ygm trading limited (ygm buy price: equity research ... trading (375_hk) overl… ·...

YGM Trading Limited (YGM貿易)

BUY Target Price: HK$29 (+54%) Price: HK$18.86 HKEx Code: 375 Tue, 07 Jun 2011

Overlooked fundamental change has taken place Equity Research

Consumer / China .

YGM Trading (375.HK) is a premium fashion retailer established in Hong

Kong since 1976. The company recently acquired all intellectual property

rights of the British premium brand “Aquascutum” in the Asia Pacific region

and became a fashion brand owner from a fashion brand licensee.The

company also comes back to the expansion track again since FY07. We

initiate YGM Trading with a BUY rating, TP at HK$29, implying the sum of

14x FY12E PE and HK$2 value to be unlocked upon properties sale.

Key points:

Changing from a premium fashion brand manager to an owner.

YGM Trading acquired the British premium fashion brand

“Aquascutum” in the Asia Pacific region in 2009. Without fear of the

brand license being bought back, the company gains sustainability and operation freedom, which we believe the market has not fully priced in.

Store expansion back on track. Due to store consolidation for the

loss-making “Michel Rene” brand, no. of stores decreased in recent years.

For the first time since FY07, management decides to open 27 stores per year, at a rate of 10% p.a., starting from Sep 2010.

Strong growth momentum expected. For the six months ended 30 Sep

2010, the group recorded SSS growth of 27% for the shops in PRC and

6.5% for HK outlets. Given the strong industry momentum in both the

PRC and HK, we are of the opinion that the stores of YGM Trading are well-established to capture the trend.

Valuation. The counter is current trading at a 9.6x FY12E PE. We

recommend buying this counter with a TP of HK$29, representing the

sum of 14x forward PE and HK$2 value to be unlocked upon properties sale, offering 54% upside.

Godfrey Leung

Oriental Patron Securities Ltd

+852 2842 5803

[email protected]

Initial Coverage

Key Data

Close price (HK$) 18.86

12 Months High (HK$) 24.65

12 Month Low (HK$) 7.80

3M Avg Daily Vol. (mn) 0.25

Issue Share (mn) 162.62

Market Cap (HK$mn) 3,067.07

Fiscal Year 03/2010

Major shareholder (s) Chan’s Family (50%)

Source: Company data, Bloomberg, OP Research

Closing price are as of 3/6/2011 All figures are subject to rounding

Price Chart

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%375 HK MSCI CHINA

OP vs Consensus

BLOOMBERG Cons OP

FY11E FY12E FY11E FY12E

Turnover 1,288 1,520 1,174 1,430

Net profit 270 337 249 326

Gross margin 66.00 66.20 67.39 67.51

Net margin 20.96 22.17 21.25 22.77

EPS 1.66 1.94 1.56 1.96

Exhibit 1: Investment Summary

Year to Mar (HK$ mn) FY09 FY10 FY11E FY12E FY13E

Revenue 971.9 991.1 1,173.6 1,429.8 1,736.2

Growth (%) (12.4) 2.0 18.4 21.8 21.4

Net profit 82.0 195.3 249.4 325.6 421.0

Growth (%) (52.0) 138.1 27.7 30.5 29.3

Diluted EPS (HK$) 0.535 1.243 1.558 1.958 2.538

Change to previous EPS (%)

N/A N/A N/A

Consensus EPS (HK$)

1.660 1.935 2.470

EPS growth (%) (51.5) 132.2 25.3 25.7 29.6

ROE (%) 10.3 20.7 22.7 25.1 27.0

ROA (%) 8.3 16.4 17.4 19.4 21.2

P/E (x) 35.6 15.3 12.2 9.7 7.5

P/B (x) 3.8 3.2 2.9 2.4 2.0

Source: Bloomberg, OP Research

Oriental Patron Research

7 June 2011 of 26

Table of Contents

Investment Highlights .................................................................................................................................... 3

From a brand manager to a premium brand owner ....................................................................................... 4

Robust demand for premium fashion brands in Hong Kong and PRC ........................................................... 7

Fashion brands with a wide spectrum ......................................................................................................... 11

Expansion back on track ............................................................................................................................. 12

Other notable fundamentals ........................................................................................................................ 13

Financials and key assumptions ................................................................................................................. 15

