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the rise of Richemont in Asia
Head of Equities
Aug 20, 2019
In a rapidly changing world, it appears counterintuitive that one of the world’s strongest businesses is selling products that have undergone only subtle changes over the past century. That’s the power of Richemont’s quintessential luxury brands – they remain highly sought after in a niche market – even after 205 years (in the case of Purdey), 172 years (Cartier), 159 years (Panerai), 151 years (IWC) and 123 years (Van Cleef & Arpels).
As cheap Chinese products flood world markets, luxury goods represent an aspirational haven of quality and history. Unlike companies that strive to churn out maximum product at minimum cost, Richemont aims to delight those who can afford it with exclusive, elegant, stylish and enduring pieces.
The fact that these distinctive products can’t be easily replicated is perhaps what’s most appealing to Asian customers – Chinese buyers in particular, who now account for half of Richemont’s sales. China is the original home of fake merchandise, and it may well be a backlash against counterfeit goods that’s driving the country’s wealthier consumers to be supremely brand-conscious.
But whereas Asian markets have developed a penchant for high-end material goods, wealthy individuals in Western cultures are increasingly going for unique, luxury experiences rather than purchasing expensive items. It’s all about discretion, rather than conspicuous consumption. With the rise of social media, they can still subtly ‘brag’ about their status – by posting pictures of their customised adventure holidays instead of their latest US$10 000 watch. The shifting focus from buying things to spending on experiences could well be one of the reasons why luxury goods conglomerate LVMH recently purchased the Belmond Limited hotel and leisure company.
Fortunately for the likes of LVMH and Richemont, however, Chinese consumers – like the nouveau riche everywhere – still wish to display their wealth materially, as a way of distinguishing themselves from ‘the rest’. This desire is exacerbated by the intersection of China’s generally high level of conformity with that society’s growing exposure to Western individualism. According to a recent Bain & Company Luxury Study, the key reason for Chinese luxury goods purchases is for the buyer to ‘feel distinct from others in the city’ – 70% of those under 30 want to ‘feel different rather than fit in with society’.
While Richemont is often viewed as a watch company, it makes substantially more money from jewellery, especially the lines of its flagship Cartier brand. Since jewellery can’t be brand-emblazoned in the way Gucci clothes are, for example, branded jewellery houses have iconic, unmistakable designs, like Cartier’s Panthère collection, or Van Cleef & Arpels’ signature Alhambra four-leaf clover range. Wearing these distinctive shapes is a subtle way of displaying wealth and status to peers.
An important trend that Richemont has now taken on board is the increased willingness of Asian customers to buy expensive goods online. This informed the luxury goods group’s 2018 decision to buy out e-commerce giant Yoox Net-a-Porter (YNAP) and plan a luxury retail platform for Chinese consumers in partnership with Alibaba. YNAP sells products beyond Richemont’s own maisons, including ‘soft’ luxury goods such as handbags and clothes from designers like Prada, Gucci and Moschino. The platform could also provide further opportunities in China for some of Richemont’s own brands, including Cartier, Montblanc, Piaget and Vacheron Constantin.
In general, the expected continued growth of the luxury industry globally bodes well for producers of high-end goods, such as Richemont. The ability of affluent consumers to spend continues to grow ahead of the broader economy. The number of high net worth individuals globally is set to grow at around 1.5 times global GDP over the next decade, according to Statista. Future customer growth for Richemont therefore seems reasonably secure.
During my first meeting with Richemont Chairman Johann Rupert many years ago, he noted that one should never layer financial leverage on top of operating leverage, and this philosophy is evident on the group’s balance sheet to this day. In an era when many companies are burdened with excess debt, Richemont maintains a net cash balance, which means it has the capacity to both weather future economic storms and take advantage of any opportunities they may provide.
Overall, Richemont is effective at creating value from its brands and generates healthy cash flows, although only around two thirds of this flows out as dividends. Going forward, we expect the group to grow its earnings ahead of the market as a whole. We’re not alone in this view, however, which is why it’s currently trading at around 24 times its expected earnings for the 2020 financial year. For now, despite Richemont being a business we’re proud to own, we view the price as a little too steep to warrant increasing our exposure to this share.
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