prada dbs initiation mar2012

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ed- JS / sa- AH

BUY HK$47.80 HSI : 21,354 (Initiate coverage) Price Target : 12-Month HK$ 57.00 Potential Catalyst: New market penetrations DBSV vs Consensus: Our FY14F EPS is 8% above market as we believe demand for soft luxury goods could continue to outperform Analyst KOK Chiew Sia +852 2820 4918 [email protected] Mavis Hui +852 2863 8879 [email protected]

Price Relative

25.9

30.9

35.9

40.9

45.9

50.9

Jun-11 Sep-11 Dec-11

HK$

85

105

125

145

165

185

205

Relative Index

Prada (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Jan (EUR m) 2011A 2012F 2013F 2014F Turnover 2,047 2,569 3,122 3,895 EBITDA 527 741 933 1,166 Pre-tax Profit 388 581 760 982 Net Profit 251 423 542 700 Net Pft (Pre Ex.) 251 423 542 700 EPS (EUR) 0.10 0.17 0.21 0.27 EPS (HK$) 1.00 1.68 2.15 2.78 EPS Gth (%) 150.3 68.5 28.2 29.2 Diluted EPS (HK$) 1.00 1.68 2.15 2.78 DPS (HK$) 0.58 0.50 0.65 0.83 BV Per Share (HK$) 4.78 6.70 8.34 10.48 PE (X) 48.0 28.5 22.2 17.2 P/Cash Flow (X) 32.8 21.0 17.2 14.2 P/Free CF (X) 66.9 34.5 27.0 19.7 EV/EBITDA (X) 23.6 16.3 12.6 9.7 Net Div Yield (%) 1.2 1.1 1.4 1.7 P/Book Value (X) 10.0 7.1 5.7 4.6 Net Debt/Equity (X) 0.3 CASH CASH CASH ROAE (%) 22.3 29.2 28.6 29.5 Earnings Rev (%): - - - Consensus EPS (EUR): 0.17 0.21 0.25 Other Broker Recs: B: 10 S: 2 H: 7

ICB Industry: Consumer Goods ICB Sector: Personal Goods Principal Business: Designing, manufacturing, marketing and retailing of fashion and luxury goods under the brands of Prada, Miu Miu, Church's and Car Shoe Source of all data: Company, DBSV, Bloomberg, HKEX

Fashion powerhouse • Premium status high fashion brand with good margin

visibility

• Right market positioning and faster retail network growth to capitalise on the booming luxury market

• Initiating coverage with BUY for 19% upside to HK$57.00 TP

Premium branding with good margin visibility. The luxury goods industry has strong pricing power and good margin outlook as their selling prices normally sustain an uptrend to maintain prestige status. For Prada, better profitability could be achieved through (a) Expanding retail sales channels via Directly-Owned Stores (DOS) that offer higher margins, (b) Alternative material sourcing and rising economies of scale, (c) Adjustment in mark-down policy to reduce discounted items during sales period. Besides, the group’s strong pricing power allows store-wide price hikes, usually at low single-digit every year, on top of occasional price lifts by a larger magnitude for new and flash collections.

Leveraging on booming luxury spending. Prada is a proxy to the booming luxury goods market in the far eastern countries, especially Greater China. Demand will come from: (a) growing middle class population, (b) increased buying power due to RMB appreciation, (c) looming demand for gift purchases, and (d) rising demand from younger consumers aged 18-35. To capture growth, Prada plans to add 240 new DOS in FY12-14F to hasten penetration and market coverage, while continues to focus on growing its more successful core brand PRADA and younger brand MIU MIU. We forecast FY12F-14F earnings CAGR of 28.7%, on 23% revenue CAGR. The key growth market will be Asia Pacific-ex Japan (+31% revenue CAGR to EUR1.5bn), which could be the largest revenue contributor (c.40%) to Prada by FY14F.

Initiate with BUY and HK$57.00 TP. Prada’s valuation is attractive relative to some recently listed peers, i.e. Salvatore Ferragamo (SFER IM) and Michael Kors (KORS US). Its bigger market cap, better earnings quality and equally attractive growth prospects justify a premium valuation, in our view. In addition, HKD-denominated investment may attract investors with EURO funds given an expectation of a stronger HKD vs EUR (+13% in 2012). Pegging peers’ average of 27x PE multiple on Prada’s CY12F EPS of HK$2.11, we arrived at HK$57.00 TP. Initiating coverage with BUY.

At A GlanceIssued Capital (m shrs) 2,559 Mkt. Cap (HK$m/US$m) 122,312 / 15,757Major Shareholders

Prada Holding B.V. (%) 80.0 Free Float (%) 20.0 Avg. Daily Vol.(‘000) 2,497

DBS Group Research . Equity 16 March 2012

China / Hong Kong Company Focus

Prada Bloomberg: 1913 HK Equity | Reuters: 1913.HK

Company Focus

Prada

Table of Contents

SWOT Analysis 3

A luxury powerhouse 4

Grabbing opportunities now 4

Company Background 4

Business Model 5

Sales Analyses 5

Costs Analyses 6

Key management team 7

Competitive Strengths 8

Growth Strategies 8

Where is Prada now? 8

Playing catch up 10

Industry prospects 10

The power of Chinese luxury consumption 10

Prospects for luxury goods’ operators could still be rosy 11

Financial estimates 12

Valuation 14

Key Risks 17

Company Focus

Prada

SWOT Analysis

Strengths Weakness

• Strong branding with a century-old track record

• Among leaders and creators of fashion trends

• Prudent and experienced management team headed by the founder’s ascendants and long-term partners

• Integrity of branding is preserved through direct control over the value chain

• Asset-light business model which allows speedier expansion of DOS network

• High bargaining power in securing retail space and leasing terms

• Over reliance on limited brand portfolio

• Brands under-utilised as only two out of four brands are performing well

Opportunities Threats

• Growing middle class and rising demand for luxury goods among the younger population

• Margin expansion through sales network expansion of Directly-Owned Stores (DOS), operating leverage and strong pricing power

• Opportunities in existing markets that are under-penetrated such as North America, Northern Europe and China, as well as new markets such as Latin America, Gulf Region and Russia

• Potential market share improvement from low base

• Sister brand MIU MIU could be the next leg of growth with more focus on marketing efforts

• Potential from brands acquired by Prada i.e. CHURCH’S and CAR SHOE (about 10-12 years in the hands of Prada) are still untapped

• Economic downturn could lead to weaker demand for luxury goods

• Lingering issues from taxation litigation or disputes could negatively affect bottomline if Prada loses, and vice versa. These mainly relate to transfer pricing and tax residence issues given its international presence

• Competition from peers (who may get better store locations or gain popularity due to more effective marketing strategies) and counterfeits (tarnishing brand image)

• Potential brand dilution due to overly aggressive DOS expansion

Source: DBSV

Company Focus

Prada

A LUXURY POWERHOUSE

Grabbing opportunities now

Company Background

A prestige brand with a 100-year history. Prada S.p.A (Prada) designs, manufactures, promotes and sells high-end luxury products ranging from leather goods to ready-to-wear (apparels) and footwear under four key brands - PRADA, MIU MIU, CHURCH’S and CAR SHOE.

