1. Summary
European luxury goods companies have delivered double-digit organic sales
growth during the past three years (+12% p.a. on average) and 2007 was the
best year yet with organic sales increasing on average by +14%. Currencies
had a negative effect in 2007, but most companies nevertheless managed to
widen their margins. We expect sales growth to weaken in the current year
and are anticipating an average organic sales growth rate of +10%, which has
so far been confirmed by the initial figures reported for 1Q08, or 1Q08 sales
growth rates have been even higher than +10%. The currency effect will
become more negative as the year progresses, however, especially for
companies whose accounts are in Swiss francs (Swatch Group). Within the
luxury goods industry the Swiss watchmaking industry is still displaying
better-than-average growth rates, particularly in the high-end segment.
Exchange rates are having a negative impact on margins but this has been
largely offset by adjusting prices. Furthermore, the feedback from the recent
watch trade shows in Basel and Geneva was very positive. After the sharp
markdown in share prices since the beginning of the year (down -23% on
average), the current valuation multiple (EV/EBITDA 09E 8.4) is well below the
historical average (12.9). Our sector favorites are the two Swiss companies on
valuation grounds and of these two we prefer Swatch Group (P/E 09E 11.4).
Richemont’s valuation is lower (Luxury P/E 09E 8.9) but there are some
uncertainties regarding the spin-off of BAT. LVMH is attractively valued in a
historical context with a P/E 09E of 13.4 (rating: Buy). Bulgari (P/E 09E 12.2)
and Hugo Boss (P/E 09E 13.4) are both rated Hold. We downgraded our rating
for Hermès from Hold to Reduce as the company has been the top performing
stock since the beginning of the year and its premium to the peer group is
back at an excessively high level (P/E 09E 24.7).
In 2007 the European luxury goods industry reported an average organic sales
growth rate of +14%, which is the highest growth rate achieved by the sector
since 2001. Currencies had an average effect of -4%, though, which was more
negative than in the previous three years. As was the case in 2006, every
company reported a higher EBIT margin except for Hermès and Bulgari. The two
Swiss companies achieved the greatest improvement (Swatch Group: +170bp,
Richemont E: +210bp).
We estimate that the average organic sales growth of EU luxury goods
companies will almost reach the double-digit threshold, and the 1Q08 quarterly
figures released so far support this forecast (Burberry, LVMH: org. +12%).
Although we anticipate a slower pace of growth in the USA and continued
sluggish business in Japan, the positive growth trends in the two most
important regions for the luxury goods sector – Europe and, especially, Asia ex
Japan – should be sustained. Swiss watchmakers should enjoy another year of
above-average growth in 2008E, which would benefit the two market leaders
Swatch Group and Richemont. The currency effect is estimated to average -5%,
and will be an even more negative -8% for Swatch Group at the current
exchange rates. Nevertheless, we expect every company to widen its margins
once again in 2008E (+40bp on average).

Exports of Swiss watches reached a new record high of CHF 14.8 bn in 2007, an
increase of +16.2% over the previous year and the fastest growth rate recorded
during the past 18 years. As in the previous year, exports of high-priced
mechanical watches grew at an above-average rate of +19%. As in the two
preceding years, export growth was fueled by higher volumes and positive
price/mix developments. Growth even accelerated in the first two months of
the current year despite the high comparison base from the previous year
(Jan/Feb 08: +21.7%). This growth has been fuelled by all market regions
(except for Japan). Mechanical watch exports were particularly high (+25.1%)
and electronic watch exports also showed double-digit growth (+14.6%). We
forecast watch exports will increase +8-10% for the full year.
Hong Kong/China is now the most important market for Swiss watches
(absorbing 19% of all exports), whereas the USA has declined in importance
(16%). Hong Kong alone is already the same size as the US market. Japan
remains the third largest market but its share of total exports has shrunk to 8%.
The fastest growth, after China, is coming from Russia (2% share) and the
United Arab Emirates (3%). The average price for Swiss watches, both
mechanical and electronic, has steadily increased in recent years.
Swiss watchmaking companies have a dominant position in the world watch
market in terms of sales: Each of top three Swiss watchmakers alone (Swatch
Group, Richemont and Rolex) generates more sales than the three largest
Japanese watchmakers together (Citizen, Seiko and Casio). Swiss watchmaking
companies are also growing much faster than their Japanese counterparts and
their margins are higher, too. Various Swiss watch manufacturers such as Patek
Philippe, Chopard, Franck Muller und Audemars Piguet also played a role here
because of their above-average sales growth in recent years thanks to their
positioning in the high-end segment.
Statements from exhibitors at the two trade fairs in April (BASELWORLD, SIHH)
were resoundingly positive. Demand at the high end remains very strong and is
reflected in the even higher selling prices for the new watches. Swatch Group
said it took in +30% more orders at the trade fair, Jaeger-LeCoultre (a
Richemont brand) mentioned a +40% increase and LVMH (TAG Heuer) also
said it had received significantly more orders than last year.

