Upgrade to BUY and raised TP to HK$ 31.39, based on 1.3x FY19E-21E PEG (changed from 25x FY19E P/E due to faster growth ahead). We believe Prada is set to turn around, thanks to 1) improving brand popularity and direct retail (excludes markdown) sales growth despite HK weakness and 2) drag from markdown sales to fade out. We think valuation at 1.1x FY19E-21E PEG remains attractive (vs Peers’ median of 1.8x) and we think further re-rating is possible as we expect financial numbers to further improve starting from 4Q19E.
- Even with the drag in HK, sales trend of direct retail in 2H19E will still improve. The social unrest in HK is certainly an investor concern and we expect a ~50% YoY drop in HK business revenue in 2H19E. However, thanks to robust mainland China growth (est. double digit) and acceleration in Europe, Korea, Japan and US, we now expect FX constant direct retail sales growth in 2H19E to speed up to 4%, vs -3% in 1H19. But counting in wholesale business restructuring and fading out markdown sales, overall group sales growth may slow down to 0.5% in 2H19E, vs 2.4% in 1H19.
- Retail turnaround in sight, as brand and product popularity increases. Prada had dedicated more on new products in recent years and successfully gained more traction from consumers, indicated by its gradual increase in the rank in Lyst index. According to Google Trends, product launches like Hobo bag, Cloudbust shoes as well as Nylon (including Re-Nylon) series are highly popular and even outperformed others like cahier and Galleria. This, in our view, will lead to a solid direct retail growth of 7% and 5% in 2H19E and 1H20E. More importantly, a highly eye-catching collaboration between Prada and Adidas (limited edition) will be launched in Dec 2019, where its Instagram post has already received over 200K likes (vs 30-40K on average) in less than 24 hours. This, in our view, could effectively draw in consumer interest on the brand once again, and help its sales growth onwards.
- Adoption of IFRS 16 standard may temporarily drag net profit. Under the new accounting standard, rental expenses will be split into 1) depreciation of right of use asset, 2) rental related expenses and 3) interest expenses on lease liability. Thus, we estimate its EBIT in FY19E-21E to be boosted by EUR 20-25mn and pre-tax profit to be reduced by EUR 10-15mn.
- Upgrade to BUY and raised TP to HK$ 31.39. We revised up FY19E/ 20E/ 21E EPS estimates by 0.5%/ 0.4%/ 5.6%, to factor in 1) higher GP margin as markdown sales reduce and 2) greater level of operating leverage. We upgrade Prada to BUY and raised TP to HK$ 31.39, based on 1.3x FY19E-21E PEG ,using a 28% 2 years EPS CAGR. The new TP implies a 37x FY20E P/E, while the old TP implied a 25x FY19E P/E.
