Hong Kong Property & Retail Sector...also stand to benefit from the booming retail market. In the...

ASIAN INSIGHTS

ed- JS / sa- CS/CW

17 July 2018 DBS Group Research . Equity

Bridge of tourists New mega infrastructure creates better links with China

Higher tourist visitation a boost to retail & hotel sectors

Top picks: Wharf REIC (1997), Luk Fook (590) & Sa Sa (178)

New mega infrastructure creates better links with China. The

soon-to-be-commissioned Express Rail Link (XRL) & HK-Zhuhai-Macau

Bridge (HZMB) will result in better transportation connectivity

between HK & Mainland China. We estimate XRL could bring in 3m

additional Mainland tourists p.a. from 2019, lifting tourist arrival

numbers by a decent 7% CAGR for 2017-20. But we should not

underestimate HZMB’s medium-term potential after the Tuen Mun-

Chek Lap Kok Link & SKYCITY come onstream by 2020. In the longer

run, prosperity of the Greater Bay Area could raise mobility within the

region and increase its GDP (+9% CAGR to US$4.6tn by 2030) and

spending power, hence further supporting the positive prospects.

Increased tourist visitation: a boost to retail and hotel sectors.

Riding on flourishing inbound tourism, the HK retail and hotel

sectors should run on a multi-year uptrend. Better retail sales could

beef up turnover rents and strengthen retail reversionary growth.

Hotels should also be able to raise room rates further, pushing up

the Revenue per available room (RevPAR) by 8-10% a year during

2018-19, in our view.

Stock recommendations. Major HK-based retailers like Chow Tai

Fook, Luk Fook, Chow Sang Sang and Sa Sa, and department store

operator Lifestyle will outperform their peers to capture sound sales

growth. They should benefit even more from better operating

leverage ahead, given at least c.50% of their HK/Macau revenue

comes from PRC tourist consumption. With a strong retail footprint

in Tsim Sha Tsui & Causeway Bay, Wharf REIC & Hysan Development

also stand to benefit from the booming retail market. In the hotel

sector, Langham Hospitality Investments and Regal REIT are our

preferred pure Hong Kong plays. Far East Consortium also offers

investors a good exposure to the three-to-four-star hotel market.

HSI: 28.316

ANALYST Jeff YAU CFA, +852 2820 4912; [email protected] Mavis HUI +852 2863 8879; [email protected] Ian CHUI +852 2971 1915; [email protected] Jason LAM +852 29711773 [email protected]

Top picks

Source: DBS Bank (Hong Kong) Limited (“DBS HK”)

Note: Prices used as of 6 July 2018

Closing 12-m

T icker Mkt Cap Price tgt Px Recom

HK$bn (HKD) (HKD)

Hong Kong Property

Far East Consortium 35 HK 10 4.52 5.53 BUY

Hysan Development 14 HK 44 42.4 51.15 BUY

Langham Hospitality 1270 HK 7 3.17 3.68 BUY

Regal REIT 1881 HK 7 2.3 2.61 BUY

Wharf REIC 1997 HK 171 56.45 65.4 BUY

Consumer

Chow Sang Sang 116 HK 10.18 14.82 20.65 BUY

Chow Tai Fook 1929 HK 85.60 8.34 n.a. NR

Lifesty le 1212 HK 26.60 16.70 18.72 BUY

Luk Fook 509 HK 18.99 31.65 40.75 BUY

Sa Sa 178 HK 14.59 4.53 6.51 BUY

Asian Insights SparX

Hong Kong Property & Retail Sector Refer to important disclosures at the end of this report

Asian Insights SparX Hong Kong Property & Retail Sector

ASIAN INSIGHTS

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

Table of Contents

Investment summary 3

New infrastructure to link Hong Kong and China 4

Inbound tourism – from strength to strength 10

Retail market recovery gaining momentum 11

Hotel boom underway 16

Retailers 19

Retail landlords 20

Hotel plays 21

Appendix 22

HK retail sales 22

PRC tourist data 24

Greater Bay Area 25

Stock Profiles 34

Far East Consortium 34 Hysan Development 34 Langham Hospitality Investments 34 Regal REIT 34 Wharf REIT 34 Chow Sang Sang 34 Chow Tai Fook 34 Lifestyle International 34 Luk Fook Holdings 34 Sa Sa 34

Note: Prices used as of 6 July 2018


ASIAN INSIGHTS

Investment summary

Forthcoming mega infrastructure projects to link up Hong

Kong with Mainland China. With the forthcoming

commissioning of the Express Rail Link (XRL) and Hong Kong-

Zhuhai-Macau Bridge (HZMB), Hong Kong will become better

connected with Mainland China than ever before, thus linking

Hong Kong to a brighter future.

Express Rail Link shortens travelling time, pointing to better

connectivity. Targeted for commissioning in the third quarter of

2018, the 26-kilometre XRL will link up Hong Kong with

Shenzhen, Guangzhou, and the high-speed railway network in

Mainland China. The travelling time between Hong Kong and

major cities in China will be considerably shorter.

Better than air travel for those within six hour travelling radius

by train. The benefits of using the XRL diminishes for Mainland

travellers when travel distance increases. We believe the XRL

would primarily attract those residing within a six-hour

travelling radius by high-speed train due to time and cost

savings. Residents in Wuhan and Xiamen are cases in point. On

the other hand, travelling to Hong Kong by air remains more

time and cost efficient for those residing in Shanghai and

Beijing.

Additional 3 million tourists per annum. We estimate that XRL

would bring in an additional three million Mainland tourists per

annum from 2019, made up of both day-trippers and

overnight visitors. This represents c.5% of total tourist arrivals.

Appeal to business travellers and middle income class. A mega-

sized office project is planned to be built above the West

Kowloon Terminus of the XRL. Coupled with easy accessibility

to Central, the XRL should hold strong appeal to business

travellers from China. Besides, the high-speed train should

become the preferred mode of transportation among frequent

individual travellers, mainly the middle income class and leisure

travellers, commuting between Mainland China and Hong

Kong.

Hong Kong-Zhuhai-Macau Bridge to be preferred transport

mode between New Territories and Macau/Zhuhai. The HZMB

is expected to come onstream in the second half of 2018,

greatly improving the connectivity between Hong Kong and

the western Pearl River Delta. In particular, the HZMB will be

the preferred transportation mode to commute between New

Territories and Macau/Zhuhai.

Enormous long-term potential to be unlocked. Between these

two infrastructure projects, the XRL should give a stronger

boost to Hong Kong’s inbound tourism initially. But long-term,

the potential of the HZMB should not be overlooked especially

when the Tuen Mun-Chek Lap Kok Link and SKYCITY becomes

operational.

Since Hong Kong’s hotel and retail industry are highly

dependent on Mainland tourists, improving the accessibility of

Mainland tourists into Hong Kong via XRL and HZMB should

give the recovering retail and hotel sectors an additional push.

Top brand retailers selling luxuries and cosmetics to also take

the lead. In view of at least 20-30% higher price points in

Mainland China mainly attributable to taxes, PRC tourists save

more when buying premium global brands and jewelleries &

watches in HK/Macau that are within close proximity.

Cosmetics have also been their favourite merchandises

considering their affordable average ticket sizes to suit

everyone. Hence, these categories will benefit the most along

with a rising number of Mainland visitors, as already seen in

their strong contribution of c.50% or higher HK/Macau sales in

these segments. To best play on the tourist boom, we like

prominent HK-based operators, including Chow Tai Fook, Luk

Fook and Chow Sang Sang in jewelleries & watches; Sa Sa in

cosmetics; as well as Lifestyle’s department stores that mainly

focus on luxuries & cosmetics. Most of these retailers are

trading at an undemanding valuation, offering about 15-30%+

upside on a 12-month horizon.

Wharf REIC and Hysan Development emerge as prime

beneficiaries of the retail market boom. Retail plays, especially

those selling expensive luxury items and cosmetics, should

continue to see better retail sales growth. This should translate

into higher turnover rent, immediately followed by stronger

retail reversionary growth in the years ahead. These factors

should drive the earnings growth for major retail landlords

including Wharf REIC and Hysan Development. Wharf REIC is

trading at 26% discount to our assessed current net asset

value (NAV) while Hysan Development is trading 44% below

our estimated current NAV. Despite these shares’

outperformance year-to-date (YTD), there is scope for further

share price appreciation in the year ahead with retail sector

expected to go from strength to strength.

Langham Hospitality Investments, Regal REIT, and Far East

Consortium to tap growing demand for hotel accommodation.

Revenue per available room (RevPAR) of Hong Kong hotels

should remain on an upward trajectory in the foreseeable

future. Far East Consortium, Langham Hospitality Investments,

and Regal REIT should benefit from this favourable sector trend

in our view. Overall, Langham Hospitality Investments and

Regal REIT are each currently offering distribution yields of

>6% for FY18-19. These stocks are BUYs with respective TPs of

HK$3.68 and HK$2.61. Far East Consortium is trading >60%

below our appraised current NAV. In addition to a recovery in

hotel earnings in Hong Kong, its overseas business expansion

will also play a crucial role in dictating its share price

performance. Maintain BUY with TP of HK$5.55


ASIAN INSIGHTS

New infrastructure to link Hong Kong and China

The Express Rail Link to be commissioned soon. Serving as

the final phase of the Guangzhou-Shenzhen-Hong Kong

Express Rail Link, the 26-km long Hong Kong Section of the

Express Rail Link (XRL) is an underground high-speed

railway line running from West Kowloon Terminus to

Shenzhen Futian, which is then linked with the Guangshen

(Guangzhou and Shenzhen) section that has been

inaugurated in phases since 2011.

Construction works for the XRL commenced in Jan 2010.

The project was 98.6% completed as of Dec 2017. It is

targeted to open in 3Q18 with trial operations commenced

in 2Q18.

The XRL is funded by the Hong Kong SAR Government,

while MTR Corporation (MTRC) is entrusted for the design

and construction of the XRL. MTRC will also be appointed as

the operator of the XRL under a service concession

agreement upon completion of construction.

The legislation of co-location arrangement was recently

enacted by the legislative council of the HKSAR. The co-

location arrangement will maximise the service convenience

for passengers and enables the line to realise the full

transport, economic, and social benefits.

Due to several difficulties encountered since construction on

the project commenced, the estimated project cost was

revised up to HK$84.42bn from the original budget of

HK$65bn with project completion delayed to 3Q18. The

government agreed to finance the project up to the revised

estimated cost of HK$84.42bn with further cost overruns to

be borne by MTRC. As a result of cost overruns, the overall

expected Economic Internal Rate of Return (EIRR) of the XRL

project has reduced from c.6% to c.4% according to the

HKSAR Government estimates made in 2015.

The high-speed cross boundary XRL will connect Hong Kong

to Shenzhen, Guangzhou and then to the National High-

speed Railway (HSR) Network in China. The HSR network

has been rapidly expanding over the past decade. It started

from only one HSR line (Beijing-Tianjin intercity railway) in

2008 connecting the two major cities with a total length of

c.120km, and has progressed towards the formation of a

national high-speed rail grid that comprises of eight high-

speed rail corridors (four between north and south and four

between east and west) with a total length of c.25,000km

by end-2017. In 2018, China will extend the total HSR

length by 3,500km to c.28,500km with targets to achieve

30,000km (covering c.80% of large cities) and 38,000km by

2020 and 2025 respectively.

Map of China’s High-Speed Rail network

Source: DBS HK

China’s High-Speed Rail development targets

Source: China Railway, DBS HK

Pursuant to a Memorandum of Understanding signed

between HKSAR Government and China Railways

Corporation in Jan 2018, XRL will operate using 127 train

pairs on a daily basis in the early stages of service

commencement. Of this, 114 train pairs will provide short-

haul services between West Kowloon Terminus and

Futian/Guangzhou South station as detailed in the table on

the next page. Fares are expected to lie between HK$80 and

HK$260. The remaining 13 pairs are direct long-haul trains

to cities including Xiamen, Wuhan, Hangzhou, Shanghai,

and Beijing.

Hong Kong

Shantou(2.5 hrs)

Xiamen(3.5 hrs)

Nanchang(4.5 hrs)

F uzhou(5 hrs)

Nanjing(8 hrs)

Hangzhou(7 hrs)

Nanning(4 hrs)

Changsha(4 hrs)

Beijing

Xi'an(9 hrs)

Kunming(6.5 hrs)

Zhengzhou(7 hrs)

Chongqing(11.5 hrs)

Chengdu(12 hrs)

Shanghai(8 hrs)

Wuhan(5 hrs)

Guangzhou

0

5,000

10,000

15,000

20,000

25,000

30,000

2017A 2018E

Total HSR length

Length of HSR (km)


ASIAN INSIGHTS

Expected ticket fare

Source: HKSAR Government, DBS HK

Planned daily train pairs


Reduced transportation time. It is clear that the XRL will

shorten the travelling time between Hong Kong and

Mainland China. Based on the estimates from the HKSAR

Government, the XRL could save an aggregate of c.39m

hours of travelling time on an annual basis. For example, the

travelling time between Hong Kong to Shenzhen (Futian)

and Guangzhou will be shortened to 14 minutes and 48

minutes respectively. It takes 4 hours to travel to Hong Kong

from Xiamen and 7 hours 45 minutes from Shanghai. This

makes it easier for Mainland travellers to pay a visit to Hong

Kong or vice versa.

Estimated travelling times between Hong Kong and China cities (Short-haul services)


Estimated travelling times between Hong Kong and China cities (Long-haul services)


Primary attraction of Chinese visitors from within the 6 hour

travelling radius. Our analysis suggests that the cost and

time benefits by travelling on the XRL diminishes as the

distance increases. When distance increase, it is not only

time required for travelling with the XRL that increases but

also the corresponding cost rises dramatically and could

exceed that of air travel. As shown in the table below, travel

to Hong Kong from Beijing and Shanghai compares

unfavourably with air travel in terms of time and cost. On

the other hand, those residing in Wuhan and Xiamen would

find it more time and cost effective to travel to Hong Kong

by XRL. All factors considered, we believe the launch of XRL

would primarily help to attract more visitors residing within

the 6-hour travelling radius by high-speed train such as

Wuhan, Xiamen and other nearby cities.

0

50

100

150

200

250

300

Futian ShenzhenNorth

Humen GuangzhouSouth

Expected ticket fare (HK$)

0

10

20

30

40

50

60

70

80

90



Daily train pairs (pairs)

0

10

20

30

40

50

60



Time of travel (mins)

0

100

200

300

400

500

600

Shanto

u(C

hao

shan S

tation)

Chan

gsh

a

Xia

men

Wuhan

Nan

hca

ng

Fuzh

ou

Zhengz

hou

Han

gzh

ou

Shangh

ai

Bei

jing

Time of travel (mins)


ASIAN INSIGHTS

Comparison between travel by air and HSR

Source: DBS HK

The XRL project is expected to bring in a meaningful

number of additional Mainland tourists, both day-trippers

and overnight visitors, to Hong Kong. The HKSAR

Government estimates the daily ridership of XRL to reach

c.109,200 upon commencement of services in third quarter

2018, gradually increasing to 119,200 by 2021 and 149,800

by 2031. About 49% of such commuters are expected to be

non-Hong Kong residents including business travellers

(18%) and non-business travellers (31%). Assuming 1) an

equal split between inbound and outbound travellers, and

2) 30% of inbound travellers are additional travellers carried

by the XRL, our calculation shows that the XRL will bring in

an additional 0.76m, 3.02m and 3.11m of Mainland visitors

in 2018, 2019 and 2020 respectively. These represent 1.3%,

5.2% and 5.3% of total visitors in 2017.

Breakdown of ridership of XRL


Breakdown of cross-border travellers (after XRL is operational)


Better connectivity with Mainland China. To conclude,

leveraging on the connection to China’s rapidly expanding

HSR network, the forthcoming XRL will open up a new

alternative to travel between Hong Kong and Mainland

China, strengthening the accessibility of Hong Kong among

those visitors in other cities outside of Guangdong.

Appeals to business travellers… . The XRL is served by West

Kowloon Terminus which is one of largest high speed train

stations around the globe with usable floor area of 4.3

million square feet. West Kowloon Terminus is in downtown

Hong Kong. It is adjacent to Kowloon Station above which

the renowned International Commerce Centre (ICC) and

Elements (a luxury shopping mall) are located. Hong Kong

Station is just one stop away from Kowloon Station. It is in

core Central, Hong Kong’s main business district.

Moreover, a commercial project standing above West

Kowloon Terminus will be up for tender in the next nine

months. This mega sized development will offer total gross

floor area (GFA) of 3.16 million square feet, primarily for

office use. We believe that this strategically located office

development will become an attractive alternative choice for

office users in Central when completed in 2025. With easy

accessibility to key business areas, the XRL should hold

strong appeal to business travellers from Mainland China.

T rav elling t ime to HK

(Cent ral):

v ia t rain

(hours)

v ia air

(hours)

F ee (t rain)

HK$

F ee (air)

(HK$)

Beijing CBD (China World

Trade Centre in Chaoyang

district)

10.25 10.00 1,383.58 933.46

Shanghai (Shanghai IFC) 9.75 9.00 1,337.90 1,078.35

Wuhan (Wuhan Centre) 6.50 7.75 930.49 1,108.77

Xiamen (Zhong Shan Road) 5.42 7.08 541.60 809.38

HK Business

18%

HK non-business

33%

Non-HK Business

18%

Non HK non-

business31%

HKXRL15%

Through train1%

Boundary train43%

Cross-boundary

coach37%

Cross-boundary

ferry4%


ASIAN INSIGHTS

… and also middle class leisure travellers. We also expect

the high-speed train to be a preferred mode of transport

among frequent individual travellers commuting between

Mainland China and Hong Kong, who are usually from the

middle income class and leisure travellers. They would have

travelled to Hong Kong before. In addition to shopping,

they would also like to explore and experience this city in

their own way when visiting Hong Kong again. Over time,

we expect more Mainland tourists to travel to Hong Kong

individually instead of in group tours. The commissioning of

the XRL offers travellers more flexibility when planning trips

to Hong Kong. With improved connectivity following the

opening of the XRL, we expect more individual travellers

(from Mainland China) making frequent visits to Hong Kong

particularly over long weekends or holidays.

Express Rail terminus in West Kowloon

Source: DBS HK

Hong Kong-Zhuhai-Macau Bridge (HZMB)

The Hong Kong-Zhuhai-Macau Bridge (HZMB) links up Hong

Kong, Zhuhai, and Macau. This mega infrastructure project

will greatly improve the connectivity between Hong Kong

and Western Pearl River Delta (population: >32 million). It

should play a crucial role in the Great Bay Area initiative.

Map of Hong Kong Zhuhai Macau Bridge

Source: HK Highways Department

Population of cities in the Western Pearl River Delta

Source: CEIC

The HZMB consists of a main bridge and link roads which

connect to boundary crossing facilities at each of the three

territories. Construction of the main bridge commenced

back in late 2009. The HZMB is anticipated to be

commissioned later this year.