Prada’s history dates back c.100 years to 1913 when Mr. Mario Prada, the grandfather of Ms. Miuccia Prada (current President of Prada), opened a luxury store in the Galleria Vittorio Emanuele II in Milan. The store sold leather handbags, travelling trunks, leather accessories and beauty cases, luxury accessories and precious objects such as silverware and Bohemian crystal. It became the official supplier to the Italian Royal Family in 1919.

Prada’s business entered into a strong growth phase during the late 1970s when Mario's grand-daughter, Ms. Miuccia took over the management and launched a partnership with Mr. Patrizio Bertelli (current CEO) who operated a high-end leather goods business at that time.

Product offerings

* Leather goods √ √ √ √ Ready-to-wear √ √ √ Footwear √ √ √ √ Eyewear √ √ Fragrances √

*MIU MIU offers products for female consumers only

Source: Company

Key events

Year Events 1913 Mario Prada opened first luxury store in the Galleria Vittorio Emanuele II in Milan 1919 Prada became an official supplier to the Italian Royal Family 1977 Patrizio Bertelli set up I.P.I. S.p.A to consolidate the production resources that he had built up over the previous ten years,

including those of Sir Robert and Granello 1977 I.P.I. S.p.A. obtained an exclusive license from Miuccia Prada to produce and distribute leather goods bearing the PRADA

brand 1980 Design and launch of the "triangle" PRADA logo 1982 Launch of the first PRADA women's shoe collection 1983 Opening of the second PRADA store in Milan, Via della Spiga 1984 Launch of the PRADA black nylon backpack 1986 Opening of the first PRADA stores abroad in Europe (Madrid) and the US (New York) 1988 Launch of PRADA women's ready-to-wear collection and first women's fashion show in Milan 1993 Launch of MIU MIU women's collection (ready-to-wear, leather goods and shoes) 1993 Launch of the PRADA men's collection (ready-to-wear and shoes) 1997 Launch of the PRADA leisure-time line, identifiable by its "red stripe" 2000 Launch of the PRADA eyewear collection 2000 First Sponsorship of the Luna Rossa Challenge 2001 Opening of the first Epicenter Store in Soho, New York 2003 IPI S.p.A was merged into PRADA S.p.A. 2003 Opening of the second Epicenter Store in Aoyama, Tokyo 2003 Agreement with Luxottica for the production and distribution of eyewear for PRADA and MIU MIU 2004 Launch of PRADA’s first fragrance 2004 Opening of the third Epicenter Store in Beverly Hills, Los Angeles 2006 Launch of the first PRADA men's fragrance 2006 First MIU MIU fashion show in Paris 2007 Launch of the LG PRADA mobile phone 2009 Launch of the exclusive new "made to measure" and "made to order" services 2010 Prada-dressed hostesses and stewards in the Italian pavillion at the Shanghai World Expo; launch of "PRADA Made in …"

Project 2011 First PRADA fashion show in Beijing

Source: Company, DBSV

Company Focus

Prada

Business Model

Managing business via an integrated business model. Prada has an integrated business model encompassing design and creation, collection of orders, sourcing and production, sales distribution as well as communications and public relations strategies.

It has a design team of c.60 designers and graphic artists (including Ms. Miuccia Prada as the stylist) as of end-FY11 to come up with new design concepts. It outsources c.80% of its product manufacturing processes to c.480 external manufacturers (semi-finished and finished products) while keeping the balance 20% of processes in-house, hence ensuring at least one important phase of the production process is performed internally. Prada has a total of 11 in-house factories (10 in Italy, 1 in the UK mainly for CHURCH’S shoes).

International brand with a global presence. Prada distributes its products through two main channels i.e. retail and wholesale. As at end-FY11, for retailing, Prada owned a total of 319 Directly-Owned Stores (DOS) across 70 countries. At the same time, it has c.1,400 wholesale clients that include reputable luxury department stores and upscale multi-brand stores with extensive experience in selling fashion and luxury goods, as well as 33 mono-brand franchise stores (operated via 9 franchisees). Top 5 wholesale clients (excluding the Prada Family – Ms. Miuccia Prada Bianchi, her sister Ms.Marina Prada Bianchi and her brother Mr.Alberto Prada Bianchi) contributed 7.1% to group sales (or 24.3% to the wholesale segment) in FY11. If Prada Family is counted as of the top 5 clients, sales contribution to the group would be 7.6% (or 26% to the wholesale segment) in FY11.

Business Model: Full Control of the Entire Value Chain

Source: Company

Sales Analyses

By brand:

PRADA remained the biggest revenue generator for the group at c.79% of total product revenue (excluding royalty fee income) in FY09-11. This was followed by MIU MIU, where contribution to revenue rose from 14.7% in FY09 to 16.3% in FY10, and 17.3% in FY11. The balance was contributed by CHURCH’S and CAR SHOE brands.

Product revenue breakdown by brand

3% 1% 0%

79%

15%

3% 2% 1%

79%

16%

79%

17%

3% 1% 0%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Prada Miu Miu Church's Car Shoe Other

FY09 FY10 FY11


By product type:

Prada derived 50% of its product revenue in FY11 (from 40% in FY09) from Leather Goods i.e. handbags, travelling trunks, and leather accessories - Prada’s core product type since 1913. Clothing or Ready-to-Wear (RTW) and Footwear served as the next important product segment for Prada with revenue contribution at 24% in FY11, shrinking from FY09’s 29% as demand for core leather goods grew faster.

