Acceleration and repatriation
After the turbulent years of 2014~15,China’s luxury consumption stabilized in 2016. We believe the overall Chinesedemand for luxury goods will accelerate into 2017, with a cyclical uptickreinforced by secular upgrade and luxury companies adopting tactics that bearfruit. We now forecast this year’s growth at 7% (constant currency), a stepdown from the 19% over 2011~13, but a rebound from the 1% during 2014~16.Meanwhile, domestic repatriation will continue, with the share of localpurchases rising from 22% to 30% over the next five years.
Winning formula: Redefine four Ps based on changes infour Ws
We believe there have been fundamentalshifts in China’s luxury goods market in terms of the 4Ws―Who, for Whom, Whatand Where. Generations Y and Z have become the major buyers of luxury goods forpersonal use. Contemporary designers and niche brands are increasingly popularon e-commerce channels. Thus, luxury companies must develop strategies aroundthe 4Ps: reinforce Product newness, enhance digital Promotions, establishomni-channel Presence and improve Price transparency.
More upsides to selective stocks
Share prices of luxury companies havemostly moved up since 4Q16 in anticipation of top-line recovery partly fueledby China demand. Purely from the China angle, we still see upside for stockslike Coach, LVMH and Pandora.
Coach has regained popularity among Chinese millennials, thanks to aseries of strategy adjustments. We believe its Greater China business willreaccelerate to high-single digits/low-double digits (constant currency) inCY17, but any disruption to the Chinese tourism flow to the US is likely to bea headwind.
We view LVMH as a portfolio company with different brands followingnon-synchronized life cycles in China. Louis Vuitton is reinvigorating, andbrands like Moynat, Rimowa and Chaumet are still in the early innings ofcapturing Chinese consumers. LVMH’s cognac business on the Mainland and its DFSbusiness in Hong Kong should continue improving this year, but other brands onthe downward cycle may dilute the overall growth
Fashion jewelry is a newly emergingcategory in China, and Pandora isleading the market with its constantly refreshing styles, quality materials andeasy personalization. We believe the brand can achieve a CAGR of 50%+ in Chinain the next three years. Nevertheless, the brand needs to fend off increasingcompetition and changing consumer tastes.
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