The main bridge is a dual 3-lane carriageway which spans a

23km suspension bridge and a 6.7km subsea tunnel. On the

eastern end of the HZMB, a boundary crossing facility is

being constructed on an artificial island immediately east of

the airport and two highways, the Hong Kong Link Road

(HKLR, 12km) and the Tuen Mun Chek Lap Kok Link (TM-

CLKL, 9km). The HKLR connects the Hong Kong boundary

crossing facility to the main bridge. The TM-CLKL connects

Tuen Mun, the boundary crossing facility, and North Lantau

Island.

Currently, motor vehicles travelling from Hong Kong to

Zhuhai and Western Guangdong province have no choice

but to travel north and take a 200-km detour via the Humen

0

1000

2000

3000

4000

5000

6000

7000

8000P

op

ula

tio

n '0

00

per

son

s


ASIAN INSIGHTS

Bridge. The HZMB is expected to reduce travel time and

distance between Hong Kong and Zhuhai by up to 60% to

80%. We expect this improvement in connectivity to drive

an increase in both passenger and freight traffic between

Hong Kong and cities in the Western Pearl River Delta.

Travelling distance/time between Hong Kong & Zhuhai

Source: DBS HK

According to a feasibility study conducted in 2008, traffic

flow for the HZMB is estimated at 9,200-14,000 vehicles per

day initially. The government has not provided any updates

to this projection.

For the long-term traffic flow forecast, the consultants

forecast that 29,100 vehicles and 42,000 vehicles will use

the HZMB per day by 2030 and 2037 respectively. This

translates into respective passenger flows of 126,000 and

175,000 per day.

After the opening of the HZMB, there will be a 24-hour bus

service covering the cross boundary facilities. It will be

served by 120 buses. Travelling time is about 40 minutes. It

is estimated that the maximum daily ridership could reach

96,000. In response to high demand, the Mainland and

Hong Kong authorities increased the quota for Mainland-

Hong Kong cross boundary private cars (dual license plates)

by 7,000 to 10,000 in Dec-17.

Currently, the high-speed ferry service is the most popular

transport mode for passengers commuting between Hong

Kong and Macau/Zhuhai. According to the Hong Kong

Marine Department, there were 36 catamarans and 11

jetfoil vessels operating between Hong Kong and Macau in

2017.

The main operators are TurboJET, owned by Shun Tak

(242.HK), and Cotai Water Jet, owned by Sands China

(1928.HK). There are two main high-speed ferry terminals in

Hong Kong - Shun Tak Centre in Sheung Wan and China

Hong Kong City in Tsim Sha Tsui. Smaller piers include

SkyPier, which is directly connected to the Hong Kong

International Airport, and Tuen Mun Ferry Terminal. In

2017, 12.5m passengers arrived in Hong Kong and 14.8m

passengers departed from Hong Kong via these ferry

terminals.:

Hong Kong-Zhuhai-Macau Bridge to be preferred transport

mode between New Territories and Macau/Zhuhai The ferry

ride usually takes around 60 to 75 minutes depending on

sea and weather conditions. The capacity of the ferries

range from 180 to >400 passengers, depending on the

vessel. The ferries to and from Shun Tak Centre and Macau

depart every 15 minutes from 7am to midnight with fewer

frequent sailings from midnight till 7am. Both Shun Tak and

Cotai Water Jet have additional sailings during peak hours.

Basic fares for each leg of the trip ranges from HK$160

(Macau to HK) to HK$170 (HK to Macau). Fares for shuttle

bus services between cross boundary facilities is HK$80. If

we take into account transportation costs needed to get to

cross boundary facilities, the overall cost should be similar

for taking ferry and bus rides

For Hong Kong Island residents, the ferry is still the most

convenient transportation option to Macau even with the

HZMB. For those residents in the New Territories, the HZMB

is expected to save up to 30 minutes of travelling time.

Assuming daily traffic flow of 8,400 vehicles in 2019, daily

ridership is estimated at 38,300. Assuming 51% of such

commuters are non-Hong Kong residents and an equal split

between inbound and outbound travellers with 30% of

inbound tourists being additional travellers carried by the

HZMB, our analysis suggests that the HZMB should bring in

additional inbound tourists of 1.07m in 2019, rising to

1.12m in 2020 and 1.22m in 2021. Overall, in comparison

to the XRL, we expect the HZMB to initially bring in fewer

tourists to Hong Kong.

Enormous long-term potential to be unlocked. However, the

long-term benefits of HZMB are expected to gradually flow

in when the TM-CLKL and SKYCITY come onstream starting

from 2021.

The Tuen Mun-Chek Lap Kok Link Road (TM-CLKL)

The Tuen Mun-Chek Lap Kok Link Road (TM-CLKL) is a 9km

highway which connects Tuen Mun and North Lantau

Island. The TM-CLKL has a 5km subsea tunnel northern

section and a 4km bridge/viaduct southern section. Using

existing roads, residents of Tuen Mun and western New

Territories have to travel >30km to the airport. The new TM-

CLKL will cut the distance by up to 22km.

Upon completion in 2020 at the earliest, the north-western

New Territories should benefit from increased tourist flow.

This augurs well for hotels such as Hong Kong Gold Coast

Hotel and shopping centres like V. City and Tuen Mun Town

Plaza in the area.

Moreover, feasibility studies for the 9km Tuen Mun Western

Bypass (TMWB) linking the Shenzhen Bay Bridge in the

north and the TM-CLKL in the south began in Oct 2017.

Current V ia HZMB Sav ings

Origin Dest inat ion Distance

(km)

T rav el

T ime

Distance

(km)

T rav el

T ime

Distance/T rav el

T ime

Kwai Chung

Container Port HK

Zhuhai > 200km 3.5hr 65km 75min >60%

HK International

Airport

Zhuhai > 200km 4hr 40km 45min >80%


ASIAN INSIGHTS

Tuen Mun-Chek Lap Kok Link Road (TM-CLKL)

Source: HK Highways Department

SKYCITY – a new destination for both locals and tourists.

Proposed by the Hong Kong Airport Authority, SKYCITY,

which was first announced in 2016, is Hong Kong’s major

integrated development with retail complexes, dining and

entertainment facilities, hotels and offices. This project will

be developed in phases. Sitting on approximately 25

hectares of land, SKYCITY is in close proximity with the

passenger terminals of the Hong Kong International Airport

on one hand and cross boundary facilities of the HZMB on

the other. Upon the commissioning of the HZMB and TM-

CLKL, the strategically located SKYCITY will see major

improvements in transportation connections. This new

destination should attract substantial interest from local

residents particularly those in the western New Territories,

as well as Mainland Chinese visitors, especially those from

the Greater Bay Area.

SKYCITY

Source: HK Airport Authority

The Airport Authority has gradually been awarding the

development rights of various land sites to private

developers in accordance with the development schedule of

the entire project.

In Feb 2017, Regal Hotels international was awarded the

development rights for a new hotel at SKYCITY by the

Airport Authority for a consideration payable in form of a

non-refundable rental payment of HK$2.189 bn. The

estimated total investment cost is close to HK$5bn. The

hotel project is the first phase of the SKYCITY integrated

development..

With a site area of 71,580 square feet, this hotel project has

permissible gross floor area of 362,750 square feet. Regal

Hotels plans to develop a 13-storey 1,203 room hotel with

extensive banquet, meeting and food and beverage

facilities. Branded as Regala Skycity Hotel held under a sub-

lease from the Airport Authority, it will operate as a full

service hotel targeting commercial, airline related, leisure

and meeting businesses. The foundation works has

commenced with project completion targeted for 2020.

In May 2018, New World Development was awarded the

rights to develop and manage the commercial development

at SKYCITY near the HKIA at Chek Lap Kok. This commercial

site is located at Site A2 and A3 of SKYCITY. Scheduled for

completion in phases from 2023-27, this development will

comprise retail, dining and entertainment facilities with a

maximum gross floor area of 3.77m square feet. The Airport

Authority will grant a lease to New World Development on

this commercial development for a term up to Sep 2066.

Pursuant to the agreement, New World Development will

pay the Airport Authority the higher of a guaranteed rent or

revenue rent that represents 20% of gross revenue derived

from the project (with subsequent adjustment to 30%)

throughout the lease term. The total investment cost is

estimated at c.HK$20bn.


ASIAN INSIGHTS

Inbound tourism – from strength to strength

Inbound tourism recovery, starting from early 2017, has

continued to gather momentum in 2018. Total visitor

arrivals grew 9.6% to 25.9m in Jan-May 2018 (5M18), led

by Mainland Chinese tourists. The number of Mainland

tourists rose 12.7% to 20.1m, representing 78% of total

visitors. Overnight visitors and same day travelers from

Mainland China grew 8.9% and 15.2% respectively. The

short haul market registered a 1.7% fall in tourist arrivals,

dragged by Taiwan and Southeast Asia. Among short haul

markets, Japanese visitors showed 5.3% growth while those

from South Korea fell marginally

Visitors from long haul markets grew modestly by 3.2% in

5M18. In particular, tourists from the US/Canada grew

5.4%.

Visitor arrivals growth – overall

Source: HK Tourism Board, CEIC

Visitor arrivals growth – China


For the full year of 2018, we project that the total number

of visitor arrivals will grow 7.6% to 62.9m, mainly driven by

Chinese tourists. Overnight visitors and day-trippers from

China are forecast to rise 7.4% and 11.8% respectively,

which takes into account the opening of XRL and HZMB.

The long haul market should remain broadly stable.

Due the full-year effect of XRL and HZMB, we estimate

11.5% growth in Mainland tourists in 2019. This should in

turn lead to another 9.1% rise in overall tourist arrivals.

Overall, we project total visitor arrivals to post 3-year CAGR

of 6.8% in 2017-20, with the corresponding growth of

8.4% and 4.9% for day-trippers and overnight visitors. The

increase would be primairly driven by Mainland Chinese

visitors. We forecast overnight visitors and day-trippers from

China to rise at a 3-year CAGR of 6.7% and 9.9%

respectively. The corresponding growth for day-trippers

should be higher due to the completion of HZMB which

would enhance the connectivity between Hong Kong and

Great Bay Area.

Total visitor arrivals

Source: DBS HK

(30)

(20)

(10)

0

10

20

30

40

50

Jan/0

8

Jul/08

Jan/0

9

Jul/09

Jan/1

0

Jul/10

Jan/1

1

Jul/11

Jan/1

2

Jul/12

Jan/1

3

Jul/13

Jan/1

4

Jul/14

Jan/1

5

Jul/15

Jan/1

6

Jul/16

Jan/1

7

Jul/17

Jan/1

8

Yoy, %May-18: 8% y-o-y

9.6% y-o-y5M18:

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

Jan/0

8Ju

l/08

Jan/0

9Ju

l/09

Jan/1

0Ju

l/10

Jan/1

1Ju

l/11

Jan/1

2Ju

l/12

Jan/1

3Ju

l/13

Jan/1

4Ju

l/14

Jan/1

5Ju

l/15

Jan/1

6Ju

l/16

Jan/1

7Ju

l/17

Jan/1

8

Yoy, %May-18: 10.6% y-o-y

12.7% y-o-y5M18:

0

10

20

30

40

50

60

70

80

2014 2015 2016 2017 2018F 2019F 2020F 2021F

(m p

erso

ns)


ASIAN INSIGHTS

Retail market recovery gaining momentum

HK retail sales continued to log sequential improvements

and achieved a strong growth of 13.7% year-on-year (y-o-y)

during Jan-May 2018. Specifically, categories well-liked by

Mainland tourists scored the best performance, including

jewellery & watches (+22.8%), and cosmetics & medicines

(+17.4%). Such robust growth was predominantly driven by

increasing sales volume, as Mainland tourist arrival numbers

also grew strongly by 12.9% to 20m visitors during the

period, versus a mere 3.9% growth in 2017.

HK total retail sales by value & volume (% change y-o-y)

*Jan-Feb data were combined to avoid seasonality impacts from the Chinese New Year.

Source: Census & Statistics Dept.

HK retail sales by category, Jan-May 18 (% change y-o-y)

Source: Census & Statistics Dept

Our channel checks also pointed to strong same-store sales

growth (SSSG) in the first half of 2018 across key retailers in

HK. Luxury watch retailers including Emperor Watch and

Oriental Watch achieved >30% SSSG. Major department

store operator, Lifestyle, also achieved double-digit SSSG for

its flagship SOGO Store in Causeway Bay given strong

efforts in product-mix refinement (2017 SSSG: +4.3%). In

addition, Sa Sa scored c.20% SSSG, inclusive of a robust

25.3% SSSG in the second quarter. Leading jewellery

retailers like Chow Tai Fook, Luk Fook and Chow Sang Sang

all posted SSSG in the teens during the first half of 2018.

Moreover, key global luxury brands like Prada were

estimated to have recorded >10% SSSG during the period.

Estimated SSSG in HK/Macau in first six months 2018 (% change y-o-y)

Note: all data are from channel checks and estimates, and had been adjusted to calendar-year basis

Source: DBS HK

Mainland tourists are crucial

Local demand YTD remains supportive, on the back of a

stable economy and the increase in purchasing power of the

middle class after salary tax cuts in the 2017/18 tax year.

More importantly, continuous improvement in tourist arrival

numbers has helped to boost retail sales growth in HK. As

HK/Macau are tax-free shopping paradises with close

proximity to China, Mainland visitors consistently contribute

to a significant portion of retail revenue in both cities. Some

examples to highlight include Prada which is estimated to

capture c.70% of its HK/Macau sales from Chinese tourists.

Sa Sa, Lifestyle’s SOGO Store (Tsim Sha Tsui), as well as Luk

Fook also captured 69%, c.60% and 58% of their

respective HK/Macau sales from Mainland visitors.

-4%

0%

4%

8%

12%

16%

20%

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

Nov-

17

Dec

-17

Jan-F

eb 2

018*

Mar-

18

Apr-

18

May-

18

Total Retail sales (value) Total Retail sales (volume)

22.8

%

17.4

%

13.9

%

13.0

%

7.2

%

1.5

%

13.7

%18.8

%

17.7

%

11.8

%

10.1

%

4.0

%

-1.4

%

12.2

%

-3%

2%

7%

12%

17%

22%

Jew

elle

ry, w

atch

es, cl

ock

s &

valu

able

gifts

Medic

ines

& c

osm

etics

Dep

art

men

t st

ore

s

Clo

thin

g, fo

otw

ear

& a

llied

pro

duct

s

Food, a

lcoholic

drinks

&to

bacc

o

Superm

arke

ts

Tota

l

Sales value Sales volume

-5%

5%

15%

25%

35%

45%

55%

Orien

tal W

atc

h

Emper

or W

atch

Life

styl

e (S

OG

O,

CW

B) Sa

Sa

Luk

Fook

Chow

Tai

Fook

Chow

San

g S

ang

Prad

a

2017 1H18E


ASIAN INSIGHTS

Sales contribution from Mainland tourists in HK/Macau (FY17)

# FY17 = 12 months ended Mar 2018

Note: Mainly based on sales transactions settled by China UnionPay, Alipay, WeChat Pay or RMB

Source: DBS HK

A good correlation between sales of discretionary products

and Mainland visitor numbers also reinstates the importance

of tourist consumption in HK. Taking Sa Sa as an example

(demonstrated in the chart below), the close relationship is

especially seen when we trace performance trends between

changes in tourist numbers in HK and Sa Sa’s sales

transactions over the years. A much higher average ticket /

basket size from Mainland tourists (>HK$600) versus Sa Sa’s

local consumers (>HK$200) further highlights the

significance of Chinese tourists in driving sales momentum

of HK/Macau retailers.

Sa Sa: sales volume vs. Mainland tourists to HK/Macau

Source: HK Tourism Board, Company, DBS HK

Last year, Mainland tourist spending in HK reached

HK$189bn in total, out of which HK$131bn (69%) was

spent on shopping, HK$21bn (10.9%) on hotel bills,

HK$20bn (10.8%) on restaurants, and the remainder on

miscellaneous items. Specifically, as much as 88% of

spending by day visitors was for the purchase of

merchandise compared to 60% for overnight visitors. Given

that the proportion of same-day visitors is on an upward

trend, hitting 61.3% of total Chinese tourists in Jan-May

2018 (2017: 58.3% of total), coupled with expectations of a

faster increase in same-day Chinese travellers visiting HK as

transport links with China improves (e.g. high-speed rail,

HK-Zhuhai-Macau Bridge, etc.), we see very good prospects

in the outlook of some leading retailers in HK/Macau. This is

particularly the case for those offering popular product

categories amongst Chinese tourists, such as cosmetics,

jewelleries, high-end watches, and major global brands.

Chinese visitor spending in HK (2017)

Source: CEIC

Chinese tourists to HK (% of overnight visitors vs. same-day)

Source: CEIC

c.70%

69%

c.60%

58%

45%

44%

c.40%

0% 20% 40% 60% 80%

Prada

Sa Sa #

Lifestyle (SOGO, TST)

Luk Fook #

Chow Tai Fook #

Chow Sang Sang

Lifestyle (SOGO, CWB)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

PRC tourist arrivals in HK (%y-o-y)

Sa Sa: No. of transactions (%y-o-y)

Sa Sa: Average basket size (%y-o-y)

88.14%

60.22%68.99%

11.86%

39.78%31.01%

Same-day Overnight All

Shopping Non-shopping

0%

10%

20%

30%

40%

50%

60%

70%

Jan-1

7

Mar-

17

May-

17

Jul-17

Sep-1

7

Nov-

17

Jan-1

8

Mar-

18

May-

18

% Overnight % Same-day


ASIAN INSIGHTS

HK: the biggest beneficiary

Among the major preferred destinations of Mainland

travellers, including domestic tourism within China as well

as outbound travelling to popular tourist destinations like

Japan, South Korea and Singapore, HK pulls in the highest

value of Mainland tourist shopping receipts as a proportion

of total retail sales. This ratio reached 29.3% last year,

which was way above that from other regions and should

expand further.

2017 Mainland tourists’ shopping receipts (as % of retail sales)

Source: CEIC

Diverting inbound Mainland tourists to HK/Macau

So far, a majority of Mainland tourists arrive in HK via trains,

buses, charter shuttles or private cars. In 2017, 84% of all

Chinese visitors come to HK by land, 12% by air, and 4% by

sea. As travelling by land is relatively more affordable,

especially for those based in Southern China, improving

infrastructure including HZMB and XRL should offer more

options for Mainland visitors to come to HK and Macau.

Chinese Visitor Breakdown by Transportation in 2017

Source: CEIC

Last year, as many as 5bn domestic tourists travelled within China, versus merely 131m Chinese tourists that travelled out of the country. As such, improving transport connections between HK/Macau and China could potentially redirect some of the domestic travellers into these two cities, especially HK that is the preferred spot among the top outbound destinations of Mainland Chinese.

