Shares of the maker of $2,000 bags and Miu Miu shoes, which gets more than 42 percent of sales from Asia, have dropped 32 percent from their July peak. The stock has fallen with companies such as jeweler Luk Fook Holdings International Ltd. (590) and Omega retailer Hengdeli Holdings Ltd. (3389) as property and stock- market declines hurt China’s consumers.
Luxury-sales growth in the world’s most populous nation will slow in 2012 from a forecast of at least 20 percent this year, said Royal Bank of Scotland analyst Katherine Chan. Coach Inc. (COH) to Gieves & Hawkes seller Trinity Ltd. (891) are already feeling the effects.
“The golden time, or the high-growth period, for many luxurious goods retailers is probably over,” said Chan. Sales growth at high-end stores open more than a year may drop by as much as six percentage points in 2012, she said.
Consumption leveled off faster than expected this quarter amid a cooling economy and market declines, Citigroup Inc. said Dec. 8, citing retailer and manufacturer projections at a Hong Kong conference.
‘Fading’ Wealth
“Chinese shoppers could cut back spending on luxury items in the near term, as the stock markets and the property markets have corrected steeply this year,” said Eddie Lau, head of regional consumer research at Citigroup. “The wealth effect is fading.”
Luxury goods sales in China will reach a record 88.8 billion yuan ($14 billion) in 2011, rising 12 percent this year and growing 82 percent since 2005, Euromonitor International estimates.
China will grow 8.5 percent next year, the lowest pace in 11 years, the Organization for Economic Cooperation and Development forecasts.
“It’s hard to repeat the 30 to 40 percent same-store sales growth we saw in 2011,” said RBS analyst Larry Cho, who recommends short-term investors avoid China discretionary stocks. “If consumers have to tighten the purse strings, they will cut back on luxury items.”
High-end brands are growing more reliant on growth from China, where urban disposable incomes almost doubled over five years to 19,109 yuan in 2010. Asia is Prada’s biggest market, with more than 42 percent of its 2 billion euros revenue in the fiscal year ending January, compared with 29 percent two years earlier.
Prada Tumbles
Prada’s stock has lost 32 percent from its July 27 record of HK$49.45, wiping more than $5 billion off its market value. The benchmark Hang Seng Index has lost 19 percent in the same period. The luxury goods maker, which raised $2.5 billion in June through Hong Kong’s biggest public offering this year, still trades at 20.52 times expected earnings, more than double that of the benchmark.
“Prada’s substantial store roll-out plan makes it particularly vulnerable to a sales slowdown or decline,” said Rey Wium, an analyst at Renaissance BJM in Johannesburg, who has a “hold” rating on the security.
Philip Mok, an analyst at Phillip Securities in Hong Kong, has a “sell” recommendation. He said in October that Prada could fall to HK$26.50. It closed today at HK$33.70. Macquarie Equities Research analyst Gary Pinge started covering the stock Dec. 9 with an “underperform” rating and a HK$31.30 price target. “Deteriorating consumer confidence in Prada’s key markets, as well as weakening trends in China, create headwinds for optimistic consensus forecasts,” he said.
Trinity Valuation
Valuations for consumer companies such Trinity, which sells Gieves & Hawkes and other expensive brands, and Prada have gone too high, said Sinopac Securities analyst Katharine Song. Share prices are sliding as “people expect high-end spending will slow in a weakening economy,” she said. Still, Chan, the RBS analyst, recommends Trinity because it has cash to make acquisitions.
Stocks have declined across the discretionary sector. Coach’s depositary receipts that started trading in Hong Kong this month have declined 8.5 percent since Dec. 2. The largest U.S. luxury handbag maker plans to increase China stores 40 percent to 75 next year. Hengdeli, the retail partner of Swatch Group AG in China, is down 46 percent for the year.
Chow Tai Fook Enterprises Ltd., the world’s largest listed jewelry chain, fell 8 percent on its Hong Kong stock exchange debut yesterday. “The macro-economic situation may weaken the buying power of the customers,” said Henry Cheng, executive chairman, adding the company is confident about long-term sales.
‘Inevitably’ Slowing Growth
The jeweler’s same-store sales growth for the six months ended Sept. 30 was 61.9 percent, according to its listing prospectus. Cho said he is doubtful “the explosive sales growth will repeat.”
Smaller competitor Luk Fook, which makes gold and diamond jewelry, has lost 38 percent since its Aug. 17 peak of HK$44.75. “Growth rate will inevitably slow as we are riding on a higher base and we have yet to see the impact from a global economic slowdown,” said Chief Financial Officer Paul Law. He predicts same-store sales growth of between 15 percent to 20 percent for the year ended March 2013, lower than at least 30 percent in fiscal 2012.
Mercedes, BMW (BMW) Discounts
Europe’s debt crisis and China’s efforts to curb property prices have pushed the Shanghai Stock Exchange Composite Index (SHCOMP) down 22 percent this year. China’s home prices declined in 33 of 70 cities in October from September, the worst performance this year, according to government statistics.
Mercedes-Benz (DAI) and BMW dealers deepened their discounts on some models in China last month, according to China Auto Market.
Average prices of Daimler AG’s 2012 Mercedes-Benz C200 sedan at Chinese dealerships were 16 percent below the manufacturer’s recommended price last month, compared with 3.4 percent in July, when the model became available, according to the research company. BMW dealers sold the 2012 320i sedan 11 percent below the suggested price, more than triple the initial discount for last year’s model.
Prada’s worldwide sales so far this year have grown with the global luxury industry, which Boston-based consultant Bain & Co estimated in October is set to rise 10 percent in 2011. Prada sales grew 25 percent for the first nine months of this year from a year earlier and its Asia Pacific revenue, excluding Japan, grew 39 percent.
‘Buy on Weakness’
Prada spokesman Luca Grassis declined to comment on the company’s outlook. The stock has declined 15 percent from its offering price.
China’s consumer sector could pick up next year if the government takes steps to boost growth. Banks including China International Capital Corp. and Goldman Sachs Group Inc. forecast Premier Wen Jiabao will cut taxes to help the economy. “The consumer sector will outperform in the second half of 2012, as China is determined to boost domestic spending,” said Catherine Yeung, investment director at Fidelity Investment Management Ltd. “Fund managers are sitting on a lot of cash and need to look back at growth.”
Companies such as Prada will keep growing as China’s population gets richer, said Seth Peterson, a London-based luxury sector analyst at Berenberg Bank. “If you believe in the long-term growth story, you could buy on weakness,” he said. “The short-term sentiment remains extremely bad, with China’s GDP slowing and European crisis continuing. This is not going to improve anytime soon.”