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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

14 March 2017 Europe/Switzerland

Equity Research Luxury Goods

Swiss Watchmakers The Ideas Engine series showcases Credit Suisse’s unique

insights and investment ideas.

Research Analysts

Guillaume Gauvillé, CFA

44 207 888 0321

[email protected]

Catherine Tillson

44 20 7888 6052

[email protected]

SECTOR REVIEW

What could go wrong in the 'rebound'

■ We reiterate our cautious view on the Swiss watch industry. While the

market seems to be expecting a bounce in watch manufacturing in 2017,

we believe the industry continues to face cyclical and structural challenges.

Exports are off to a slow start (down 6% in January), the KOF Swiss

Economic Institute survey suggests overcapacity persists and we think

manufacturers have to tackle not only inventory issues but also a negative

ASP development in the medium term.

■ New analysis provides new perspectives on the Swiss watch industry.

Our proprietary work features (a) a detailed analysis of product launches

for five brands covering half the Swiss watch industry which indicates that

the average selling price at the retail level is likely to be negative, (b) a

benchmark analysis with sell-in data which suggests the negative mix for

the industry is yet to come at the wholesale level, (c) an excess inventory

model which concludes that the stock overbuild in Asia remains but is

marginally improving whilst the stock situation in the US has worsened, and

(d) an innovative way to assess the inventory glut by brand using the

average discount on watches when purchased on the grey market.

■ We rate both Swatch Group and Richemont Underperform. With >70%

of watch sales being wholesale and >55% of sales coming from Asia, we

are most negative on Swatch Group, chiefly on fundamentals. Most of its

brands show more problematic inventory issues than peers. Our Swatch

target price increases to SFr260 from SFr220 due to the time value factor

and the rerating of luxury peers. We remain cautious on Richemont largely

on valuation grounds. Our target price is unchanged at SFr65.

Figure 1: Value chain for the Swiss watch industry

Source: Credit Suisse research

Retailers

Grey market

ConsumersManufacturers

Inventory buybacks

analysis

Proprietary excess inventory

model for Asia and US

Proprietary analysis of average

discount in the grey market

SELL IN SELL THROUGH

Detailed channel

checks in Asia and US

Proprietary analysis of

product launches

14 March 2017

Swiss Watchmakers 2

Key charts

Figure 2: ASP at the retail level is coming down

according to our proprietary product launch analysis

Figure 3: This suggests that mix should ultimately

start to become negative at the wholesale level

Entry price points and ASP by brand and by launch date ASP development of Swiss watch exports

Source: Company data, Credit Suisse research Source: FHS, Credit Suisse research

Figure 4: Our excess stock model shows that stock

overbuild remains in Asia but is not worsening

Figure 5: Our analysis of the grey market shows that

the inventory glut is the highest for Swatch Group

Estimated excess stocks in Asia Average discount on grey market online retailer Jomashop

Source: FHS, Credit Suisse research Source: Company data, Credit Suisse research

Figure 6: Swatch Group is already pricing in a

rebound in exports

Figure 7: Swatch Group and Richemont do not

screen well under our EV/IC framework

Swatch Group's share price vs. KOF Business Climate index 2018e EV/IC vs. RNOA/WACC

Source: KOF Swiss Economic Institute, FHS, Credit Suisse research Source: Credit Suisse estimates

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LVMHRichemont

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Kering BurberryHugo Boss

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14 March 2017

Swiss Watchmakers 3

Table of contents

Key charts 2

What could go wrong in the 'rebound' 4

Setting the scene ...................................................................................................... 4

New analysis provides new perspectives ................................................................. 6

Negative mix yet to be seen 7

The way we think brands are adapting their offer .................................................... 7

Looking for empirical evidence ................................................................................. 7

IWC Schaffhausen ................................................................................................... 9

Jaeger-LeCoultre .................................................................................................... 10

Cartier ..................................................................................................................... 11

Rolex ...................................................................................................................... 12

Omega .................................................................................................................... 13

The price/mix conundrum in sell-in numbers ......................................................... 14

Stock levels in the channel 17

A recap on sell-through .......................................................................................... 17

Marginal improvement in stock levels .................................................................... 21

Industry responds with inventory swaps ................................................................ 24

A closer look at discounts within the grey market .................................................. 25

The way we approach valuation 27

Swatch Group (UHR.S) 29

Charting the story ................................................................................................... 31

Financials ............................................................................................................... 32

Valuation ................................................................................................................. 33

Compagnie Financiere Richemont SA 35

Charting the story ................................................................................................... 37

Divisional assumptions ........................................................................................... 38

Valuation ................................................................................................................. 39

The authors of this report wish to acknowledge the contribution made by Maya

Mahadevan, an employee of CRISIL Global Research and Analytics, a business division

of CRISIL Limited, a third-party provider of research services to Credit Suisse.

14 March 2017

Swiss Watchmakers 4

What could go wrong in the 'rebound'

Setting the scene

The general assumption appears to be that the downturn for the Swiss watch

industry is over. The share prices for both Swatch Group and Richemont have rallied

c.30% in the last six months and outperformed their peers by 5%. The sell side has turned

slightly less bearish on these two names with now 9/30 analysts having a sell rating on

Swatch Group and only 3/34 for Richemont. A growing number of clients we have met in

the last few months have also turned less pessimistic on the Swiss watch industry. We

believe five factors have contributed towards this regained optimism leading to the share

price rally:

1. Improving sales for Richemont in the three months to December. Richemont

reported 3Q17 group organic sales up +5% improving from -12% in 1H17. While

jewellery was the main driver of the improvement, watch retail sales seemed to be

rising and wholesale had become less negative.

2. A recovery in Chinese demand for luxury goods. There are now tangible signs that

Chinese demand is picking up after 3-4 years of relative austerity marked by the anti-

corruption campaign initiated in 2013 and the stock market correction in 2015. If we

take Louis Vuitton as a proxy for Chinese luxury goods demand, LVMH reported that

sales in the Chinese market grew strong double digits in 2H16 after being flat in 1H

and rising mid-single digits in 2013, 2014 and 2015.

3. Bullish 2017 guidance from Swatch Group. During the 2016 results conference call,

CEO Nick Hayek stated that he expects organic sales to grow +7% to +10% in 2017,

therefore improving from the 11% decline recorded in 2016. He also indicated that the

group reported positive organic sales growth in retail/wholesale in January.

4. Money flow into European cyclicals. Our strategists note that the European non-

financial cyclicals outperformed defensives by 10% in the last six months (see Four

areas of complacency published on 2 February). This has largely benefited high-beta

stocks in cyclical sectors, namely Swatch Group and Richemont in luxury.

5. Retailers turning less pessimistic on demand trends. Feedback from retailers and

the SIHH in Geneva suggest that sell-through is improving in some of the most

problematic markets including Hong Kong and the US.

However, we think the picture may not be as rosy as it appears. The market

sometimes appears to be too complacent about challenging the above factors. We

highlight our thoughts below:

1. Stock swaps may have inflated the underlying wholesale trends at Richemont.

We welcome the initiatives of some watch brands to help retailers clear inventories by

swapping slow moving items for newer and more affordable watches. However, we

believe the wholesale performance of Richemont would have been much worse than

the 3% decline reported in wholesale in 3Q17 in the absence of these swaps. We

estimate the underlying wholesale business could have been down at least high single

digits in 3Q (see Mind the dynamics around inventory swaps published on 10

November 2016). This would be consistent with the overall export figures of the Swiss

watch industry of -9% in the quarter.

2. Official sell-through may be boosted by the crackdown on the grey market. We

do not deny that Chinese demand is improving. But the degree of the improvement

seen in China is rather surprising. We believe the initiatives taken by the Chinese

government last year to tackle the grey market for luxury goods had an influence on

the rate of growth in the Chinese market. For instance, the government has

implemented stricter controls at Chinese customs, making it much harder for the

https://plus.credit-suisse.com/r/V6xyvK1AF-WElY95


https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&sourceid=emblast&document_id=x737099&serialid=rem9TLA7vFAnnWZ51rOYGA9nscYEsjtxa6hEuV5uuvs%3d

14 March 2017

Swiss Watchmakers 5

daigou to conduct their business. Our channel checks suggest that this redirected

sales to traditional retail channels and therefore boosted the reported sell-through

numbers in China.

3. We are cautious on guidance from Swatch Group. From experience, Swatch

Group tends to be overly bullish at the beginning of the year. Judging by the last four

years, the company has consistently failed to deliver on its initial guidance. Moreover,

Mr Hayek's comment on January performance being up in retail/wholesale seems to

contradict the industry data that showed a 6% drop in exports despite easy comps,

one additional working day and the earlier timing of the Chinese New Year compared

to the same month in the prior year (see Figure 8).

4. The cyclicals rally may be running out of steam, according to our strategists.

The last few months of strong outperformance has left cyclicals in Europe pricing in

extremely strong growth outturns. Our strategists note that the cyclical/defensive ratio

is consistent with PMI new manufacturing orders rising to c.60. This would be

consistent with GDP growth of c.4% in Europe, double the pace forecast by our

economists (see Four areas of complacency published on 2 February, Figure 9).

Figure 8: Exports saw little sign of improvement in

January despite Swatch's bullishness

Figure 9: The outperformance of cyclicals seems to

imply a sharp rebound in PMI and European growth

Swiss watch exports Cyclicals/defensives performance against Euro area PMI

Source: FHS, Credit Suisse research Source: Credit Suisse Global Strategy Team

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14 March 2017

Swiss Watchmakers 6

New analysis provides new perspectives

We believe some structural and cyclicals issues still need to be tackled. In fact, this

regained optimism seems to overshadow some lingering challenges for the Swiss watch

industry. In order to shed light on these, our proprietary work features:

1. An analysis of new product ASP against previous lines for five Swiss brands.

Our channel checks suggest that sell-through is improving globally but demand has

changed radically since the last peak of the cycle. When asking retailers about what

product is performing better, they generally respond: 'the more affordable price points

of the more iconic brands'. Given the lack of data available to gauge ASP at the retail

level, we have screened 2,000 SKUs of watches across five different brands covering

nearly half of the Swiss watch industry. We then compare ASP as well as entry price

points of the recent launches against the existing lines. As brands are adapting their

offer to a changing demand, this should give a fair picture of the likely ASP

development at the retail level. In terms of sell-through, we conclude that ASP could

be trending in negative double digits over the medium term.

2. Benchmarking against sell-in data. Detailed data from the Fédération de

l'Horlogerie Suisse suggest that ASP has been broadly flat in each price segment and

within its largest markets. For instance, the industry was down 10% in both value and

volumes in 2016 and mix was only low single-digit negative in the last few months. As

a result, the negative mix we are starting to see in sell-through should eventually feed

through sell-in numbers.

3. A detailed excess inventory model. We extended our proprietary model to include

markets like Japan, Singapore and the US in addition to Hong Kong/China. Following

a bottom-up analysis of trends at key retailers in Asia and the US, we compare sell-

through against sell-in over the last four years in order to estimate (a) the necessary

level of exports to meet replenishment needs of retailers and (b) the stock overbuild.

We conclude that the situation in Asia is becoming marginally better. While exports

have been adjusted down to replenishment levels, we estimate there are still 90 days

of excess stocks in the retail channel. The situation in the US seems more problematic

with exports still well above replenishment levels, leading to a bigger inventory glut.

4. An analysis of the grey market to assess inventory issue by brand. We have

screened 1,000 SKUs of watches across 20 different brands sold on grey market

platforms in the US. In practice, the higher the discount at these unauthorised dealers,

the more problematic the inventory issue. We aim to give a regular update to investors

on how the average discount by brand evolves. We conclude that Patek Philippe and

Rolex remain the most desirable brands among consumers and the inventory problem

appears to be manageable. On the contrary, Swatch Group does not screen well with

its largest brands being discounted on the grey market by more than the 30% industry

average discount.

14 March 2017

Swiss Watchmakers 7

Negative mix yet to be seen

The way we think brands are adapting their offer

Swiss watch brands are focusing increasingly on three main areas. From our

research of retailers, industry players and watchers, we have identified three pillars to

drive volume growth in the industry:

1. (Re)developing ladies' watches. We believe there are reasons why the industry has

been neglecting this segment for so long and only a few brands have a sizeable ladies'

watch business. First, it is less lucrative than selling men's watches. In fact, ladies'

watches directly compete against other accessories including jewellery and handbags.

Second, the know-how of most Swiss watchmakers traditionally has focused more on

the mechanisms and complications than on the aesthetic qualities. Our research has

shown that more complex watches, e.g. that indicate moon phases and sunset times,

are more likely to appeal to men. Third, male customers appear to have a higher

degree of loyalty to Swiss brands, whereas women switch brands more frequently for

reasons such as novelty and fashion and are likely to be less passionate about

collecting watches. That said, there clearly is a market for ladies' watches. It may not

be as lucrative as the men's segment but we believe this remains an untapped

opportunity for Swiss watch brands.

