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Consumer Brands & Retail Global Luxury Goods Company report Equity – France Essilor (EI FP) Buy: Bigger playing field becomes reality Buy Target price (EUR) Share price (EUR) Upside/Downside (%) Dec HSBC EPS HSBC PE 131.00 108.90 20.3 2014 a 2015 e 2016 e 2.99 36.5 3.67 29.6 4.15 26.2 Performance 1M 3M 12M Absolute (%) Relative (%) 2.3 6.9 1.8 9.7 25.3 22.7 2 October 2015 Anne-Laure Jamain * Analyst HSBC Bank plc +44 20 7991 6587 [email protected] Antoine Belge * Analyst HSBC Bank plc, Paris branch +33 1 56 52 4347 [email protected] Erwan Rambourg * Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6572 [email protected] View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Bank plc Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it “A captain of industry” in corrective lenses playing in a bigger playing field with the expansion in sun and online, and, we believe, likely also at some stage in contact lenses We forecast +5% pure organic sales growth for Q3 15 due on 22 October 2015 Retain Buy, raise target price to EUR131 (from EUR125) on DCF rollover to 2016e partially offset by our 2015e-17e EPS cut Essilor remains by far a “captain of industry” in the corrective lenses but also in the optical instruments market. The expansion in new markets (sun and online) supported by the global roll-out of direct-to-consumer marketing campaigns (a game changer in our view as it is targeting directly end consumers and not opticians) is acting as a catalyst for further market share gains in a highly fragmented market. Essilor increased its market share in volume from 36% in 2012 to 39% in 2014. Ongoing investments in media spending should enable the group to meet its +4.5% sales growth at constant FX and perimeter target in FY2015. We forecast +4.6% for FY15e and +5% in Q3 15e due on 22 October. The optical market is still significantly underpenetrated. The “Growing in a Bigger Playing Field” strategy presented by Essilor at its June 2014 Investor Day is becoming a reality, especially with the good execution in terms of expansion in sun and online. The group is now not only addressing the needs of vision correction of 4.2bn people globally but potentially of 7.2bn in needs of corrective and protective lenses. Whilst the group was mostly involved in prescription lenses (a cEUR11bn market in FY14e growing at 3-4% p.a), it now intends to address a larger market which is expected to reach EUR27bn by 2018 growing at +6-7% p.a, according to Essilor’s own projections, by expanding into the sunglasses market (estimated at EUR8.5bn by FY18e, growing at +6-7% p.a) and the online market (EUR5.8bn by 2018e, growing at +14% p.a). Longer-term, we believe Essilor could also decide to expand into contact lenses, which could be another attractive segment, especially with the increase in number of people affected by myopia in China. Retain Buy rating and raise target price to EUR131 (from EUR125) on the back of our DCF rollover to 2016e, partially offset by our 4%, 3% and 3% EPS cut in FY2015e-17e respectively due to a higher tax rate. In 2015e, tax rate should increase 200bps to 28% due to a less favourable geographical mix. Essilor is currently trading at 29.6xPE2015e and 26.2xPE2016e, a 90% premium to the DJ Stoxx 600 (above its 10-year average of 77%) but is offering superior visibility on continuous earnings growth (23% EPS growth in FY2015e and 13% in FY16e-17e respectively). In addition, in the current market environment, Essilor’s defensive status should appeal to risk –adverse investors. Index Index level RIC Bloomberg Source: HSBC SBF-120 3,500 ESSI.PA EI FP Enterprise value (EURm) Free float (%) Market cap (USDm) Market cap (EURm) Source: HSBC [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International 25099 92 26,274 23,537 abc Essilor (EI FP) Global Luxury Goods 2 October 2015 Financials & valuation Financial statements DCF analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit 5,670 1,440 -451 989 -32 948 948 -246 930 642 6,774 1,543 -332 1,211 -24 1,187 1,187 -332 789 789 7,347 1,708 -360 1,348 -19 1,328 1,328 -365 892 892 8,005 1,893 -392 1,501 -14 1,487 1,487 -404 1,005 1,005 1,032 -232 -2,068 -198 