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3Q11 revenue Rmb1.87bn (+48.2% YoY); Net profit attributable toshareholders Rmb137mn (+100.5% YoY) or Rmb0.35/sh, in line withexpectations.

Comments

Demand for luxury watches remains strong, sales of Fiyta expandingrapidly. Passion for luxury watches remains high with increasing demandfor high-end consumer goods. The value of watches imported fromSwitzerland rose 73% YoY in January~August. Following sales channelexpansion, the company saw revenue rise 48.2% YoY in 1~3Q, with YoYgrowth of Harmony watch exceeding 40% and Fiyta’s surpassing 60%.

Affected by macro economic uncertainties, YoY growth in 3Q (41.5%) hasslowed to some extent compared to previous quarters, and it remains to beseen whether the company will maintain strong growth.

Increased gross margin offsets higher selling expense ratio, net marginimproving. Gross margin increased 3.7ppt, thanks to luxury watch pricehikes and higher sales proportion of Fiyta watches (with high GM). Thecompany opened ~40 new stores in 1~3Q, pushing up selling expense ratio1.1ppt YoY. Net margin rose 1.9ppt YoY.

Channel expansion to further boost earnings. The company opened 57Harmony stores in 2010, 48 of which were opened in 2H10, and we expectthese stores to start contributing profits by 4Q11, driving up earnings growthin 2011~2012. The company plans to open 45 new stores in each of the nexttwo years, and the Harmony brand is expected to maintain 45% revenueCAGR. In addition, with improving Fiyta’s brand operation and salesmanagement, we expect to see > 60% growth in the Fiyta brand this year.

Investment recommendationWe maintain our earnings forecasts at Rmb0.47/sh for 2011 and Rmb0.64/shfor 2012. Fiyta-A is trading at 34.2x/24.9x 2011/2012e P/E, while Fiyta-B isat 17.7x/12.9x 2011/2012e P/E. We maintain ACCUMULATE on Fiyta-Aand a BUY rating on Fiyta-B given the great growth potential of luxurywatch consumption in China. We suggest long-term investors buy the stock.

RisksDouble-dip economic recession; luxury watch consumption loses steamagain; lower valuation due to a fall of the broader market.