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Abercrombie & Fitch


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Abercrombie & Fitch

  1. 1. Abercrombie & FitchStrategic and financial analyses
  2. 2. Execu&ve  Summary  •  Introduc&on:  aims  of  the  analysis  •  The  sectoral  analysis:   –  Key  figures  &  main  compe&tors   –  Trends  and  legal  evolu&ons  •  The  company  analysis:   –  A&F  presenta&on   –  A&F  strategic  analysis    •  A&F  financial  analysis:   –  Accoun&ng  data  and  ra&os  changes   –  Financial  data  and  business  analysis  •  A&F  valua&on:   –  Mul&ples   –  DCF  •  Conclusion:  what  we  think  of  A&F  investment  opportuni&es   Financial  diagnosis  A&F  2012   2  
  3. 3. Introduc&on:  aims  of  this  analysis  •  This  analysis  aims  to:   –  Present  data  on  the  apparel  market,   –  Present  precised  informa&on  on  the  firm,   –  Present  selected  figures  on  the  company,   –  Present  detailed  ra&os  and  cash-­‐flow  calcula&ons,   –  Valuate  A&F,  and   …  conclude  on  the  investment  opportuni&es   Financial  diagnosis  A&F  2012   3  
  4. 4. SECTORAL  ANALYSIS   Financial  diagnosis  A&F  2012   4  
  5. 5. Sectoral analysis: the apparel industry1.  Global apparel market2.  Main competitors and their strategies3.  Macroeconomic and legal constraints4.  Innovation5.  Seasonal cyclicity Financial  diagnosis  A&F  2012   5  
  6. 6. Global apparel market Apparel US$ 1,542 bn Childrenswear Hosiery Closing accessories Men’s Outerwear US$ 146 bn US$ 49 bn US$ 66 bn US$ 373 bnMens Underwear, Nightwear and Women’s Undervear, Swimwear Women’s Outerwear Nightwear and Footwear US$ 500 bn Swimwear US$ 287 bn US$ 37 bn US$ 85 bn Financial  diagnosis  A&F  2012   6  
  7. 7. Main Competitors and global market shares Companies 2010 % market share Nike 1.9 Adidas 1.8 Inditex 1.1 H&M 0.9 Gap 0.9 Cofra Holding 0.6 Fast Retailing (Uniqlo) 0.5 Levi Strauss 0.4 Limited Brands 0.4 VF Corp 0.3 A&F 0.2=> A split up market Financial  diagnosis  A&F  2012   7  
  8. 8. Nike/Adidas: Sportwear brands•  Nike Inc. –  a major publicly traded clothing, footwear, sportswear, and equipment supplier based in the United States –  the worlds leading supplier of athletic shoes and apparel and a major manufacturer of sport equipment•  Adidas AG –  a German sports apparel manufacturer –  the largest sportswear manufacturer in Europe and the second-biggest sportswear manufacturer in the world=> Both companies are mainly operating on the sportswear market and therefore are not A&F’s direct competitors Financial  diagnosis  A&F  2012   8  
  9. 9. Inditex/H&M•  Inditex –  a large Spanish company and the worlds largest fashion group –  runs over more than 5402 stores worldwide and owns famous brands such as Zara, Massimo Dutti or Pull and Bear etc.•  H&M –  a Swedish retail-clothing company, known for its fast-fashion clothing offerings for women, men, teenagers and children –  the second largest global clothing retailer, just behind Spain-based Inditex and leads over third largest global clothing retailer, United States based GAP Inc. (ranking without sportswear companies)=> Both firms operate on the ready to wear retail market of casual clothing (day to day clothes) and therefore are direct competitors of A&F Financial  diagnosis  A&F  2012   9  
  10. 10. Gap•  Gap Inc –  A&F’s main competitor in terms of clothing style –  Its clothing range has a preppy style, which is typical of American university students –  Gap’s namesake fascia aims to have a similar style, but it has struggled to attract a younger consumer in its home market => The firm operates on the ready to wear retail market of casual clothing and therefore is a direct competitor of A&F Financial  diagnosis  A&F  2012   10  