1,438 940 1,037 -339 -569 -219 14 624 1,290 -331 -580 -269 -451 879 1,429 -360 -632 -304 -498 984 Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (EURm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 6,200 1,154 3,162 626 10,789 2,418 2,447 1,821 4,915 7,472 6,200 1,391 3,671 675 11,535 2,655 2,510 1,835 5,359 7,933 6,200 1,612 4,031 799 12,116 2,777 2,183 1,384 6,140 8,266 6,200 1,852 4,755 1,252 13,080 2,918 2,138 886 7,003 8,636 Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e 11.9 32.1 17.3 12.2 7.3 19.5 7.1 22.4 25.2 22.9 8.5 10.7 11.3 11.9 13.0 9.0 10.9 11.4 11.9 12.6 Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS DCF, comprising Risk-free rate (%) Equity premium (%) Sector beta Specific beta 3.50 5.50 0.90 0.50 EBIT growth 2015-25e CAGR (%) EBIT growth 2025-45e CAGR (%) Fade period 2045-53e WACC (%) 1.0 12.3 14.8 7.9 25.4 17.4 45.0 34.6 1.3 56.7 0.9 11.3 15.4 7.9 22.8 17.9 63.4 32.2 1.2 56.5 0.9 12.1 15.5 8.3 23.2 18.3 88.4 21.3 0.8 93.2 0.9 12.9 15.3 8.7 23.6 18.7 132.1 12.1 0.5 161.3 Cost of capital vs fade period 4.33 2.99 1.02 22.88 3.67 3.67 1.25 24.95 4.15 4.15 1.42 28.58 4.68 4.68 1.60 32.60 5.88 4.9% 5.4% 5.9% 6.4% 6.9% 4 years 8 years 12 years 160 142 126 113 102 168 148 131 117 105 169 151 136 122 110 Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e 4.4 17.4 3.4 36.5 4.8 4.0 0.9 3.7 16.3 3.2 29.6 4.4 2.7 1.2 3.4 14.4 3.0 26.2 3.8 3.8 1.3 3.0 12.8 2.8 23.3 3.3 4.2 1.5 EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Price relative 121 121 111 111 101 101 91 91 81 81 71 71 61 Oct-13 Apr-14 Oct-14 Apr-15 Essilor Rel to SBF-120 Note: price at close of 30 Sep 2015 Per share data (EUR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS Book value 8.6 4.6 Sensitivity and valuation range Source: HSBC Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt HSBC assumptions 2 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International 61 Oct-15 abc Essilor (EI FP) Global Luxury Goods 2 October 2015 Bigger playing field becomes reality "A captain of industry" in corrective lenses playing in a bigger playing field with the expansion in sun and online, and, we believe, likely also at some stage in contact lenses We forecast +5% pure organic sales growth for Q3 15 due on 22 October 2015 Retain Buy, raise target price to EUR131 (from EUR125) on DCF rollover to 2016e partially offset by our 2015e-17e EPS cut Bigger playing field with the expansion in sun and online 39% volume market share in 2014 (vs 36% in FY2012) of the global lens market Essilor has the competitive advantage of being “the captain of industry” in corrective lenses as well as in optical instruments. The group increased its market share in volume to 39% in FY2014 (from 37% in FY13 vs 36% in FY12) with also the largest share of the R&D development, accounting for 75%. However, since 2014, Essilor had widened its playing field: whilst the group was mostly involved in prescription lenses (a cEUR11bn market in FY14e growing at +3-4% p.a), it now intends to address a larger market which is expected to reach EUR27bn by 2018e growing at +6-7% p.a, according to Essilor’s own projections, by expanding into the sunglasses market (estimated at EUR8.5bn by FY18e, growing at+ 6-7% p.a) and the online market (EUR5.8bn by 2018e, growing at +14% pa). Longer-term, we believe Essilor could also decide to expand into contact lenses, which could be another attractive segment, especially in China (6% of the group sales) where there is a large number of people affected by myopia (estimated at c800m). Essilor: Share of the global lens market 2014 (volume) Essilor: Share of global eyewear R&D spent 2014 Other industry players 25% Others 43% Essilor 39% Carl Zeiss 7% Essilor 75% Hoya 11% Source: Essilor, HSBC estimates Source: Essilor 3 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International abc Essilor (EI FP) Global Luxury Goods 2 October 2015 Raising its brands awareness through Direct-to-consumer media campaigns We continue to believe direct-to-consumer marketing campaigns - targeting directly end consumer and not opticians - are a game changer. From the synergies derived from the integration of Transitions – acquired in 2014 - the group has decided to re-invest