Recommendation: BUY with TP at HK$29 .................................................................................................. 17

Financial Summary ..................................................................................................................................... 18

Risks ........................................................................................................................................................... 20

Appendix 1: Business ................................................................................................................................. 21

Appendix 2: Management profile ................................................................................................................ 23

Appendix 3: Shareholding Structure ............................................................................................................ 24


7 June 2011 of 26

Investment Highlights

YGM Trading is a premium fashion brand owner. Since its acquisition of the intellectual

property rights of the British premium brand “Aquascutum” in the Asia Pacific region, YGM

Trading has essentially transformed from a fashion brand manager, which risks its brands

being bought back from the original brand holder, to a brand owner itself.

Store expansion back on track. Due to store consolidation of the “Michel Rene” brand,

number of total point of sales dropped in 2010. It shows a false impression that YGM Trading

has been contracting in recent years, yet YGM Trading was expanding in terms of gross sales

area. On sales location with strong growth momentum, the company expands the sales area by

renting another shop within the same department store. By the end of FY10, management

decided to put the company back onto the expansion track at a rate of 30 (~10% yoy) outlets

per annum.

Trading at a steep discount to its peers. YGM Trading’s closest peer, Trinity (891.HK), is

trading at 28x consensus forward PE. We identify a number of issues which make YGM

Trading being valued in a discount to Trinity. Such factors include (i) lower trading liquidity;

(ii) less diversified brand portfolio; (iii) less research coverage, etc. Yet, we strongly believe

that YGM Trading’s current valuation of 9.6x FY12E PE is severely underrated.

Robust sales growth in HK supported by PRC tourists. Revenue in HK amounts to

approximately 50% of the group revenue in 1H11 and is the major geographical region for the

group. According to the Census and Statistics Department of Hong Kong, yoy growth of retail

sales value of the wearing apparel category was reported at 40% for Apr 2011, outperforming

total sales value yoy growth of 28% for the same period by 12%, largely driven by the

demand of PRC tourists. Same store sales growth for the “Aquascutum” outlets in HK

recorded ~16% in 1H11, we believe growth momentum was even more robust for the second

half of FY11.

Strong industry growth momentum in PRC. Revenue contributed by PRC was 36% of the

total group revenue in 1H11. Same store sales growth figures released by listed China

department stores were promising and some reported same store sales growth as high as

30% yoy for 1Q11. This would benefit Aquascutum, which has the majority of its stores

as department store outlets.

Properties sales value to be unlocked. On 12 Oct 2010, YGM Trading announced its

consideration to dispose of two shops located in Park Lane in Tsim Sha Tsui. Although the

tender is closed at this moment, management remains open for the sale of these two shops. It

is expected that these properties would unlock HK$350-400mn value for YGM Trading.

Unbroken dividend payout record. Since its listing in 1988, dividend payout record was

unbroken at a dividend payout ratio of 53% on average.

Valuation. The counter is current trading at a 9.6x FY12E PE, representing a PEG ratio of

0.3x, which is deeply underwater in our opinion. We recommend buying this counter with a

TP of HK$29, representing the sum of 14x FY12E PE and HK$2 value to be unlocked upon

properties sale, offering 54% upside.


7 June 2011 of 26

From a brand manager to a

premium brand owner

YGM Trading used to be a premium fashion brand licensee. In Sep-09, the group completed

acquisition of the intellectual property rights of the brand “Aquascutum” in relation to the

Asia region. “Aquascutum” is a British brand founded in 1851. YGM Trading obtained

licensing rights of the brand in 1998. It has been positioned as a luxury and contemporary

fashion brand. At the moment of the acquisition, “Aquascutum” had distribution channels

over the world, YGM Trading was the then licensee for the Greater China, Singapore,

Malaysia and Thailand region, operating 150 outlets under the brand in Mainland China,

Hong Kong, Macau and Taiwan. We regard the acquisition as a positive fundamental change

for the company with the following reasons:

Restricted operation for “Aquascutum” before 2009. Before 2009, the company operated

most of its brands (with the exception of “Michel Rene” and “Hang Ten”) through a “license

to manufacture and distribute”. That is, YGM Trading had the rights to design, manufacture

and distribute apparel and accessories under respective brands, yet YGM Trading has to first

get consent from the brand owner. Also, there were certain products to which YGM Trading

did not have the right to design and manufacture, these products were usually sold in a lower

gross margin.