Taking the new High-Speed Rail as an example, passengers

could shorten their travel time from various PRC cities upon

its inauguration, especially across the Southern China

Province. This should then create better opportunities to

unlock and channel some of the Chinese inbound tourist

receipts, which amounted to over US$700bn in 2017, into

HK/Macau.

Total spending by Chinese domestic tourists (US$bn)

Source: CEIC

29.3%

2.8%1.6% 1.5% 0.6%

0%

5%

10%

15%

20%

25%

30%

35%

HongKong

Singapore SouthKorea

China Japan

By Land84%

By Air12%

By Sea 4%

473.5

534.0

615.1

713.0

0

100

200

300

400

500

600

700

800

2014 2015 2016 2017


ASIAN INSIGHTS

China's total number of outbound tourists (m)

Source: CEIC, Chinese Outbound Tourism Research Institute

Top destinations of China’s inbound / outbound tourists

Source: Global Independent Travel Report 2017

Currency fluctuation could potentially be a swing factor on

the retail market growth and is among the key things to

watch for. Recently, the Rmb resumed its depreciation trend

against the HK dollar, and this may weigh on the cross

border spending by Mainland tourists.

All considered, we forecast total retail sales values to rise

c.10% in 2018, after allowing for the slightly higher

comparison base starting from second half 2017, followed

by c.8% in 2019. The growth should be mainly supported

by improving tourist spending and local consumption on

discretionary items.

Despite a swift recovery in the retail market, high-street

shops generally recorded much lower rents upon lease

renewals or re-lettings, as the rentals are substantially lower

now than a few years ago.

High street shop rental growth (core areas, accumulative)

Source: CBRE Research, 4Q17

While rentals across street-level stores in the major shopping

districts of HK had corrected for three consecutive years, we

still expect some rent cuts to take place on lease renewals in

2018. Based on a normal 3-year term, this year, retailers are

seeking to re-negotiate for shop rentals that were anchored

since 2015, which are still generally much higher than the

current market level. Besides, among key retail chains that

we have talked to, most of them are looking for at least a

single-digit to 10%+ rental cut upon lease renewals for

street-level stores this year, and are well-prepared to

relocate if landlords refuse to reduce their rentals.

Against this backdrop, we should be able to see retailers’

posting lower rental expenses for 2018 despite some recent

signs of higher asking rents. In the next 2-3 years, even if

the HK retail market rebounds further from rising Mainland

tourist consumption, we expect rental hikes to merely have

a small impact on operating costs. Better sales momentum

along with rising shoppers’ traffic should also enhance

operating leverage and safeguard profitability of key

retailers.

10.3

130.5

400.0

0

50

100

150

200

250

300

350

400

450

2000 2017 2030F

9% CAGR (2017-30F)

16% CAGR (2000-17)

1 Beijing 1 Hong Kong

2 Shanghai 2 Bangkok

3 Chengdu 3 Phuket

4 Chongqing 4 Tokyo

5 Xiamen 5 Bali

6 Hangzhou 6 Singapore

7 Guangzhou 7 Macau

8 Xian 8 Chiang Mai

9 Sanya 9 Seoul

10 Qingdao 10 Osaka

11 Nanjing 11 Taipei

12 Dali 12 Nha Trang

13 Lijiang 13 Kyoto

14 Suzhou 14 Sabah

15 Tianjin 15 Kuala Lumpur

Inbound tourist s Outbound tourist s


ASIAN INSIGHTS

Prime shopping malls are faring much better than high

street shops. Landmark malls such as Harbour City and

Times Square recorded single-digit rental reversions.

Suburban mall operator Fortune REIT achieved 10-15%

rental growth on renewal. Link REIT has fared better with

reversionary growth of >25%.

That said, some leases expiring this year were renewed

before the retail sales rebound was evident. Hence

reversionary growth could be largely neutral or even

negative if retail landlords had already re-let space to new

trades or tenants.

While retail reversionary growth appears mixed in 2018, a

swift retail market recovery should inevitably give landlords

more pricing power in future lease negotiations with

tenants. To put it another way, this augurs well for

reversionary growth in the years ahead. That said, any rental

hikes to merely cast a laggard impact on operating costs of

retailers. Better sales momentum along with rising shoppers’

traffic should also enhance operating leverage and

safeguard profitability of key retailers.


ASIAN INSIGHTS

Hotel boom underway

Supported by 6% growth in overnight visitors, the overall

hotel occupancy increased 3 percentage points (ppts) to

91% in 5M18. The improvement was across the board.

High Tariff A hotels (five star-rated equivalent) saw their

occupancy rates rise by 5ppts to 89%. Occupancies of

Medium Tariff hotels and High tariff B hotels grew 4ppts

and 2ppts to 92% and 91% respectively. This was despite

increased supply of hotel rooms.

Overnight visitor arrival growth per annum - overall


Overnight visitor arrival growth per annum - China


Hotel occupancy -overall


Hotel occupancy – High Tariff A


-10%

-5%

0%

5%

10%

15%

20%

25%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

5M

18

YOY%

-10%

-5%

0%

5%

10%

15%

20%

25%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

5M

18

YOY%

70

75

80

85

90

95

100

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

(%)

2016 2017 2018

70

75

80

85

90

95

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

(%)

2016 2017 2018


ASIAN INSIGHTS

Hotel occupancy – High Tariff B


Hotel occupancy – Medium Tariff


As of May 2018, there were 284 hotels with 79,321 guest

rooms, up 2.3% from a year earlier. High Tariff A and B

hotels accounted for 23.9% and 38.1% respectively. The

balance came primarily from Medium Tariff hotels. Between

2017 and 2020, we project that total hotel room supply to

increase at 3-year CAGR of 3.9%. Given the buoyant

commerical property valuations, a growing number of well-

located three or four star rated hotels are being or will be

redeveloped into commercial properties to maximise the site

value. J Plus is a case in point. A local investor bought this

hotel from CSI Properties in early 2017 which is now being

demolished for commercial redevelopment. This could

potential dilute hotel room growth.

Breakdown of hotel rooms – May 2018

Source: HK Tourism Board

The hotel room rates continued on its recovery path with

improving momentum. In Jan-May 2018, overall hotel room

rates grew 7.9% to HK$1,359, compared to 3.2% in fourth

quarter 2017. Medium tariff hotels continued to lead the

market with 14.3% growth in room rates in the same

period. High Tariff hotels are catching up. High Tariff B

hotels showed 11.7% increase in room rate during the

same period which compares favourably with 6.4% in

fourth quarter 2017. Room rates of High Tariff A hotels

grew modestly by 4% in Jan-May 2018, reversing the

downtrend since 2015.

Hotel room rate - overall


70

75

80

85

90

95

100

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

(%)

2016 2017 2018

70

75

80

85

90

95

100

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

(%)

2016 2017 2018

High Tariff A

24%

High Tariff B38%

Med Tariff31%

Unclassified7%

900

1000

1100

1200

1300

1400

1500

1600

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

HK$/night

2016 2017 2018


ASIAN INSIGHTS

Hotel room rate growth - overall


Hotel room rate growth – High Tariff A


Hotel room rate growth – High Tariff B


Hotel room rate growth – Medium Tariff


With higher occupancies on one hand and increased room

rates on the other, the overall Revenue per available room

(RevPAR) rose 11.6% primarily led by increased room rates

in Jan-May 2018. Medium Tariff hotels recorded a stronger

RevPAR increase of 19.5% followed by High Tariff B hotels

(+14.2%) and High Tariff A hotels (+10.2%).

Hotel RevPAR (Jan-May 2018)

Source: HK Tourism Board, CEIC, DBS HK

Based on our projection of the growth of overnight visitors

and hotel room supply, we estimate the overall hotel

occupancy will stand at c.91% on average in 2018-20.

Given consistently high occupancy rates expected, there

should be upward pressure on room rates as well as RevPAR

in future years. We forecast the overall RevPAR to grow 8-

10% in each of 2018 and 2019.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Jan-1

8ARR: All Hotels

(YOY%)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Jan-1

8

ARR: HTA

(YOY%)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Jan-1

8

ARR: HTB

(YOY%)

-25%

-15%

-5%

5%

15%

25%

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Jan-1

8

ARR: Med Tariff

(YOY%)

0

5

10

15

20

25

High Tariff A High Tariff B Med Tariff

(%)


ASIAN INSIGHTS

Retailers

Better operating leverage matters

Riding on sequential SSSG improvement across key retailers

based in HK, together with their stringent costs control,

operating cost ratios have come down firmly along with a

better operating leverage. Notably, major retailers who had

recently reported sound top-line growth had been able to

dilute their overheads, reducing operating costs (in terms of

sales) and achieving better overall profitability.

As illustrated in the following charts, upon significant SSSG

rebound, both Sa Sa (HK/Macau only) and Chow Tai Fook were

able to achieve a substantial drop in rental cost ratio (in terms

of sales) of 1.6ppt in 2H FY18 and 0.9ppt in FY18, respectively.

Sa Sa’s advertising & promotional (A&P) expenses also fell by

0.3ppt in 2H FY18, while Chow Tai Fook’s staff costs declined

by 0.2ppt in FY18. Hence, both companies were able to

register a good increase in their profitability: Sa Sa scored

1.2ppt expansion in net margin to 9.3% in 2H FY18 (1H FY18:

down 0.6ppt to 5%). Chow Tai Fook also achieved 0.9ppt

increase in net margin to 6.9% in FY18 (FY17: +0.8ppt),

despite 1.3ppt decline in gross margin due to changing

product-mix (FY17: -0.4ppt).

Sa Sa: operating cost changes (ppt. y-o-y)

FY18 = 12 months ended Mar 2018

Source: Company (HK/Macau only)

Chow Tai Fook: operating cost changes (ppt. y-o-y)

FY17 / FY18 = 12 months ended Mar 2017 / Mar 2018

Source: Company

Overall, by expecting a higher amount of Mainland tourists

visiting HK/Macau ahead, local retailers are well-poised to

benefit to a good extent. Given at least 20-30% higher price

points in Mainland China mainly attributable to taxes, PRC

tourists could save a lot when buying goods in HK/Macau, and

could continue to be attracted to visit and shop in the two

cities given their close proximity to China.

To best play on the tourist boom, we like prominent HK-based

operators that offer hard luxuries, including Chow Tai Fook

(1929), Luk Fook (590) and Chow Sang Sang (116), as they

allow Mainland customers to save more upon making

purchases under the tax-free environment. We also like Sa Sa

(178) in the cosmetics industry considering their affordable

average ticket sizes that suit everyone, as well as Lifestyle

(1212) that operates department stores focusing on luxuries &

cosmetics. Most of these retailers are trading at an

undemanding valuation, offering about 15-30%+ upside on a

12-month horizon.

-0.1

0.7

0.3

-1.6

0.1

-0.3

-1.8

-1.3

-0.8

-0.3

0.2

0.7

Rentals Staff costs A&P expenses

1H FY18 (SSSG -2.1%) 2H FY18 (SSSG +9.1%)

ppt.

-0.1

0.1

-0.9

-0.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

Rentals Staff costs

FY17 (SSSG: -12.4% in HK/Macau; -5.2% in China)

FY18 (SSSG: +10.2% in HK/Macau; +8% in China)

ppt.


ASIAN INSIGHTS

Retail landlords

Improving tenants’ sales at landmark malls YTD, there was a

remarkable improvement in tenant sales across the board at

landmark malls. Retail sales growth at Harbour City in Tsim Sha

Tsui, Wharf REIC’s retail flagship, accelerated strongly to 37%

in 1Q18, from 2017’s 9.1%, primarily led by sales of expensive

luxury goods. Times Square in Causeway Bay and The Mall at

Pacific Place in Admiralty recorded respective tenant sales

growth of 23% and 25.9%, compared to 1.1% and 7.2% in

2017. In Jan-May 2018, Hysan Development’s retail portfolio in

Causeway Bay also registered 28% tenant sales growth

(excluding Apple). Lee Gardens hub (which accommodates

mainly luxury retailers) and Hysan Place fared better with

tenant sales growth exceeding 30% in total. Tenant sales at

MTRC’s Elements atop Kowloon Station, which features luxury

brands, also expanded by more than 20% YTD.

With the commissioning of the XRL and HZMB to further

increase tourist visitation to Hong Kong, overall tourist

spending is set to grow. This should support tenant sales

growth at key malls, particularly those targeting tourists such

as Harbour City. This is despite a higher comparison base.

Turnover rents to jump. Rebounding tenant sales would

translate into higher turnover rents, which could make up 10-

20% of retail rental income. This would benefit the retail

landlords immediately.

Better reversionary growth ahead. The better the tenants sales,

the stronger is the landlords’ ability to raise the rents during

lease renewals. Meanwhile, the retail reversionary growth

remains mixed. However, with retail sales growth momentum

sustainable, we expect retail landlords to see better

reversionary growth outlook in the year ahead. We expect

landmark shopping malls to register double digit rental

reversion in 2019.

With strong property presence in Hong Kong’s traditional retail

hubs of Tsim Sha Tsui and Causeway Bay, Wharf REIC and

Hysan Development stand to benefit from retail market boom.

Key Retail Properties – Wharf REIC

Source: Wharf REIC

Key Retail Properties – Hysan Development

Source: Hysan

YTD, retail landlords staged strong share price performance.

Share prices of Wharf REIC and Hysan Development rose 9%

and 1%, outperforming the broad market and most of Hong

Kong property counters. Yet, we still see room for further

share price appreciation in the year ahead given improving

retail market prospects.

Key Retail Propert ies Dist rict

GF A

('000 sf )

Harbour City Tsim Sha Tsui 2,068

Time Square Causeway Bay 943

Plaza Hollywood Diamond Hill 562

Key Retail Propert ies Dist rict

GF A

('000 sf )

Hysan Place Causeway Bay 450

Lee Gardens One Causeway Bay 192

Lee Gardens Two Causeway Bay 131

Lee Gardens Three Causeway Bay 100

Lee Theatre Plaza Causeway Bay 315


Hotel plays

Regal REIT boasts a balanced portfolio of nine hotels with a

total of 4,909 rooms, representing c.6% of total inventory in

Hong Kong. They are branded under “ Regal” and “iclub”

which target different market segments. This enables Regal

REIT to cater for the need of different travellers. Aided by the

revival of overnight visitor arrivals, Regal REIT’s hotel RevPAR

rose >10% in Jan-Apr 2018. This should support revenue

growth.

With a portfolio of three quality hotels on the Kowloon

Peninsula, Langham Hospitality Investments is tapping the

growing demand for hotel accommodation led by reviving

inbound tourism. Particularly, Langham Hospitality Investments

should benefit from the return of overnight visitors from

Mainland China which contributed a growing share of its total

guests in recent years. The Langham and Cordis registered

RevPAR growth of c.9% led by increased room rates in Jan-Apr

2018. Despite short-term business disruption, the renovation at

Eaton should enhance its long-term competitiveness.

Far East Consortium is a key owner and operator of three-to-

four star rated hotels in Hong Kong with c.2900 rooms. Three-

star rated hotels are among the first to recover with

respectable RevPAR growth. This should benefit Far East

Consortium the most.

Hotel portfolio- Langham Hospitality Investments

Source: Langham Hospitality Investments

Hotel portfolio – Regal REIT

Source: Regal REIT

Hotel portfolio – Far East Consortium

Source: Far East Consortium

Despite the improving hotel sector outlook, shares of Langham

Hospitality Investments, Regal REIT and Far East Consortium

have fallen 3-8%, in tandem with the broad market.

Continued interest rate hikes cast a shadow over the

performance of Langham Hospitality Investments and Regal

REIT which are seen as bond-like investments.

Meanwhile, Langham Hospitality Investments and Regal REIT

are offering distribution yields of >6% for FY18-19. New

infrastructure projects should increase tourist visitation to Hong

Kong leading to a brighter future for hotel plays. We

recommend BUY with their respective TPs of HK$3.68 and

HK$2.61. Far East Consortium is trading >60% below our

appraised current NAV. In addition to local hotel earnings

recovery, its overseas business expansion would also play a

crucial role in its share price performance. Maintain BUY with

TP of HK$5.53.

Propert ies Dist rict Num. of Rooms

The Langham Tsim Sha Tsui 498

Cordis Hotel Mong Kok 668

Eaton Hotel Yau Ma Tei 465

Total 1,631


Regal Hong Kong Hotel Causeway Bay 481

iclub Wan Chai Hotel Wan Chai 99

iclub Sheung Wan Hotel Sheung Wan 248

iclub Fortress Hill Hotel Fortress Hill 338

Regal Kowloon Hotel Tsim Sha Tsui 600

Regal Oriental Hotel Kowloon City 494

iclub Ma Tau Wai Hotel Kowloon City 340

Regal Riverside Hotel Sha Tin 1,138

Regal Airport Hotel Chek Lap Kok 1,171

Total 4,909


Dorsett Kwun Tong Kwun Tong 361

Dorsett Tsuen Wan Tsuen Wan 547

Silka Far East Tsuen Wan 240

Cosmo Hotel HK Wanchai 142

Dorsett Mongkok Mongkok 285

Lain Kwai Fong Hotel Central 162

Silka Seaview Yau Ma Tei 268

Silka Tsuen Wan Tsuen Wan 409

Dorsett Wanchai Wanchai 454

Total 2,868


ASIAN INSIGHTS

Appendix

HK/Macau same-store sales growth (%)

Source: DBS HK (Estimated numbers for Chow Sang Sang as the company does not report quarterly data.)

