equities research how we differ from the street bosideng

PREPARED BY BNP PARIBAS SECURITIES ASIA THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX

COMPANY REPORT

EQUITIES RESEARCH

3998 HK

BOSIDENG INTERNATIONAL CHINA / CONSUMER DURABLES & APPAREL

HOW WE DIFFER FROM THE STREET

BNPP Consensus % Diff

Target Price (HKD) 2.20 2.79 (21.1)

EPS 2012 (RMB) 0.18 0.18 0.0

EPS 2013 (RMB) 0.18 0.19 (5.3)

Positive Neutral Negative

Market Recs 10 2 1

BUY UNCHANGED

TARGET

PRIOR TP

CLOSE

UP/DOWNSIDE

HKD2.20

HKD2.80

HKD1.92

+14.6%

INDUSTRY OUTLOOK é

Yield play

CHANGE Transfer coverage and maintain BUY

We transfer coverage of Bosideng to Sarah Liu and maintain BUY.

Although the down apparel business has high seasonality and is impacted

by unforeseeable weather conditions, we credit Bosideng for standing out

in the niche market and avoiding fierce competition. The down business

offers stable cash flow to Bosideng and high yield to investors.

CATALYST We expect in-line FY12 results, due on 28 June

Bosideng will announce its FY12 results on 28 June after the market close.

We expect no surprises from Bosideng’s coming results and are

forecasting a net profit of RMB1,443m, 13.8% growth. We also expect a

final dividend of RMB706m, or RMB0.088 per share, by modelling in a 70%

payout ratio for FY12.

VALUATION Stock oversold and BUY for dividend

Bosideng is now trading at 8.7x FY13 P/E, with an 8.1% dividend yield. The

valuation factors in any potential weakness in the coming winter, and

concerns for Bosideng’s expansion plans in the non-down market, but we

do see upside risks from our current estimates. Maintain BUY with a TP of

HKD2.20 based on 9.6x 2013 P/E.

KEY CHART Scenario analysis for Bosideng's 2013 dividend yield

(%) Down apparel revenue growth in 2013 FY13E dividend yield

Best case 10 8.7

Base case — 8.1

Worst case (20) 7.0

Source: BNP Paribas estimates

TRANSFER OF COVERAGE

Sarah Liu [email protected]

+86 21 6096 9032

BNP Paribas Securities (Asia) Ltd. research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.

19 JUNE 2012

KEY STOCK DATA YE Mar (RMB m) 2012E 2013E 2014E

Revenue 8,380 8,822 9,505

Rec. net profit 1,443 1,454 1,624

Recurring EPS (RMB) 0.18 0.18 0.20

Prior rec. EPS (RMB) 0.18 0.20 0.23

Chg. In EPS est. (%) (0.9) (10.1) (10.9)

EPS growth (%) 10.5 0.8 11.7

Recurring P/E (x) 8.7 8.7 7.8

Dividend yield (%) 8.0 8.1 9.0

EV/EBITDA (x) 6.5 5.5 4.7

Price/book (x) 1.8 1.7 1.6

Net debt/Equity (%) (19.6) (20.1) (23.0)

ROE (%) 20.8 20.1 20.9

Share price performance 1 Month 3 Month 12 Month

Absolute (%) 3.8 (22.0) (3.0)

Relative to country (%) 1.1 (12.4) 10.1

Next results June 2012

Mkt cap (USD m) 1,981

3m avg daily turnover (USD m) 2.4

Free float (%) 32

Major shareholder Gao DeKang (68%)

12m high/low (HKD) 2.61/1.43

3m historic vol. (%) 38.0

ADR ticker -

ADR closing price (USD) -

Issued shares (m) 8,007

Sources: Bloomberg consensus; BNP Paribas estimates

Environmental Risk Impact Ratio

2.9% Rank in Sector 3/3

(10)

0

10

20

30

40

50

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

(%)(HKD) Bosideng International Rel to MSCI China

http://equities.bnpparibas.com/

Bosideng International

2

RISK EXPERTS

Key Earnings Drivers & Sensitivity

Same-store-sales growth

Gross margin

Bosideng International and MXCN Index(3M and 6M Realised-Vol)

China sector correlation matrix at

Banks Insurance

Banks 1.00 0.79

Insurance 1.00

Metal & mining

Oil & gas

Property

Telecom

Utilities

Coal

Source: BNP Paribas Sector Strategy

The Risk Experts

Our starting point for this page is a recognition of the macro

factors that can have a significant impact on stock

performance, sometimes independently of bottom

With our Risk Expert page, we identify the key

that can impact stock performance.

This analysis enhances the fundamental work laid out in the

rest of this report, giving investors yet another resource to

use in their decision-making process.

