INDUSTRY OVERVIEW SOURCES OF INFORMATION

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1 This section and elsewhere in this document contain information extracted from a commissioned report, or the Frost & Sullivan Report, prepared by Frost & Sullivan for inclusion in this document. We believe that the sources of information of this section are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. The information has not been independently verified by our Directors, the Sponsor, the [REDACTED], the [REDACTED], the Underwriters, any of their respective directors, advisers, officers, employees, agents, or representatives or any other person involved in the [REDACTED], other than Frost & Sullivan, and no representation is given as to its fairness, correctness and accuracy. Accordingly, you should not place undue reliance on such information or statistics. Please see Risk Factors Risks relating to the statements made in this document and from other sources Statistics and facts in this document have not been independently verified. for details. We confirm, after making reasonable enquiries, that there have been no material adverse changes in the market information since the date of the Frost & Sullivan Report which may qualify, contradict or have an impact on the information in this section. SOURCES OF INFORMATION Our Group commissioned Frost & Sullivan, a market research consultant, to prepare the Frost & Sullivan Report for use in this document. Our Group has agreed to pay a fee of RMB438, for the Frost & Sullivan Report. Our Group is of the view that the payment of such fee does not affect the fairness of the conclusions drawn in the Frost & Sullivan Report. Established in 1961, Frost & Sullivan provides market research on a variety of industries, including the functional lingerie industry. The Frost & Sullivan Report includes information on the functional lingerie markets in Hong Kong, the PRC and Macau. In preparing the Frost & Sullivan Report, Frost & Sullivan conducted detailed primary research which involved having in-depth discussions with the industrial association, industry experts and leading industry participants. Frost & Sullivan has also conducted secondary research which involved reviewing company annual reports, independent research reports and data from its own research database. Frost & Sullivan obtained the figures for the estimated total market size from historical data analysis plotted against macroeconomic data as well as considered the industry drivers. The Frost & Sullivan Report was compiled based on the following assumptions: (i) the social, economic and political environment in Hong Kong, the PRC and Macau will remain stable from 216 to 22, and (ii) key market drivers that continue to affect the functional lingerie market from 216 to 22. Frost & Sullivan and we believe that the basic assumptions used in preparing the Frost & Sullivan Report, including those used to make future projections, are factual, correct and not misleading. Frost & Sullivan has independently analysed the information, but the accuracy of the conclusions of its review largely relies on the accuracy of the information collected. The historical market information from 1 January 216 to 31 July 216 was not available as the overall industry research conducted by Frost & Sullivan was based on calendar year and 31 December is the typical time node for historical data analysis. 55

2 OVERVIEW OF THE MACRO ECONOMY IN HONG KONG AND THE PRC The growth of per capita disposable income in Hong Kong has been moderate from 211 to 215, with a CAGR of approximately 4.6% and increased from approximately US$32,2 to approximately US$38,6 in 215. The per capita disposable income in the PRC increased at a CAGR of approximately 12.4% from approximately US$2,3 in 211 to US$3,6 in 215. By 22, the per capita disposable income in Hong Kong and the PRC is estimated to reach approximately US$43,2 and approximately US$6,, respectively. The charts below illustrate the historical and expected per capita disposable income in Hong Kong and the PRC from 211 to 22: Per Capita Disposable Income (Hong Kong), E Thousand USD 5 HK YOY Growth % % % % 1.71% 1.96% 2.4% 2.51% 2.66% 12% 1% 8% 6% 4% 2% % PerCapitaDisposableIncome(thePRC),211 22E Thousand USD 7 PRC YOY Growth % % 11.33% 8.8% 9.14% 1.15% 1.83% 11.23% 12.15% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 56

