COMPANY UPDATE. March 16, 2018

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1 Summary. The 2017 results of Emperor Watch & Jewellery (EWJ) is an another example showing that high-end luxury retail market in Hong Kong has recovered. The Company s performance in Jan-Feb 2018 is even more encouraging, as SSSG growth was in the mid-30% range. We believe the operating leverage will become more visible in The Company has been long forgotten by the market, but we believe the results may attract investors attention again. We reiterate our positive view on other Hong Kong-based retailers based on the solid results and bullish outlook of EWJ. The Company. Founded in 1940s, EWJ is a Hong Kong-based luxury watch and jewellery retailer with watches accounting for approximately 80% of revenue. It is one of Hong Kong s leading distributors of high-end watch brands, such as Rolex, Cartier and Patek Philippe. Yeung Sau Shing, Albert s family trust is the largest shareholder, with a 52.76% stake. Visible Exposure to Hong Kong s High-End Luxury Retail. As at the end of 31 December 2017, EWJ had 24 stores in Hong Kong and 46 in mainland China. The Company has a significant presence in Hong Kong s prime retail locations, namely Russell Street, Causeway Bay and Canton Road, Tsim Sha Tsui. The stores located there are usually the best performing stores and help enhance Emperor s bargaining power with suppliers (such as Rolex SA). Some of the stores in these prime locations are leased from a sister company, Emperor International [163.HK], which is also owned by Mr. Albert Yeung. The Company explained that this arrangement provides stability in rental arrangements, but details for the arrangement have to be announced to provide clarity Turnaround with Strong 2H 2017 Performance. EWJ s NPAT in 2017 was HK$159.7m. This is a huge improvement compared to 2016, in which it had a loss of HK$64.8m. EWJ had recorded losses before taxes since 1H 2015, as the retail market in Hong Kong started to turn sour as early as As consumer sentiment recovered in late 2016, EWJ started to record a profit in 2H 2016, and the operating leverage became more obvious in 2H The turnaround in 2017 can be attributed to: (1) improvement in revenue, with an increase in both ASP and volume for watches, as consumers were willing to buy more expensive models; (2) improvement in GPM, as smaller discounts had to be offered since customers were less price-sensitive; and (3) improved operating leverage, thanks to lower lease payments. Bullish Outlook for 2018 Given 30%+ YTD SSSG. Management attributed the strong performance in 2017 to recovering retail sentiment and the wealth effect in Hong Kong, and it expects this to be carried forward to Specifically, SSSG for Jan-Feb 2018 was in the mid-30% range, which is an encouraging sign of robust consumer demand for high-end watches and jewellery. As pricing power for EWJ has been strengthened, it expects its GPM to remain at a similar level (26.7% in 2017) While sales growth in Hong Kong was solid, management expects rental levels in Hong Kong to remain flattish, especially for street-level stores. It noted that there are still vacant properties in some prime locations, so landlords prefer to be conservative EMPEROR WATCH & JEWELLERY [887.HK, NOT RATED] (HK$) Market Cap: US$395m; Free Float: 47.2% Source: Bloomberg Turnover (RHS) Price (LHS) (HK$ million) HKD Revenue (m) 5,925 4,431 3,642 4,075 COGS (m) (4,436) (3,325) (2,733) (2,986) Gross profit (m) 1,489 1, ,089 Gross margin (%) EBIT (m) 166 (115) (64) 172 Net profit (m) 138 (120) (65) 160 Net margin (%) 2.3 (2.7) (1.8) 3.9 EPS 0.02 (0.02) (0.01) 0.02 ROE (%) 3.12 (2.75) (1.53) 3.74 Dividend yield (%) PER (x) 22.5 N/A N/A 19.4 PBR (x) As for business outside Hong Kong, besides opening more stores in mainland China (9 stores in 1H 2018), the Company will expand in Southeast Asia. The region proved to be resilient, as suggested by the EWJ Singapore s performance (revenue up 43% YoY). EWJ opened a store in Kuala Lumpur in 2018 and is seeking opportunities to open more stores in other ASEAN countries. Net Cash of HK$1.6bn Ready for Expansion. As at the end of 2017, EWJ had cash of HK$1.6b and was debt free. Because of the expansion plan, EWJ plans to spend HK$ m to open new stores (including refurbishment and inventory), and will stock more inventory to cope with customer demand. Valuation. After share price jumped >18% on 15 Mar 2018, EWJ is now trading at 19.4x 2017 PER. EWJ announced a final DPS of HK0.58 cent, making the total DPS for FY 2017 HK0.75 cent per share, equivalent to a 1.67% dividend yield. If ballpark EPS growth of 30% for 2018E is assumed, then EWJ is trading at 14.9X 2018E PER. The valuation should be similar to that of other Hong Kongbased jewelers, but earnings growth could be even higher than that of the larger players, given the more visible operating leverage, in our view. (continued on next page)

