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EQUITY RESEARCH Consumer | Hong Kong/China Food, Beverages Note fiscal years are March year-end.Source: Company data, Barclays Capital.Why a 1-Overweight? We expect 19% earnings CAGRoverFY11-14Edrivenbyrapidstore expansion. We like L'Occitane's ability to gain market share and it being in a more defensive segment. We see its key positives as its brand strength, solid expansion planWe have factored in conservative estimates on Europe and N. America due to uncertainty in the macroeconomyAnyrecoveryintheretail envrionment could bring significant upside to our growth assumptions. Upside case assumes earnings are 11% above current Downside case is if the global macroeconomic deteriorates further and if Asia retail environment is also significantly impacted.Our downside case assumes earnings are10% belowour current estimates and based on CY12 PE of 18x.050010001500FY07AFY09AFY11AFY13EEUR mnSell-out turnoverSell-in turnover B-2-b turnoverDownside CaseHK$17 (-9.47%) Price TargetHK$23.5 (25.1%)Upside CaseHK$26 (38.4%)81318232821-Sep-101-Sep-11Barclays Capital | L'Occitane International 2 September 2011 3 INVESTMENT SUMMARY We initiate coverage of L’Occitane with a 1-Overweight rating and a price target of HK$23.50. We like L’Occitane for: 1) its strong position in a defensive industry amid the current uncertain macroeconomic conditions, given the company’s proven ability to deliver growth in both good and bad economic times; 2) its strong brand name, which we expect to help deliver sustainable growth; 3) its significant points of sale (POS) expansion plans that will drive growth; and 4) its exposure to Asia (60-70% of its operating profits), positioning the company well to benefit from growth in the region.  Proven record of market share gains in defensive segment: Revenue for the global cosmetics/personal care industry rose 5% for 2008 and 1% for 2009 (source: Euromonitor) despite the tough economic conditions, whereas sales for the global high- end/luxury goods sector fell 2% and 8%, respectively. L’Occitane had a particularly impressive record of market share gains during the period, registering revenue growth in local currency terms of 27% FY2009 (March year end) and 14% for FY2010. Even in developed countries, L’Occitane reported local revenue growth of 38% and 12%, respectively, in Japan; 43% and 1% in France; and 17% and 25% in the UK.  Strong brand likely to sustain long-term growth, sub-segment less crowded. We view L’Occitane’s high-end natural products positioning and its ability to roll out new products (gross additions of 100 new products a year) and generate repeat business as key positives in supporting its expansion plans.  Points of sale additions should drive earnings growth of 19%. Driven by its increases in POS globally, we project a CAGR of 19% for net profit for FY11-14E on a CAGR of 17% for revenue. We expect the “sell-out” segment (mainly self-operated stores) to see a CAGR of 18% for revenue on a CAGR of 15% in store count, with the rest of the growth coming from increases in same store sales (SSS). We project 705 store additions for FY11-15, which is ahead of management’s five-year plan for 650, because we expect store openings in Asia to exceed expectations, although we reckon additions for Europe and the Americas will likely fall slightly short of target. For the “sell-in” segment (sales to wholesalers, distributors, etc.), we forecast a revenue CAGR of 16%.  Significant profit contribution from Asia positions L’Occitane for growth. We estimate that Asia contributes 48% to revenues and 60-70% to EBIT, which is higher than that of its peers. Thus, we believe that L’Occitane presents a better growth story than international peers and, importantly, it is less susceptible to the potentially challenging retail conditions in North America and Europe. Valuation – Initiate coverage at 1-Overweight Our price target of HK$23.50 implies 25% potential upside and is based on a P/E of 22x calendar 2012E EPS, which represents a slight premium to the global cosmetics peer average of 20.4x (see Figure 1). We believe L’Occitane’s stock deserves to trade at a premium valuation due to the company’s faster growth rate compared with that of its peers (peer average forward two-year net profit growth at 13%) and its higher earnings contribution from Asia. Our price target implies a 1.1x PEG (on 20% FY12-14E earnings growth), significantly lower than the peer average of 1.7x and the average of the global high-end/luxury retail stocks (that have a prominent presence in Asia) of 1.5x. A CY12E P/E of 22x is also comparable to the one-year forward historical average P/E for L’Occitane. Initiate coverage of L’ Occitane at 1-Overweight with HK$23.50 PT Barclays Capital | L'Occitane International 2 September 2011 4 We note that our earnings estimates for L’Occitane are 4-5% below the Bloomberg consensus for FY12-13E, but we believe this is explained by our conservative growth f。