Trading Meets Fundamentals: The Curious Incident of Chinese Luxury Demand
The incident to analyse here is the apparent divergence of Chinese personal luxury demand, which remained robust over 1H15 and accelerated in 2Q15 vs. 1Q15, from a weakening Chinese macroeconomic backdrop, a deteriorating real estate market, and a softening auto market.
Look at things by nationality, not by geography - Two structural tailwinds to be considered
Chinese consumers buy luxury goods everywhere in the world – this is what seems to have
accelerated over 1H15. By contrast, luxury goods sales in China – and in particular in Hong Kong
and Macau – have been declining (The Great Mall of China). Two structural tailwinds should be
considered: 1/ Continuing growth of luxury-hungry middle-class Chinese consumers; 2/ Boost to
discretionary spend from socio-demographic shifts.
Factor in contingent differences
1/ Anti-gifting creates easier y/y comps for personal luxury goods players; 2/ Stock market
gyrations: A massive stock market boom, followed by a sharp partial correction, may have
prompted many Chinese not to play with stocks for a while, and to enjoy some of their money
instead; 3/ Small ticket vs. Big ticket items replacement: It may well be that Chinese consumers are
postponing big ticket decisions in a more uncertain macro-economic environment and have more
money on their hands for smaller purchases; 4/ Daigou’s expectations that price gaps will close
somewhat over 2H15 (either because of FX movements or price changes) may have pushed sales
up as purchases are brought forward.
Stay on guard – Pick stocks, rather than seek broad sector exposure
We concentrate on names where self-help opportunity is least appreciated by the market against a
backdrop of soft economic conditions. LVMH, Kering and Swatch appear as reasonable longs.
Richemont may be added to the group, given its strong structural appeal and relatively compelling
valuation. We’d be more prudent on Burberry. By contrast, we think it is time to look at Prada, as it
is going to benefit from remedial action in 2H15. In this report, we also roll forward our 12-month
EPS and fine-tune our market relative P/E to derive our new TPs.