Upgrade to BUY and raised TP to HK$ 32.82, based on 41x FY21E P/E, ~2 s.d. above 5 years avg. of 28x (from 25x FY21E P/E). We believe Prada’s impressive turnaround in Jun - Jul 2020 is the result of series of successful reforms and should deserve a re-rating. Therefore, its valuation at 35x FY21E P/E, at ~1 s.d. above 5 years avg. of 28x, in our view, is still attractive (vs peers’ average of 29x).
- 1H20 results slightly missed. 1H20 sales fell by 40% YoY to EUR 0.94bn, below BBG est. by 7%, and net losses of EUR 180mn was recorded, also below BBG est. of EUR 129mn. This miss, in our view, was mainly due to lower-than-expected GP margin at 70.4%, where a drag of ~3.3pt came from high industrial fixed costs in the supply chain during pandemic.
- However, 2Q20 recovery was impressive and happened not only in mainland China. Prada’s momentum was strong since 2H19, with high-teens retail sales growth in Jan 2020, indicating gains in brand traction following successful product launches and marketing campaign. Therefore, even with COVID-19 disruption, we are not surprised to see a strong comeback from them. In fact, retail sales growth already returned to single digit decline in Jul 2020 vs ~20% drop in Jun 2020, despite ~30 stores are yet to re-open, lack of tourists flow and various travel restrictions. Note that momentum in Jul was not only superb in mainland China (~66% jump), but also in Asia Pacific (~20% growth) and Middle East (strong double digit), while US (slight negative), Japan (low double digit negative) and EU (double digit negative) are also recovering meaningfully from 2Q20. More importantly, the group already went back into profit in Jun and Jul 2020.
- The Company is cautiously targeting a EBIT breakeven in FY20E. According to management, a EBIT breakeven in FY20E is still possible as long as retail sales growth in 2H20E stay flattish. We believe that is achievable as long as strong sales trend in Jul 2020 sustains into 2H20E.
- We are more optimistic on FY21E, thanks to: 1) better pricing and margins, 2) ramp up of e-commerce and 3) opex savings (e.g. rental and other variables). We are becoming more positive on FY21E, as: 1) management guided for a strong 75% GP margin, with the aid of ASP increases (a sign of better popularity), 2) higher margin e-commerce sales growth to stay fast (online sales grew by 150% in 1H20) and 3) pressure from opex to be eased with many rental contracts being renegotiated.
- Upgrade to BUY and raised TP to HK$ 32.82. We revised down FY20E/ 21E/ 22E EPS estimates by 129%/ 11%/ 7%, to factor in the pandemic related losses. As we believe Prada is in a much better position to gain market shares in near future, we upgrade Prada to BUY and lifted TP to HK$ 32.82, based on a 41x FY21E P/E, ~2 s.d. above 5 years average of 28x (from 25x FY21E P/E, given strong turnaround).