0

20

40

60

80

100

Oct-07 Oct-08 Oct-09 Oct-10

(%)Bosideng International - 3M Realised - Vol Bosideng International

MSCI China - 3M Realised - Vol MSCI China - 6M Realised

Sources: Bloomberg; BNP Paribas

BNP PARIBAS

EXPERTS l Macro BUY UNCHANGED

BOSIDENG INTERNATION

Key Earnings Drivers & Sensitivity

Scenario analysis for Bosideng’s 2013 dividend yield

(%) Down apparel revenue growth in 2013

Best case

Base case

Worst case


MXCN Index

Regression – Bosideng InternationalIndex

at 30 April 2012

Metal & mining Oil & gas Property Telecom

0.85 0.78 0.76

0.77 0.70 0.69

1.00 0.76 0.79

1.00 0.60

1.00

Long/Short Chart

Our starting point for this page is a recognition of the macro

factors that can have a significant impact on stock-price

performance, sometimes independently of bottom-up factors.

With our Risk Expert page, we identify the key macro risks

This analysis enhances the fundamental work laid out in the

rest of this report, giving investors yet another resource to

Sources: Bloomberg, BNP Paribas

Oct-11

Bosideng International - 6M Realised - Vol

6M Realised - Vol

-23.00%

-13.00%

-3.00%

7.00%

17.00%

27.00%

-22.00% -17.00% -12.00% -7.00%


Bosideng International = 0 + 0.0297 * MXCN IndexR Square = 0.1845

Regression based on 244 observations of 5 years weekly data. Please refer to Appendix 1 for the explanation of R-square Sources: Bloomberg; BNP Paribas

0.14

0.19

0.24

0.29

0.34

0.39

0.44

0.49

0.54

Sep-09 Mar-10 Sep-10

(x) Bosideng International


Sarah Liu

19 JUNE 2012

BOSIDENG INTERNATIONAL 3998 HK

Scenario analysis for Bosideng’s 2013 dividend yield

Down apparel revenue growth in 2013 FY13 dividend yield

10 8.7

0 8.1

(20) 7.0

Bosideng International to MXCN

Telecom Utilities Coal

0.65 0.51 0.80

0.58 0.44 0.73

0.58 0.50 0.83

0.72 0.51 0.78

0.48 0.43 0.70

1.00 0.45 0.62

1.00 0.47

1.00

-2.00% 3.00% 8.00% 13.00% 18.00%

MSCI China

Bosideng International = 0 + 0.0297 * MXCN Index

Regression based on 244 observations of 5 years weekly data. Please refer to Appendix 1 for

-2s

-1s

Mean

+1s

+2s

Mar-11 Sep-11 Mar-12

Bosideng International - China Lilang


3

RISK EXPERTS

Principal Activities Operating Activities

Men''s and boys'' cut and sew apparel manufacturing

Women''s and girls'' cut and sew apparel manufacturing

Bosideng International primarily focuses on developing and managing the portfolio of its

down apparel brands, which includes research, design and development, raw materials

procurement, outsourced manufacturing, and marketing and distribution of the

branded down apparel products. Its business segments includes Down apparels and

Original Equipment Manufacturing management. The down apparels segment carries on

the business of sourcing and distributing down apparels; and The OEM management

segment carries on the business of sourcing and distributing OEM apparels.

Direct Environment Damage Issues

The direct environmental damage costs are those incurred when

International emits pollutants or uses natural resources as part of its own activities. The five most significant direct impacts are listed below.

Emission Resource (2010) (Tonnes) Source Quantity

Carbon Dioxide TC 28,709

Other (Process Water) TC 402,926

Landfill (Non-Hazardous) TC

Incineration (Non-Hazardous) TC

HFCs TC

Other

Total 435,870

Direct Impact Ratio (%) 0.19 Direct Cost / EBITDA

Peer Analysis - Country

Bubble size indicates Market Cap

CHINA LILANG BOSIDENG INTERNATIONA

1234 HK 3998 HK

Impact Ratio (%) 2.66 2.88

Turnover (HKD m) 2,337.6 6,533.6

Market Cap (US $ bn) 0.83 1.98

Year 2010 2010

Impact ratio and turnover of Bosideng International (3998 HK

peers in the same country. A higher Impact ratio indicates higher external

environment costs and weaker environment performance.

1234 HK2.66

2.60

2.65

2.70

2.75

2.80

2.85

2.90

2.95

Impact Ratio (%

)

BNP PARIBAS

EXPERTS l Environmental

% of Turnover

50.00

50.00

Bosideng International primarily focuses on developing and managing the portfolio of its

down apparel brands, which includes research, design and development, raw materials

procurement, outsourced manufacturing, and marketing and distribution of the Group’s

branded down apparel products. Its business segments includes Down apparels and

Original Equipment Manufacturing management. The down apparels segment carries on

the business of sourcing and distributing down apparels; and The OEM management

ries on the business of sourcing and distributing OEM apparels.

BUY UNCHANGED

BOSIDENG INTERNATION

Key Ratios (2010)

Impact Ratio (%) EBITDA Impact Ratio (%)

Direct Impact Ratio (%) Direct Cost / EBITDA (%)

Supply Chain Impact Ratio (%) Cost Ratios (%)

*Impact Ratio = Total Environment Damage Cost/Turnover

Direct Environment Damage Issues Supply Chain Environment Damage Issues

The direct environmental damage costs are those incurred when Bosideng

rces as part of its own activities. The five most significant direct impacts are listed below.

The Supply Chain environmental damage costs are those that are incurred

as a result of the activities carried out by chain. The five most significant Supply Chain impacts are listed below.

