- One-off headwinds blowing in 2016 are abating - we expect a constructive 2H16E:
1. Chinese spend repatriation; 2. Elimination of “single child” policy; 3. Tail end of wholesale destocking.
- Structural moderation remains on the cards:
1. Sufficient retail network development; 2. Maturing Chinese early adopters => Fading benefit for
“high end” brands from the “mega-brand bathtub” (e.g. Chanel, BV) and for “late” categories from
the “category spend shift” (e.g. Jewellery).
- Higher competition in most categories is a reality:
1. Fewer new consumers, plenty of brand/product choices; 2. Need for faster innovation; 3. “Locust
effect”.
- Macro risks persist, but don’t look like a clear and present danger:
1. Question marks on the Chinese economy; 2. Consensus seeing a macro slowdown over the
next two years; 3. Luxury goods consensus expectations still skewed towards faster growth in
outer years – but the buyside seems to know better.
- Our investment recommendations move one notch closer to a “risk-on” approach
We downgrade Hermès to Underperform as we note a disconnect between its trading multiples
and growth outlook + expect lower investor appetite for it as a “safe haven”. We downgrade Kering
to Neutral, as we see smaller share price headroom from the brilliant Gucci self-help, and have
doubts on BV, SL, and a short-term Puma divestiture. Our top investment recommendation is
LVMH for its strong structural appeal, self-help with near-term benefits, and reasonable valuation.