A safe bet
Department stores – a safe haven amid a volatile market
We prefer the department-store subsector over the other five – sports,
brands, F&B, supermarkets and restaurants – on the back of its strong
growth outlook and superior earnings quality. According to our forecast,
the department-store subsector ranks second after sports in terms of its
earnings-growth outlook. This subsector has the best earnings of the six,
with plenty of turnover drivers. Department-store operators have a
diversified revenue stream, and we believe that rising opex and rawmaterial
costs are less of a concern to them (they are, in fact,
beneficiaries of an inflationary environment). Furthermore, strong
balance sheets and cash inflows on positive changes in working capital
would support future M&A plans.
Future development
Amid rising competition, we believe department-store operators will need
larger stores. We also believe more differentiation (in terms of
positioning and sales mix) will be needed when this market becomes
more mature. Furthermore, national plays are better-positioned and
more resilient to some potential changes, such as less emphasis on
agents to act on the principals’ (ie brands) behalf. Lastly, we are of the
view that, in the long run, average commission rates will see an upward
trend, the proportion of direct sales to total gross sales proceeds (GSP)
will increase, and more M&A activity will take place.
Top picks
Parkson (3368 HK, BUY, TP: HKD92.50) – BUY for its leading position,
strong profitability in terms of earnings growth and ROE. Parkson will
benefit most from the industry development. Minorities and managedstore
buyouts will be an earnings upgrade catalyst. NWDS (825 HK,
BUY, TP: HKD12.00) – A cheaper vehicle (at 25.4% discount to sector
average P/E). Potential acquisition of a Beijing managed store would add
to earnings (9% upgrade). Sister company’s huge landbank gives it
growth potential. Golden Eagle (3308 HK, BUY, TP HKD11.00) – The
market is slowly factoring in the contribution from its Nanjing no.2 store,
scheduled to open in early February 2008. It is consistent in terms of
adopting an asset heavy strategy and hence around 90% GFA
comprises self-owned properties valued at HKD2.80/share.

Contents
Department stores – a safe haven amid a volatile market............................................. 3
Prefer department-store subsector to others 3
Future development....................................................................................................... 8
Larger store sizes, more direct sales 8
More differentiation 10
Opportunities – commission rates, direct sales and M&A 11
Location, location, location .......................................................................................... 14
Geographical presence 14
Favourable macro environment ................................................................................... 20
Penetration rate of China department stores is still low 20
Fashion department stores increase more quickly 22
Apparel sales growth sees strength 23
Modernised department stores to partake in the growth 23
Valuation...................................................................................................................... 25
Stock picks................................................................................................................... 28
Parkson (3368 HK, BUY, TP: HKD92.50) 28
NWDS (825 HK, BUY, TP HKD12.00) 29
Golden Eagle (3308 HK, BUY, TP HKD11.00) 29
Appendices .................................................................................................................. 31
1. Devil’s advocate: Risks to our investment case 31
2. Key Department Store Plays In China 32
3. Store location and store data 33
Company updates........................................................................................................ 39
Golden Eagle 40
Intime Department Store 45
New World Department Store 48
Parkson Retail 51

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