3.1 Steady investment return, through the bull and bear
Top luxury brands and luxury groups with diversified businesses have a stronger ability to resist risks. From January 2007 to the end of April 2022, the annual growth and decline of LVMH, Kering Group and Hermes were 21.6%, 24.6% and 11.1%, respectively. Comparing the historical valuation of luxury Group (PE-TTM) with the Shenwan Textile and Apparel Industry Index, in addition to the long-term low valuation of Hermes International, leading luxury brands have been given higher than the average valuation level of the textile and apparel industry in most historical periods.

3.2 High brand barriers drive the sustainability of performance growth

In 2021, the revenue of LVMH, Kaiyun Group and Richemont Group is 64215,17645,1314.4 billion yuan respectively, with a year-on-year change of 43.8%/34.69%/-7.68%. From 2016 to 2021, LVMH's revenue grew at a compound annual rate of 11%, while Kering's/Richemont's revenue grew at a compound average annual rate of 7%/3%, respectively. In 2013, the net profit scale of LVMH, Kaiyun Group and Richemont Group returned to their mothers was 12036/3361/128.9 billion yuan, with a year-on-year increase of 143%, 70.44% and 38.45% respectively. From 2016 to 2021, the compound growth rate of net profit of LVMH, Kering Group and Richemont Group was 22.5%/21.3%/-10.4%, respectively.

The revenue of LVMH and Kering Group is mainly fashion leather goods, and Richemont Group is mainly jewelry, and the difference in category structure affects the level of operating profit margin. In 2021, LVMH fashion leather goods achieved revenue of 30.9 billion euros, accounting for 48% of the total revenue, and by category, wine and spirits had the highest operating margin, reaching 31.19%, followed by fashion and leather goods, reaching 23.27%. Kering's leather goods category accounted for 50% of revenue, while Richemont's jewelry category accounted for 57% of revenue.

The direct operation mode is dominant, and the high added value of luxury brands brings high gross profit margin. Looking at the global luxury brands, the gross profit margin is basically more than 60%, fast fashion brands and luxury brands are mainly in the direct mode, in 2021, Prada, Hermes, Zara, Uniqlo directly operated stores accounted for 96.07%, 72.94%, 86.85% and 98.70%. From the perspective of individual product price, luxury brands have high added value, which is mainly reflected in the difference between mid-end price and cost. In 2021, the gross profit margin of Inditex (Zara) and Fast Retailing (UniQlo) will be 57.1% and 50.3% respectively. Well below the gross margins of luxury brands.

Multiple marketing strategies enhance user stickiness, and the sales expense rate of luxury brands is significantly higher than that of fast fashion brands.

In 2021, LVMH and Richemont's sales expense ratio was 34.74% and 24.66%, respectively, while Fast Retailing's was 3.12%. Take Dior, a brand owned by LVMH, for example, in addition to the fashion week held every year and the advertising blockades shot for the ready-to-wear series, it also holds various art exhibitions from time to time.

For example, Dior, as the chief partner of the 8th West Bund Art and Design Fair, holds the exhibition Dior and Art in Shanghai West Bund Art Center. Collaborate with Chinese artists, integrate into the local culture, and establish a solid influence in the Chinese market.

Digital innovation has become the new normal for Dior, and the first fashion show after the epidemic was held in conjunction with local channels such as Weibo, wechat, Tencent video, Tiktok, Bilibili, and XiaoHongshu, creating a live broadcast form of "watching the show together in the cloud".

In addition, Dior targets the diverse interest circles of young consumers and innovatively explores the virtual world and esports market. In 2020, Dior reached a brand friend relationship with the League of Legends 2018 world champion Yu Wenbo JackeyLove, and then provided men's classic suits for all members of the Taobo e-sports Club at the 2020LPL All-Star e-sports event at the beginning of the year, achieving cross-border cooperation from single to the whole team. In the release of the early spring 2022 resort series, Dior launched the virtual image "Sweet little sweet" for Chinese skincare ambassador Jing Tian, and virtual appeared in Athens Panathinaikos Stadium "Cloud watch show".

Luxury companies generally have a high net profit margin, but the difference between different brands is large, which is mainly due to the difference in body gauge mold and category.