some in advertising. This strategy boosted organic sales growth in H1 2015 and should continue to do so going forward by increasing Essilor brand awareness in lenses and in other categories (i.e sunwear). Management mentioned during the H1 15 conference call that the group was planning to invest EUR215m in FY15e in media campaigns (vs EUR150m in FY2014). Note that no indications have been shared regarding FY2016. Sun and online industry segments offer the biggest growth opportunities At this stage, sun and online are Essilor’s main expansion priorities. Breakdown of the EUR27bn market targeted by Essilor by 2018e 30 27.0 25 20 15 12.7 8.5 10 5.8 5 0 a EUR27bn market by 2018e Prescription lenses Sunglasses Online Source: Essilor Essilor sales in lenses accounted for 88% of the group sales in FY2014, a market segment in which the group has by far the most significant share of R&D vs peers with c75% end FY2014. Essilor is now transferring its know-how in optical lenses to sunglasses, in improving online consumer experience but also developing affordable innovations dedicated to Fast-Growing markets (23% of the group sales in FY2014), which are key for the group to capture growth in every market segments. In addition, the above-mentioned media campaigns are also supporting the growth of the sun and online segments. Online is well fitted for easily solved visual problems Essilor online sales are still very small in the group sales mix with cEUR200m in FY2014. The group plans to reach EUR400-500m in online sales by 2018. Online has the advantage to give access to visual correction for easily solved problems such as myopia, well fitted for countries where there is a lack of optometrists. In China, there is a large number of people affected by myopia (c800m), people in need of visual correction can have a direct access to visual correction through the online channel while there is a lack of professionals especially in Tier 4 & 5 cities. Note that even if North America accounts for c60% of Essilor’s total on-line sales due to the weight of the acquisition of Coastal.com, the penetration for the online business is much higher in China than in Europe and North America, which we take as a positive for future growth in Europe and North America. 4 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International abc Essilor (EI FP) Global Luxury Goods 2 October 2015 Essilor: online regional sales mix in FY2014e Rest of the world 20% Europe 20% North America 60% Source: Essilor Sunwear (12% of the group sales in FY2014) Sunwear reached 12% of Essilor sales in FY2014. Management expects to reach EUR1.1bn sales by 2018 implying a 10% CAGR. The strategic goal for this division is to innovate beyond fashion by boosting lens performance, but also to acquire and develop strong regional brands and to have a wide price offering and channel expertise. In addition, by expanding in sun, the group is addressing a larger market by offering a visual protection and not only a visual correction to 4.2bn people globally but potentially to 7.2bn in needs of corrective and protective lenses. Note that corrective lenses only account for 5% of the sun business. Contact lenses could be another attractive segment for Essilor We estimate that the contact lenses market value was cEUR6bn in FY2014e growing at a slightly higher pace (i.e at +5% p.a) than prescription lenses (+3-4% p.a). It could add another cEUR7bn to Essilor’s EUR27bn targeted market by 2018e. We believe that longer-term, Essilor could also decide to expand into contact lenses, which could be another attractive segment for the group, especially in China where there is a large number of people affected by myopia (estimated at c800m). The contact lenses market is highly concentrated, according to GIA, the global market share of Johnson and Johnson, Ciba Vision, Bausch & Lomb and Cooper was c90% in 2011 and we do not see any material reason why it should have changed that much in FY2014. Even if we understand from Essilor that the main priority between now and 2018 is about expanding in sun and online, we believe there is no structural reason which can explain why Essilor would not be interested in developing in this market segment. We believe that contact lenses could be another attractive opportunity for the group. In our view, it would be a good complement to Essilor’s existing portfolio. Essilor is relatively small in this market, only distributing (not manufacturing) contact lenses through two channels: (i) the opticians (sales of cEUR113m in FY14e) and (ii) Coastal.com (73% of its sales).We believe that Essilor could potentially expand in contact lenses through acquisitions either of small players or larger groups. Potential merger with Luxottica M&A will continue to be a significant part of the business model of Essilor. While Essilor is the captain of the industry in lenses and optical instruments, Luxottica (LUX MI, Hold, EUR62, TP EUR66) is the captain in framewear. We believe Luxottica’s main focus is likely to be on acquiring retail chains in emerging markets, with the intention to re-brand the acquired stores into LensCrafters or Sunglass Hut, 5 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International Essilor (EI FP) Global Luxury Goods 2 October 2015 abc while Essilor is likely to continue to acquire laboratories, distributors and build its sunwear and online businesses. Regarding Luxottica, the potential to add new brands or new licence contracts to the existing portfolio is less significant than in the past, so any possible acquisition in this area would be likely to be an add-on rather than a strategic deal. During Luxottica’s 1 September 2014 conference call, Luxottica mentioned that a potential merger had been envisaged with Essilor. During Luxottica’s investor day on March 3rd 2015 management stressed that each of the two companies had its specific strength (lenses for Essilor, frames for Luxottica), but did not say anything other than "we will see". In our view, a possible merger between Luxottica and Essilor would have strategic merit, as it would combine the worldwide leader in frames with that of lenses and would generate significant distribution synergies. We note that the two groups have relatively similar market caps (EUR28bn for Luxottica and EUR22bn for Essilor). The main hurdle in our view would relate to corporate governance, ie what type of involvement in the new entity the Del Vecchio family (which owns 61% of Luxottica shares) would ask for and which would not be seen as an issue by Essilor, as was highlighted in the FT press article of 2 September 2014. Earnings valuation and risks H1 2015 earnings released on 30 July 2015 H1 2015 “contribution from operations” grew 24% y-o-y to EUR651m, implying a “contribution from operations” margin up 20bps to 19.1%. Gross margin improvement of 190bps in H1 15 to 59.9% margin was partially offset by higher operating expenses which increased 170bps as % of sales to 40.8% mainly due higher media spend. Q2 2015 sales came in at EUR1,749m up 20% reported and 4.4% at constant FX and perimeter. Sales growth at constant FX and perimeter in Q2 15 showed a slight acceleration from the +4.0% achieved in Q1 15, mainly driven by a solid acceleration in Europe boosted by the direct to consumer marketing campaigns. Tax rate came in at 29% in H1 15 much higher than in H1 14 due changes in the scope of consolidation and increased sales in North America. EPS rose 19% y-o-y to EUR1.83 Unchanged FY2015 guidance Management unchanged its FY2015 guidance of sales growth at constant FX and perimeter in excess of 4.5% and 8-11% sales growth at constant FX. The “contribution from operation margin” is expected to be at least 18.8% (vs 18.6% in 2014). In FY2015 tax rate should increase to c28% (i.e by 200bps vs FY14, vs 29% in H1 15), due to a less favourable regional mix. An improvement is expected in FY2016-17, an update provided in H2 15. Q3 2015 sales due on 22 October 2015 Essilor will report its Q3 2015 sales on 22 October. We expect organic sales growth at constant FX and perimeter of 5%, accelerating sequentially from the 4% reported in Q1 15 and 4.4% in Q3 15. By region, we believe that the performance in Europe should remain solid (HSBCe +4.5% vs +5% in Q2 15) as well as in North America (HSBCe +3.5% vs +3.7% in Q2 15). Asia-Pacific should improve, our forecast assumes a +7.2% organic sales growth rate in Q3 15 (vs 5.2% in Q2 15), and +10.5% in Latin America in line with Q2. Laboratory equipment should remain in negative territory. It should remain impacted by 6 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International abc Essilor (EI FP) Global Luxury Goods 2 October 2015 intra-group sales to acquired companies. For FGX we expect growth at constant FX and perimeter of +6.2% (vs 3.2% in Q2 15). Essilor: quarterly sales growth at constant Fx and perimeter FY2013-17e 7.0% 6.0% 6.0% 5.0% 5.0% 4.0% 3.9% 3.5% 3.1% 3.0% 5.0% 3.7% 4.0% 4.4% 5.0% 5.5% 4.6% 2.9% 2.3% 2.1% 2.4% 2.0% 1.0% 0.1% 0.0% Q1 13 Q2 13 Q3 13 Q4 13 FY2013 Q1 14 Q2 14 Q3 14 Q4 14 FY2014 Q1 15 Q2 15 Q3 15e Q4 15e FY2015e FY2016eFY 2017e Source: Essilor, HSBC estimates 2015-17 EPS estimates cut by 4%, 3% and 3% respectively We cut our 2015-17 EPS estimates by 4%, 3% and 3% respectively due to a higher tax rate for FY15e-18e. For FY2015e, we expect organic sales growth at constant FX and perimeter of 4.6% implying a 5.0% growth rate in both Q3 and Q4 15e which should remain boosted by the direct-toconsumer marketing campaigns but also an improved performance in Asia, product innovations and the ramp-up of new contracts in Europe and in the US (with CVS for instance). Our forecasts assume “a contribution from operations” of 18.9% (vs 19.1% in H1 2015). Note that the positive impact from FX at the top line level (10% in FY15e) is only a conversion impact ie no impact on the EBIT margin in comparison with exporters such as luxury goods companies as Essilor manufactures locally. For FY16e-17e, we expect organic sales growth at constant FX and perimeter in excess of 5% at respectively 5.5% and 6.0% and “a contribution from operations” of 19.3% and 19.6% respectively. We are now 1%, 2% and 4% above Bloomberg consensus estimates. Essilor: Summary of HSBC sales estimate changes and comparison with Bloomberg consensus (EURm) Sales EBIT* EPS* _________________ 2015e ________________ _________________ 2016e __________________ __________________2017e __________________ ___ HSBC ____ HSBC __ HSBC____ HSBC ___ HSBC ____ HSBC New Old Cons Chg vs Cons New Old Cons Chg vs Cons New Old Cons Chg vs Cons 6,774 1,211 3.67 6,789 1,229 3.83 6,771 1,227 3.67 0% -1% -4% 0% -1% 0% 7,437 1,348 4.15 7,363 1,356 4.28 7,299 1,353 4.13 0% -1% -3% 1% 0% 1% 8,005 1,501 4.68 8,023 1,502 4.80 7,837 1,469 4.55 0% 0% -3% 2% 2% 3% * Note that our 2015 numbers are on an adjusted basis, ie not affected by the treatment of exceptionals mainly related to Transitions Source: HSBC estimates, Bloomberg consensus Valuation and risks We raise our fair value target price to EUR131 (from EUR125) mainly on the back of our DCF roll-over to 2016e, partially offset by our 2015e-17e EPS cut. The assumptions used in our DCF are detailed on page 2. Our target price of EUR131 implies an upside potential of 20%. Therefore we retain our Buy rating. Essilor is currently trading at 29.6xPE2015e and 26.2xPE2016e, a 90% premium to the DJ Stoxx 600 (above its 10-year average of 77%) but is offering superior visibility on continuous earnings growth (23% 7 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International abc Essilor (EI FP) Global Luxury Goods 2 October 2015 EPS growth in FY2015e and 13% in FY16-17 respectively). In addition, in the current market environment, Essilor’s defensive status should appeal to risk –adverse investors. Essilor – Forward PE since 01/01/2002 Essilor – Forward PE rel. to DJStoxx600 since 01/01/2002 30 x 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5 28 x 26 x 24 x 22 x 20 x 18 x Average since 01/02/04: 21.7x 16 x 14 x 12 x Average since 01/02/14: 1.7 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Source: Factset Source: Factset Downside risks to our rating include: (i) lower than-expected “pure” organic sales growth, (ii) lower contributions from acquisitions, (iii) depreciation of the USD against the EUR. From a share price perspective, sector rotation out of defensive stocks in favour of cyclical stocks is theoretical downside risks. Essilor – P&L EURm Revenue Cost of sales Gross profit Gross margin Research and development costs Selling and distribution costs Other operating expenses Total SG&A SG&A as % of sales Contribution from operations Contribution as a % of sales Compensation costs on share-based payments and others Operating profit (EBIT) EBIT margin Finance costs Income from cash and cash equivalents Other financial income and expenses, net Profit before taxes Income taxes Tax rate Net profit of fully-consolidated companies Share of profits of associates Profit for the period Attributable to minority interests Adjusted net attributable profit EPS (basic) EUR EPS (Diluted) EUR YoY evolution Sales Gross profit SG&A EBIT Adjusted net attributable profit EPS diluted 2006 2007 2008 2,690 -1,123 1,567 58.2% 128 605 352 1,084 40.3% 483 17.9% -22 460 17.1% -31 20 -9 441 -138 31.2% 303 29 332 3 329 1.61 1.55 2,908 -1,234 1,674 57.6% 138 643 366 1,147 39.4% 527 18.1% -23 505 17.4% -36 33 -4 498 -156 31.3% 342 29 371 4 367 1.78 1.74 3,074 -1,325 1,749 56.9% 145 672 381 1,198 39.0% 551 17.9% -37 514 16.7% -28 29 -3 512 -149 29.2% 363 26 389 6 382 1.85 1.81 11.0% 12.7% 12.0% 16.7% 14.2% 13.9% 8.1% 6.8% 5.8% 9.6% 11.6% 12.2% 5.7% 4.5% 4.5% 2.0% 4.3% 4.0% 2009 2010 2011 2012 2013 2014* 2015e 2016e 2017e 3,268 3,892 4,190 4,989 5,065 5,670 6,774 7,347 8,005 -1,435 -1,732 -1,868 -2,205 -2,227 -2,342 -2,720 -2,928 -3,174 1,833 2,160 2,321 2,784 2,838 3,328 4,054 4,419 4,831 56.1% 55.5% 55.4% 55.8% 56.0% 58.7% 59.9% 60.2% 60.4% 151 151 151 162 164 188 217 238 261 707 860 960 1,140 1,145 1,367 1,687 1,837 1,993 380 444 462 588 612 717 868 930 1,003 1,238 1,455 1,573 1,889 1,921 2,271 2,772 3,004 3,258 37.9% 37.4% 37.6% 37.9% 37.9% 40.1% 40.9% 40.9% 40.7% 595 705 748 894 917 1,057 1,282 1,415 1,573 18.2% 18.1% 17.9% 17.9% 18.1% 18.6% 18.9% 19.3% 19.6% -39 -86 -65 -62 -74 -68 -71 -67 -72 555 618 683 832 843 989 1,211 1,348 1,501 17.0% 15.9% 16.3% 16.7% 16.6% 17.4% 17.9% 18.3% 18.7% -32 -12 -14 -24 -26 -32 -33 -28 -23 19 9 11 17 18 0 9 9 9 2 -8 -10 -11 -12 -12 0 0 0 544 608 670 814 823 945 1,187 1,328 1,487 -168 -167 -179 -207 -199 -246 -332 -365 -404 30.9% -27.5% -26.8% -25.5% -24.2% -26.0% -28.0% -27.5% -27.2% 376 440 490 607 624 699 854 963 1,082 26 32 28 24 22 3 0 0 0 402 472 518 630 646 702 854 963 1,082 8 10 13 46 53 60 65 71 78 394 462 506 584 593 642 789 892 1,005 1.91 2.20 2.44 2.80 2.82 3.05 3.75 4.24 4.77 1.89 2.18 2.41 2.77 2.78 2.99 3.67 4.15 4.68 6.3% 4.8% 3.3% 7.9% 3.0% 4.3% 19.1% 17.8% 17.5% 11.4% 17.3% 15.3% 7.7% 7.5% 8.1% 10.4% 9.5% 10.6% 19.1% 19.9% 20.1% 21.8% 15.5% 14.8% 1.5% 2.0% 1.7% 1.4% 1.5% 0.6% 11.9% 17.3% 18.2% 17.3% 8.2% 7.3% Note*adjusted for non-recurring items mainly related to the Transitions Optical, Coastal.com and Costa acquisitions Source: company data, HSBC estimates 8 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International 19.5% 21.8% 22.1% 22.4% 22.9% 22.9% 8.5% 9.0% 8.4% 11.3% 13.0% 13.0% 9.0% 9.3% 8.4% 11.4% 12.6% 12.6% Essilor (EI FP) Global Luxury Goods 2 October 2015 abc Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Anne-Laure Jamain, Antoine Belge and Erwan Rambourg Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating. From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates). Upside/Downside is the percentage difference between the target price and the share price. Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral. *A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. 9 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International abc Essilor (EI FP) Global Luxury Goods 2 October 2015 Rating distribution for long-term investment opportunities As of 01 October 2015, the distribution of all ratings published is as follows: Buy 46% (32% of these provided with Investment Banking Services) Hold 40% (29% of these provided with Investment Banking Services) Sell 14% (18% of these provided with Investment Banking Services) For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above. Share price and rating changes for long-term investment opportunities Recommendation & price target history Essilor (ESSI.PA) Share Price performance EUR Vs HSBC rating history From Underweight Overweight Target Price 116 106 96 86 76 66 56 46 36 26 Oct-15 Oct-14 Oct-13 Oct-12 Oct-11 Oct-10 Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 To Date Overweight Buy Value 09 January 2013 31 March 2015 Date 70.00 90.00 94.00 