Product revenue breakdown by product type


27%

1%

29%

40%

30%

1%

26%

46%

24%

50%

25%

1%0%

10%

20%

30%

40%

50%

60%

Clothing Leather goods Footwear Other

FY09 FY10 FY11

Company Focus

Prada

By sales channel:

Sales split between retail and wholesale was more or less in similar proportion in FY09, with retail sales via DOS contributing 54% to product sales while wholesale was 46%. However, retail sales picked up faster during FY10-11 as sales contribution increased to 65% in FY10 and 71% in FY11 of total product sales. This was attributed to more DOS additions of 27 stores in FY10 and 54 in FY11, bringing total DOS to 265 and 319, respectively.

Product revenue breakdown by sales channel

54%65% 71%

46%35% 29%

0%

20%

40%

60%

80%

100%

120%

FY09 FY10 FY11

DOS Wholesale ^

EUR1.6b EUR1.5b EUR2.0b


By geographical area:

Prada’s sales are predominantly from Europe, with contribution at 51%, 46% and 42% in FY09, FY10 and FY11, respectively. Although Europe is still the dominant market, its contribution is declining as demand in the Asia Pacific grew at much faster pace (2-year sales CAGR of +51% vs European market’s +1%). Contribution from the Asia Pacific region has been rising from 18% in FY09 to 26% in FY10, and 32% in FY11.

Product revenue breakdown by geographical area

24%27%

18% 18%

26%

1%

32%

1%

12%12%

15%

24%22%

1%

11%15%

22%19%

0%

5%

10%

15%

20%

25%

30%

35%

Italy

Euro

pe

Nor

th

Am

erica

Asia

Pac

ific

Japa

n

Oth

er

coun

trie

s

FY09 FY10 FY11


Costs Analyses

Cost structure dominated by raw materials and selling/marketing expenses. The two biggest cost items for Prada are raw materials and selling expenses (includes sales staff salaries, rental expenses, depreciation expenses and other expenses related to managing DOS). As a percentage of revenue, these expenses made up 29% and 31% of total FY11 revenue, respectively.

Cost structure in FY11

Raw material & manuf.

exp29%

Transports6%

Product & dev'ment

5%Selling

expenses31%

General & admin7%

Others6%

Profits12%

A&P4%

FY11 total revenue: EUR2.1b


Good improvement in profitability. There was a significant improvement in profitability as EBIT margin marched up to 20.5% in FY11 vs FY09’s 11.6% and FY10’s 12.0%. This was lifted by: (a) the faster expansion in the retail segment, which was more profitable, compared to wholesale. Prada added 54 new DOS in FY11 vs 27 in FY10, as well as expanded its network coverage to the Middle East via a joint-venture agreement with leading luxury retailer Al Tayer Insignia LLC; and (b) adjustment in its mark-down policy as Prada reduced the number of products subject to mark-down and percentage of mark-down in product prices during the sales period. Since 4Q09, Prada has cut down price reduction rate for certain products from 50% to 30% and some from 20% to 10%.

Sales are exposed to seasonal fluctuations. Prada’s sales experience seasonal fluctuations as it is common in the fashion segment. Sales to wholesale clients usually peak between June and July in conjunction with delivery of the fall/winter collection, and between Dec and Jan for the spring/summer collection. Retail sales tend to peak in Dec, in line with general consumer spending patterns during the festive season. In FY09-11, sales in 4Q were the highest for the year, representing 30.7%, 32.7% and 32.4% of total FY sales, respectively.

Company Focus

Prada

Sales Trend

Profitability Trend

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010A 2011A 2012F 2013F 2014F

EUR m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Total Revenue Revenue Growth (%) (YoY)

100

200

300

400

500

600

700

800

900

2010A 2011A 2012F 2013F 2014F

EUR m

Operating EBIT Pre tax Profit Net Profit

Source: Company, DBSV Source: Company, DBSV

Key management team

Management Composition. The management team comprises a list of managers with vast experience in their respective area. Ultimate direction is also being guided by the two co-founders, Ms. Miuccia Prada and Mr. Patrizio Bertelli.

As far as we understand, there are no immediate successors for Ms. Miuccia Prada and Mr. Patrizio Bertelli. However, we think the succession risk is minimised given Prada Group’s established and capable management team as listed in the following table. In addition, one of the key management behind the brands, Mr. Fabio Zambernardi, plays an important role in the group. He is

the Design Director for MIU MIU and PRADA brands since Nov 2002. He is responsible for the collection concept development, overseeing all the strategic activities as well as supporting the strategic brands image communication. In fact, Mr. Fabio Zambernardi has been collaborating with Prada since 1981. Ms. Prada and Mr. Bertelli have been working closely with Mr. Zambernardi as which we believe should ease the risk of any product development disruptions.

Key management team

Name Age Position Miuccia Prada Bianchi 63 President (Wife of Mr. Patrizio Bertelli) Patrizio Bertelli 65 CEO (Husband of Ms. Miuccia Prada Bianchi) Carlo Mazzi 64 Deputy Chairman Donatello Galli 49 Chief Financial Officer / Executive Director Brice Baudoin 45 CEO Asia Pacific Stefano Cantino 45 Group Communication and External Relations Director Maurizio Ciabatti 45 Group Engineering Directors Alessandra Cozzani 48 Group Investor Relations Director Stephen Etheridge 52 CEO at Church & Co Giuliano Giannessi 48 Group Corporate Finance Director Francois Kress 44 CEO of Prada USA Lorenzo Panerai 43 Leather Goods Industrial Division Director Gabriella Schnitzler 53 CEO of Prada Germany Davide Sesia 43 President of Prada Japan Sebastian Suhl 43 Group Chief Operating Officer - Commercial Area Cinzia Tito 55 Group Human Resources Director Armando Tolomelli 45 Group Controlling Director Fabio Zambernardi 48 Design Director

Source: Prada’s prospectus

Company Focus

Prada

COMPETITIVE STRENGTHS

Strong branding with a century-old track record. Prada’s brand value has been building up since 1913 by founder Mr. Mario Prada, the grandfather of Ms. Miuccia Prada (current President of Prada Group). Prada’s success as a prestigious, high-end leather goods brand owner is attributed to its focus and consistent effort in product innovation. Its success has been supported by rising consumerism in luxury products, in line with growing high-net-worth individuals and middle-class population especially in Greater China (disclosed under Asia Pacific). Prada’s sales from Asia Pacific grew at 2-year CAGR of 51.1% vs European market’s 1.3% p.a over FY10-11.

