20150916-DBS_Group-普拉达-01913.HK-Staying_watchful_in_near-term_11页_312kb

Prada Summary: DBS Group Research - Equity (16 September 2015)

Core Content

• Company Overview: Prada is a luxury group that designs, manufactures, markets, and retails fashion and luxury goods under the brands Prada, Miu Miu, Church's, and Car Shoe.
• Industry Classification: ICB Industry: Consumer Goods; ICB Sector: Personal Goods.
• Investment Rating: HOLD (upgraded from Fully Valued).
• Price Target: HK$33.18 (7% upside from last traded price of HK$30.90).
• Valuation Metrics: The valuation is based on a 20x forward price-earnings ratio. The current price is at a 7% discount to the new price target.

Main Points

• Earnings and Revenue Trends:

  • Prada's 1H FY16 net revenues grew by 4% to EUR1.8bn, with a 6% growth in retail revenue (excluding FX impact) and a 14% decline in wholesale revenue (excluding FX impact).
  • In 2Q FY16, retail revenue grew by 8% (excluding FX impact) and wholesale revenue declined by 17% (excluding FX impact).
  • Net profit fell by 23% to EUR189m in 1H FY16 due to operating deleverage.

• Geographical Performance:

  • Europe: Retail sales increased by 12% (excluding FX impact) in 1H FY16.
  • Americas: Retail sales grew by 15% (excluding FX impact) in 1H FY16.
  • Middle East: Retail sales increased by 15% (excluding FX impact) in 1H FY16.
  • Asia Pacific: Retail sales dipped by 1% (excluding FX impact) in 1H FY16, with a notable 5% fall in Greater China.
  • Japan: Retail sales grew by 12% (excluding FX impact) in 1H FY16.

• Strategic Initiatives:

  • Prada repositioned about 20% of its products to prices over EUR1,700, showing some beneficial effects.
  • The company is focusing on enhancing its supply chain and inventory management, and is rolling out new products and innovations to align with demand patterns.
  • Cost control and optimization of the retail network (with fewer store openings and more store-level efficiency) are also being pursued to strengthen the company's overall performance.

• Valuation and Risks:

  • Valuation: The price target is based on a 20x FY17 PE ratio.
  • Risks: Consumer sector headwinds, intensifying competition, weaker consumer sentiment, and foreign exchange fluctuations.

Key Financials

Company Focus

• Net Sales by Geography:

  • Europe: Increased by 12% in 1H FY16 (as reported) and 11% (same FX).
  • Americas: Increased by 15% (as reported) and -5% (same FX).
  • Asia Pacific: Decreased by 1% (as reported) and -17% (same FX).
  • Japan: Increased by 12% (as reported) and 5% (same FX).
  • Greater China: Decreased by 5% (as reported) and -23% (same FX).

• Net Sales by Brand:

  • Prada: Increased by 5% (as reported) and -5% (same FX).
  • Miu Miu: Increased by 19% (as reported) and 6% (same FX).
  • Church's: Increased by 19% (as reported) and 9% (same FX).
  • Car Shoe: Increased by 1% (as reported) and -6% (same FX).

• Net Sales by Product:

  • Leather Goods: Increased by 2% (as reported) and -8% (same FX).
  • Footwear: Increased by 31% (as reported) and 17% (same FX).
  • Ready to Wear: Increased by 8% (as reported) and -3% (same FX).
  • Others: Increased by 23% (as reported) and 23% (same FX).

Peer Comparison

Investment Thesis

• Profile: Prada operates in the luxury goods sector, offering high-end products ranging from leather goods to ready-to-wear and footwear.
• Rationale:
  • Room for growth in key markets.
  • Strong brand positioning with good bargaining power for transfer pricing to mitigate rising costs.
  • Potential for retail network expansion in the long term.
• Valuation: The valuation is based on a 20x forward price-earnings ratio.
• Risks:
  • Consumer sector headwinds.
  • Intensifying competition.
  • Weaker consumer sentiment.
  • Foreign exchange fluctuations.

Financial Highlights

• Earnings Growth:
  • Net Profit Growth for 2016 is estimated at 7%.
• Margins:
  • Gross Margins decreased slightly from 73.8% to 71.8%.
  • Net Profit Margins decreased from 17.5% to 12.7%.
• ROAE:
  • ROAE for 2016 is 13.3%, down from 25.1% in 2014.
• Net Debt/Equity:
  • The company is currently in a cash position, with no net debt.

Key Assumptions

• Store Count:
  • Expected to increase from 461.0 in 2013A to 644.0 in 2017F.
• EBITDA Margin:
  • Expected to decrease from 31.9% in 2013A to 23.7% in 2016F.
• Net Cash:
  • Expected to decrease from EUR317m in 2013A to EUR161m in 2017F.

Summary

Prada is a luxury goods company with a diversified brand portfolio and a focus on strategic repositioning and cost optimization. The company's recent performance has shown mixed results, with growth in Europe, Americas, and Middle East, but declines in Asia Pacific and Greater China. The investment thesis highlights potential for growth, strong brand positioning, and the possibility of retail network expansion. However, risks such as consumer sector headwinds, competition, and foreign exchange fluctuations are present. The valuation is based on a 20x forward PE ratio, and the price target is HK$33.18. The company is currently in a cash position, with a net profit margin that has declined. Despite the challenges, the company is expected to show positive earnings growth in the medium term.