Baozi secures third place in China's retail market

Baozi (0589) is the third largest retail market in China, ranking second only to international brands Chanel and Louis Vuitton. In addition, Baozi also sells BMW fashion products in China according to a concession plan. Baozi’s successful establishment of the brand was partly due to the earlier landing in the Chinese market and the sale of high-end clothing and accessories since 1993. The image of its international brand has been rooted in the hearts of mainland residents.

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Baozi continued to expand its sales outlets in department stores in the Mainland. We believe that the Chinese business will become the main driving force for the company's future sales growth. In the second half of 2006, the net sales of Ports and BMW's fashion products were 20 and 4 respectively. Currently, 75% of the company's stores are located in department stores. In the future, the number of retail outlets of Ports and BMW will reach 317 and 36 stores respectively.

During our recent visit, the management pointed out that global expansion has been carried out through the wholesale business of high-end department stores around the world. The next step will be to gradually set up counters in high-end department stores in the United States. Its marketing work has achieved remarkable results. Hollywood celebrities Nicole Kidman and Celine Dion are also welcome fans of Ports. The appearance of Ports Fashion in the film also enhances the brand's international reputation.

Baozi will announce 2006 results on the 22nd of this month. We are full of performance in its retail business. Under the expected improvement of OEM and ODM business, overall performance should not be disappointing. We estimate that the company's turnover in 2006 increased by 22% year-on-year to RMB 1.039 billion, and net profit rose by 22% to RMB 201 million (EPS: RMB 0.37). The 2007 profit forecast for the stock rose 25% year-on-year to RMB 252 million (EPS: 0.46 RMB). Baozi’s 2006 P/E ratio is 50x, its P/E ratio to growth ratio (PEG) is 2.1x, Esprit (0330.HK, .55, held)'s relative PEG is 1.2x, unless Ports’ forthcoming performance exceeds expectations, otherwise Its stock price is really expensive.