Strong leadership from key management. The management team consists of a group of senior management with vast experience in the industry or related industries or in their own space of expertise. The two co-founders namely Ms. Miuccia Prada and Mr. Patrizio Bertelli are actively involved in growing its existing brand portfolio.

Direct control to maintain brand integrity. Prada has direct control over production processes and value chains in order to maintain brand integrity and manage costs at the same time. This has helped to boost sales and margins between FY09 and FY11.

Special collections to entice sales. Apart from main product collections, Prada has introduced “flash collections” and “monthly packages” in order to keep consumers’ interest and to entice sales. Flash collections are supplementary products for the existing main collections with minor variations through a leaner production process. It normally takes 4-6 weeks from design to the placement of the flash collections in the DOS. For monthly collections, these are special collections produced for specific events (such as Christmas and Valentine’s Day) and are available in DOS for a limited period of one month only.

GROWTH STRATEGIES

Where is Prada now?

Prada’s global sales network for PRADA brand consists of 207 DOS, the third largest after LV (451) and Gucci (317) based on 2011 estimates. There remains room for further growth given its strong brand name and growing demand for luxury goods in Asia and the Middle East. However, its second brand MIU MIU is under-penetrated with only 71 DOS currently, far behind some of the leading brands like Dior, Bottega Veneta and Chanel. On a base of 319 DOS as of end-FY11, Prada has key presence in Italy (37), Europe (88), North America (39), Asia Pacific (99) and Japan (56). (Please refer to charts on pages overleaf for Prada’s global presence and further breakdown of DOS by geographical area vs peers).

Prada’s DOS network coverage - Total 319 DOS as of FY11


Company Focus

Prada

PRADA and MIU MIU have fewer DOS than competitors

207

71

451

317

193 175148 145

0

100

200

300

400

500

Prad

a

Miu

Miu LV

Gu

cci

Her

mes

Dio

r

Bo

tteg

aV

enet

a

Ch

anel

Rooms for PRADA and MIU MIU to expand in mature market

65

26

105

7970

51

0

30

60

90

120

Prada MiuMiu

LV Gucci Hermes Chanel

Europe

Significant untapped market in North America

26

7

129

64

33 31

0

30

60

90

120

150

Prada MiuMiu


North America

Source: Company, DBSV (2011 estimates)

Bigger market in Asia that is still growing

116

38

153169

89

49

0

30

60

90

120

150

180

Prada MiuMiu


Asia

DOS presence still low in Mainland China

14

4

35

40

17

8

0

10

20

30

40

50

Prada MiuMiu


Mainland China

Company Focus

Prada

Playing catch up

Adding new DOS. Prada has set an aggressive expansion plan for FY12-14F to add a total of 240 DOS (net of store closings) by FY14F (average of 80 DOS p.a). This target is more than its previous net openings of about 30 stores a year. We understand that out of the total 240 new DOS, Prada plans to open 70 in the Asia Pacific with China taking up more than 30 DOS. As at 31 Oct 2011, Prada has added 46 DOS (net of store closings). For FY12F, we understand that Prada could have a net addition of nearly 70 new DOS, slightly below the average target of 80 DOS p.a. However, we believe Prada would fill up the gap in FY13F.

Prada’s DOS network growth


Entering new markets. Prada plans to enter new markets in the Middle East including United Arab Emirates, Kuwait, Qatar and Saudi Arabia, South America such as Brazil, and Eastern Europe including Russia. These are countries it currently has no presence in or only has wholesale distribution exposure.

Growing younger brand MIU MIU. Prada intends to grow its sister brand MIU MIU which was founded by Ms. Miuccia Prada in 1993 for young and fashion-forward female customers. MIU MIU derived 35% of sales from Asia Pacific in FY11. It continued to record strong demand from Asia Pacific, especially the Greater China where sales grew 42% y-o-y to EUR359.3m in 9MFY12. The group is looking to add c.30 DOS for MIU MIU in Asia Pacific by FY14F.

E-commerce - new growth dimension. Prada started to offer its products through e-commerce in 2010. This channel generated maiden sales revenue of EUR1.9m in FY11. This is a new avenue for growth as online shopping, a less costly and mass-reaching channel, is gaining popularity in the emerging markets as well as developed markets amid rising costs and preference for convenient shopping. We have not factored in any online sales estimates in our forecasts for now.

Margin enhancement opportunities. The group is continuously exploring ways to increase margins through raising unit margin and cost efficiencies. This could be achieved via: (a) Alternative material sourcing and economies of scale; and (b) Expanding retail sales channels through DOS, which has higher margin than wholesale due to the differences between sell-in and sell-out prices. In our view, possible margin enhancement could also come from adjustment in its mark-down policy, where Prada has reduced the number of products subject to mark-down and percentage of mark-down of product prices during sales period.

INDUSTRY PROSPECTS

The power of Chinese luxury consumption

According to Almagamma Worldwide Markets Monitor, Asia ex-Japan was the fastest growing region for luxury goods consumption in 2005-2010, growing 13.4% CAGR to EUR28bn vs other regions’ -1.7% to 7.9% p.a. Within the region, Greater China (China, Hong Kong, Macau and Taiwan) grew 23% y-o-y and comprised 10.2% (or EUR17.6bn) of global luxury goods sales in 2010E. This was very close to Japan’s share of 10.5% of global luxury goods sales but recorded zero growth.

A market study by the US consulting firm, McKinsey & Co also pointed to an expectation of strong growth in luxury goods demand in China. According to its report in 2011, China would consume about US$27bn (or EUR35bn) annually in luxury goods in 4-5 years’ time. This would consist c.20% of global luxury goods market’s estimate of US$135bn (EUR175bn) in 2015.

Global luxury goods market by geographical region

54 61 66 65 58 64 68 80

5156 58 53

4653 57

672121 20 20

1818 17

1815

16 19 2023

2833

44

11

99

887

66

-

50

100

150

200

250

2005

2006

2007

2008

2009

2010

E

2011

F

2014

F

RoW

Asia exJapan

Japan

Americas

Europe

(EUR bn)

147160

170166

153172

185221

FY11-14F +6.2% CAGR

Source: Almagamma Worldwide Markets Monitor, DBSV

166 177 207 242 285 32536 5171

99

133165

3434

36

43

50

57

23

5

5

6

7

0

100

200

300

400

500

600

FY09 FY10 FY11 FY12E FY13F FY14F

Prada Miu Miu Church's Car Shoe

238265

319389

474554

(Unit)

Company Focus

Prada

Prospects for luxury goods’ operators could still be rosy

1) RMB appreciation, stronger purchasing power. The Chinese market has been the key growth driver for purchases of luxury goods between 2007 and 2010 (CAGR estimated at 27% to EUR9.2bn) partly due to RMB appreciation against EURO and USD, which boosted purchasing power. Since the Chinese government ended the yuan-dollar peg and moved to a currency basket basis on 21 Jul 2005, RMB has appreciated 13% and 27% against the EURO and USD respectively. Our economists expect RMB to strengthen further vs EURO by 16.8% in 2012F and 1.2% in 2013F, and vs USD by 3.1% in 2012F and 6.2% in 2013F.

