We forecast double-digit growth in watch exports in 1H and +8% for FY10E. This is primarily driven by Asia ex Japan. We assume watch/jewellery makers will register higher growth and a stronger margin improvement in 2010E. The current sector valuation (EV/EBITDA 11E 10.5x) is still well below the longstanding average (12.4x) and we expect the positive news flow to continue. Owing to the high sales share of Asia ex Japan and the lower valuation, we rate Richemont (Asia ex Japan 33%, P/E 11E 15.8x) and Swatch Group (Asia ex Japan 39%, P/E 11E 16.3x) Buy, LVMH and Hugo Boss Hold and Bulgari and Hermès Reduce owing to their rich valuation.
European luxury goods companies posted average organic sales growth of -6.6% in 2009 (08: +4%, 07: +14%) compared to -13% in 1H09. All companies registered an EBIT margin decline in 2009 (average -270bp). Bulgari was the hardest hit at -810bp to 1.8%.
We assume that EU luxury goods companies to post an average organic sales growth of +7% in 2010, which will be even higher in 1H10. The strongest growth comes from Asia ex Japan, while we assume moderate growth in the US. We forecast unchanged demand in Europe and a decline in Japan in 2010. We expect watch/jewellery producers (Bulgari, Swatch Group, Richemont) to see a sharper increase than leather goods producers (Hermès, LVMH) thanks to an easier comparison base. We estimate a margin improvement at all companies in 2010E although it will be above average at watch/jewellery producers. (Average +250bp, Bulgari +720bp, Swatch Group +330bp and Richemont +250bp).