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1、24,HK$18,Asia Pacific Equity Research17 March 2011Corrected NoteInitiation,LOccitane International SABest of both worlds Initiate coverage with OW,Mar-12 PT of HK$24,based on 1.1x PEG on a24%two-year EPS CAGR,equating to 26x FY12E P/E.LOccitane is a leadingnatural ingredient cosmetics and personal c
2、are product retailer(Asia-ex,Japan,Americas,Europe account for 25%,24%,20%,and 31%of sales,respectively).Our earnings outlook has the company achieving a 24%ROE by FY14E on theback of its unique vertically integrated retailing model,profit-orientedexpansion strategy,and premium brand positioning.Pro
3、fitable growth model in DMs and EMs:LOccitane intends to double itsdirect retailing network,adding 650 stores over FY11-15E,with approximatelyone-third of the new stores in its top four developed markets,where LOccitaneshould benefit from steady retail recoveries and further penetration,and another,
4、Overweight0973.HK,973 HKPrice:HK$17.30Price Target:HK$24.00LuxembourgSpecialty RetailingACElsa Yang(852)2800-J.P.Morgan Securities(Asia Pacific)LimitedPrice Performance,one-third in BRIC(of which 40%in China),where sales should enjoy start-uptype growth.Margins and ROE have risen in tandem with the
5、enlarged networkand have outperformed many global peers.We expect further margin upside on,12Mar-10,Jun-10,Sep-10,Dec-10,Mar-11,production and operating leverage,thus driving two-fold increase in earningsover FY11-14E.,0973.HK share price(HK$HSI(rebased),We anticipate further re-rating,on the back o
6、f better-than-expected Chinaexpansion.LOccitane should report nearly a 5%sales contribution from Chinain FY11,making the combined market of HK and China the companys second-largest market(at c.14%of sales).Rising luxury consumption should drive,AbsRel,YTD-21.4%-21.0%,1m-12.1%-13.1%,3m-17.0%-16.6%,12
7、m15.6%4.8%,HK/China sales to reach 20%of sales by FY15.FY11 results,due to bereported in June,are a possible near-term catalyst.Price target,key risks:Our target 1.1x PEG ratio represents a 20%discount toglobal peers and a 10%discount to HK-listed consumer discretionaries.Thediscounts reflect LOccit
8、anes smaller scale versus global peers and shortertrading track record.Key risks include any abrupt change in euro exposure andA&P budget,execution risks in expansion of the store network,slower SSSgrowth in key markets,as well as product quality risks.LOccitane International SA(Reuters:0973.HK,Bloo
9、mberg:973 HK),in mn,year-end MarRevenue(mn)Net Profit(mn)EPS()DPS()Revenue growth(%)Net profit growth(%)EPS growth(%)ROEP/E(x)P/BV(x)EV/EBITDA(x)Div idend Yie ld,FY09A537580.050.0229.5%21.7%-98.2%34.6%34.610.923.71.5%,FY10A612820.060.0613.9%39.8%39.8%47.7%24.712.817.84.0%,FY11E769990.070.0125.6%21.7
10、%5.0%30.9%23.64.812.80.8%,FY12E8861250.080.0215.3%25.4%25.4%23.2%18.84.010.01.1%,FY13E1,0461580.110.0218.0%26.6%26.6%24.0%14.83.27.61.3%,Shares O/S(mn)Market cap(mn)Market cap($mn)Price(HK$)Date Of PriceFree float(%)3mth Avg daily volume3M-Average daily Value(HK$mn)Average 3m Daily Turnover($mn)HSIE
11、xchange RateFiscal Year End,1,4772,3413,27717.3016 Mar 1130.7%2,474,866.0048.466.2222,7017.80Mar,Source:Company da ta,Bloomberg,J.P.Morgan estimates.See page 47 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business withcompa
12、nies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.Investors should consider this report as only a single factor in making their investment decision.See page 47 for analyst certifica
13、tion and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report.Investors sh
14、ould consider this report as only a single factor in making theirinvestment decision.,UK,5.0%,Elsa Yang(852)2800-,Asia Pacific Equity Research17 March 2011,Company DescriptionLOccitane is a leading natural ingredientcosmetics and personal care productretailer.It originated in Provence,in thesouth of
15、 France,with three self-ownedpremium brands,LOccitane,Melvita,andLe Couvent des Minimes.LOccitane is thecompanys signature brand,contributing,P&L sensitivity metricsAverage number of storesImpact of each 5%decreaseAverage retail sales per storeImpact of each 5%decreaseGross margin assumptionImpact o
16、f each 1%decrease,EBITDA FY11 Eimpact(%)-4.3%-5.0%-4.5%,EPS FY11 Eimpact(%)-5.4%-6.3%-5.7%,96%of total sales in FY09.In FY10,the,company operated a direct-operated retailnetwork of 764 stores worldwide;sell-outsegment(i.e.retail business)accounted forc.74%of total revenue.The productsinclude face ca
17、re,body care,hair care,fragrances,toiletries,Mens grooming,andhome fragrances.FY10 revenue breakdown,Source:J.P.Morgan estimates.Price target and valuation analysisOur Mar-12 price target is based on a 24%two-year EPS CAGR overFY12-14E and a 1.1x PEG ratio,at a 20%discount to the global peeraverage