Luxury goods sales in China

4.5

5.9

7.1

9.2

31.1%

20.3%

29.6%

0

2

4

6

8

10

2007 2008 2009 2010

0%

5%

10%

15%

20%

25%

30%

35%

Chinese Luxury Goods Value (EURm) (LHS) % yoy (RHS)

(EURm)

Source: Almagamma Worldwide Markets Monitor, DBSV

RMB appreciated vs EUR and USD

0.06

0.08

0.10

0.12

0.14

0.16

0.18

2007 2008 2009 2010 2011 2012F 2013F

CNY per EUR CNY per USD

(unit/CNY)

Source: Bloomberg, DBS, DBSV

2) New consumption patterns in China. Luxury goods industry in China has developed a very interesting trend, where luxury goods consumption is segregated into two main categories: (a) self-consumption; and (b) gift-giving. This trend of buying luxury goods as gifts for business or personal relationship reasons is rising. This is in contrast with the spending pattern in Europe and North America whereby spending on luxury goods is based on practicality and necessity. According to The New York Times, consumption split between self-consumption and gifts is 50:50 in China, based on total sales value of luxury goods.

3) Privilege in pricing ability. Pricing power of luxury brands stays strong as selling prices normally go up to maintain their prestige status. This is different vis-a-vis other industries where prices are stable or even show a downward trend in order to stay competitive. We understand that industry-wide retail pricing for luxury goods tends to be adjusted upwards once or twice every year, with increases more apparent during the Spring season. According to a media report (from www.cnga.org.cn), key luxury brands like Hermes, Bulgari, Chanel and Dior raised prices between 5-15% during Jan-Feb 2012. Demand for luxury goods remains rosy despite price increases. The ideology behind this and brand owners’ pricing privilege is to maintain luxury brands’ high prestige status.

4) Preservation of margins backed by pricing power. Against the backdrop of RMB appreciation, we think retail pricing could continue to march up to maintain margins while keeping up with the “prestige” image. Historically, Prada managed to achieve better margins due to higher pricing, increased retail sales and improved economies of scale.

Prada: Margins on the uptrend

67.862.4

58.0

20.4

12.011.6

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

FY09 FY10 FY11

Gross margin EBIT margin

(%)


Company Focus

Prada

FINANCIAL ESTIMATES

Multiplier effect from global economic growth. Based on historical trend in 2004-2007, every 1% increase in global GDP boosted global luxury goods sales by 1.2%-1.9%, but this multiplier has increased to 2.0%-2.5% in recent years (2010-2011F). Meanwhile, based on 2010 and 2011E data, for every 1% increase in global luxury goods sales, Prada’s sales increase by 2.5%-3.4%. Our sales growth assumptions on Prada of 21.5% and 24.7% for FY13-FY14F translate into a multiplier of 2.2x on global GDP growth and 2.9x on luxury goods sales growth as tabulated in the following table.

Prada’s sales growth assumption

Calendar Year

Global GDP Growth Multiplier

Luxury Goods Growth Multiplier

Prada's Sales Growth

2009* (1.3) 6.2 (7.8) 0.6 (5.0) 2010 5.0 2.5 12.4 2.5 31.1 2011E 3.8 2.0 7.6 3.4 25.4 2012F 3.4 2.2 7.5 2.9 21.7 2013F 3.9 2.2 8.6 2.9 24.9

* Global financial crisis Source: IMF, World Bank, DBSV

Global GDP to global luxury goods industry

Growth Index (1995=100)

Source: Altagamma Worldwide Markets Monitor, International Monetary Fund

2-year earnings CAGR of 28.7%. We expect Prada to post 2-year earnings CAGR of 28.7% to EUR701m by FY14F, on the back of 2-year revenue CAGR of 23% to EUR3.9bn. Key sales driver would mainly come from the Asia Pacific region, in particular Greater China amid the rising middle class income group and increasing demand for luxury lifestyle from the younger population. Sales breakdown by brands in percentage terms is expected to change slightly as we expect higher sales contribution from MIU MIU. Meanwhile, leather goods sales should continue to rise and dominate group sales.

Prada’s strategy to add 240 DOS (c.80 p.a.) by FY14F should boost retail segment’s contribution vs wholesale. Margins could improve further as retail segment is more profitable. We expect Prada’s EBIT margin to inch up 1.0ppt to 24.6% in FY13F, and 0.6ppt to 25.2% in FY14F on better operating leverage and higher retail contribution.

Company Focus

Prada

Asia Pacific’s contribution is expected to rise to 40% by FY14F


MIU MIU’s sales contribution is expected to rise


Leather goods sales remain the key product type


DOS sales’ contribution is expected to rise to 84% by FY14F

^ Independent customers, franchises and related parties Source: Company, DBSV

EBIT margin is expected to rise as DOS’ contribution increases

Wholesale customers refer to independent customers, franchises and related parties Source: Company, DBSV

1%

11%

1%

19%

15%

32%

22%

17%

22%

13%

40%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Italy

Euro

pe

Nor

thA

mer

ica

Asia

Paci

fic

Japa

n

Oth

erco

untr

ies

FY11 FY12F FY13F FY14F

71% 80% 82% 84%

29% 20% 18% 16%

0%

20%

40%

60%

80%

100%

120%


DOS Wholesale ^

EUR2.0b EUR2.5b EUR3.1b EUR3.9b

871.3991.5 1,427.4

2,029.1 2,531.0 3,239.9

555.6507.3589.7539.1 617.1732.9

25.2%24.6%23.7%

20.4%

12.0%11.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY09 FY10 FY11 FY12E FY13F FY14F

0%10%20%30%40%50%60%70%80%90%100%

DOS Sales Wholesale Sales EBIT Margin

(EBIT%) (Sales %)

0.7% 0.2%0.3%0.9%2.6%

17.5%

78.7%72.9%

23.9%

2.3%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Prada Miu Miu Church's Car Shoe Other


1%

24%

50%

25%

1%

20%

57%

23%17%

60%

22%

1%

64%

20%

1%

15%

0%

10%

20%

30%

40%

50%

60%

70%

Clothing Leather goods Footwear Other


Company Focus

Prada

VALUATION

Initiating coverage with BUY. By attaching a PE multiple of 27x (based on peers’ average PE of 27x) on Prada’s CY12 EPS of HK$2.11, we derive a target price of HK$57.00 for Prada. This is equivalent to 0.9x PEG, which is relatively cheaper compared to its peers’ average PEG of 1.3x. With potential upside of 19%, we initiate coverage on Prada with BUY recommendation.

