Prada to Benefit as Chinese Buyers Turn 'Sophisticated'

As the high-end Chinese consumer becomes more discerning in a slowing luxury goods market, analysts say Hong Kong-listed Italian fashion house Prada can face up to the challenge given its attractive product mix and store expansion plans, forecasting huge gains for the company’s stock over the next 12 months.

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Erwan Rambourg, Head of Consumer Brands Research at HSBC, says as consumers in China - the second-largest market in the world for luxury goods after the U.S. - become more "sophisticated" and "demanding," Prada’s product range that includes pure leather bags and smaller logos, is turning out to be more appealing than those of competitors Louis Vuitton and Gucci.

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“Chinese consumers are moving away from logo driven brands such as Louis Vuitton and Gucci. Prada looks like a edgy, newcomer with higher image potential,” Rambourg said.

“Prada’s presence in China is limited, which helps them have a more exclusive image. There is first mover disadvantage for companies like Louis Vuitton, they can only lose share,” he added. While Prada has 19 retail outlets in China, Guccias 48 stores.

China, Prada’ largest market, accounted for 30 percent of overall global sales in the fiscal year that ended in January 31, 2012. Revenue from “like-for-like” or existing stores in China grew 40 percent for the Milan-based retailer last year compared to 16 percent in North America.

The growth in China’s luxury goods market is expected to slowdown from a heady 50 percent achieved in 2011 to 15-20 percent this year, according to a CLSA estimate. But the slowdown in sales growth at Prada will be less severe. The brokerage expects Prada's sales growth in existing stores to slow to 11 percent in the current fiscal year ending January 31, 2013 from 23 percent last year.

According to Rambourg, Prada’s strategy of launching “flash collections” – which involves updating products on a monthly basis – will help it ride out the slowdown in the overall market. “It keeps their offering fresh and enables them to respond to changing trends quickly.”

Huge Upside for the Stock

Rambourg has upgraded the stock to overweight from neutral this week, setting a price target of HK$53 ($6.82) – marking a 15 percent upside over the next 12 months.

According to Aaron Fischer, analyst for consumer brands at CLSA, Prada’s shift in “product mix” away from women’s wear and shoes towards leather goods, which carry wider margins, is positive for the company’s earnings.

He adds that the company’s expansion of its retail network will also be a key driver of earnings. Out of the 80 retail outlets set to be launched this year, 40 of them are expected to be located in emerging markets, with 12-15 of them in China.

Fischer has a 12-month price target of HK$68.70 for the stock, forecasting a 47 percent upside from current levels.