How To Tap Into The Asian Luxury Market Boom

Tony Sagami

My kids think I'm the biggest cheapskate in the world. I buy some of my clothes at Costco, clip coupons, shop at Wal-Mart, drive a pickup, and drink instant coffee.

So what is a skinflint like me doing at stores like Tiffany, Louis Vuitton, Starbucks, BMW, Gucci, Apple, and Prada while I am in Asia?

I can assure you that I am not spending any of my money, but I am very interested in watching other people spend their money. Why? Because investing in companies that have successfully tapped into the Asia luxury market are making a mountain of money. Plus, investing in those companies can deliver huge portfolio profits.

Chinese consumers are spending money like mad. China's retail sales grew by 15.8% year in the first two months of this year, according to the National Bureau of Statistics. A big chunk of those growing sales are going for big ticket and luxury goods.

For example, Chinese consumers bought 600,000 tablet computers in 2010, but sales are expected to hit 4.5 million this year. Apple has a 73% global market share of the tablet market, but has a 78% market share in China, according to research firm IDC. With a starting price of $499 for the basic model, iPads are not cheap.

Ten years ago, China bought 1% of the world's cars. Today, it is purchasing 13% of the world's total car output.

  • BMW is doing gangbuster business in China. BMW sold 21,687 cars in China during the month of March, a whopping 70% increase. March wasn't an aberration either. BMW sold 58,506 cars in the first three months of 2011, up 71% compared with the same period last year.
  • Audi reported its best Q1 in history. Audi's record first quarter was fueled by a 25% increase to 64,122 vehicles in China.
  • Mercedes-Benz sold 42,990 cars in the first quarter, a 78% increase. To put that number in perspective, Mercedes-Benz sales in the United States were up by a much smaller 8.4%.

And boy, do Chinese love the prestigious designer labels for many reasons.

First, the average Chinese millionaire is only 39 years old, which is 15 years younger than the average millionaire in Japan, Europe, and the United States. These young millionaires love to show off their wealth.

Secondly, luxury goods are an essential part of Chinese business culture. To build 'guanxi' or strong relationships, it is common to give luxury gifts such as a Hermes scarf or a Gucci necktie.

Lastly, wearing a Rolex watch or carrying a Louis Vuitton handbag shows everybody you have a fat bank account, which is the ultimate status symbol in China.

That is why luxury retailers such as Coach and Burberry are opening a fleet of new stores in China and promoting fashion shows in major hubs such as Hong Kong, Shanghai and Beijing.

In fact, this luxury buy-a-thon is going to get even bigger. A new study from brokerage house CLSA predicts that China will become the largest market for luxury goods by 2020, accounting for 44% of global sales, up from 15% today.

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By the way, China isn't the only Asian country spending big bucks on luxury items. Japan is the biggest buyer of luxury goods, and accounts for 24% of global luxury sales.

Have you Heard of Kleiner Perkins Caufield & Byers? KPCB, based in Silicon Valley, is the top venture capitalist in the world and specializes in investments in incubation and early-stage companies.

Since its founding in 1972, KPCB has invested in hundreds of companies such as Amazon.com, Sun Microsystems, Electronic Arts, Genentech, Intuit, AOL, VeriSign and Google.

KPCB is so optimistic about the luxury market in China that it has opened offices in Shanghai and Beijing. It just invested $20 million in Xiu.com, a Chinese luxury and fashion ecommerce website.

There are several stocks you can invest in to tap into this booming luxury market.

LVMH Moet Hennessy (LVMHF.PK) is a luxury conglomerate with handbags, fashion accessories, champagne, jewelry, and watches.

Hermes International (HESAF.PK), best known for its sky-high priced scarves, is a fashion powerhouse selling leather goods, perfume, jewelry, watches, shoes, and apparel.
PPR SA (PPRUF.PK) is the holding company for Gucci and Yves Saint Laurent.

Burberry Limited (BBRYF.PK) is a famous British designer of coats and leather goods.

Porsche Automobile Holdings (POAHY.PK) has a kicker: It owns 18% of Volkswagen.

Tiffany & Co. (TIF), the iconic purveyor of the little blue box and high-end jewelry.

Harry Winston Diamond Corp. (HWD) is known as the jeweler to the stars.

Coach (COH) handbags look like a bargain compared to Louis Vuitton but are big, big sellers in Asia.

Polo Ralph Lauren (RL): The Chinese love the little polo pony more than Americans.

The most exciting opportunity may be Italian luxury fashion giant Prada. Prada recently filed an application with the Hong Kong stock exchange to go public sometime this summer.

Roughly one-third of Prada's 326 directly operated stores are in Asia.

Revenue increased 31% to €2.05 billion with Asia leading the way. Sales increased by 63% in Asia compared to 30% in the United States and 20% in Europe.

Prada's profit more than doubled last year on growth in the Asia-Pacific region. Profits rose to a record €250.8 million ($355 million) from €100.2 million in 2009.

Prada used some of those profits to reduce its debt, cutting it to €408.6 million from €485.3 million in 2010.

The Prada family owns 95% of the company and will sell about 20% of the company in the Hong Kong IPO. Prada expects to be valued at around 15 times 2010 earnings.

As always, you need to do your homework and decide whether Prada or any of the other luxury retailers are appropriate for your personal situation and financial goals. And as you know, timing is everything when it comes to investing, so you should wait for these to go on sale before jumping in or wait for my buy signal in Asia Stock Alert.

As I mentioned above, this exciting IPO will be offered on the Hong Kong stock exchange; not the U.S. Why I am telling you this? Because many of the readers of this column keep telling me that they are unwilling to buy stocks on a foreign stock exchange and I am hoping that perhaps this Prada story will encourage them to become a global investor and start investing in exciting Asian markets like Tokyo, Hong Kong, and Singapore.

Buying stocks on major Asian exchanges is EASY, SIMPLE, CHEAP and the home of the best opportunities.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you'll ever make.


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Posted 04-15-2011 10:45 AM by Tony Sagami