2 Risks: (1) Weaker-than-expected tourist arrivals and retail sales in Hong Kong; (2) higher-than-expected staff costs; and (3) higher-than-expected rental expenses in Figure 1: 2017 Results Review HK$'000 1H H 2016 FY2016 1H H 2017 FY2017 FY2017 vs FY2016 Revenue 1,674,853 1,966,992 3,641,845 1,827,220 2,247,904 4,075, % Cost of sales -1,257,712-1,475,160-2,732,872-1,339,955-1,645,925-2,985, % Gross profit 417, , , , ,979 1,089, % Gross Margin 24.9% 25.0% 25.0% 26.7% 26.8% 26.7% 1.8 ppt Other income 3,644 2,456 6,100 4,034 3,759 7, % Selling and distribution expenses -407, , , , , , % Administrative and other expenses -78,962-83, ,520-72,009-75, , % Profit (loss) before tax -65,666 5,823-59,843 40, , ,237 N/A Taxation -2,965-2,013-4,978-1,209-12,337-13, % Profit (loss) for the year -68,631 3,810-64,821 39, , ,691 N/A Net Profit Margin -4.1% 0.2% -1.8% 2.1% 5.4% 3.9% 5.7 ppt EPS (HK$) N/A estimates Figure 2: Revenue Breakdown by Segment and KPIs Revenue (HK$m) FY2015 FY2016 FY2017 By Product Segement YoY Change for 2017 Watch 3,541 2,857 3, % Jew ellery % Diamond & Jade % Others % Total 4,431 3,642 4, % By Geographical Segment HK 3,457 2, % Macau % China % Singapore % Total 4,431 3, % KPIs Same Store Sales Grow th (Overall) -28.1% % 15.10% Same Store Sales Grow th (Hong Kong) -28.6% % 14.30% Store Rental / Revenue 15.2% 12.90% 10.40% Store Staff Cost / Revenue 4.2% 4.80% 4.70% 2

3 Figure 3: ASP & Volume Breakdown FY2015 FY2016 FY2017 YoY Change for 2017 Volume Sold (pieces) Watch 48,306 35,789 37, % Jew ellery (Diamond and Jade) 24,501 24,850 25, % Jew ellery (Others) 75,416 84,306 82, % ASP (HK$) Watch 73,305 79,821 86, % Jew ellery (Diamond and Jade) 24,003 18,808 20, % Jew ellery (Others) 4,000 3,769 4, % Figure 4: Store Network As at 31 December 2017 Figure 5: Rental Expenses Breakdown by Region Singlebrand Watch Only Number of Stores Floor Area (sq.ft.) HK$'000 FY2015 FY2016 FY2017 Multi-brand Hong Kong 572, , ,597 Watch Jewellery Total Total Average with/without Only Macau 14,243 12,735 12,583 Jewellery Other Regions in Asia Pacific 86,893 78,894 79,847 Unallocated 8,746 8,638 8,638 Total 682, , ,665 Hong Kong ,018 3,917 Macau ,994 1,332 Mainland China , Singapore , Total ,422 1,755 Figure 6: Brands Distributed by EWJ Hong Kong Mainland China Singapore 1 Baume & Mercier 15 Mido 1 Baume & Mercier 15 Vacheron Constantin 1 Cartier 2 Bedat & Co 16 Omega 2 BVLGARI 16 Zenith 2 Patek Philippe 3 Bell & Ross 17 Officine Panerai 3 Carl F. Bucherer 3 Rolex 4 Blancpain 18 Parmigiani 4 Chopard 4 Tudor 5 Breguet 19 Patek Philippe 5 Franck Muller 6 Cartier 20 Piaget 6 Girard Perregaux 7 Certina 21 Rado 7 Jaeger LeCoultre 8 Chopard 22 Rolex 8 Montblanc 9 Franck Muller 23 Tag Heuer 9 Omega 10 Girard Perregaux 24 Tissot 10 Piaget 11 Hamilton 25 Tudor 11 Rado 12 IWC Schaffhausen 26 Vacheron Constantin 12 Rolex 13 Jaeger LeCoultre 27 Zenith 13 Tag Heuer 14 Montblanc 14 Tudor 3

4 Figure 7: Illustration of EWJ s Select Store Locations in Prime Commercial Areas 4

5 Figure 8: Peers Comparison Company Ticker Trading Price Mkt Cap PER(x) PBR(x) ROE(%) Div YIeld(%) Currency US$m FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2 Our Coverage Chow Tai Fook Jew ellery 1929 HK HKD , Luk Fook Holdings Intl Ltd 590 HK HKD , Chow Sang Sang Hldg 116 HK HKD , Simple Average Peers Listed in Hong Kong Emperor Watch & Jew ellery 887 HK HKD Hengdeli Holdings Ltd 3389 HK HKD Oriental Watch Holdings 398 HK HKD Tse Sui Luen Jew ellery Intl 417 HK HKD Simple Average Peers Listed in A-share Lao Feng Xiang Co Ltd-A CH RMB , Shanghai Yuyuan Tourist-A CH RMB , Chow Tai Seng Jew ellery Co-A CH RMB , Guangdong Chj Industry Co-A CH RMB , Zhejiang Ming Jew elry Co-A CH RMB Simple Average International Peers LVMH Moet Hennessy MC FP EUR , Cie Financiere Richemont CFR SW CHF , Tiffany & Co TIF US USD , Pandora A/S PNDORA DC DKK , Signet Jew elers Ltd SIG US USD , Simple Average Sources: Bloomberg, CGIS Research estimates for covered companies 5

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