Prada delivered an exceptional 1H performance with 17.4% reported sales growth. Upon its forthcoming 3Q data release, we project revenue growth will start to normalise towards mid-single-digit, and this should not come in as a total surprise to the market, in our view, considering the well-communicated management guidance given at the beginning of the year. By region, we caveat that sales in Europe will likely face the toughest comp among all, when the return of tourist traffic to Western Europe drove the region’s sales growth to 30%+ in 3Q22. Asia would likely face similar headwind owing to Shanghai’s reopening in the same quarter last year. On the flip side, momentum in the US should remain lukewarm and yet the magnitude, in our view, is unlikely to deteriorate further from the underlying 6% decline recorded in 2Q23. The sequential improvement we observed in July sales could imply business performance has been well taken care of. Growth in Japan and the Middle East sustain. Down the P&L, we do not expect the quarter’s GPM to deviate from what we saw in 1H, a historical high of c.80% which was fuelled by sustainable divers such as mix upgrade and scale efficiency. We update our model mainly with a 1.2pp higher gross margin and a 2.9pp higher EBIT margin. While recent share price correction has priced- in ex-ante the normalising revenue trajectory of the coming quarters, we argue that the market could have overlooked the profitability step-up that Prada is delivering. This is not to mention the merit of geographical diversification and the scarcity value as a global luxury brand that the company could offer in the HK/China stock market. We remain Buyer of Prada.
Recap on management targets. Prada’s new management set out EUR4.5bn revenue and a 20% adjusted EBIT margin as their medium financial targets at the beginning of this year. Of note, the latter has reportedly been attained in 1H while the former tracked 49% to the target.
Stock Connect. We again remind investors that Prada is set to participate in the scheme and the event could further optimize the company’s shareholder base, in our view. That said, the limited market free float could remain a technical drag to share price, when the controlling family holds approximately 80% of the shares.
Earnings revision. We keep our 2023-25E revenue estimates largely unchanged, but raise our 2023E gross/EBIT margins by 1.2pp/2.9pp respectively to reflect the positives from mix upgrade and scale efficiency.
Valuation. Our TP is DCF-based. In our model, we assume WACC of 7.7%, and risk-free rate of 3.5%. Our TP implies 19.6x end-23E EV/EBIT, which largely benchmarks to ~20.0x global peer average.