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Luxury firms on the up as demand from China rallies

Watches sit on display at the Mont Blanc store in Beijing, China, on Thursday, Jan. 5, 2012. Photographer: Keith Bedford/Bloomberg

Watches sit on display at the Mont Blanc store in Beijing, China, on Thursday, Jan. 5, 2012. Photographer: Keith Bedford/Bloomberg

Published Nov 26, 2012



The cost of bearish options on LVMH Moët Hennessy Louis Vuitton and Financiere Richemont fell to the lowest levels in more than 12 months on Friday on optimism luxury stocks will extend their rally as Chinese consumers support sales.

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Puts protecting against a 10 percent decline in LVMH cost 3.72 points more than calls betting on a 10 percent gain, according to three-month data.

The price relationship known as skew reached 3.23 on November 2, the lowest since April last year. For Richemont, the measure slipped to 2.59 that day, the lowest since June last year. The stock jumped 44 percent this year to Friday, as LVMH rose 18 percent.

Concern over slowing Chinese growth was waning, which might help luxury shares, said Joerg Lorenz of Zuercher Kantonalbank. Sales in the second-biggest economy had risen since the summer, and spending abroad was now “more aggressive”, Francesco Trapani, the head of LVMH’s watch and jewellery unit, said.

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Richemont’s first-half profit beat analyst estimates, as a weaker euro spurred Asian spending on luxury goods in Europe.

“Markets seem to assume that China growth is bottoming out and there’s even more of a rally in store for luxury goods,” Lorenz said. “The latest watch export statistics support this view.”

Geneva-based Richemont climbed to a record Sf68.55 (R655.144) this week after the Federation of the Swiss Watch Industry said exports rose 13 percent last month from a year earlier.

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The second-biggest luxury goods company reported on November 9 that its first-half profit increased 53 percent and its operating margin widened 1.5 percentage points to a record 27 percent. Asia accounted for 51 percent of the company’s revenue in fiscal year 2012, data compiled by Bloomberg show.

LVMH, the world’s largest maker of luxury goods, is 4.8 percent away from its all-time high reached in March.

The company raised prices at its flagship fashion and leather-goods brands in Europe to help dispel growth concerns. LVMH, which reported last month the slowest sales expansion since 2009, will increase jewellery prices next year amid rising raw material costs.

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About 27 percent of the company’s revenue came from Asia in the 2011 fiscal year. Wine and champagne sales rose 12 percent in the first nine months to e1.2 billion (R13.7bn), it said last month in a presentation posted on its website. Implied volatility, the key gauge of options prices, for three-month contracts 10 percent below LVMH shares fell to 24.38 on Friday, data compiled by Bloomberg show.

The measure for calls 10 percent above was at 20.67. For Richemont, put implied volatility slipped to 26.39, compared with 23.39 for calls, according to the data. Alan Grieve, a spokesman for Richemont, declined to comment on the options trading.

LVMH’s press office did not respond to calls and e-mails.

Richemont and LVMH do not have much more room to advance, according to John Plassard of Mirabaud Securities in Geneva. Chinese economic expansion will slow to 7.7 percent this year and 8.1 percent in 2013, from 9.3 percent in 2011, according to the average economist estimate in a Bloomberg survey.

Bain predicts the luxury market will expand 5 percent this year, less than half last year’s rate.

“It’s especially the general increased risk appetite we’ve seen this year that has pushed Louis Vuitton and Richemont shares to their highs,” Plassard, the vice-president at Mirabaud Securities, said. “I’d still be careful with the shares – and luxury stocks in general – as they’re beginning to look like they’re reaching a top. The macroeconomic uncertainties remain, with subdued growth in China being just one of them.” Richemont trades at 16.4 times earnings projected in the next year, Bloomberg data show.

That is near the highest multiple since April and 34 percent above the ratio for the Stoxx Europe 600 index. LVMH is valued at 17.8 times its forecast price-to-earnings ratio, 45 percent higher than the multiple for the Stoxx 600, the data show. The VStoxx index, which measures the cost of Euro Stoxx 50 index option prices, climbed 1.2 percent to 17.65 at 9.26am in Frankfurt, after reaching its lowest level since December 2007 last week. The Chicago Board Options Exchange Volatility index advanced 1.5 percent to 15.31 on November 21.

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