CITIC SEC: Overseas luxury goods industry remains sluggish, focusing on internal growth.

CITIC SEC released a research report stating that after experiencing a glimpse of recovery at the end of 2024, the global luxury goods industry faced pressure again in the first quarter of 2025. Against the backdrop of consumers becoming more rational and emphasizing the "quality-price ratio," the industry's significant price increases and creative enhancements do not match. Coupled with the current uncertain macro environment, the bank believes that the industry will continue to face short-term pressure. Under the assumption of no negative factors affecting growth, the bank expects a moderate recovery in the luxury goods consumption market in mainland China. Overall, the bank expects the profit margins in the industry to continue to be under pressure in the first half of 2025, with a lack of clear catalyst for valuation recovery in the sector, and maintains a cautious attitude towards the global luxury goods industry and related assets in the short term. The main points of CITIC SEC are as follows: Slowing growth in Q1 LVMH/Hermes/Kering/Burberry/Prada/Moncler/Tapestry/Ralph Lauren's revenue growth in Q1 2025 at fixed exchange rates were -3%/+7%/ -14%/ +7%/ +13%/ +2%/ +8%/ +8% (Note: Kering and Ralph Lauren for FY 2025 Q4, Tapestry for FY 2025 Q3). According to the bank's statistical list, the average industry growth rate year-on-year remained flat (compared to +3% in Q4 2024 and -4% in Q3 2024). In terms of regional structure, with the narrowing price difference between the Chinese and overseas markets and potential economic policy expectations, the overall luxury goods market in mainland China is stabilizing, but still under short-term pressure. The Japanese market is moving towards normalization against the backdrop of reduced price differentials, with strong local customer resilience, while the North American market experienced some fluctuations after a strong holiday consumption in Q4 2024. The bank categorizes current luxury goods consumers' brand preferences into four types (using soft luxury goods as an example): 1) Traveler consumption - high-price difference brands (prefer brands such as Gucci, Burberry), 2) Top luxury/ value-preserving brands (such as Hermes, Chanel, LV), 3) High-potential fashion brands (such as Miu Miu, Coach), 4) Functional brands (such as Moncler, Brunello Cucinelli). The bank remains cautious in the short term about the luxury goods industry and related assets as a whole. Regional structure: Significant improvements in Asia-Pacific, with Europe and the United States leading growth Asia-Pacific (excluding Japan): The average growth rate in Q1 2025 was -6%, with overall declines stabilizing (compared to -4% in Q4 2024 and -12% in Q3 2024). The mainland Chinese market has seen improvements in luxury consumption driven by economic policy stimulus and narrowing price differences between domestic and overseas markets due to economic policy stimulus. The bank believes that the momentum of Chinese consumers' luxury consumption is more driven by wealth effect, so real estate expectations remain a key short-term observation indicator. Japanese market: With the sharp decline of the yen in the first half of 2024 driving growth in luxury consumption in Japan, but with the yen rising in the second half of 2024 and brand adjustments, the price difference between Chinese and Japanese luxury goods had narrowed from 16% in May 2024 to 4% in May 2025 (additional tax refunds for Japanese luxury goods are approximately 8%-9%). The bank believes that the current growth in the Japanese market is entering a normal stage, and Q2 2025 may face pressure from higher base numbers. European and American markets: After showing strong consumer willingness and higher spending levels in the holiday shopping season of Q4 2024, consumer spending in the United States and Europe has cooled down. The average growth rates in Q1 2025 were 2% and 6%, respectively (compared to approximately +7% and +9% in Q4). Despite the easing of current US-China trade tensions, recent indications from Trump about imposing tariffs on European products have had a significant impact on the market, with passing on tariffs through price increases becoming an industry consensus. Due to rapid deterioration in inflation expectations and weak consumer confidence from severe financial market fluctuations in April, the bank expects a short-term cooling in the US market in Q2 2025. Category structure: Differential performance in leather goods, significant resilience in jewelry, and data improvement in watches due to a low base The bank believes that in recent years, many luxury brands have adopted aggressive price increase strategies, which have to some extent overdrafted the consumption capacity of non-VIC customers (especially entry-level consumers) as the quality and price mismatches. However, brands with alpha energy, such as Prada, Miu Miu, and Coach, still perform well in categories like leather goods and clothing. The jewelry category continues to lead, with many luxury brands restarting price increases to hedge against tariff pressures, stabilizing profit margins in the short term, but increasing price sensitivity among consumers for leather goods and clothing categories. The jewelry category is supported by gold cost inflation and sustainable price increases that do not diminish the relative "value for money advantage" of relatively soft luxury goods, and the bank is optimistic about the continued resilience of the jewelry category. Watches continue to be under pressure, mainly due to: 1) the relatively strong Swiss franc exchange rate, 2) cost pressures from rising gold prices, 3) geopolitical situations, and 4) high inventory levels among distributors. The bank expects top brands to significantly outperform their peers. Outlook: Q2 2025 may continue to be under pressure, with Alpha greater than Beta Considering the turbulent financial markets since April and the impact of macroeconomic uncertainties on consumer confidence, the bank believes that the US market may continue to cool down in Q2 2025, the Japanese market may face pressure from higher base numbers under the current background of reduced price differences, and luxury goods consumption in the Chinese market is expected to continue a moderate recovery. The bank remains cautious in the short term about the luxury goods industry and related assets. Risk factors: Economic recovery slower than expected; increased volatility in overseas stock markets; intensified market competition; changes in fashion cycles; adverse exchange rates; increased raw material costs; rising store rents; excessive production/supply constraints.