spin-off could unleash dividend potential of hk sogo … · spin-off could unleash dividend...

April 27, 2016

ACTION

Buy Lifestyle International Holdings (1212.HK)

Return Potential: 32% Equity Research

Spin-off could unleash dividend potential of HK SOGO store; add to CL

Source of opportunity

With a mix of HK/China dept stores, Lifestyle has been adversely affected in the

past in two ways — its FCF-generative HK SOGO asset being weighed down by

China’s capex needs, and China assets worth HK$10bn at cost not being well

appreciated by the market. We think Lifestyle’s proposed spinoff of China ops

(announced on Apr 22) could change this and unlock value. We expect a higher

payout from its HK assets to HK$1.3bn in 2017E, +30% from HK$1bn (2015).

With a more “REIT” like payout profile, we see rerating potential as investors

benchmark its value on DPS. We estimate its HK assets are worth HK$18bn,

implying negligible value for China operations. Maintain Buy, add to CL.

Catalyst

As investors gain clarity on Lifestyle HK’s dividend plans, we believe the stock

has the potential to rerate. Although we do not take a view on the likelihood

of the spin-off materializing, if it were to happen, we would expect the first

indication of a higher payout in 1H16 results in Aug, with a potential dividend

hike likely coming through during its 2016 full year results. Fundamentally,

the reversal of losses from its Shenyang store closure and concessionaire

margin hikes from HK SOGO should help keep a well anticipated 1H16 EBIT

decline at -8%, better than -20% for other HK retailers under coverage.

Valuation

We switch our methodology to SOTP from P/E, with a 12-m TP of HK$15.3

(from HK$14.5) — a combination of its HK and China value. HK (HK$18bn,

similar to the group’s current mkt cap): With stable cash flows and a

higher payout (85% in 2017E), we value the HK business with an average of

dividend yield (7% 2017E target yield), P/E (12X 2017E), and DDM (8% COE,

0.5% terminal growth), benchmarking our assumptions vs leading HK REITs;

China (HK$6bn): We value its department store business at 9X 2017E

EV/EBITDA, JVs at 0.4X book, and Zhabei project at paid construction cost.

Key risks

If the spin-off does not materialize, Lifestyle could revert to a P/E trading

pattern; 12X ‘17E P/E (China dept store avg), implies a value of HK$14.5/shr.

INVESTMENT LIST MEMBERSHIP

Asia Pacific Buy List

Asia Pacific Conviction Buy List

Coverage View: Neutral

Ricky Tsang, CFA +852-2978-6631 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Joshua Lu +852-2978-1024 [email protected] Goldman Sachs (Asia) L.L.C.

Alan Lee +852-2978-0953 [email protected] Goldman Sachs (Asia) L.L.C.

The Goldman Sachs Group, Inc. Global Investment Research

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Lifestyle International Holdings (1212.HK)

Asia Pacific Consumer Peer Group Average

Key data Current

Price (HK$) 11.58

12 month price target (HK$) 15.30

Market cap (HK$ mn / US$ mn) 18,934.5 / 2,441.1

Foreign ownership (%) --

12/15 12/16E 12/17E 12/18E

EPS (HK$) New 1.17 1.15 1.15 1.18

EPS revision (%) 0.0 (2.8) (7.3) (7.9)

EPS growth (%) (10.7) (1.7) 0.3 2.1

EPS (dil) (HK$) New 1.17 1.15 1.15 1.18

P/E (X) 11.2 10.1 10.0 9.8

P/B (X) 1.9 1.6 1.5 1.4

EV/EBITDA (X) 9.4 9.6 10.4 11.7

Dividend yield (%) 4.8 6.1 7.0 7.1

ROE (%) 17.2 16.3 15.4 15.0

CROCI (%) 15.4 13.0 11.4 9.4

Price performance chart

18,000

20,000

22,000

24,000

26,000

28,000

30,000

9

10

11

12

13

14

15

Apr-15 Aug-15 Nov-15 Feb-16

Lifestyle International Holdings (L) Hang Seng Index (R)

Share price performance (%) 3 month 6 month 12 monthAbsolute 21.4 4.9 (23.2)

Rel. to Hang Seng Index 8.3 13.6 2.2

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 4/27/2016 close.

http://www.hibor.com.cn/

April 27, 2016 Lifestyle International Holdings (1212.HK)

Goldman Sachs Global Investment Research 2

Lifestyle International Holdings: Summary Financials

Analyst Contributors

Ricky Tsang, CFA

[email protected]

Joshua Lu

[email protected]

Alan Lee

[email protected]

Profit model (HK$ mn) 12/15 12/16E 12/17E 12/18E Balance sheet (HK$ mn) 12/15 12/16E 12/17E 12/18E

Total revenue 6,171.4 5,726.5 5,698.1 5,839.0 Cash & equivalents 8,669.6 7,576.1 6,005.8 5,016.8

Cost of goods sold (2,464.5) (2,265.0) (2,252.4) (2,306.5) Accounts receivable 273.2 203.2 202.1 207.0

SG&A (1,518.2) (1,437.0) (1,460.9) (1,496.0) Inventory 79.3 75.8 76.5 77.4

R&D -- -- -- -- Other current assets 5,204.0 5,204.0 5,204.0 5,204.0

Other operating profit/(expense) 188.3 177.4 176.5 180.7 Total current assets 14,226.2 13,059.1 11,488.3 10,505.1

EBITDA 2,615.3 2,444.5 2,422.4 2,491.9 Net PP&E 7,392.9 9,072.3 11,112.7 12,494.2

Depreciation & amortization (238.3) (242.5) (261.2) (274.7) Net intangibles 3,425.5 3,425.5 3,425.5 3,425.5

EBIT 2,377.0 2,202.0 2,161.2 2,217.2 Total investments 3,713.6 4,138.5 4,560.8 4,999.0

Interest income 150.7 138.7 113.6 90.1 Other long-term assets 46.1 46.1 46.1 46.1

Interest expense (284.7) (303.5) (228.4) (215.9) Total assets 28,804.3 29,741.6 30,633.4 31,469.9

Income/(loss) from uncons. subs. 438.5 424.9 422.2 438.2

Others (6.2) 153.7 153.7 153.7 Accounts payable 2,470.6 2,364.5 2,348.9 2,337.6

Pretax profits 2,675.4 2,615.8 2,622.4 2,683.3 Short-term debt 3,165.2 3,165.2 3,165.2 3,165.2

Income tax (504.1) (489.2) (489.4) (501.4) Other current liabilities 356.5 356.5 356.5 356.5

Minorities (256.9) (243.9) (245.4) (253.8) Total current liabilities 5,992.2 5,886.1 5,870.5 5,859.2

Long-term debt 9,351.3 9,351.3 9,351.3 9,351.3

Net income pre-preferred dividends 1,914.4 1,882.7 1,887.6 1,928.1 Other long-term liabilities 364.6 364.6 364.6 364.6

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 9,715.9 9,715.9 9,715.9 9,715.9

Net income (pre-exceptionals) 1,914.4 1,882.7 1,887.6 1,928.1 Total liabilities 15,708.1 15,602.0 15,586.4 15,575.1

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 1,914.4 1,882.7 1,887.6 1,928.1 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 11,123.1 11,922.6 12,584.6 13,178.7

EPS (basic, pre-except) (HK$) 1.17 1.15 1.15 1.18 Minority interest 1,973.1 2,217.0 2,462.3 2,716.1

EPS (basic, post-except) (HK$) 1.17 1.15 1.15 1.18

EPS (diluted, post-except) (HK$) 1.17 1.15 1.15 1.18 Total liabilities & equity 28,804.3 29,741.6 30,633.4 31,469.9

DPS (HK$) 0.63 0.71 0.81 0.83

Dividend payout ratio (%) 53.5 61.3 70.0 70.0 BVPS (HK$) 6.80 7.29 7.70 8.06

Free cash flow yield (%) 6.3 3.3 1.5 4.7

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E

Sales growth 3.4 (7.2) (0.5) 2.5 CROCI (%) 15.4 13.0 11.4 9.4

EBITDA growth (0.7) (6.5) (0.9) 2.9 ROE (%) 17.2 16.3 15.4 15.0

EBIT growth (0.1) (7.4) (1.9) 2.6 ROA (%) 6.9 6.4 6.3 6.2

Net income growth (10.7) (1.7) 0.3 2.1 ROACE (%) 13.0 11.5 10.2 10.4

EPS growth (10.7) (1.7) 0.3 2.1 Inventory days 12.3 12.5 12.3 12.2

Gross margin 60.1 60.4 60.5 60.5 Receivables days 19.3 15.2 13.0 12.8

EBITDA margin 42.4 42.7 42.5 42.7 Payable days 376.1 389.6 381.9 370.8

EBIT margin 38.5 38.5 37.9 38.0 Net debt/equity (%) 29.4 34.9 43.3 47.2

Interest cover - EBIT (X) 17.7 13.4 18.8 17.6

Cash flow statement (HK$ mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E

Net income pre-preferred dividends 1,914.4 1,882.7 1,887.6 1,928.1

D&A add-back 238.3 242.5 261.2 274.7 P/E (analyst) (X) 11.2 10.1 10.0 9.8

Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) 1.9 1.6 1.5 1.4

Net (inc)/dec working capital (24.6) (32.5) (15.2) (17.0) EV/EBITDA (X) 9.4 9.6 10.4 11.7

Other operating cash flow 189.2 (16.2) (62.1) (58.6) EV/GCI (X) 1.3 1.2 1.1 1.1

Cash flow from operations 2,317.3 2,076.5 2,071.5 2,127.1 Dividend yield (%) 4.8 6.1 7.0 7.1

Capital expenditures (828.9) (1,375.2) (1,754.7) (1,109.4)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 220.3 0.0 0.0 0.0

Others (1,295.6) (408.1) (433.2) (456.7)

Cash flow from investments (1,904.2) (1,783.3) (2,187.9) (1,566.1)

Dividends paid (common & pref) (1,025.1) (1,083.2) (1,225.5) (1,334.1)

Inc/(dec) in debt 1,992.6 0.0 0.0 0.0

Common stock issuance (repurchase) (868.6) 0.0 0.0 0.0

Other financing cash flows (27.8) (303.5) (228.4) (215.9)

Cash flow from financing 71.1 (1,386.7) (1,454.0) (1,550.0)

Total cash flow 484.2 (1,093.5) (1,570.3) (988.9) Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.




Proposed spin-off splits FCF rich HK asset from China projects

Background of the spin-off of Lifestyle China

On April 22, Lifestyle announced the proposed spin-off of its China business (Lifestyle

China) to a separate listing.

The spin-off will be done via distribution in specie, i.e., shareholders will be entitled to

shares of Lifestyle China at the same ownership percentage in the form of dividend.

Post spin-off, Lifestyle (1212.HK) will focus on the HK business (mainly CWB Sogo),

while Lifestyle China will be a separate listed entity.

The spin-off is pending listing approval and final decision of the Board of directors

(however, no shareholder vote/approval is required).

Timeline: There is a degree of uncertainty to the listing timeline given the need of

listing approval for Lifestyle China. However, taking into consideration historical

precedents of a dividend in specie spin-off (Li & Fung spinning off GBG), it took 3-4

months from application to listing.

Pro-forma capital structure (as announced by the company): Post spin-off, Lifestyle

would have zero net debt; while Lifestyle China will have c.HK$1.3bn net debt (with

c.Rmb1.9bn untapped bank loans for its Zhabei project).

Exhibit 1: Spin-off separates Lifestyle group into a mature, highly cash generative HK business; along with a China

business in investment phase Illustration of pro-forma P&L and Balance sheet, post proposed spin-off

Source: Company data, Goldman Sachs Global Investment Research.

Lifestyle (HK + China dept stores)

- 2015 gross sales: HK$14bn

- 2015 OP: HK$2.4bn

- 2015 NP: HK$1.9bn; EPS: HK$1.17

Balance sheet

Cash eq HK$8.7bn

Fin. assets 5.1bn

PP&E 10.8bn

JV + Assoc 3.7bn

(20% stake in Beiren)

Total 28.3bn

Lifestyle HK (Sogo dept stores)

- 2015 gross sales: HK$10bn

- 2015 OP: HK$2.1bn

- 2015 NP: HK$1.6bn

Balance sheet

Lifestyle China (PRC stores)

- 2015 gross sales: HK$3.8bn

- 2015 OP: HK$245mn

- 2015 NP: HK$305mn

Balance sheet

Debt + bonds 12.5bn

Equity 11.1bn

Minority int 2.0bn

Net work cap 2.7bn

Total 28.3bn

Cash eq HK$6.4bn

Fin. assets 5.1bn

PP&E 3.2bn

JV + Assoc 0.1bn

Total 14.8bn

Debt + bonds 11.5bn

Equity 1.0bn

Minority int 0.7bn

Net work cap 1.6bn

Total 14.8bn

Cash eq HK$2.3bn

PP&E 7.6bn

JV + Assoc 3.6bn

(20% stake in Beiren)

Total 13.5bn

Debt 1.0bn

Equity 10.1bn

Minority int 1.3bn

Net work cap 1.1bn

Total 13.5bn




Investment thesis – Spin off likely to unlock dividend potential

With the announcement of the full financials for the Lifestyle China proposed spin off, we

now have visibility in the capital structure of its HK and China businesses. This affirms our

earlier view that the spin off could separate Lifestyle into two distinct businesses with

varying cash flow profiles – a HK entity with one of the most productive retail properties in

the world (CWB Sogo at US$1bn+ sales p.a.), and China entity with China department

stores and a Shanghai Zhabei project in development (Exhibits 1, 2).

The investment opportunity here lies in the fact that we see a significant potential for

Lifestyle HK to hike its 2017E payout to HK$1.3bn from HK$1.0bn (30% increase). With

limited capex needs, we note that Lifestyle HK could be perceived more like a REIT, and we

could see a higher payout from its strong FCF profile (Exhibit 2).

With the proposed spin off in progress, we expect investors to gradually view this business

as two separate entities, driving us to switch our valuation methodology to SOTP from P/E

to explore the value of the HK and China businesses separately.

Applying a 7% target dividend yield, the HK business is already at the group’s current

market cap (HK$18bn), implying negligible valuation for China (which has a HK$10bn book

value). And China, which is still earning decent profits (c.HK$300mn in 2015), are not

seeing sales declines YTD. Capex needs for its multi-billion Shanghai prime location

(Zhabei) project is also likely to be funded by existing debt and cash flows. We value China

at HK$5-7bn.

Exhibit 2: Cash flows: The HK business is a mature, cash generative property; without new projects in the pipeline, we

see the potential for a higher payout Illustration of cash flows post spinoff


Lifestyle (HK + China dept stores)

- 2015 OCF: HK$2.3bn

- 2015 Capex: HK$0.8bn

- 2015 FCF: HK$1.5bn

- 2015 dividend: HK$1.0bn(54% payout, 67% of FCF)

Lifestyle HK (Sogo dept stores) Lifestyle China (PRC stores)

No growth in OCF

HK$3.3bn capex in the next 3 years

Future cash flow profile

- 2015 OCF: HK$1.9bn


- 2015 FCF: HK$1.7bn

- May pay out most of FCF as dividend

Healthy FCF: HK$1.6bn p.a

Potential higher payout in sight (GSe: HK$1.3bn p.a. in 2017-18E, 85% payout on NP/FCF)


Mature, productive, high FCF property

- 2015 OCF: HK$0.4bn


- 2015 FCF: -HK$0.2bn

FCF to stay negative on Zhabei project

(Rmb3bn capex needs in 2016-19)


Existing stores + upcoming project




‘REITizing’ HK value: Higher payout potential on better FCF profile

2017E DPS 30% higher than 2015 on higher FCF payout

We expect dividend payments to increase to HK$1.3bn by 2017E from HK$1.0bn in 2015,

implying an earnings payout of 70% for the current group (and 85% for the standalone HK

property’s earnings/FCF). Our view is based on:

Operating cash flows of HK$1.6bn: Overall we continue to view HK SOGO as a highly

cash generative asset even in a challenging environment. Even in a tough year for HK

retail, Lifestyle HK generated close to HK$2bn in FCF (flattish yoy). YTD trends have

remained weak, with a 10% drop in sales. We hence expect a FCF drop in a similar

magnitude, as negative operating leverage effect is partially offset by higher

concessionaire margins on a better business mix.

Limited capex needs: Most of SOGO’s capex needs are from maintenance and

renovation needs, which should be at a sub HK$100mn range. Since the group’s listing

in 2004, almost all of Lifestyle’s capex expansion has been in China, pointing to limited

capex needs in HK, further freeing up FCF available for dividends.

Debt fully covered by cash and financial assets: Lifestyle HK’s HK$11bn debt is fully

covered by its HK$6bn cash and HK$5bn in fixed income investments.

A higher payout in sight: With a much cleaner FCF profile, we expect a higher 85%

DPS payout for its HK properties on EPS in 2017E (first year post spin off), up from 54%

in 2015. Our estimates are still below that of a typical HK REITs which have similar cash

flow profiles, which pays out 100% of attributable FCF (Exhibit 3).

Exhibit 3: We have budgeted for a 10% decline in HK operating cash flows in 2016E, in-line with the YTD demand run-

rate HK vs China FCF progression estimates


Cash flow metrics (HK$mn) 2014 2015 2016E 2017E 2018E

Operating cash flows 2,384 2,317 2,076 2,072 2,127

HK 1,904 1,910 1,611 1,603 1,635 China 481 407 465 468 492

Capital expenditures (604) (809) (1,375) (1,755) (1,109)

HK (246) (168) (100) (80) (80) China (358) (641) (1,275) (1,675) (1,029)

Free cash flows 1,780 1,508 701 317 1,018

HK 1,657 1,743 1,511 1,523 1,555 China 123 (234) (810) (1,206) (537)

Dividends declared 965 1,025 1,153 1,321 1,350

HK NA NA NA 1,321 1,350 China NA NA NA - -

Payout (on FCF) 54% 68% 164% 417% 133%

HK NA NA NA 87% 87%China NA NA NA 0% 0%

Payout (on earnings) 45% 54% 61% 70% 70%

HK NA NA NA 85% 85%China NA NA NA 0% 0%

We expect a higher

payout ratio (both in

terms of FCF and

earnings) after the spin-

off of Lifestyle China




Exhibit 4: Payout ratio to hit historical high

Dividend expectation (HK$) and payout (on group level)

Exhibit 5: DPS expectations should also improve despite

a flattish earnings outlook DPS expectation (HK$)



Exploring SOTP valuations: HK business at HK$18bn, similar to the

group’s current market cap

In our view, post the proposed spin-off, Lifestyle HK could be perceived more like a REIT,

given stable FCF, low net gearing, and limited development needs.

As such, we adopt a blended valuation methodology for Lifestyle HK, taking a simple

average of dividend yield, DDM, and P/E based valuations. The assumptions are

benchmarked to leading REITs and landlords in HK (Link REIT, Fortune REIT, Hysan).

Dividend yield: For our base case valuations, we assign a 7% target dividend yield to

Lifestyle’s HK$1.3bn dividend stream in 2017E, which implies a 20% higher yield than

REIT peers, in-line with historical average. This yields HK$18bn implied value for the

HK business. Our bull case assumes Lifestyle trades even closer to historical peak

levels, at 5% yield, implying a HK$26bn value. Our bear case assumes a historical high

9% yield, implying HK$14bn.

DDM: We have taken conservative assumptions to Lifestyle HK’s dividend growth

profile, assuming almost no growth from 2017E dividends. Our terminal growth rate is

at 0.5%, and COE is at 8% (our property team uses 2.5% TGR and 7% COE for Link

REIT). This yields a valuation of HK$18bn. We further stress our payout assumptions

under this scenario, and even with a 70% payout, Lifestyle HK would have an implied

value of HK$15bn.

P/E: Our P/E valuation helps address variances in the payout ratio. Our benchmark

valuations of 10X-15X yield a narrower valuation range, but a similar value of around

HK$20bn.

469 566

752 821

1,371

965 1,025 1,153

1,321

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Divs declared (HK$mn) Payout % (RHS)

0.28 0.34

0.45 0.49

0.83

0.59 0.63

0.71

0.81

-

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2009 2010 2011 2012 2013 2014 2015 2016E 2017E




Exhibit 6: Our blended methodology values Lifestyle’s HK business at HK$18bn, similar to current group market cap Our blended (dividend yield, P/E and DDM) valuation ranges for Lifestyle HK and implied Lifestyle group


Adding China to the SOTP

We hence derive our target price using SOTP valuation — a combination of the HK and

China businesses. Our 12-m TP of HK$15.3 implies 32% upside potential.

Exhibit 7: Our 12-m SOTP-based TP of HK$15.3 implies 32% upside potential

SOTP valuation for Lifestyle International Holdings


10

14

18

22

26

30

34

Div yield P/E DDM

Valuing Lifestyle HK(HK$bn)

Current group mkt cap: c.HK$18bn

Bull (5%):

HK$25.6bn

Bear (9%):

HK$14.2bn

Base (7% div yield):

HK$18.3bn

15X:

HK$23.7bn

10X:

HK$15.8bn

12.5X:

HK$19.7bn

100% payout:

HK$20.7bn

85% payout:

HK$17.8bn

70% payout:

HK$14.8bn

Adding Lifestyle China

(HK$6.1bn)

10

14

18

22

26

30

34

Div yield P/E DDM

Valuation for the group level(HK$bn)

Current group mkt cap: c.HK$18bn

Bull: HK$31.8bn

Bear: HK$20.4bn

Base : HK$24.4bn

HK$29.8bn

HK$21.9bn

HK$25.9bn

HK$26.9bn

HK$23.9bn

HK$21.0bn

Lifestyle valuation Methodology HK$ bn Comments

HK business

Core business Avg of div. yield, P/E, DDM 18.6 Target div. yield of 7%, 12.5X P/E, 85% payoutTotal value for HK 18.6 Implied 2017E P/E is 12X

China business

China core ops 9X 2016E EV/EBITDA 3.2 Golden Eagle / Intime avg 13X EV/EBITDAZhabei 60% discount to construction cost 1.4 In-line with retail landlord NAV discountJV and assocciates 0.4X price/book 1.6 In-line with P/B for retail landlords in ChinaNet cash 1.3Less: minority interest (1.3) Mostly in Beiren associate stakeTotal value for China 6.1 Implied P/B is 0.6X

SOTP value 24.7

Per share (HK$) 15.3




Exhibit 8: We set dividend yield based valuation range at

5%-9% Forward dividend yield: Lifestyle, Hysan, Link REIT, Fortune

REIT

Exhibit 9: Our P/E valuation cross check uses a 10X-15X

range NTM P/E: Lifestyle, Hysan, Link REIT, Fortune REIT



Exhibit 10: REITs are generally trading at a 5%-6% 2017E dividend yield, with a much larger P/E range owing to different

payout and gearing ratios Valuation profiles for Link REIT, Fortune REIT and Hysan, which we believe are key comps to Lifestyle


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Forward dividend yield

Lifestyle

Hysan

Link REIT

FortuneREIT

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Forward P/E

Lifestyle

Hysan

Link REIT

FortuneREIT

HK REIT/landlords trade at c.5% div. yield on

avg, vs our 7% target for Lifestyle HKImplied 12X P/E for Lifestyle HK is also below

HK REIT/landlords

Payout ratio of 85% is comparable to the

REITsGearing ratio of Lifestyle HK is low

4.2%

5.5%

4.0%

7.0%

4.5%

5.5%

4.0%

7.0%

4.8%

5.6%

4.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Lifestyle HK(target)

Link REIT Fortune REIT Hysan

Dividend yield

2015 2016E 2017E

25

1716

12

2321

16

12

21 20

17

-

5.0

10.0

15.0

20.0

25.0

30.0



P/E

2015 2016E 2017E

101%94%

61%

85%

100%

114%

63%

85%

100%

114%

66%

0%

20%

40%

60%

80%

100%

120%



Payout ratio

2015 2016E 2017E

24%

43%

3%0%

27%

44%

4%0%

27%

46%

4%

0%5%

10%15%20%25%30%35%40%45%50%

Lifestyle HK Link REIT Fortune REIT Hysan

Net debt / Equity

2015 2016E 2017E




China business: Valuation range at HK$5-7bn

Lifestyle China generated solid earnings of HK$300mn even in a tough 2015, with stable

YTD trends, and an upcoming Zhabei project which could be internally funded. Post the

proposed spin off, Lifestyle China would be an asset with a HK$10bn book value, which is

most of its department store properties at cost. We value the China business at HK$5-7bn,

implying 0.5X-0.7X book. Our valuation is based on:

Core business (HK$2.5-3.9bn valuation range): Lifestyle’s core Shanghai and Suzhou

department stores are still making profits (c.HK$200mn in 2015), and are seeing stable

topline trends in 2016 YTD. With the closure of Shenyang store, we estimate a reversal

of losses of c.HK$100mn in 2016E, further lifting overall group profits. Our valuation for

its core business is based on 7X-11X 2016E EV/EBITDA, still at a discount vs national

peers such as Golden Eagle and Intime which are at 13X which have much larger scale.

Zhabei (HK$1-1.5bn valuation range): Lifestyle’s Zhabei project is a large scale multi-

purpose development property in Shanghai Zhabei, with a total GFA of 345,000 sqm

(81,000 sqm office, 264,000 sqm retail). The office space is likely to be available for sale

by end 2017, followed by the retail property in end 2018 which Lifestyle will operate.

So far, around HK$3bn has already been spent on construction, with another c.HK$4bn

capex needs for the next 3 years. Per mgmt, the project is expected to generate

HK$3bn cash inflows from office sales by end 2017, and continued cash flows from

operations of the retail property starting 2019. We value Zhabei at HK$1-1.5bn, which is

a 50%-70% NAV discount to the construction costs which are already spent. This may

be perceived to be conservative as this is only pricing in half of the unfinished project,

and does not mark-to-market to current value. We also highlight that the Zhabei

business is well funded even with existing funding sources, given HK$1.3bn in net cash,

and a Rmb1.9bn untapped bank loan.

