Prada s Numbers Sparkle but Shares Edge Lower in Hong Kong

Shares in Prada (1913.HK) were trading around 2% lower in Hong Kong in early afternoon trading despite the group posting some impressive numbers overnight.

It’s not the shareprice action that has us interested, it’s the actual detail in Prada’s global business that sheds light on some very interesting economic trends.

Share prices move upwards and downwards relative to expectations, so the argument that these numbers were largely priced in is somewhat fair. Let’s leave the share price aside for now.

Asia an ‘Important Growth Segment’

Prada chose to list in Hong Kong because it sees Asia as an important growth segment for its business and wants to align regional investors with its growing regional presence.

Therefore this set of interim earnings numbers for 2012 were always important in justifying the broad vision and ability to meet expectations.

Prada now generates around 44% of its total global sales in the Asian region when including the Japanese market. In terms of its products, leather goods represent around two thirds – the rest split across apparel and footwear. Products are niche and tailored to a very specific affluent demographic.

Macau Gaming Numbers

We tend to look at Macau gaming numbers as a broad measure of mainland Chinese wealth.

We have previously written that solid gaming numbers in Macau tend to be a good forward indicator of data on the mainland – not always, but generally this correlation holds true.

Macau might not be the best sample to form this basis but recent trends do correlate well with numbers released by Prada overnight.

Our notes from the overnight conference call to analysts show that in the first half of this financial year, comparable sales in the Greater China region (which includes China, Hong Kong and Macau) firmed at 21%. Comparable sales numbers are the best measure – they remove distortions to sales from the addition or removal of stores.

In the second quarter of the year, when production and industrial data out of China pointed lower, comparable sales for Prada still managed to grow by 19%.

Total growth (when accounting for new stores) added 173%.

Long Term Potential

Businesses like Prada don’t grow unless they see long term potential, so even the aggregate numbers highlight confidence in the Greater China region.

Even in Japan, comparable sales were 3% higher than the same period last year during the second quarter of the year.

Rate of Growth Higher in Europe

What is more fascinating is the actual performance in Europe – a continent which has bore the brunt of financial market pressure in 2012 with several near fatal experiences.

European comparable sales were 32% higher in the second quarter.

The rate of growth in Europe is actually higher than that in Asia for the time being – an assumption which doesn’t diminish Asian growth prospects, but rather highlights the opportunities still present in the vast European market, even for a well established niche luxury brand.

When taking into account the first three months of the year, the European sales growth number fell slightly to 31%, which is still very strong.

Prada: Solid European Franchise and Growing Asian Presence

Overall Prada is a business generating returns on capital of around 43% as of July this year. It is a business with a solid European franchise, a growing Asian presence listed on the Hong Kong market.

The share price might be down, but the prospects are pointing upwards for those like Prada. The chart below shows the geographic divisional breakdown.