  11. 11. Macroeconomic trends•  The  global  economic  downturn  had  a  profound  effect  on  consumer   spending  habits  (consump?on  goods):   –  In  the  developed  world  in  par&cular,  job  losses,  economic  uncertainty   and  the  implementa&on  of  public  austerity  measures  con&nue  to   dampen  consumer  confidence   –  Increase  of  “saving  money”  was  seen  in  Brazil  (39%),  India  (38%)  and   the  US  (36%);  while  the  UK  had  the  largest  share  of  respondents  who   had  increased  visits  to  discount  stores   –  However,  consumers  are  not  prepared  to  compromise  on  quality        =>  Value  for  money  is  the  key  goal  of  most  shoppers   Financial  diagnosis  A&F  2012   11  
  12. 12. Legal constraints•  Labeling of textile industry products all around the world•  Ex: current regulations of the European Communities by which labelling of textile products relates to the material composition and regulates: –  the details required in labelling textile products with information on the composition of the material used, –  an overview of the names of individual types of textile fibres and a description thereof, –  contractual mark—ups used for calculation of the mass of fibres contained in textile products, –  a list of textile products not subject to labelling or marking as regards textile fibre content, –  a list of products for which only inclusive labelling or marking is obligatory.  •  Protection of trademarks, drawings and models in Asia•  Controls of textile products toxicity and clothing in the EU•  Guide of the EU preferential rules of origin (trade partnership quota)  =>    Global  legal  constraints  are  lead  by  the  WTO,  then  other  constraints  are  managed  locally   accor?ng  to  the  geographic  zone   Financial  diagnosis  A&F  2012   12  
  13. 13. Innovation in the apparel industry: well-being concept•  Which company? –  Goodnighties Recovery Sleepwear is made using a patented ionization process, dubbed Ionx technology, which embeds negative ions into the fabric fibres•  How does it work? –  Positive ions are associated with pollution and are thought to cause headaches and depression –  On the contrary, negative ions are thought to have a positive effect on health and wellbeing=> Fabric innovation can influence trends in laundry care and laundry appliances Financial  diagnosis  A&F  2012   13  
  14. 14. Innovation in the apparel industry: environmental protection•  Which company? –  One of the most advanced new fabrics is a new eco-sustainable yarn, r-Starlight, produced by a Swiss firm, Noyfil SA, in conjunction with four other manufacturers•  How does it work? –  The fabric is made from post-consumer recycled pet bottles –  The resulting sportswear line boasts a small environmental footprint as well as comfort, coolness, breathability, colourfastness and thermoregulation=> Fabric innovation can improve brand notoriety Financial  diagnosis  A&F  2012   14  
  15. 15. Seasonal cyclicity•  The retail apparel market has two principal selling seasons: –  the Spring season which includes the first and second fiscal quarters –  the Fall season which includes the third and fourth fiscal quarters•  As is typical in the apparel industry, the company experiences its greatest sales activity during: –  the Fall season due to the Back-to-School (August) –  Holiday (November and December) selling periods=> The annual selling activity is concentrated on three months: August, November and December Financial  diagnosis  A&F  2012   15  
  16. 16. A&F  HISTORY  &  PRESENTATION   Financial  diagnosis  A&F  2012   16  
  17. 17. Abercrombie & Fitch•  Founded in 1892 in New York City•  Bankrupt in 1976 and revived in 1997•  Sells « Casual Luxury » clothes focused on young consumers•  Gathers 4 brands : –  Abercrombie & Fitch –  Abercrombie Kids –  Hollister –  Gilly Hicks•  RUEHL brand was closed in 2009•  End of 2011: Has over 1045 stores worldwide Financial  diagnosis  A&F  2012   17  
  18. 18. Abercrombie & Fitch brands : The American Luxury cool• East coast traditions and Ivy league • Prestigious East coast prep schoolsheritage • Vintage-inspired style for kids• Privilege and casual luxury • Suited for 7-14 years• Class and sexy, a bit provocative• Suited for 18-22 years old• Fantasy of Southern California • Cheeky cousin of Abercrombie & Fitch• Young, spirited beach style • Australia-inspired Underwear and bras• Suited for 14-18 years old • Suited for Women from 18 years old Financial  diagnosis  A&F  2012   18  
