3Q23 revenue expected to grow 7% YoY (up 12% CER YoY)
　　We expect Prada Group’s 3Q23 retail revenue to grow 11% YoY at constant exchange rates (CER) and to grow 6% YoY at reported rates to EUR1,036mn. Factoring in an estimated 4% growth in wholesale revenue and 80% growth in royalties income at reported rates, we expect Prada Group’s 3Q23 total revenue to grow 7% YoY to EUR1,152mn. We believe the personal luxury industry should report an average of low-to- mid single digit YoY growth in 3Q23 at reported rates, thus Prada Group should have outperformed in 3Q23. All growth rates below are CER YoY unless specified.
　　Looking at retail revenue by region in 3Q23, we expect Asia Pacific ex Japan to grow 15% thanks to strong performance in Hong Kong SAR and Macao SAR, and Japan to grow 40% thanks to inflow of Chinese tourists. In Europe, we expect growth to slow from 22% in 2Q23 to 10% in 3Q23 due to stronger base of comparison and weaker local European demand. On the other hand, as the Americas enjoyed a lower base of comparison in 3Q23, we expect the Americas’ decline to narrow from -6% in 2Q23 to -3% in 3Q23. We expect both the Prada and Miu Miu brands to record strong growth in 3Q23, with Miu Miu outperforming.
　　We estimate mid-to-high single-digit forex impact from headwinds in 3Q23.
　　Trends to watch
　　Post-COVID 19, we believe that average revenue growth of the personal luxury industry will normalize to mid-to-high single-digits in 2023. We expect EBIT margins of most luxury companies to be under pressure from higher spending on marketing and higher payroll amidst cost inflation pressure but less significant price hikes.
　　Against this backdrop, we believe Prada will outperform the market in both revenue growth and margin expansion in 2023 as the group is still benefiting from new designs, industry-wide aesthetic pivot to quiet luxury, and improving retail density coming from a relatively low base.
　　Financials and valuation
　　We lower our 2023 revenue forecast by 3% to EUR4,703mn and lower 2024 revenue forecast by 3% to EUR5,164mn due to industry-wide slowdown in luxury demand especially, from American and European　clusters. Accordingly, we lower our 2023 and 2024 net income forecasts by 2% and 2% to EUR623mn and EUR737mn.
　　We roll forward our valuation to be based on 2024 net income. We maintain our OUTPERFORM rating but lower our target price by 6.7% to HK$70, implying 27.8x 2024 P/E. The stock is trading at 18.5x 2024 P/E. Our target price offers 52.8% upside.
　　Risks
　　Fashion risks; intensified competition; geopolitical tensions.