Visibility and sustainability gained after the acquisition. In 2009, YGM Trading acquired

all intellectual property rights of “Aquascutum” in 42 Asia Pacific countries. Since then, the

company enjoys a number of benefits:

1. Ownership of the entire intellectual property for the brand “Aquascutum” in the Asia

Pacific region, no fear for buy back and sustainability in brand development;

2. The absolute freedom in the whole development process, including design, manufacture

and distribution; and

3. More room for product extension, and optimization of product mix, so as to improve

gross margin.

We believe the acquisition is a positive fundamental change to the company.

“Aquascutum” is the major sales contributor of the company. Up to 1H10, its self-owned

brand “Aquascutum” and “Michel Rene” contributed 56% and 11% of the company’s

turnover respectively. “Aquascutum” becomes the bread-and-butter of the company.


7 June 2011 of 26

Exhibit 2: Revenue contribution of different brands in 1H11

Aquascutum56%

Michel Rene11%

Guy Laroche6%

Ashworth14%

J.Lindenberg0% Export

9%

Others4%

Source: Company, OP Research

No risk of “Aquascutum” being bought back. In the industry, there were cases when

licensees of various international brands were making good sales, the brand owner would

bought back their respective licenses. In 1997, the brand “Valentino”, which license was held

by YGM Trading then, was bought back by its original brand owner. In recent years,

international renowned brands such as “Hugo Boss” and “Prada” has also bought back the

licensing rights of their brands in the Greater China region, stripping off the prospect of its

licensees.

The brands are now either owned or in long term license. Since the acquisition, the

company holds a portfolio with a mixture of owned and licensed brands, with breakdown as

follows:

Exhibit 3: Brand portfolio

Brand Rights Period Region

“Aquascutum” All intellectual property right of 42 Asia

Pacific countries

Owned Asia Pacific

“Ashworth” Licensing rights Rights till 2028 Greater China

“Michel Rene” Self-owned brand Owned Greater China

“Guy Laroche” Licensing business Owned European, ASEAN and the U.S.

“J. Lindeberg” Exclusive distribution right Rights till 2020 Greater China

“Hang Ten” Self-owned brand, with passive

shareholdings

Owned Asia

Source: Company

Current valuation has not reflected the positive change. YGM Trading gains sustainability

and freedom in operation which allows room for improvement in operating efficiency. We see

this as a huge improvement in company fundamentals. With its closest peer Trinity (891.HK)

trading at 28x FY11E PE, YGM Trading’s valuation shows that the market has not fully

priced in this fundamental change.


7 June 2011 of 26

Exhibit 4: Historical PE of YGM Trading remains at a minimal level

0

5

10

15

20

Jan/09 May/09 Sep/09 Jan/10 May/10 Sep/10 Jan/11 May/11

Announced acquisition of "Aquascutum" in Asia



7 June 2011 of 26

Robust demand for premium

fashion brands in Hong Kong and

PRC

The HK retail market is largely driven by PRC tourists’ demand. Hong Kong market is a

major segment of the company. For the six months ended 30 Sep 2010, Hong Kong segment

contributes 50% of the revenue.

Exhibit 5: Geographical revenue breakdown in 1H11

Hong Kong50%

China36%

Taiwan8%

Others6%


Hong Kong retail market benefits from the increase in number of tourists, particularly in the

luxury goods segment. Proportion of tourists from China has been increasing steadily in

recent years, while demand in high end and luxury goods is largely driven by mainland

tourists. This is evidenced by the high correlation shown between the number of mainland

tourists’ arrival and apparel sales growth.

Exhibit 6: Monthly no. of Chinese tourists arrival is increasing

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11



7 June 2011 of 26

Exhibit 7: Apparel tops the spending behaviour of tourists in HK

Ready-made wear24%

Cosmetics, skin care

16%

Snacks / Confectioneries

15%

Shoes / Other

footwear11%

Handbag / Wallets / Belts

9%

Souvenirs / Handicrafts

7%

Medicine / Chinese Herbs

6%

Perfume5%

Personal care5%

Toys and gaming machines

3%

Source: Hong Kong Tourism Board, OP Research

Exhibit 8: HK retail apparel sales is in line with mainland tourists arrival

-40%

-20%

0%

20%

40%

60%

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Mainland tourists arrival yoy growth HK wearing apparel sales yoy growth

Source: Census and Statistics Department, Hong Kong Tourism Board, OP Research

HK retail sales growth for apparel in Apr 2011 was as high as 40% yoy. Riding on the strong

growth momentum, we believe performance for 2H11 would be better than that of 1H11.

