Investment highlights

As a leading domestic player, Magic Holdings is well-positionedto capture opportunities in China’s fast-growing face masksindustry: China’s skin care products industry has been experiencingstrong growth over the past several years thanks to rising disposableincomes and urbanization. Face masks have seen the fastest growthand still have significant growth potential on increasing marketpenetration. Magic Holdings further expanded its share in the facemasks market to ~20% in FY12.

First-mover advantage in distribution channel, branding, andR&D: Magic Holdings has established a comprehensive distributionnetwork covering personal care stores; supermarkets; hypermarkets;

cosmetics chains; convenience stores; and e-commerce channels, andhas penetrated all levels of urban consumer markets, with terminalsincreasing rapidly but far from saturation. Thanks to its advancedbranding and R&D concepts, Magic Holdings has been devotingmuch greater effort to above-the-line promotion than other Chineselocal brands, and has been launching new products to meet diverseneeds.

Wide coverage of incentive plans can help improve operatingefficiency: The company’s share award plan and the share optionscheme have wide coverage and can bring long-term incentiveeffects, which should help improve its management and operationefficiency. This is vital to its long-term growth sustainability.

Valuation and recommendation

We expect FY13/14 EPS to be HK$0.26/0.33. The stock is nowtrading at 11x/9x FY13/14e P/E. We initiate coverage with a BUYrating as Magic Holdings is well-positioned to benefit from therapidly growing market penetration of face masks thanks to itsindustry leading position. Set TP at HK$3.90 based on 15x FY13eP/E.