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Oct 26, 2012

Quick Note on Suzhou Visit

We recently visited several shopping locations in the downtown area of

Suzhou. The city attracted many tourists during the weekend. Brand

names are typically offering discounts to drive sales for their autumn

items in preparation for winter sales, suggesting margins may continue

to be under pressure in October and that the expected improvement in

Q4 is yet to come. Sales for down apparel appear to be gradually gain-

ing momentum as the weather turns cooler.

No Signs of a Turnaround in Oct; Q4 Improvement Is Yet to Come

Vicky Lai—Analyst

(852) 3698-6515

vickylai@chinastock.com.hk

John Mulcahy—Head of Research

(852) 3698-6889

johnmul@chinastock.com.hk

Ladies footwear: competition among players in the high-end mar-ket appears to be more intense than those in the low to mid-market.

Down apparel: sales are picking up as the weather turns cooler. We like Bosideng due to its variety of product offerings and wide price range catering to different customer needs.

Menswear: we noticed a clear consumer preference for domestic brands compared with small foreign brands. We also saw support for sales of luxury brands.

Sportswear: the shopping street was crowded with multiple stores operating by each brand name. We did not see signs of any pick-up in demand and sportswear seems to have fallen out of favour due to a change in fashion trend.

Key Takeaway Source: Company and CGIHK Research

Monthly Disposable Income per Capita in Suzhou

Source: Company and CGIHK Research

Suzhou in Highlighted Portion

Retail Sales in Suzhou

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List of locations we visited:

Guanqian Street: main shopping street was jammed with tourists. Sales were driven by impulse buying.

People Department Store: traditional mass-market department stores with primarily domestic brand names.

First Department Store: more modern mass-market department stores with both a mix of domestic and inter-national brand names.

Meiluo Shopping Mall: premium malls with luxury brand names on the first floor.

According to locals many of the residents are businessmen. These people tend to shop inside department stores or malls, supporting traffic at premium places like Meiluo. They are also more likely to make purchases when browsing items within a store compared with the mass market consumers.

Another major part of the population comprises immigrants coming to work in lower-tier jobs (i.e. factory workers, sales) in the city. They make up a significant proportion of the “strollers” walking around the shopping streets. Purchases tend to be price-driven and are usually made on impulse.

Figure 3: First Department Store

Location and Consumer Dynamics

Figure 4: Meiluo Shopping Mall

Figure 1: Guanqian Street Figure 2: People Department Store

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Cooperating with department stores, all shoe brands are offering 30-50% discounts on their autumn shoes as they are in the phase of shifting product mix to sell-ing winter boots. Such discounting is even more ag-gressive compared with the National Golden Week, suggesting the expected margin improvement for Q4 is yet to come. Competition among the players in the low to mid-market seems to be less severe than in the high-end market.

High-End Market

The clustering feature of high-end shoe brands (~10 brands) within department stores helped drive traffic at the expense of intensified competition. Counter display and product designs of different brands appear to be similar.

Despite lower pricing (10-15%) compared with its peers, C. Banner [1028.HK; HK$2.68] seemed to record lower footfall due to its second-tier store and product design.

Staccato (by Belle [1880.HK; HK$14.30]) attract-ed strong customer flow due to the fashion element in its products.

Selling at premium prices (RMB 1600 vs RMB 1000 per autumn shoes), Stella Lunar [1836.HK; HK$20.60] also stood out by adopting a unique color scheme and elegant store display. We no-ticed that footfall at Stella Lunar counters was stronger in Suzhou compared with Shanghai, pos-sibly suggesting consumers in top-tier cities are more cautious on their spending relative to those in lower-tier cities.

Le Saunda [0738.HK; HK$2.27] appeared to re-serve more shelf space for its spring/summer items. Leftover rate was estimated to be 15-20% versus 5-10% by other brand names.

Low to Mid-Market

The lower-tier brands are located around the shopping street, with three to four brands opening close to each other. Curiously, competition among these players ap-peared to be less intense compared with the high-end market. We saw Aokang and Josiny located right next to Daphne [0210.HK, HK$8.66] and Shoebox. But flow inside the Daphne store remained strong due to its RMB149 per pair autumn shoes promotion.

Ladies Footwear

Figure 5: Shoes counters clustering together (First Department Store)

Figure 6: Staccato counter within Meiluo Shopping Mall

Figure 7: Daphne store in Guanqian Shopping Street

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Down apparel brands have started to advertise their own brands. Counters within department stores are set up for the winter sales. Various brands (e.g. Yalu, Hampsheer) are offering different discounts as a strategy to drive sales, but the after-discount selling prices are similar to last year.

Among the brand names, we believe the counters offering Bosideng [3998.HK; HK$2.37] stood out in terms of 1) location and size, 2) image projected by the store display (use of models and lightings), 3) variety of colours and styles for its products.

The company has multiple brands (e.g. Snow Flying) with separate counters targeting specific customer groups. Price range for its products is quite broad covering competitors’ price bands. As down jackets are durable items, we believe consumers focus more on product design and material (e.g. down content) instead of pure pricing when choosing among brands.

Down Apparel

Figure 8: Snowfly counter within People Department Store Figure 9: Bosideng counter within People Department Store

Figure 10: Yalu counter within People Department Store Figure 11: Hampsheer counter within People Department Store

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Menswear

Within the department stores we visited, we noticed consumers’ preference toward domestic brands, such as Joeone and

Bosideng Man. They generally recorded stronger footfall relative to less well-known foreign brand names. Store design and

product offering by different brand names are quite similar within department stores. After talking to store managers, we sus-

pect brand names can build stronger customer loyalty by operating specialty stores instead of concessionaire counters.

We also saw relatively strong footfall among luxury menswear stores in Suzhou compared with Guangzhou and Shanghai.

We observed strong customer flow in Giorgio Armani. Located next to Armani and Hugo Boss, we also saw transactions in

Cerruti 1881, and Kent and Curwen, both operated by Trinity [0891.HK; HK$5.47], possibly owing to its good store loca-

tions at the entrance of the premium mall Meiluo.

Along the shopping street, we saw many sportswear specialty stores with domestic brand names. Each brand operates two

to four shops, suggesting the supply side is fairly over-crowded. We also noticed some inconsistency in store design and

display among the shops under the same brand name.

Despite heavy discounting offered by sportswear names, customer flow within these stores remained minimal. We suspect

the change in fashion trend has turned sportswear out of favour as we do not see many people dressed in sportswear along

the street. Among Li Ning [2331.HK; HK$4.17], Anta [2020.HK; HK$6.41], Xtep [1368.HK; HK$3.43] and 361 Degree

[1361.HK; HK$2.24], we noticed stronger footfall in 361 Degree as it was offering a promotion of “buy 1 get 2 free”, suggest-

ing a desperate need of inventory clearance. Based on such observation, we are not convinced that there has been a major

turnaround in the sector.

Figure 12: Bosideng Man counter within People Department Store Figure 13: Cerruti 1881 in Meiluo Shopping Mall

Sportswear

Figure 14: Minimal flow at other sportswear stores Figure 15: Stronger flow in 361 Degree shop in Guanqian Street

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Valuation Table

Valuation table of companies mentioned in the report:

Sources: Bloomberg & CGIHK Research (last updated on Oct 25)

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Explanation on Equity Ratings

BUY – share price will increase by >20% within 12 months in absolute terms

SELL – share price will decrease by >20% within 12 months in absolute terms

HOLD – no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL