Overview

Milan Station is principally engaged in the retail of unused and second-hand luxury branded handbags and apparel products in Hong Kong, China and Macau by operating a total of 14 retail shops under the brand names of “Milan Station” and “France Station”.

Milan Station focused on retail sales of second-hand luxury branded handbags since its establishment. The products offered by the Company include unused and second-hand handbags, clothing, shoes, watches and other accessories. The company currently carried over 20 brands of handbag products and over 30 brands of other products from international luxury fashion houses including Balenciaga, Bottega Veneta, Ce´ line, Chanel, Chloe´, Dior, Fendi, Goyard, Gucci, Hermès, Louis Vuitton, Miu Miu, Prada and Yves Saint Laurent.

For the valuation of Milan station, we adopted the financial multiplier valuation model with focus on P/E ratio. We believe as the luxury goods industry is a globalized, mature and well-covered industry; the comparison can truly reflect intrinsic value of Milan station.

We forecast the leading P/E for Milan station, to be 19.34x and EPS of HKD 0.0972. With the price of HK$1.88 and an implied leading P/E of 20.5x, representing a 6% upside potential. We give Milan station a 12-month target price of HK$1.99 and a “HOLD” rating.

Business Model

Milan Station focuses on the sale of second-hand and unused luxury branded products. The Company's retail shops in Hong Kong and Macau sell both second-hand and unused products while the retail shops in China only sell second-hand products.

Milan Station aims to makes luxury branded handbags more accessible and available. Milan Station provides a platform for its customers to purchase second-hand and unused luxury branded products and sell such products back for cash. All these products sold to the Company shall become its inventories.

Supply and demand

Milan Station relies on two major channels to source products. Public consumers (accounting of about 86% of total supply) who sold their unused or second-hand products to the company. Traders (accounting of about 14% of total supply) who directly purchase the unused products from either overseas or local boutiques or retail shops of international fashion houses or other dealers and then sell such products to the Company.

The following chart shows the market sales value estimation for luxury branded handbags in Asia Pacific from 2006 to 2014:

From this estimate, the Asia Pacific market exhibits a CAGR of 18.8% from 2006 – 2014. Despite the strong growth from 2006 – 2014, we aware the estimated growth rate is expected to slow down form 2012 – 2014. We expected in short to medium term, demand of luxury branded handbags from China (ranked 3rd in 2009 luxury branded handbag sales in Asia-Pacific) would remain robust. This conclusion is drawn from China's rosy economic outlook and possibility of revocation or altering of the value-added tax for the unused products.

Due to the unique business model of Milan Station, the supply and demand for the Company's product is related. For example, a buoyant demand of luxury branded handbags and it may boost he supply of used luxury branded handbags, as consumers may need fund for the purchase. This special relationship will increase the operational risk of the Company.

Product Examination and brand building

Milan Station implements a set of procedures to distinguish whether the products supplied by its suppliers are unused or second-hand products; and prevent the Company from purchasing counterfeit products from its suppliers in order to ensure the products sold and distributed are genuine and authentic products. Most of the products will be authenticated through a two tiers examination process.

After years of operation in Hong Kong, Milan Station successful built up an image of selling genuine and authentic products. In 2010, Milan Station became members of the “No Fakes Pledge” scheme launched by the Hong Kong Intellectual Property Department. Together with the recent IPO, Milan Station further underpinned its “product credibility and brand awareness. We believe the “Milan Station” brand is critical for the unused and second-hand luxury product retail business and brand building would become the major entry barrier for potential competitors.

Provision policy

The cost of the counterfeit products which are found in the Company's retail shops in Hong Kong, Macau and the PRC or products which are unable to be repaired will be fully written off. Besides, Milan Station has a policy of making provision for slow-moving inventories. Handbag products of over 90 days and other products of over 45 days will be recognized as slow-moving inventories. At the end of each year, the Company would make 10% provision on the carrying value of handbags and other products that are aged over 90 days and 45 days, respectively. Additional 10% provision on the carrying value of the inventories will be made if another 90 days and 45 days passed for the handbags and other products respectively and so on.

Investment Thesis

Capturing the China's potential

From 2006 to 2010, China's GDP grew at approximately 10% each year and became the world's second largest economy after the U.S. in 2010. In future, Milan Station's blueprint is to focus its growth in China.

Milan Station plans to further expand its retail network in China by opening an aggregate of 24 retail shops in China by the end of 2013. Out of these 24 shops, 11 of the new shops will be financed by the proceeds from IPO.

Expanding its retail network in China, Milan Station not merely captures the sales potential of the China market, but also exploits a huge potential supply of second-hand luxury products. We believe the development of Milan Station in China would be critical to its future value. We estimate that Milan Station will record a robust growth in 2012.

Advantages over traditional specialty stores

Advantages of Milan Station's retail stores over traditional specialty stores included: 1. Sells of limited edition or popular items 2. One-stop shopping services with a wide variety of luxury brands 3. Discounted price with customer friendly initiatives such as interest-free installment plans

Milan station identifies and focuses on the procurement of limited edition or popular items. Limited edition or popular items are shortage in supply in open market or not readily purchasable from the specialty stores. These items allow the Company to yield a higher revenue but lower profit margin as the Company would offer higher trade-in price to the selling prices listed by the specialty store to attract public consumers to offer for sale of their second-hand or unused limited edition or popular items.

Milan station currently carries over 20 brands of handbag products and over 30 brands of other products from international luxury fashion houses. Milan station provides one-stop shopping services, which attract customers with different luxury brands desire.

In 2010, over 50% of the revenue came from the sales of second-hand products, which normally have a discounted price. This makes the products of the Company became affordable to customer with lower purchasing power and provides a cost-effective way to obtain luxury goods. Milan station also offers customers with customer friendly initiatives such as interest-free installment plans which are not available for purchase at specialty stores.

Risk

Revocation or altering of the value-added tax in China

Currently the China government imposed a 17% value-added tax on imported luxury good. Milan station is currently enjoying a 2% value-added tax on its products as the Company only engaged in retailing of second-hand luxury goods in China. In near future, to stimulate the domestic demand of goods and services, China government may revoke or alter the current value-added tax of 17%. This action will effectively reduce the unused luxury good price in China and pile pressure on Milan station's products` demand and profit margin.

Issue of counterfeit in China

Since joining the World Trade Organization in 2001, China was often accused of its manufacturing of counterfeit. Although China possesses a huge potential supply of second-hand luxury goods, the threat of counterfeit cannot be omitted. Milan station will encounter great difficulties in preventing the intrusion of counterfeit into its supply chain.

Financial Analysis

From the above graph, we can conclude that: 1. Second-hand products offer higher gross profit margin than unused products 2. Products in lower price range offer higher gross profit margin than products in higher price range 3. Retails shops in China and Macau yield better gross profit margin.

We short term, we expected the overall gross profit margin would remain stable, but we expected a drop in overall gross profit margin in medium to long term. In short term, the increase in proportion of sales of high price range products would decrease the overall gross profit margin whereas the expansion in China would increase overall gross profit margin. As a result the overall gross profit margin will remain stable in short term. However, in medium and long term, we expected the gross profit margin from China and Macau market would decrease due to increase in competition and revoke or alter of the value-added tax in China.

Milan station also shows unhealthy signs in inventory turnover and operational cash flow. We believe Milan station's inventory management will improve upon the rapid expansion in China, as it will enjoy a better economic of scale in operation. However, we remain concern on its cash flow management as the rapid expansion in China may pile further pressure on its operational cash flow.

Peers comparison and Valuation

For the valuation of Milan station, we adopted the financial multiplier valuation model with focus on P/E ratio. We believe as the luxury goods industry is a globalized, mature and well-covered industry; the comparison can truly reflect intrinsic value of Milan station.

In our valuation of Milan station, we take the following factors into consideration:

- Estimate sales turnover according to its expansion plan

- Gross profit margin remains constant

- Inflation adjusted selling expense

- An increase in administrative and other operating expenses accounting for the global offering expenses

- A constant tax rate

- Use the average P/E ratio of the peers as reference.

We forecast the leading P/E for Milan station, to be 19.34x and EPS of HKD$0.0972. The current share price of HK$1.88 and an implied leading P/E of 20.5x represent a 6% upside potential. We initiate our coverage of Milan station with a 12-month target price of HK$1.99 and a “HOLD” rating.

Financial information

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