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Luxury: Hong Kong could cost the sector up to 1.2% growth

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10/11/2019 | 04:23 pm
What will be the impact of the persistent unrest in Hong Kong on the luxury industry? About 0.6 to 1.2% on the growth of the sector in 2019 if the turmoil persists by the end of the year, according to Bernstein's projections. It also cites the key players who will, from its point of view, be the most and least affected.

 

Luxury stocks experienced varying fortunes on the stock market this year, but they held up well overall despite fears for China's growth, its main market, and tensions in Hong Kong, one of their historic bastions. Like LVMH, some of them even posted insolent runs.

For investors, it is mainly in Hong Kong that concerns converge. The clash between freedom-conscious demonstrators and a power corseted by Beijing has major consequences on tourist numbers. "The main problem for the sector in Hong Kong is the significant decline in the number of Chinese tourists who consume there," explains analyst Luca Sola. Mathematical, since the turnover of Luxury Goods depends on approximately 80% of visitors and only 20% of residents. However, in August, the hotel occupancy rate dropped to 60%, with downward trends still identified in August and September. In terms of figures, attendance fell by -5% in June compared to the same period last year, but by -10% in July and -25% in August. And while some signs of improvement appeared at the end of September, tensions between demonstrators and the police remain high.

Turmoil that companies can cushion for the time being

In this context, Bernstein's research team sought to model the impact of the situation on the sector's revenue in 2019. Its work shows that it could reduce 2019 growth by 0.6 to 1.2%, if the clashes continue to discourage tourists from travelling to Hong Kong in the coming weeks. The City has lost some ground on the world luxury scene, but it remains a hub: it accounts for 5 to 10% of the industry's sales. Rather close to 10% for "Hard Luxury" (jewelry, watches, pens) and closer to 5% for "Soft Luxury" (leather goods, fashion, accessories).

Bernstein has also worked to quantify the impact of its modeling on the different brands. Louis Vuitton (LVMH), Burberry and Hermès are the brands least likely to be affected, while the strongest impact would be Bottega Veneta (Kering), Alexander McQueen and Miu-Miu (Prada). Dior (LVMH), Moncler and Gucci (Kering) are more likely to be in the half of the companies with the least impact and Tiffany, Balenciaga (Kering) and Van Cleef (Compagnie Financière Richemont) in the half of the companies most affected. In any case, the impact "seems manageable for the luxury industry, although it clearly constitutes an air gap".

Bernstein is following six projects in the sector, Compagnie Financière Richemont, EssilorLuxottica, Kering, LVMH, Moncler and Tiffany. The analyst is rather neutral on Hermès, Prada, The Swatch Group and Farfetch. Burberry is his only negative recommendation. In the end, his in-depth analysis did not lead to any fundamental change in his feelings about the companies concerned.

As a bonus, you will find below the top of the brand power list created by Bernstein with the support of Promise Consulting. Behind the unlisted superstar Chanel are three other French and two Italian actors.

The strength of Luxury brands through three criteria: notoriety, desirability, exclusivity (Source Bernstein with Promise Consulting)

Anthony Bondain
MarketScreener.com 2020
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