Bocom: China Sportswear, Footwear Sectors Struggling
Bocom International said that following recent channel checks in coastal China, it found that the country’s listed athletic apparel and footwear makers were enduring tough market conditions.
“During our recent visit to certain department stores, shopping malls, menswear and sportswear stores in Xiamen, we found that the sportswear sector and selected ladies footwear brands continued to be challenged by excess inventories, while menswear brands saw decent SSS (same store sales) growth,” Bocom said.
The research house said Kappa, 361° and Le Saunda appeared to have more excess inventories than their peers as it observed that these brands arranged more retail space and provided heavier discounts than their peers to clear spring/autumn products.
“The 1Q12 SSS growth rates of Lilanz and Cerruti 1881 were satisfactory, according to store managers. The discount promotion strategies of department stores and ladies footwear brands were within our expectations. We did not see any special promotion events related to the National Consumption Month.”
As a whole, Bocom said its observations were in line with its less positive view on the 2012 consumption outlook, with sportswear brands taking it on the chin.
“Both Li Ning (HK: 2331) and Peak (HK: 1968) seemed to have disappeared from the key Zhongshan Lu pedestrian street in Xiamen, Fujian Province. We observed that Kappa (HK: 3818) and 361° (HK: 1361) offered more retail space and heavier discounts than peers to sell spring/autumn products.”
Bocom added that the ground floor of Kappa’s flagship store was selling these products at 40-50% discounts and a small 361° store was offering these products at 50% off.
“Overall, the traffic flows of the sportswear stores remained low. These observations reinforce our negative view on the sector."
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Bocom initiates coverage of PRADA with ‘Buy’
Bocom International said it is beginning coverage of Italian luxury brand Prada (HK: 1913) with a “Buy” recommendation, and a target price of 62.8 hkd, which is based on an FY13E P/E of 28x.
“We expect its re-rating to continue on its sustainable leading growth story (29% FY13-14E net profit CAGR vs. 19% of global sector average),” Bocom said.
The research house said the Italian luxury brand was leveraging the worldwide recognition of its iconic brands, namely “Prada” and “Miu Miu,” and the management’s ability to cultivate trendsetting product designs.
“We believe Prada is well-geared to capture the continuing upturn in the global fashion and luxury goods market, including the booming Chinese market. This, coupled with the group’s sustained margin strength, convinces us that Prada deserves to trade at a higher valuation.”
Key company strengths include a leading global brand recognition; scope for network expansion; margin upside, supported by the group’s ongoing effective sales/channel/geographical mix strategy and outsourcing capability; and the rising growth engine from Miu Miu.
“Fuelled by the leading growth Chinese market, we forecast Prada to post 31% and 27% growth, respectively, in FY13E and FY14E net profit. The Greater China market (China, HK and Macau) continues to be the group’s leading growth market, with 36% FY13-14E revenue CAGR.”
Bocom added that it feels Prada has been “prudent” in expanding the China market.
“This can be shown by its much smaller China store network compared with its major peers. Despite having opened eight stores in FY12, the group had a total of 25 stores in China (covering 14 cities) only, with 19 stores for the Prada brand and six for the Miu Miu brand.
“Compared with the single-branded Gucci with over 70 stores and LV with 40 stores, this shows China is still an under-penetrated market for the group.”
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