Quantity External Cost

(HKD m)

28,709 7.85

402,926 1.56

3,069 1.11

1,099 0.69

0 0.28

66 0.73

435,870 12.23

Direct Cost / EBITDA (%) 1.34

Emission Resource (2010) (Tonnes)

Other (Process Water)

Carbon Dioxide

Nitrogen

Particulates

Dinitrogen Oxide (Nitrous Oxide)

Other

Total Supply Chain Impact Ratio (%) 2.70

Peer Analysis - Sector

Bubble size indicates Market Cap

TRINITY CHINA LILANG

891 HK 1234 HK

Impact Ratio (%) 0.71

Turnover (HKD m) 2,009.0 2,337.6

Market Cap (US $ bn) 1.19

Year 2010

3998 HK) against its

in the same country. A higher Impact ratio indicates higher external

environment costs and weaker environment performance.

Impact ratio and turnover of Bosideng International

peers.

3998 HK2.88

891 HK0.71

.00

.50

1.00

1.50

2.00

2.50

3.00

3.50

Impact Ratio (%

)

Sarah Liu

19 JUNE 2012

BOSIDENG INTERNATIONAL 3998 HK

2.88 20.63

0.19 1.34

2.70 19.29

*Impact Ratio = Total Environment Damage Cost/Turnover

Chain Environment Damage Issues Sarah Liu

The Supply Chain environmental damage costs are those that are incurred

as a result of the activities carried out by Bosideng International‘s supply chain. The five most significant Supply Chain impacts are listed below.

Quantity External Cost

(HKD m)

19,992,282 77.63

173,410 47.44

548 13.00

61 5.87

63 5.13

27,214,578 27.04

47,380,942 176.10

Supply Chain Cost / EBITDA (%) 19.29

Sector

CHINA LILANG BOSIDENG INTERNATIONA

1234 HK 3998 HK

2.66 2.88

2,337.6 6,533.6

0.83 1.98

2010 2010

Bosideng International against its regional

1234 HK2.66

3998 HK2.88

Bosideng International Sarah Liu

4 BNP PARIBAS 19 JUNE 2012

We expect in-line 2012 results and RMB0.092 final dividend per share

Bosideng will announce its FY12 annual results on 28 June after the market close (Bosideng’s financial year ends on 31 March). We expect no surprises from Bosideng’s coming results and are forecasting Bosideng to report 19.1% y-y revenue growth to RMB8,380m, and 13.8% profit growth to RMB1,443m. Our revenue and net profit forecasts are in line with consensus. We also expect Bosideng to propose a final dividend of RMB706m, or RMB0.088 per share, by modelling in a 70% payout ratio for FY12.

EXHIBIT 1: Bosideng FY12 P&L forecast

Year-end 31 Mar 2011 2012E Growth Comments

(RMB m) (RMB m) (y-y %)

Revenue 7,038 8,380 19.1

Down apparel 5,685 6,253 10.0

OEM business 769 899 17.0

Non down apparels 584 1,227 110.0 Due to M&A

Cost of sales (3,738) (4,441) 18.8

Gross profit 3,299 3,939 19.4

Gross margin (%) 46.9 47.0

Slight margin expansion

Other income 20 30 52.9

Distribution expenses (1,707) (2,011) 17.8

As a % of revenue (%) 51.7 51.1

Thanks to change of return policy

Administrative expenses (207) (251) 21.3

As a % of revenue (%) 2.9 3.0

Other expenses (33) (20) (39.8)

Profit from operations 1,372 1,686 22.9

Operating margin (%) 19.5 20.1

Slight margin expansion

Finance income 142 148 3.8

Finance costs (13) (26) 89.8

Pre-tax profit 1,501 1,808 20.5

Income tax expense (229) (353) 54.2

Effective tax rate (%) 15.2 19.5

Gradual end of tax holiday

After-tax profit 1,272 1,455 14.4

Minority (4) (13)

Net profit 1,268 1,443 13.8

Dividend 1,500 1,019

Payout ratio (%) 117.9 70.0

Cut payout ratio to save cash for future M&A

Interim 505 304

Final 529 715

Special 466 —

Sources: Bosideng International; BNP Paribas estimates



Down apparel to offer stable cash flow and safe yield

The down apparel business has been Bosideng’s cash cow up to now and accounts for 74.6% of its revenue and 80.0% of its gross profit in FY12.

EXHIBIT 2: Revenue breakdown by business segment EXHIBIT 3: Gross margin breakdown by business segment



The down apparel industry itself is not inspiring, with high seasonality, subject to unforeseeable weather conditions, and a wholesale business model. As shown in the charts below, Bosideng’s revenue and profit could vary hugely in the second half compared to the first half just because of seasonality. It is difficult for brand owners/manufacturers to make precise production plans, and also difficult for distributors/retailers to arrange promotions or management inventory.

EXHIBIT 4: Bosideng's down apparel sales

Note: Bosideng’s financial year ends in March, 1H refers to April to September, and 2H refers to October to March next year. Sources: Bosideng International; BNP Paribas

But, everything has two sides. Overall, China’s clothing market is highly fragmented, without anyone taking more than 1% of market share. The top-10 players take a total of 6.0% market share in 2011, while top-30 players take a total of 11%. If we look at some sub-sectors of China’s clothing market, like Sportswear or menswear, the market is also fragmented. For example, the sportswear market is more consolidated than the overall industry, but still, the market leader has less than 15% market share. And the menswear market is also highly fragmented without a clear leader.

The uninspiring industry dynamics of the down apparel segment enable Bosideng to avoid direct competition from thousands of clothing manufacturers in China, and helps Bosideng to become the leader of this segment with over one-third of the market share in China’s down apparel, and top-five in terms of retail sales in China’s apparel market.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012E

Down apparel OEM Non down

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012E

Down apparel OEM business Menswear

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11

(RMB m)

2.1xof 1H3.4x of 1H

3.5x of 1H

3.7xof 1H



EXHIBIT 5: Market share of China’s apparel industry – 2011

EXHIBIT 6: China’s top 10 apparel companies in terms of retail sales – 2011

Rank Company

1 Semir Group Co

2 Bestseller A/S

3 Metersbonwe Group

4 Bosideng International Holdings Co

5 Nike Inc

6 Texwinca Holdings

7 Li Ning Co

8 Adidas AG

9 Anta (China) Co

10 Youngor Group Co L

Sources: Euromonitor; BNP Paribas

Sources: Euromonitor; BNP Paribas

EXHIBIT 7: Bosideng's market share in the down apparel industry

Sources: Bosideng International; CIIC; BNP Paribas

Moreover, when we compare Hong Kong/China listed apparel companies, we can see that Bosideng is not only sizeable in terms of revenue and retail sales, but also in terms of operating profit. The unique market positioning that helps Bosideng avoid fierce competition, the well-accepted brand image in the down apparel segment, and the extensive retail network all enable Bosideng to achieve the size.

Top 106.0%

Top 11~ 203.1%

Top 21~302.0%

The remaining88.9%

39.5 38.0 36.7

0

5

10

15

20

25

30

35

40

45

2008 2009 2010

(%)



EXHIBIT 8: Listed companies' revenue and operating profit in 2011

BBG code Reporting currency Revenue Operating profit

(RMB m) (RMB m)

Bosideng Int’l* 3998 HK RMB 8,380 1,686

Sportswear Anta 2020 HK RMB 8,905 2,012

Xstep 1368 HK RMB 5,540 1,219

Peak 1968 HK RMB 4,647 938

Lining 2331 HK RMB 8,929 631

361 degree 1361 HK RMB 2,383 440

Menswear Trinity 891 HK HKD 2,607 614

Lilang 1234 HK RMB 2,708 704

Septwolves 002029 CH RMB 2,921 484

Joeone 601566 CH RMB 2,257 598

Womenswear ESPRIT* 330 HK HKD 27,392 561

I.T.* 999 HK HKD 3,110 376

Ports Design 589 HK RMB 1,985 566

Casual wear Metersbonwe 002269 CH RMB 9,945 1,446

Giordano 709 HK HKD 4,554 737

Note: Bosideng’s financial year ends in March, and we use BNP’s estimated FY12 revenue and operating profit in this table. Esprit’s financial year ends in June and I.T.’s ends in February, and we are using the latest full-year number in this table. Sources: Bosideng International; Companies data; BNP Paribas

Nowadays, China’s retail/apparel industry is becoming increasingly crowded. Global luxury brands, global fast fashion operators, and China domestic brands are all fighting for retail space and customer attention these days. The competition and fashion risks that apparel companies are facing are fiercer than ever before.

But Bosideng is facing less competition in the down apparel industry, compared with sportswear, menswear or womenswear. While the down apparel industry is already relatively mature and consolidated, what Bosideng needs to do to achieve net profit growth is to improve the store efficiency, logistics chain, inventory management skill, to achieve margin expansion, rather than opening new stores.

We are glad to see that Bosideng has been doing so over the past several years. Bosideng has launched several initiatives to improve internally, including:

§ Launching multiple brands to meet demands from different customer groups: Bosideng has four down apparel brands, Bosideng as the core brand targeting the mid- to high-end with trendy and fashionable designs, Bengen as the low- to mid-range brand targeting females in the mass market, Snow Flying as the mid-range brand for the younger generation, and Conbo for male customers in the mass market.

§ Better inventory management: Bosideng launched a new business model in 2010, by offering distributors an extra 6-16% discount on top of the wholesale price while terminating promotional subsidies and 20% goods-return policy. Bosideng is able to maintain the same operating margin by making this change, while facing less inventory risks because distributors under the new policy are usually prone to select products that better match local demand.

§ Using Enterprise Resource Planning (ERP) information system: now unified ERP information system is shared by 90% of stores. Thanks to the ERP system which could provide timely and accurate sales and inventory data, Bosideng started to do flexible small batch production in 2011, which helps it to better control inventory and meet customer needs.

§ Centralized and regional distribution centres: Bosideng streamlined its logistics chain last year, eliminating separate warehouses and ensuring all products are distributed through a logistics centre. This movement enhances logistical efficiency by shortening cross-country product delivery time from three days to one.

We appreciate those management initiatives, and we are expecting steady margin expansion in the next three years thanks to those internal improvements.

In the long run, Bosideng may not be a growth story: the relatively mature development of China’s down apparel market and Bosideng’s extensive retail network (8,434 stores for down apparel) provide difficulties in gaining market share. But we think Bosideng is defensive given the low competition and low fashion risks in the down apparel industry, and we view Bosideng as a mature company offering an attractive dividend

http://www.google.com.hk/url?q=/finance%3Fclient%3Dob%26hl%3Dzh-CN%26q%3DSHA:601566&sa=X&ei=Jh7YT5ngKsvNrQeyruztDw&ved=0CBMQowE&usg=AFQjCNEVfnt1_Z8exS_46ddWS49fD3wilw



yield for investors. Bosideng has paid 122.5%, 90.8% and 118% of net profit as dividends in 2009, 2010 and 2011, and it will lower its dividend payout to around 70% in FY12 and FY13 to save some cash for future M&A opportunities, according to management. Bosideng has been generating healthy operating cash flow from its mature down business, based on our model (Exhibit 9).

EXHIBIT 9: Bosideng's cash flow

Year-end 31 Mar (RMB m) 2009 2010 2011 2012E 2013E 2014E

Net cash generated from operating activities 1,424 1,605 49 1,499 1,434 1,688

Acquisition capex - (612) - (350) (250) (250)

Maintenance capex (36) (179) (144) (150) (150) (150)

Dividends paid (993) (917) (1,189) (1,299) (1,010) (1,018)

Bosideng’s operating cash flow is enough to support future acquisition and dividend payout


EXHIBIT 10: Bosideng's dividend payout ratio


Looking forward, we very cautiously forecast zero growth for Bosideng’s down apparel sales this coming winter given the unforeseeable winter conditions, yet investors could still get 8.1% FY13 dividend yield if they enter at current levels. In the past, Bosideng’s down apparel business dropped 19.5% in FY09 (or winter of 2008), and even under the worst-case scenario of 20% down apparel revenue drop in FY13, Bosideng still offers 7.0% dividend yield to investors to FY13.

EXHIBIT 11: Scenario analysis for Bosideng's 2013 dividend yield

(%) Down apparel revenue growth in 2013 FY13 dividend yield

Best case 10 8.7

Base case 0 8.1

Worst case (20) 7.0


Non-down business: Abundant room to grow

While management believes, and also we believe, that it is increasingly difficult for Bosideng to achieve high growth in the down apparel business, we believe expanding to the non-down segment is the right strategy.

The non-down apparel segment is fragmented and very competitive. Bosideng’s strategy is to acquire brands with a strong brand reputation, in the development stage, and with strong growth prospects and an experienced management team; while Bosideng, as the platform, will help acquired brands to access better sales channels and better store locations, financial support, and share resources like marketing and raw materials.

Now Bosideng has Bosideng Men and Vetallo in the menswear segment; Bosideng Ricci, Mogao and Jessie in the womenswear segment. No-one can guarantee every acquisition will succeed, and Bosideng decided to cease operation of children’s wear and Rocawear business this May. Those two brands together accounted for less than 2% of Bosideng’s revenue for the six months ended 30 September 2011, and don’t have any meaningful impact to Bosideng’s P&L, in our view.

40

50

60

70

80

90

100

110

120

130

2007 2008 2009 2010 2011 2012E 2013E 2014E

(%)



Although the operating environment is tough and some acquisitions turned out to be not that successful, we need to highlight that the expansion into the non-down apparel segment did contribute growth for Bosideng (Exhibit 10) and did not drag down Bosideng’s margin or ROE (Exhibits 11-12).

EXHIBIT 12: Non-down apparel revenue as a % of total

Non down apparel segment has been growing faster than down apparel

Sources: Bosideng International; BNP Paribas

EXHIBIT 13: Bosideng’s gross margin EXHIBIT 14: Bosideng’s ROE



This year, Bosideng’s non down apparel segment is also experiencing challenges during the current downturn. In April’s order-placing meeting for the coming winter, its womenswear brand Jessie saw 21% growth, while its menswear segment reported less than 2% growth. We are cautiously forecast 25% revenue growth for Bosideng’s non down apparel business, which only factors in the revenue contribution from the acquisition of the Jessie brand in last November.

In the long run, we are still confident for the growing demand and market consolidation for the womenswear and menswear market. Good management, consistently improving operation and proper brand management will help players to stand out. Whether Bosideng can successfully help Jessie achieve 25% CAGR in the next three years and achieve its goal of lifting the revenue contribution from non-down apparel to 30% remains to be seen, and we hold a cautious stance here by not factoring in strong growth in the non-down segment yet, but we believe that is the right strategy for Bosideng management.

High dividend supports our BUY

We forecast Bosideng to report RMB1,443m, RMB1,454m and RMB1,624 net profit for FY12, FY13 and FY14, and our key assumptions are listed below. Based on our assumptions, Bosideng’s pre-tax profit will grow at 20.5%, 9.6% and 12.0% y-y in FY12-14, while the net profit will grow at a slow pace of 13.8%, 0.8% and 11.7% given a rising tax rate after the gradual termination of favourable tax rate.

We believe our forecast is conservative enough and there are more upside risks than downside risks for our FY13 earnings forecast, given:

§ We forecast zero growth for down apparel for FY13.

0

2

4

6

8

10

12

14

16

18

20

1H10 2H10 1H11 2H11 1H12

(%)

40

45

50

55

60

2008 2009 2010 2011

(%) Down Non down

10.0

12.5

15.0

17.5

20.0

2008 2009 2010 2011

(%)



§ We are projecting 25% revenue growth for non-down apparel, which is basically only revenue contribution from the newly acquired brand Jessie (Bosideng acquired Jessie in November 2011) and does not factor in any organic revenue growth from the existing business at all.

§ We are only projecting 1% gross margin expansion and 1% operating margin expansion to reflect Bosideng’s improvement on distribution, logistics chain and inventory management.

Our TP of HKD2.20 is based on 9.6x 2013E P/E, with is at par with Bosideng’s historical average P/E. As a yield play, when we use a DDM model to cross check our TP, by modelling in 12% WACC and 0% terminal growth, we could get a fair value of HKD3.10, and our TP is actually 30% lower than the DDM-derived NAV, which is enough to discount high seasonality of Bosideng’s business nature. Bosideng could still offer 7.3% 2012E dividend yield at our TP, which is on a par with the average yield of HK-listed apparel, which also justifies our TP.

Bosideng is now trading at 8.7x FY13E P/E, with an 8.1% dividend yield. We believe the valuation factors in any potential weakness in the coming winter, and the concerns investors are having for Bosideng’s expansion plans in the non-down market. We do see upside risks from our current estimates from better-than-expected down apparel sales, good operation of newly acquired Jessie brand and better-than-expected margin expansion. We like Bosideng’s high dividend yield and attractive valuation and rate it a BUY.

The downside risks include:

§ Down price: The down price fluctuates, and is increasing this year. But Bosideng has prepaid RMB731m for down materials last year, and down only accounts for around 10% of Bosideng’s COGS, so we do not expect gross margin contraction due to the rise of down price. But, a higher-than-expected down price increase may place downside risks to our forecast.

§ Operating margin: We are expecting gradual operating margin expansion thanks to Bosideng’s improving operational management. But lower-than-expected operating margin could lead to an earnings cut.

§ Inventory: We are expecting 110-120 inventory days in FY12, FY13 and FY14. Any poorer-than-expected inventory management could lead to lower gross margin and rising working capital, which could place downside risks to our dividend forecast.

EXHIBIT 15: Key assumptions

Year-end 31 Mar 2009 2010 2011 2012E 2013E 2014E

(%) (%) (%) (%) (%) (%)

Revenue growth

Down (19.5) 25.1 21.2 10.0 0.0 6.0

OEM (15.6) 22.6 18.9 17.0 15.0 12.0

Non-down

45.2 110.0 25.0 12.0

Gross margin 45.5 50.3 46.9 47.0 48.0 49.0

Distribution cost as a % of total revenue 24.1 23.4 24.2 24.2 24.2 24.2

Administrative cost as a % of total revenue 6.7 4.1 2.9 3.0 3.0 3.0

Tax rate 3.6 15.6 15.2 19.5 25.0 25.0




EXHIBIT 16: Bosideng’s historical average 12-month forward P/E


EXHIBIT 17: Valuation comparison of China discretional

BBG Market Share ----------- P/E ----------- ---------- P/BV ---------- --------Div yield -------- ----------- ROE -----------

Company code cap price 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E

(USD m) (LC) (x) (x) (x) (x) (x) (x) (%) (%) (%) (%) (%) (%)

Apparel

Bosideng 3998 HK 1,982 1.92 9.6 8.7 8.7 1.8 1.8 1.7 12.3 8.0 8.1 24.1 19.9 20.3

Trinity 891 HK 1,202 5.44 18.0 16.9 15.1 2.9 2.7 2.5 4.2 4.2 4.8 15.8 15.6 16.2

China Lilang 1234 HK 833 5.38 8.5 7.6 6.5 2.4 2.1 1.9 5.5 7.4 8.6 30.9 29.9 30.3

Giordano 709 HK 1,015 5.12 10.6 9.5 8.4 2.8 2.7 2.5 7.4 8.0 9.1 28.3 29.2 30.8

I.T. 999 HK 478 3.02 7.7 7.0 5.7 1.9 1.5 1.3 4.8 5.2 6.2 24.5 22.6 23.8

Average

10.9 10.0 8.9 2.4 2.2 2.0 6.9 6.6 7.4 24.7 23.4 24.3

Footwear

Belle 1880 HK 13,829 12.72 20.7 18.7 16.0 4.5 3.8 3.3 1.4 1.6 1.9 23.3 23.0 23.2

Daphne 210 HK 1,697 7.99 14.0 12.3 10.0 3.2 2.8 2.3 2.1 2.5 3.1 26.1 25.0 25.7

Average

17.3 15.5 13.0 3.9 3.3 2.8 1.8 2.1 2.5 24.7 24.0 24.5

Sportswear

Anta 020 HK 1,788 5.56 6.6 7.5 7.4 1.8 1.6 1.5 9.3 8.3 8.4 28.7 22.6 21.0

361 Degrees 1361 HK 517 1.94 2.7 3.6 3.7 1.0 0.7 0.6 14.6 13.2 12.8 28.7 20.7 18.2

Li Ning 2331 HK 670 4.92 11.0 12.8 9.6 1.2 1.1 1.0 2.8 2.6 3.5 11.3 8.7 10.6

China Dongxiang 3818 HK 585 0.82 36.9 9.5 8.6 0.6 0.5 0.5 1.8 5.4 6.0 1.4 4.9 5.0

Peak 1968 HK 392 1.45 3.2 4.8 4.4 0.6 0.6 0.5 9.6 6.6 7.1 20.7 12.8 12.1

Average

12.1 7.7 6.7 1.0 0.9 0.8 7.6 7.2 7.5 18.2 14.0 13.4

Retailers

Golden Eagle 3308 HK 3,949 15.78 20.8 17.2 14.1 5.5 4.4 3.5 1.5 1.5 1.8 29.4 27.9 28.3

Parkson 3368 HK 2,561 7.07 14.5 13.1 11.2 3.1 2.7 2.4 3.1 3.4 3.9 23.0 22.0 23.6

Intime 1833 HK 1,988 7.72 14.7 13.2 11.6 1.9 1.8 1.6 2.7 3.2 3.6 13.8 14.1 14.5

Lifestyle 1212 HK 3,675 17.14 15.3 14.7 12.7 3.4 3.0 2.6 2.6 2.7 3.1 24.2 21.7 21.9

SaSa 178 HK 1,615 4.45 18.1 15.7 13.1 9.5 6.8 5.8 0.9 4.5 5.4 45.8 47.9 48.0

Average

16.7 14.8 12.6 4.7 3.7 3.2 2.2 3.0 3.6 27.2 26.7 27.3

Sources: Bloomberg; BNP Paribas estimates

0

5

10

15

20

25

30

Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12

(x)

mean = 9.6x

2 SD +

1 SD +

Historical avg.

1 SD -

2 SD -



Financial statement Bosideng International

Profit and Loss (RMB m) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

Revenue 5,738 7,038 8,380 8,822 9,505

Cost of sales ex depreciation (2,827) (3,695) (4,360) (4,451) (4,663)

Gross profit ex depreciation 2,911 3,343 4,020 4,370 4,842

Other operating income 36 20 30 30 30

Operating costs (1,692) (1,947) (2,283) (2,358) (2,539)

Operating EBITDA 1,256 1,415 1,767 2,043 2,333

Depreciation (24) (43) (81) (136) (184)

Goodwill amortisation 0 0 0 0 0

Operating EBIT 1,231 1,372 1,686 1,907 2,149

Net financing costs 46 129 122 74 70

Associates 0 0 0 0 0

Recurring non operating income 0 0 0 0 0

Non recurring items 0 0 0 0 0

Profit before tax 1,277 1,501 1,808 1,981 2,218

Tax (199) (229) (353) (495) (555)

Profit after tax 1,079 1,272 1,455 1,486 1,664

Minority interests 0 (4) (13) (32) (40)

Preferred dividends 0 0 0 0 0

Other items 0 0 0 0 0

Reported net profit 1,079 1,268 1,443 1,454 1,624

Non recurring items & goodwill (net) 0 0 0 0 0

Recurring net profit 1,079 1,268 1,443 1,454 1,624

Per share (RMB)

Recurring EPS * 0.14 0.16 0.18 0.18 0.20

Reported EPS 0.14 0.16 0.18 0.18 0.20

DPS 0.13 0.19 0.13 0.13 0.14

Growth

Revenue (%) 34.2 22.6 19.1 5.3 7.7

Operating EBITDA (%) 88.3 12.7 24.9 15.6 14.2

Operating EBIT (%) 90.7 11.4 22.9 13.1 12.7

Recurring EPS (%) 45.9 17.5 10.5 0.8 11.7

Reported EPS (%) 45.9 17.5 10.5 0.8 11.7

Operating performance

Gross margin inc depreciation (%) 50.3 46.9 47.0 48.0 49.0

Operating EBITDA margin (%) 21.9 20.1 21.1 23.2 24.5

Operating EBIT margin (%) 21.5 19.5 20.1 21.6 22.6

Net margin (%) 18.8 18.0 17.2 16.5 17.1

Effective tax rate (%) 15.6 15.2 19.5 25.0 25.0

Dividend payout on recurring profit (%) 90.8 118.3 70.0 70.0 70.0

Interest cover (x) - - - - -

Inventory days 110.8 102.5 112.1 123.7 124.7

Debtor days 50.5 49.6 49.9 52.9 52.3

Creditor days 118.1 117.7 108.1 118.1 120.1

Operating ROIC (%) 99.7 75.3 58.1 53.7 54.1

Operating ROIC - WACC (%) - - - - -

ROIC (%) 31.2 23.0 22.3 23.6 25.3

ROIC - WACC (%) - - - - -

ROE (%) 16.1 18.5 20.8 20.1 20.9

ROA (%) 13.2 13.3 13.9 13.7 14.9

*Pre exceptional, pre-goodwill and fully diluted

Revenue By Division (RMB m) 2010A 2011A 2012E 2013E 2014E

Down 4,689 5,685 6,253 6,253 6,628

OEM 647 769 899 1,034 1,158

Non-down 402 584 1,227 1,534 1,718


Stable growth in 2013 on

our very cautious

assumptions




Cash Flow (RMB m) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

Recurring net profit 1,079 1,268 1,443 1,454 1,624

Depreciation 24 43 81 136 184

Associates & minorities 0 0 0 0 0

Other non-cash items 131 (154) (134) (72) (53)

Recurring cash flow 1,234 1,157 1,390 1,518 1,754

Change in working capital 371 (1,108) 108 (84) (66)

Capex - maintenance (791) (142) (499) (399) (149)

Capex - new investment 0 0 0 0 0

Free cash flow to equity 815 (93) 1,000 1,036 1,539

Net acquisitions & disposals (612) 0 (350) (250) (250)

Dividends paid (917) (1,189) (1,299) (1,010) (1,018)

Non recurring cash flows (581) (356) 867 105 95

Net cash flow (1,296) (1,638) 218 (119) 366

Equity finance 0 0 0 0 0

Debt finance 0 (164) 868 (455) 0

Movement in cash (1,296) (1,802) 1,086 (574) 366

Per share (RMB)

Recurring cash flow per share 0.16 0.15 0.17 0.19 0.22

FCF to equity per share 0.10 (0.01) 0.12 0.13 0.19

Balance Sheet (RMB m) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

Working capital assets 2,121 3,260 3,376 3,534 3,715

Working capital liabilities (1,428) (1,392) (1,617) (1,691) (1,806)

Net working capital 693 1,868 1,759 1,843 1,909

Tangible fixed assets 214 313 731 993 1,208

Operating invested capital 908 2,181 2,490 2,836 3,117

Goodwill 526 509 509 509 509

Other intangible assets 32 31 30 29 28

Investments 2,360 3,580 2,861 2,861 2,861

Other assets 0 0 0 0 0

Invested capital 3,826 6,302 5,890 6,235 6,515

Cash & equivalents (3,128) (1,418) (2,854) (2,529) (2,896)

Short term debt 0 587 1,455 1,000 1,000

Long term debt * 0 0 0 0 0

Net debt (3,128) (831) (1,399) (1,529) (1,896)

Deferred tax 141 166 166 166 166

Other liabilities 0 0 0 0 0

Total equity 6,813 6,873 7,017 7,461 8,067

Minority interests 0 94 106 138 178

Invested capital 3,826 6,302 5,890 6,235 6,515

* includes convertibles and preferred stock which is being treated as debt

Per share (RMB)

Book value per share 0.88 0.88 0.88 0.93 1.01

Tangible book value per share 0.80 0.81 0.81 0.86 0.94

Financial strength

Net debt/equity (%) (45.9) (11.9) (19.6) (20.1) (23.0)

Net debt/total assets (%) (37.3) (9.1) (13.5) (14.6) (16.9)

Current ratio (x) 3.7 2.4 2.0 2.3 2.4

CF interest cover (x) - - - - -

Valuation 2010A 2011A 2012E 2013E 2014E

Recurring P/E (x) * 11.3 9.7 8.7 8.7 7.8

Recurring P/E @ target price (x) * 13.0 11.1 10.0 9.9 8.9

Reported P/E (x) 11.3 9.7 8.7 8.7 7.8

Dividend yield (%) 8.0 12.3 8.0 8.1 9.0

P/CF (x) 9.9 10.6 9.1 8.3 7.2

P/FCF (x) 15.0 (132.1) 12.6 12.2 8.2

Price/book (x) 1.8 1.8 1.8 1.7 1.6

Price/tangible book (x) 2.0 1.9 1.9 1.8 1.7

EV/EBITDA (x) ** 7.0 7.3 6.5 5.5 4.7

EV/EBITDA @ target price (x) ** 7.7 7.7 6.8 5.8 5.0

EV/invested capital (x) 2.4 1.8 1.9 1.8 1.7

* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income


High dividend



History of change in investment rating and/or target price

Bosideng International (3998 HK)

Sarah Liu started covering this stock from 19-Jun-2012 Price and TP are in local currency

Valuation and risks: Key downside risks to our P/E-based TP include fluctuations in the price of down, lower-than-expected operating margin and poorer-than-expected inventory management.


Date Reco TP

12-Jan-11 HOLD 3.30

2-Nov-11 BUY 2.80

0.41

0.91

1.41

1.91

2.41

2.91

3.41

3.91

4.41

Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

(HKD) Bosideng International Target Price



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RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more.

Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.

* In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Industry Recommendations Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Neutral (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months.

Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 18 June 2012)

Total BNP Paribas coverage universe 546 Investment Banking Relationship (%)

Buy 317 Buy 3.8

Hold 170 Hold 1.8

Reduce 59 Reduce 3.4

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2012 BNP Paribas Group

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