Share price performance was resilient despite concerns on the global economy. Post IPO debut (IPO price: HK$39.50), Prada’s share price hit a high of HK$49.45 on 27 July 2011 before tumbling to the low of HK$28.80 on 3 Oct 2011. This was mainly affected by looming concerns on the European sovereign debt risk which could have contagion effects on the global economy as well as demand for luxury goods. Prada’s share price has since rebounded and traded between HK$32 and HK$40 for 4.5 months before breaking above HK$40 in mid-Feb 2012, possibly reflecting its solid fundamentals underpinned by resilient demand for soft luxury goods.

A neglected jewel? Compared to some recently listed peers i.e. Salvatore Ferragamo (SFER IM Equity) and Michael Kors (KORS US Equity), Prada is the largest by market cap and earnings, and has the highest pretax margin. Yet, it is the cheapest by

PE, PEG and P/BV. All of the three companies are positioned as luxury brand owners and operators with either a global presence or in the midst of establishing a global presence (i.e. Michael Kors).

We think the valuation discrepancy is unjustified given Prada’s size and growth potential. Meanwhile, an expectation of a strengthening HKD (pegged to USD) against EUR by 13% in 2012F presents another attractive investment opportunity for investors with EUR-denominated funds.

Stronger financial position. We expect Prada’s balance sheet to have a net cash balance of EUR319m in FY13F from EUR 5m in FY12F, mainly driven by strong cash generation from operations assuming demand for luxury goods continues to flourish.

Potential higher dividend payout in the medium-term. We understand there is no stated dividend policy but the group looks to pay 25-30% of earnings as dividends. We think the group could be paying out more than 25-30% of earnings in the medium-term given its strong Free Cash Flow of c.EUR349m in FY12F, EUR446m in FY13F, and EUR611m in FY14F, in the absence of any major capex requirement. Having said that, based on a 30% prudent payout assumption, this would translate into 1.1%-1.7% net yield in FY12F-FY14F.

Peer valuation

Company FYE Price Market

cap PE Div yield (%) ROE (%)

Net gearing

(x)

Earnings CAGR (%)

PEG (x)

(local) (US$m) FY11F FY12F FY13F FY11F FY12F FY10 FY10 FY11-13F FY13F

Prada SpA^* Jan 47.80 15,757 28.5 22.2 17.2 1.1 1.4 22.3 0.3 28.7 0.6 LVMH Dec 135.00 89,455 22.4 19.5 17.2 1.3 2.2 12.9 0.2 14.1 1.2 Hermes Int’l Dec 249.40 34,354 48.0 41.3 37.1 0.8 0.9 19.5 Cash 13.6 2.7 PPR Dec 136.00 22,540 17.5 14.8 12.7 2.6 3.0 8.2 0.3 17.3 0.7 Burberry Grp PLC ^ Mar 1,554.00 10,674 25.0 21.3 18.1 0.0 0.0 28.4 Cash 17.3 1.0 Michael Kors ^* Mar 47.65 9,091 65.6 48.5 37.6 n.a. n.a. 57.9 0.7 32.1 1.2 Tod's SpA Dec 84.25 3,365 19.1 17.8 16.1 3.3 3.6 15.8 Cash 8.8 1.8 Salvatore Ferragamo* Dec 15.20 3,340 31.5 25.7 16.4 1.2 1.6 25.3 0.1 38.4 0.4 Average 32.7 27.0 22.2 1.5 1.9 24.0 20.2 1.3

Share price is as of 15 Mar 2012 Currency: EUR/USD = 0.77; HKD/USD = 7.76; CHF/USD = 0.93; GBP/USD = 0.64 ^ FY10=FY11, FY11F=FY12F; FY12F= FY13F; FY13F=FY14F * Listed within the last 12 months Source: Bloomberg, DBS Vickers

Company Focus

Prada

Financial comparison

FYE Revenue (USDm) Pretax Margin (%) Net Profit (USDm) FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F Prada SpA^* Jan 3,353 4,074 5,082 22.6 24.4 25.2 552 707 914 LVMH Dec 30,870 34,761 37,774 20.8 20.8 21.7 3,999 4,577 5,205 Hermes Int’l Dec 3,709 4,162 4,562 30.8 30.3 30.6 716 832 925 PPR Dec 15,954 17,310 18,417 11.2 12.5 13.2 1,287 1,523 1,770 Burberry Group PLC^ Mar 2,915 3,314 3,768 20.2 20.6 21.1 427 501 588 Michael Kors ^* Mar 1,281 1,664 2,055 18.0 18.6 19.2 139 188 242 Tod's SpA Dec 1,166 1,246 1,348 23.6 24.5 24.5 176 189 209 Salvatore Ferragamo* Dec 1,277 1,463 1,624 18.5 19.8 20.5 106 130 203

Currency: EUR/USD = 0.77; HKD/USD = 7.76; CHF/USD = 0.93; GBP/USD = 0.64 ^ FY10=FY11, FY11F=FY12F; FY12F= FY13F; FY13F=FY14F * Listed within the last 12 months Source: Bloomberg, DBS Vickers

Prada: PE band chart

Prada: PB band chart

-2 SD

-1 SD

Mean

+1 SD

+2 SD

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

PE (x)

-2 SD

-1 SD

Mean

+1 SD

+2 SD

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

PBV (x)

Source: Bloomberg, DBS Vickers Source: Bloomberg, DBS Vickers

Company Focus

Prada

Salvatore: PE band chart

Salvatore: PB band chart

-2 SD

-1 SD

Mean

+1 SD

+2 SD

10.0

15.0

20.0

25.0

30.0

35.0

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

PE (x)

