SUNDAY TIMES - Richemont pins hopes on middle-class China
Sunday Times Business By PALESA VUYOLWETHU TSHANDU, 2017-03-19 00:00:00.0

Richemont pins hopes on middle-class China

Shoppers cross a street at the Causeway Bay shopping district in Hong Kong July 22, 2014
Image: © Reuters Staff / Reuters REUTERS

The future of Richemont may be in the hands of young, middle-class Chinese consumers as the luxury retailer seeks to attract millennials to its brands.

And it seems that South African investors are willing to pay a premium to gain favour with this growing consumer market.

David Lerche, a senior investment analyst at Sanlam Private Wealth, said that at a forward price-to-earnings multiple of 24.5, investors in Richemont shares today were already paying for a number of years of future growth.

"This growth is not certain and thus the risk or reward profile of such an investment is not particularly attractive," he said.

"The group also trades at an unusually high multiple relative to its peers in the luxury space, which means there are probably better options available."

But Lerche added that local investors did not have access to Richemont's peers - such as LVMH, Tiffany and Kering.

According to Bloomberg data, Moët Hennessy Louis Vuitton SE, Tiffany and Kering are trading at price-to-earnings ratios of 25.2, 24.4 and 36.7 respectively, an attractive value proposition for investors looking for rand hedge stocks.

They have almost no exposure to South Africa.

Lerche said that local investors were looking for investments that had revenues, costs and profits in the dollar or euro.

Jelena Sokolova - an equity analyst at Chicago-based Morningstar who currently has a hold option on the stock - said Richemont stock was fair value.

"We believe it is a high-quality business with a portfolio of very strong global luxury brands, and we would be buyers of the stock at a discount to our fair value estimate," said Sokolova.

Richemont brands include Cartier, Dunhill and Mont Blanc.

"Richemont's brands are in hard luxury, where product cycles are longer and fashion risk is lower than apparel or handbags," Sokolova said.

"This mitigates some execution risks, but makes the company more cyclical - given that there is less recurring demand from existing customers," she said.

At an investors meeting last year, Richemont's chairman Johann Rupert called for "fewer grey-haired men and fewer grey-haired Frenchmen" at the helm of the luxury goods retailer - suggesting material changes as it seeks to target younger, middle-class consumers.

But Atiyyah Vawda, an equity analyst at Avior Capital Markets, said that the majority of Richemont's "target market is not particularly the middle-income class, although they are moving in that direction".

"If you look at the change in price points, they are trying to capture the middle-income Chinese consumer," but the argument is more about consumers who move from the middle-income class to a higher income bracket and Richemont capturing that move, said Vawda.

In November Rupert also announced changes to management, axing the position of CEO meaning brand chiefs will directly report to the board.

Since the announcement, the stock on the JSE gained about 5.74%, while its primary listing on the Switzerland-based listing gained about 17.18%.

Sokolova said Richemont's move towards a decentralised management structure suggested that the company would also start focusing on digital marketing and distribution through its stake in Net-a-porter and consider ways to be more responsive to changes in demand - this was challenging given long production lead times, especially for watches.

The group is also expected to review underperforming operations in fashion and apparel, which may lead to it selling these operations if they cannot be turned around.

Sokolova added that the company had to build on its existing strengths.

But, for Lerche, only time will tell what the luxury retailer's future looks like.

"We can probably expect the group's online presence to improve.

"We may also see more rapid responses to changing consumer tastes," he said.