Hong Kong retail sales (monthly)

Hong Kong retail sales (annual)

Source: CEIC Source: CEIC

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

Sa Sa Chow Sang Sang Chow Tai Fook Luk Fook

(21)

(14)

(7)

0

7

14

21

28

35

0

20,000

40,000

60,000

80,000

100,000

Jan-F

eb 1

1

Jul-11

Dec

-11

Jun-1

2

Nov-

12

May-

13

Oct

-13

Apr-

14

Sep-1

4

Mar-

15

Aug-1

5

Jan-F

eb 1

6

Jul-16

Dec

-16

Jun-1

7

Nov-

17

Hong Kong Retail Sales (LHS) YoY growth (RHS)

HKD bn %

275325

406445

494 493 475437 446

0.6%

18.3%

24.9%

9.8%11.0%

-0.2%

-3.7%

-8.1%

2.2%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

200920102011201220132014201520162017

Hong Kong Retail Sales (LHS) YoY growth (RHS)

HKD bn


Hong Kong retail sales breakdown

Hong Kong retail sales breakdown (monthly)

Source: CEIC

Retail sales growth (YoY, %)

Categories 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 5M18

Jewellery, Watches, Clocks &

Valuable Gift50.4 43.3 11.8 3.9 32.6 13.5 (16.7) (10.2) (15.9) (15.2) (21.1) (13.2) 0.8 9.3 22.8

Clothing, Footwear & Allied Products 27.8 28.2 11.5 4.1 9.8 6.8 8.1 0.1 (3.6) (10.1) (7.8) (0.9) (2.4) 3.0 13.0

Consumer Durable Goods 26.7 30.2 27.7 12.7 10.9 (3.8) (3.5) 8.6 12.3 (0.1) (24.1) (17.4) (8.9) 2.8 15.3

Department Stores 20.3 22.8 10.8 8.7 19.9 15.9 3.0 (0.2) (1.0) (7.0) (9.0) (3.4) 0.8 5.9 13.9

Other Consumer Goods 17.1 18.0 10.6 7.4 10.4 8.2 6.6 6.1 (0.8) (5.0) (2.1) 1.5 3.8 7.2 16.0

Fuels 15.1 14.4 6.0 0.9 1.5 (1.2) (0.9) (1.9) (12.5) (8.5) (1.6) 0.7 3.9 4.1 8.6

Supermarkets 10.9 13.9 12.6 8.1 7.2 6.4 6.0 3.2 1.1 1.5 1.0 0.6 (1.2) 0.7 1.5

Food, Alcoholic Drinks & Tobacco 5.8 8.6 3.1 2.6 2.4 4.5 7.1 6.1 7.9 4.0 1.2 2.2 2.4 3.9 7.2

Medicines & Cosmetics 22.3 20.8 17.0 13.1 13.2 10.6 8.4 10.2 0.9 (4.9) (1.6) 1.7 2.7 8.6 17.4

Retail Sales V alue 24.4 25.3 13.1 6.8 15.0 7.1 (1.3) 0.8 (1.6) (5.8) (10.5) (5.5) (0.6) 5.0 13.7

Retail sales growth (YoY, %)

2017 2018

Categories

J an-

F eb Mar A pr May J un J ul A ug Sep Oct Nov Dec

J an-

F eb Mar A pr May

Jewellery, Watches, Clocks & Valuable Gift (1.2) 8.3 0.2 1.0 (0.8) 13.3 7.4 14.8 8.5 7.8 6.2 21.2 23.8 24.5 23.8

Clothing, Footwear & Allied Products (6.6) 1.2 1.8 (0.8) (1.9) 0.5 (1.4) 1.6 6.3 3.8 6.1 19.3 11.5 6.5 7.4

Consumer Durable Goods (15.5) (1.4) (12.7) (6.2) 0.2 (0.9) 4.3 (5.3) (8.4) 14.8 12.3 24.2 4.5 15.3 8.8

Department Stores (1.7) 0.1 3.9 3.6 0.8 5.5 5.2 9.4 6.2 5.7 3.9 11.3 17.5 12.5 16.7

Other Consumer Goods 3.9 5.3 5.7 3.0 0.7 4.5 2.5 8.9 8.0 11.2 8.6 16.8 14.2 14.9 16.9

Fuels 6.4 9.1 2.9 0.6 (0.8) 1.4 3.3 6.5 8.2 4.0 1.0 4.4 5.8 10.0 17.5

Supermarkets (3.9) 2.6 (0.5) (1.3) 0.4 0.0 2.3 2.7 0.7 1.5 (2.8) 0.9 2.0 1.1 2.7

Food, Alcoholic Drinks & Tobacco 1.5 2.8 3.1 3.1 2.6 4.5 (3.9) 9.2 8.9 3.6 1.1 10.5 4.0 3.9 5.9

Medicines & Cosmetics 3.0 3.4 4.8 2.4 (0.5) 2.6 2.3 12.8 10.0 13.6 11.4 17.0 16.5 17.8 18.7

Retail Sales V alue (3.2) 3.0 0.1 0.4 0.1 4.0 2.7 5.7 3.9 7.5 5.8 15.7 11.5 12.2 12.9


ASIAN INSIGHTS

Same-day PRC visitor shopping expenditure in HK (HK$bn)

Overnight PRC visitor shopping expenditure in HK (HK$bn)


Total spending by PRC domestic tourists (US$bn)

Per capita spending of PRC tourists (US$)


Mainland Chinese visitors to HK, Japan, Singapore and South Korea (no. of person)

Source: CEIC

23.91

32.00

45.38

59.49

70.29 68.34

53.68 52.43

2010 2011 2012 2013 2014 2015 2016 2017

64.03

78.79

91.60

109.41119.27

98.13

82.16 78.20

2010 2011 2012 2013 2014 2015 2016 2017

374.1 379.1481.9

625.1

99.4154.8

133.2

87.8

2014 2015 2016 2017

Non-shopping Shopping

0

500

1000

1500

2000

2500

3000

Hong Kong Japan South Korea Singapore

2014 2015 2016 2017

-

1

2

3

4

5

6

7

1/2014 4/2014 7/2014 10/2014 1/2015 4/2015 7/2015 10/2015 1/2016 4/2016 7/2016 10/2016 1/2017 4/2017 7/2017 10/2017 1/2018

Mil

lio

ns

Hong Kong Japan South Korea Singapore


Guangdong, Hong Kong, Macau: The Greater Bay Area (GBA)

The Greater Bay Area (GBA) is an initiative that altogether

involves 11 cities. They include 9 Mainland Chinese Cities in

the Guangdong province (i.e. Guangzhou, Shenzhen,

Dongguan, Foshan, Huizhou, Jiangmen, Zhaoqing,

Zhongshan, Zhuhai), and the two Special Administrative

Regions of Hong Kong and Macau (“9+2 cities”).

Along with on-going developments, the Chinese

government envisions the regional integration of these 11

cities, and aims to create a cluster that would leverage on

the competitive advantages of each specific city. For

instance, Shenzhen will take a leading role in technology

and innovation; Hong Kong will continue to take leadership

as an international financial center; while Macau will serve

as an integrated entertainment hub.

Map of Greater Bay Area (GBA)

Source: HK Government


ASIAN INSIGHTS

With a total population of nearly 70m, the GBA covers over

55,000 sq. km. and had an overall GDP of US$1.5tn last

year. The region should eventually be comparable to, or

even outshine other well-developed economic hubs in the

world, including the Greater Tokyo Metropolitan Area, San

Francisco Bay Area and the New York City.

GBA: Population by city (2017)

Source: HKTDC, DSEC

GBA: GDP by city (2017)

Source: HKTDC, DSEC

King & Wood Mallesons projects that the GBA could achieve

a combined population of 86m (+1.6% CAGR) by 2030,

with an estimated GDP of US$4.6tn (+9% CAGR). This

could translate into a GDP per capita of over US$53,000 in

12.5 years.

Macro statistics: key economic hubs in the world (2017)

Source: King & Wood Mallesons, HKTDC, DSEC

At the national level, the GBA also plays an important

strategic role in the One Belt One Road Initiative (OBOR).

Hong Kong, Pearl River Delta cities, and Macau are

advantageously located and have existing maritime

infrastructures in place. The GBA will serve as a stepping

stone for Chinese companies, goods and services to go

abroad. The High-speed Rail and the HZMB will be key

infrastructure projects that will directly enhance

transportation connectivity between Hong Kong/Macau and

the rest of the “9+2 cities”.

In terms of initial potential benefits of the GBA

development, we expect improving corporate synergies in

the region and a bigger influx of talents from other parts of

China and overseas. More importantly, we should expect

sound improvement in the overall mobility among residents

in the GBA to further boost tourist arrival numbers in

HK/Macau in the medium-term.

On the whole, the impending GBA infrastructural

improvements should significantly reduce the time required

to commute between different cities, hence we expect a

rising number of Mainlanders travelling to HK/Macau more

efficiently at lower transportation costs. To quote a few

examples, travelling time between Zhuhai and HK will be

shortened to 30 minutes (currently: c.3 hours by land) once

the HK-Zhuhai-Macau Bridge inaugurates. Zhongshan to

Shenzhen could also take merely 30 minutes to commute

upon completion of the Shenzhen-Zhongshan Passage /

Bridge. Besides, the Zhongshan-Kaiping Expressway that is

currently in the planning stage could also shorten the travel

time between Jiangmen and Shenzhen to 1.5 hours. The

intercity Mass Rapid Transit Railway also effectively links up

various major cities including Guangzhou, Shunde,

Zhongshan, Jiangmen, etc.

Overall, 78% of the bridges and intercity rails in GBA that

are currently under construction should be completed by

2020 (source: HK Economic Digest). Upon completion, the

GBA transport network development should help to cut

down commuting time between further away Chinese cities

and the Pearl River Delta Region to less than 2 hours only.

All these should mean a swifter and much easier travel

process for Mainlanders to visit HK/Macau ahead.

14.5

12.5

8.3 7.7 7.4

4.8 4.6 4.1 3.3

1.8 0.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Gua

ngzh

ou

Shen

zhen

Don

ggua

n

Fosh

an

Hon

g Ko

ng

Hui

zhou

Jiang

men

Zhao

qing

Zhon

gsha

n

Zhuh

ai

Mac

au

(mil of persons)

Major c it ies GDP (US$bn)

GDP per capita

(US$)

A rea

(sq. km)

Macau 49 75,385 29

Hong Kong 336 45,590 1,104

Shenzhen 335 26,736 1,992

Guangzhou 321 22,153 7,434

Zhuhai 39 22,096 1,732

Foshan 142 18,562 3,798

Zhongshan 51 15,644 1,784

Dongguan 114 13,669 2,460

Huizhou 57 11,932 11,200

J iangmen 41 8,991 9,505

Zhaoqing 33 8,010 14,891

Total 1,518 21,838 55,929

Locat ion Populat ion GDP (US$ tn) GDP per capita

Greater Tokyo Area 44 m 1.8 40,909

New York City 8.6 m 1.7 197,674

San Francisco Bay 7.6 m 0.8 105,263

Greater Bay Area (GBA) 69.5 m 1.5 21,838


GBA: Transportation network extension

Hotel portfolio – Regal REIT (1881.HK)

Note: MRT (Mass Rapid Transit)

Source: The HK Economic Digest, DBS

inauguration

Shenzhen-Zhongshan

Passage/Bridge (深中通道)

(under construction)

Humen Pearl River Bridge

(虎門大橋)

Hong Kong-Zhuhai-Macau Bridge

(港珠澳大橋)

(Expected inauguration: 2H18)

Qianhai New District

(前海新區)

Foshan

(佛山)

J iangmen

(江門)

Shunde

(順德)

Zhongshan

(中山)

Guangzhou(廣州)

Dongguan

(東莞)

Shenzhen

(深圳)

Hong Kong

(香港)

Macau

(澳門)

GuangzhuWest Line

(廣珠西線)

Outer Harbour Ferry Terminal

(外港碼頭)

Z huhai

(珠海)

Zhongshan-KaipingExpressway

(中開平高速)

(under planning)

Werstern Coastal Expressway

(西部沿海高速)

HK-MacauFerry Terminal

(港澳碼頭)

China HK City Ferry Terminal

(中港城碼頭)

Zhongshan Port Terminal

(中山港碼頭)

Jiuzhou Port Terminal

(九洲港碼頭)

Intercity MRT Cuiheng Station

(城軌翠亨站)

Intercity MRT Nanlang Station

(城軌南朗站)

Intercity MRT Zhongshan

Station

(城軌中山站)

Intercity MRT Guangzhou

South Station

(城軌廣州南站)

Intercity MRT Shunde Station

(城軌順德站)

Intercity MRT Jiangmen Station

(城軌江門站)

Hengqin New District

(橫琴新區)

Nansha New District

(南沙新區)


ASIAN INSIGHTS

Selected major infrastructural projects in the GBA

Source: Wikipedia, Economic Digest

GBA: Area by city

Note: 1 HKD = 0.89558 RMB as of Dec 2016

Source: Wind, Census and Statistics Department of HKSAR, Statistics and Census Service of Government of Macao SAR

New inf rast ructures Target complet ion Remark s

Shenzhen–Zhongshan Passage /

Bridge

2024

(original target: 2021)

To connect two major cities of Shenzhen (towards the East) and Zhongshan (towards the wes)

within the Pearl River Delta (PRD) of China. It will consist of a series of bridges and tunnels, starting

from Bao'an International Airport on the Shenzhen side. The proposed 51 km eight-lane link is

expected to cost around US$4.83bn. It will be located about 27 km downriver from the Humen

Bridge, the only current bridge crossing of the delta, and some 32 km north of the new Hong

Kong–Zhuhai–Macau Bridge that will soon commence operations, and will link the cities of Hong

Kong, Zhuhai, and Macau at the southern end of the PRD. Construction started in May 2017.

Guangzhou-Zhuhai Intercity

Railway

Completed Also called the Guangzhu intercity railway (广珠城轨). It is a dedicated, grade-separated regional

railway linking Guangzhou South railway station in Panyu, Guangzhou, and Zhuhai Airport in

Zhuhai, v ia Shunde, Zhongshan and J iangmen, in the Guangdong province. It is the first line

completed in the currently under construction Pearl River Delta (PRD) Rapid Transit network.

The railway has partly started operations in January 2011. It will be div ided into three parts with a

total of 27 stations. Its main line between Guangzhou and Zhuhai City, v ia Shunde and Zhongshan,

is 117 km long, with 17 stations and a maximum speed of 200 km/h (124 mph). The planned

extension from Zhuhai City to Zhuhai Airport is 35.3 km long, with 7 stations and a maximum speed

of 160 km/h (99 mph). Its spur line between Zhongshan and J iangmen is 26 km long, with 6

stations and a maximum speed of 200 km/h (124 mph).

When fully completed, passengers traveling on the main line between Zhuhai and Guangzhou South

will have a choice between a 46-minute non-stop and a 76-minute, 140 km/h all-stop serv ice. The

non-stop serv ice is offered between Zhuhai and Guangzhou South only, and travel between Zhuhai

(Gongbei) and Zhuhai Airport will be cut down to 25 minutes. It currently takes 50 minutes to

travel by automobile from Gongbei, Zhuhai to Zhuhai Airport, and 1 hour 30 minutes from

Gongbei, Zhuhai to Panyu, Guangzhou.

Pearl River Delta Metropolitan

Region Intercity Railway System

2030 It is a regional high-speed rail and commuter rail network being gradually constructed in the PRD of

China. The project's goal is to have every major urban center in the PRD to be within one-hour travel

by rail to Guangzhou. On March 16, 2005, the State Council examined and approved plans for a

regional high-speed commuter rail network for the J ingjinji, Yangtze River Delta and the Pearl River

Delta. According to the plan, by 2020, PRD MAIR network will have a total route mileage of about

600 kilometres. In September 2009, the plan was expanded to 1,478 km of routes split up into 23

lines. In the long term vision, network length will reach 1,890 km by 2030. By then the network

will provide basic coverage to the PRD region.

Zhuhai F oshan Huizhou Zhongshan Dongguan J iangmen Zhaoqing Shenzhen Guangzhou Hong Kong Macau

Primary Sector 2% 2% 5% 2% 0% 8% 15% 0% 1% 0% 0%

Secondary Sector

Industrial 43% 21% 51% 50% 45% 45% 45% 37% 27% 1% 1%

Construction 6% 2% 3% 2% 1% 3% 3% 3% 3% 5% 7%

Other secondary activ ities 0% 37% 0% 0% 0% 0% 0% 0% 0% 1% 1%

Tert iary Sector

Transport, Storage and Postage 2% 3% 2% 2% 3% 4% 3% 3% 7% 6% 4%

Wholesale & Retail 10% 7% 10% 9% 12% 8% 9% 11% 15% 22% 7%

Accommodation & Restaurants 2% 1% 3% 1% 2% 1% 2% 2% 2% 3% 8%

Financial sector 7% 4% 4% 6% 6% 5% 3% 14% 9% 18% 9%

Real Estate 9% 8% 7% 7% 6% 6% 3% 9% 8% 11% 13%

Other serv ices 19% 15% 14% 20% 22% 19% 16% 20% 28% 32% 50%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


Far East Consortium NAV Discount Far East Consortium NAV Discount Band

Hysan Development NAV Discount Hysan NAV Discount Band

Wharf REIC NAV Discount Wharf REIC NAV Discount Band

Source: Thomson Reuters, DBS HK

(85)

(80)

(75)

(70)

(65)

(60)

Jun-1

6

Aug-1

6

Oct

-16

Dec

-16

Feb-1

7

Apr-

17

Jun-1

7

Aug-1

7

Oct

-17

Dec

-17

Feb-1

8

Apr-

18

Jun-1

8

%

Average: -67%

-2SD: -74%

-1SD: -70%

+1SD: -63%

+2SD: -59%

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Jun-1

6

Aug

-16

Oct-

16

Dec-

16

Feb

-17

Apr-

17

Jun-1

7

Aug

-17

Oct-

17

Dec-

17

Feb

-18

Apr-

18

Jun-1

8

-82%

-76%

-71%

-66%

-60%

HK$

-82%

-76%

-71%

-66%

-60%-60%

-66%

-76%

-82%

(80)

(70)

(60)

(50)

(40)

(30)

(20)

(10)

0

Jul-07

Jan-0

8Ju

l-08

Jan-0

9Ju

l-09

Jan-1

0Ju

l-10

Jan-1

1Ju

l-11

Jan-1

2Ju

l-12

Jan-1

3Ju

l-13

Jan-1

4Ju

l-14

Jan-1

5Ju

l-15

Jan-1

6Ju

l-16

Jan-1

7Ju

l-17

Jan-1

8Ju

l-18

%

Average: -40%

-2SD: -58%

-1SD: -49%

+1SD: -31%

+2SD: -22%

3

13

23

33

43

53

63

73

Jan-0

7Ju

l-07

Jan-0

8Ju

l-08

Jan-0

9Ju

l-09

Jan-1

0Ju

l-10

Jan-1

1Ju

l-11

Jan-1

2Ju

l-12

Jan-1

3Ju

l-13

Jan-1

4Ju

l-14

Jan-1

5Ju

l-15

Jan-1

6Ju

l-16

Jan-1

7Ju

l-17

Jan-1

8Ju

l-18

HK$

-69%

-54%

-40%

-25%

-10%

(40)

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

Nov-

17

Dec

-17

Jan-1

8

Jan-1

8

Feb-1

8

Mar-

18

Mar-

18

Apr-

18

May-

18

May-

18

Jun-1

8

%

Average: -27%

-2SD: -33%

-1SD: -30%

+1SD: -24%

+2SD: -21%

0

20

40

60

80

100

120

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

HK$

-66%

-1%

-17%

-33%

-50%


ASIAN INSIGHTS

Langham Hospitality NAV Discount Langham Hospitality historical yield bands

Regal REIT NAV Discount Regal REIT historical yield bands


2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

May/

13

Nov/

13

May/

14

Nov/

14

May/

15

Nov/

15

May/

16

Nov/

16

May/

17

Nov/

17

May/

180.43x

0.52x

0.61x

HK$

0.7x

0.79x

-

1.00

2.00

3.00

4.00

5.00

6.00

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HK$

Ceiling: 4.1%

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HK$

Ceiling: 4.5%

Mid: 14.4%

Floor: 24.3%


Chow Sang Sang PE Band Chow Sang Sang PB Band

Luk Fook PE Band Luk Fook PB Band

SASA PE Band SASA PB Band


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6.0

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Jul-14

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Jun-1

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Jan-1

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Sep-1

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May-

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x

Avg: 5.6x

+1SD: 7.9x

-1SD: 3.4x


ASIAN INSIGHTS

Chow Tai Fook PE Band Chow Tai Fook PB Band

Lifestyle PE Band Lifestyle PB Band


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Avg: 13.4x

+1SD: 19x

-1SD: 7.9x

0.0

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Avg: 3.3x

+1SD: 4.6x

-1SD: 2.1x


STOCK PROFILES

ed-JS/ sa- CS /DL

BUY Last Traded Price (6 Jul 2018): HK$4.52 (HSI : 28,316)

Price Target 12-mth: HK$5.53 (22% upside)

Potential Catalyst: Improving hotel market and successful project sales Where we differ: Market.has higher earnings estimate for FY19-20 Analyst Jeff YAU CFA, +852 2820 4912 [email protected] Ian CHUI +852 2971 1915 [email protected] Jason LAM +852 29711773 [email protected]

Price Relative

Forecasts and Valuation FY Mar (HK$ m) 2017A 2018A 2019F 2020F Turnover 5,005 5,831 6,117 6,622 EBITDA 1,694 2,220 2,203 2,157 Pre-tax Profit 1,567 2,156 1,604 1,533 Net Profit 1,118 1,567 1,142 1,144 EPS (HK$) 0.51 0.69 0.50 0.50 EPS Gth (%) 40.7 34.4 (28.0) 0.1 PE (X) 8.8 6.5 9.1 9.1 P/Cash Flow (X) 8.4 82.6 (5.2) 2.2 EV/EBITDA (X) 9.5 7.2 7.3 7.4 DPS (HK$) 0.19 0.22 0.22 0.22 Div Yield (%) 4.1 4.9 4.9 4.9 Net Gearing (%) 31 29 37 27 ROE (%) 10.7 13.2 8.6 8.2 Est. NAV (HK$) 12.7 13.8 Disc. to NAV (%) (64) (67) Earnings Rev (%): Nil NIl Consensus EPS (HK$): 0.67 0.74 Other Broker Recs: B:3 S:0 H:0

ICB Industry: Financials ICB Sector: Real Estate Holding & Development Principal Business: Engages in property development & investment, hotel investment & operations, and car park and facility mangement operations across different cities Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”) Thomson Reuters, HKEX

Hotels are a bright spot

• Local hotels going from strength to strength

• Overseas investments to drive long-term growth

• BUY with HK$5.53 TP

Local hotels going from strength to strength. Supported by the

return of overnight visitors, Far East Consortium’s (FEC) hotels in

Hong Kong have recorded sequential operational improvements.