2. (Re)focusing on entry-price points. Feedback from retailers suggests that there is

demand for entry-price timepieces. However, this does not mean that the entire

demand is shifting towards low-end watches, priced <$1,000. Instead, we believe

brands should look at rebalancing the pricing architecture so that the SKU distribution

is skewed towards their existing entry-price points rather than the tail. We believe

brands are unlikely to slash prices on existing products or they will run the risk of

damaging their brand equity. Therefore, this will be a lengthy process of rebalancing

the offering through product launches and perhaps discontinuing existing lines.

3. (Re)adapting the price/value proposition. This is probably a trend that relates to the

entire luxury goods industry. We believe many millennials put the price/value

proposition at the forefront of their purchase decision. Therefore, branding still matters,

of course, but the high price of a luxury item also has to reflect a superior quality. Full

transparency on product characteristics and prices through the increasing number of

brands launching their own website or specialists' blogs has contributed towards that.

Although understanding watchmaking is not effortless, we believe the rise of millennials

in the overall luxury market makes it necessary for Swiss watch brands to rethink their

current price/value proposition.

Looking for empirical evidence

There is an apparent lack of data. As of now, there are not many data points available to

the financial community that can shed light on the ASP development for luxury watches at

the retail level. Therefore, investors tend to rely solely on qualitative comments made by

watch retailers. In fact, we find that only Oriental Watch and Emperor Watch & Jewellery,

two of the three HK-listed watch retailers, disclose ASP on a half-yearly basis (Figure 10).

But Oriental Watch and Emperor Watch & Jewellery do not provide any concrete

conclusions. Two out of the three time series provided by the two HK retailers suggest

that ASP is rising; however, we think this is questionable. There has been a positive brand

mix effect as high-end brands like Patek Philippe are still outperforming. We understand

that HK may have been biased towards the purchase of high-end products recently due to

decreasing price differentials with other regions and more easily negotiable discounts.

14 March 2017

Swiss Watchmakers 8

Figure 10: ASP for Oriental Watch and Emperor Watch & Jewellery

In HKD unless stated otherwise FY11 FY12 FY13 FY14 FY15 1H16

Emperor Watch & Jewellery 64,970 70,963 69,592 69,710 73,305 78,489

Y/Y % change 9% (2%) 0% 5% 7%

In HKD unless stated otherwise FY14 FY15 FY16 1H17

Oriental Watch* core brands 43,169 53,200 55,143 56,548

Y/Y % change 23% 4% 3%

Oriental Watch* non-core brands 18,074 19,654 19,741 16,048

Y/Y % change 9% 0% (11%)

Source: Company data, Credit Suisse research. Note: *year end March

We aim to tackle this lack of data through an analysis of product launches. If brands

are rebalancing their offer towards entry price points, this should be seen in the most

recent product launches already available for purchases or presented at the Geneva and

Basel watch fairs. Therefore, we look at the watches introduced in the last 6-12 months

and see how these compare against the existing offer in terms of price points.

We analyse five different watch brands covering 2,000 SKUs. These include Cartier,

IWC, Jaeger LeCoultre, Omega and Rolex. Together, we estimate these cover nearly half

of the Swiss watch industry in value (see Figure 11). For each brand, we are able to

identify the products that have been launched recently and derive an ASP of the new

additions at retail value. We carry out the analysis for the US market and we either use the

brands' own websites when online shopping is available or third-party websites such as

Tourneau. Lastly, we use an harmonic mean instead of an arithmetic mean to derive ASP.

The main advantage of the harmonic mean is that it is largely insensitive to large outliers.

In other words, it better reflects the sales volumes curve whereby high-end brands offer

timepieces >$100,000 but volumes at these levels are very low.

Figure 11: We cover almost half of the Swiss watch

industry in our ASP analysis

Figure 12: We use the harmonic mean mainly

because it is largely insensitive to large outliers

Value breakdown of the Swiss watch industry by brand (2016) Harmonic mean formula

Source: Company data, FHS, Credit Suisse estimates Source: Credit Suisse research

We highlight some caveats in our pricing analysis. Because our analysis is based on

US prices, we are mindful that comparing historical data may be biased by currency

fluctuations. The US dollar has indeed strengthened against the euro and the renminbi in

the last two years. As a result, the constant need to rebalance pricing across markets in

theory should have led to downward price adjustments when introducing new lines in the

US. However, with the vast majority of costs being in Switzerland, we believe the

appreciation of the Swiss franc and the need to protect margins have largely mitigated this

downward price adjustment in the US. In fact, the USD/CHF has remained close to parity

in the last two years.

Rolex15%

Omega12%

Cartier11%

Jaeger LeCoultre3%

IWC3%

Others56%

14 March 2017

Swiss Watchmakers 9

IWC Schaffhausen

The early update of the Pilot line shows the need to highlight entry price points.

There are six main watch lines at IWC, of which we believe Portugieser, Portofino and

Pilot are the most iconic. IWC typically updates one of its lines each year. While we

expected an update of the Portofino line to be presented at the 2016 SIHH given the

historic innovation cycle (see Figure 13), IWC decided to do an early revamp of its Pilot

line. We think this is particularly interesting for two reasons:

1. The Pilot watches constitute the most affordable line. Our analysis indicates that

the ASP of the Pilot line is $6,513 against $8,274 for the Portofino line and $9,076 for

the entire IWC offer (see Figure 14).

2. ASP on the new Pilot line has come down slightly. IWC introduced the Pilot's

Watch Mark XVIII in 2016 replacing the Pilot's Watch Mark XVII launched in 2012. This

entry price Pilot watch, which is also the entry price IWC watch, sells for $3,950.

Interestingly, this compares with $4,100 for the similar 2012 Pilot's Watch Mark XVII

with the only main difference being a case 1mm smaller for the new version. More

broadly, we find that the ASP of the new Pilot line is 8% less expensive than the

previous line in 2012.

Figure 13: IWC lines updated at the last SIHH

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ingenieur Aquatimer Portugieser Portofino Pilot Ingenieur Aquatimer Portugieser Pilot Da Vinci

Source: Company data, Credit Suisse research

The new Da Vinci line has lowered its entry price point and is focusing on ladies'

watches. While an update of the Portofino line could have been on the agenda for the

2017 SIHH, IWC presented a complete revamp of its Da Vinci line instead. Two aspects of

the new line particularly caught our attention:

1. ASP on the new Da Vinci line has fallen. The new entry price Da Vinci Automatic

watch selling for $5,400 replaces the previous version selling for $6,500. Similarly, the

Da Vinci Chronograph now costs $12,700 against $14,500 for the previous version.

More broadly, our research suggests that the ASP of the new Da Vinci collection for

men has dropped to $12,290 from $14,971.

2. IWC is expanding its ladies' offer with the Da Vinci line. While this line was chiefly

for men, the revamped Da Vinci line now offers more ladies' watches than men's

watches. With the Da Vinci line, we find that IWC doubled the number of ladies'

watches it offers (see Figure 15).

Figure 14: IWC is focusing on entry price points… Figure 15: …and is expanding its ladies' offer

Entry price points and ASP by product line for IWC (in $) Number of ladies' watches by product line for IWC

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

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14 March 2017

Swiss Watchmakers 10

Jaeger-LeCoultre

The focus of the 2017 SIHH was on a new entry price points for the Master lines.

Among the six main lines for men's watches at Jaeger-LeCoultre, we believe Reverso,

Master and Geophysic account for the majority of revenue. At the 2017 SIHH, the brand

focused on three new Master watches all with lower entry price points than the previous

comparable Master lines. In fact, the entry price point fell to $5,700 from $6,350 for the

Master Control Data line, to $8,000 from $9,000 for the Master Chronograph line and to

$9,400 from $10,800 for the Master Geographic line. More broadly, we find that the ASP of

the recent launches for the new Master lines is $11,945 against $19,924 for the existing

watches (see Figure 16).

Affordable manual/quartz Reverso watches were the highlight of the 2017 SIHH. This

year, we noticed that the brand presented very few, if any, highly complex watches.

Instead, the emphasis was on entry price products. In fact, all watches presented had

manual winding or quartz movements, instead of automatic movements. Their look is very

close to the automatic Reverso lines but retail prices are lower because of the lower cost

of producing or sourcing components. For instance, Jaeger-LeCoultre focused on its

updated men's Reverso Classic watch with manual movements selling for $5,900, the

entry price point for the Reverso lines. This compares against the most affordable launch

of the SIHH 2016 which was an automatic Reverso Classic for $8,000. Another example is

the launch of a manual Reverso Classic Large Duoface watch for $8,400 in 2017 when the

directly comparable automatic watch still sells for $11,400. More broadly, we find that the

ASP of the 2017 launches for men's Reverso watches was $8,512 against $17,274 for the

existing lines (see Figure 16).

Jaeger-LeCoultre launched more ladies' watches than men's in 2017. The product

offer is already by nature more oriented towards ladies' watches than most other

Richemont's brands, with the exception of Cartier or Piaget. We calculated that 40% of

watches sold on the website are for women. Interestingly, we find that Jaeger-LeCoultre

launched 19 ladies' watches against 18 for men's watches in 2017. The main launches

were both for the Reverso and the Rendez-Vous lines. Similar to what we found for men's

watches, the ASP of the new launches for ladies were lower than the existing watch

collection (see Figure 17).

Figure 16:ASP and entry price points have generally

fallen for men's watches at Jaeger-LeCoultre

Figure 17: As well as launching more ladies'

watches than men's in 2017, ASP has fallen

Entry price points and ASP for men's watches at Jaeger-LeCoultre (in $)

Entry price points and ASP for ladies' watches at Jaeger-LeCoultre (in $)


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2017 SIHH Existing lines

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Reverso Rendez Vous

2017 SIHH Existing lines

14 March 2017


Cartier

The repositioning which began in 2015 is clearly visible. Cartier is possibly the only

brand, along with Tag Heuer, that has been vocal about the need to realign its product

offering with the current demand environment. As recently as 2015, Cartier launched two

new lines aimed at the more affordable area of the brand's pricing architecture:

1. Cartier launched the more affordable Clé line in 2015. At the beginning, Cartier

focused on the Clé in pink gold selling for nearly $20,000 but subsequently released

the gold and steel men's version selling for $9,650. However, Cartier did not say at the

launch whether a steel only version would be available. This was eventually launched

in 2016 for a retail price of $5,500. The new Clé Steel is the entry price automatic

watch of all Cartier lines and improves the price/value perception, in our opinion. In

fact, It carries the same price as the existing entry price Ballon Bleu Steel that features

a quartz movement and a smaller case. The overall ASP of the Clé at $10,650 for

men's is the lowest of all Cartier lines (see Figure 18).

2. The Drive line appears to be more affordable than Calibre or Tank. The new Drive

family of watches was introduced at the 2016 SIHH. This is a men-only watch line

whose price positioning sits between the Clé/Ballon Bleu lines and the Calibre/Tank

lines. The entry price Drive Steel and Leather sells for $6,250 against $6,350 for the

historic entry price mechanical Tank and entry price Calibre selling for $6,450.

Interestingly, having already launched the entry price points last year, the focus of the

2017 SIHH for the Drive line was on thin watches or precious metals.

The highlight of the 2017 SIHH was the relaunch of a ladies' line. Cartier is, by nature,

a jeweller and therefore its product offering is more geared towards ladies' watches than

most of its competitors. We calculated that 50% of watches sold on the websites are

ladies' watches. Interestingly, the main introduction for Cartier at the last SIHH was the

Panthère line that had been discontinued for more for than a decade. Cartier will be

releasing 17 new Panthère watches in June 2017. These are largely jewellery accessories

as they are all simple timepieces featuring a quartz movement. The entry price small

Panthère Steel will sell for $4,000, i.e. below their equivalents in the Clé, Ballon Bleu and

Tank lines. Only the quartz Tank Solo Steel is more affordable.

Figure 18: Cartier's new lines are priced below the

existing ones

Figure 19: Cartier relaunched a women's line at this

2017 SIHH

Entry price points and ASP by product line for Cartier in men's watches (in $)

Entry price points and ASP by product line for Cartier in ladies' watches (in $)


0

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Entry price ASP

Recent launches

0

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Cartier Tank Ballon Bleu Clé Panthère

Entry price ASP

Recent launches

14 March 2017


Rolex

ASP of the most recently launched watches is lower than the existing lines. Being

the biggest Swiss watch brand, Rolex is also the most complex to analyse. We have

limited our pricing analysis to new watches across six lines for men and one unisex watch

line. For men's watches, the overall ASP of the novelties was c.13% lower than the ASP of

the existing models across those lines. While more affordable price points seem to be the

case for the men's segment, the latest launches in the women's segment are priced higher

than the combined ASP of the existing collections.

The relaunched Cosmograph Daytona was the highlight of 2016 Baselworld. Rolex

introduced the unisex Oyster Perpetual Cosmograph Daytona in steel replacing the

existing Rolex Daytona dating back to 2000. With this new watch, we note that Rolex

wishes to reinforce its entry price offer. Although its price of $12,400 is higher than the

previous entry price Daytona watch selling for $10,600, the ASP of the existing Daytona

lines, including both men's and women's watches, is more than twice as high at $27,335.