-2 SD

-1 SD

Mean

+1 SD

+2 SD

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

PBV (x)


Michael Kors: PE band chart

Michael Kors: PB band chart

-2 SD

-1 SD

Mean

+1 SD

+2 SD

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.065.0

70.0

Dec

-11

Jan-

12

Feb-

12

PE (x)

-2 SD

-1 SD

Mean

+1 SD

+2 SD

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

Dec

-11

Jan-

12

Feb-

12

PBV (x)


Company Focus

Prada

KEY RISKS

Economic downturns. A downturn in the global economy could adversely affect demand for luxury goods. During the 2008/09 global economic crisis, the value of global luxury goods market fell 7.8% y-o-y in 2009 to EUR153bn, while Prada’s FY10 sales (for the year ended Jan10) contracted 5% y-o-y to EUR1.6bn. However, when the economy recovered, global demand for luxury goods rebounded strongly by 12.4% y-o-y to EUR172bn in 2010E, while Prada’s revenue surged by 31.1% y-o-y to EUR2.1bn for the year ended Jan11, exceeding 2008’s level.

Based on our sensitivity analysis, every 1% growth in the global luxury goods market will raise Prada’s sales by c.2.5%-3.4%. However, during a downturn, every 1% drop in the global luxury goods market will lead to a 0.6% decline in Prada’s sales.

Potential brand dilution from overly aggressive expansion. We think there could be a risk of brand dilution if DOS expansion is too aggressive within a short period of time. It could become too commercialised and easily obtainable as opposed to the perception that the products have a prestige value and are exclusive. We think this boils down to brand communication and marketing strategies while striking a balance between expansion and maintaining its prestige status. As for Prada’s current expansion plans, the group has accelerated the pace of store additions while the scale still remains fairly reasonable, especially given its lower number of stores in various major consumer markets against close peers.

Over reliance on existing brands. There could be a risk of insufficient brands to support Prada’s longer term growth as we believe that every brand has a growth ceiling in order to preserve its prestigious or premium status. Prada could adopt a more pro-active strategy to widen its brand portfolio to increase its revenue base such as PRADA-liked or MIU MIU-liked brands. Take the case of LVMH (LVMH Moet Hennessy Louis Vuitton

SA), a leader in the luxury goods industry with an estimated market share of 18% in global luxury goods market in 2010. LVMH has a stable of brands in each of its product segments. For example, Louis Vuitton, Fendi, Donna Karan, Loewe, Marc Jacobs, Céline, Kenzo, Givenchy, Thomas Pink, Pucci, Berluti, and Rossimoda are among the brands that form its fashion and leather goods franchise, while Christian Dior, Guerlain, Givenchy and Kenzo are in the perfumes, make-up and skincare sector.

Forex exposure. Prada is exposed to various forex currencies due to its global presence. However, we are less concerned on this matter as the group has adopted a hedging policy, which had helped to minimise currency fluctuations in the past. Prada incurred total exchange losses (net of gains) of EUR2.1m in FY09, EUR8m in FY10, and EUR4.7m in FY11.

Interest rates exposure. As at 31 Jan 2011, Prada’s total debt amounted to EUR497.6m, with the split between short-term and long-term debt standing at 39% and 61%, respectively. Out of the short-term loans, 96% was represented by fixed interest rate loans. Meanwhile, c. 80% of long-term loans was represented by fixed rate loans. We believe any fluctuation in benchmark interest rates will not affect Prada materially given that it has little exposure to floating rate loans.

Ongoing tax disputes. Prada was involved in a total of 18 tax disputes during FY09-11. It paid tax penalties of EUR5.8m, EUR3.9m, and EUR2.4m in FY09-11, respectively. The company has also made provisions in respect of tax disputes of EUR6.9m, EUR7.3m, and EUR40.1m for FY09-11, respectively. These tax disputes were mainly due to issues such as: (a) tax residence; (b) permanent establishment; and (c) transfer pricing.

Company Focus

Prada

Key Assumptions Sensitivity Analysis

FY Jan 2009A 2010A 2011A 2012F 2013F 2014F

No. of new stores (unit) n.a. 35 59 75 85 80 FY13F

Total no. of stores (unit) 238 265 319 389 474 554 Raw materials +/- 1% Net Profit -/+ 1%

EBIT margin (%) 11.6 12.0 20.4 23.7 24.6 25.2 Selling exp +/- 1% Net Profit -/+ 1.3%

Segmental Breakdown (EUR m) FY Jan 2009A 2010A 2011A 2012F 2013F 2014F Revenues (EUR m) Prada 1,266 1,210 1,587 1,936 2,291 2,814 Miu Miu 240 252 353 512 693 922 Church's 50 44 53 64 74 87 Car Shoe 34 19 18 18 22 26 Others 54 37 36 40 43 46 Total 1,644 1,561 2,047 2,569 3,122 3,895

Income Statement (EUR m) Margins Trend FY Jan 2009A 2010A 2011A 2012F 2013F 2014FRevenue 1,644 1,561 2,047 2,569 3,122 3,895 Cost of Goods Sold (691) (587) (659) (740) (893) (1,161) Gross Profit 953 975 1,388 1,829 2,229 2,734 Other Opng (Exp)/Inc (762) (788) (970) (1,222) (1,460) (1,752) Operating Profit 191 187 418 608 769 982 Other Non Opg (Exp)/Inc (2) (8) (5) (9) 0 0 Associates & JV Inc 1 0 (4) 0 0 0 Net Interest (Exp)/Inc (36) (24) (21) (18) (9) 0 Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 154 155 388 581 760 982 Tax (53) (53) (135) (154) (213) (275) Minority Interest (2) (3) (3) (4) (5) (7) Preference Dividend 0 0 0 0 0 0

6.0%

11.0%

16.0%

21.0%

26.0%

2010A 2011A 2012F 2013F 2014F

Operating Margin % Net Income Margin %

Net Profit 99 100 251 423 542 700 Net Profit before Except. 99 100 251 423 542 700 EBITDA 282 282 527 741 933 1,166 Growth Revenue Gth (%) N/A (5.0) 31.1 25.5 21.5 24.7 EBITDA Gth (%) N/A 0.2 86.7 40.6 25.9 24.9 Opg Profit Gth (%) N/A (2.1) 123.7 45.3 26.5 27.7 Net Profit Gth (%) N/A 1.4 150.3 68.5 28.2 29.2 Margins & Ratio Gross Margins (%) 58.0 62.4 67.8 71.2 71.4 70.2 Opg Profit Margin (%) 11.6 12.0 20.4 23.7 24.6 25.2 Net Profit Margin (%) 6.0 6.4 12.3 16.5 17.4 18.0 ROAE (%) 19.7 9.8 22.3 29.2 28.6 29.5 ROA (%) 9.1 4.6 11.1 16.3 17.9 19.7

