Luxury Goods: LMVH vs CFR vs Swatch

Swiss Watch exports in Sep 2019 increased 10.2% YoY, improving from 1,7% in the previous month - benefitting from a low base and strong performance in Asian markets ex HK. LMVH reported that disruption in HK is not necessarily being offset in neighboring Asian markets an deman was stable from H1'19. LMVH further stated a 40% decline in HK sales in August and September. Not ideal for CF as it has the largest exposure to HK (12% of sales). Chow Tai Food (HK jewellery retailer) reported a 42% decline in like-for-like revenue over the quarter.

UBS noted that they believe we are near the end of the Lux goods cycle and pointed to Richemont and Swatch as being exposed to the most risk. UBS have placed outperform ratings on LMVH, Kering, Moncler, and Hermes. They site near-term escalation of protests in Hong Kong as well as recent CNY depreciation, as posing the biggest risk to the hard luxury names, Swatch and Richemont.

This chart is to track the UBS investment thesis to stay overweight LMVH and underweight CFR

Comment:

Swiss watch exports grew by 1.5% for Oct’19, slowing from +10.4% in the Sep’19. The main contributor to the slowdown was Hong Kong, which declined by 29.7% y/y.

This decline is in line with luxury peer’s revenue and retail sales growth in Hong Kong. Estimations that exports to Greater China declined by 10% y/y this month despite strong growth in Mainland China (+17.6% y/y).

The increased spending in Mainland China has not sufficient to offset the steep decline in Hong Kong.

Japan (+13%) normalised from +31.6% in the previous month after VAT hike was implemented on 1 Oct’19.

The US (+9.5%) remains robust and is now the largest market for watch exports. Europe (+8.3%) sustained recovery from the previous month.

By category, luxury watches continue to outperform (+5.6% y/y) but have slowed from the previous month due to Hong Kong exposure to high-end watches.