Recommendation

BUY Target Price: HK$6.98 (+26.8%)

Giordano International (709.HK) SECTOR: Apparel

29 June 2012

HSI: 19,025

EARNINGS

PRICE: HK$5.50 KEY DATA

For the fiscal year ended

2010

2011

2012E

2013E

2014E

Issued Capital (m Shrs)

Turnover (HK$m)

4,731

5,614

6,298

6,987

7,757

Market Cap (HK$m)

1,529 8,410

Operating Profit (HK$m)

695

909

948

1,038

1,096

Avg. Daily Vol. (6 mths)

4,602,599

Net Profit (HK$m)

537

728

814

907

983

High/Low (HK$)

7.22/4.37

EPS (HK$)

0.36

0.48

0.54

0.60

0.65

Net Gearing FY11 (%)

Net Cash

% Change

86%

33%

12%

11%

8%

BV/Share FY11 (HK$)

1.85

PER (x)

15.3

11.5

10.2

9.2

8.5

Free Float

74%

DPS (HK$) Div Yield

0.28

0.38

0.41

0.46

0.47

Major Shareholders

5.1%

6.9%

7.5%

8.4%

8.5%

Cheng Yu Tung (25%) Aberdeen Asset Management (11.3%) Franklin Resources Incorporated (4.8%)

Note2: Differences may arise due to rounding errors Source: Bloomberg, HKEx, Company data, Platinum estimates

SECTION 1

RESULTS BRIEFING

Record sales and earnings driven by strong sales growth in HK and Taiwan

Sales and earnings for FY11 grew by 19% and 36% YoY respectively. Giordano reported strong sales growth of 19% to HK$5,614m and net earnings growth of 36% YoY to HK$728m for FY11, recovering from the FY08/FY09 downturn across all four main areas of the business. Sales were driven by strong SSS growth along with its net add of 184 stores in China and a further 134 across the rest of the group, raising its total number of outlets to 2,671. By region, sales in China grew 13.9% as comparable store sales increased by 6.3% and retail floor space increased by 136,400sq.ft. Sales in Hong Kong and Taiwan grew 21.6% YoY (18.2% excluding the effect of translating Taiwan dollars into Hong Kong dollars), as comparable store sales and sales per sq.ft grew a strong 18.0% and 27%, due to increases in ASP and volume increase of 4.3%. This is despite a major shop closure in Hong Kong due to high rental, although shop adds in Taiwan continued to be strong with 27 shop openings. Sales in the rest of Asia Pacific regions grew 19.7% YoY (12.0% excluding the effect of foreign currencies gains), with same store sales of 7.7%. Sales growth was strong in 1Q of 2011 due to cold weather, but slowed in 2H due to a slower global economy. E-tailing was particularly successful with e-shop extending its operations on platforms such as Taobao, Amazon.cn and 360buy.com. Sales grew from HK$48m by 141.7% to HK$116m.

Gross margin increased by 1% despite increased cotton costs, well done by management

Dividend yield stood at 7% with payout of 79%

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Operating profits and net profits grew by 30.8% and 35.6%. Gross margin managed to rise by 80bps to 58.5% despite worldwide increases in cotton prices, as sales price increases were implemented to recover the cost increases. Operating margin increased 1.5ppts to 16.2%. All markets achieved improving operating margin except China. Net profit grew 35.6%, with net profit margins improving by 1.6ppts to 13%. Strong balance sheets with high dividend payout ratio. 2011 dividend yield stood at 6.9%. Payout of 79% exceeded management guidance of 65-75% range. Net cash to equity continued to improve from 41% in 2010 to 44% in 2011. Its stronger balance sheet enhanced its ability to reward investors with higher dividends. ROAA and ROAE increased by 3.3ppts and 4.6ppts to 21.8% and 28.3% respectively.

IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

SECTION 2

COMPANY BACKGROUND Well known international apparel retailer. Established in 1981 in Hong Kong, Giordano is one of the best known and well established retailer and distributor of casual apparel and accessories in Asia Pacific region carrying brands such as Giordano, Giordano Ladies, Giordano Junior, BSX, and Concepts One. It has a total of 2,671 outlets spread over the Asia Pacific markets, 1,372 of which are in China, as well as in the Middle East, Eastern Europe, Central Asia, and North America. The company also engages in manufacturing apparel, wholesaling, E-commerce, and supplying products to third parties. Chart 2: Retail floor space

No. of stores

1,600

1,372

1,400 1,200 1,000 800 600 400

1,188 1,017

909

820 302360

365 274

351 249

356 256

417 281

200 0

1,400,000 Retail floor space (sq.ft)

Chart 1: Number of Shops

1,173,900

1,200,000

1,037,500

1,000,000

816,800

903,600

800,000 690,700 600,000 400,000

354,300 329,600

358,700 303,600

342,000 272,800

337,200 274,800

380,200 297,000

200,000 0

2007

2008

Mainland

2009

Hong Kong & Taiwan

2010

2011

Rest of Asia Pacific

Source: Company data

SECTION 3

2007

Mainland

2008

2009

Hong Kong & Taiwan

2010

2011

Rest of Asia Pacific

Source: Company data

BUSINESS OUTLOOK Management determined to maintain gross and operating margins. Giordano’s management team has proven its capabilities in expanding the Company’s gross and operating margins by delivering respectable results since 2007. Despite the increase in cotton costs during 2011, the Company managed to improve its gross margins by a 1ppt, largely by transferring the increased costs to its consumers by raising its ASP. We expect margins to remain stable for the group as management continues to exercise prudent cost control and pricing strategies for the current and following years.

Decentralization in management to improve quality of sales by achieving better regional focus and better support to its franchisees E-tailing to grow faster in the longer term

HK billionaire Cheng Yu Tung has taken over the leading shareholder position in Giordano

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Restructured management to advance growth in Mainland markets. In 2H11, Giordano made significant changes to its management structure in China by decentralizing into four regional hubs, located at Beijing(North), Shanghai(East), Guangzhou(South), and Wuhan(West). This decentralisation is expected to significantly improve long-term operational effectiveness in 2012 and beyond. Mainland China’s operations are expected to accrue benefits of faster local decisions, regionally relevant marketing and advertising campaigns. Encouraging E-commerce future prospects. Although contribution from this segment accounted for just 2% of total sales in FY11, we expect it to play a more important role in the longer term, given that e-commerce is becoming one of the preferred shopping channels by the younger generations in China. Moreover, the Company plans to continue develop its E-partnerships with more virtual shopping malls. Major shareholders. Dr. Cheng Yu Tung, is currently the major shareholder with 25% interest. Dr. Cheng first acquired a 14.35% stake on 9 May, 2011 at HK$4.81 per share and had continuously accumulated additional stakes in Giordano on a regular basis. The average price paid for his entire 25% interest in the Company is estimated at HK$5.29 per share. We believe Dr. Cheng’s ownership of the company could bring synergies to Giordano with NWDS on store penetration into T2/T3 cities. Aberdeen Asset Management and its associates is the second major shareholder after Dr. Cheng with 11.34% interest. The group has been one of the major shareholders of Giordano for over a decade.

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SECTION 4

VALUATION

Table 1 - Relative valuation of apparel retailers Companies

Apparel 1 Esprit 2 Texwinca 3 Giordano 4 I.T 5 Pou Sheng Intl* 6 Bossini 7 Crocodile Garment Simple average Mkt cap weighted average

Currently trading at 10.4x FY12e PER, 9.9.x ex-cash and a dividend yield of 7%, we think that the stock is cheap

Ticker

Mkt Cap

Price

52-wk L/H

FY11 PER

FY12E PER

FY13E PER

FY11 PBR

FY12E PBR

(HK$b)

(HK$)

(HK$)

(x)

(x)

(x)

(x)

(x)

(x)

(%)

