China’s Luxury Demands: The Chinese consumer is coming of age both at home and abroad and these seven brands stand to benefit the most.
China is the new Japan. According to a Goldman Sachs report, “Analysis of Chinese Demand Potential,” strong consumer interest from, and increased international travel by, the Chinese could raise the average fair value for some luxury...
China is the new Japan. According to a Goldman Sachs report, “Analysis of Chinese Demand Potential,” strong consumer interest from, and increased international travel by, the Chinese could raise the average fair value for some luxury stocks by 15 percent. While some brands have made inroads in China, opening stores in Beijing and Shanghai, Goldman Sachs believes the market’s impact is still underestimated. Already the third-largest customer base for some of the biggest labels, the Chinese account for about 12 percent of global sales for several companies on this list. With growing disposable income and a young population, the Chinese could develop an appetite for luxury products as insatiable as the Japanese’s. Of the companies it researches, Goldman Sachs said these seven stand to gain the most from increased Chinese spending.
TOD’S SPA 2005 Revised earnings growth estimate, based on potential Chinese demand: 28.4 percent 2005 Sales growth estimate, based on potential Chinese demand: 8.6 percent Tod’s came late to the Chinese party, arriving in 2003 with a store in Shanghai and last month opening its second store in Beijing, part of an aggressive expansion campaign that will bring 20 more stores to the country within the next five years. As Chinese travel to European destinations increases, as it is expected to, consumers will become more familiar with French and Italian brands, and the logos of companies such as Tod’s will be increasingly sought after. The company’s price points and varied product line also bode well for expansion in China, which prompted Goldman Sachs to raise its previous 2005 estimates of 25.1 percent growth in earnings and 7.4 percent growth in sales.
COMPAGNIE FINANCIERE RICHEMONT SA 2005 Earnings growth: 24.9 percent 2005 Sales growth: 10.1 percent At DFS Galleria Sun Plaza in Hong Kong, the Chinese account for 41 percent of Dunhill’s sales and 28 percent of sales of writing instruments, leathergoods and watch brand Montblanc. But others of the group’s watch brands — which include Cartier, Vacheron Constantin, Jaeger-LeCoultre and IWC — are too pricy, in the view of Goldman Sachs, to attract a significant number of Chinese customers. The investment bank’s previous 2005 estimates called for 18.8 percent growth in earnings and an 8.6 percent rise in sales.
LVMH MOET HENNESSY LOUIS VUITTON 2005 Earnings growth: 19.8 percent 2005 Sales growth: 9 percent Before its revision, Goldman Sachs estimated a 2005 earnings increase of 13.7 percent and a sales hike of 6.5 percent, but factoring Louis Vuitton’s strong recognition in China caused it to raise estimates. Louis Vuitton has a 47 percent share of the leathergoods market in Hong Kong and 37 percent in Taiwan. Vuitton opened its first mainland store in 1992. A Vuitton flagship, unveiled in Shanghai in September, is an example of the brand’s ambitions in China. A similar flagship is scheduled to bow this year in Beijing. The company plans to open stores in two new cities a year. At LVMH’s DFS subsidiary, Vuitton and the French group’s stable of other luxury brands are on prominent display.
THE SWATCH GROUP LTD. 2005 Earnings growth: 16.7 percent 2005 Sales growth: 8.1 percent Swatch, which has been present in China since the early Seventies, owns the three watch brands with the biggest sales in the country: Omega, Longines and Rado. Omega scored a victory when it was named official timekeeper of the 2008 Beijing Olympic Games, which will further raise its profile. Swatch has plenty of room to grow in China. The company is planning to open 500 to 1,000 stores and counters in China, 20 percent of which will be in Shanghai. Goldman Sachs originally forecast an 11.2 percent rise in earnings and a 5.6 percent increase in sales for 2005.
BURBERRY GROUP PLC 2005 Earnings growth: 16.4 percent 2005 Sales growth: 12.1 percent Burberry, which opened its first mainland store in 1993, has 33 points of sale in 23 Chinese cities, about half of which are in-store shops in department stores. Goldman Sachs believes the brand will benefit from its relatively accessible price points and men’s wear heritage, since male consumers have traditionally carried the wallets in China. Nonetheless, women’s wear and accessories are seen as growing significantly. The company’s strategy is to open a greater number of smaller stores in more cities rather than a few large store in major cities. Earnings at Burberry in 2005 had been expected to grow 10.3 percent while sales had been estimated to rise 10.1 percent.
BULGARI SPA 2005 Earnings growth: 13.1 percent 2005 Sales growth: 7.9 percent Goldman Sachs views jewelry less enthusiastically than leathergoods and ready-to-wear due to high import duties and limited popularity of branded jewelry in China. Sales for Bulgari will come from a small affluent group of consumers rather than the broader younger population other luxury brands are targeting. Bulgari, which entered China in late 2003, has some catching up to do with only two stores, in Beijing and Shanghai. Nonetheless, Goldman Sachs increased its earnings and sales estimates growth from 11.4 percent and 7.1 percent, respectively.
HERMES INTERNATIONAL 2005 Earnings growth: 9.6 percent 2005 Sales growth: 7.8 percent Hermès, like Bulgari, has more limited prospects than Richemont or Swatch’s Omega, given its price points, according to Goldman Sachs. However, the company is no newbie to China, having opened its first store in the market in 1997. Hermès now operates five stores in five Chinese cities. Goldman Sach originally saw Hermès growing its earnings by 7.3 percent and its sales by 6.6 percent in 2005 prior to revisions.
SOURCE: “ANALYSIS OF CHINESE DEMAND POTENTIAL”; GOLDMAN SACHS GLOBAL INVESTMENT RESEARCH, LONDON; JACQUES-FRANCK DOSSIN; AARON FISCHER, CFA, LUCA CIPICCIA AND ESTHER SILLI. ANALYSIS INCLUDES LUXURY COMPANIES WITHIN THE LONDON OFFICE OF GOLDMAN SACHS GLOBAL RESEARCH’S COVERAGE UNIVERSE.
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