More affordable Explorer and Yacht-Master 40 watches were launched last year. At

Baselworld 2016, Rolex introduced entry models of the Explorer and the Yacht-Master 40

lines. The recently launched Explorer features the same movement and metals as its

sister Explorer II line. The only major difference lies in the case size which is smaller for

the recent launches. The new Explorer is selling for $6,550 against $8,100 for the Explorer

II. A new Yacht-Master 40 in gold was launched at $14,050 in 2016. Admittedly, this was

above the current entry price point of the Yacht Master 40 in steel and slightly above the

line's ASP at $13,611. However, it is still priced 52% below the ASP of the Yacht-Master II

line.

Datejust continues to dominate the product lines. The Datejust 41 remains one of the

most sought-after Rolex watches and this is evident from the fact that over half of the new

launches came in this particular line. The women's variant Lady-DateJust dominates the

women's offerings in both existing lines as well as new launches. It is interesting to note

that the new launches in the Lady-Datejust models have smaller cases (28mm) than the

existing 31mm case watches, which constitutes over half of the units in the brand's

women's watches.

Figure 20: Rolex shows mixed results in terms of ASP/entry price point by line

Entry price points and ASP by product line for Rolex watches (in $)


0

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Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

ASP

Rolex Air King Explorer CosmographDaytona

Datejust 41 Yacht Master Cellini Day-Date 40

2016 Baselworld Existing lines

14 March 2017


Omega

A refocus on more affordable watches is not apparent. Omega seems to break the

trends we have seen for the other watch brands. In other words, the most recent launches

were watches priced significantly higher than the ASP of existing models. The only

exception was the Globemaster for men launched in steel with an annual calendar selling

for just over $8,000. This is close to the entry price point of the line at $7,700 and below its

ASP at $10,317.

Recent launches focused on the Seamaster line. While the Globemaster, Speedmaster

and the Constellation all saw one new model each launched in the respective lines, the

Seamaster line outdid them all with six new launches for the Planet Ocean line and two for

the Aqua Terra line. The Seamaster and Speedmaster both saw new launches in the

region of $10,000 while the ASP of existing lines for these models is in the region of

$7,000. The Constellation watch for women was launched at over $11,000, almost double

the current ASP of $5,974 for the existing line.

Upcoming launches show no intention to adapt to a changing demand scenario. In

early January this year, Omega offered a preview of its upcoming launches at Baselworld

2017 due 23-30 March: the new Speedmaster 38mm and the Speedmaster Moonwatch

Automatic. The prices of both are currently withheld and will be disclosed only at the

event. From the teaser of the launch, we find it fairly evident that the new Speedmaster

38mm is targeting the higher-end of the price spectrum, given its diamond-encrusted bezel

in addition to a Sedna gold casing and complications.

Figure 21: The Globemaster was an exception in

2016 with ASP of new launch lower than existing

Figure 22: The latest Constellation watch for women

was launched at a significantly higher price point

Entry price points and ASP by product line for Omega men's watches (in $)

Entry price points and ASP by product line for Omega ladies watches (in $)


0

2,000

4,000

6,000

8,000

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Entry price ASP Entry price ASP Entry price ASP Entry price ASP Entry price ASP

Seamaster Constellation Speedmaster Globemaster Omega


0

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Entry price ASP Entry price ASP Entry price ASP Entry price ASP

Seamaster Constellation Speedmaster Omega


14 March 2017


The price/mix conundrum in sell-in numbers

ASP at the retail level is clearly coming down. Besides the qualitative comments from

retailers and industry participants, we have found empirical evidence that the product offer

in the Swiss watch industry is shifting towards low-profile, more affordable watches. In

fact, the five brands we analyse, with the exception of Omega, have all focused on their

more affordable lines and entry price watches at the most recent watch fairs in Geneva or

Basel. We find it difficult to put a hard number on the likely development of the ASP at the

retail level in the next few years. However, by simply using the overall ASP development

of the recent launches we calculated for nearly half of the Swiss watch industry, we find

that the overall ASP of the most recent watch launches are priced c.20% below the

existing lines (see Figure 23).

Figure 23: ASP for most recent men's watches is generally down against the

existing lines Entry price points and ASP by brand and product line (in $)


This should break a decade-long period of positive mix. ASP for the Swiss watch

industry has risen by +7% on average since 1993. This has been driven largely by rising

demand for precious metals watches from the late 2000s pushing the value share of the

>SFr3,000 segment from <40% before the mid-2000s to >60% in the most recent years

(see Figure 24). Therefore, if our previous analysis of product launches truly reflects a

demand shift towards more affordable timepieces, then the mix of the overall Swiss watch

industry is likely to be rebalanced to the 2010 pre-bubble levels.

Figure 24: The value share of high-end watches has

increased considerably from mid-2000s

Figure 25: ASP has remained mostly in line with the

2014 peak at the wholesale level

Swiss watch exports breakdown by price segment in value terms ASP development for Swiss watches at wholesale value

Source: FHS, Credit Suisse research Source: FHS, Credit Suisse research

0

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Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

ASP Entryprice

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ASP

Average Omega IWC Cartier Rolex Jaeger LeCoultre

New launches Existing

0%

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<SFr200 SFr200-500 QFr500-3,000 >SFr3,000

-10%

-5%

0%

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25%

0

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2013

2014

2015

2016

ASP (in SFr, lhs) Y/Y % chg. (rhs)

14 March 2017


Mix at the wholesale level has remained fairly neutral in recent years. To our surprise,

the industry did not record any decline in ASP in 2016. Swiss watch exports were down

10% in both volumes and value. This followed a 2% negative mix in 2015. As a result, the

ASP of Swiss watches at wholesale value has barely changed since the 2014 peak and

remains 25% above the 2010 pre-bubble level (see Figure 25).

We introduce new value/volumes data series by region. We question whether this data

series could be distorted by mix shifts across regions and price brackets. In other words,

ASP could be down in each price segment but the outperformance of high-end brands

relative to the low- to mid-end may have left the overall ASP number unchanged. Using

FHS data, we demonstrate that this is not the case based on two observations:

1. ASP in each price segment has barely moved in the last four years. Figure 26

demonstrates that a change in category/segment mix has not played a role in the ASP

development, as it has remained broadly flat in the last four years. The mid-end

segment of SFr200-3,000 watches at export value posted flat ASP in the last four

years. The high-end segment of >SFr3,000 watches only recorded a 3% decline in

ASP from their 2015 peak.

2. ASP in each key market has barely moved in the last four years. Figure 27

demonstrates that ASP in the two largest watch markets, the US and Hong Kong, has

not changed in recent years. Interestingly, ASP in China came down in 2012-2013 and

was slightly up in 2016.

Figure 26: ASP has been stable in the last four

years in each price segment

Figure 27: ASP has been fairly stable in HK and the

US

ASP for Swiss watches by price segment (at export value, 1993=100 for each price segment)

ASP for Swiss watches by market (at export value, 1997=100 for each market)

Source: FHS, Credit Suisse research Source: FHS, Credit Suisse research

We conclude that a negative mix is yet to happen at the wholesale level. Because

there does not seem to be any geographical or segment mix distorting the overall ASP

development, we are convinced that the negative ASP seen at the retail level will

eventually feed through to sell-in numbers. It is hard for us to predict how long it could take

for ASP to set to a more normal level but we think we could just be at the beginning of this

process. We note that mix started to turn negative only a few months ago with ASP down

4% on average in the last three months (see Figure 28).

More affordable price points could be unfavourable for margins. Companies disclose

very little on the topic. Our research suggests that brands generally generate the highest

margins at the midpoint of their pricing architecture (see Figure 29). For example, we

understand that an entry price Clé de Cartier watch in steel generates lower margin than

the more expensive model featuring the same movement but with a mixture of gold and

steel. At the other end of the spectrum, a watch with several complications requiring many

more man-hours and produced in small numbers will not generate the highest margin for

the brand.

80

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<SFr200 SFr200-500 QFr500-3,000 >SFr3,000

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HK China US

14 March 2017


Ladies' watches tend to be higher gross margin but the product cycle is shorter.

Ladies' watches are much less complicated than men's watches and are therefore less

labour intensive. We believe precious metals account for the majority of costs. As a result,

we understand gross margins are generally higher. For instance, the entry price Cartier

Panthère watch in steel which sells for $4,000 and features an inexpensive quartz

movement should be margin accretive for the ladies' segment. However, we believe

product cycles are shorter for ladies' watches and marketing investment may be higher

than for men's.

Figure 28: ASP development has just started to turn

negative

Figure 29: Entry price watches tend to be lower

margins than mid-price products

Y/Y % change for ASP of Swiss watch exports Margin profile by price points

Source: FHS, Credit Suisse research Source: Credit Suisse research

-10%

-5%

0%

5%

10%

15%

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25%

May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16

Mar

gin

Price points

14 March 2017


Stock levels in the channel

A recap on sell-through

There remains a lack of transparency on sell-through trends. Unlike Swiss watch

exports data which gives a good picture of sell-in, there is no data series directly available

to the financial community to analyse sell-through. As a result, we carry regular channel

checks among watch retailers/dealers and other industry participants to gauge demand for

luxury watches. However, this approach is admittedly made difficult for two reasons:

1. There are very few listed watch retailers. The large global listed companies in the

watch industry are mainly manufacturers and therefore wholesalers. Major watch

retailers such as Tourneau in the US, Bucherer in Switzerland or Watches of

Switzerland in the UK are all privately-owned companies. Other global multi-brand

retailers like Hour Passion or Tourbillon are part of Swatch Group and therefore

disclosure is limited. Only Hengdeli, Emperor Watch & Jewellery, Oriental Watch or

Hour Glass are listed entities in Asia with a reasonable level of financial disclosure.

2. The grey market increasingly contributes to watch sales globally. This is

particularly true in the US largely as a result of the development of e-commerce and

high inventory levels in the traditional retail channels. By nature, it is difficult to assess

the size of the grey market and even more the sell-through.

Sell-through in HK appears to be bottoming. Our most recent channel checks with the

two largest watch retailers in HK suggest that the rate of decline for LFL retail sales

moderated to single digits in 2H and further improved in 4Q:

1. Oriental Watch mainly distributes Rolex/Tudor but also Richemont's brands in HK.

After LFL sales fell 17% in the six months to Sept-16, it appears the rate of decline

moderated to -5% in the three months to Dec-16. Coupled with positive developments

in China, the group retail LFL sales moved into positive territory in the last quarter

(see Figure 30). The company seems cautiously optimistic and predicts a stabilisation

of sell-through trends in HK instead of a sharp growth acceleration with retail LFL

sales growth closer to flat than positive in the coming year.

2. Emperor Watch & Jewellery mainly distributes Richemont's brands alongside Rolex

and Patek Philippe in HK. The company indicated that retail LFL sales growth turned

mid-single digit positive in 4Q after being down mid-single digit in 3Q. According to

Emperor Watch & Jewellery, this improvement seems to be largely driven by three

years of easy comps and lower price differentials with Japan and Europe.

Figure 30: LFL at Oriental Watch is turning back

positive thanks to lower rates of declines in HK

Figure 31: LFL at Emperor Watch turned positive in

4Q and was overall flattish in 2H

Group retail LFL sales for Oriental Watch (HK + Macau + China) Group retail LFL sales for Emperor Watch (HK + Macau + China)


-30%

-25%

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-15%

-10%

-5%

0%

5%

10%

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17-40%

-30%

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0%

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30%

40%

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16

14 March 2017


This brings sell-through closer to pre-bubble levels in HK. Although exchange rate

swings largely contributed towards making HK a more attractive place to shop, we find two

data series that suggest sell-through may be closer to the bottom than the peak:

1. HK Watch & Jewellery sales are a well-known proxy for sell-through of Swiss

watches. However, we need to be mindful that fluctuations in the gold price typically

influence the sales of affordable golden jewellery and create some noise in the data

series (see Figure 32). That said, we note that 2016 retail sales were between the

2010-2011 level and nearly 50% off the 2013 peak. Another downward adjustment

towards the 2009-2010 levels does not seem like an impossible scenario, in our

opinion, but this would be a less sharp contraction than seen in recent years.

2. Aggregate watch retail sales were compiled using the HK businesses of the three

HK-listed watch retailers. We used consensus estimates for 2016 revenue numbers.

This exercise indicates that retail sales have fallen by 45% since the 2012 peak and

are currently at a level that is comparable with 2009.

Figure 32: Total watch and jewellery sales in HK are

possibly closer to the bottom than the peak

Figure 33: Aggregate retail sales for the three

largest HK watch retailers are close to 2009 levels

HK Watch & Jewellery sales (in HKDm) Aggregate retail sales of the three HK-listed retailers (in HKDm)

Source: Hong Kong Census & Statistics department, Credit Suisse research Source: Company data, Thomson Reuters, Credit Suisse research

China sell-through has been improving since 2Q16. Our research suggests that sell-

through in China for watches swung back to positive territory in 2H16 and exited 2016 at a

double-digit rate. We draw this conclusion chiefly on feedback from two retailers:

1. Hengdeli is the largest Swiss watch retailer in China with a 35% market share, on our

estimates. >70% of 2015 revenue came from mid-end watches (<¥30,000 at retail

value) with the rest from high-end watches. After reporting LFL retail sales down 9% in

1H16 (see Figure 34), it appears LFL turned flattish in 3Q and positive in 4Q. Hengdeli

will report 2016 results later in March at which point we should expect more detail on

LFL trends also by price segment.