RevPAR growth in 2HFY18 (Oct-17 to Mar-18) improved by 13.5%

from 1HFY18’s 8.3% as room rate growth accelerated. In addition

to the revival of overnight visitor arrivals from China, FEC has

attracted a diversified base of international travelers, particularly

from South Korea and South East Asia. Opened for business in Jan-

17, Silka Tsuen Wan has rapidly ramped up its operations. With a

portfolio of nine three-to-four star hotels (2868 rooms) spread

across Hong Kong, FEC should continue to benefit from the hotel

market upturn. Given improving hotel asset valuations, we do not

rule out the possibility of the company crystallising the hidden value

of its hotels via disposal if opportunity knocks.

Overseas investments to drive long-term growth. In recent

months, FEC turned positive on the prospects of Singapore’s high-

end residential market. Since Mar-18, the company has acquired

four residential lots/properties in Singapore through different

channels. They will altogether provide attributable saleable area of

0.3m sf. Total attributable land cost was S$562m. FEC has also

expanded its footprint into the gaming sector with the acquisition

of Trans World Corporation and 4.99% stake in The Star

Entertainment to complement its “Asian Wallet“ strategy. Even

allowing for these recent overseas investments, its financial risk

should remain manageable.

BUY with HK$5.53 TP. The stock is trading at 64% discount to

our assessed current NAV with dividend yield of 4.9% for FY19.

Valuation is by no means expensive. The company is currently riding

on the prevailing hotel market upcycle in Hong Kong. Moreover, it

is proactively pursuing overseas investments, which could serve as

share price catalyst if they bear fruit. BUY with HK$5.53 TP,

premised on 60% discount to our Jun-19 NAV estimate.

At A Glance

Issued Capital (m shrs) 2,297

Mkt Cap (HK$m/US$m) 10,381 / 1,323

Major Shareholders (%)

Chiu (Tat Cheong David) 46.8

Chiu (Te Ken Deacon) 6.8

Value Partners Ltd. 6.0

Free Float (%) 40.4

3m Avg. Daily Val. (US$m) 0.4


Far East Consortium

Bloomberg: 35 HK | Reuters: 0035.HK Refer to important disclosures at the end of this report


Far East Consortium

Income Statement (HK$ m) Balance Sheet (HK$ m)

FY Mar 2017A 2018A 2019F 2020F FY Mar 2017A 2018A 2019F 2020F

Turnover 5,005 5,831 6,117 6,622 Fixed Assets 10,483 11,404 11,946 12,381 EBITDA 1,694 2,220 2,203 2,157 Other LT Assets 2,025 2,403 2,453 2,508 Depr / Amort (324) (355) (370) (384) Cash & ST Invts 4,186 4,609 2,469 5,158

EBIT 1,370 1,865 1,834 1,772 Other Current Assets 11,705 16,073 20,824 18,838 Associates Inc (4) 10 10 15 Total Assets 28,400 34,489 37,691 38,885 Interest (Exp)/Inc (158) (212) (240) (254) ST Debt

2,755 6,194 6,194 6,194

Exceptionals 359 494 0 0 Creditors 889 1,725 2,025 2,325

Pre-tax Profit 1,567 2,156 1,604 1,533 Other Current Liab 2,536 2,364 2,614 2,864 Tax (434) (571) (446) (380) LT Debt 10,507 10,161 12,161 12,161 Minority Interest (15) (19) (15) (10) Other LT Liabilities 768 902 902 902

Net Profit 1,118 1,567 1,142 1,144 Minority Interests 152 173 183 188 Shareholder’s Equity 10,792 12,971 13,613 14,252 Total Cap. & Liab. 28,400 34,489 37,691 38,885 Sales Gth (%) 25 16 5 8 Share Capital (m) 2,238 2,302 2,302 2,302 Net Profit Gth (%) 52 40 (27) 0 Net Cash/(Debt) (7,646) (8,260) (10,923) (8,233) EBITDA Margins (%) 34 38 36 33 Working Capital 9,710 10,399 12,460 12,613 EBIT Margin (%) 27 32 30 27 Net Gearing (%) 31 29 37 27 Tax Rate (%) 28 26 28 25

Cash Flow Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions

FY Mar 2017A 2018E 2019F 2020F FY Mar 2017A 2018A 2019F 2020F

EBIT 1,370 1,865 1,834 1,772 Revenues (HK$ m) Tax Paid (275) (571) (446) (380) Property Development 2,937 3,431 3,570 3,952 Depr/Amort 324 355 370 384 Property Investment 55 66 68 69 Chg in Wkg.Cap (556) (2,047) (4,201) 2,536 Hotel Operations 1,309 1,538 1,602 1,670 Other Non-Cash 38 (49) 1 1 Car Park Operations 641 666 696 731

Operating CF 901 (447) (2,443) 4,314 Others 64 130 182 200 Net Capex 80 (183) (911) (819) Assoc, MI, Invsmt (870) (35) (35) (35) Total 5,005 5,831 6,117 6,622 Investing CF (789) (218) (946) (854) Net Chg in Debt (450) 500 2,000 0 Key Assumptions (%) 2019F 2020F New Capital 2,309 0 0 0 Residential price - HK 13 0 Dividend (53) (422) (505) (510) Office rental - HK 5 3 Other Financing CF (363) (229) (246) (260) Retail rental (High street shops) - HK 0 5

Financing CF 1,443 (151) 1,249 (770) Retail rental (Shopping centre) - HK 5 5 Chg in Cash 1,555 (816) (2,140) 2,689 Hotel RevPAR 8 8

Source: Company, DBS HK

ed-JS/ sa- CS /AH

BUY Last Traded Price (6 Jul 2018) HK$42.40 (HSI : 28,316)


Potential Catalyst: Stronger retail market Where we differ: Market has similar earnings estimate for FY19 Analyst Jeff YAU CFA, +852 2820 4912 [email protected] Ian CHUI +852 2971 1915 [email protected] Jason LAM +852 29711773 [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2016A 2017A 2018F 2019F Turnover 3,535 3,548 3,800 4,081 EBITDA 2,910 3,135 3,033 3,326 Pre-tax Profit 2,991 3,205 3,044 3,312 Underlying Profit 2,369 2,491 2,437 2,660 EPS (HK$) 2.26 2.38 2.33 2.54 EPS Gth (%) 5.3 5.3 (2.2) 9.1 PE (X) 18.7 17.8 18.2 16.7 P/Cash Flow (X) 13.3 15.3 14.6 13.3 EV/EBITDA (X) 17.5 16.2 16.8 15.3 DPS (HK$) 1.35 1.37 1.38 1.44 Div Yield (%) 3.2 3.2 3.3 3.4 Net Gearing (%) 5 5 5 4 ROE (%) 3.5 3.6 3.4 3.6 Est. NAV (HK$) 76.3 78.7 Disc. to NAV (%) (44) (46) Earnings Rev (%): Nil NIl Consensus EPS (HK$): 2.72 2.59 Other Broker Recs: B:10 S:3 H:3

ICB Industry: Financials ICB Sector: Real Estate Holding & Development Principal Business: Property leasing with core focus in Causeway Bay

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”) Thomson Reuters, HKEX

Creating a better shopping experience

• Riding on retail market upturn

• Offices at Lee Garden Three largely committed


Riding on the retail market upturn. In 5M18, the overall tenants’ sales (excluding Apple) grew strongly by c.30% led by Lee Gardens hub and Hysan Place, both of which showed remarkable retail sales growth of > 30%. Lee Theatre hub, however, posted growth of just 7-8%, below the market average, dragged by certain tenants. Turnover rents should receive a boost from sharply improved tenants’ sales. This should help offset the income shortfall led by the departure of high paying Ralph Lauren. The majority of space surrendered by Ralph Lauren has been re-let. In 2018, about 35% of lease is scheduled for expiry in terms of floor area. Of this, 80% has been or will be renewed at slightly higher rents. The remaining premises will be re-let. Despite potentially negative rental reversion, the trade mix refinement should enhance customers shopping experience. Lee Garden Three retail arcade had a soft opening in late May with commitment rate of c.90%. It hosts mainly lifestyle and F&B tenants. Offices at Lee Garden Three largely committed. Office occupancy remains firm at 97%. About 24% of office floor area is scheduled for roll over in 2018. Reversionary growth is expected to moderate to 5-6% on higher expiring rents. With Goldman Sachs taking up five floors for its back office operations, the office portion of the newly built Lee Garden Three is 95% committed with a significant portion of tenants relocating from Central/Admiralty. Residential portfolio, mainly Bamboo Grove, should see positive reversionary growth but occupancy has yet to recover partly due to renovation works. BUY with HK$51.15 TP. The stock is trading at 44% discount to our assessed current NAV. From an historical viewpoint, valuation is inexpensive. The company is benefitting from the prevailing retail market upturn. Continued trade/tenant mix optimisation could enhance the shopping experience. Despite short-term earnings drag, this should boost the portfolio’s long-term competitiveness. BUY with HK$51.15 TP. This is premised in 35% discount to our Jun-19 NAV estimate.

At A Glance


Mkt Cap (HK$m/US$m) 44,359 / 5,652


Lee Hysan Company Ltd 41.4

Silchester International Investors, L.L.P. 8.0

First Eagle Investment Management, L.L.C. 5.0

Free Float (%) 45.6



Hysan Development



Hysan Development


FY Dec 2016A 2017A 2018F 2019F FY Dec 2016A 2017A 2018F 2019F

Turnover 3,535 3,548 3,800 4,081 Fixed Assets 70,353 73,221 74,545 76,000 EBITDA 2,910 3,135 3,033 3,326 Other LT Assets 5,396 5,501 5,906 6,523 Depr / Amort (22) (22) (22) (22) Cash & ST Invts 2,630 2,662 2,626 3,206

EBIT 2,888 3,113 3,011 3,304 Other Current Assets 1,642 738 723 708 Associates Inc 231 209 208 223 Total Assets 80,021 82,122 83,801 86,437 Interest (Exp)/Inc (128) (117) (175) (215) ST Debt

1,180 150 300 300

Exceptionals 0 0 0 0 Creditors 935 736 721 706

Pre-tax Profit 2,991 3,205 3,044 3,312 Other Current Liab 778 875 875 875 Tax (463) (484) (461) (502) LT Debt 5,113 6,035 5,785 5,685 Minority Interest (159) (230) (146) (150) Other LT Liabilities 1,330 1,323 1,323 1,323

Underlying Profit 2,369 2,491 2,437 2,660 Minority Interests 3,195 3,048 3,148 3,291 Shareholder’s Equity 67,490 69,955 71,648 74,257 Total Cap. & Liab. 80,021 82,122 83,801 86,437 Sales Gth (%) 3 0 7 7 Share Capital (m) 1,046 1,046 1,046 1,046 Net Profit Gth (%) 4 5 (2) 9 Net Cash/(Debt) (3,663) (3,523) (3,459) (2,779) EBITDA Margins (%) 82 88 80 81 Working Capital 1,379 1,639 1,453 2,033 EBIT Margin (%) 82 88 79 81 Net Gearing (%) 5 5 5 4 Tax Rate (%) 15 15 15 15



EBIT 2,888 3,113 3,011 3,304 Revenues (HK$ m) Tax Paid (407) (410) (461) (502) Property rental income 3,535 3,548 3,800 4,081

Depr/Amort 22 22 22 22 Total 3,535 3,548 3,800 4,081 Chg in Wkg.Cap 411 15 0 0 Other Non-Cash 5 (250) 0 0

Operating CF 2,919 2,490 2,573 2,824 Net Capex (847) (2,140) (622) 0 Assoc, MI, Invsmt (639) 2,186 (152) (349)

Investing CF (1,486) 46 (774) (349) Net Chg in Debt (250) (130) (100) (100) Key Assumptions (%) 2018F 2019F New Capital 1,285 0 0 0 Dividend (1,524) (1,539) (1,514) (1,535) Office rental - HK 5 3 Other Financing CF (161) (200) (220) (260) Retail rental (High street shops) - HK 0 5

Financing CF (650) (1,869) (1,834) (1,895) Retail rental (Shopping centre) - HK 5 5 Chg in Cash 783 667 (36) 580


ed-JS/ sa- CS /AH



Potential Catalyst: Improving hotel market Where we differ: Market has similar DPU estimate for FY18. Analyst Jeff YAU CFA, +852 2820 4912 [email protected] Ian CHUI +852 2971 1915 [email protected] Jason LAM +852 29711773 [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2016A 2017A 2018F 2019F Gross Revenue 706 694 708 762 Net Property Inc 594 581 592 638 Net Profit 410 1,146 356 378 Distribution Inc 501 437 420 447 DPU (HK$) 0.26 0.22 0.20 0.21 DPU Gth (%) 4 (15) (7) 5 Div Yield (%) 8.0 6.8 6.3 6.6 Gross Gearing (%) 36 35 33 32 Book Value (HK$) 5.65 5.93 6.32 6.54 P/Book Value (x) 0.6 0.5 0.5 0.5 Earnings Rev (%): (6) (3) Consensus DPU (HK$): 0.15 0.17 Other Broker Recs: B:1 S:1 H:1

ICB Industry: Financials ICB Sector: Equity Investment Instruments Principal Business: Hotels


Facelift at Eaton to boost competitiveness

• Renovation allows Eaton to better cater to targeted travelers

• Higher RevPAR at The Langham and Cordis


Renovation to allow Eaton better capture targeted

travelers. The renovation at Eaton’s hotel entrance has been

completed and the food hall at the basement is already operating.

The co-working space is targeted to be completed in Aug-18 . The

retail shops would be leased to F&B tenants. Hence, F&B and retail

income from Eaton is expected to recover gradually from 2Q18

onwards. In Mar-18, Langham Hospitality Investments

commenced its room renovation programme at Eaton, to be

carried out in four phases. This would reduce the number of

rooms available in the meantime, thus diluting room revenue.

Despite the short term income shortfall, this initiative should

enable the hotelier to better tap the demand from millennial

travelers and enhance the long-term competitiveness of Eaton.

Higher RevPAR at The Langham and Cordis. Aided by the

revival of overnight visitor arrivals, The Langham in Tsim Sha Tsui

and Cordis in Mongkok registered RevPAR growth of c.9% in

4M18, primarily led by better room rates. F&B revenue grew in the

mid-single digits. This should lead to higher gross operating

profits. On the other hand, despite higher room rates, RevPAR of

Eaton in Yau Ma Tei was marginally lower, dragged by reduced

occupancy as a result of ongoing renovation works.