Garment sales outperforms the general retail market in PRC. Consumer goods sales,

particularly in the department stores of PRC, have been on the uptick since 2009. As at April

2011, total yoy growth of retail sales in the PRC reported 17%. Garment sales reported 27%,

outperforming the general retail market by 10%.


7 June 2011 of 26

Exhibit 9: PRC garment retail sales outperform total retail sales of

consumer goods

-20%

0%

20%

40%

60%

Jan/09 Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11

Total Retail Sales of Consumer Goods: yoy %

Retail Amount: Clothing, Shoes, Hats, Knitwear and Textile: yoy %

Source: Wind, OP Research

Exhibit 10: PRC garment retail sales is at a period of high growth rate

-10%

10%

30%

50%

70%

0

20

40

60

80

Jan-2007 Aug-2007 Mar-2008 Oct-2008 May-2009 Dec-2009 Jul-2010 Feb-2011

Monthly garments retail sales (RMB bn, LHS) Yoy growth (RHS)

Source: Wind, OP Research

Department stores deliver good results in 1Q11. 1Q11 same store sales growth figures

released by listed China department stores were as high as 30%. YGM Trading, with the

majority of its PRC outlets located in department stores, would benefit from this growth trend.

The group achieved 27% same store sales growth for 1H11 in the PRC segment, we are of the

opinion that YGM Trading should perform better in 2H11.


7 June 2011 of 26

Exhibit 11: Robust same store sames growth of PRC department stores

0

0.1

0.2

0.3

0.4

1H09 2H09 1H10 2H10 1Q11

Golden Eagle (3308) Intime (1833) Maoye (848)

Parkson (3368) New World (825)

Source: Company announcements, OP Research


7 June 2011 of 26

Fashion brands with a wide

spectrum

Brands under management cover a wide variety of clients. The group possesses a brand

portfolio of six brands with different focuses, covering the luxury European fashion segment

to mainstream fashion. The brands include premium fashion brands (i.e. Aquascutum, Guy

Laroche), fashion and sports apparel (i.e. Ashworth, J.Lindeberg) and mainstream fashion (i.e.

Michel Rene, Hang Ten). With a portfolio of diversified clientele, we believe YGM trading is

well positioned to serve different clientele and is more resilient in times of market turbulence.

Exhibit 12: YGM Trading possesses a wide spectrum of fashion brands

A wide spectrum of fashion brands

Luxury

European Fashion

International Fashion

&

Sports Apparel

Mainstream

Fashion

Source: Company presentation

Introduction of new brands in 2010. Moreover, a new brand “J.Lindeberg” was launched in

2010 with an exclusive distribution right in the Greater China region, contract term is due

2020. The brand was established in Sweden in 1996, with products available in more than 25

countries. It is expected that the brand would attract younger consumers with its more trendy

and fashionable line.


7 June 2011 of 26

Expansion back on track

Expansion for the first time since FY09. YGM Trading has been closing distribution outlets

since Mar 2009, number of stores decreased from 321 as at 31 Mar 2009 to 295 stores as at 30

Sep 2010. This was mainly due to the consolidation of loss making “Michel Rene” outlets. As

of 1H11, “Michel Rene” segment became breakeven. Management plans to put the company

back to the expansion track again.

Management targets to open 83 stores by Sep 2013, with the majority of the stores opened in

the PRC. Apart from increase in point of sales, YGM Trading has also been expanding by

increasing square footage of each point of sales. In outlets where sales were satisfactory,

YGM Trading would expand the sales footage by renting another store front in the same

department store, enriching products lines available at the same place.