2. Oriental Watch has a business in China mainly selling Rolex/Tudor in mono-brand

boutiques and accounting for 1/3 of retail sales, on our estimates. The Chinese retail

business turned sharply positive from 1H17 and sustained strong double-digit growth

momentum through 3Q17 (see Figure 35).

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2008 2009 2010 2011 2012 2013 2014 2015 2016e

14 March 2017


Figure 34: Hengdeli reported a gradual improvement

in China trends

Figure 35: Trends turned sharply positive in China

in the middle of last year for Oriental Watch

China LFL retail sales for Hengdeli (Y/Y % chg.) China LFL retail sales at Oriental Watch (Y/Y % chg., YE March)


We do not deny there has been a pick-up in underlying Chinese demand. After

consumer sentiment turned negative following the anti-corruption campaign which began

in 2013 and the stock market correction in 2015, the Chinese consumer seems to be

moving on from four years of relative austerity. Luxury goods proxy Louis Vuitton recorded

a sharp acceleration in Chinese spending globally to double-digit rates in 2H16 from flat in

the prior four quarters (see Figure 36). We note that this recovery in Chinese demand

overall has not only been felt in handbags but also across categories that appeared to be

out of favour in recent years, such as cognac and watches.

Figure 36: Louis Vuitton sales growth among the Chinese clientele

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Source: Company data, Credit Suisse research. Note: growth >10%, mid- to high-single digit % growth, mid-single digit % growth, flat % growth

However, we think the improvement in China/HK is also partly due to regional shifts.

Asia accounted for 39% of Swiss watch exports in 2016, of which c.33% is HK and 17% is

China. If we simply consider a similar split for retail sales in Asia, this implies that c.50% of

watch retail sales are generated outside China/HK. The two largest Asian markets outside

China/HK are Japan and Singapore, accounting for 17% and 13% of watch exports to Asia

in 2016. Trends in these two markets have been weak in recent quarters, which illustrates

the transfer of watch sales back to China/HK away from other Asian markets. We highlight

two data series:

1. Watch & jewellery sales at Japanese department stores have been declining since

2Q16 (see Figure 37). We believe this is a good proxy for watch sell-through in Japan

given that our research suggests that department stores account for a far bigger share

of the watch retail market than in the US or Europe. This includes all of the largest

department stores such as Takashimaya, Isetan, Mitsukoshi, Matsuya and Daimaru.

The caveat of this indicator is that it also includes jewellery. Watch & jewellery retail

sales were down 8% in both 2Q16 and 3Q16 and down 6% in 4Q16.

2. The Hour Glass is one of the largest watch retailers in South East Asia, mainly in

Singapore. It sells primarily mid- to high-end brands including Richemont's and

Swatch Group's brands as well as Patek Philippe and Rolex/Tudor. Management has

been fairly bearish on the outlook for 2017 suggesting that sustaining retail sales at

the 2016 level would already be a great achievement.

-25%

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-15%

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-5%

0%

5%

1H13 2H13 1H14 2H14 1H15 2H15 1H16

Total China High-end China Mid-end China

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1H14 2H14 1H15 2H15 1H16 2H16 1H17 3Q17

14 March 2017


Figure 37: Watch sales in Japanese department

stores have been declining since 2Q16

Figure 38: Hour Glass' management remains

cautious on 2017 retail sales development

Japanese department store sales of art, jewellery and watches Group sales for the Hour Glass (Y/Y % chg., Y/E March)

Source: Japan department stores association, Credit Suisse research Source: Company data, Credit Suisse research

The US remains mixed. We tend to look at multi-brand watch retailer Tourneau as a

proxy for the sell-through of luxury watches in the US. The company communicates rarely

on trading and financial performance but our research suggests that Tourneau enjoyed

positive LFL retail sales in 2H16 improving from flattish in 1H16 and a 10-20% decline

sales in 2015. On the other hand, Fossil, admittedly not the best proxy for sell-through in

the US given its lower price point but the only US-listed watch company with relatively

detailed LFL disclosure, recorded a further deterioration of trends in the US. This led to

group LFL retail sales declining >5% in 4Q16 (see Figure 40).

Figure 39: Sales of watches in Singapore were down

overall in 2016, albeit improving in 4Q

Figure 40: Fossil global retail sales have been

trending downwards

Singapore retail sales of watches and jewellery Fossil global retail LFL sales (Y/Y % change)

Source: Statistics Singapore, Credit Suisse research Source: Company data, Credit Suisse research

-20%

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0%

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Mar

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10

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Y/Y % change 3-month moving avg.

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3

Jan-

14

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4

Jan-

15

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5

Jan-

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Jul-1

6

Watch & jewellery retail sales 3-month moving avg.

-10%

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1Q11

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2Q16

3Q16

4Q16

14 March 2017


Marginal improvement in stock levels

We focus on stock levels at the retail level. We find that investors' concerns around

excess inventories in the distribution channels have mostly vanished following a recovery

in sell-through in HK/China. Unless retail trends pick up significantly to the extent that

watch retailers/dealers are willing to reorder again despite low stock turns (see Figure 41),

we continue to believe overstocking remains an issue for the Swiss watch industry which

should weigh on sell-in numbers in the near term.

We expand our proprietary excess inventory model to regions outside HK/China. In

our previous Ideas Engine report on the Swiss watchmakers (see Swiss Watchmakers:

Ideas Engine published on 2 August 2016), we introduced an excess inventory model for

HK/China. In this section, we take it a step further to include Singapore, Japan and the

US. These five markets together account for >40% of exports last year. Unfortunately, we

fail to gather sufficient data from European retailers given the lack of public companies.

That said, we believe the inventory situation in Europe is less problematic than elsewhere

given strong sell-through in 2015/2016 in the Eurozone/UK and cautious replenishment.

Figure 41: Inventory turns remain low for Asian

retailers

Figure 42: Our excess inventory analysis covers

>40% of the Swiss watch market

Days of inventories for four major Asian retailers Swiss watch exports breakdown by market (in 2016)

Source: Company data, Credit Suisse research Source: FHS, Credit Suisse research

Our approach lies in comparing sell-in against sell-through. The main assumption is

that retailers typically adjust their replenishment according to recent and anticipated sell-

through trends. As a result, sell-in and sell-through should ultimately adjust to the same

levels through a full cycle. However, what is generally a 6- to 12-month cycle in traditional

retailing has stretched to a multi-year cycle in Swiss watch retailing. Manufacturers have

taken advantage of their bargaining power to push inventories into the distribution

channels in order to keep watch factories running at nearly full utilisation rates. In our

analysis, we aim to break out Swiss watch exports into two brackets: (a) the normal

replenishment needs according to sell-through development and (b) the excess stocks that

are either sitting at the retailers or feeding the grey market.

We take 2011-12 as a starting point and use our sell-through time series as base. It

is debatable whether 2011 or 2012 was the peak of the watch cycle. Exports of Swiss

watches to both HK and China peaked in 2012, while sell-through for the Chinese peaked

in 2011. To analyse sell-in vs. sell-through dynamics, we take 2011 as a starting point. In

other words, the assumption is that inventories were in a healthy position in 2011. The

average stock turns for the listed retailers only started to deteriorate from 2012 (see Figure

41) suggesting sell-in was inadequate relative to sell-through. In addition, our analysis

chiefly uses the regional time series we presented in the previous section as a proxy for

sell-through. The caveat of this method is that it only captures the sell-through trends in

the traditional retail channels but not in the grey market.

0

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H15 1H16

Oriental Watch Emperor Watch & Jewellery Hengdeli Hour Glass

Hong Kong12%

USA12%

China7%

Japan7%

Singapore5%

Others57%

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1063793621&serialid=IvQWDm7fDsUJBmn6cjSvVlaXuPItTSdwOewwxGdRWWQ%3d

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1063793621&serialid=IvQWDm7fDsUJBmn6cjSvVlaXuPItTSdwOewwxGdRWWQ%3d

14 March 2017


We take a deep look at the inventory cycle in Asia. We highlight four regions that

together account for nearly 80% of 2016 export value:

1. Stock levels did not deteriorate further in HK in 2016, but overstocking remains.

The good news about HK is that, unlike 2015, Swiss watch exports were broadly

aligned with replenishment needs in 2016 (see Figure 43). We estimate that retail

sales of Swiss watches have declined by 46% since 2011 while the industry reported

a 42% drop in exports to HK over the same period. While this may seem reassuring,

this does not eliminate the four years of overstocking (2011-16). We estimate that

there was a SFr1.7bn inventory build-up over the 2011-2016 period. Part of it is still

sitting on the books of watch retailers/dealers and part of it is in the grey market.

Figure 43: Estimated excess watch inventories in HK in value terms

In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2011-2016

Emperor watch & jewellery 0% (1%) (14%) (28%) (15%)

Oriental watch NA (10%) (15%) (22%) (9%)

Hengdeli Elegant (1%) 1% (18%) (27%) (11%)

Average sell-through (1%) (3%) (15%) (26%) (11%) (46%)

Swiss watch exports (a) 4,371 4,125 4,122 3,176 2,383 18,177

Y/Y % change 7% (6%) (0%) (23%) (25%) (42%)

Exports for normal stock replenishment (b) 4,202 4,062 3,435 2,555 2,263 16,517

Y/Y % change 3% (3%) (15%) (26%) (11%) (45%)

Excess stocks 169 63 687 621 120 1,659

Source: Company data, FHS, Credit Suisse research and estimates

2. Stock levels in China appear to be less problematic. We estimate that sell-through

declined by 14% over the 2011-2016 period. This uses Hengdeli as proxy for China

mid-end watch retail sales and Oriental Watch for China high-end watch retail sales.

Our analysis suggests that there has not been any major inventory build-up in the

distribution channels. We note that exports to China have fallen by 21% since 2011,

therefore a bigger drop than sell-through (see Figure 44).

Figure 44: Estimated excess watch inventories in China in value terms


Hengdeli (1%) (7%) (1%) (10%) (1%)

Oriental NA (11%) (3%) (8%) 11%

Average sell-through (1%) (9%) (2%) (9%) 5% (14%)

Swiss watch exports 1,653 1,446 1,401 1,336 1,293 7,130

Y/Y % change 1% (12%) (3%) (5%) (3%) (21%)

Exports for normal stock replenishment 1,631 1,483 1,455 1,328 1,396 7,294

Y/Y % change (0%) (10%) 1% (5%) 4% (15%)

Excess stocks 22 (37) (54) 8 (103) (164)


3. Japanese retailers have swiftly adjusted their replenishment plans. Following

three years of strong sell-through, driven by rapid growth in Chinese tourism due to

the weak yen, retail sales trends turned negative in 2016. We note that exports to

Japan rapidly adjusted to the negative sell-through in 2H16. Exports were down 3% in

2016 broadly in line with retail trends. Since the 2011-12 average, we note that

exports to Japan have jumped by 38% while sell-through has increased by 25%. This

led to a manageable overstocking position of SFr0.1bn, on our estimates (Figure 45).

14 March 2017


Figure 45: Estimated excess watch inventories in Japan in value terms


Watch & Jewellery sales 3% 15% 4% 8% (6%) 25%


Y/Y % change 20% 6% 15% (2%) (3%) 38%


Y/Y % change 13% 9% 7% 0% (4%) 25%

Excess stocks 59 (32) 92 (29) 7 97

Source: Japan department stores association, FHS, Credit Suisse research and estimates

4. Inventory levels in Singapore seem to be healthy. We use the retail sales index for

watches and jewellery as a proxy for sell-through in Singapore. Our research suggests

that jewellery is a much smaller component than watches in the index. On that basis,

we note that exports have dropped more than sell-through since 2012. During the

more difficult year of 2016, watch retailers/dealers adapted their replenishment and

there was no overstocking during the 2012-2016 period, according to our analysis.

This is confirmed by inventory turns at Cortina or Hour Glass that did not deteriorate

over the period, albeit with some volatility ranging from 170 to 210 days and 240 to

280 days respectively.

Figure 46: Estimated excess watch inventories in Singapore in value terms


Watch & Jewellery sales 0% 1% (2%) 1% (6%) (6%)


Y/Y % change (2%) 1% (1%) 1% (10%) (12%)


Y/Y % change (1%) 1% (2%) 1% (6%) (6%)

Excess stocks (14) (14) (4) (7) (58) (99)

Source: Statistics Singapore, FHS, Credit Suisse research and estimates

The stock overbuild in Asia continues but is not worsening. Our aggregate analysis

for the four largest markets in Asia concludes that 2016 shipments to Asia were finally

aligned with sell-through trends and replenishment needs of watch retailers/dealers. This

breaks a four-year trend where manufacturers have shipped watches to retailers/dealers

well above their replenishment needs. This is good news because it appears that the

overbuild is finally stabilising. However, similar to what happened in HK, this does not wipe

out the SFr1.5bn excess inventories that have accumulated since 2011. We estimate the

excess stocks account for 91 days of buying in 2016 up from 88 days in 2015 and 47 days

in 2014 (see Figure 47). Leaving aside the effect of inventory buybacks which we

discussed later in the next section, this simply means that manufactures should halt their

shipments to Asia for about 90 days in order for retailers/dealers to possibly clear the

excess inventory.