3 The increasing disposable income has brought up consumption expenditure of Hong Kong consumers on goods and services. From 211 to 215, per capita consumption expenditure in Hong Kong had grown at a CAGR of approximately 6.% from approximately US$22,2 to approximately US$28,1. During the same period, per capita consumption expenditure in the PRC had grown at a CAGR of approximately 12.6% from approximately US$1,6 to approximately US$2,9. By 22, per capita consumption expenditure in Hong Kong and the PRC is projected to reach approximately US$37, and approximately US$5, respectively. The charts below illustrate the historical and expected per capita consumption expenditure in Hong Kong and the PRC from 211 to 22: Per Capita Consumption Expenditure (Hong Kong), E Thousand USD HK YOY Growth % 14% 12% 1% % 6.92% 5.29% 5.17% 5.45% 5.1% 5.95% 6.31% 5.57% 8% 6% 1 4% 5 2% % Per Capita Consumption Expenditure (the PRC), E Thousand USD 6 PRC YOY Growth % 15.85% 13.21% 14.1% 13.31% 14.46% 14.74% 14.22% 1 7.8% 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 57

4 FUNCTIONAL LINGERIE MARKET OVERVIEW Definition and classification of functional lingerie Functional lingerie, including mainly functional bras, panties (ankle-length and mid-thigh), vests and body shaping suits (full-body and mid-thigh), refers to undergarment designed to shape wearer s body shape and encourage good posture. Major functions of functional lingerie, apart from basic functions of traditional lingerie, mainly include lifting, sliming and shaping. Functional lingerie is also different from basic lingerie in three main aspects, namely function, fabric, and design. Functional lingerie, as one of the major lingerie products for female consumers, has increasingly obtained market recognition and contributed to a growing share of total lingerie market in the PRC and Hong Kong. Functional lingerie is considered a sub-segment market of lingerie products as it possesses additional functions that are beyond the functions of ordinary lingerie products, and as such, Frost & Sullivan considers that functional lingerie could be an industry classification. These products are typically designed to flatten wearer s stomach and make them look slimmer and more attractive in the outfit they are wearing on top. Functional lingerie comes in various forms, from simple underpants to one-piece garments covering thighs and/or upper body. Functional lingerie is usually made from fabrics made of polyester, polyamide or spandex, which are light materials made from artificial fibres, characterised by elasticity and shape retention ability, and is often applied to make outerwear, active wear and swimwear. 58

5 Production volume of functional lingerie in the PRC The functional lingerie production volume in the PRC has been increasing since 211, from approximately 74.8 million units to approximately million units in 215, representing a CAGR of approximately 2.5%. The majority of functional lingerie manufacturers opt to establish factories in the PRC due to the relatively low production costs including labour and raw material. The chart below illustrates the historical and expected production volume of the functional lingerie market in the PRC from 211 to 22: Production volume of functional lingerie market (the PRC), E Units Million 4 CAGR ( ): 2.5% 35 CAGR (216 22E): 19.8% Retail functional lingerie market in Hong Kong Since 211, the retail functional lingerie market in Hong Kong has experienced steady growth. From 211 to 215, the retail functional lingerie market in Hong Kong increased from approximately HK$169.9 million to approximately HK$236.8 million, at a CAGR of approximately 8.7%. It is estimated that the retail functional lingerie market will accelerate at a CAGR of approximately 1.5%, reaching approximately HK$386.7 million by 22. The table below 59

6 illustrates the historical and expected market size of the functional lingerie market in Hong Kong from211to22: Retail sales of functional lingerie (Hong Kong), E HK$ Million 4 CAGR ( ): 8.7% 35 CAGR (216 22E): 1.5% Retail functional lingerie market in the PRC The retail functional lingerie market in the PRC has maintained a considerable growth in the past five years. From 211 to 215, the retail functional lingerie market in the PRC increased from approximately RMB4.7 billion to approximately RMB11.8 billion, at a CAGR of approximately 25.8%. The retail functional lingerie market in the PRC is expected to reach approximately RMB37.8 billion by 22, representing a CAGR of approximately 26.4% in the next five years. The table below illustrates the historical and expected market size of the functional lingerie market in the PRC from 211 to 22: RMB Billion Retail sales of functional lingerie (the PRC), E CAGR ( ): 25.8% CAGR (216-22): 26.4%