Swiss watch industry 2008: Slower growth with a
negative currency effect, but still solid, especially in
the high end!
After a record-breaking 2007 (+16%), exports of Swiss watches won’t grow as fast in
2008 (E: +8-10%), but they were still strong in the early months of the year and
feedback from the recent industry trade shows was positive: 2007 exports +16.2% to
CHF 15.96 bn, mechanical watch exports +19.3%, electronic watch exports +10.3%.
Jan/Feb 2008 +21%, exports higher in all regions (except Japan) – mechanical watch
exports still growing faster than average (+21.5%), but electronic watch exports also
strong (+11.9%). Feedback from the watch industry’s trade shows in Basel and Geneva
was resoundingly positive and new orders were sharply higher, especially for watches at
the top end of the market.
Highly negative currency effect in 2008E for luxury goods companies, especially into
CHF, but prices are higher: The weak USD portends a negative currency effect of about
-5% for EUR companies. At Swatch Group (CHF) this negative currency effect will be
compounded by a negative EUR effect (total -8%). In 2007, the negative translation
effect of the weak USD and JPY on Swiss watchmakers was more than offset by the
positive margin effect from the strong EUR, but this year the EUR translation effect will
also be negative. This will be partially offset by price increases though.
Not quite double-digit organic growth and slight margin improvement at all EU luxury
goods companies in 2008E: We expect sales growth at all EU luxury goods companies to
be almost in the double-digits, with the highest growth rates again coming from their
watchmaking activities. We also anticipate another slight improvement in EBIT margins in
2008E (+40bp on average).
Valuation of EU luxury goods companies at historically attractive levels, recession in the
USA will be offset by other markets, e.g. Asia ex Japan, Russia and the Middle East. The
average ratio of EU luxury goods companies is 8.4 (EV/EBITDA 09E), which is well below
the historical average of 12.9. Their share prices have declined by -22.8% on average
since the beginning of the year (MSCI Europe -13%), which we consider a clear sign of
market overshooting. We recommend Swatch Group (P/E 09E 11.4x), Richemont (Luxury
P/E 09E 8.9x) and LVMH (P/E 09E 13.4x) and currently prefer Swatch Group even though
Richemont’s valuation is lower because of the uncertainty at Richemont regarding the
spin-off of BAT. Hermès (P/E 09E 24.7) has been downgraded to Reduce again because of
its relatively high premium.

Contents
1. Summary 3
2. Valuation 9
2.1 European / US luxury goods companies – a valuation comparison 9
2.2 Performance 10
3. Luxury Goods industry – sector comparison 14
3.1 Sales growth 14
3.2 Sales breakdown by region 17
3.3 Comparison of EBIT margins 20
3.4 Profits 22
3.5 Debt / Payout ratio 24
4. Watches 26
4.1 Watch market 26
4.2 Swiss watch industry trade show / Trends 30
4.2.1 BASELWORLD – The Watch and Jewellery Show 33
4.2.2 SIHH Geneva (Salon International de la Haute Horlogerie) 33
4.3 Swiss watch export statistics 34
4.3.1 Swiss watch export statistics: Quanties – Price/Mix 37
4.3.2 Swiss watch export statistics: Mechanical watches – average prices 39
4.3.3 Swiss watch export statistics – January/February 2008 41
4.4 Watch brands 42
4.5 Acquisitions 2007/2008 43
5. Listed non-European watch manufacturers 47
6. Comparison of watch divisions at EU luxury goods companies with competitors 51
7. Unlisted watch companies 53
Audemars Piguet – will remain family-owned 54
Breitling – THE aviator watch, in family ownership 55
Chopard – the watch/jewelry brand in firm family hands 56
Patek Philippe – top end of the high end of Swiss watches 57
Franck Muller – founding shareholders reach a solution, Mr. Sirmakes takes majority58
Sowind Group (Girard-Perregaux) – IPO no longer an issue at the present time 59
Rolex – controlled by a foundation 60
8. Vontobel European Luxury Goods Universe 61
9. Company Dates 62
Companies
Bulgari 63
Hermès 69
Hugo Boss 73
LVMH 77
Richemont 87
Swatch Group 97