Hard Times for Hong Kong's Expat Brands

A presence on the city's stock exchange is no substitute for an Asian strategy that actually works.

Five years ago, foreign consumer brands listing in Hong Kong carried the cachet of an Ian Fleming hero: Stylish, international, and with an unmistakable scent of victory about them. Nowadays, they're starting to resemble the broken dead-enders of a Graham Greene novel.

In June 2011, when Samsonite and Prada followed L'Occitane in raising capital in Hong Kong, a presence in a market that put such high premiums on its stocks seemed an obvious move. Blended forward enterprise value-to-Ebitda valuations were 8.0 on the Hang Seng Index at the start of that month, versus 7.4 on the S&P 500, 5.3 on Italy's FTSE MIB, and 5.8 on France's CAC 40.

Now that the froth has come off Asia's consumer boom, all three are learning that a presence on the Hong Kong stock exchange is no substitute for an Asian strategy that actually works.

Flying High

Samsonite shares have outperformed the Hang Seng Index in recent years while Prada has sunk

Source: Bloomberg

Prada shares enjoyed their strongest rally in nearly five years on Monday, but are still down almost 40 percent since their June 2011 debut. Samsonite has fared better with a 59 percent gain since listing that same month, but warned in first-half results Tuesday that changes in the market had raised the question of whether its "broad future growth prospects" could match its historic performance. L'Occitane is up 13 percent since its May 2010 initial public offering, roughly in line with the Hang Seng Index.

Similar companies traded in more conventional markets have mostly outperformed. While Coach shares have slid 39 percent since June 30, 2011, Hermes is up 90 percent and stock in Salvatore Ferregamo has doubled. L'Oreal is up 92 percent.

One key mistake fashion firms have made in approaching Asian markets has been around price points. As Gadfly's Andrea Felsted has noted, the premium labels that have prospered have been able to offer the right products at appealing prices, attracting locals as well as tourists, and constantly innovating so their brands stay fresh.

Prada has been a notably poor performer on that front, moving only within the past year to produce somewhat less expensive handbags. L'Occitane, on the other hand, has always covered the more affordable end of the spectrum, and has done better. Samsonite has the high-end in the form of newly acquired Tumi, the mid-end with its own-name brand and American Tourister, and the low-end, with a $100 suitcase that sells well in places like China, Taiwan and South Korea.

Cleaning Up

Mainland China's share of L'Occitane's global sales has grown smartly over the last five years

Source: Bloomberg

Aiming too hard at China can be a mistake, though. Prada and Samsonite listed in Hong Kong just as President Xi Jinping's campaign against conspicuous consumption began to bite, and 2015's stock-market tumble has eaten away at disposable income. Of the three, Samsonite is still the least reliant on greater China, with Asia's largest economy accounting for less than 15 percent of sales compared with more than 20 percent for Prada and L'Occitane, according to Bloomberg Intelligence analyst Catherine Lim.

China, Hong Kong and Macau were Prada's worst-performing major markets in the first half, with net sales down 24 percent from a year earlier, the company said last week. Trailing 12-month sales in the region are at their lowest level since April 2012, despite the addition of dozens of outlets.

Samsonite tells much the same story, with a 16 percent fall in net sales from Hong Kong including Macau and a 5.2 percent drop in China during the first half. Luckily for the suitcase maker, the U.S. remains its top market.

Indeed it's Japan -- often portrayed as the sick economy of Asia as far as consumption is concerned -- that's been the standout performer. It's the only one of Prada's major markets that saw sales growth in the 12 months through July, and it accounted for 84 percent of Samsonite's global first-half net sales growth versus a year earlier. It also happens to be L'Occitane's single-biggest market, with 19 percent of takings.

Big in Japan

The country is Prada's most-resilient market, based on change in trailing 12-month sales

Source: Company reports

Note: Segmental figures for April 2016 quarter aren't available; July 2016 figures based on that period's half-year sales figures.

As Gadfly has argued before, retailers underestimate the Japanese consumer at their peril, especially now that many Chinese prefer to do their high-end shopping in Ginza rather than Sanlitun.

The other problem with rolling out all those new stores in China is that people aren't walking in the doors. E-commerce has been causing "significant upheavals" to Samsonite's business, Chairman Timothy Parker said Tuesday, and online shoppers are becoming ever more value conscious.

Prada, the only one to lack a presence in Alibaba's Tmall.com, at least grasps that there's a problem. But its plans to open online stores in China, Hong Kong and Singapore by the end of next year seem like too little, too late.

It's possible the worst may be over for these expat brands. Chinese consumption is starting to show signs of life, with hotel occupancy in Macau running strong in June and shares in pricey firewater-maker Kweichow Moutai hitting a record last month. Sales across China, Hong Kong and Macau have also seen a "real sign of improvement" in July and August, Prada Chief Financial Officer Alessandra Cozzani said last week.

Such hopes of a revival will be cold comfort for those who bought stock in Hong Kong-listed expat brands five years ago. Even if the worst is over, investors would have been better off staying closer to home.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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