Figure 47: Estimated excess watch inventories in four Asian countries in value

terms



Y/Y % change 6% (5%) 1% (13%) (14%) (24%)


Y/Y % change 3% (2%) (8%) (12%) (6%) (25%)

Excess stocks 235 (20) 721 593 (34) 1,494

Stock overbuild 235 214 935 1,528 1,494

Days of excess stocks 11 10 47 88 91

Source: Company data, Credit Suisse estimates

14 March 2017


The inventory situation in the US seems more problematic. We use our channel

checks on Tourneau as well as reported group LFL for Fossil to derive an approximation of

sell-through in the US. We estimate that retail sales have been broadly flat over the 2011-

2016 period while Swiss watch exports have risen sharply by 22%. As a result, we believe

Swiss watch retailing in the US moved from a period of healthy stock levels in 2012-13 to

a gradual stock build up from 2014. We estimate that there has been a build-up of

SFr0.6bn excess inventories in the US market since 2011 representing 106 days of buying

(see Figure 48).

Figure 48: Estimated excess watch inventories in the US in value terms


Tourneau 7% 5% - (12%) 2%

Fossil 3% - 2% 1% (5%)

Average sell-through 5% 3% 1% (6%) (2%) 1%


Y/Y % change 10% 2% 6% (1%) 2% 22%


Y/Y % change 10% 3% 1% (6%) (2%) 1%

Excess stocks (5) (7) 108 214 304 615

Stock overbuild (5) (11) 97 312 615

Days of excess stocks NA NA 16 53 106


Industry responds with inventory swaps

We agree that buying back stocks is the right path to take for the long term… After

years of pushing inventories into the retail channel, the reverse action is clearly welcome.

Undoubtedly, these kinds of initiatives have proven to be helpful for other watch brands

over the long term, namely Tag Heuer. Coupled with successful launches of lower-price

products, buybacks enable watch dealers/retailers to free up their inventories and make

space for more popular products.

…but this may not solve the problem entirely. Companies in general and Richemont in

particular were very vocal about buying back inventories from retailers last year, mostly in

Asia. Richemont indicated that it had repurchased €198m worth of watches, mainly at

Cartier, in the six months to September 2016. We find investors often overestimate the

benefits of these actions on the stock overbuild. We make the following three

observations:

1. SFr1.5bn of Swiss watches came back to Switzerland in 2016e. The Swiss

Federal Customs Administration started providing some useful data last year on

reimported goods, and in particular for watches (see Figure 49). The 2016 report has

not been published yet but the Administration issued a press release in December

indicating that reimported Swiss watches amounted to SFr1.3bn for the first 10

months of 2016. If we were to extrapolate the trend for the whole of 2016, we

calculate that reimported watches could amount to SFr1.5bn.

2. But 2016 was not the only year that the industry has undertaken inventory

buybacks. Whilst the industry has been fairly vocal about buybacks lately, the data

suggest that bringing stocks back into Switzerland is common practice. During what

could be considered as good years, namely 2005-2008 and 2011-2013, 2-4% of

watch exports in value terms came back to Switzerland. Our research concludes that

manufacturers regularly bring back timepieces from their subsidiaries to be

reallocated. These are generally high-end watches. That said, this process

accelerated from 2014 and buybacks amounted to almost 8% of exports in 2016. In

other words, we can attribute the incremental 4% from 2014 levels to the efforts made

14 March 2017


by manufacturers to help retailers/dealers with their excess stocks. As a result, we

estimate that the industry brought back SFr700-800m worth of watches at wholesale

value in addition to the recurring reimports.

3. These additional buybacks are not a cash-for-stock exchange; they are

inventory swaps. In other words, the slow-moving stocks are taken back and watch

dealers/retailers receive credit notes to order the more popular products at some point

in time. On the one hand, our channel checks with retailers in Asia suggest these

credit notes can be exercised from two weeks to six months following the inventory

buyback. On the other hand, Richemont indicated that its partners are given infinite

time to trigger the reordering process. Interestingly, we believe these swaps distort the

Swiss watch exports data. Reimports are indeed not netted off the official Swiss watch

exports data. As a result, if we assume retailers exercise their credit over 12 months,

we calculate this could boost monthly exports by up to 4%.

Figure 49: Buying back inventories is not abnormal but this process has

accelerated in recent years

Reimported Swiss watches

Source: Federal Customs Administration, FHS, Credit Suisse estimates

A closer look at discounts within the grey market

Traditional methods of clearing excess stocks may not be enough. Authorised watch

retailers/dealers have generally little flexibility when it comes to discounting. To put it

simply, they cannot openly put products on sale and have regular visits by "mystery

shoppers" sent from the manufacturers like Richemont or Swatch Group. As a result,

discounts will only be limited to a core clientele with whom the retailer has built up a

relationship. Because of this, inventory swaps and selective discounts are generally not

enough to improve stock turns.

Watch retailers/dealers are pushing stocks into the grey market. Our research

suggests that it is common practice for authorised retailers/dealers to use unauthorised

third-parties to clear excess stocks. This can be done through online platforms that market

the watches as pre-owned although they could be new watches. A major difference with

authorised dealers lies in the warranty. Unauthorised retailers cannot grant the

manufacturer's warranty but instead offer their own warranty which carries more risk given

their limited access to spare parts. We note that this process is legal.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e

Reimported watches (SFrm, lhs) As a % of watch/movement exports value (rhs)

14 March 2017


We introduce an innovative way to think about the inventory issue by brand. In

practice, the lower the demand and the bigger the inventory glut for one particular brand,

the more likely watch retailers will try to clear these excess stocks through the grey market

at bigger discounts. As a result, we use one of the largest pre-owned watch retailers

Jomashop in the US to assess the average level of discount by brand. The advantage of

Jomashop is that most of the pre-owned watches come directly from authorised retailers

and, therefore, can be considered as new.

We have screened discounts on 1,000 SKUs across 20 different brands. For the

samples to be statistically relevant, we randomly selected 50 watches of each brand. None

of the watches we considered are part of a discontinued line and each watch is sold as

new with the Jomashop warranty. From our analysis, we draw four conclusions:

1. Patek Philippe and the Rolex Group stand out. We calculated an average discount

of 11% and 16% for Patek Philippe and Rolex respectively (see Figure 50). This

confirms our belief that these two brands benefit from stronger desirability and more

manageable inventory issues than their peers. We note that mid-price brand Tudor,

part of the Rolex Group, has an average discount of 23%.

2. The results for Richemont are mixed. We calculated the lowest average discount

for Cartier at 25%. This is possibly the result of the inventory buybacks last year and

the launch of more affordable products. However, we calculated an average discount

rate for IWC, Vacheron Constantin and Jaeger LeCoultre of at least 30%.

3. Swatch Group does not score well. Besides Blancpain and Breguet, all of the main

brands of the Swatch Group are fairly heavily discounted in the grey market. We

calculate an average discount of 38% for its largest brand, Omega. This indicates that

stock levels, in this case, in the US, relative to the end demand are higher than the

competition.

4. LVMH could have scored better. To our surprise, we found that the average

discount for Tag Heuer watches is higher than its peer group. The company initiated

an inventory buyback process more than two years ago, revenue grew in 2016 and

our research suggests that sell-through for Tag Heuer is performing well.

Figure 50: Proprietary analysis of discounts in the grey market suggests that

the inventory glut for Swatch Group is bigger than its peers

Average discount on Jomashop (red=Richemont, blue=Swatch Group, orange=LVMH, grey=independent)


0%

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10%

15%

20%

25%

30%

35%

40%

45%

50%

Average

14 March 2017


The way we approach valuation Swatch Group appears fairly valued according to the KOF business climate index.

We view the KOF Swiss Economic Institute survey (see Introducing the KOF business

climate survey published on 3 October 2016) as a cyclical indictor for Swiss watch

manufacturing. We find an interesting correlation between Swatch Group's share price and

the overall business climate index. On that particular metric, the stock looks fairly valued

and the recent absolute share price performance seems to be consistent with the small

improvement in the overall business climate index (see Figure 51). However, in order to

justify a share price >SFr400, we would need to see the majority of the 40 survey

respondents reporting an increase in production and incoming orders against the same

period last year, according to the KOF barometer.

Figure 51: Swatch Group appears to be fairly valued against the KOF indicator

Swatch Group's share price vs. KOF Business Climate index

Source: KOF Swiss Economic Institute, FHS, Credit Suisse research

Richemont and Swatch Group are already trading at peak multiples. On consensus

earnings forecasts, Swatch Group and Richemont are now trading at 22x and 25x 12-

month forward P/E respectively against a long-term historical average of 16x. These two

stocks have moved away from their historical discount to luxury goods peers in less than a

year. Therefore, the market seems to already assume Swatch Group and Richemont will

deliver earnings growth well ahead of peers in the next few years

Figure 52: Richemont is trading at a historical high

premium to its luxury goods peers

Figure 53: Swatch Group has moved from >20%

discount to none in less than a year

12-m fwd. consensus P/E relative to luxury peers for Richemont 12-m fwd. consensus P/E relative to luxury peers for Swatch Group

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

-100

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-60

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-20

0

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400

500

600

700

2002 2002 2003 2004 2005 2005 2006 2007 2008 2008 2009 2010 2011 2011 2012 2013 2014 2014 2015 2016 2017

Swatch Group share price (SFr, lhs) KOF Business climate (3-m moving average, rhs)

12%

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-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Prem. (disc.) vs. sector Avg. premium (discount) vs. sector

0%

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-50%

-40%

-30%

-20%

-10%

0%

10%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Prem. (disc.) vs. sector Avg. premium (discount) vs. sector

https://plus.credit-suisse.com/u/_Xzfg1AA-WEp0ar

https://plus.credit-suisse.com/u/_Xzfg1AA-WEp0ar

14 March 2017


Richemont is already pricing in a return to peak earnings. Adjusted EPS for the

company peaked at €3.68/share in FY13. After applying the average P/E of 16x of the last

five years, we derive an equity value of €60/share or SFr65/share. This compares to a

share price of SFr76 on 9 March suggesting a return to peak earnings is currently priced

in. We believe a return to peak earnings will unlikely be achieved through cost cutting only.

Further job cuts should remain limited and underlying cost inflation on rent is unavoidable.

As a result, we calculate that jewellery has to sustain double-digit sales growth from FY18

and watch sales to excess peak levels of FY15 at some point in the next 3-5 years.

Both stocks look expensive on EV/Sales multiples. We tend to rely on EV/Sales or

EV/GP when earnings have come down and consensus expectations have been cut

significantly. While Swatch Group tends to screen relatively well on EV/Sales at 2.2x on

12-month forward consensus numbers against a 10-year average of 2.5x, Richemont

trades at 3.0 EV/Sales against an average of 2.4x and a slight premium to luxury peers.

Figure 54: Richemont looks expensive on EV/Sales

above average levels

Figure 55: Swatch Group is back to below average

levels

12-m fwd. consensus EV/Sales for Richemont 12-m fwd. consensus EV/Sales for Swatch Group

Source: Thomson Reuters Source: Thomson Reuters

Figure 56: Luxury goods valuation table

P/E EV/Sales EV/EBITDA EV/EBIT Div. Yield

CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E

x x x x x x x x % %

Richemont 28.7x 25.7x 2.8x 2.7x 13.3x 12.4x 18.2x 16.7x 2.4% 2.5%

Swatch 26.5x 22.6x 2.3x 2.2x 12.9x 11.6x 19.4x 16.8x 2.1% 2.3%

LVMH 20.8x 19.2x 2.7x 2.5x 11.2x 10.4x 14.3x 13.1x 2.4% 2.6%

Kering 19.8x 17.7x 2.5x 2.4x 12.9x 11.8x 15.9x 14.4x 2.1% 2.3%

Hermes 37.6x 34.6x 7.6x 7.1x 21.3x 19.6x 23.6x 21.8x 1.0% 1.0%

Burberry 22.3x 20.9x 2.5x 2.3x 11.4x 10.7x 15.7x 14.7x 2.1% 2.2%

Hugo Boss 20.1x 18.9x 1.8x 1.8x 10.4x 9.9x 15.8x 14.9x 4.0% 4.2%

Tod's 23.0x 21.2x 2.2x 2.1x 12.1x 11.2x 16.5x 15.3x 3.0% 3.1%

Ferragamo 24.3x 22.6x 3.3x 3.1x 14.4x 13.5x 17.9x 16.8x 2.1% 2.3%

Prada 28.3x 25.7x 2.9x 2.8x 12.6x 11.8x 19.4x 17.6x 0.3% 0.3%

Brunello Cucinelli 32.6x 29.6x 2.8x 2.6x 16.6x 15.3x 22.5x 20.7x 1.1% 1.2%

European average 21.4x 19.5x 2.5x 2.4x 11.4x 10.6x 15.0x 13.8x 2.3% 2.4%

Source: Company data, Credit Suisse estimates. Note: shares prices as of 09-Mar-2017

3.0x

2.4x

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1.8x

-

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Richemont EV/sales Average Stdev+/-1

2.2x

2.5x

3.1x

1.9x

-

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Swatch EV/sales Average Stdev+/-1

14 March 2017


Europe/Switzerland Luxury Goods

Swatch Group (UHR.S) Rating UNDERPERFORM Price (09 Mar 17, SFr) 341.20 Target price (SFr) (from 220.00) 260.00 Market Cap (SFr m) 18,473.8 Enterprise value (SFr m) 17,701.4 Target price is for 12 months.