BUY with HK$3.68 TP Langham Hospitality Investments offers distribution yields of 6.3-6.6% for FY18-19. With a portfolio of three strategically located hotels in Kowloon, Langham Hospitality Investments should be well placed to riding on the hotel sector upturn led by improving inbound tourism. Despite the short term business disruption, the renovation should allow Eaton to boost its long-term competitiveness. BUY with DDM-based TP of HK$3.68

At A Glance


Mkt Cap (HK$m/US$m) 6,654 / 848


Great Eagle Holdings Ltd 62.5

Free Float (%) 37.5



Langham Hospitality Investments



Langham Hospitality Investments



Gross revenue 706 694 708 762 Fixed Assets 18,432 19,373 20,422 21,084 Property expenses (113) (113) (116) (124) Other LT Assets 32 28 28 28

Net Property Income 594 581 592 638 Cash & ST Invts 238 101 20 3 Other expenses (11) (9) (9) (9) Other Current Assets 121 115 120 125

Interest (Exp)/Inc (118) (153) (178) (195) Total Assets 18,824 19,618 20,590 21,241 Exceptionals 28 805 0 0 ST Debt

0 0 0 6,791

Pre-Tax Profit 493 1,223 405 435 Creditors 78 97 96 95 Tax (83) (77) (49) (57) Other Current Liab 33 24 24 24 Non-Controlling Interests 0 0 0 0 LT Debt 6,739 6,757 6,774 0

Net Profit 410 1,146 356 378 Other LT Liabilities 297 329 329 329 Distribution income 501 437 420 447 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 11,677 12,411 13,367 14,002 Revenue Gth (%) 4 (2) 2 8 Total Capital 18,824 19,618 20,590 21,241 NPI Gth (%) 5 (2) 2 8 Share Capital (m) 2,067 2,088 2,110 2,133 Dist. Inc Growth (%) 5 (13) (4) 6 Gross Debt (6,800) (6,800) (6,800) (6,800) DPU Growth (%) 4 (15) (7) 5 Working Capital 249 96 20 (6,781) Book NAV (HK$) 5.65 5.94 6.33 6.56 Gross Gearing (%) 36 35 33 32



Pre-Tax Income 493 1,223 405 435 Revenues (HK$ m) Tax Paid 0 (55) (49) (57) Base rent 225 225 225 225 Depr/Amort 25 18 17 17 Variable rent 476 468 481 535 Chg in Wkg.Cap. (7) 10 (6) (6) Rental income from retail 6 1 2 2

Other Non-Cash 42 (734) 69 76 Total 706 694 708 762 Operational CF 552 463 436 465 Net Capex (65) (119) (80) (50) Assoc, MI, Invsmt 62 2 2 2

Investment CF (3) (118) (78) (48) Net Chg in Debt (72) 0 0 0 Key Assumptions (%) 2018F 2019F New issues/Unit Buyback 0 0 0 0 RevPAR 8 8 Distribution Paid (483) (483) (440) (434) Other Financing CF 0 0 0 0

Financing CF (555) (483) (440) (434) Chg in Cash (6) (137) (81) (17)


ed-JS/ sa- CS /DL



Potential Catalyst: Improving hotel makret Where we differ: n.a. Analyst Jeff YAU CFA, +852 2820 4912, [email protected] Ian CHUI+852 2971 1915, [email protected] Jason LAM +852 29711773, [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2016A 2017A 2018F 2019F Gross Revenue 973 958 1,020 1,094 Net Property Inc 944 927 988 1,062 Net Profit 564 2,488 493 514 Distribution Inc 502 472 486 510 DPU (HK$) 0.15 0.15 0.15 0.16 DPU Gth (%) 0 (6) 3 5 Div Yield (%) 6.7 6.3 6.5 6.8 Gross Gearing (%) 37 38 36 34 Book Value (HK$) 4.13 4.75 5.19 5.52 P/Book Value (x) 0.6 0.5 0.4 0.4 Earnings Rev (%): 0 0 Consensus DPU (HK$): 0.15 0.16 Other Broker Recs: B:2 S:0 H:0

ICB Industry: Financials ICB Sector: REITs (HK) Principal Business: Owns and operates hotels in HK


Room to grow

• Hotel RevPAR headed higher

• Potential acquisitions to spice up distributions


Hotel RevPAR headed higher. Aided by the revival of overnight

visitor arrivals from Mainland China, Regal REIT’s hotels witnessed

solid RevPAR growth of >10% in 4M18, mainly led by higher

room rates. The “Regal” branded hotels performed better than

“iclub” branded hotels. Given positive operating leverage, we

forecast gross operating profit from initial hotel portfolio to be

c.9% higher in FY18. As a result, initial hotel portfolio should see

remarkable growth in variable rents in addition to 2.5% increase

in base rents. This, coupled with the full-year rental contributions

from newly acquired iclub Ma Tau Wai Hotel, should more than

offset the income shortfall from iclub Sheung Wan Hotel and iclub

Fortress Hill Hotel, and increased cash finance costs.

Potential acquisitions to spice up distributions. Its parent Regal

Hotels International, through P&R Holdings, is developing iclub

Mongkok Hotel and iclub SoHo Hotel which are anticipated to

open for business in 2019. They are located near Mongkok and

Sheung Wan MTR stations, pointing to convenient transportation

accessibility. Potential acquisitions of these two limited service

hotels could add spice to Regal REIT’s future distribution income.

BUY with HK$2.61 TP. Regal REIT is trading at distribution yields

of 6.5-6.8% for FY18-19. The new mega infrastructure projects

including the Express Rail Link and Hong Kong-Zhuhai-Macau

should improve the connectivity between Hong Kong and

Mainland China, and should stimulate the growth of inbound

tourism. This augurs well for Regal REIT’s growth prospects.

Potential yield-accretive acquisitions could add to its investment

appeal. BUY with HK$2.61 TP. With all debts on floating rate

basis, interest rate hike remains the major investment risk.

At A Glance


Mkt Cap (HK$m/US$m) 7,492 / 955


Regal Hotels International Holdings Ltd 74.6

Nuveen LLC 10.5

Free Float (%) 14.9



Regal REIT



Regal REIT



Gross revenue 973 958 1,020 1,094 Fixed Assets 21,632 25,136 26,558 27,670 Property expenses (30) (31) (32) (32) Other LT Assets 590 656 659 662

Net Property Income 944 927 988 1,062 Cash & ST Invts 122 102 113 134 Other expenses (115) (153) (129) (135) Other Current Assets 33 64 70 72

Interest (Exp)/Inc (235) (224) (248) (289) Total Assets 22,377 25,958 27,400 28,538 Exceptionals 91 2,044 0 0 ST Debt

170 2,823 2,603 1,625

Pre-Tax Profit 685 2,595 612 638 Creditors 62 99 99 99 Tax (121) (106) (119) (124) Other Current Liab 98 68 68 68 Non-Controlling Interests 0 0 0 0 LT Debt 8,104 6,931 7,150 8,128

Net Profit 564 2,488 493 514 Other LT Liabilities 505 553 589 626 Distribution income 502 472 486 510 Non-Controlling Interests 0 0 0 0 Unitholders’ funds 13,438 15,485 16,890 17,991 Revenue Gth (%) (3) (2) 6 7 Total Capital 22,377 25,958 27,400 28,538 NPI Gth (%) (3) (2) 7 7 Share Capital (m) 3,257 3,257 3,257 3,257 Dist. Inc Growth (%) 0 (6) 3 5 Gross Debt (8,274) (9,753) (9,753) (9,753) DPU Growth (%) 0 (6) 3 5 Working Capital (175) (2,824) (2,588) (1,587) Book NAV (HK$) 4.13 4.75 5.19 5.52 Gross Gearing (%) 37 38 36 34



Pre-Tax Income 685 2,595 612 638 Revenues (HK$ m) Tax Paid (75) (124) (83) (87) Rental revenue 940 923 983 1,055 Depr/Amort 8 9 9 9 Hotel revenue 34 35 37 39

Chg in Wkg.Cap. (18) 28 0 0 Total 973 958 1,020 1,094 Other Non-Cash (43) (2,015) (6) (2) Operational CF 556 493 531 558 Net Capex (62) (102) (49) (51) Assoc, MI, Invsmt (17) (1,364) 0 0

Investment CF (78) (1,467) (49) (51) Net Chg in Debt 45 1,452 0 0 Key Assumptions (%) 2018F 2019F New issues/Unit Buyback 0 0 0 0 Distribution Paid (502) (502) (472) (486) Hotel RevPAR 8 8 Other Financing CF 0 0 0 0

Financing CF (457) 950 (472) (486) Chg in Cash 21 (24) 10 21


ed-JS/ sa- CS /AH


Price Target 12-mth: HK$65.40 (16% upside) (Prev HK$64.70)

Potential Catalyst: stronger retail market Where we differ: Market has slightly lower earnings estimate for FY18-19 Analyst Jeff YAU CFA, +852 2820 4912 [email protected] Ian CHUI +852 2971 1915 [email protected] Jason LAM +852 29711773 [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2017A 2018F 2019F Turnover 20,904 15,992 16,641 EBITDA 15,495 12,448 13,007 Pre-tax Profit 14,433 11,254 11,651 Underlying Profit 9,500 9,330 9,638 EPS (HK$) 3.13 3.07 3.17 EPS Gth (%) 11.4 (1.8) 3.3 PE (X) 18.0 18.4 17.8 DPS (HK$) 0.95 1.96 2.00 Div Yield (%) 1.7 3.5 3.5 Net Gearing (%) 20 19 18 ROE (%) 4.7 4.4 4.3 Est. NAV (HK$) 76.6 81.6 Disc. to NAV (%) (26) (31) Earnings Rev (%): Nil Nil Consensus EPS (HK$): 3.05 3.25 Other Broker Recs: B:9 S:0 H:6

ICB Industry: Financials ICB Sector: Real Estate Holding & Development Principal Business: Engaged mainly in property investments and hotel operations in Hong Kong. Owns a 72% stake in Harbour Centre Development (51.HK). Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”) Thomson Reuters, HKEX

Riding on rising retail consumption

• Robust retail sales growth to boost turnover rents

• Usage conversion to exploit earnings potential of Harbour City

• BUY with HK$65.40 TP Robust retail sales growth to boost turnover rents. Benefitting from improved tourist spending and increased local consumption, Wharf REIC’s two landmark shopping malls recorded notable increases in tenants’ sales. Retail tenants’ sales growth at Harbour City in Tsim Sha Tsui accelerated to 37% in 1Q18, from 2017’s 9.1%. Times Square showed encouraging retail sales growth of 23% in the same period, and this compares favourably with 1.1% in 2017. Both malls outperformed the overall Hong Kong retail sector. Key contributor to robust tenants’ sales was luxury product sector thanks to an upswing in inbound tourism. Electronics/audio visual sector also posted a solid performance, reversing the previous downtrend. Spectacular retail sales improvement should boost the turnover rents which stood at HK$738m or 8% of the company’s retail revenue in FY17. Moreover, this also underpins stronger reversionary growth in the years ahead. Overall, we forecast Harbour City and Times Square to show 5-6% growth in retail income in FY18 led by notably higher turnover rents and favourable rental reversion. Usage conversion to exploit the earnings potential of Harbour City. Wharf REIC is converting the serviced apartments at Hampton Court into office premises. Conversion works are expected to be completed in 3Q19. In view of higher rental yields for office, this initiative should be value accretive despite the minor income shortfall during the period of usage conversion. The Murray, a Niccolo hotel converted from an ex-government building, opened for business early this year. Although the inbound tourism recovery has been gathering momentum, this luxury hotel is not expected to make any meaningful contributions initially due to depreciation and amortisation expenses (c.HK$140m p.a.)

BUY with HK$65.40 TP. The stock is trading at 26% discount to our

appraised current NAV. With strong foothold in the retail property

market, Wharf REIC should stand to benefit the most from the retail

market upturn. From this perspective, we see further upside potential for

its share price. BUY with HK$65.40TP, based on 20% discount to our

Jun-19 NAV estimate.

At A Glance


Mkt Cap (HK$m/US$m) 171,395 / 21,838


Wheelock and Co Ltd 61.6

Free Float (%) 38.4



Wharf REIC



Wharf REIC


FY Dec 2017A 2018F 2019F FY Dec 2017A 2018F 2019F

Turnover 20,904 15,992 16,641 Fixed Assets 262,376 271,203 277,662 EBITDA 15,495 12,448 13,007 Other LT Assets 6,408 6,608 6,758 Depr / Amort (144) (288) (300) Cash & ST Invts 3,076 3,179 3,290

EBIT 15,351 12,160 12,707 Other Current Assets 815 1,770 2,550 Associates Inc 67 200 150 Total Assets 272,675 282,760 290,261 Interest (Exp)/Inc (985) (1,106) (1,206) ST Debt

20,800 1,500 4,900

Exceptionals 0 0 0 Creditors 8,805 9,005 8,805

Pre-tax Profit 14,433 11,254 11,651 Other Current Liab 2,829 2,829 2,829 Tax (4,267) (1,824) (1,898) LT Debt 24,752 43,052 38,652 Minority Interest (666) (99) (116) Other LT Liabilities 2,521 2,521 2,521

Underlying Profit 9,500 9,330 9,638 Minority Interests 5,650 5,449 5,265 Shareholder’s Equity 207,318 218,403 227,288 Total Cap. & Liab. 272,675 282,760 290,261 Sales Gth (%) 24 (23) 4 Share Capital (m) 3,036 3,036 3,036 Net Profit Gth (%) 12 (2) 3 Net Cash/(Debt) (42,476) (41,373) (40,262) EBITDA Margins (%) 74 78 78 Working Capital (28,543) (8,385) (10,694) EBIT Margin (%) 73 76 76 Net Gearing (%) 20 19 18 Tax Rate (%) 30 16 16


FY Dec 2017A 2018F 2019F FY Dec 2017A 2018F 2019F

EBIT 15,351 12,160 12,707 Revenues (HK$ m) Tax Paid (1,745) (1,824) (1,898) Investment Property 13,334 13,731 14,275 Depr/Amort 144 288 300 Development Property 5,907 0 0 Chg in Wkg.Cap (3,282) (1,410) (1,460) Hotels 1,403 1,996 2,096 Other Non-Cash (820) (136) (136) Others 260 265 271

Operating CF 9,648 9,077 9,513 Total 20,904 15,992 16,641 Net Capex (2,507) (1,500) (1,500) Assoc, MI, Invsmt (10,106) 0 0

Investing CF (12,613) (1,500) (1,500) Net Chg in Debt 41,170 (1,000) (1,000) Key Assumptions (%) 2018F 2019F New Capital 1,000 0 0 Dividend (10,374) (6,160) (6,312) Office rental - HK 5 3 Other Financing CF (31,319) 0 0 Retail rental (High street shops) - HK 0 5

Financing CF 477 (7,160) (7,312) Retail rental (Shopping centre) - HK 5 5 Chg in Cash (2,488) 417 702


sa- CS / CW

BUY Last Traded Price (6 Jul 2018):HK$14.82 (HSI : 28,316)

Price Target 12-mth: HK$20.65 (39.3% upside)

Potential Catalyst: Rising tourist mobility & consumption; online sales

Where we differ: Yet to include benefits from better infrastructural

connections between China and HK/Macau Analyst Mavis HUI +852 2863 8879 [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2016A 2017A 2018F 2019F Turnover 16,093 16,633 17,916 19,357 EBITDA 1,163 1,165 1,380 1,608 Pre-tax Profit 1,000 1,137 1,200 1,395 Net Profit 742 876 924 1,075 Core Profit 744 763 924 1,075 EPS (HK$) 1.10 1.29 1.37 1.59 Core EPS (HK$) 1.10 1.13 1.37 1.59 EPS Gth (%) (34.3) 18.1 5.5 16.3 Core EPS Gth (%) (10.0) 2.6 21.1 16.3 Diluted EPS (HK$) 1.10 1.29 1.37 1.59 DPS (HK$) 0.43 0.51 0.54 0.63 BV Per Share (HK$) 13.35 14.96 15.78 16.75 PE (X) 13.5 11.4 10.9 9.3 Core PE (X) 13.5 13.1 10.9 9.3 P/Cash Flow (X) 30.7 (98.9) 18.6 15.7 P/Free CF (X) 76.9 (31.6) 41.7 29.7 EV/EBITDA (X) 9.1 9.3 8.0 6.9 Net Div Yield (%) 2.9 3.4 3.6 4.2 P/Book Value (X) 1.1 1.0 0.9 0.9 Net Debt/Equity (X) 0.1 0.1 0.1 0.1 ROAE (%) 8.2 9.1 8.9 9.8 Earnings Rev (%): Nil Nil Consensus EPS (HK$) 1.40 1.56 Other Broker Recs: B:6 S:0 H:5

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters, HKEX

Lower base; brighter growth outlook • Sequential SSSG improvement in HK/Macau during 1H18

• Better store-level efficiency, product-mix refinement and its lower

base vs. major peers should all help earnings outlook

• Coupled with impending volume drivers from infrastructural

improvements and better prospects of the Greater Bay Area, BUY.

Multiple catalysts. We stay positive for Chow Sang Sang’s (“CSS”)

business outlook, especially for the coming 1-2 years given its lower

base versus major peers, a YTD pick-up in tourist consumption in

HK/Macau, and the inauguration of HK High-Speed Rail and the HK-

Zhuhai-Macau Bridge to potentially attract more inbound tourists.

Decent medium-term outlook also comes from the Greater Bay Area

development to strengthen S. China economic conditions and

travellers’ mobility. Its better operating leverage and normalized gross

margin for gold products also help earnings. Our projection has yet to

include benefits from impending infrastructural improvements.

Sound SSSG in HK/Macau. Following a low-teens’ same-store sales

growth (SSSG) in HK/Macau during 1Q18, channel checks suggest a

sequential SSSG improvement in May-Jun 2018, as compared to Mar-

Apr this year. After all, CSS also benefits from a relatively lower base

for 1H18 (1H17: -3%) as compared to key competitors (1H17: Chow

Tai Fook up 4-5%; Luk Fook up 2-3%). In China, CSS could see a

more diverse performance in 1H18, with two-thirds of the time

seeing single-digit positive SSSG, and the rest a negative SSSG.

Overall, group level performance remains promising.

Better margin prospects. On the back of strengthening SSSG in

HK/Macau markets that bear comparatively higher fixed costs, we

could see better operating leverage to lift margins. A stronger

demand for mid-ranged jewellery products (e.g. 1ct. diamonds) that

contribute slightly higher gross margins could also mean potential

improvement in profitability. In terms of sales network, CSS focuses

on store-level performance, including the gradual adoption of more

efficient store size (1,000-1,500 GFA) in HK/Macau, and migration of

stores from department stores to quality shopping malls in China.