Other components – JV and associates valued at 0.3X-0.5X P/B (HK$1.2-1.8bn), net

cash at HK$1.3bn, and a final deduction of minority interests at HK$1.3bn (as

announced by the company).

Exhibit 11: We expect Lifestyle China’s current funding sources to be able to cover capex

needs for the Zhabei project Funding sources vs capex needs: Lifestyle China


-

1,000

2,000

3,000

4,000

5,000

Funding/cash Capex need (2016-18E)

HK$mn

Untapped

bank loan

Operating

cash flows

(2016-18E)

Net cash

Zhabei

project

Maintenance

capex and

other projects




Underlying earnings – Budgeting for a challenging 2016

HK (c.90% sales from CWB Sogo) retail environment remains tough. CWB Sogo sales

were down more than 10% yoy in 1Q16 (vs -7% in 2H15). Besides the downtrend of

visitor arrivals (PRC visitors to HK were down 18% yoy in Jan-Feb), weakness in local

spending was a key driver for the sales decline. HK’s outbound tourists were up 5%

yoy in 1Q16 (vs +5% in 2015, and flattish level in 2011-14) as overseas travel was

boosted by strong HKD, which may have impacted local spending. That said, we note

that CWB Sogo’s concessionaire margin has continued to improve (up to 24.0% in 2015,

vs 23.0%/23.7% in 2013/14) thanks to the optimization of tenant mix, which may help

offset the sales decline. For 2016, we still expect a 10% sales decline for CWB Sogo, but

sales could stabilize from 2017 onwards.

China could still have positive earnings growth (GSe: +6% in 2016E). Lifestyle closed

down the Shenyang Jiuguang store in Dec 2015; Shenyang Jiuguang had a loss of

>HK$100mn in 2015 (operating loss, one-off expense from store closure), that will not

recur in 2016 and imply a HK$100mn swing in China earnings. YTD, management

commented that sales of Shanghai Jiuguang (Lifestyle’s largest store in China, c.70%

of China sales) were still positive yoy.

Overall, we forecast a 2% earnings decline at group level in 2016E (before stabilizing in

2017E), as decline in HK could only be partially offset by higher profits from China. Our

2016E-2018E sales and EPS are slightly below IBES consensus, after factoring in the

YTD weakness and deteriorating outlook of the HK retail sector.

Exhibit 12: On a group level, we expect Lifestyle’s earnings to drop 2% in 2016E, before stabilizing in 2017 Our new estimates for Lifestyle


(HK$ millions) 2016E 2017E 2018EYear Ended December 31 2014 2015 New Old chg% New Old chg% New Old chg%Gross proceeds 13,617 13,836 12,858 13,134 -2.1% 12,786 13,531 -5.5% 13,093 13,930 -6.0%Revenue 5,970 6,171 5,727 5,871 -2.5% 5,698 6,052 -5.8% 5,839 6,235 -6.4%Cost of goods sold (2,386) (2,464) (2,265) (2,335) -3.0% (2,252) (2,405) -6.3% (2,307) (2,476) -6.8%Gross profit 3,584 3,707 3,462 3,537 -2.1% 3,446 3,647 -5.5% 3,532 3,759 -6.0%Other operating income 252 188 177 179 -0.7% 176 184 -4.2% 181 190 -4.7%Operating expenses (1,456) (1,518) (1,437) (1,441) -0.3% (1,461) (1,500) -2.6% (1,496) (1,556) -3.9%

Operating income 2,379 2,377 2,202 2,274 -3.2% 2,161 2,332 -7.3% 2,217 2,393 -7.3%- Lifestyle HK 2,124 2,132 1,921 2,043 -6.0% 1,879 2,095 -10.3% 1,920 2,150 -10.7%- Lifestyle China 255 245 281 231 21.5% 283 237 19.2% 297 243 22.2%Finance costs (70) (134) (165) (165) 0.0% (115) (112) 2.8% (126) (108) 16.3%Shared profits of associates/JCEs 374 439 425 468 -9.2% 422 497 -15.1% 438 517 -15.3%Other non-op gain/(loss) 149 (6) 154 128 20.0% 154 128 20.0% 154 128 20.0%

Income before tax 2,832 2,675 2,616 2,705 -3.3% 2,622 2,845 -7.8% 2,683 2,930 -8.4%Provision for income tax (466) (504) (489) (507) -3.5% (489) (533) -8.2% (501) (549) -8.6%

Income before MI 2,365 2,171 2,127 2,198 -3.3% 2,133 2,313 -7.8% 2,182 2,381 -8.4%Minority interest (221) (257) (244) (262) -6.9% (245) (277) -11.3% (254) (287) -11.6%

Reported net income 2,144 1,914 1,883 1,937 -2.8% 1,888 2,036 -7.3% 1,928 2,094 -7.9%Recurring net income 2,020 1,919 1,758 1,832 -4.1% 1,763 1,932 -8.8% 1,803 1,990 -9.4%

EPS (HK$) 1.31 1.17 1.15 1.18 -2.8% 1.15 1.25 -7.3% 1.18 1.28 -7.9%DPS (HK$) 0.59 0.63 0.71 0.63 12.5% 0.81 0.56 44.2% 0.83 0.58 43.2%Payout ratio 45.0% 53.5% 61.3% 52.9% 8.3ppt 70.0% 45.0% 25.0ppt 70.0% 45.0% 25.0ppt