Exhibit 13: New stores added for the past years

-10%

-5%

0%

5%

10%

-40

-20

0

20

40

FY08A FY09A FY10A FY11E FY12E FY13E

store opened/ (closed) (LHS) store expansion yoy (RHS)

Consolidation of "Michel Rene" stores

Source: Company presentation, OP Research

Active penetration into the 3rd

and 4th

tier cities. YGM Trading is actively penetrating the

3rd

and 4th tier cities. As at Feb 2011, number of stores at 3

rd to 4

th tier cities amounts to 31%

of the total number of store count in China. We believe YGM Trading shall be able to capture

the rising purchasing power of people in the 3rd

and 4th tier cities.

Exhibit 14: Current distribution of store outlets

1st & 2nd tier cities, 131

3rd tier cities, 39

4th tier cities, 19

Source: Company presentation


7 June 2011 of 26

Other notable fundamentals

Sale of two properties in Tsim Sha Tsui is going to unlock shareholders’ value. On 12 Oct

2010, YGM Trading set up a public tender to dispose of two shops situated at the Park Lane,

Tsim Sha Tsui. Although the tender was closed on 11 Dec 2010, management is always open

for any buyers bidding with a price satisfactory to them. Management is targeting for

HK$350-400mn, it is expected that the sales will unlock the property value equivalent to

HK$2 per share.

Exhibit 15: Properties open for sale in Tsim Sha Tsui

Source: OP Research

Unbroken record of dividend payout since listing in 1988. Backed by its solid business,

YGM Trading has continually paid dividend since its listing in 1988. Payout ratio has never

dropped below 30% even in the toughest years. In the most recent six financial years, payout

ratios were above 40% and management stated that dividend payout would be relatively stable

in the coming years.

Exhibit 16: Payout ratio staying at a level higher than 40%

0

20

40

60

80

2005 2006 2007 2008 2009 2010



7 June 2011 of 26

Management starts to actively attend non-deal road shows in the recent year. In fear of

the license rights of “Aquascutum” being bought back or terminated by the original holder,

management was reluctant to engage in disclosures, promotions and road shows. Even

revenue for each of the brands was not disclosed in the annual reports. With the acquisition of

the intellectual properties of “Aquascutum” in 2009, management now actively participates in

investor relation exercises and reveals to investors its hidden strong growth potential. We see

re-rating on the horizon.


7 June 2011 of 26

Financials and key assumptions

Revenue growth resumes as “Aquascutum” runs out as the largest revenue contributor.

During FY05 – FY08, revenue growth was slow in the range of -0.9% to 8.5% around

HK$1bn for several years since performances of the brands under management varied. In

those years, the brand “Aquascutum” grew fast and ran out as the largest revenue contributor

of the group. For 1H11, revenue contributed by the brand amounts to 56%. Backed by store

expansion, we believe the group revenue will go back to the growth period again.

Revenue growth backed by store expansion and strong same store sales. According to the

management, growth drivers for the group are mainly “Aquascutum” and “Ashworth”. It is

expected that “J.Lindeberg” will emerge as a new growth driver in the future. On the back of

the strong sales demand and store expansion pace of 10% p.a. (in store count), we estimate

revenue growth to be 18%, 22% and 21% for FY11, 12, and 13 respectively.

Exhibit 17: Revenue forecast

0

500

1,000

1,500

2,000

FY09 FY10 FY11E FY12E FY13E

(HK

$m

n)


Exhibit 18: Net profit forecast

0

100

200

300

400

500


(HK

$m

n)



7 June 2011 of 26

Gross margin to improve slightly due to more room in product mix optimization. Since

the acquisition of “Aquascutum”, YGM Trading enjoys more freedom in introducing higher

margin accessories and products. Also, customers for high end fashion brands are less

price-sensitive. Management is confident to pass on the cost increment onto their customers.

We estimate gross margin to slightly improve.

Exhibit 19: Gross margin forecast

60%

62%

64%

67%

69%



High operating leverage translates to EBIT margin improvement. Due to strong same

store sales growth and the administration expenses being fixed, we forecast the growth rate of

the total SG&A to be lower than that of the revenue growth. Apart from the expenses

associated with the opening of new stores and those relating to distribution, the remaining

SG&A are pretty stable. We expect the EBITDA margin to increase each year at a rate of

around 1%.

Exhibit 20: EBITDA margin forecast

10%

15%

20%

25%

30%



Other financial assumptions. Our assumptions for other items are as follows: (i) tax rate and

cash conversion cycle are to remain stable; capital expenditure for new stores opening is

around RMB30mn p.a.