ROCE (%) 14.0 6.9 14.9 21.6 23.1 25.4

Div Payout Ratio (%) 0.0 0.0 58.2 30.0 30.0 30.0

Net Interest Cover (x) 5.3 8.0 19.6 33.5 87.9 n.m. Source: Company, DBS Vickers

Gradual increase in margins reflecting its operating leverage and higher retail contribution

Main cost items are raw materials purchased and selling expenses related to retail operating expenses

Key growth drivers remain PRADA and MIU MIU

Company Focus

Prada

Balance Sheet (EUR m) Asset Breakdown

FY Jan 2009A 2010A 2011A 2012F 2013F 2014F

Net Fixed Assets 379 418 537 619 710 766 Invts in Associates & JVs 10 10 2 2 2 2 Other LT Assets 1,041 1,033 1,058 1,052 1,046 1,040 Cash & ST Invts 87 99 97 352 567 912 Inventory 251 232 280 395 480 599 Debtors 251 224 274 270 329 410 Other Current Assets 158 133 119 119 119 119

Total Assets 2,176 2,148 2,366 2,809 3,252 3,847 ST Debt 367 459 194 144 94 44 Other Current Liab 386 370 465 571 693 844 LT Debt 264 111 303 203 153 103 Other LT Liabilities 147 150 193 193 193 193

Debtors - 16.5%

Net Fixed Assets - 37.8%

Associates'/JVs 0.1%

Bank, Cash and Liquid

Assets - 21.5%

Inventory - 24.1%

Shareholder’s Equity 1,003 1,048 1,204 1,688 2,103 2,641 Minority Interests 9 9 6 10 15 22 Total Cap. & Liab. 2,176 2,148 2,366 2,809 3,252 3,847 Non-Cash Wkg. Capital 273 218 209 214 235 285 Net Cash/(Debt) (544) (472) (401) 5 319 764 Debtors Turn (avg days) 27.8 55.5 44.4 38.7 35.0 34.6 Creditors Turn (avg days) 70.3 161.3 145.1 161.1 162.9 149.9 Inventory Turn (avg days) 76.6 182.4 172.6 206.3 219.3 201.7 Asset Turnover (x) 1.5 0.7 0.9 1.0 1.0 1.1 Current Ratio (x) 1.0 0.8 1.2 1.6 1.9 2.3 Quick Ratio (x) 0.4 0.4 0.6 0.9 1.1 1.5 Net Debt/Equity (X) 0.5 0.4 0.3 CASH CASH CASH Net Debt/Equity ex MI (X) 0.5 0.5 0.3 0.0 (0.2) (0.3) Capex to Debt (%) 22.9 23.3 37.7 64.7 103.0 162.6 Z-Score (X) NA NA NA NA NA NA Source: Company, DBS Vickers

c.80% of Other LT Assets is Intangibles Assets

Strengthening fundamental with growing cash from operation

Company Focus

Prada

Cash Flow Statement (EUR m) Capital Expenditure FY Jan 2009A 2010A 2011A 2012F 2013F 2014F

Pre-Tax Profit 154 155 388 581 760 982 Dep. & Amort. 92 104 118 142 164 184 Tax Paid (98) (39) (90) (108) (154) (213) Assoc. & JV Inc/(loss) (1) 0 4 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. 27 49 (76) (51) (80) (112) Other Operating CF (8) 11 23 10 10 10

Net Operating CF 166 280 368 574 701 851 Capital Exp.(net) (144) (133) (188) (225) (255) (240) Other Invts.(net) (8) (9) (4) (4) (4) (4) Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 0 0 0 0 0 0 Net Investing CF (152) (142) (192) (229) (259) (244)

0

50

100

150

200

250

300

2010A 2011A 2012F 2013F 2014F

Capital Expenditure (-)

Div Paid (1) (48) (59) (146) (127) (163) Chg in Gross Debt (15) (77) (110) (150) (100) (100) Capital Issues 0 0 0 207 0 0 Other Financing CF 0 0 0 0 0 0 Net Financing CF (16) (125) (169) (89) (227) (263) Currency Adjustments 7 (3) 4 0 0 1 Chg in Cash 5 9 10 256 215 346 Opg CFPS (EUR) 0.05 0.09 0.17 0.24 0.31 0.38 Free CFPS (EUR) 0.01 0.06 0.07 0.14 0.17 0.24 Source: Company, DBS Vickers

Capex is mainly for new store openings

Company Focus

Prada

APPENDIX A. Management Team

Source: Company

Company Focus

Prada

B. Branding – The Identity

Source: Company and various websites

Company Focus

Prada

C. Store Concept

PRADA’s Store Concept

Milan, Italy Milan, Italy

Nagoya Tower, Japan Canton Road, Hong Kong MIU MIU’s Store Concept

New Bond Street, London

Rem Koolhaas, SoHo, New York Herzog & De Meuron, Aoyama, Tokyo Source: Company

Company Focus

Prada

D. Potential Markets Expansion potential in underpenetrated markets

Source: Company

Expansion potential in new markets

Source: Company

Company Focus

Prada

Expansion focus in Greater China market

Source: Company, DBS Vickers

Global luxury market’s growth potential to be driven by retail expansion and rising demand from Asia especially China (EUR bn) (% growth)

Source: Altagamma Worldwide Market Monitor

Company Focus

Prada

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.

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b. there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his / her spouse and/or relatives and/or associate who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

Company Focus

Prada

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the

report is published.

2. DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject companies mentioned in this document as of the latest available date of the updated information.

3. Compensation for investment banking services: DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject companies mentioned in this document.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia

This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA..

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Singapore

This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report produced by a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to “Institutional Investors”, “Expert Investors” or “Accredited Investors” as defined in the Securities and Futures Act, Chap. 289 of Singapore. Any distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.

Dubai/ United Arab

Emirates

This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3rd Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.

United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers (Hong Kong) Limited

18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong

Tel: (852) 2820-4888, Fax: (852) 2868-1523

prada dbs initiation mar2012

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