…but China could be a significant growth driver in 2023

Luxury companies published strong 2022 numbers despite China being in lock down.

One of the most positive surprises has been the resilience of luxury consumption in Europe and the US despite the Ukrainian war and the Chinese lockdown. Richemont* seen as highly dependent on China published a 2022 EBITDA growth of 27% and came with its highest revenues number in history despite Ukraine and China.
Hermes, Richemont and LVMH made bullish comments on the US market growth in 2022 and the resilience of Europe despite the war and the covid. Hermes 2022 sales for example, were up 32% in the US, 18% in Europe and 27% in France.

According to Bain Company, the Chinese luxury market was down 10% in 2022 in the same period with Watches posting a 25% decline.

Valuations remain inexpensive despite a strong share performance in 2022.

Luxury good shares enjoyed a strong performance over the past 12 months: Hermes is nearly up 100% over the past year, Richemont* and LVMH are up 60%. Kering which changed their Gucci designer lagged with a 20% rise.

Despite this strong performance, valuations remain undemanding from an historical perspective: Richemont is still currently trading at 15 times EV/EBITDA its historical average multiple of the past 15 years as investors have just been adjusting positive earnings revisions.

Luxury managements are more bullish than investors.

In 2023, all managements came with bullish comments on China recovery and outlook. Leaving aside Hayek, Swatch CEO who is a perma bull, Richemont*, Hermes and LVMH made constructive comments on 2023 arguing that China reopening will boost 2023 revenues. LVMH which is usually conservative said during Q1 2023 earnings call to be “very optimistic for China in 2023.”

Conclusion

2022 showed that the resilience of luxury without China.  But in 2023, China could be a significant engine of growth for the sector especially in hard luxury (jewelry and watches).
From a valuation perspective, in 2022, investors questioned the long-term growth of luxury because of the China Lock, self-inflicted Chinese macro headwinds and the war in Ukraine. In 2023, the global bull case seen in Europe and the US in 2022 could be jolted upwards by a positive surprise from the Chinese consumer. Finally, India could be an additional wild card. Tim Cook the CEO of Apple seen as many as a luxury brand, recently visited the country and made, during Apple last earnings call very upbeat comments on the rising Indian local classes (and yes also on China).

* Deshima Croissance Contrariante is invested in Richemont.