9.99 7.19 5.50 3.33 0.65 0.49 0.32

7.55/25.75 6.8/11.12 4.37/7.22 2.94/8.12 0.6/1.4 0.47/0.935 0.277/0.487

166.5 12.2 17.6 10.1 6.7 6.0 2.3 30.2 60.5

19.7 11.7 15.9 8.8 8.6 N/A N/A 11.2 12.68

14.0 11.0 14.3 7.7 5.2 N/A N/A 8.8 10.07

0.8 1.9 3.1 2.2 0.4 1.0 0.2 1.4 1.7

0.8 1.7 2.8 1.9 0.4 N/A N/A 1.5 1.60

0.8 1.6 2.7 1.6 0.4 N/A N/A 1.4 1.50

10.0 7.4 6.9 4.4 0.0 10.8 0.0 5.6 7.2

330 HK EQUITY 12.9 321 HK EQUITY 10.3 709 HK EQUITY 8.5 999 HK EQUITY 4.0 3813 HK EQUITY 2.8 592 HK EQUITY 0.8 122 HK EQUITY 0.3

FY13E FY12E FY11 Yield PBR Yield

FY13E Yield

FY12E ROE

(%)

(%)

(%)

3.9 7.7 7.5 3.7 0.0 N/A 0.0 5.6 5.72

4.2 8.2 8.4 4.7 0.0 N/A 0.0 6.3 6.83

4.9 21.7 29.2 21.8 4.5 N/A N/A 16.4 16.62

Strong balance sheets and attractive growth but already priced in. We like Giordano for its strong balance sheets, robust growth prospects, its regionally focused new management structure, and its rapid expansion in 2nd and 3rd-tier cities in the Mainland. Giordano currently trades at 10.4x FY12 PER which we value as inexpensive, and at 9.9x excash and a dividend yield of 6.9%, which we view as attractive with FY11-14e CAGR at 11%. We derive our target price of HK$6.98 by assigning a FY12 PER of 13.05x, which corresponds to the five-year historical average PER. Given Giordano’s proven track record and its execution capabilities, we believe our valuation is justified as it is very likely that the Company will continue to achieve more growth stability. Downside risks: 1) Slower-than-expected recovery in key markets, especially Mainland China, in 2H12. 2) Gross margins proving unsustainable due to slower-than-expected sales and higher pressure on inventory levels. All these factors would result in downside risks to our earnings forecasts and price target.

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Chart 3 – Giordano International Price Chart (2 years) 6/28/2010 - 6/27/2012 (GMT)

Daily GIORDANO INT'L

Price HKD Line, GIORDANO INT'L, Trade Price(Last) 6/27/2012, 5.510 SMA, GIORDANO INT'L, Trade Price(Last), 50 6/27/2012, 6.035 SMA, GIORDANO INT'L, Trade Price(Last), 200 6/27/2012, 5.945 SMA, GIORDANO INT'L, Trade Price(Last), 100 6/27/2012, 6.175

7.8 7.5 7.2 6.9

SMA 100

6.6 6.3

SMA 50

6 5.7 5.4 5.1 4.8 4.5

SMA 200

4.2 3.9 3.6 3.3 3

.123 Vol, GIORDANO INT'L, Trade Price 6/27/2012, 5.200M

Volume 20M 15M 10M 5M .1234

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16 02 16 01 16 04 18 01 16 01 16 03 17 01 16 01 16 01 18 03 16 01 16 04 18 01 16 01 16 03 17 01 16 01 16 03 16 01 16 01 16 02 02 16 01 18 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12

Source: Reuters

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IMPORTANT HONG KONG REGULATORY DISCLOSURES ON HONG KONG LISTED COMPANIES OF WHICH WE HAVE COMMENTED ON. Research Certification. No part of the compensation of the analyst(s)’ who are primarily responsible for producing this report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s)’ in this research. Market Making. This firm does not make a market in securities of the companies covered in this report. Conflicts of Interest. This firm holds a shareholding of less than 1% of Giordano, which can increase or decrease without further notice. The analysts involved in the preparation of this report have no financial interest in the common shares of Giordano. Investment Banking. Within the past 12 months a company controlled by the holding company of this firm has provided investment banking services to, and received compensation from, one of the companies covered in this report; namely Midas Holdings Limited. Relevant relationships. This firm and individuals employed by or associated with the firm are not officers of the companies covered in this report.

GENERAL DISCLOSURES.

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