Generally speaking, the group > single brand, business categories are mainly fashion leather goods > jewelry. The net profit margin of the three major groups LVMH, Kering and Richemont in 2021 is 19%/18%/10%, respectively, higher than that of the single-brand group, mainly because of the synergies between the brands, and the ratio of dilutive sales expense to scale. Under the influence of high sales expenses, the net interest rate of a single brand luxury goods company is not much different from that of a fast fashion group, such as the net interest rate of Prada and Ferragamo in 2021 is 9% and 7%, respectively. Inditex and Fast Retailing, the fast-fashion brands, have net parent interest rates of 12 per cent and 8 per cent respectively.

Brand barriers support the sustainability of performance growth, with core elements including accurate brand narratives, the ability to create iconic products and intimate interactions with consumers. 1) Precise brand narrative: Luxury brands focus on profound history and culture, have special cultural background and brand story, and the accumulation of brand culture takes a long time, which is difficult to copy and non-renewable; 2) The ability to create iconic products: on the one hand, iconic products are the guarantee of corporate profitability, while product innovation ability is also the driving force for revenue growth. For example, Dior's new Caro handbag is sought after by the market, and Celine designer ready-to-wear series has received good market feedback; 3) Consumer intimacy: The formation of consumer loyalty takes a long time, and brands need to constantly consider how to integrate the market and important trends in luxury demand, face the trend of younger people, how to develop sustainable practices in the business, cater to the leisure style preferred by millennials and Gen Z, and explore the meta-universe.

The characteristics of luxury goods focus on customer service and experience, making offline retail stores always the main channel of luxury goods sales, large brand owners with scale advantages have stronger premium ability, can occupy a better geographical position in high-end shopping malls, forming channel advantages.

4. Investment analysis

Despite the slowdown in the growth of the global consumer market, high-end consumer demand is strong and resilient, and the brand value of the head luxury group is expected to be further highlighted under the trend of demand recovery after the epidemic, the expansion of emerging consumer groups and the digital transformation of the industry.

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Luxury goods sector: The Asia-Pacific region leads the global luxury demand to show a V-shaped recovery, despite the macro environment of geopolitical tensions, inflation and the pressure of the Federal Reserve to raise interest rates, but luxury demand is relatively resilient, and the industry's leading brand barriers are deep, supporting its sustainable growth.

LVMH Group: the world's largest luxury goods group, owns 75 well-known brands, including LV and Dior two ace, sales network all over the world, capital strength and category breadth to build a deep moat.
Hermes: the century-old accumulation of brand culture, in the brand and channel to highlight the consistency of the brand connotation and high-end, strong channel control, customer stickiness, brand reputation, to build profound barriers.

Kering Group: Innovation and change is one of the core strategies of Kering Group, its brand expertise and creative inspiration is its valuable moat, bringing together a series of well-known fashion, leather goods and jewelry, with Gucci, Saint Laurent and other well-known brands.

Duty-free sector: As the epidemic risk clears, overseas high-end consumption returns, the penetration rate of domestic luxury goods purchases increases, shopping festivals and other activities mobilize the duty-free consumption boom, the duty-free policy of Hainan Island is relaxed, the increase of duty-free licenses drives the market expansion, and the industry maintains a high prosperity and growth.

China National Tax Exemption: The domestic operator with all-channel tax exemption qualification, "airport + island + city" tax exemption all-round layout, significant channel advantages, enjoy the industry's high dividend. The company operates more than 240 duty-free shops, with outstanding scale advantages and strong bargaining power. In the field of duty-free for many years, has established cooperative relations with more than 1,000 well-known brand suppliers around the world, has a wealth of brand resources and stable product supply capacity.

Wangfujing: The leading department store in the country, backed by the Beijing Municipal SASAC, has abundant own property, outstanding location and scale advantages, and steadily promoted its duty-free business. With the strategic opportunity of Hainan Free Trade Port, it actively laid out duty-free islands and duty-free islands, and developed airport duty-free and city business based on Beijing.

Create synergy effect with tourism, travel, accommodation and other business segments of BTG Group, the company's controlling shareholder.