Event. Hengdeli made a voluntary announcement clarifying its latest position.Management noted there are negative speculations and doubts about thebusiness and financial conditions of the company.It explained it has attained stable business growth in recent years and hasmaintained good partnerships with key watch suppliers. As of the date of the announcement, “there is no material change in theoperation policy of the company and the business continues to operate anddevelop in a normal, healthy and stable manner.” To facilitate the future development of the company it recently issuedUS$350m senior notes. It is to repay the outstanding 2015 convertible bondsand for general corporate purposes. The board considered the issue will widenthe financing channel, and improve its ability to access the international capitalmarkets to support the growth of the company. The issue was over-subscribedby 15 times. Swatch CEO Nick Hayek also said yesterday in an interview with Bloombergthat the company is a big shareholder and is very happy. There are no issues inthe collaboration with Hengdeli. He expects “healthy growth” for Swisswatches this year with Mainland China watch market growing ~10% in 2013.Deutsche Bank View. We believe the company’s announcement is in responseto an article from Next Magazine date 30 January 2013, which challenge itsstore expansion, decline in wholesales business with loss of exclusive license,negative cashflow situation, fund-raising practices and major shareholders’activities. Share price declined by 13% yesterday. In our view, network expansion was relatively more reasonable for the past 2years with most stores targeting the mass market segment. In the next 2 years,the company is likely to maintain its store-opening plan of 40 stores annually.Gold, jewelry and watch retailers tend to experience negative cashflow duringexpansion as inventory is costly. In addition, orders are placed mainly throughwatch trade fairs, which are held twice a year. Shifting from wholesale toretail operation has been the company’s strategy which has been successful. We do not like management’s short-term loan to distributors and thechairman’s share pledge activity, which is reflected in its share price correctionand de-rating in PE multiple when it was first reviewed to the public. We thus believe those events were reflected in the price already and reiterateour Buy recommendation as we believe mid end segment (50% of sales inChina and 10% in HK) would continue to benefit from increase in middleincome class spending and high end segment to recover in 2H13 withimprovement in consumer sentiment.