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China to become the world’s largest market for luxury goods over the next decade

2 February, 2011

Hong Kong - Wednesday, 2 February 2011 - CLSA Asia-Pacific Markets (“CLSA”), Asia’s leading independent brokerage and investment group, forecasts demand for luxury goods and travel from Greater Chinese to account for 44% of global sales by 2020, up from 15% today. With an estimated annual growth rate of 23%, China will become the world’s largest domestic market for luxury goods, worth Euro74 billion or 0.6% of the country’s total GDP, over the next decade.

CLSA’s new report, Dipped in Gold: Luxury lifestyles in China and Hong Kong, published by Regional Head of Consumer Research Aaron Fischer, examines the economic and cultural drivers of this rapid rise in discretionary spending and details companies that will benefit in both the short and long term.

As incomes rise, China’s burgeoning middle class is adopting previously unattainable high-end lifestyles and is transitioning from a saving to spending culture. A CLSA survey of 340 consumers and 31 luxury store managers in China’s Tier 1-3 cities found that more than half have made or are planning a luxury purchase. Those who bought luxury goods in the past 12 months spent an average 10-12% of their total household income on these items, demonstrating a high propensity to spend.

Luxury goods companies are expanding rapidly in China to accommodate demand that will account for half of their forecasted global growth in the next 10 years. Handbags, leather goods, watches and jewellery are expected to see the fastest growth. Louis Vuitton’s biggest customers are already Chinese buyers, while Greater China represents 28% of sales for Swatch, 22% for Richemont, 18% for Gucci, 14% for Bulgari and 11% for Hermes.

Younger and richer than their counterparts’ overseas, Chinese consumers enjoy displaying their wealth and success and are not just spending on themselves but also purchasing gifts for friends and family. The CLSA report identifies eight cultural and social differences that will contribute to the rapid growth of the luxury goods sector by Chinese consumers.

The first of these is that mainland Chinese millionaires are 15 years younger than their overseas peers. The number of individuals with more than Rmb1,000 million has increased at an annual rate of 50% from 24 in 2000 to 1,363 in 2010. Secondly, success, wealth and fame/social standing are highly regarded in Chinese culture and displaying this through watches, jewellery, apparel, cars and wine garner respect. As is being treated like a VIP; wealthy Chinese expect to be acknowledged through personalised service and products.

The luxury market in China is still largely male-dominated given workforce demographics and the culture of gift giving for business purposes. CLSA estimates nearly 20% of Chinese consumers buy luxury goods as gifts with luxury handbags, clothing, watches and jewellery the most popular items. This is particularly popular around important Lunar holidays such as the Chinese Lunar New Year in early February.

Chinese appreciate high-quality craftsmanship. Foreign luxury brands in particular, with large logos and signature collections are particularly desirable. Spending amongst female consumers in China is increasing and luxury handbags are gaining increasing popularity; this will be positive for foreign brands such as Gucci, Hermes, Louis Vuitton and Prada.

As Chinese consumer become wealthier they are starting to travel and overseas purchases provide a cache that domestic consumption is yet to replicate. They are also willing to pay a premium, a trend noticeable in the wine sector where fine wine prices increased 40% during 2010.

It is only a matter of time before Chinese luxury brands are established at home. However, we expect this to happen in product categories where China has a perceived fundamental advantage, primarily in the use of materials such as jade, porcelain or precious woods that can be used in jewellery, homeware and furniture. In the meantime, we expect Asian companies to look to acquire European brands and build up manufacturing expertise

Investors looking for 100% pure-play exposure to Chinese luxury demand can look to the Asian-listed high-end companies which have rerated by 57% during 2010, but are still attractive at an average PE of 22x and PE/G of 1x. Of the stocks CLSA covers, our top picks are Ports Design, Evergreen, L’Occitane, Parkson and Hengdeli. We also like Trinity, Lifestyle, I.T, Emperor Watch & Jewellery and Sa Sa International.

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Please contact CLSA if you wish to obtain a copy of the 140-page report ‘Dipped in Gold: Luxury lifestyles in China/HK’