Maintain the buy rating and raise the target price to HK $54.70, based on 55 times forecast 22-year earnings (previously 41 times 2021), about 3.5 standard deviations higher than the five-year average of 30 times. We think Prada's sales in December 20 are encouraging, a clear indication of the growing popularity of its brand and will continue to support its valuation. The current valuation is 47 times forecast earnings for fiscal year 22, which is about 2 standard deviations higher than the 5-year average of 30 times (the median for the industry is 30 times). We think valuations are still attractive.
The recovery in the fourth quarter of FY20 was strong. Prada sales improved from a high number of units in the third quarter to a decline in low and medium units in the fourth quarter, a significant improvement from a 32% decline in the first half of the year. In fact, the luxury industry as a whole did well in the second half of the year, with Richemont growing 5 per cent year-on-year in the fourth quarter and sales of LVMH / Kering falling only 7 per cent / 9 per cent in the third quarter. More importantly, Prada sales stopped falling in December 2020, which is very exciting because: 1) the base in the fourth quarter of 19 is actually quite high (15% growth); 2) the European market is still under a lot of pressure under the continuation of Lockdown.
The biggest drag comes from Europe and Japan. By region, sales in Europe and Japan are still declining in the second half of the year due to the relatively high share of tourist sales in the past (China Bank International forecasts a year-on-year decline of about 30% and about 20%), while other regions return to growth (about 52% in China). Growth in the Asia-Pacific region (about 25% forecast by China Bank International), the United States (about 5% forecast by China Bank International) and the Middle East (about 15% forecast by China Bank International) Are obviously driven by the wealth effect.
The company's target for fiscal year 21 is cautious. The company has successfully achieved EBIT break-even guidelines for fiscal year 20 (excluding capital gains of 37 million euros from real estate sales), which means that EBIT profit margins have returned to about 13% in the second half of the year. But management reiterated its cautious target for FY21 (close to 9.5% in FY19) because Prada is expected to have more advertising activities, its operating expenses will rise, and the recovery in Europe may not be smooth. But we are relatively more confident because: 1) new products are very popular, such as the newly promoted Cleo is already quite popular (can already be compared with Hobo), 2) continue to vigorously develop e-commerce (especially Prada.com) and 3), by improving store efficiency to pull operating leverage (increase the average unit price through product mix and joint rate).
Maintain the buy rating and raise the target price to HK $54.70. We will adjust our earnings per share forecast for fiscal year 20-21-22-55% to reflect an increase in operating expenses in fiscal 21 and an improvement in operating leverage in fiscal 22. We expect Prada to gain more market share in the near future (unlike in fiscal year 2014-18), so we maintain the buy rating and raise the target price to HK $54.70. based on 55 times forecast earnings for FY22, it is about 3.5 standard deviations higher than the 5-year average of 30 times (previously 41 times FY21).