Research Analysts


44 207 888 0321

[email protected]

Catherine Tillson

44 20 7888 6052

[email protected]

A few areas of complacency

■ We reiterate our Underperform rating on Swatch Group. The stock has

rallied 30% and has outperformed our coverage universe by 5% in the last six

months. This was achieved against no earning upgrades unlike most of its

luxury goods peers. While the market seems to be expecting a bounce in

watch manufacturing in 2017, we think the industry continues to face multiple

challenges which we believe the Swatch Group is not addressing.

■ Swatch Group's mid-end business may face more competition. We

estimate that 50% of sales are watches priced <$5,000. While this may seem

a favourable exposure at first given consumer preference shifting towards

more affordable watches, we think it is an issue. Our channel checks suggest

that demand is not shifting across brands but across product lines and price

points within each brand. Our product analysis shows that the more high-end

and iconic brands outside Swatch Group are adapting to these demand shifts

by launching new entry price products, hence creating more competition for

Swatch Group's mid-end business. Moreover, our analysis shows that its

largest brand Omega is not adapting its product offer to capture the more

aspirational part of the luxury watch clientele.

■ Inventory gluts may be the most problematic for Swatch Group. First,

the company is the most exposed to difficult markets. 66% of 2017e sales are

to Asia or America. Our excess inventory model suggests that the stock

overbuilds remain, albeit with marginal improvement in Asia. Second, Swatch

Group has the highest level of discounts on the grey market which indicates

more challenging inventory gluts than watch peers.

■ We raise our target price to SFr260 from SFr220. This is largely driven by

the time value factor and rerating of luxury peers. We are leaving our 2017/18

EPS forecasts broadly unchanged as currency impacts offset more prudent

underlying assumptions. We remain >10% below consensus EPS for both

years. The stock now trades at 16x 12-month forward EV/EBIT on consensus

numbers and at a premium to peers. We think this is unjustified given

continuous earnings risk and decreasing ROIC.

■ Risks to our Underperform rating include a faster than expected rebound

in the Swiss watch industry, inventory buybacks and management changes.

Share price performance

The price relative chart measures performance against the

SMI PRICE which closed at 8639.7 on 09/03/17

On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.-

Eu.95/US$1

Performance 1M 3M 12M Absolute (%) 1.7 7.4 -5.8 Relative (%) -1.6 0.6 -15.5

Financial and valuation metrics

Year 12/16A 12/17E 12/18E 12/19E Revenue (SFr m) 7,553.0 7,818.7 8,160.3 8,510.4 EBITDA (SFr m) 1,242.0 1,371.0 1,532.2 1,668.9 Adjusted net income (SFr m) 570.95 680.48 783.12 870.67 CS EPS (adj.) (SFr) 10.68 12.90 15.13 16.97 Prev. EPS (SFr) 12.52 13.28 15.14 15.41 ROIC (%) 6.1 6.8 7.7 8.5 P/E (adj.) (x) 31.9 26.5 22.6 20.1 P/E rel. (%) 177.3 157.6 148.7 142.2 EV/EBITDA (x) 14.1 12.9 11.6 10.4

Dividend (12/17E, SFr) 7.26 Net debt/equity (12/17E,%) -7.0 Dividend yield (12/17E,%) 2.1 Net debt (12/17E, SFr m) -772.4 BV/share (12/17E, SFr) 229.9 IC (12/17E, SFr m) 10,289.4 Free float (%) 79.0 EV/IC (12/17E, (x) 1.7 Source: Company data, Thomson Reuters, Credit Suisse estimates

14 March 2017


Swatch Group (UHR.S)

Price (09 Mar 2017): SFr341.2; Rating: UNDERPERFORM; Target Price: (from SFr220.00) SFr260.00; Analyst: Guillaume Gauville

Income statement (SFr m) 12/16A 12/17E 12/18E 12/19E

Revenue 7,553 7,819 8,160 8,510 EBITDA 1,242 1,371 1,532 1,669 Depr. & amort. (437) (460) (480) (501) EBIT 805 911 1,052 1,168 Net interest exp. 6 6 6 6 Associates (4) 0 0 0 PBT 773 917 1,057 1,174 Income taxes (184) (216) (250) (277) Profit after tax 589 701 808 897 Minorities (19) (21) (25) (27) Preferred dividends - - - - Associates & other 1 0 0 0 Net profit 571 680 783 871 Other NPAT adjustments 3 0 (0) 0 Reported net income 574 680 783 871

Cash flow (SFr m) 12/16A 12/17E 12/18E 12/19E

EBIT 805 911 1,052 1,168 Net interest 6 6 6 6 Cash taxes paid (277) (216) (250) (277) Change in working capital 41 (151) (96) (113) Other cash and non-cash items 435 460 480 501 Cash flow from operations 1,010 1,010 1,192 1,286 CAPEX (533) (506) (516) (527) Free cashflow to the firm 960 963 1,144 1,236 Acquisitions 0 0 0 0 Divestments 3 0 0 0 Other investment/(outflows) 46 0 0 0 Cash flow from investments (484) (506) (516) (527) Net share issue/(repurchase) (331) (350) (309) 0 Dividends paid (439) (363) (383) (406) Issuance (retirement) of debt 103 (0) 2 7 Cashflow from financing (666) (712) (689) (399) Changes in net cash/debt (252) (209) (15) 353 Net debt at start (1,233) (981) (772) (757) Change in net debt 252 209 15 (353)

Net debt at end (981) (772) (757) (1,110)

Balance sheet (SFr m) 12/16A 12/17E 12/18E 12/19E

Assets Total current assets 9,045 9,016 9,107 9,590 Total assets 13,106 13,123 13,250 13,758 Liabilities Total current liabilities 1,207 1,235 1,245 1,261 Total liabilities 2,033 2,061 2,072 2,088 Total equity and liabilities 13,106 13,123 13,250 13,758

Per share 12/16A 12/17E 12/18E 12/19E

No. of shares (wtd avg.) (mn) 54 53 52 51 CS EPS (adj.) (SFr) 10.68 12.90 15.13 16.97 Dividend (SFr) 6.75 7.26 7.76 8.31 Free cash flow per share (SFr) 17.86 18.24 22.09 24.10

Key ratios and valuation 12/16A 12/17E 12/18E 12/19E

Growth/Margin (%) Sales growth (%) (10.6) 3.5 4.4 4.3 EBIT growth (%) (44.5) 13.1 15.5 11.0 Net income growth (%) (47.6) 19.2 15.1 11.2 EPS growth (%) (46.7) 20.8 17.3 12.2 EBITDA margin (%) 16.4 17.5 18.8 19.6 EBIT margin (%) 10.7 11.6 12.9 13.7 Pretax profit margin (%) 10.2 11.7 13.0 13.8 Net income margin (%) 7.6 8.7 9.6 10.2

Valuation 12/16A 12/17E 12/18E 12/19E

EV/Sales (x) 2.3 2.3 2.2 2.0 EV/EBITDA (x) 14.1 12.9 11.6 10.4 EV/EBIT (x) 21.7 19.4 16.8 14.9 Dividend yield (%) 1.98 2.13 2.28 2.43 P/E (x) 31.9 26.5 22.6 20.1

Credit ratios (%) 12/16A 12/17E 12/18E 12/19E

Net debt/equity (%) (8.9) (7.0) (6.8) (9.5) Net debt to EBITDA (x) (0.8) (0.6) (0.5) (0.7) Interest coverage ratio (x) (127.0) (148.3) (189.6) (184.6)

Company Background

The Swatch Group Ltd. is engaged in the manufacture of watches, jewelry and accessories as its core business. The Company also manufactures mechanical and quartz movements, and is active in the design, production and marketing of electronic components.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (SFr) (from 315.00) 390.00

Our blue sky scenario is based on an earlier rebound for watches leading to margin recovery. This leads to an operating profit being 15% higher than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation above the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr390.

Our Grey Sky Scenario (SFr) (from 165.00) 210.00

Our grey sky scenario is based on prolonged weakness for watches leading to further margin pressure. This leads to an operating profit being 15% lower than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation below the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr210.


The price relative chart measures performance against the SMI PRICE which

closed at 8639.7 on 09/03/17

On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.- Eu.95/US$1

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates

14 March 2017


Charting the story

Figure 57: Competition for more affordable watches

is likely to rise

Figure 58: Swatch Group's brands show some of

the highest discount rates on the grey market

Estimate revenue breakdown by ASP at retail value (in FY16) Average discount on Jomashop (Swatch Group = blue)


Figure 59: We and the market are already assuming

margins have troughed for Swatch Group

Figure 60: A weaker Swiss franc fully offsets

negative underlying revisions

Long-term operating margin Old vs. new FY17e operating profit forecast bridge

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

Figure 61: We remain >10% below consensus on

operating profit over FY17-19e

Figure 62: The stock is now trading at record high

multiples

CS vs. consensus forecasts (in SFrm) 12-month forward consensus EV/EBIT

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse research

$50010%

$500-$1,00017%

$1,000-$5,00024%

>$5,00049%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Average

5%

10%

15%

20%

25%

30%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

e

2018

e

2019

e

911918

+5% -3%

-2%

600

650

700

750

800

850

900

950

1000

Old FY17e op. profit Currency effect Organic sales Underlying margin New FY17e op. profit

0

200

400

600

800

1,000

1,200

1,400

1,600

FY17e FY18e FY19e

Consensus CS

16.3x

11.2x

8.7x

13.6x

4x

6x

8x

10x

12x

14x

16x

18x

20x

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Swatch 12-month EV/EBIT Average +/- 1 stdev

1

14 March 2017


Financials

Figure 63: Cost of goods sold model

In SFrm unless stated otherwise FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Material purchases (1,274) (1,422) (1,634) (1,870) (1,843) (1,746) (1,565) (1,587) (1,634) (1,680)

% change 16% 12% 15% 14% (1%) (5%) (10%) 1% 3% 3%

Material purchases (1,471) (2,221) (2,356) (2,456) (2,240) (2,001) (1,642) (1,665) (1,714) (1,763)

% change 33% 51% 6% 4% (9%) (11%) (18%) 1% 3% 3%

Changes in inventories 197 799 722 586 397 255 77 77 80 82

% change 2,089% 306% (10%) (19%) (32%) (36%) (70%) 1% 3% 3%

Personnel expense (1,020) (1,126) (1,241) (1,282) (1,385) (1,462) (1,496) (1,529) (1,563) (1,602)

% change 1% 10% 10% 3% 8% 6% 2% 2% 2% 3%

Subcontracting and other costs of sales (281) (287) (295) (313) (304) (291) (260) (266) (277) (289)

% change 12% 2% 3% 6% (3%) (4%) (11%) 2% 4% 4%

Depreciation on tangible assets (170) (177) (201) (237) (274) (309) (334) (352) (368) (383)

% change (1%) 4% 14% 18% 16% 13% 8% 5% 4% 4%

Total (2,745) (3,012) (3,371) (3,702) (3,806) (3,808) (3,655) (3,735) (3,842) (3,955)

% change 9% 10% 12% 10% 3% 0% (4%) 2% 3% 3%

Gross profit 3,363 3,752 4,425 4,754 4,903 4,643 3,898 4,084 4,319 4,555

Gross margin 55.1% 55.5% 56.8% 56.2% 56.3% 54.9% 51.6% 52.2% 52.9% 53.5%


Figure 64: Operating expenses model

In SFrm unless stated otherwise FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Personnel expense (614) (692) (747) (862) (958) (922) (846) (861) (881) (896)

% change 5% 13% 8% 15% 11% (4%) (8%) 2% 2% 2%

Other operating expenses (1,400) (1,482) (1,878) (2,029) (2,340) (2,278) (2,394) (2,328) (2,521) (2,498)

% change 18% 6% 27% 8% 15% (3%) 5% (3%) 8% (1%)

Marketing, sales and administration (863) (948) (1,097) (1,261) (1,347) (1,279) (1,201) (1,188) (1,216) (1,268)

% change 11% 10% 16% 15% 7% (5%) (6%) (1%) 2% 4%

as a % of sales 14.1% 14.0% 14.1% 14.9% 15.5% 15.1% 15.9% 15.2% 14.9% 14.9%

Maintenance, rents and energy (426) (487) (604) (703) (843) (938) (1,022) (1,063) (1,106) (1,150)

% change 14% 14% 24% 16% 20% 11% 9% 4% 4% 4%

Other operating expenses (111) (47) (177) (65) (150) (61) (170) (77) (199) (80)

% change 226% (58%) 277% (63%) 131% (59%) 179% (55%) 160% (60%)

Depreciation and amortization (52) (52) (60) (67) (84) (95) (103) (108) (113) (118)

% change 8% - 15% 12% 25% 13% 8% 5% 4% 4%

Other operating income 139 88 238 518 231 103 206 124 247 124

% change 34% (37%) 170% 118% (55%) (55%) 100% (40%) 100% (50%)

Total (1,927) (2,138) (2,447) (2,440) (3,151) (3,192) (3,136) (3,173) (3,267) (3,387)

% change 13% 11% 14% (0%) 29% 1% (2%) 1% 3% 4%

% change (excl. other op. income) 10% 11% 15% 15% 12% 0% (2%) 2% 3% 4%

as a % of sales 31.6% 31.6% 31.4% 28.9% 36.2% 37.8% 41.5% 40.6% 40.0% 39.8%

as a % of sales (excl. other op. income) 33.8% 32.9% 34.4% 35.0% 38.8% 39.0% 44.3% 42.2% 43.1% 41.3%


14 March 2017


Valuation

We increase our target price to SFr260 from SFr220. This largely reflects the time value

factor and a higher EV/IC peer multiple valuation given the sharp rerating of most luxury

goods stocks in the last six months. Our new target price is a simple average of our EV/IC

valuation methodology (SFr235) and Credit Suisse HOLT® (SFr284).