  19. 19. Abercrombie & Fitch : US-concentrated sales•  Abercrombie & Fitch is focused on the american market : 81% of sales Sales  •  Famous brands with luxury cool image in the US Other   Europe   6%  •  Reputation still to build 13%   internationnally•  Highly profitable segment (12,6% operating margin in 2010)•  Highly volatile segment due to advertising and opertating costs (1,8% operating margin in 2011) United  •  Depends on american States   consumption and macroeconomics 81%  •  Selling operated by the 1045 stores and Internet (12% of total sales) Financial  diagnosis  A&F  2012   19  
  20. 20. Stores distribution : US closings and worldwide expansion US  Stores   Interna?onal  Stores   1200   120   1000   100   Gilly  Hicks   800   80   Hollister   600   60   abercrombie  Kids   400   40   A&F   200   20   0   0   January  2011   January  2012   January  2011   January  2012  •  946 out 1045 stores located in the US as of January 29, 2012•  71 stores were closed in the US in 2011, 50% of which concerned the A&F brand•  International expansion started in 2006 after maximum growth was reached in the US•  47 new stores were opened outside the US, 39 of which concerned the Hollister brand.•  The international stores were mainly opened in Germany, Spain and France. Financial  diagnosis  A&F  2012   20  
  21. 21. Strategy•  Targeting : –  Target cool and attractive people –  Target fashion-conscious consumers with age ranging from elementary school to post-college served by their four brands•  Positionning : –  Inspirational brand of college, cool, with high quality products –  Cater a very niche market –  Near luxury brand – casual luxury : brands target customers from the middle and upper-middle class who desire to wear the latest fashions, but can not afford to pay premium, luxury prices     Financial  diagnosis  A&F  2012   21  
  22. 22. Mix Marketing Analysis (1/2)•  Promotion : –  The Abercrombie & Fitch person (through cutting or shape of clothes). Target age, being young adult, models in the catalogs, magazines, website, and store posters appear to be in their early twenties –  Uniqueness (through design & logos) –  Luxury (through the store concept and advertising) –  Exclusivity (through membership and promotional event)•  Place : –  Company views the customers in-store experience as the primary vehicle for communicating the spirit of each of the brands –  company uses the visual presentation of the merchandise, the in-store marketing, music, fragrances and the sales associates, or brand representatives –  effort to reinforce the inspirational lifestyles represented by thebrands, the youthfulness and the sensuality which they endorse Financial  diagnosis  A&F  2012   22  
  23. 23. Mix Marketing Analysis (2/2)•  Price : –  sell the products at premium price without necessity for regular discounts –  categorize their price range with respect to the product line and the market segment•  Product : –  products  sold  by  Abercrombie  &  Fitch  send  messages  of  fency  and  high  quality   clothes  as  well  as  “casual  luxe”   –  the  use  of  word  logos  like  A&F  tended  to  be  on  the  more  relaxed  clothing  such   as  t-­‐shirts,  sweatpants,  and  sweatshirts   –  the   moose   symbol   is   on   more   high   quality   clothing   such   as   bufon   up   shirts   and  cashmere  sweaters.   –  products  shaped  to  spread  the  message  of  thinness,  in  large  sizes Financial  diagnosis  A&F  2012   23  
  24. 24. ORGANIZATION  &  CAPITAL  STRUCTURE   Financial  diagnosis  A&F  2012   24  
  25. 25. Organization & Capital Structure 2010   Total Debt/EBITDA 0.1x Total Senior Debt/EBITDA 0.1x Total Debt/(EBITDA-CAPEX) 0.2x Total Senior Debt/(EBITDA-CAPEX) 0.2x Total Senior Secured/(EBITDA-CAPEX) 0.1x 50.3 Total Debt 3.5% 1,387 Total Common Equity 96.5% 1,437.3 Total Capital 100% Financial  diagnosis  A&F  2012   25  