7 With regard to the retail sales breakdown in Hong Kong, functional bra enjoyed a relatively faster growth rate during the past few years. Body shaping underwear, which is considered as highend lingerie products with higher retail prices, accounts for a significant proportion of market share. Theoverallgrowthinvariousproductsegmentsisexpectedtomaintainintheforecastedperiodup to 22 along with expansion of consumer group and improved quality of functional lingerie products. The chart below illustrates the historical and expected retail sales breakdown of functional lingerie by product categories in Hong Kong from 211 to 22: Retail sales breakdown of functional lingerie by product categories (Hong Kong), E HK$ Million Bra Vest Body shaping underwear Product categories Approximate CAGR Approximate CAGR E Bra 9.1% 1.9% Vest 8.2% 9.9% Body shaping underwear 8.6% 1.3% With regard to the retail sales breakdown in the PRC, functional bra and body shaping underwear enjoyed significant growth from 211 to 215, reaching approximately RMB4.4 billion and approximately RMB5. billion in 215, respectively. With further acceptance of high-end functional lingerie and diversified functionality in the PRC, functional bras are expected to witness growth at a CAGR of approximately 27.9% from 216 to 22. The chart below illustrates the 61

8 historical and expected retail sales breakdown of functional lingerie by product categories in the PRC from 211 to 22: Retail sales breakdown of functional lingerie by product categories (the PRC), 211 to 22 RMB Billion Bra Vest Body shaping underwear Product categories Approximate CAGR Approximate CAGR E Bra 26.8% 27.9% Vest 22.% 21.7% Body shaping underwear 26.9% 27.7% The average retail prices of functional lingerie products sold to the mass market in Hong Kong usually range from HK$25 to HK$45 whereas products above HK$45 and below HK$25 are targeted at high-end and low-end segments, respectively. From 211 to 215, the mass market enjoyed a significant growth in sales revenue, increasing from approximately HK$77.5 million to approximately HK$115.3 million at a CAGR of approximately 1.5%. This is due to the fact that high value-for-money functional lingerie is increasingly popular among female consumers. Therefore, the market share of this segment also increased from approximately 45.6% in 211 to 62

9 approximately 48.7% in 215. The chart below illustrates the historical and expected retail sales value of functional lingerie by target markets in Hong Kong from 211 to 22: Retail sales value of functional lingerie by target market (Hong Kong), E HK$ Million Low-end Mass Market High-end Target markets Approximate CAGR Approximate CAGR E High-end market 9.8% 11.7% Mass market 1.5% 12.% Low-end market 2.4% 2.% The average retail prices of functional lingerie products sold to the mass market in the PRC usually range from RMB15 to RMB3. Functional lingerie with prices above RMB3 is considered high-end, while functional lingerie with prices below RMB3 is considered low-end. From 211 to 215, the market share of mass market experienced rapid growth, increasing from approximately 41.4% to approximately 44.5%. In 215, the retail sales value of the mass market of functional lingerie reached approximately RMB5.3 billion, while high-end market share reached approximately 35.2%. Given the huge potential of the female consumer base of functional lingerie, the mass market is expected to demonstrate large market potential, with a market share of 63

10 approximately 49.8% by 22. The chart below illustrates the historical and expected retail sales value of functional lingerie by target markets in the PRC from 211 to 22: Retail sales value of functional lingerie by target market (the PRC), E RMB Billion High-end Mass Low-end Target markets Approximate CAGR Approximate CAGR E Low-end market 26.1% 16.8% Mass market 27.99% 28.92% High-end market 21.12% 27.57% Raw materials of functional lingerie market Major raw materials for manufacturing functional lingerie include fabrics made of polyester, polyamide, spandex, etc.. During the past five years, the average prices of these raw materials went through noticeable downturn. The average price of polyester decreased from approximately RMB12,85 per tonne in 211 to approximately RMB8,73 per tonne in 215, representing a CAGR of approximately -9.2%. With the supply and demand of such raw materials becoming more stabilised, their prices will experience less fluctuation in the future. The main reason of the price reduction is the over-supply of common textile products in the market, giving manufacturers relatively higher bargaining power in raw material sourcing. The graph below illustrates the 64