Our EV/IC valuation approach uses a 2017e invested capital base adjusted for operating

leases vs. our RNOA/WACC in order to derive a fair Enterprise Value for Swatch Group.

After deducting our projections for net cash, operating lease obligation, pension, and

minorities, we estimate an equity fair valuation for the stock of SFr235 per share with a 12-

month horizon.

Figure 65: EV/IC valuation framework

In SFrm unless stated otherwise

FY17e invested capital base (lease adjusted) 14,607

FY17e RNOA/WACC spread 0.7

EV fair value 15,123

Net debt (FY17e) (799)

Lease adjustment (FY17e) 4,447

Minorities (FY17e) 86

Pension (FY17e) 39

Equity fair value today 11,350

Share count (m) 52.2

Equity fair value per share today (SFr/share) 218

Equity fair value in 12-months (SFr/share) 235

Source: Credit Suisse estimates

The Credit Suisse HOLT-based valuation approach incorporates our five-year explicit

forecast period and a five-year transition period. This assumes +3% revenue growth and

margin declines reflecting increased competition. Beyond a 10-year competitive advantage

window, the HOLT model assumes CFROI® to fade gradually to 6% and asset growth to

fade to 2.5%. This reflects the economic reality of competition, eliminating excess returns

and growth regressing to the corporate average. The HOLT-12-month warranted value

stands at SFr284.

14 March 2017


Figure 66: Credit Suisse HOLT valuation framework

Source: Credit Suisse HOLT, company data, Credit Suisse estimates

Current Price: CHF 341.20 Warranted Price: CHF 284.83 Valuation date: 09-Mar-17

Sales Growth (parallel % point change to forecasts) Dec 15A Dec 16A Dec 17E Dec 18E Dec 19E

CHF -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % -3.0 -9.4 2.6 4.3 4.3

EBITDA Mgn, % 21.9 17.1 17.9 19.1 19.9

Asset Turns, x 0.34 0.3 0.3 0.3 0.3

CFROI®, % 7.8 5.2 4.8 5.0 5.2

Disc Rate, % 3.8 4.1 4.6 4.6 4.6

Asset Grth, % 11.8 3.2 3.9 3.5 3.6

Value/Cost, x 1.2 1.1 1.2 1.1 1.1

Economic PE, x 15.7 21.5 24.6 22.4 20.7

Leverage, % 19.3 25.4 26.5 27.0 28.0

HO

LT

-

C

red

it S

uis

se A

naly

st

Scen

ari

o D

ata

THE SWATCH GROUP SA (UHR)

EB

ITD

A M

arg

in (

para

llel

% p

oin

t ch

an

ge

to f

ore

casts

)

-2.0% -40% -36% -30% -24%

-1%

-17%

-1.0% -35% -29% -23% -17% -9%

0.0% -29% -23% -17% -9%

16%

1.0% -23% -17% -10% -2% 8%

2.0% -17% -10% -3% 6%

More than

10%

downside

Within 10%More than

10% upside

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

-15

-10

-5

0

5

10

15

20

2012 2014 2016 2018 2020 2022 2024 2026

Sales Growth (%)

0

5

10

15

20

25

30

35

2012 2014 2016 2018 2020 2022 2024 2026

EBITDA Margin

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

2012 2014 2016 2018 2020 2022 2024 2026

Asset Turns (x)

0

2

4

6

8

10

12

14

2012 2014 2016 2018 2020 2022 2024 2026Historical CFROI Historical Transaction CFROIForecast CFROI Forecast CFROICFROI Discount Rate

CFROI & Discount Rate (in %)

0

2

4

6

8

10

12

14

16

18

2012 2014 2016 2018 2020 2022 2024 2026

Historical Asset Growth Rate Forecast GrowthForecast Growth RAGRNormalised Growth Rate

Asset Growth (in %)

14 March 2017


Europe/Switzerland Luxury Goods

Compagnie Financiere Richemont SA

(CFR.S) Rating UNDERPERFORM Price (09 Mar 17, SFr) 75.70 Target price (SFr) 65.00 Market Cap (SFr m) 39,515.4 Enterprise value (SFr m) 33,859.6 Target price is for 12 months.

Research Analysts


44 207 888 0321

[email protected]

Catherine Tillson

44 20 7888 6052

[email protected]

Pricing in a rapid return to peak earnings

■ We reiterate our Underperform rating on Richemont. The stock has

rallied 30% and has outperformed our coverage universe by 5% in the last

six months. Admittedly, this was achieved thanks to better 1H and 3Q results

leading to c.10% earnings upgrades over the period. However, we believe

consensus earnings growth of 20% in FY18e is challenging. After raising our

FY17-19e EPS forecasts by 3% on average, we remain >10% below

consensus estimates. Our target price of SFr65 is unchanged.

■ Richemont's watch business should see pressure on ASP. 40% of group

sales still come from wholesale in FY18e. Our analysis of Cartier, IWC and

Jaeger-LeCoultre shows that the ASP is likely to come down at the retail

level. While this is positive long term as it drives a volume recovery, more

affordable price products should weigh on gross margin and profit in the near

term.

■ Inventory issues may not be completely sorted. The buybacks for Cartier

last year have helped. Our analysis shows that Cartier watches are the least

discounted among Richemont's brands on the US grey market. However, an

average discount of 25% remains high vs. best-in-class peers like Rolex or

Patek Philippe. Moreover, its other brands like IWC, Vacheron Constantin or

Jaeger-LeCoultre are still heavily discounted on the grey market.

■ The stock is pricing in a return to peak earnings. Using FY14 peak EPS

and the 16x average P/E of the last five years gives a valuation of

SFr65/share. In contrast, we think the market is assuming that Richemont will

grow earnings well ahead of peers and return to peak levels in the medium

term. We believe this cannot be achieved solely through cost cutting but that

double-digit growth rates in jewellery and watch sales returning to previous

peaks are necessary to justify the current valuation.

■ Risks to our Underperform rating include a faster than expected rebound

in the Swiss watch industry and sustained double-digit growth in jewellery.


The price relative chart measures performance against the SMI

PRICE which closed at 8639.7 on 09/03/17

On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.-

Eu.95/US$1

Performance 1M 3M 12M Absolute (%) 1.1 12.2 14.7 Relative (%) -1.5 6.0 6.2

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (€ m) 11,076.0 10,643.2 11,291.3 11,684.8 EBITDA (€ m) 2,708.0 2,157.5 2,437.5 2,591.2 Adjusted net income (€ m) 2,324.00 1,138.22 1,478.54 1,578.89 CS EPS (adj.) (€) 4.11 2.01 2.62 2.79 Prev. EPS (€) - 2.03 2.45 2.67 ROIC (%) 18.4 12.4 14.2 14.9 P/E (adj.) (x) 17.2 35.1 27.1 25.3 P/E rel. (%) 95.6 209.4 178.4 179.2 EV/EBITDA (x) 11.8 14.7 12.8 11.9

Dividend (03/17E, €) 1.64 Net debt/equity (03/17E,%) -34.1 Dividend yield (03/17E,%) 2.3 Net debt (03/17E, € m) -5,282.5 BV/share (03/17E, €) 27.4 IC (03/17E, € m) 10,192.9 Free float (%) 90.0 EV/IC (03/17E, (x) 3.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

14 March 2017


Compagnie Financiere Richemont SA (CFR.S)

Price (09 Mar 2017): SFr75.7; Rating: UNDERPERFORM; Target Price: SFr65.00; Analyst: Guillaume Gauville

Income statement (€ m) 3/16A 3/17E 3/18E 3/19E

Revenue 11,076 10,643 11,291 11,685 EBITDA 2,708 2,157 2,437 2,591 Depr. & amort. (550) (594) (641) (675) EBIT 2,158 1,563 1,797 1,916 Net interest exp. 17 20 20 25 Associates (5) (10) (12) (14) PBT 2,155 1,403 1,805 1,927 Income taxes (370) (265) (326) (348) Profit after tax 1,785 1,138 1,479 1,579 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other 539 0 0 0 Net profit 2,324 1,138 1,479 1,579 Other NPAT adjustments (97) 99 0 0 Reported net income 2,227 1,237 1,479 1,579

Cash flow (€ m) 3/16A 3/17E 3/18E 3/19E

EBIT 2,158 1,563 1,797 1,916 Net interest (10) 20 20 25 Cash taxes paid (446) (265) (326) (348) Change in working capital (12) (400) (148) (155) Other cash and non-cash items 274 685 641 675 Cash flow from operations 1,964 1,604 1,983 2,113 CAPEX (613) (587) (609) (621) Free cashflow to the firm 1,351 1,017 1,374 1,491 Acquisitions (280) (114) (79) (82) Divestments 6,034 2,596 0 0 Other investment/(outflows) (6,428) (2,742) 0 0 Cash flow from investments (1,287) (847) (688) (703) Net share issue/(repurchase) (94) (67) 0 0 Dividends paid (854) (878) (922) (969) Issuance (retirement) of debt (100) (1,433) 57 62 Cashflow from financing (1,201) (2,380) (866) (906) Changes in net cash/debt (80) (57) 372 441 Net debt at start (5,419) (5,339) (5,282) (5,655) Change in net debt 80 57 (372) (441) Net debt at end (5,339) (5,282) (5,655) (6,096)

Balance sheet (€ m) 3/16A 3/17E 3/18E 3/19E

Assets Total current assets 14,358 13,940 14,569 15,277 Total assets 20,125 19,850 20,526 21,264 Liabilities Total current liabilities 4,196 3,603 3,702 3,805 Total liabilities 5,078 4,374 4,483 4,595 Total equity and liabilities 20,125 19,850 20,526 21,264

Per share 3/16A 3/17E 3/18E 3/19E

No. of shares (wtd avg.) (mn) 566 565 565 565 CS EPS (adj.) (€) 4.11 2.01 2.62 2.79 Dividend (€) 1.56 1.64 1.72 1.80 Free cash flow per share (€) 2.39 1.80 2.43 2.64

Key ratios and valuation 3/16A 3/17E 3/18E 3/19E

Growth/Margin (%) Sales growth (%) 6.4 (3.9) 6.1 3.5 EBIT growth (%) (11.4) (27.6) 14.9 6.7 Net income growth (%) 111.3 (51.0) 29.9 6.8 EPS growth (%) 111.4 (51.0) 29.9 6.8 EBITDA margin (%) 24.4 20.3 21.6 22.2 EBIT margin (%) 19.5 14.7 15.9 16.4 Pretax profit margin (%) 19.5 13.2 16.0 16.5 Net income margin (%) 21.0 10.7 13.1 13.5

Valuation 3/16A 3/17E 3/18E 3/19E

EV/Sales (x) 2.9 3.0 2.8 2.6 EV/EBITDA (x) 11.8 14.7 12.8 11.9 EV/EBIT (x) 14.8 20.2 17.4 16.1 Dividend yield (%) 2.20 2.31 2.43 2.55 P/E (x) 17.2 35.1 27.1 25.3

Credit ratios (%) 3/16A 3/17E 3/18E 3/19E

Net debt/equity (%) (35.5) (34.1) (35.2) (36.6) Net debt to EBITDA (x) (2.0) (2.4) (2.3) (2.4) Interest coverage ratio (x) (126.9) (76.6) (89.3) (77.2)

Company Background

Richemont is the second largest luxury goods company globally, with particular strengths in jewellery, luxury watches and writing instruments.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (SFr) 82.00

Our blue sky scenario is based on an earlier rebound for the watch and jewellery businesses leading to margin recovery. This leads to an operating profit being 15% higher than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation above the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr82.

Our Grey Sky Scenario (SFr) 34.00

Our grey sky scenario is based on prolonged weakness for both watches and jewellery leading to further margin pressure. This leads to an operating profit being 15% lower than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation below the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr34.


