Expect 4Q23 retail revenue to grow 14% CER YoY
　　We expect Prada Group’s 4Q23 retail revenue to grow 14% YoY at constant exchange rates (CER) and to grow 10% YoY at reported rates to EUR1,197mn. Factoring in an estimated 1% YoY decline in wholesale revenue and 30% YoY growth in royalties income at reported rates, we expect Prada Group’s 4Q23 total revenue to grow 13% CER YoY and to grow 10% reported YoY to EUR1,347mn. Given that most luxury players have already reported 4Q23 results, we believe Prada Group might have outperformed most peers with its 4Q23 revenue growth possibly trailing closely after Hermès’ (+18% CER YoY) and Moncler’s (+16% CER YoY). All growth rates below are CER YoY unless specified.
　　Looking at retail revenue by region in 4Q23, we expect Asia Pacific ex Japan to grow +25% thanks to easier comparison in Chinese mainland, and Japan to grow +33% thanks to inflow of Asian tourists. In Europe, we expect growth to stabilize at +7% and we expect growth in the Americas to turn positive to +1% thanks to spending repatriation. We expect both the Prada and Miu Miu brands to record strong growth in 4Q23.
　　We estimate mid-single-digit forex headwind in 4Q23.
　　On the margins, we expect Prada Group’s gross margin to inch up to 79.0% in 2023 thanks to higher retail contribution and EBIT margin to significantly improve to 21.6% (vs. 18.5% in 2022) thanks to operating leverage driven by higher retail density.
　　Trends to watch
　　Going into 2024, we believe that average revenue growth of the personal luxury industry will normalize to mid-to-high single-digits. 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 visible price hikes.
　　Against this backdrop, we believe Prada will outperform the market in both revenue growth and margin expansion in 2024 as the group is still benefiting from new designs, industry-wide aesthetic pivot to quiet luxury, and improving retail density coming from a relatively lower base.
　　We attribute part of Prada’s strong momentum in 4Q23 to Pradasphere II, a public exhibition in Shanghai, which ran from December 7, 2023 to January 21, 2024 tracing the history and culture of Prada from its origins in 1913 to the present day.
　　Financials and valuation
　　We keep our 2023 revenue and earnings forecast largely unchanged. We slightly lower 2024 revenue forecast by 2% to EUR5,044mn, lower 2024 EBIT forecast by 4% to EUR1,147mn and lower 2024 net profit forecast by 4% to EUR709mn on fewer price hike opportunities and potential forex headwind. We introduce 2025 revenue forecast of EUR5,473mn, EBIT forecast of EUR1,311mn and net profit forecast of EUR818mn.
　　The stock is trading at 23.0x 2024 P/E. We maintain OUTPERFORM rating and target price of HK$70.00, implying 29.1x 2024 P/E. Our TP offers 26.6% upside.
　　Risks
　　Fashion risks; intensified competition; geopolitical tensions.