Prada: The new fashion brand of choice for corrupt officials?
Understated is not usually a word associated with China’s luxury shoppers better known for bearing huge logos and generally flaunting their cash in all directions. But with the economy slowing and changing consumer preferences – low key is the buzz word amid an austerity campaign while mature shoppers prefer personalization – brands that provide subtlety are a good look. Italian fashion house Prada (1913.HKG) was flagged by CLSA analyst in a media call on Thursday as a strong luxury pick. The brand has gained strong traction in Asia since listing in Hong Kong in 2011 and now gets about 37% of its sales from Asia Pacific. CLSA noted the company has tailored products well to the China market and is now benefitting from a preference for less flashy items (Prada logos are less visible on its wares than say LV or Gucci). They have a wider range of fashionable goods, which also puts the brand in a stronger position vis-à-vis competitors in China. And it is a strong “tourism stock”, according to CLSA analyst Aaron Fischer: Italians only account for around 10% of store sales in Italy, with bulk going to visitors including Chinese. Prada is also less likely to be caught up in the corruption campaign led by bloggers – officials caught flaunting pricey goods normally go for something showy.
KFC consumers lose their appetite
US fast food retailer Yum! Brands (YUM.NYSE) is still in trouble in China, where it has more than 6,000 KFC, Pizza Hut and other branded eateries and derives over half of its profits from. This week the company reported a significant 68% drop in its third-quarter profits. Among other things, this was triggered by an 11% fall in same-store sales from a year earlier in China. The company attributed the weak performance there to increased competition from brands including Dicos and Hai Lai Shi and still weak consumer trust in chicken, which was hit by an avian flu scare in April and a problem with some KFC poultry suppliers at the end of 2012. Some observers also note that middle class consumers are tightening their purse springs amid government austerity and that Yum’s portfolio is too geared towards fried chicken. The consensus on Wall Street leaned towards “hold” ratings after the results. However, Goldman Sachs analyst Michael Kelter cautioned that because September same-store sales in China also saw an 11% year-on-year decline, fourth quarter results were also likely to be down.
Uncertain road to recovery for the J3
After months and months of generally poor sales results in China, Japanese auto titans Toyota (TM.NYSE, 7203.TYO), Nissan (7201.TYO) and Honda (HMC.NYSE, 7267.TYO) saw a spectacular rebound in performance in September. Year-on-year sales growth in China topped 83% for Nissan and 63% for Toyota, while Honda’s sales more than doubled. Wow! Does this mean that the Japanese brands are finally staging a recovery in world’s largest, and given the size of potential demand most important auto market? Perhaps – but it’s not a given. The huge year-on-year growth is attributable to a big fall in sales in September 2012, when Japanese auto brands were targeted in anti-Japan protests that swept China’s coastal cities. Media reports still regularly cite concerns among Chinese drivers that if they buy a Japanese car it could be damaged by vandals or that they themselves could be threatened. Bad enough as that is some analysts also cite serious strategic issues: Japanese auto firms didn’t anticipate demand for cars in the recent boom years and were unable to keep up, thereby losing share to German, US and even South Korean brands. Outside China, however, their fortunes are rosier. In an industry report released last week, CLSA analysts saw stronger US demand expected in October and a pickup in Japan sales as a positive for the brands, with “buy” ratings for all three.
Hong Kong saw six IPOs this week. Related to China, Yestar (2393.HKG), a provider of color photographic paper and a broad range of imaging products and aerosol developer and manufacturer China Ludao (2023.HKG), were the most active. China City Railway Transportation Technology (8240.HKG), which provides railway solutions, has applied to transfer from the growth board to the main board in Hong Kong. In the least surprising news of the week, Alibaba has decided not to go public in the territory, CEO Jonathan Lu told the media.