18、of 1.4x and almost a 10%discount to the HK-listed consumerdiscretionary sector average of 1.2x.Our PT corresponds to 26xFY12E P/E.The premium is justified by the companys superiorgrowth profile and profitability compared with its global peers,in ourview.On a PEG basis,LOccitane trades at 1x,still at
19、 a discount toglobal and regional comparables.,Brazil,4.2%,Othercountries,27.2%,Japan,24.1%Hong Kong,8.1%,USA,14.6%,France,12.7%,Taiwan,4.0%,Key downside risks to our PT are any abrupt change in euro exposure,and A&P budget,execution risks in expansion of the store network,slower SSS growth in key m
20、arkets as well as product quality risks.Source:Company reports.EPS:J.P.Morgan vs.consensus,J.P.Morgan,Consensus,FY11EFY12EFY13ESource:Bloomberg,J.P.Morgan.Peer valuation comparison,0.0670.0840.107,0.0690.0840.103,CompanyTrinityLifestyleHengdeliBelleSa SaLOrealEstee Lauder*Shiseido*LVMHRichemont*Burb
21、erry*,Ticker891 HK1212 HK3389 HK1880 HK178 HKOR FPEL US4911 JPMC FPCFR VXBRBY LN,RatingOWNNROWNOWNNRNRNRNR,Price(HK$)HK$7.5HK$18.7HK$4.3HK$13.2HK$4.0 78.2$89.1 1480.0 103.9CHF 48.4 1132.0,PT(HK$)HK$9.5HK$20.5HK$15.0HK$4.5 100.0$100.0,Mkt cap(US$MM)1,6274,0382,41414,3231,43865,42017,6607,33871,01230,
22、3247,921,FY10E36.724.726.528.023.019.523.429.619.618.124.0,P/E(x)FY11E27.121.121.722.318.417.720.218.316.715.319.7,FY12E20.118.416.918.115.116.0NA16.014.813.617.1,P/BV(x)FY10E5.64.43.25.57.93.17.61.73.23.17.2,FY11E4.13.92.94.86.72.87.21.62.62.75.9,Average,24.8,19.9,16.6,4.8,4.1,Source:Bloomberg,J.P.
23、Morgan estimates.Prices as of Mar 16,2011.*FY11 figures given under 2010 as the year ends in Jan-Jun.Bloomberg consensus estimates.2,Elsa Yang(852)2800-8523,Asia Pacific Equity Research17 March 2011,Table of contentsTable of contents.3Positive drivers.4Risks to our view.5Valuation and share price an
24、alysis.7PEG is our main valuation methodology.7Comparable analysis.7Share price performance.9DCF valuation.12Sensitivity analysis.12Industry overview.13Key drivers.13Distribution channels.19Peer comparison.20Multinational versus regional/local companies.20Mainstream versus niche market players.20LOc
25、citanes competitive edge.21Operational comparison with the Body Shop.23Operational overview.23A multi-brand retailer with premium positioning.24A multi-channel retailer with a vertically integrated model.24A wide range of products with the focus on face care.26A well-targeted marketing strategy.27A
26、proven profitable growth track record.28Well set to benefit from the best of both the worlds.29Highly-driven management.36Seasonality.37Financial analysis.38P&L.38Balance sheet and cash flow.423,Elsa Yang(852)2800-8523,Asia Pacific Equity Research17 March 2011,Positive driversA vertically integrated
27、 retailing model:LOccitane has full control over its brandsand products.The company conducts its own sourcing,R this should also double BRICs sales contribution to nearly 19%byFY15E.Well set for a steady recovery in developed markets:LOccitane recordedconsistent market share gain in developed market
28、s during 2007-2010 against thestagnant cosmetic population and overall sluggish economies in 2008-2009.Thecompanys top-four mature markets sales grew by c.8%Y/Y in FY10 andcontributed c.57%of top line.We expect to see higher positive SSS growth on therecovery in developed markets.Therefore,sales gro
29、wth in developed markets shouldaccelerate to around 13%CAGR over FY11E-14E.Although the faster-growing EMmarkets will dilute the developed markets sales weighting to around 48%by FY15E,4,Elsa Yang(852)2800-8523,Asia Pacific Equity Research17 March 2011,these markets still serve as the resilient cash
30、 cows,ensuring cash flow due to highmargins.This should support an attractive free cash flow yield of near 5%in FY12E.Margins to expand on production leverage and optimized mix:Thereorganization of two self-owned production plants in France should increase theutilization,and thus gross margins;profi
31、tability should also benefit from theincreasing contribution of higher-margin face-care products and travel-retailbusiness;operational efficiency should improve on the application of SAP in FY12E;the vertically integrated retailing model further consolidates margins along the valuechain.Therefore,EB
32、IT margins should rise to above 21%by FY14E,staying amongthe top of the industry.Well-positioned in a sweet spot:LOccitane is the beneficiary of:(1)rising demandfor natural and organic products due to the trend towards LOHAS(lifestyles ofhealth and sustainability);(2)fast-growing skincare segment,dr
33、iven by the agingpopulation in mature markets and rising income in emerging markets;(3)shiftingshopping behavior towards beauty-specialty retailers;and(4)rising aspirationalconsumption.An increasingly notable PRC luxury play:In our view,LOccitane will benefitfrom the rising luxury consumption in Chi
34、na.We expect the China store counts tojump from FY10s 47 to 74 in FY11 and then to almost 130 stores by FY15.In theFY11 annual results,we expect the company to disclose China sales separately,withabout a 5%contribution to total revenue.Since Hong Kong is generally regarded asan integral part of the