  26. 26. SWOT  &  OTHER  ANALYSIS  TOOLS   Financial  diagnosis  A&F  2012   26  
  27. 27. SWOT Analysis (1/2)•  Strengths: –  Brand Image –  Senses experience in stores (sight, taste, sound, smell, touch) –  Flag Ship Stores in new countries –  Strong financial performance –  Robust balance sheet (see financial analysis)•  Weaknesses: –  Costs of structure –  Low inventory turnover ratio (40 days average) –  They seem to stigmatize an important part of the population by creating their specific universe –  The exclusivity created by the brand alienates some groups Financial  diagnosis  A&F  2012   27  
  28. 28. SWOT Analysis (2/2)•  Opportunities : –  Expand Internationnaly outside US –  Sucess of the french store on the Champs Elysées –  Expend products / services line –  Develop even more on-line shopping experience•  Threats : –  Striving for a certain look and style –  Limiting the types of clientele that frequent the stores, it limits the potential income that the company could be earning –  Economic slowdown (cyclical economic changes) –  Rising cost of materials, commodity prices –  Counterfeit goods   Financial  diagnosis  A&F  2012   28  
  29. 29. The five-forces model of competition (1/2)•  Barriers to entry : –  relatively low as the cost to purchase and produce apparel is minimal –  economies of scale provide a significant advantage over the local stores –  low growth in this industry also makes it less attractive to new entrants•  Competition : –  moderate to high –  forces each company to reinvent itself to maintain efficiency and inventory control –  strong rivalry when firms are unable to differentiate their products in the industry•  Direct substitute : –  difficulty due to brand identification –  once the name brand has been removed, one article of clothing becomes difficult to tell apart from a similarly looking article of clothing Financial  diagnosis  A&F  2012   29  
  30. 30. The five-forces model of competition (2/2)•  Suppliers : –  little power due to the fact that the company buys merchandise from numerous factories and suppliers around the globe (in 27 countries)•  Buyers : –  willing to pay a premium price for perceived quality and “fashion recognition” –  pricing points tend to be very elastic –  buyers hold minimal power over their suppliers because of the fragmentation of the retail industry Financial  diagnosis  A&F  2012   30  
  31. 31. Potential causes of changes in industry and competitive conditions (1/2)•  Globalization : –  moving from regional focus to international focus –  globalization is a strong driver to broaden its current market share•  Emerging new Internet capabilities and applications : –  gives buyers extraordinary ability to explore the product offerings from any brands and any shop of the market for the best value (11.7% of net sales)•  Product innovation : –  wider product differentiation to attract more first-time buyers•  Marketing innovation : –  controversy advertising such as publishing a provocative catalog photograph, revealing clothes can alter the competitive positions of rival firm and effectively attract attention of teenager and young adult who often respond positively to this kind of marketing strategy Financial  diagnosis  A&F  2012   31  
  32. 32. Potential causes of changes in industry and competitive conditions (2/2)•  Changing social concerns, attitudes and lifestyles : –  rising   social   issues   and   changing   ahtudes   and   lifestyles   can   be   dominant  to  lead  the  industry  change   –  people  purchase  the  product  not  just  for  the  func&onality  but  because   it  promotes  a  certain  value  that  they  can  relate  to       Financial  diagnosis  A&F  2012   32  
  33. 33. FINANCIAL  ANALYSIS   Financial  diagnosis  A&F  2012   33  
  34. 34. Financial  analysis:  ra&os  &  cash-­‐flows  •  Balance  sheet  and  income  statement  changes  •  Liquidity  analysis  •  Profitability  analysis  •  Solvency  analysis  •  Peers  Mul&ple  Method    •  Transac&ons  mul&ple  method  •  DCF  valua&on   Financial  diagnosis  A&F  2012   34  