11 historical and expected average prices of the major raw materials for manufacturing functional lingerie in the PRC from 211 to 22E: Average price of major raw materials (the PRC), E RMB Polyester Polyamide Spandex 6, 5, 49,2 49,5 54,15 51,5 45,6 44,86 43,95 43,14 42,11 41,66 4, 3, 2, 1, 29,85 25,65 26,465 22,7 12,85 12,6 9,972 1,8 2,56 19,65 19,5 18,43 17,98 17,31 8,73 8,68 8,55 8,43 8,31 8,18 Labour costs of the functional lingerie market Labour cost also contributes a large proportion of total production cost. From 211 to 215, average labour costs in Hong Kong, the PRC and Macau experienced continuous growth. In 215, the median monthly wages in Hong Kong and Macau were approximately HKD13,956 and MOP14,, respectively, while the average monthly wage in the PRC was approximately RMB5,94. From 216 to 22, the median monthly wages in Hong Kong and Macau are expected to increase at CAGRs of 5.28% and 5.74%, respectively. By 22, the average monthly wage in the PRC is expected to reach approximately RMB7,85. Labour Cost and Forecasts (Hong Kong, PRC, Macau), E Hong Kong (HKD/month) PRC (RMB/month) Macau (MOP/month) 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Hong Kong (HKD/month) PRC (RMB/month) Macau (MOP/month) 11,28 3,483 1,3 11,856 12,584 12,852 3,897 4,29 4,697 12, 12,3 14,1 13,956 15,1 16, 5,94 5,52 5,895 15, 16,13 17,2 16,88 17,7 18,44 6,282 6,677 7,85 18,15 19,5 2, 25, 2, 15, 1, 5, 65

12 Market drivers of functional lingerie market. Sustained growth of macro economics and rise of disposable income: Hong Kong has witnessed sustained growth of macro-economy, which is expected to maintain stable growth momentum in the next few years. Undoubtedly, such trend guarantees an excellent macroeconomic environment for the development of the retail industry, which will positively affect the functional lingerie market. With the increasing average income level and purchasing power, people in Hong Kong are continuously looking to improve their living standards. Lingerie products, as a kind of necessity, have obtained much more emphasis among consumers.. More awareness and emphasis on body shaping and body health: with continuous improvement in living standards, women s consciousness on body shapes has gradually increased. Accordingly, the consumption demand on high-quality functional lingerie products has seen rapid growth as increasing number of female consumers wear functional lingerie for body-shaping and better postures. The popularity of functional lingerie continuously broadens consumers understanding in lingerie products and encourages the consumption of high quality lingerie products. As a result, lingerie as well as functional lingerie brands have paid higher attention to the development of functional lingerie products, and their expansion in the functional lingerie market.. Increase brand awareness: due to years of development of the market and more mature consumption habits, Hong Kong consumers have shown higher preference to buy branded products, which indicates that brand awareness and identity are important in current years. As consumers have shown higher confidence in the overall quality of branded products, the demand for functional lingerie products of popular brands, especially internationally wellknown brands, has experienced a dramatic growth. Under this consumption upgrade, famous functional lingerie brands can sell their products at a premium.. Knowledge in orthopaedic/ergonomic principles: as functional lingerie designers and companies usually have knowledge in orthopaedic and ergonomic principles and apply them to the design and development of new functional lingerie products, newly-developed products are more advanced in improving body postures. COMPETITIVE LANDSCAPE Competitive landscape of the functional lingerie market in Hong Kong Functional lingerie market accounted for approximately 6.5% of the overall lingerie market in Hong Kong measured by retail turnover for the year ended 31 December 215. As at 31 December 215, there were approximately 4 market players in the functional lingerie market in Hong Kong. As a small segment of the overall lingerie market, the functional lingerie market in Hong Kong is highly concentrated with the top five players dominating approximately 89.2% of the total market share by retail turnover in 215. In 215, we ranked second in the functional lingerie market in Hong Kong with a market share of approximately 18.7% in terms of retail turnover. The following 66