The price relative chart measures performance against the SMI PRICE which

closed at 8639.7 on 09/03/17

On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.- Eu.95/US$1

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates

14 March 2017


Charting the story

Figure 67: Richemont is the most exposed to the

high end segment with negative ASP development

Figure 68: We forecast FY18 growth to be more 1H

weighted as Richemont annualises the buybacks

Estimate revenue breakdown by ASP (in FY16) Organic sales growth by product line (Y/Y % chg.)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 69: Our forecasts already assume margin

recovery in the next three years

Figure 70: Our forecasts move up due to a stronger

US dollar and inventory buybacks rolling off

Long-term operating margin Old vs. new FY18e operating forecast bridge

Source: Company data, Credit Suisse estimates Source: credit Suisse estimates

Figure 71: We remain >10% below consensus on

operating profit over FY18-19e

Figure 72: The stock looks particularly expensive

even on EV/sales multiples

CS vs. consensus forecasts (in €m) 12-month forward consensus EV/Sales

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse research

$1,000-$5,0006%

>$5,00094%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1H08

2H08

1H09

2H09

1H10

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

2H14

1H15

2H15

1H16

2H16

1H17

2H17

e

1H18

e

2H18

e

1H19

e

2H19

e

Watches Jewellery Group

0%

5%

10%

15%

20%

25%

30%

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17e

FY

18e

FY

19e

1797

1683+4%

+3% -1%

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

Old FY18e op. profit Currency effect Inventory buybacksrolling off

Underlying margin New FY18e op. profit

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

FY17e FY18e FY19e

Consensus CS

3.0x

2.4x

3.0x

1.8x

-

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Richemont EV/sales Average Stdev+/-1

14 March 2017


Divisional assumptions

Figure 73: Sales and operating profit breakdown

In €m unless stated otherwise

Sales by region FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e

Europe 2,099 2,588 3,098 3,611 3,919 3,908 4,363 3,964 4,115 4,239 4,450

Reported growth (11%) 23% 20% 17% 9% (0%) 12% (9%) 4% 3% 5%

Underlying growth (11%) 20% 20% 14% 11% 7% 10% (8%) 2% 3% 5%

Asia Pacific 1,740 2,569 3,684 4,162 4,235 4,100 3,937 3,908 4,349 4,510 4,751

Reported growth 18% 48% 43% 13% 2% (3%) (4%) (1%) 11% 4% 5%

Underlying growth 17% 36% 46% 5% 6% (6%) (13%) (0%) 9% 4% 5%

Japan 625 737 833 904 892 814 1,031 1,017 996 1,036 1,088

Reported growth (10%) 18% 13% 9% (1%) (9%) 27% (1%) (2%) 4% 5%

Underlying growth (17%) 1% 9% 6% 23% (6%) 20% (12%) - 4% 5%

Americas 712 998 1,253 1,473 1,603 1,588 1,745 1,754 1,831 1,900 1,991

Reported growth (20%) 40% 26% 18% 9% (1%) 10% 1% 4% 4% 5%

Underlying growth (20%) 30% 30% 11% 14% 8% (1%) 1% 1% 4% 5%

Total 5,176 6,892 8,868 10,150 10,649 10,410 11,076 10,643 11,291 11,685 12,281

Reported growth (4%) 33% 29% 14% 5% (2%) 6% (4%) 6% 3% 5%

Underlying growth (5%) 24% 30% 9% 10% 1% (1%) (4%) 4% 3% 5%

Sales by Maisons

Jewellery Maisons 2,688 3,479 4,590 5,206 5,438 5,657 6,048 5,771 6,173 6,420 6,805

Reported growth (3%) 29% 32% 13% 4% 4% 7% (5%) 7% 4% 6%


Specialist Watchmakers 1,353 1,774 2,323 2,752 2,986 3,123 3,225 2,916 2,882 2,911 2,998

Reported growth (6%) 31% 31% 18% 9% 5% 3% (10%) (1%) 1% 3%

Underlying growth (5%) 23% 31% 13% 13% 2% (3%) (10%) (3%) 1% 3%

Other Businesses 584 967 1,232 1,426 1,495 1,630 1,803 1,957 2,237 2,354 2,478

Reported growth 73% 66% 27% 16% 5% 9% 11% 9% 14% 5% 5%

Underlying growth - 56% 28% 11% 10% (0%) 4% 8% 12% 5% 5%

Total 5,176 6,892 8,868 10,150 10,649 10,410 11,076 10,643 11,291 11,685 12,281

Reported growth (4%) 33% 29% 14% 5% (2%) 6% (4%) 6% 3% 5%


Operating profit by Maisons

Jewellery Maisons 742 1,062 1,510 1,818 1,890 1,975 1,892 1,481 1,623 1,720 1,857

Operating margin 27.6% 30.5% 32.9% 34.9% 34.8% 34.9% 31.3% 25.7% 26.3% 26.8% 27.3%

Specialist Watchmakers 231 392 539 733 778 730 520 305 374 392 419


Writing Instrument Maisons 79 109 119 120 43

Operating margin 14.3% 16.2% 16.5% 15.7% 5.9%

Other Businesses (36) (34) (27) (38) (80) 170 (94) (9) 0 24 50

Operating margin (6.2%) (3.5%) (2.2%) (2.7%) (5.4%) 10.4% (5.2%) (0.5%) 0.0% 1.0% 2.0%

Total 830 1,364 2,057 2,435 2,430 2,436 2,158 1,563 1,797 1,916 2,139



14 March 2017


Valuation

We are leaving our target price unchanged at SFr65. Our target price was set as a

simple average of our EV/IC framework (SFr66) and Credit Suisse HOLT (SFr64).

Our EV/IC multiple approach uses the FY18e invested capital base adjusted for

operating leases vs. our RNOA/WACC in order to derive a fair Enterprise Value for

Richemont. After deducting our projections for net cash, operating lease obligation,

pension, and minorities, we estimate an equity fair valuation for the stock of SFr66 per

share with a 12-month horizon.

Figure 74: EV/IC valuation framework

In €m unless stated otherwise

FY18e invested capital base (lease adjusted) 14,473

FY18e ROIC/WACC spread 1.2

EV fair value today 32,782

Net debt (FY18e) (5,595)

Lease adjustment (FY18e) 5,530

Minorities (FY18e) -

Pension (FY18e) 315

Equity fair value 32,533

Share count (m) 565

Equity fair value per share today (€/share) 58

Equity fair value in 12-months (€/share) 62

Equity fair value in 12-months (SFr/share) 66


The Credit Suisse HOLT-based valuation approach incorporates our five-year explicit

forecast period and a five-year transition period. This assumes +4% revenue growth and

margin declines reflecting increased competition. Beyond a 10-year competitive advantage

window, the HOLT model assumes CFROI® to fade gradually to 6% and asset growth to

fade to 2.5%. This reflects the economic reality of competition, eliminating excess returns

and growth regressing to the corporate average.

14 March 2017


Figure 75: Credit Suisse HOLT framework

Source: Credit Suisse HOLT, Credit Suisse estimates

Current Price: EUR 70.69 Warranted Price: EUR 59.99 Valuation date: 09-Mar-17

Sales Growth (parallel % point change to forecasts) Mar 15A Mar 16A Mar 17E Mar 18E Mar 19E

EUR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % -2.2 6.4 -3.9 6.1 3.5

EBITDA Mgn, % 28.0 24.0 20.3 21.6 22.2

Asset Turns, x 0.42 0.4 0.5 0.5 0.5

CFROI®, % 9.0 10.2 8.1 8.9 8.8

Disc Rate, % 3.9 3.3 4.2 4.2 4.2

Asset Grth, % 23.7 0.4 -7.6 4.8 4.0

Value/Cost, x 2.3 2.0 2.2 2.1 2.0

Economic PE, x 25.4 19.7 26.4 23.1 22.5

Leverage, % 13.4 12.6 12.0 12.5 12.9

More than

10%

downside

Within 10%More than

10% upside

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

15%

1.0% -12% -7% -3% 3% 9%

2.0% -7% -3% 2% 8%

-8% -3%

0.0% -16% -12% -8% -3%

HO

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-

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Scen

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RICHEMONT (COMPAGNIE

FINANCIERE) (CFR)

EB

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A M

arg

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% p

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casts

)

-2.0% -24% -21% -18% -13%

3%

-9%

-1.0% -20% -16% -13%

-10

-5

0

5

10

15

20

25

30

35

2011 2013 2015 2017 2019 2021 2023 2025

Sales Growth (%)

0

5

10

15

20

25

30

2011 2013 2015 2017 2019 2021 2023 2025

EBITDA Margin

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2011 2013 2015 2017 2019 2021 2023 2025

Asset Turns (x)

0

2

4

6

8

10

12

14

16

2011 2013 2015 2017 2019 2021 2023 2025Historical CFROI Historical Transaction CFROIForecast CFROI Forecast CFROICFROI Discount Rate

CFROI & Discount Rate (in %)

-10

-5

0

5

10

15

20

25

30

2011 2013 2015 2017 2019 2021 2023 2025

Historical Asset Growth Rate Forecast GrowthForecast Growth RAGRNormalised Growth Rate

Asset Growth (in %)

14 March 2017


Companies Mentioned (Price as of 09-Mar-2017) Brunello Cucinelli SpA (BCU.MI, €20.72) Burberry Group (BRBY.L, 1788.0p) Compagnie Financiere Richemont SA (CFR.S, SFr75.7, UNDERPERFORM, TP SFr65.0) Cortina Holdings (CORT.SI, S$0.69) Emp Wat & Jew (0887.HK, HK$0.295) Fossil Group (FOSL.OQ, $16.82) Hengdeli (3389.HK, HK$1.21) Hermes International (HRMS.PA, €423.05) Hour Glass (HRGS.SI, S$0.69) Hugo Boss (BOSSn.DE, €67.68) Kering (PRTP.PA, €236.85) LVMH (LVMH.PA, €195.65) Movado Group (MOV.N, $22.45) Oriental Watch (0398.HK, HK$1.66) PRADA S.p.A. (1913.HK, HK$31.0) Salvatore Ferragamo Spa (SFER.MI, €28.35) Swatch Group (UHR.S, SFr341.2, UNDERPERFORM, TP SFr260.0) Tod’s Group Spa (TOD.MI, €67.85)

Disclosure Appendix

Analyst Certification Guillaume Gauvillé, CFA, and Catherine Tillson each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Compagnie Financiere Richemont SA (CFR.S)

CFR.S Closing Price Target Price

Date (SFr) (SFr) Rating

07-Apr-14 85.00 100.00 O

25-Apr-14 88.40 105.00

28-Aug-14 87.90 103.00

29-Jan-15 76.40 85.00

16-Mar-15 85.30 100.00

09-Nov-15 80.15 91.00

21-Jan-16 62.40 80.00

24-Mar-16 61.30 70.00 N

23-May-16 56.90 58.00

02-Aug-16 56.40 50.00 U

10-Nov-16 66.60 53.00

16-Jan-17 76.80 65.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for Swatch Group (UHR.S)

UHR.S Closing Price Target Price

Date (SFr) (SFr) Rating

28-Mar-14 550.00 650.00 O

25-Jul-14 493.90 620.00

29-Jan-15 369.50 400.00 N

16-Mar-15 439.30 470.00

18-May-15 397.30 440.00 O

04-Sep-15 370.40 480.00

20-Nov-15 369.50 450.00

12-Feb-16 324.00 420.00

16-Jun-16 282.20 340.00

02-Aug-16 248.10 230.00 U

03-Oct-16 272.00 220.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

14 March 2017


Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expec ted total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 39% (60% banking clients) Underperform/Sell* 14% (52% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Compagnie Financiere Richemont SA (CFR.S)

Method: Our Underperform rating and target price of SFr65 is set based on a simple average of HOLT® (using a 10-year competitive advantage period window) and our EV/IC vs. RNOA/WACC framework. We rate the stock Underperform as we find valuation particularly stretched while a rebound in watches is highly uncertain.

Risk: Key risks to our target price of SFr65 and Underperform rating include: a significant rebound in consumer demand for high end watches, the 'feel good' factor returns and drives a recovery in big ticket jewellery sales, currency movements, launch of a signficant cost control programme which looks to protect margins.

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14 March 2017


Target Price and Rating Valuation Methodology and Risks: (12 months) for Swatch Group (UHR.S)

Method: Our target price of SFr260 is set based on a simple average of HOLT® (using a 10-year competitive advantage period window) and our EV/IC vs. RNOA/WACC framework. We rate the stock Underperform as we see continued weakness in Swiss watch exports and only a timid recovery in end demand, while the valuation remains stretched.

Risk: Key risks to Swatch Group's Underperform rating and target price include; (i) a strong rebound in consumer demand for watches, (ii) a change in top management results in a new strategy and overhaul of the cost base, (iii) the current CEO attempts to buy back the business, taking it off the market, and (iv) Belenos, the company's battery venture, makes a break through for car batteries.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (BRBY.L, HRMS.PA, LVMH.PA, PRTP.PA, BOSSn.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (BOSSn.DE) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (BOSSn.DE) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CFR.S, BRBY.L, LVMH.PA, PRTP.PA, TOD.MI, BOSSn.DE) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BRBY.L). As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (CFR.S). Credit Suisse has a material conflict of interest with the subject company (UHR.S) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=288763&v=3elzo6n0hgbwcllmdaonitu97 .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (PRTP.PA, BOSSn.DE). As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of UHR.S, 1.0% or more of CFR.S Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse International ................................................................................................................... Guillaume Gauvillé, CFA ; Catherine Tillson To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International ................................................................................................................... Guillaume Gauvillé, CFA ; Catherine Tillson

Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.

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14 March 2017


Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.



14 March 2017


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This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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