  35. 35. Balance  sheet  and  income  statement   changes   Jan-­‐2009   Jan-­‐2010   Jan-­‐2011   Jan-­‐2009   Jan-­‐2010   Jan-­‐2011  %  of  total  BS   %  of  total  Revenue  ASSET  Total  Cash  &  ST  Investments   Income  Statement   18%   25%   28%      Gross  Profit  Total  Receivables   67%   64%   64%   2%   3%   3%      Other  Opera?ng  Exp.,  Total  Current  Assets  (Cash Total  +Receivables+Inventory+DTx)   53%   59%   56%   38%   43%   18%      Opera?ng  Income  Net  Property,  Plant  &  Equipment   14%   5%   8%   49%   44%   39%      Net  Interest  Exp.  LIABILITIES   0.3%   0.1%   -­‐0.1%  Total  Current  Liabili?es      EBT  Excl.  Unusual  Items   16%   16%   19%   15%   5%   8%  Total  Liabili?es  (current      EBT  Incl.  Unusual  Items  liabili?es+LTDebt+Dtx+Non-­‐ 15%   4%   7%  Recurrent  liabili?es)   35%   35%   17%      Earnings  from  Cont.  Ops.  Total  Common  Equity   9%   3%   4%   65%   65%   64%      Net  Income  to  Company  Total  Equity   8%   0%   4%   65%   65%   64%      Net  Income   8%   0%   4%   • The  Balance  Sheet  is  quite  steady  even  if  Abercrombie  &  Fitch  has  started  to  invest  more  in  its  inventory  while   dives&ng  from  its  net  property   • This  is  consistent  with  its  strategy  aiming  at  being  able  to  face  a  huge  growth  in  demand   Financial  diagnosis  A&F  2012   35  
  36. 36. Liquidity  analysis   Liquidity ratio Jan-09 Jan-10 Jan-11 Inventory Turnover (days) 40.70 39.68 42.36 Current ratio 1.10 0.96 0.95 DSO (days) 5.20 10.57 7.35 DPO (days) 27.46 48.96 37.25•  Stable  inventory  turnover  of  40  days  which  remains  constant  •  In  2009,  A&F  had  a  posi&ve  current  ra&o  that  shows  its  ability  to  face  its  short  term  liabili&es  but  from  2010   the  current  ra&o  is  nega&ve  thus  showing  an  issue  in  the  management.  The  growing  opera&ng  expenses  allow   us  to  draw  the  same  conclusion  as  far  as  A&F  opera&ng  management  is  concerned  •  As  A&F’s  business  is  based  on  retail  store  selling  the  company  as  small  DSO.  Most  of  the  &me,  customers  pay   directly  when  buying  from  the  store  •  The  increasing  DPO  shows  that  A&F  is  pressuring  suppliers  by  paying  later  than  before.  This  can  be  explained   by  its  increasing  bargain  power  consistent  with  its  growing  success   Financial  diagnosis  A&F  2012   36  
  37. 37. Profitability  analysis   Profitability ratio Jan-09 Jan-10 Jan-11 Gross margin 33.09% 35.68% 36.23% Operating margin 14.35% 4.85% 8.08% Net margin 7.81% 0.01% 4.33% ROE 14.69% 0.01% 7.91% ROA 9.52% 0.01% 5.09% ROCE 15.26% 0.02% 9.88%•  The  gross  margin  has  improved  a  lifle  bit  but  the  opera&ng  margin  shows  some  weakness  in  opera&ng   management  but  can  be  explained  by  different  factors:  the  development  of  new  brand  concept  such  as   Gilly  Hicks,  store  closure  and  lower  net  gains  from  foreign  currency  denominated  transac&ons.   Nevertheless,  the  management  seems  to  have  iden&fied  some  factors  to  achieve  a  improvement  of   opera&ng  margin  •  The  net  margin  has  undergone  a  huge  drop  in  2010  and  a  lifle  recovery  in  2011  due  to  the  overall  cost   increasing  •  The  ROE  has  dropped  in  2010  because  of  the  net  margin  drop  •  The  ROA  has  dropped  in  2010  the  net  income  drop   Financial  diagnosis  A&F  2012   37  
  38. 38. Solvency  analysis   Solvency ratio Jan-09 Jan-10 Jan-11 Debt to equity 29.95% 29.79% 26.35% LT Debt to equity 5.42% 3.90% 3.63% EBIT/Interest Expenses 147 22 36 EBITDA/Interest Expenses 147 22 36•  The  debt  to  equity  ra&o  is  stable  un&l  2010  and  decrease  in  2011  due  to  a  deleveraging  in  order  to  be  more   comfortable  with  their  credit  agreement  covenants  •   The  LT  debt  to  equity  decreasing  shows  that  A&F  rely  less  in  LT  financing  •  EBIT  and  EBITDA  to  interest  expenses  are  greater  than  way  greater  than  1  which  shows  the  great  ability  of   A&F  to  cover  its  interest  payments   Financial  diagnosis  A&F  2012   38  