13 table sets out the ranking and market share of the top five functional lingerie brands in Hong Kong in terms of sales revenue in 215: Top five functional lingerie brands (Hong Kong), 215 Rank Company Approximate retail turnover (HK$ million) Approximate market share 1 Company A % 2 Our Group % 3 Company B % 4 Company C % 5 Company D % Subtotal: % Competitive landscape of the functional lingerie market in the PRC As at 31 December 215, there were more than 1,5 functional lingerie brands in the PRC, including common lingerie brands that offer functional lingerie products. The functional lingerie market in the PRC is relatively concentrated with the top five players accounting for approximately 24.9% of the total market share by retail turnover in 215. Our Group had less than.1% of the total market share by retail turnover in 215. The following table sets out the ranking and market share of the top five functional lingerie brands in the PRC in terms of sales revenue in 215: Top five functional lingerie brands (the PRC), 215 Rank Company Approximate retail turnover (RMB million) Approximate market share 1 Company E % 2 Company F % 3 Company G % 4 Company H % 5 Company I % Subtotal: 11, % Competitive landscape of the functional lingerie market in Macau Macau is one of Asia s famous cities known for shopping and tourism. Under the influence of western culture, female consumers in Macau are in general more likely to accept functional lingerie products than female consumers in the PRC. Most of the leading functional lingerie brands have operations in Macau, which include both retail stores and department store counters. Along with further development and expansion of trading scale and retail industry, industries such as textile apparel in Macau grew at a fast pace, which created good business opportunities for local functional 67

14 lingerie companies. Similar to the Hong Kong functional lingerie market competitive landscape, leading market players in Macau mainly consist of large international brands and local small to medium-sized businesses. As at 31 December 215, there were approximately 3 market players that provided functional lingerie products in Macau, among which the top five players accounted for approximately 91.7% of the total market share by retail turnover in 215. The following table sets out the ranking and market share of the top five functional lingerie brands in Macau in terms of sales revenue in 215: Top five functional lingerie brands (Macau), 215 Rank Company Approximate retail turnover (MOP Million) Approximate market share 1 Company C % 2 Company J % 3 Company D % 4 Company B % 5 Company K % Subtotal: % Source: Frost and Sullivan Entry barriers. Research and development capacity: lack of competitive research and development and technological capabilities compared with established market participants which have advanced perspective and effective implementation.. Market insight: lack of market insight for the successful introduction of a new product, such as understanding consumers preference and predicting market trends.. Supply chain management: lack of experience and resources to maintain relationship and collaboration with various chain partners, affecting the ability to achieve superior supply chain management. Supply chain management is a cross-function and complicated approach that includes managing the movement of raw materials, the internal processing of raw materials into finished goods, and the movement of finished goods to the consumer. Superior supply chain management can improve production efficiency, product quality and profit margins.. Capital investment: new entrants need enough capital to start its business (for example, to conduct research and development, purchase of equipment and sales and marketing) and to compete with existing market players. Development trends of the functional lingerie market. Product innovation with diversified functionality: with increasing different demands from different consumers, functional lingerie products have become more diversified. To meet different consumers diversified demands, functional lingerie manufacturers design and develop different kinds of products for different ages or purposes. In-depth understanding in 68

15 consumer preferences and effective marketing strategies are crucial for long-term growth of functional lingerie companies. Hence, these companies continue to seek deeper insights in different segments of the market as well as develop diversified and creative product designing and manufacturing capabilities with innovative technologies, so that they could gain faster growth and capture new market opportunities.. Improvement of manufacturing technology: in recent years, some functional lingerie companies have emphasised manufacturing technology innovation and improvement in manufacturing automation level. The recent introduction of the injection moulding technology to this industry is also an example of the cross-industry technology innovation. With such manufacturing technology innovation, manufacturers can improve their product quality, production efficiency as well as the profit margins. Opportunity. Production diversification and market segmentation: as the demand for functional lingerie consumption continuously upgrades and diversifies, functional lingerie companies need to develop different types of products catered to the demand of female consumers of different age groups. Functional lingerie designed for specific purposes such as improving postures of teenage wearers are expected to enjoy higher market awareness. Further product diversification and market segmentation encouraged by the changing demand for functional lingerie drive continuous product innovation and create opportunities for market players in expanding product offerings. Challenges. Application of new materials and technologies: understanding and applying new elements such as 3-dimensional printing technology and the application of new synthetic materials into the traditional manufacturing process to increase efficiency and profits will be a long term goal for market players.. Rising labour cost: increasing average salary in both Hong Kong, the PRC and Macau will bring challenges to players due to increase in the overall production and operating costs. 69