YoY chg %Gross proceeds -1.3% 1.6% -7.1% -5.1% -2.0ppt -0.6% 3.0% -3.6ppt 2.4% 3.0% -0.6pptRevenue 0.2% 3.4% -7.2% -4.9% -2.3ppt -0.5% 3.1% -3.6ppt 2.5% 3.0% -0.6pptGross profit 0.7% 3.4% -6.6% -4.6% -2.0ppt -0.5% 3.1% -3.6ppt 2.5% 3.1% -0.6pptSG&A 1.1% 4.2% -5.4% -5.1% -0.3ppt 1.7% 4.1% -2.4ppt 2.4% 3.8% -1.4pptOperating income 0.0% -0.1% -7.4% -4.3% -3.0ppt -1.9% 2.5% -4.4ppt 2.6% 2.6% 0.0ppt- Lifestyle HK 4.9% 0.3% -9.9% -4.1% -5.7ppt -2.2% 2.5% -4.7ppt 2.2% 2.6% -0.4ppt- Lifestyle China -27.9% -3.7% 14.4% -5.9% 20.3ppt 0.6% 2.5% -1.9ppt 5.2% 2.6% 2.5pptPretax income -10.1% -5.5% -2.2% 1.1% -3.3ppt 0.3% 5.2% -4.9ppt 2.3% 3.0% -0.6pptIncome before MI -11.4% -8.2% -2.1% 1.3% -3.3ppt 0.3% 5.2% -4.9ppt 2.3% 3.0% -0.7pptNet income -12.4% -10.7% -1.7% 1.2% -2.8ppt 0.3% 5.1% -4.9ppt 2.1% 2.9% -0.7pptRecurring income -1.9% -5.0% -8.4% -4.5% -3.9ppt 0.3% 5.4% -5.1ppt 2.3% 3.0% -0.7ppt

MarginsConcessionaire margin 23.9% 24.4% 24.6% 24.6% 0.0ppt 24.7% 24.7% 0.0ppt 24.8% 24.8% 0.0pptGross margin - direct sales 26.7% 26.5% 26.6% 26.6% 0.0ppt 26.6% 26.6% 0.0ppt 26.6% 26.6% 0.0pptSG&A / GSP 10.7% 11.0% 11.2% 11.0% 0.2ppt 11.4% 11.1% 0.3ppt 11.4% 11.2% 0.3pptOperating income / GSP 17.5% 17.2% 17.1% 17.3% -0.2ppt 16.9% 17.2% -0.3ppt 16.9% 17.2% -0.2pptOperating income / Operating revenue 39.9% 38.5% 38.5% 38.7% -0.3ppt 37.9% 38.5% -0.6ppt 38.0% 38.4% -0.4pptPretax income / Operating revenue 47.4% 43.4% 45.7% 46.1% -0.4ppt 46.0% 47.0% -1.0ppt 46.0% 47.0% -1.0pptNet income / Operating revenue 35.9% 31.0% 32.9% 33.0% -0.1ppt 33.1% 33.6% -0.5ppt 33.0% 33.6% -0.6pptReported net income / GSP 15.7% 13.8% 14.6% 14.7% -0.1ppt 14.8% 15.0% -0.3ppt 14.7% 15.0% -0.3pptRecurring net income / GSP 14.8% 13.9% 13.7% 14.0% -0.3ppt 13.8% 14.3% -0.5ppt 13.8% 14.3% -0.5ppt

SSSG (overall) 2.6% -4.5% -6.7% -4.7% -2.0ppt -0.6% 3.0% -3.6ppt 2.4% 3.0% -0.6ppt- SSSG (CWB Sogo) 3.7% -4.5% -10.0% -7.5% -2.5ppt -2.5% 2.5% -5.0ppt 2.0% 2.0% 0.0ppt




Appendix

Exhibit 13: Profit and loss statement split based on company announcement of China data


Exhibit 14: Balance sheet split based on company

announcement of China data

Exhibit 15: Cash flow statement split based on company

announcement of China data

Note: We adjusted for the amount due from Lifestyle China to Lifestyle,

which will be settled by way of capitalization according to the company.



HK$mn 2014 2015 2014 2015

Gross sales (GSP) 9,872 10,115 3,744 3,781

Net sales 4,614 4,790 1,356 1,381

COGS (2,039) (2,098) (347) (367) Gross profits 2,575 2,692 1,009 1,015

Opex, other operating items (451) (561) (754) (769) Operating income 2,124 2,132 255 245

Investment income (incl interest) 346 90 67 73 Share of profit of JVs and associates (24) 30 398 408 Finance costs (224) (258) (44) (27) Other non-ops (68) (19) - - Profits before tax 2,155 1,975 676 700

Tax charges (356) (361) (110) (143) Minority interests 20 (5) (241) (252) Net income 1,819 1,609 325 305

YoY %

Gross sales (GSP) -3% 2% 3% 1%Net sales -1% 4% 7% 2%Gross profits -2% 5% 7% 1%Operating profits 2% 0% -16% -4%Profits before tax -11% -8% -6% 3%Net earnings -13% -12% -11% -6%Margins

Operating income / GSP 21.5% 21.1% 6.8% 6.5%Pretax income / GSP 21.8% 19.5% 18.1% 18.5%Net income / GSP 18.4% 15.9% 8.7% 8.1%

