidly in the Middle Kingdom as China
will account for half of global growth over the next 10 years. We expect
handbags, leather goods, watches and jewellery to see the fastest growth.
Strong demand is already reflected in higher prices with fine wines increasing
by 40% in 2010 and waiting lists are growing for many exclusive items.

Chinese luxury brands to come

It is only a matter of time before Chinese luxury brands are established at
home. However, we expect this to happen in product categories where China
has a perceived fundamental advantage, primarily in the use of materials
such as jade, porcelain or precious woods that can be used in jewellery,
homeware and furniture. In the meantime, we expect Asian companies to
look to acquire European brands and build up manufacturing expertise.

Asian pure plays
Exposure can be gained via the brand owners listed in Europe and the USA.
However, these companies only generate about 10-30% of sales to Chinese
customers. We therefore recommend obtaining 100% pure-play exposure to
Chinese luxury demand via the Asian-listed high-end companies. These stocks
have rerated by 57% during 2010 but we believe valuation is still attractive at
an average PE of 22x and PE/G of 1x. Of the stocks we cover, our top picks are
Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli. We also like Trinity,
Lifestyle, I.T, Emperor Watch & Jewellery and Sa Sa International. Strong sales
over the December period will be the necessary catalyst for earnings upgrades
and share-price outperformance.