Prada faces choppy debut

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Could the timing of Prada’s HK IPO be any worse? Asian markets had a torrid day on Thursday, with the Hang Seng among the biggest fallers.

Meanwhile debt worries in Greece appear to be deepening, hitting global sentiment. And then there’s Samsonite – which debuted on the market amid much fanfare, only to utterly flop on day one, closing down over 8 per cent.

On Friday Prada will set its final price for its IPO in Hong Kong, as it seeks raise up to $2.6bn. Already there have been some worrying signs. Retail investors have largely stayed away – put off by the prospect of paying capital gains tax in Italy on any profits they make on the shares. Analysts warn that the potential price to earnings ratio of 27 times looks overly optimistic. If Samsonite is anything to go by, a choppy debut is in store.

But there are some reasons for hope. Mulberry’s earnings – up 358 per cent – pushed up the luxury bagmaker’s shares by as much as 8.6 per cent in London on Thursday. Clearly some analysts have low-balled the rate of earnings growth in the luxury sector, and much of Mulberry’s growth has come in Asia. Mulberry’s shares are now trading at more than 40 times earnings – similar to Hermes, the French purveyor of silk scarves, which has been touted (by Prada) as the most accurate comparison.

Burberry – famous for its iconic British trench coat – has also been buoyant on Asian demand. Its shares are up 16 per cent this year on rocketing sales.

If Burberry trades around at 26 times earnings, and both Hermes and Mulberry at over 40 times – a mid-to-high 20 times for Prada seems reasonable.

So perhaps it’s not the pricing that worries investors but the business plan. Burberry is well established in China, having bought up its franchised stores. It has over 50 stores in the country already, including in tier 2 cities that most people on Bond Street will never have heard of – like Changsha and Zhengzhou. It has plans to take that number above 100.

Prada, meanwhile, has just 14 stores on the mainland. It is planning to use the cash it raises to expand internationally, not specifically in China. Samsonite, meanwhile, raised funds to give back to existing shareholders – allowing the likes of CVC and RBS to cash out.

The moral of the story… if you want to raise cash in Hong Kong, don’t just worry about the price, worry about the pitch.

Related reading:
Prada IPO faces tax hurdle, FT
Prada: overhyped China story, Lex
Mulberry: valuing luxury, beyondbrics

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