HK China

HK$mn 2014 2015 2014 2015

Cash and equivalents 6,235 6,378 2,078 2,292 Financial assets at fair value through P&L 3,855 5,124 45 - Trade and other receivables 143 114 225 159 Inventories 39 41 48 38 Other current assets (85) (35) 191 116 Total current assets 10,186 11,621 2,587 2,605

PP&E 1,951 2,012 3,649 4,713 Investment properties 700 668 - - Prepaid lease payments 626 570 3,625 2,856 Interests in JV, associates 84 57 3,415 3,656 Other non-current assets 23 46 2 0 Total non-current assets 3,385 3,353 10,691 11,225

Total assets 13,570 14,974 13,278 13,830

Trade and other payables 1,399 1,313 1,209 1,118 Amount due to associates - - - 40 Short term borrowings 1,868 3,012 136 153 Other current liabilities 292 312 59 44 Total current liabilities 3,560 4,637 1,404 1,355

Long term bank borrowings 7,971 8,463 549 889 Other non-current liabilities 208 210 168 154 Total non-current liabilities 8,179 8,673 717 1,043

Total liabilities 11,738 13,310 2,121 2,398

Total common equity 1,152 1,011 9,951 10,112 Minority interest 680 653 1,206 1,320 Total equity 1,832 1,664 11,157 11,432

Total liabilities & equity 13,570 14,974 13,278 13,830

Net debt/(cash) (250) (26) (1,438) (1,250) Net debt/Total equity -14% -2% -13% -11%

HK China

HK$mn 2014 2015 2014 2015

Profit before taxation 2,155 1,975 676 700

Adjustments for:Depreciation & Amortization 64 92 189 146 Share of profit of JVs and associates 50 8 (398) (408) Other non-cash income/expenses (226) 271 62 55

Change in working capital 246 (96) 19 71 Total tax paid (386) (340) (69) (157)

Operating cash flows 1,904 1,910 481 407

Purchase of PP&E (246) (168) (358) (641) Acquisition/disposal of subsidiaries 343 - - (13) Dividend received 30 37 23 92 Net purchase of financial assets (380) (1,362) (45) 45 Other investing cash flows 38 57 16 50 Investing cash flows (216) (1,436) (364) (468)

Dividends paid (933) (1,002) (13) (24) Share repurchase (353) (369) - - Increase/(decrease) in debt (506) 1,630 205 393 Finance costs paid (221) (249) (205) (224) Change in minority interest - - (89) (89) Other financing cash flow items (357) (307) 372 311 Investing cash flows (2,370) (297) 270 368

Total cash flows (682) 178 387 307

HK China




Disclosure Appendix

Reg AC

We, Ricky Tsang, CFA, Joshua Lu and Alan Lee, hereby certify that all of the views expressed in this report accurately reflect our personal views

about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or

indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Ricky Tsang, CFA: Asia Pacific Consumer and Retail, Hong Kong/China Consumer. Joshua Lu: Asia Pacific Consumer and Retail, Hong Kong/China

Consumer.

Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, BGF Retail, China Resources Enterprise, CJ CheilJedang, CP ALL PCL, E-

Mart, Eclat Textile Co, Far Eastern Department Stores, GS Retail Co., Hyundai Department Store, KT&G, LG Household & Healthcare, Lotte Shopping,

Makalot Industrial Co, Matahari Department Store, Mitra Adiperkasa, MOMO.COM Inc., Orion, PChome Online Inc., Pou Sheng International Holdings,

President Chain Store, PT Gudang Garam Tbk, PT Hanjaya Mandala Sampoerna Tbk, PT Indofood CBP Sukses Makmur, PT Indofood Sukses Makmur

Tbk, PT Kalbe Farma Tbk, PT Unilever Indonesia Tbk, Shenzhou International Group Holdings Ltd, Shinsegae, Stella International Holdings, Sun Art

Retail Group, Taiwan FamilyMart Co. Ltd., Tingyi (Cayman Islands) Holdings, Tsingtao Brewery (A), Tsingtao Brewery (H), Uni-President China

Holdings, Uni-President Enterprises, WH Group Ltd., Yue Yuen Industrial.

Hong Kong/China Consumer: Anta Sports Products, Belle International Holdings, Chow Sang Sang Holdings, Chow Tai Fook Jewellery Group, Global

Brands Group Holding Limited, Golden Eagle Retail Group, Hengdeli Holdings, Intime Retail (Group), Li & Fung, Li Ning Co., Lifestyle International

Holdings, Luk Fook Holdings International, Sa Sa International Holdings, Samsonite International SA.

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Goldman Sachs had a non-securities services client relationship during the past 12 months with: Lifestyle International Holdings (HK$11.58)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 53% 15% 65% 58% 51%

As of April 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 3,029 equity securities. Goldman Sachs assigns stocks as

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21.923.6

18.6 19 18.7

18.620

17.6

17.1

1614.5

10,00010,50011,00011,50012,00012,50013,00013,50014,00014,50015,000

5.007.009.00

11.0013.0015.0017.0019.0021.0023.0025.00

Lifestyle International Holdings (1212.HK)

Goldman Sachs rating and stock price target history

Stock Price Currency : Hong Kong Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2016.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

Rating

Price target

Price target at removal

Covered by Ricky Tsang, CFA,as of Jun 16, 2014

Not covered by current analyst

MSCI Hong Kong

Inde

xPr

ice

Sto

ckPr

ice

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J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M

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