7 June 2011 of 26

Recommendation: BUY with TP at

HK$29

Valuation deeply underwater. In comparison with its closest peer Trinity (891.HK), YGM

Trading at a steep discount. The counter is trading at 9.6x FY12E PE, while Trinity is trading

at a FY11E PE of 28x.

Exhibit 21: Comparison between YGM Trading (375.HK) and Trinity

(891.HK)

YGM Trading Trinity Market capitalisation (HK$mn) 3,067 13,118 Forward PE 9.6x 28x^ FY10A ratios:

Revenue (HK$mn) 991 2,011 Net profit (HK$mn) 198 341 Gross margin 64.6% 77.2% EBIT margin 17.3% 21.4% Net margin 19.8% 16.9% Brands under management - Aquascutum

- Ashworth

- Guy Laroche

- J.Lindeberg

- Michel Rene

- Hang Ten

- D'urban

- Gieves & Hawkes

- Kent & Curwen

- Cerruti 1881

- Intermezzo

- Altea Notes:

^ Bloomberg consensus

* FY12E

Source: Company, OP Research, Bloomberg

Business model of YGM Trading is close to that of Trinity, save as a bit smaller in terms of

revenue and the portfolio being more concentrated. The management team has extensive

experience in the industry. We believe there is only one step forward for YGM Trading to

becoming the next Trinity by improving its investor relation after the acquisition of

“Aquascutum”.

We agree that YGM Trading deserves a trading discount to its peers at this moment in view

of:

Smaller in size and its thin trading liquidity;

Concentrated portfolio with the largest brand contributing more than 50% of the group’s

revenue;

Less investors’ confidence in the aggressiveness of the management team; and

Low-profile investor relation activities before.

Recommend BUY with TP at HK$29. Yet we believe with Trinity trading at FY11E PE of

near 30-ish, a valuation of 14x FY12E PE, representing roughly half the valuation of Trinity,

is not demanding for YGM Trading. We recommend buying this counter, with a TP of HK$29,

representing the sum of 14x FY12E PE and HK$2 value to be unlocked upon properties sale,

offering 54% upside.


7 June 2011 of 26

Financial Summary

Exhibit 22: Profit and loss

Year to Mar (HK$ mn) FY09A FY10A FY11E FY12E FY13E

Revenue 972 991 1,174 1,430 1,736 EBITDA ( ex-assoc) 120 194 290 369 468 Depreciation (36) (25) (29) (29) (29) EBIT( ex-assoc) 84 169 260 339 439 Net interest inc/(exp) 3 2 3 8 15 Associates' profits 17 29 35 42 51 Exceptional items/others (13) 28 0 0 0 Pre-tax profit 91 229 299 390 505 Tax (12) (31) (46) (59) (77) Minority interest 3 (3) (4) (5) (7) Preference dividends 0 0 0 0 0 Net profit 82 195 249 326 421 Others 0 0 0 0 0 Dividends (59) (84) (100) (130) (168) Retained earnings 23 111 150 195 253 Source: Company, OP Research

Exhibit 23: Balance sheet


Cash & deposits 239 215 388 540 742 ST marketable sec's 0 0 0 0 0 Trade debtors 52 81 95 116 141 Other debtors 0 0 0 0 0 Inventories 140 102 121 147 179 Other current assets 62 48 48 48 48 Intangible assets 108 287 287 287 287 Investment, associates and Other LT assets 210 271 306 349 400 Fixed assets 181 191 192 192 193 Total assets 992 1,194 1,437 1,679 1,990 Trade creditors 40 41 48 59 72 Other creditors 0 0 0 0 0 ST debt 15 47 47 47 47 Other current liabs 125 146 228 259 297 LT borrowings 3 2 2 2 2 Deferred taxation and others 11 14 14 14 14 Other LT liabilities 0 0 0 0 0 Total liabilities 193 249 339 380 431 Share capital 77 77 77 77 77 Reserves 702 845 995 1,190 1,443 S'holders' funds 779 922 1,072 1,267 1,520 Minorities 19 22 26 31 38 Total 992 1,194 1,437 1,679 1,990 Net cash (debt) 221 166 340 491 694 Total cap employed 798 944 1,098 1,299 1,558 Source: Company, OP Research