At A Glance

Issued Capital (m shrs) 677

Mkt Cap (HK$m/US$m) 10,175 / 1,296


Everwin Company Ltd 17.7

Happy Incorporated 9.7

Capital World Investors 8.2

Happy Family Limited 8.0

Capital Research Global Investors 7.9

Free Float (%) 48.5


ICB Industry: Consumer Services / General Retailers

54

74

94

114

134

154

174

194

214

9.9

11.9

13.9

15.9

17.9

19.9

21.9

23.9

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Relative IndexHK$

Chow Sang Sang (LHS) Relative HSI (RHS)


Chow Sang Sang

Bloomberg: 116 HK EQUITY | Reuters: 0116.HK Refer to important disclosures at the end of this report


Chow Sang Sang



Turnover 16,093 16,633 17,916 19,357 Net Fixed Assets 1,000 1,084 1,141 1,207 Cost of Goods Sold (12,042) (12,643) (13,573) (14,621) Invts in Assocs & JVs 28 32 32 32

Gross Profit 4,050 3,991 4,343 4,736 Other LT Assets 1,029 1,119 1,140 1,163 Other Opng (Exp)/Inc (3,097) (3,036) (3,200) (3,386) Cash & ST Invts 1,316 1,217 913 660

Operating Profit 954 955 1,144 1,350 Inventory 6,558 7,490 8,004 8,581 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 1,842 2,212 2,383 2,574 Associates & JV Inc 4 5 5 5 Other Current Assets 429 516 516 516

Net Interest (Exp)/Inc 21 44 31 20 Total Assets 12,201 13,670 14,129 14,734 Dividend Income 23 20 20 20 Exceptional Gain/(Loss) (1) 113 0 0 ST Debt 1,483 1,618 1,404 1,233

Pre-tax Profit 1,000 1,137 1,200 1,395 Creditors 1,026 1,160 1,246 1,342 Tax (258) (261) (275) (320) Other Current Liab 97 98 104 110 Minority Interest 0 0 0 0 LT Debt 360 454 454 454 Preference Dividend 0 0 0 0 Other LT Liabilities 197 215 236 260

Net Profit 742 876 924 1,075 Shareholder’s Equity 9,038 10,125 10,685 11,336 Net Profit before Except. 744 763 924 1,075 Minority Interests 0 0 0 0

EBITDA 1,163 1,165 1,380 1,608 Total Cap. & Liab. 12,201 13,670 14,129 14,734 Sales Gth (%) (15.6) 3.4 7.7 8.0 EBITDA Gth (%) (6.4) 0.2 18.4 16.5 Non-Cash Wkg. Cap 7,706 8,959 9,553 10,220 Opg Profit Gth (%) (7.6) 0.2 19.7 18.0 Net Cash/(Debt) (527) (855) (945) (1,026) Net Profit Gth (%) (34.3) 18.1 5.5 16.3 Effective Tax Rate (%) 25.8 23.0 23.0 23.0 Cash Flow Statement (HK$ m) Rates & Ratio


Pre-Tax Profit 1,000 1,137 1,200 1,395 Gross Margins (%) 25.2 24.0 24.2 24.5 Dep. & Amort. 182 185 211 232 Opg Profit Margin (%) 5.9 5.7 6.4 7.0 Tax Paid (234) (261) (275) (320) Net Profit Margin (%) 4.6 5.3 5.2 5.6 Assoc. & JV Inc/(loss) (4) (5) (5) (5) ROAE (%) 8.2 9.1 8.9 9.8 (Pft)/ Loss on disposal of FAs FAFAsiaries/Investments (-/+)

239 0 0 0 ROA (%) 6.1 6.8 6.6 7.4 Chg in Wkg.Cap. (854) (1,168) (599) (673) ROCE (%) 6.4 6.3 7.0 8.0 Other Operating CF (3) 9 9 9 Div Payout Ratio (%) 39.2 39.4 39.4 39.4

Net Operating CF 327 (101) 540 638 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (196) (216) (300) (300) Asset Turnover (x) 1.3 1.3 1.3 1.3 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 33.9 44.5 46.8 46.7 Invts in Assoc. & JV 3 0 0 0 Creditors Turn (avg days) 29.8 32.0 32.9 32.8 Div from Assoc & JV 24 20 20 20 Inventory Turn (avg days) 203.6 205.8 211.6 210.4 Other Investing CF (1) 30 (21) (23) Current Ratio (x) 3.9 4.0 4.3 4.6

Net Investing CF (171) (166) (301) (303) Quick Ratio (x) 1.2 1.2 1.2 1.2 Div Paid (393) (345) (364) (424) Net Debt/Equity (X) 0.1 0.1 0.1 0.1 Chg in Gross Debt 126 86 0 0 Capex to Debt (%) 10.7 10.4 16.1 17.8 Capital Issues 0 0 0 0 Z-Score (X) 5.3 4.9 4.9 5.1 Other Financing CF (174) 444 (179) (163) N.Cash/(Debt)PS (HK$) (0.78) (1.26) (1.40) (1.52)

Net Financing CF (440) 185 (543) (587) Opg CFPS (HK$) 1.74 1.58 1.68 1.94 Currency Adjustments (54) 0 0 0 Free CFPS (HK$) 0.19 (0.47) 0.36 0.50 Chg in Cash (338) (83) (304) (252)


DBS HK's discussion of the issuer (Chow Tai Fook (1929 HK)) in this report will not be continuously followed. Accordingly, this report is being provided as a stand-alone analysis and recipients of this report should not expect additional reports relating to this issuer, unless so decided by DBS HK.

sa- CS / CW

NOT RATED

Last Traded Price (6 Jul 2018):HK$8.34 (HSI : 28,316)

Price Target 12-mth: N.A.


Where we differ: Slightly more prudent estimates on margin growth vs.

consensus Analyst Mavis HUI +852 2863 8879 [email protected]

Price Relative

Forecasts and Valuation FY Mar (HK$ m) 2017A 2018A 2019F 2020F Turnover 51,246 59,156 65,109 69,970 EBITDA 5,116 6,589 7,592 8,442 Pre-tax Profit 4,378 5,832 6,525 7,295 Net Profit 3,055 4,095 4,820 5,461 EPS (HK$) 0.31 0.41 0.48 0.55 EPS Gth (%) 3.9 34.0 17.7 13.3 Diluted EPS (HK$) 0.31 0.41 0.48 0.55 DPS (HK$) 0.00 0.00 0.00 0.00 BV Per Share (HK$) 3.18 3.34 3.37 3.44 PE (X) 27.3 20.4 17.3 15.3 P/Cash Flow (X) 13.3 29.3 9.8 14.3 P/Free CF (X) 14.9 42.4 10.9 16.8 EV/EBITDA (X) 16.1 13.1 10.8 9.8 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 2.6 2.5 2.5 2.4 Net Debt/Equity (X) CASH 0.1 CASH CASH ROAE (%) 9.2 12.6 14.4 16.0 Consensus EPS (HK$) 0.50 0.56 Other Broker Recs: B:10 S:1 H:10


More strategic moves to drive growth • The leading regional jewellery play that will benefit from rising

spending power & mobility of Mainland Chinese consumers

• Additional product, brand & store varieties should all help

beefing up market share further

• Aside from infrastructural improvements in HK/Macau, medium-

term potentials include Greater Bay Area development, S. China.

Size matters. As the leading jewellery retailer in Greater China with strong heritage of nearly 90 years, Chow Tai Fook (“CTF”) possesses one of the best position to sustain growth. In recent years, its efforts to explore into new brands & products, roll-out of new store labels, tapping into new markets (e.g. Japan), and enhancement of its IT & systems for better big data analyses could all provide more potential growth drivers in medium run. Coupled with sound YTD sales momentum in its core HK/Macau markets, robust online performance in China, and the impending opportunities from infrastructural & economic enhancement in the Greater Bay Area, CTF is well-poised to better ride on an improving business outlook. Sound YTD performance. CTF scored 17% SSSG in HK/Macau, as well as 7% SSSG in China during Jan-Mar 2018. Recent sales momentum for Apr-Jun 2018 should sustain a similar growth level. While the company is guiding mid single-digit SSSG for HK/Macau and low single-digit SSSG for China in FY19, we believe they are prudent guidance, especially with HK/China already scoring double-digit SSSG in 1Q FY19, the low base for 3Q FY19 (3Q FY18: 5% SSSG), and impending inauguration of the HK High-Speed Rail (Sep 2018) to potentially bring more Mainland tourists into HK/Macau. Chinese visitor consumption contributed 45% of CTF’s HK/Macau revenue in FY18 (FY17: 44%) and sees ample room to expand ahead. Good efforts on newer strategies. In recent years, CTF has rolled out new products and store labels to extend its reach to different customers. Aside from its earlier acquisition of the US label “House Of Fire” (US$150m), the company also launches its own brand “T Mark” that offers traceable diamonds, as well as SOINLOVE and MONOLOGUE stores that mainly serve the niche wedding market and young consumers, respectively. All such moves should enhance its ability to further expand its leading market share in the region.

At A Glance


Mkt Cap (HK$m/US$m) 85,600 / 10,906


Chow Tai Fook (Holding) Ltd. 89.3

Free Float (%) 10.7



41

61

81

101

121

141

161

181

201

221

3.8

4.8

5.8

6.8

7.8

8.8

9.8

10.8

11.8

12.8


Relative IndexHK$

Chow Tai Fook (LHS) Relative HSI (RHS)


Chow Tai Fook



Chow Tai Fook




Gross Profit 14,963 16,213 17,845 19,177 Other LT Assets 1,480 1,335 1,317 1,280 Other Opng (Exp)/Inc (10,584) (10,382) (11,320) (11,882) Cash & ST Invts 7,943 7,944 8,702 8,326

Operating Profit 4,378 5,832 6,525 7,295 Inventory 29,259 34,929 33,020 36,181 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 0 0 0 0 Associates & JV Inc 0 0 0 0 Other Current Assets 5,066 6,438 5,572 5,614

Net Interest (Exp)/Inc 0 0 0 0 Total Assets 49,402 57,570 56,030 59,281 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 5,693 8,359 6,475 6,958

Pre-tax Profit 4,378 5,832 6,525 7,295 Creditors 10,005 12,260 14,360 16,360 Tax (1,227) (1,629) (1,631) (1,751) Other Current Liab 90 101 101 101 Minority Interest (96) (108) (73) (83) LT Debt 600 2,100 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 512 653 653 653

Net Profit 3,055 4,095 4,820 5,461 Shareholder’s Equity 31,799 33,423 33,695 34,379 Net Profit before Except. 3,055 4,095 4,820 5,461 Minority Interests 703 674 748 831

EBITDA 5,116 6,589 7,592 8,442 Total Cap. & Liab. 49,402 57,570 56,030 59,281 Sales Gth (%) (9.4) 15.4 10.1 7.5 EBITDA Gth (%) 8.1 28.8 15.2 11.2 Non-Cash Wkg. Cap 24,230 29,007 24,132 25,334 Opg Profit Gth (%) 11.2 33.2 11.9 11.8 Net Cash/(Debt) 1,650 (2,515) 2,228 1,368 Net Profit Gth (%) 3.9 34.0 17.7 13.3 Effective Tax Rate (%) 28.0 27.9 25.0 24.0 Cash Flow Statement (HK$ m) Rates & Ratio


Pre-Tax Profit 4,378 5,832 6,525 7,295 Gross Margins (%) 29.2 27.4 27.4 27.4 Dep. & Amort. 854 871 966 1,056 Opg Profit Margin (%) 8.5 9.9 10.0 10.4 Tax Paid (920) (1,015) 0 0 Net Profit Margin (%) 6.0 6.9 7.4 7.8 Assoc. & JV Inc/(loss) 80 0 0 0 ROAE (%) 9.2 12.6 14.4 16.0 (Pft)/ Loss on disposal of FAs FAFAsiaries/Investments (-/+)

10 7 7 7 ROA (%) 5.8 7.7 8.5 9.5 Chg in Wkg.Cap. 1,452 (3,026) 892 (2,719) ROCE (%) 9.9 13.0 14.3 16.4 Other Operating CF 397 182 160 183 Div Payout Ratio (%) 0.0 0.0 0.0 0.0

Net Operating CF 6,252 2,851 8,550 5,823 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (1,213) (1,611) (1,058) (1,058) Asset Turnover (x) 1.0 1.1 1.1 1.2 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) N/A N/A N/A N/A Invts in Assoc. & JV (20) (43) 0 0 Creditors Turn (avg days) 124.6 96.3 105.2 112.9 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 311.3 277.7 268.4 254.4 Other Investing CF 86 76 99 115 Current Ratio (x) 2.7 2.4 2.3 2.1

Net Investing CF (1,147) (1,577) (959) (943) Quick Ratio (x) 0.5 0.4 0.4 0.4 Div Paid (5,148) (4,260) (6,182) (6,604) Net Debt/Equity (X) CASH 0.1 CASH CASH Chg in Gross Debt 0 0 0 0 Capex to Debt (%) 19.3 15.4 16.3 15.2 Capital Issues 0 0 0 0 Z-Score (X) N/A N/A N/A N/A Other Financing CF (4,624) 2,507 (296) 1,704 N.Cash/(Debt)PS (HK$) 0.17 (0.25) 0.22 0.14

Net Financing CF (9,771) (1,753) (6,477) (4,900) Opg CFPS (HK$) 0.48 0.59 0.77 0.85 Currency Adjustments 0 0 0 0 Free CFPS (HK$) 0.56 0.20 0.77 0.50 Chg in Cash (4,667) (479) 1,114 (20)


sa- CS / CW

BUY

Last Traded Price (6 Jul 2018):HK$16.70 (HSI : 28,316)


Potential Catalyst: Rising tourist mobility & consumption; Kai Tak City

Where we differ: Slightly faster SSSG estimates vs. consensus Analyst Mavis HUI +852 2863 8879 [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2016A 2017A 2018F 2019F Turnover 4,672 4,899 5,594 6,095 EBITDA 2,430 2,892 2,740 3,040 Pre-tax Profit 1,886 3,411 2,380 2,612 Net Profit 1,571 2,875 1,970 2,167 Core Profit 1,369 1,361 1,772 1,950 EPS (HK$) 0.98 1.79 1.23 1.35 Core EPS (HK$) 0.85 0.85 1.11 1.22 EPS Gth (%) (15.5) 83.0 (31.5) 10.0 Core EPS Gth (%) (25.8) (0.5) 30.2 10.0 Diluted EPS (HK$) 0.98 1.79 1.23 1.35 DPS (HK$) 0.63 0.63 0.49 0.54 BV Per Share (HK$) 1.15 2.52 2.92 3.69 PE (X) 17.0 9.3 13.6 12.3 Core PE (X) 19.6 19.7 15.1 13.7 P/Cash Flow (X) 13.6 12.8 10.6 9.7 P/Free CF (X) (4.6) 9.9 14.6 13.0 EV/EBITDA (X) 14.1 11.0 11.3 9.9 Net Div Yield (%) 3.8 3.8 2.9 3.2 P/Book Value (X) 14.5 6.6 5.7 4.5 Net Debt/Equity (X) 2.8 1.3 0.9 0.6 ROAE (%) 24.2 97.5 45.2 40.9 Earnings Rev (%): Nil Nil Consensus EPS (HK$) 1.17 1.25 Other Broker Recs: B:9 S:0 H:0


A niche tourist play • Robust 1H18 SSSG to fuel better operating leverage

• With the right product-mix to best capture PRC tourist

consumption, impending infrastructural improvement and rising

Mainland visitor numbers should be beneficial

• Trading at c.13x 12-month rolling PE and 11% discount to our TP

of HK$18.72, we maintain BUY

Right locations, right products. Lifestyle currently operates 2 SOGO

Stores in HK. The company possesses strong retail expertise and long

relationship with key global brands, as well as strategic store

locations atop main subway stations to maximize shoppers’ traffic.

Given its sound exposure to Mainland tourist consumption that

represents 40%+ sales of its self-owned flagship store in Causeway

Bay (“CWB”), and 65%+ sales of its rented store in Tsim Sha Tsui

(“TST”), sustainable PRC tourist arrivals along with better transport

links with China should be favourable. Medium-term growth drivers

will also include its new Kai Tak City in Kowloon East (by 2022).

Accelerated SSSG. On the back of improving tourist numbers, we

anticipate Lifestyle to score a strong double-digit same-store sales

growth (SSSG) for both its SOGO CWB Store (1H17: -1.5%) and

SOGO TST Store (1H17: +17.7%) during 1H18. In terms of category

sales, cosmetics should register the strongest SSSG of 30-40%+,

followed by selected luxury brands and jewellery plays. SSSG across

menswear, footwear and household items could perform relatively

slower. Blended commission rate from concessionaires should also

edge down slightly given robust sales of luxury groups. Yet, overall

1H18 should be promising and outlook stays encouraging.

Good prospects. Better operating leverage should be unlocked in

both SOGO stores this year, particularly for its self-owned store in

CWB. In view of strengthening sales momentum, expanding margins

and decent prospects from better Mainlanders’ mobility ahead to

potentially fuel tourist consumption in HK, Lifestyle sustains a good

business outlook. Our target price of HK$18.72 is based on sum-of-

the-parts valuation that adopts 4.5% cap rate on the concessionaire

income, 8x PE on retail operations, and an NAV discount of 40%.

At A Glance


Mkt Cap (HK$m/US$m) 26,603 / 3,389


Lau (Luen Hung) 35.5

United Goal Resources Ltd. 33.7

Fidelity Management & Research Company 5.4

Free Float (%) 25.3



45

65

85

105

125

145

165

185

205

8.3

10.3

12.3

14.3

16.3

18.3

20.3

22.3

24.3

26.3


Relative IndexHK$

Lifestyle International (LHS) Relative HSI (RHS)


Lifestyle International

Bloomberg: 1212 HK Equity | Reuters: 1212.HK Refer to important disclosures at the end of this report


Lifestyle International




Gross Profit 2,643 2,786 3,188 3,488 Other LT Assets 5,262 4,991 4,991 4,991 Other Opng (Exp)/Inc (627) (725) (825) (871) Cash & ST Invts 9,961 10,738 12,015 13,886

Operating Profit 2,016 2,061 2,363 2,618 Inventory 35 38 51 63 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 194 175 200 218 Associates & JV Inc 0 0 0 0 Other Current Assets 16 0 0 0

Net Interest (Exp)/Inc (332) (163) (180) (223) Total Assets 21,117 21,632 22,931 25,267 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 202 1,513 197 217 ST Debt 7,307 2,602 2,602 2,602

Pre-tax Profit 1,886 3,411 2,380 2,612 Creditors 1,243 1,293 1,446 1,542 Tax (338) (537) (410) (445) Other Current Liab 309 199 209 220 Minority Interest 24 0 0 0 LT Debt 9,550 13,220 13,720 14,720 Preference Dividend 0 0 0 0 Other LT Liabilities 260 273 273 273


EBITDA 2,430 2,892 2,740 3,040 Total Cap. & Liab. 21,117 21,632 22,931 25,267 Sales Gth (%) (24.3) 4.9 14.2 9.0 EBITDA Gth (%) (6.7) 19.0 (5.3) 10.9 Non-Cash Wkg. Cap (1,307) (1,280) (1,405) (1,481) Opg Profit Gth (%) (14.4) 2.3 14.6 10.8 Net Cash/(Debt) (6,897) (5,083) (4,307) (3,436) Net Profit Gth (%) (17.9) 83.0 (31.5) 10.0 Effective Tax Rate (%) 17.9 15.7 17.2 17.0 Cash Flow Statement (HK$ m) Rates & Ratio


Pre-Tax Profit 2,237 3,838 2,380 2,612 Gross Margins (%) 56.6 56.9 57.0 57.2 Dep. & Amort. 211 162 180 205 Opg Profit Margin (%) 43.1 42.1 42.2 42.9 Tax Paid (404) (329) (410) (445) Net Profit Margin (%) 33.6 58.7 35.2 35.6 Assoc. & JV Inc/(loss) (212) 0 0 0 ROAE (%) 24.2 97.5 45.2 40.9 (Pft)/ Loss on disposal of FAs FAFAsiaries/Investments (-/+)

12 (842) 0 0 ROA (%) 6.3 13.4 8.8 9.0 Chg in Wkg.Cap. (91) 82 115 65 ROCE (%) 7.3 8.7 9.4 9.7 Other Operating CF 215 (828) 263 322 Div Payout Ratio (%) 64.5 35.2 40.0 40.0

Net Operating CF 1,969 2,083 2,527 2,759 Net Interest Cover (x) 6.1 12.6 13.1 11.7 Capital Exp.(net) (7,834) 611 (700) (700) Asset Turnover (x) 0.2 0.2 0.3 0.3 Other Invts.(net) (1,838) (1,510) 0 0 Debtors Turn (avg days) 18.3 13.8 12.2 12.5 Invts in Assoc. & JV (2,063) 0 0 0 Creditors Turn (avg days) 368.9 237.4 224.5 227.1 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 11.4 6.7 7.2 8.7 Other Investing CF 4,653 1,243 0 0 Current Ratio (x) 1.2 2.7 2.9 3.2

