Downgrade to HOLD and trimmed TP to HK$ 22.84, based on 33x FY20E P/E (changed from 1.3x 2 years PEG due to slower growth ahead). We believe Prada is negatively impacted by the coronavirus in China and overseas (esp. Japan and Italy) in 1H20E and further drag is still possible. We think its valuation at 36x FY20E P/E, is rich (vs Peers’ average of 29x), PEG at 2.0x (vs median of 1.6x).
- More negative than SARS, because of: 1) greater China mix and 2) outbreak in overseas. Referencing to SARS, sector correction for luxury brands was 27% during Nov 2002 to Apr 2003 and average sales growth was 9% YoY decline in 1H03. We believe the negative impact would be worse during this COVID-19 period, because: 1) China’s contribution is a lot higher at ~20% of total sales (doubled vs 2003, by our est.) and 2) the overseas coronavirus cases in South Korea, Italy, even Germany and France have been piling up since late Feb. Note that Japan, China and Italy made up 49% of Prada’s sales in FY18, by CMBIS est.
- We expect the recovery pace to be slow and gradual. Again, referring to SARS in 2003, sales growth for luxury brands did not return to positive growth quickly. Major brands reported 2.2% YoY decline in 2H03, following a 9.4% YoY drop in 1H03 (Fig 14-15), as it took time for the economy and consumer sentiment to recover. Also, we think travel restrictions imposed by various governments and advises of World Health Organization (on China, Korea, Italy, etc) will substantially discourage travelling worldwide. According to ForwardKeys, a travel analytic company that analyses millions of daily flights and hotel bookings data, stated that the outbound flights from China had dropped by 58% (during 20 Jan to 9 Feb) and 56% (during 1 Mar to 30 Apr, future bookings), pointing to weakened tourist spending in 2Q20E.
- Having Raf Simons as co-creative director, in our view, is a positive. Raf Simons will join Prada on 2 Apr 2020 (not a surprise). Raf Simons is one of the most influential designers, who were at Christian Dior and Calvin Klein. Some says he was too artistic but we think, may well be what Prada need. Nonetheless, share prices for Dior and PVH Corp did well during his terms.
- Downgrade to HOLD and cut TP to HK$ 22.84. We adjusted FY19E/ 20E/ 21E EPS estimates by 0.5%/ -18.4%/ -14.3%, to factor in 1) losses of China and sales and operating deleverage and 2) reduction of tourists spending worldwide. We downgrade Prada to HOLD and trimmed TP to HK$ 22.84, based on 33x FY20E P/E, with a 18% 2 years adj. EPS CAGR. The old TP was based on 1.3x 2 years PEG and implied a 37x FY20E P/E.