  39. 39. Peers  mul&ple  method  •  Our sample is composed of contemporary brand, missy brands and teen brand asA&F represents all these styles EV 2,802•  The multiple EV/Ebitda seems to be the most accurate multiple as our company is -­‐Debt  Net 57.9an apparel retailer +Cash  &  Cash  equivalent 668.1 -­‐prefered  equity 0•  We obtain an EV of 2,802 billions US dollars using and EV/Ebitda multiple of 5,5. -­‐total  minority  interest 0 Market  Capitalization 3,412•  The Equity value deducted from this EV is of 3,412 billions US dollars Financial  diagnosis  A&F  2012   39  
  40. 40. Transac&ons  mul&ple  method   EV Sales EV/ Date Target Acquiror % (M€) (M€) Sales EBITDA EBIT PER 02/12 Billabong TPG Capital 76% 1 114 1 329 0,84x 6,9x 8,6x 7,4x 02/12 Benneton Edizione Holding 95% 1 612 2 032 0,79x 6,7x 10,5x 11,8x 12/11 Wave International Tokyo Style 100% 12 41 0,30x n.a 7,4x 27,9xMedian 0,79x 6,78x 8,60x 11,79xMean 0,64x 6,78x 8,81x 15,69xSources : mergermarket    •  Because similar transactions with figures are rare, we have selected three recentoperations which can benchmark the value of our transaction. EV 3,485•  The multiple of EV/EBITDA is 6,78 and therefore the enterprise value is of 3,455 -­‐Debt  Net 57,9billions US dollars. +Cash  &  Cash  equivalent 668,1 -­‐prefered  equity 0• The equity value is 4,095 billions US dollars. -­‐total  minority  interest 0 Market  Capitalization 4,095 Financial  diagnosis  A&F  2012   40  
  41. 41. DCF  valua&on   Assump&ons  for  DCF  simula&on:       •  Analysts’  consensus  on  the  business  plan  from  2012  to  2016   •  32%  tax  rate  for  the  US   •  1.5%  growth  prior  to  final  year  for  terminal  value  calcula&on   •  WACC  :  13.1%  from  capital  structure  DCF  valua?on   WACC  in  $  millions   2012e   2013e   2014e   2015e   2016e   rf   3.23%   E(rm)-­‐rf   5.00%  EBITDA   540.54   746.29   861.73   1,009.97   1,051.95   Bu   1.97   Pie    Ebit   307.58   486.77   618.4   756.82   897.00           WACC   13.1%  Capex   241.80   378.89   369.7   365.23   317.74  Delta  BFR   51.01   58.92   65.96   72.64   76.40   Valeur  Terminale  FCF   149.30   308.48   426.07   572.10   657.81   g   1.5%        Coefficient  dactualisa?on   1.13   1.28   1.45   1.64   1.85   VT   5766  FCF  actualisé   132.03   241.24   294.66   349.89   355.77   Tax  rate   32%  Somme  FCF  actualisés                 1,373.60   Financial  diagnosis  A&F  2012   41  
  42. 42. DCF  valua&on   Assump&ons  for  DCF  simula&on:       Entreprise Value 17117 •  Analysts  consensus  on  the  business  plan  from  2012  to  2016   •  32%  tax  rate   Market cap 4331 •  1.5%  growth  prior  to  final  year  for  terminal  value  calcula&on   Net Debt -463 •  WACC  :  13.1%   Market EV 4794 A&F  (&cker:  ANF)     04/17/2012:  $  48.42  =>  total  market  cap:  $  4.100  bn     Peers  mul&ple  method:  $  3.412  bn   Transac&ons  mul&ple  method:  $  4.095  bn   Average  =  $  4.100  bn   DCF  method:  $  4.794  bn   Median  =  $  4.103bn  •   Our  valua&on  shows  that  Abercrombie  &  Fitch  is  well  valued  by  the  market  •   Indeed,  the  market  is  s&ll  quite  vola&le  (S&P500  +1.55%)  because  of  the  fear  among  investors  concerning  the  US  recovery  and  the  apparel  industry  suffers  from  its  intrinsic  vola&lity  (ANF  +3.51%)   Financial  diagnosis  A&F  2012   42  
  43. 43. ANF  quotes  and  volumes  from  IPO   (August  1996)   Financial  diagnosis  A&F  2012   43  
  44. 44. CONCLUSION  •  A&F  seems  well  valued  to  us  according  to   valua&on  methods  employed  •  Strong  and  stable  balance  sheet   (Equity=65%BS)  =>  weak  gearing  ra&o  •  Posi&ve  perspec&ves  (strong  brand  image  +   new  markets  opportuni&es  in  Asia)    =>  Buy   Financial  diagnosis  A&F  2012   44