Net Investing CF (7,081) 344 (700) (700) Quick Ratio (x) 1.1 2.7 2.9 3.2 Div Paid (1,013) (1,013) (788) (867) Net Debt/Equity (X) 2.8 1.3 0.9 0.6 Chg in Gross Debt 5,487 (1,120) 500 1,000 Capex to Debt (%) 46.5 N/A 4.3 4.0 Capital Issues 0 0 0 0 Z-Score (X) 2.4 3.0 3.0 2.9 Other Financing CF (486) (434) (263) (322) N.Cash/(Debt)PS (HK$) (4.30) (3.17) (2.69) (2.14)

Net Financing CF 3,988 (2,566) (551) (189) Opg CFPS (HK$) 1.29 1.25 1.51 1.68 Currency Adjustments (25) 9 0 0 Free CFPS (HK$) (3.66) 1.68 1.14 1.28 Chg in Cash (1,149) (131) 1,277 1,870


sa- CS / CW




Where we differ: Slightly better estimates on SSSG & operating leverage

vs. consensus Analyst Mavis HUI +852 2863 8879 [email protected]

Price Relative

Forecasts and Valuation FY Mar (HK$ m) 2017A 2018A 2019F 2020F Turnover 12,807 14,578 16,751 18,822 EBITDA 1,366 1,771 2,060 2,325 Pre-tax Profit 1,250 1,613 1,947 2,207 Net Profit 1,017 1,369 1,633 1,840 EPS (HK$) 1.73 2.33 2.78 3.13 EPS Gth (%) 6.3 34.7 19.3 12.7 Diluted EPS (HK$) 1.73 2.33 2.78 3.13 DPS (HK$) 1.10 1.10 1.34 1.50 BV Per Share (HK$) 15.11 17.09 17.99 19.62 PE (X) 18.3 13.6 11.4 10.1 P/Cash Flow (X) 25.8 16.7 15.3 17.9 P/Free CF (X) 29.7 18.1 17.0 20.6 EV/EBITDA (X) 12.6 9.7 8.6 7.6 Net Div Yield (%) 3.5 3.5 4.2 4.8 P/Book Value (X) 2.1 1.9 1.8 1.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.6 14.5 15.9 16.7 Earnings Rev (%): Nil Nil Consensus EPS (HK$) 2.40 2.63 Other Broker Recs: B:9 S:1 H:7


Accelerated SSSG • Latest SSSG in core HK/Macau markets ascended further to over

20% in 1Q FY19, vs. 18% in 4Q FY18 and 9% in FY18

• Good business outlook and better operating leverage also

reinforce promising prospects

• Trading at an undemanding c.11x 12-mth rolling PE, at >4% yield,

BUY

Strengthening performance. Luk Fook has recently reported a 13.8% y-o-y increase in revenue for FY18. Better operating leverage in HK/Macau & Overseas, especially into 2H FY18 had lifted segmental margins and helped boosting overall earnings growth by 44%. With a strengthening sales trend for FY19, especially given impending infrastructural improvements (e.g. HK High-speed Rail) and vibrant development of the Greater Bay Area of China, travelers’ mobility should improve, hence creating better prospects for tourist consumption in HK/Macau.

Sustainable sales momentum. In 1Q FY19, Luk Fook’s same-store sales growth (SSSG) strengthened further to over 20% in HK/Macau, thanks to stronger contribution from Mainland visitors (FY18: 58% of HK/Macau sales) and supportive local demand. China is seeing a mixed trend, with gem-set sales resuming growth while gold product sales remain quite soft; e-commerce performance stays robust though and should grow by at least 30% even on a higher base (FY18: up 88.7% to reach 15.5% of China retail revenue). Overall, Luk Fook targets at double-digit SSSG for HK/Macau and a single-digit SSSG for China in FY19. No less than 120 stores will also be added in China during FY19, predominantly licensed stores. Another 5 stores could be added in HK/Macau, plus 3-5 new openings in overseas markets (e.g. Malaysia, Philippines).

Better profitability. Riding on robust SSSG to better dilute the overheads, key cost items had seen decent improvement. For instance, we saw a 0.5ppt decline in rental cost ratio to 5.7% of sales, and 0.2ppt reduction in advertising & promotional expense ratio to 0.6% of sales during FY18. Looking ahead, better operating leverage given a strengthening SSSG, and normalizing wholesale gross margin that was affected in FY18, by some one-off price adjustments and an exceptionally high-base, should benefit profitability and support earnings growth for FY19-20. At A Glance

Issued Capital (m shrs) 587

Mkt Cap (HK$m/US$m) 18,993 / 2,420


Luk Fook (Control) Ltd. 39.9

Silchester International Investors, L.L.P. 11.1

Free Float (%) 49.1



60

80

100

120

140

160

180

200

220

11.5

16.5

21.5

26.5

31.5

36.5


Relative IndexHK$

Luk Fook Holdings (LHS) Relative HSI (RHS)


Luk Fook Holdings



Luk Fook Holdings


FY Mar 2017A 2018F 2019F 2020F FY Mar 2017A 2018A 2019F 2020F

Turnover 12,807 14,578 16,751 18,822 Net Fixed Assets 812 821 848 877 Cost of Goods Sold (9,530) (10,837) (12,452) (13,987) Invts in Assocs & JVs 176 163 163 163

Gross Profit 3,277 3,741 4,299 4,835 Other LT Assets 260 353 353 353 Other Opng (Exp)/Inc (1,988) (2,069) (2,350) (2,633) Cash & ST Invts 1,862 2,098 1,644 1,797

Operating Profit 1,289 1,673 1,949 2,202 Inventory 6,973 7,992 9,012 9,931 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 541 725 833 935 Associates & JV Inc (54) (30) (24) (19) Other Current Assets 56 64 64 64

Net Interest (Exp)/Inc 15 23 22 24 Total Assets 10,679 12,215 12,917 14,121 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 (52) 0 0 ST Debt 437 726 816 921

Pre-tax Profit 1,250 1,613 1,947 2,207 Creditors 1,005 1,125 1,231 1,383 Tax (223) (243) (293) (344) Other Current Liab 152 174 174 174 Minority Interest (10) (1) (21) (23) LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 105 109 115 115


EBITDA 1,366 1,771 2,060 2,325 Total Cap. & Liab. 10,679 12,215 12,917 14,121 Sales Gth (%) (8.7) 13.8 14.9 12.4 EBITDA Gth (%) 7.7 29.7 16.3 12.8 Non-Cash Wkg. Cap 6,413 7,481 8,504 9,374 Opg Profit Gth (%) 6.4 29.7 16.5 13.0 Net Cash/(Debt) 1,425 1,372 829 876 Net Profit Gth (%) 6.1 34.7 19.3 12.7 Effective Tax Rate (%) 17.8 15.1 15.1 15.6 Cash Flow Statement (HK$ m) Rates & Ratio


Pre-Tax Profit 1,250 1,613 1,947 2,207 Gross Margins (%) 25.6 25.7 25.7 25.7 Dep. & Amort. 131 128 135 142 Opg Profit Margin (%) 10.1 11.5 11.6 11.7 Tax Paid (215) (243) (293) (344) Net Profit Margin (%) 7.9 9.4 9.7 9.8 Assoc. & JV Inc/(loss) 54 0 0 0 ROAE (%) 11.6 14.5 15.9 16.7 (Pft)/ Loss on disposal of FAs FAFAsiaries/Investments (-/+)

2 0 0 0 ROA (%) 9.5 12.0 13.0 13.6 Chg in Wkg.Cap. (511) (337) (524) (915) ROCE (%) 11.1 13.9 14.8 15.4 Other Operating CF 9 (51) (48) (53) Div Payout Ratio (%) 63.5 47.1 48.0 48.0

Net Operating CF 720 1,110 1,217 1,038 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (95) (82) (122) (134) Asset Turnover (x) 1.2 1.3 1.3 1.4 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 14.2 15.8 17.0 17.1 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 36.8 36.3 34.9 34.5 Div from Assoc & JV 1 1 1 1 Inventory Turn (avg days) 258.6 255.0 251.9 249.7 Other Investing CF (314) (102) (852) 29 Current Ratio (x) 5.9 5.4 5.2 5.1

Net Investing CF (407) (183) (973) (105) Quick Ratio (x) 1.5 1.4 1.1 1.1 Div Paid (646) (645) (784) (883) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (477) 289 89 106 Capex to Debt (%) 21.7 11.3 15.0 14.6 Capital Issues 0 0 0 0 Z-Score (X) 10.3 10.3 10.4 9.8 Other Financing CF 323 (2) (2) (2) N.Cash/(Debt)PS (HK$) 2.43 2.34 1.41 1.49

Net Financing CF (799) (358) (697) (780) Opg CFPS (HK$) 2.10 2.47 2.97 3.33 Currency Adjustments (14) 0 0 0 Free CFPS (HK$) 1.07 1.75 1.86 1.54 Chg in Cash (500) 569 (454) 153


sa- CS / CW



Potential Catalyst: Rising tourist mobility & consumption; e-commerce

Where we differ: better operating leverage vs. consensus

Analyst Mavis HUI +852 2863 8879 [email protected]

Price Relative

Forecasts and Valuation FY Mar (HK$ m) 2017A 2018A 2019F 2020F Turnover 7,746 8,018 9,023 9,811 EBITDA 498 647 921 1,089 Pre-tax Profit 405 561 796 954 Net Profit 327 465 660 792 EPS (HK$) 0.11 0.15 0.22 0.26 EPS Gth (%) (16.9) 38.5 40.6 19.9 Diluted EPS (HK$) 0.11 0.15 0.22 0.26 DPS (HK$) 0.17 0.17 0.22 0.26 BV Per Share (HK$) 0.74 0.82 0.82 0.82 PE (X) 40.6 29.3 20.8 17.4 P/Cash Flow (X) 37.2 45.3 28.2 20.6 P/Free CF (X) 48.2 101.1 44.7 24.2 EV/EBITDA (X) 24.7 19.0 13.6 11.6 Net Div Yield (%) 3.7 3.9 4.8 5.8 P/Book Value (X) 6.1 5.5 5.5 5.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 14.5 19.8 26.6 31.9 Earnings Rev (%): Nil Nil Consensus EPS (HK$) 0.21 0.25 Other Broker Recs: B:10 S:0 H:3


Overall prospects improved • Robust SSSG of 26.9% in HK/Macau from Apr to mid-Jun 2018

• Potential upsurge of PRC tourists via better transport links

should continue to support sales volume into FY19-20

• Operating leverage to improve further on sound revenue

expansion. Maintain BUY

Volume is the key. Sa Sa reported a 6% y-o-y growth in sales, and

c.53% increase in core earnings to HK$502m in its latest FY18

results. Riding on an increasing number of Chinese visitors into its

core HK/Macau markets, especially given impending inauguration

of the high-speed rail, the company’s affordable ticket size

(c.HK$600) could more easily secure PRC tourists’ consumption

(FY18: 70%+ of HK/Macau sales). With a compelling HK/Macau

same-store sales growth (SSSG) of 26.9% during 1 Apr - 18 Jun

2018 (FY18: up 3.9%), and sound catalysts from infrastructural

improvement to attract more Mainland tourists, we stay confident

on strong sales volume to sustain better operating leverage and

margin enhancement into FY19-20.

Improving non-core divisions. In FY18, Malaysia/Singapore already

turned around to make HK$4.7m profits. Both China and its e-

commerce division also saw narrowed losses. The company also

stays positive in e-commerce, targeting at sound divisional growth

of 20%+ for FY19 and better operating efficiency from impending

relocation of its PRC logistics center from Zhengzhou to Hangzhou.

Strong operating leverage. Sa Sa has secured better operating

leverage as SSSG continues to ramp up. The latest example points

to its much improved 2H FY18 SSSG of +9.1% for HK/Macau (1H

FY18: -2.1%), hence better operating cost ratios (in terms of sales)

that included rentals of 11.1% (1H FY18: 14%), staff expenses of

11.9% (1HFY18: 13.4%), and advertising & promotional costs of

1.1% (1H FY18: 1.4%). Management’s key initiatives ahead will

mainly focus on sales enhancement to more effectively capture

operating leverage. Its store addition in HK/Macau (add 5-6) and

China (add 8) in FY19, inclusive of 4 new stores in the Greater Bay

Area of China (e.g. Dongguan, Zhuhai, Jiangmen) should stengthen

operating scale further and open up new medium-term

opportunities.

At A Glance


Mkt Cap (HK$m/US$m) 14,592 / 1,859


Sunrise Height Incorporated 48.8

Green Ravine Limited 14.2

Free Float (%) 37.0



33

53

73

93

113

133

153

173

193

213

1.8

2.8

3.8

4.8

5.8

6.8


Relative IndexHK$

Sa Sa (LHS) Relative HSI (RHS)


Sa Sa



Sa Sa



Turnover 7,746 8,018 9,023 9,811 Net Fixed Assets 284 340 373 326 Cost of Goods Sold (4,517) (4,644) (5,271) (5,741) Invts in Assocs & JVs 0 0 0 0

Gross Profit 3,229 3,374 3,752 4,070 Other LT Assets 164 157 172 189 Other Opng (Exp)/Inc (2,834) (2,825) (2,968) (3,129) Cash & ST Invts 969 1,365 1,221 1,184

Operating Profit 395 549 783 941 Inventory 1,222 1,337 1,518 1,653 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 67 145 43 46 Associates & JV Inc 0 0 0 0 Other Current Assets 223 232 383 416

Net Interest (Exp)/Inc 10 12 12 13 Total Assets 2,929 3,577 3,709 3,815 Dividend Income 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 ST Debt 0 0 0 0

Pre-tax Profit 405 561 796 954 Creditors 606 977 1,099 1,195 Tax (79) (95) (135) (162) Other Current Liab 45 61 64 68 Minority Interest 0 0 0 0 LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 59 57 62 69

Net Profit 327 465 660 792 Shareholder’s Equity 2,219 2,483 2,483 2,483 Net Profit before Except. 327 465 660 792 Minority Interests 0 0 0 0

EBITDA 498 647 921 1,089 Total Cap. & Liab. 2,929 3,577 3,709 3,815 Sales Gth (%) (1.3) 3.5 12.5 8.7 EBITDA Gth (%) (14.7) 29.8 42.5 18.2 Non-Cash Wkg. Cap 861 678 779 852 Opg Profit Gth (%) (14.3) 38.8 42.8 20.1 Net Cash/(Debt) 969 1,365 1,221 1,184 Net Profit Gth (%) (14.8) 42.4 42.0 19.9 Effective Tax Rate (%) 19.4 17.0 17.0 17.0 Cash Flow Statement (HK$ m) Rates & Ratio


Pre-Tax Profit 405 561 796 954 Gross Margins (%) 41.7 42.1 41.6 41.5 Dep. & Amort. 103 98 138 148 Opg Profit Margin (%) 5.1 6.8 8.7 9.6 Tax Paid (4) (57) (81) (97) Net Profit Margin (%) 4.2 5.8 7.3 8.1 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 14.5 19.8 26.6 31.9 (Pft)/ Loss on disposal of FAs FAFAsiaries/Investments (-/+)

12 0 0 0 ROA (%) 10.5 13.7 17.6 20.5 Chg in Wkg.Cap. (80) (203) (228) (173) ROCE (%) 13.4 18.5 25.2 30.2 Other Operating CF (80) (97) (137) (163) Div Payout Ratio (%) 154.9 114.2 100.0 100.0

Net Operating CF 357 301 488 669 Net Interest Cover (x) NM NM NM NM Capital Exp.(net) (82) (166) (180) (100) Asset Turnover (x) 2.6 2.2 2.4 2.6 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 3.2 6.6 1.7 1.7 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 49.1 63.5 73.8 74.9 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 96.1 102.7 101.5 103.5 Other Investing CF 7 12 12 13 Current Ratio (x) 3.8 3.0 2.7 2.6

Net Investing CF (75) (154) (168) (87) Quick Ratio (x) 1.6 1.5 1.1 1.0 Div Paid (381) (531) (660) (792) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 0 0 0 0 Capex to Debt (%) N/A N/A N/A N/A Capital Issues (5) 0 0 0 Z-Score (X) 17.7 17.7 17.4 16.4 Other Financing CF 0 781 196 174 N.Cash/(Debt)PS (HK$) (0.33) (0.45) (0.40) (0.39)

Net Financing CF (386) 250 (465) (618) Opg CFPS (HK$) 0.15 0.17 0.24 0.28 Currency Adjustments (6) 0 0 0 Free CFPS (HK$) 0.09 0.04 0.10 0.19 Chg in Cash (110) 397 (145) (36)



DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 17 Jul 2018 09:29:38 (HKT) Dissemination Date: 17 Jul 2018 19:24:09 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.


ASIAN INSIGHTS

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate

1 does not serve as an officer of

the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests

2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Langham Hospitality Investment Limited (1270 HK), Fortune Real Estate Investment Trust (778 HK), Sands China Limited (1928 HK) and New World Development Company Limited (17 HK) recommended in this report as of 13 Jul 2018.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Langham Hospitality Investment Limited (1270 HK) and Fortune Real Estate Investment Trust (778 HK) recommended in this report as of 13 Jul 2018.

4. DBS Bank Ltd, DBS HK, DBSVS, DBS Vickers Securities (USA) Inc (“DBSVUSA”), or their subsidiaries and/or other affiliates beneficially own a total of 1% of the issuer's market capitalization of Langham Hospitality Investment Limited (1270 HK) and Fortune Real Estate Investment Trust (778 HK) as of 13 Jul 2018.

5. Compensation for investment banking services:

DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Far East Consortium International Limited (35 HK), Wharf REIC (1997 HK), Regal Hotels International Holdings Limited (78 HK) and Csi Properties Limited (497 HK) as of 30 Jun 2018.

6. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Far East Consortium International Limited (35 HK), Wharf REIC (1997 HK) and Csi Properties Limited (497 HK) in the past 12 months, as of 30 Jun 2018.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities

as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to

obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security

discussed in this document should contact DBSVUSA exclusively.

7. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of

which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a

new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.


RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946.

DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws.

Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.

United Kingdom

This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai International Financial Centre

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor,

Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.


ASIAN INSIGHTS

United Arab Emirates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank (Hong Kong) Limited

18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong

Tel: (852) 2820-4888, Fax: (852) 2521-1812


DBS Regional Research Offices

HONG KONG DBS Bank (Hong Kong) Ltd Contact: Carol Wu 18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong Tel: 852 2820 4888 Fax: 852 2521 1812 e-mail: [email protected]

MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia. Tel.: 603 2604 3333 Fax: 603 2604 3921 e-mail: [email protected]

SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected]

THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 857 7831 Fax: 66 2 658 1269 e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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