Keep buying and raise the target price to HK $67.31, based on a price-to-earnings ratio of 60 times for fiscal 22 (previously 55 times), higher than the five-year average of 36 times about 2.0 standard deviations. We expect Prada's strong sales growth in the first half of FY21 to improve profit margins and boost investor confidence and valuation.
Therefore, we believe that the current valuation of 52 times the price-to-earnings ratio for fiscal year 22 is still quite attractive (although the industry average is 33 times).
Retail sales maintained rapid growth in the first half of fiscal year 21, benefiting from a low base, improved brand power and wealth effect. We expect Prada's retail sales growth in the first half of FY21 (compared with the first half of FY19) to be about medium units, including rapid growth in the first quarter (about 7 per cent year-on-year) and significant acceleration in the second quarter (about 90 per cent), benefiting from 1) a low base (an average of about 40 per cent of stores closed between February and May 2020) and 2) rising brand power Reflected in the increased popularity of various product lines (leather goods: Galleria (reprint), Cleo, Hobo/ clothing: Linea Rossa/ footwear: cross-border co-naming with Adidas, Cloudbust, Slingback, etc.) as well as various fabrics and designs (e.g. Re-Nylon) and 3) wealth effect, the high net worth population in the United States and China increased by 11% in 2020 compared with the same period last year, according to the Capgemini 2021 World Wealth report. Regionally, we expect China (about 70%) and the United States (about 64%) to grow faster, but the European Union (about 41%), the Middle East (about 41%) and Japan (about 34%) are relatively weak due to a lack of tourists.
Profitability will gradually improve with the improvement of pricing power and store efficiency. The overall pace of recovery certainly depends on the control of the epidemic, but we are full of confidence in the growth after the epidemic. If we strip out the 100-130 stores that were temporarily closed in the first half of the year due to the epidemic, the actual average sales per store increased by 10-15% in the first half of fiscal year 21 compared with 19%, which is actually quite encouraging. We expect operating margins to jump from 9.5% in fiscal 19 to 16.7% in fiscal 23 due to higher gross margins (higher average selling prices, less discounted sales and e-commerce sales) and better operating leverage.
It is one step closer to the sales target of 5 billion euros in fiscal year 24-25. In our view, the possibility of achieving this goal is slightly increased, as Prada began to report faster sales growth than the industry in the first half of FY21. We now expect sales to grow at a compound annual rate of 13% in fiscal year 20-25, compared with the company's target of about 15% and industry growth of about 10%.
Maintain the buy rating and raise the target price to HK $67.31. We raised our earnings per share forecast for FY21 / FY22 / FY23 by 2% / 7% / 13%, taking into account faster sales growth and better operating leverage.
As we expect Prada to outperform the industry in the future (unlike in FY14-18), we keep buying and raise our target price to HK $67.31, based on a price-to-earnings ratio of 60 times for FY22 (previously 55 times), which is approximately 2.0 standard deviation above the 5-year average of 36 times.