35、PRC luxury consumption story,these two markets combinedsales should contribute nearly 14%of total sales in FY11 and reach 20%by FY15,from FY10s 11%.This would make them the second-largest market for LOccitane.Risks to our viewCurrency risks:LOccitane generates sales revenue in over 15 different curr
36、enciesand reports its results in euro.Around 46%of the total costs(cost of good sold andoperating expenses)were denominated in euro,while approximately 27%of saleswere denominated in euro.Therefore,the company benefits from weakness in theeuro,and suffers when the euro strengthens.Based on our sensi
37、tivity analysis(detailsbelow),every 10%drop in the euro vs.the yen(other assumptions held equal)shouldlead to 4%upside in FY12E earnings,and every 10%drop in the euro vs.the US$(other assumptions held equal)should lead to 2%upside in FY12E earnings.Regulation risks:LOccitane operates in different co
38、untries and faces variousindustry regulations.Changes in existing laws and regulations are likely to raiseentry barriers and lead to additional costs.For instance,in 2010,the company faced asupply shortage of some best-selling items in China for six months due to the changein regulations in the coun
39、try.This discounted the companys fast growth in thecountry to some extent.Execution risks:Some of the markets are highly competitive,with well establishedinternational competitors armed with greater resources.New local entrants wouldalso stir up competition.The rapidly changing competitive landscape
40、,therefore,islikely to increase execution risks,especially in emerging markets.Supply risks:Nearly all the natural and organic ingredients used in LOccitanesproducts are derived from plants and other natural produce grown in or around5,Elsa Yang(852)2800-8523,Asia Pacific Equity Research17 March 201
41、1,Provence.The company also sources most of the shea butter from Burkina Faso inAfrica.In addition,it sources all the packaging materials from a large number ofthird-party suppliers.Therefore,an abrupt shortage in supply or delays in deliverydue to natural disasters,adverse weather conditions or oth
42、er inclement factors wouldnegatively affect the business.Quality risks:Quality control is critical in the cosmetics and personal-care industry.Any contamination,product safety or other quality incidents could cause seriousdamage to the brand and long-term development.6,Elsa Yang(852)2800-8523,Asia P
43、acific Equity Research17 March 2011,Valuation and share price analysisPEG is our main valuation methodologyOur Mar-12 price target of HK$24 is based on a 24%earnings CAGR over FY12-14E and a PEG of 1.1x,a 20%discount to the global peer average of 1.4x and almosta 10%discount to the HK-listed consume
44、r discretionary sector average of 1.2x.Thediscounts mainly reflect LOccitanes smaller scale compared with its global peers aswell as its shorter trading track record.LOccitane was listed in May 2010 with anIPO price of HK$15.08.The share price has appreciated by around 15%since itsIPO.Our price targ
45、et corresponds to 26x FY12E P/E,suggesting another c.40%upside.Compared to the global cosmetic brands,we believe the below factors should betaken into account for the premium valuation of LOccitane in terms of P/Emultiples:Sustainable higher growth:Well balanced exposure to both DMs and EMssuggests
46、the company should benefit the best from both the worlds in terms ofhigh growth leverage on economic recovery of DMs,greater penetration as wellas start-up type of high growth in EMs.Premium brand positioning:We positioned to capture a global and Chinaluxury market rebound.Higher ROE and higher marg
47、ins:LOccitane generates superior profitabilityand returns compared with its global peers,on the back of its unique verticallyintegrated business model.Comparable analysisBeauty and skin careWe include major players in the segment across the countries for our analysis.Someindustry heavyweights such a
48、s Estee Lauder and LOreal have acquired natural andorganic-based cosmetics brands.Although they are not clear-cut comparables,theirvaluations should shed some light on LOccitane in terms of global brand recognitionand market presence as well as overall cosmetic market growth prospects.Although globa
49、l peers trade at lower P/Es than LOccitane,this reflects their lowergrowth prospects,in our view.On a PEG basis,the group trades at around 1.4x onaverage,much higher than LOccitanes 0.9x.Personal careGlobal personal care companies are expected to grow at half of the growth rate ofLOccitane.Therefore
50、,similar to the beauty and skin-care comparables,this groupsaverage PEG is around 2.2x over two years of earnings,despite the lower P/Emultiples.Specialty retailersSa Sa and Dairy Farms Mannings are the two closest comparables in terms ofspecialty retailing formats.Nevertheless,self-owned branded pr