97.00 94.00 100.00 104.00 125.00 22 October 2012 09 January 2013 08 March 2013 14 October 2013 17 February 2014 16 June 2014 05 November 2014 31 March 2015 Source: HSBC Source: HSBC HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure ESSILOR ESSI.PA 108.90 30-Sep-2015 2, 4, 5, 6 Source: HSBC 1 2 3 4 5 6 7 8 9 10 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 31 August 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 10 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International Essilor (EI FP) Global Luxury Goods 2 October 2015 11 abc At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. Additional disclosures 1 2 3 This report is dated as at 02 October 2015. All market data included in this report are dated as at close 30 September 2015, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 11 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International Essilor (EI FP) Global Luxury Goods 2 October 2015 abc Disclaimer * Legal entities as at 30 May 2014 Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation HSBC Bank plc Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, 8 Canada Square Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 London, E14 5HQ, United Kingdom HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Telephone: +44 20 7991 8888 Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Fax: +44 20 7992 4880 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Website: www.research.hsbc.com Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. 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MICA (P) 073/06/2015 , MICA (P) 136/02/2015 and MICA (P) 041/01/2015 12 [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International abc Global Consumer Brands & Retail Research Team Europe Asia Consumer Brands & Retail Antoine Belge Head of Consumer Brands and Retail Equity Research +33 1 56 52 43 47 [email protected] Consumer Brands & Retail Erwan Rambourg Head of Consumer Brands and Retail Equity Research +852 2996 6572 [email protected] Anne-Laure Jamain Analyst +44 207 991 6587 [email protected] David McCarthy Head of Consumer Retail, Europe +44 207 992 1326 [email protected] Christopher Leung Analyst +852 2996 6531 [email protected] Lina Yan Analyst +852 2822 4344 [email protected] Catherine Chao Analyst +852 2996 6570 [email protected] Andrew Porteous Analyst +44 20 7992 4647 [email protected] Paul Rossington Analyst +44 20 7991 6734 Charlene Liu Analyst +65 6658 0615 [email protected] [email protected] Scott Chan +852 3941 7005 [email protected] Karen Choi Analyst +822 3706 8781 [email protected] Jérôme Samuel Analyst +33 1 56 52 44 23 [email protected] Emmanuelle Vigneron Analyst +33 1 56 52 43 19 [email protected] Graham Jones Analyst +44 20 7992 5347 Permada (Mada) Darmono Analyst +65 6658 0613 [email protected] Amit Sachdeva Analyst +91 22 2268 1240 [email protected] Kuldeep Gangwar Analyst +91 22 3396 0686 [email protected] Anthony Bucalo Analyst - Beverages +44 20 7991 9815 [email protected] Chloe Wu Analyst + 8862 6631 2866 [email protected] CEEMEA Jenny Chae Associate +822 3706 8774 [email protected] Damian McNeela Analyst +44 20 7992 4223 [email protected] [email protected] Consumer Brands & Retail Bulent Yurdagul Analyst +90 212 3764612 [email protected] North & Latin America Jeanine Womersley Analyst +27 21 6741082 [email protected] Consumer & Retail Richard Cathcart Analyst +55 11 2169 4429 [email protected] Ankur P Agarwal Analyst +966 11 299 2103 [email protected] Ana C Hernandez Associate +52 55 5721 2745 [email protected] [email protected] Mariana Vergueiro Associate +55 11 3847 6066 [email protected] Yazeed Al Turki Analyst +966 11 299 2260 Food & Beverage Carlos Laboy Global Head of Beverages Research +1 212 525 6972 [email protected] Specialist Sales David Harrington +44 20 7991 5389 [email protected] James Watson, CFA Analyst +1 212 525 4905 [email protected] Henry Nasser Analyst +55 11 2169 4424 [email protected] Agricultural Products Alexandre Falcao Analyst +55 11 3371 8203 [email protected] Ravi Jain Analyst +1 212 525 3442 [email protected] Gustavo Gregori Analyst +55 11 3847 9881 [email protected] [email protected] Christine Balle 10/02/15 04:25:40 AM Essilor International