7 June 2011 of 26

Exhibit 24: Cash flow


Pre-tax profit 104 201 299 390 505 Taxes paid (13) (21) (18) (46) (59) Depreciation/amort'n 36 25 29 29 29 Associates' adj. (17) (29) (35) (42) (51) Exceptional items 13 (28) 0 0 0 Gross cash flow 123 147 275 332 424 Capex 1 (19) (30) (30) (30) Change in working cap (63) 11 (26) (37) (44) Free cash flow 62 138 219 265 350 Dividends (59) (84) (45) (113) (147) Investments 0 (240) (35) (42) (51) Disposals 31 0 0 0 0 Share issues (59) 143 0 0 0 Others 28 (40) 35 42 51 Net cash flow 2 (83) 174 152 203 Net cash (debt) start 231 221 166 340 491 Net cash (debt) at Y/E 221 166 340 491 694 S'holders' funds + MI 798 944 1,098 1,299 1,558 Net debt/equity (%) (28) (18) (31) (38) (45) Source: Company, OP Research

Exhibit 25: ROE decomposition

Year to Mar FY09A FY10A FY11E FY12E FY13E

EBIT margin (%) 8.69 17.05 22.18 23.73 25.29 Pre-tax/EBIT (x) 1.08 1.35 1.15 1.15 1.15 Net profit/pre-tax (x) 0.90 0.85 0.83 0.83 0.83 Asset turnover (x) 0.98 0.83 0.82 0.85 0.87 Assets/equity (x) 1.24 1.26 1.31 1.29 1.28 ROE (%) 10.27 20.67 22.71 25.07 27.02 Source: Company, OP Research

Exhibit 26: Statistics and ratios

Year to Mar FY09A FY10A FY11E FY12E FY13E

Growth rate (%) Revenue (12) 2 18 22 21 EBITDA (ex-assoc) (9) 62 49 27 27 EBIT (ex-assoc) (12) 100 54 30 29 Net profit (52) 138 28 31 29 Fully diluted EPS (51) 132 25 26 30 Margins (%) EBITDA (ex-assoc) 12 20 25 26 27 EBIT (ex-assoc) 9 17 22 24 25 Other ratio Effective tax rate (%) 11 15 15 15 15 Payout ratio (%) 71 43 40 40 40 Net ROE (%) 10 21 23 25 27 Net gearing (%) -28 -18 -31 -38 -45 ROA (%) 8 16 17 19 21 Interest coverage (x) 49 186 268 280 302 Debtors (days) 19 30 30 30 30 Creditors (days) 15 15 15 15 15 Stock (days) 53 38 38 38 38 Source: Company, OP Research


7 June 2011 of 26

Risks

Execution risks. YGM Trading has undergone store consolidation of the loss-making brand

“Michel Rene”. For the first time since Mar 2009, YGM Trading comes back to the expansion

track again. Risks include expansion speed falls below the originally planned (30 stores, or

10% p.a.).

Lawsuit regarding “Guy Laroche”. YGM Trading went into a lawsuit with a licensee of

“Guy Laroche”. According to the management, daily operation of “Guy Laroche” is not

affected. The involved licensee attributes only a small portion of the total license income of

the brand. Currently the court case is put onto the Court of Appeal of Paris, the court is not

expected to hear this case before 2012. The counsel of the company is of the opinion that no

provision needs to be made. In the worst case, YGM Trading is expected to pay EUR2.6mn

indemnity to the licensee.

Concentrated brand portfolio. Over 55% of the group revenue comes from the brand

“Aquascutum”, brand portfolio is concentrated.


7 June 2011 of 26

Appendix 1: Business

YGM Trading Limited (“YGM Trading”, 375.HK) was established in 1976 as a local fashion

retailer with its own brand “Michel Rene” launched. Over the years, YGM Trading had

evolved into a multi-brand manager.

Exhibit 27: Company milestone

Year Event

1976 Established and launched own brand “Michel Rene”

1988 Listed on the HKEx

1996 Acquired “Hang Ten” brand worldwide

1998 Obtained licensing right of “Aquascutum” for the Greater China region;

Signed a 30-year licensing right of the brand “Ashworth”

2002 Spun off “Hang Ten” Group (448.HK)

2004 Acquired “Guy Laroche” worldwide

2009 Acquired all rights of “Aquascutum” in 42 Asia Pacific countries

2010 Obtained an exclusive distribution right of “J.Lindeberg” in Greater China Region

Source: Company

For the brands with licensing rights, YGM Trading would perform design and manufacturing

process, finished goods are either sold to the franchisee stores or distributed through the

company’s self-operated retail outlets.

