This is an idea which I am contemplating for some time.
Coneventional stock market wisdom says: Chinese / Asians love luxury goods, therefore this is the safest bet to buy Luxury stocks who sell to the Chinese consumer.
As a result, many luxury companies had great runs intheir stock price, for instance:
LVMH
Boss
or Ralph Lauren
However up until now, I did not really no where a “catalyst” would come from. So switch to the brilliant John Hampton at Bronte who really nails it down with Richemont, the Swiss luxury group:
Swiss Watch exports have been increasing, as the Chinese really dig expensive watches:
It is the Rococo stuff that is winning. The Federation of the Swiss Watch Industry publish export data from Switzerland (not sales to end consumers). June data shows a 4.1 percent reduction in volume, a 21.7 increase in value. The average price of a watch is going up sharply. This has been the case for years. The Federation published this graph which shows that (relatively accurate) electronic watches have been flat in value for years – but that mechanical movements (inaccurate but reassuringly expensive) have gone skyward:
Although exports to Hong kong are still increasing strongly, sales seem to have stalled:
There are several data sources I watch to keep tabs on spending by Chinese elite. The Swiss Watch data is obvious.
Exports to Hong Kong in June were up 21.2 percent. It was about the same in May (but the monthly data has disappeared from the web). It was about the same every other month this year. They keep upping the exports to Hong Kong.
But Hong Kong also has sales tax data which comes from the sales tax receipts. There is in the data a series for “Jewellery, watches, clocks and valuable gifts” by both value and volume. The value series – relatively flattering, has monthly sales (versus previous corresponding period) for the last six months as:
+18.3%
+14.1%
+18.4%
+15.1%
+2.9%
+3.1%
Sales growth stopped. However exports to Hong Kong kept up (note that 21.2 percent figure above).
John Hempton is not a guy who would short such a share because of date, he needs a real reason and this is the following:
have a theory given to me by a China watcher. The theory – it turned bad sharply with the ouster of Bo Xilai and now the murder charge on his wife Gu Kailai. Gu Kailai is going to have a hard time avoiding a mobile execution unit. This changes the stakes and it is structural. A half million dollar watch no longer says “look at me”. It says “look at me, I am a kleptocrat”. Thoughts of that beautiful Van Cleef and Arpels hair clip become the last thing that runs through your brain before the bullet.
And he can prove his theory with the example Brazil in the 80ties and 90ties:
We know what a completely collapsed luxury good market looks like. Brazilians like a bit of bling. But in the late 1980s and into the 1990s the kidnapping rate in Brazil went skyward. (There is an horrific documentary about that called Manda Bala which translates “send a bullet”.) After kidnapping became a major industry (particularly in São Paulo) carrying a $3000 handbag no longer said “look at me”, it said “kidnap me”.
Two other data points in the recent weeks show that maybe the Chinese consumer might be (for any reason) a little biut more cautious:
– Sales at Sand’s Chinese casinos disappointed strongly
– and even McDonalds announced that same store sales in China fell
For me, such company news are much more reliable than any Chinese Government statistics.
Let’s quickly look at Richemont:
The stock price ist still below its 2008 highs:
The stock doesn’t look so expensive either:
Trailing P/E 16,6
P/B 2.8
P/S 2.9
EV/EBITDA 9
is not that expensive for a stock with a 17% profit margin and 20% ROIC, a very conservative balance sheet with no goodwill and net cash. Even mean reversion would support current levels. 10 year average net margin is 20%, only 10 year average ROIC is “only” around 10%.
A much more interesting short candidate might be Boss.
Boss is more expensive
Trailing P/E 17.3
P/B 11.9
P/S 2.4
EV/EBITDA 11.5
and 10 year avg. profit margin is 8.6% against current 13%.
Still, I would prefer to short luxury shares with aggressive accounting, but I have to dig a little bit deeper for this.
And do not forget: Luxury sales in Europe are bad anyway and as Coach shows, even the US is not “an island” with regard to luxury sales.
Summary:
I guess shorting Luxury stocks might be an interesting idea at some point in time. I wouldn’t short Richemont, as this is really one of the rock solid companies, but other candidates might be more interesting. Preferably with aggressive accounting and US / Europe exposure.
