The 2019 results were in line with expectations. Revenue increased 2.7% year over year, mainly driven by a 4.1% increase in retail channel sales year over year.

Gross margin fell slightly by 0.1 percentage points year over year to 71.9%. Overall operating expenses increased 3.8% year over year, leading to a decrease in operating profit margin of 0.8 percentage points to 9.5% year over year. Net profit increased 24.5% year over year to €256 million, mainly due to the European patent box system generating a one-time benefit of €102 million. The 2019 dividend ratio was 20.0%, far lower than the 74.7% in 2018.

Earnings forecasts per share for 2020 and 2021 were lowered by 47.8% and 17.7% to €0.045 and €0.082, respectively.

The novel coronavirus pneumonia outbreak in many countries around the world will have a negative impact on the company's sales in the first half of 2020 or even the whole year. As a result, we lowered our 2020 and 2021 revenue forecasts by 12.7% and 4.2%, respectively. Pressure on retail channels is likely to cause retail discount rates to rise, which will lead to lower gross margins in 2020.

The target price was lowered to HK$20.90 and downgraded to the “sell” rating. Prada has taken steps to improve its business and brought about some business recovery, particularly strong growth in regular-priced sales in 2019. However, companies are likely to face significant resistance in 2020 due to the impact of the pandemic. Our new price targets are equivalent to 54.0 times, 30.0 times, and 27.5 times the price-earnings ratio for 2020, 2021, and 2022, respectively, and room for a decline of 22.6%. As a result, we downgraded our investment rating from “neutral” to “sell.”