Exhibit 28: Business process

Outsourced manufacturingLicensing / owned Design Franchisees

Distribution Retailer shops


In FY09, YGM Trading consolidated “Michel Rene” shops with lower operation efficiency.

Management decides to put the company back to the expansion track again, and targets a 28%

increase in number of “point-of-sales” to 378 by 20 Sep 2013.

Exhibit 29: POS according to brands

0

50

100

150

200

FY08 FY09 FY10

Aquascutum Ashworth Michel Rene

Source: Company


7 June 2011 of 26

Exhibit 30: POS according geographical coverage as at 1H11

China, 198

HK & Macau, 53

Taiwan, 39

SE Asia, 12 Europe, 1

Source: Company

Recently, approximately 69% of point of sales in the PRC is located in tier 1 & tier 2 cities,

the company will further expand their retail sales network into 3rd

and 4th tier cities in order to

capture the increasing consumption power from lower tier cities.


7 June 2011 of 26

Appendix 2: Management profile

Chan Wing Fui, Peter (陳永奎), Chairman, joined the group in 1969. He was appointed

director and managing director of the group in 1971 and 1980 respectively. Later in 1987, he

was appointed as vice chairman of the group. Recently in 2010, he was appointed as chairman

of the group. Mr. Chan has been actively involved in the industry in Far East and USA for

over 30 years.

Chan Wing Sun, Samuel (陳永燊), Vice Chairman, joined the group in 1974 as the

company secretary and a director. He was appointed managing director in 1987 and the CEO

in 2006. Recently in 2010, he was appointed vice chairman of the company. Mr. Samuel Chan

was a qualified Chartered Accountant.

Chan Suk Ling, Shirley (周陳淑玲), CEO, joined the group in 1973. She was appointed

director in 1983, vice managing director in 1987 and managing director in 2006. In May 2010,

she was appointed CEO of the company. She has extensive experience of management in the

garment retail and wholesale business.

Fu Sing Yam, William (傅承蔭), Managing Director, joined the group in 1985. He was

appointed director in 1995 and vice managing director in 2006. In May 2010, he was

appointed managing director of the company. He has extensive experience in fashion retailing,

wholesaling, marketing and merchandising.


7 June 2011 of 26

Appendix 3: Shareholding

Structure

Exhibit 31: Shareholding structure

Chan’s Family Public Shareholders

YGM Trading

50% 50%

Source: HKEx Shareholding Disclosures


7 June 2011 of 26

Exhibit 32: Peer Group Comparison

Bloomberg Year Mkt Cap Price PER (x) P/B (x)

code End (HKD mn) (HKD) FY10A FY11E FY12E FY10A FY11E FY12E

Close comparison

TRINITY LTD* 891 HK 31st Dec 13,118 7.74 35.8 27.5 20.5 5.5 4.4 4.0

YGM TRADING 375 HK 31st Mar 3,067 18.86 14.7 11.4 9.7 3.1 N/A N/A

Average 25.3 19.3 15.1 4.3 4.4 4.0

Median 25.3 19.3 15.1 4.3 2.2 2.0

Other peers

I.T LTD* 999 HK 28th Feb 9,509 7.79 33.9 25.8 18.7 6.1 5.2 4.2

CHINA LILANG LTD* 1234 HK 31st Dec 13,014 10.84 27.1 19.7 15.7 5.9 4.9 4.1

PORTS DESIGN LTD* 589 HK 31st Dec 11,313 19.90 20.6 16.5 13.6 5.8 4.9 4.1

ESPRIT HLDGS* 330 HK 30th Jun 36,197 28.05 8.4 10.1 9.0 2.2 2.1 1.9

Average 22.5 18.0 14.2 5.0 4.3 3.6

Median 23.9 18.1 14.7 5.9 4.9 4.1

Note: * Bloomberg Consensus


Oriental Patron Research – Equities

7 June 2011 of 26

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