Pricing shows narrowing differentials
Updating our price comparison from March shows that the price gap between Europe and Asia has narrowed back towards normalised levels. Our data (albeit a small sample) shows Hong Kong is now at a 13% premium (historically c15%) and China +37% (historically 30-40%). This appears to have been completed efficiently through some price adjustments for some brands and helped by FX although it is too early to examine the impact on volumes and the redirection of the demand. While this is selective data it shows that the hard luxury companies have fully moderated prices while soft luxury companies have some way to go. While we wait for the volume impact, we remain more positive on the hard luxury companies, with Richemont the preferred name in the sector. In soft luxury LVMH is our preferred choice given it remains the price leader and has handled its LV rejuvenation exceptionally well. With H1 margins the other main issue due to continued softness in organic growth and FX hedging, we remain relatively cautious on the sector. Following the departure of the coverage analyst, with this report we transfer primary coverage of Richemont, Kering, Swatch, Tod’s and Mulberry to Julian Easthope.
Soft luxury companies still some way to go: Our analysis shows that the industry has narrowed the pricing gap in Hong Kong from 30% to 19% and China from 59% to 44% between March and June with the US at a 19% premium. We believe most companies are waiting for price leader Louis Vuitton to make adjustments before following suit Although there are margin implications of doing this before the FX hedges ease in Q4.
Hard Luxury companies have adjusted: By contrast, the hard luxury companies now average a 10% price discount in Hong Kong, 13% premium in China, with the US at a 5% discount. Even taking VAT refunds into account, there is still relatively limited opportunity for parallel imports.
Sector expensive in nominal terms but reasonable relative to the market: looking at the pure luxury companies, the weighted average PE of 18.7x is at the top end of the 13x-19x PE range although this amounts to just a 25% market premium – towards the bottom of the 5% to 53% range. We believe that H1 will be a tough period on margin with the full impact of FX hedging likely to be felt in this period but these pressures should ease in H2 and become a tailwind in 2016.
Richemont the preferred investment: With hard luxury pricing having been addressed and with the margin implications highlighted by the company at the FY 15 results, Richemont is our favored stock. It benefits from its strong position in jewellery, which is performing well, significant cash pile together with Yoox/Net-A-Porter JV that we believe is worth 4 points on the multiple on 18.7x (c14.7x ex cash and NAP).
LVMH – also good value: In the soft luxury area, we prefer LVMH given its price leadership that stands on 18.1x – in line with the sector.