1H22 performance exceeded expectations
Prada announced 1H22 results: 1H22 revenue of 1.9 billion euros, a year-on-year increase of 22% at a fixed exchange rate, exceeding the market consensus of 1.8 billion euros. 1H22 revenues are mainly driven by Europe and the Americas, where sales rose 89 per cent year-on-year and 41 per cent respectively at fixed exchange rates, while sales in the Asia-Pacific region (excluding Japan) fell 7 per cent year-on-year at the fixed exchange rate, as 30 per cent of Chinese retail stores were affected in 2Q22, but the impact was partly offset by bright performance in South Korea and Southeast Asia. 1H22 Asia Pacific, excluding Japan, accounts for 35 per cent of the group's total revenue. By category, the 1H22 clothing category performed well, with sales at fixed exchange rates up 32% and 65% respectively compared with 2021 / 2019. Under the fixed exchange rate, the retail revenue of 1H22 increased by 26% and 38% respectively compared with that in 2021, while the distribution channel decreased by 3% and 39% respectively compared with that in 2021. 1H22 retail revenue accounts for 90 per cent of total revenue, while revenue from direct e-commerce channels increased by 29 per cent year-on-year, accounting for 7 per cent of retail revenue. The company's gross profit margin increased from 74.3% of 1H21 to 77.7% of 1H22, of which the increase in 2.8ppt was mainly driven by product upgrading and channel structure optimization, slightly offset by rising costs, including logistics, and the remaining 0.6ppt was mainly due to the devaluation of the euro.
1H22's adjusted EBIT is 331 million euros, double 1H21's 166 million euros, and 1H22/1H21 corresponds to adjusted EBIT profit margins of 17.4% and 11.1% respectively. As of June 30, 2022, Prada had net cash of 179 million euros.
Trend of development
During the results call, management demonstrated its confidence in accelerating the achievement of its medium-term targets and reiterated that the company is still considering completing a dual listing on the Milan Stock Exchange (currently listed in Hong Kong). Main points of the conference call: 1) sales in China have increased since stores in China resumed business in June 2022. Prada plans to hold an offline fashion show in Beijing on August 5 this year to better reach Chinese consumers. 2) the growth rate of retail revenue accelerated, with 1Q22/ 2Q22 growing by 34% and 41% respectively compared with the same period in 2019. 3) the management believes that the market consensus forecast of 17% EBIT profit margin in 2022 is conservative. 4) Leather products are the focus of 2H22's development, and the company plans to expand its revenue share to 60% (1H22's 50%).
5) the company plans to open 8 new Prada stores and 4 Miu Miu stores by the end of 2022, and launch about 20 flash stores. 6) despite increases in energy prices, including electricity prices (up 25-30%), the company believes it is important to continue to invest in Italian factories. We believe that the outstanding performance of the company's clothing category is a testament to the success of the new design by Joint Creative Director Raf Simons. Proactive cuts in distribution also help boost profit margins and brand image, thereby boosting the higher-margin retail business. We are bullish on the continued expansion of Prada's revenue and profit margins and believe that it will be able to achieve its medium-term target (revenue of 4.5 billion euros and EBIT profit margin of 20%) earlier than expected (CICC forecast for 2024).
Profit forecast and valuation
We have raised our revenue forecast for 2022 Miu Miu 23 by 9% to 3.93 billion euros / 4.26 billion euros respectively, based on market share gained by Miu Miu and return to growth. We raised the 2022 EBIT 23 EBIT by 32% to 750 million euros / 860 million euros respectively, and raised the 2022 Acme 23 net profit forecast by 35% and 31% to 500 million euros / 580 million euros respectively. Based on the increase in AUR (average unit selling price), the channel mix is skewed towards higher-margin retail and direct e-commerce, as well as improved flat efficiency. The current share price corresponds to a price-to-earnings ratio of 27.1 times / 22.5 times 2022 / 2023. We maintained our outperforming industry rating and raised our target price by 5.7% to HK $56.00 (corresponding to a price-to-earnings ratio of 36.0 times / 31.3 times 2022 / 2023), with valuation multiples lowered due to higher interest rates in Europe and the United States. The target price has 27.9% upside over the current share price.
Risk
There is a deviation in the control of consumer preferences and timely fashion trends; the United States may face recession; and the COVID-19 epidemic continues.