investment thesis catalysts · in q2 fy17, lvmh acquired christian dior couture with €12.1...

AnalystsRussellLui-LeadAnalystrussell.lui@u.nus.edu

JaredLim-Analystjared_lyj@u.nus.edu

PamelaEe-Analysteeroujiapamela@u.nus.edu

BasicInformation LastClosedPrice €403.0012MTargetPrice €481.26+/-Potential +19.4%BloombergTicker MCGICSSector ConsumerDiscretionaryGICSSub-Industry Apparel&LuxuryGoods

1YPricevRelativeIndex

CompanyDescription LVMHisafamily-rungroup,witha diverseportfolioof75houses, rangingacross6segmentsfromfashionandleatherhousestohospitalitycompanies.Thecompanyalsospansacross70countrieswithatotalof4,600stores.

KeyFinancials MarketCap 204.194BBasicSharesO/S 505.43MFreeFloat 49.89%52-WkHigh-Low €242.30-€404.55FiscalYearEnd 31-Dec-2019

(€ M) FY18A FY19

EFY20

EFY21E

Revenue 46,826 53,228 59,003 65,901GrRate(%) 9.8 13.7 10.8 11.7NI 6,472 7,448 8,288 9,286

Margin(%) 13.57 13.99 14.05 14.09ROE 21.41 19.32 19.00 18.84ROA 9.79 9.46 9.74 9.94ROIC 17.56 18.01 19.32 20.89

KeyExecutives BernardArnault ChiefExecutiveOfficer

ChairmanofLVMHsince1989

AntonioBelloniGroupManagingDirector

We are initiating coverage ofMoetHennessy LouisVuittonwith aBUYratinganda€481.2612Mpricetarget.

1H19EarningsHighlights● Recordedrevenueof€25.1Bwithorganicgrowthof15%,ontrack

tosurpass2018figureswith1H2018revenuegrowthof13.9%,operatingprofitup14%from2018

● FashionandLeatherGoodsremaintheirstrongestrevenuedriver,withorganicrevenuegrowthof18%duetocontinuedstrengthintheChineseMarketandsuccessfollowing acquisitionofChristianDiorCouturewithstronggrowthparticularlyinFrancetobounceQ22019revenueby15%

● Application of IFRS16 resulted in an increase of net debt from€7359Mto€8684M,partlyduetoBelmondHotelsacquisition

● LVMH maintains a 25% gearing ratio up from last year’s 23%after IFRS16 implementation despite increased debt, due tostrong and sustainable cash flows from growing businesssegments,withoperatingfreecashflowat€1.7B

InvestmentThesis● Strong track record of strategic acquisitions to increase

market share and diversify risk in luxury goods marketstrengthens LVMH’s portfolio creating deep economic moatsagainstcompetitors

● Steady expansion of business in China to capitalise on thecontinual growth in China’s consumer spending in the luxurygoodsmarketfollowingtheluxuryboomviatheWinesandSpiritssegmentandcontrolleddigitalexpansion

● Consistentearningswithoutanoverextendedbalance sheetdespite business growth allow LVMH to maintain consistentlyhighmarginswithoutexcessivedebtlevelsaheadofcompetitors

Catalysts● Ongoingdiscussionsregardinganall-cashacquisitionof Tiffany

&Co.tostrengthenfootholdinJewellerymarketandbuildsynergyamongstexistingbrands

● PolicyeasinginChinathroughtheChinesecommercialbank’scutinmedium-term loan rates and forecasted easing ofmonetarypolicy will increase liquidity to the Chinese economy andencourageincreasedspending,thusallowingLVMHtocapitaliseontheirincreasinglylargeChinesemarket

ValuationsOur 12M price target from date of coverage is€481.26.Valuationwas derived through weighted price blend obtained from aDiscountedCashFlowmodel,andaComparableCompanyAnalysis.

InvestmentRisks● Rise of ESG-aware consumers who are aware of the

environmentalimpactofthefashionindustrymayalterdemandpatternsduetoincreasedpopularityintheresalemarket

● QE inEurozonemaynot translate into increasedconsumerspendingduetoadecrease inconsumerconfidence in Europe,withanegativeinterestrate

● RelianceonChineseconsumers:Increasingrelianceleaves thecompanyexposedtochangeofspendingpreferences amidstUS-Chinatradewarandmark-upscomparedtoEuropeangoods

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Figure1.LVMHCompanyStructure

Source:LVMHBusinessGroupsFigure2.LVMHasaleadingluxuryMaison

Source:FitchSolutionsFigure3.RevenuebyRegion(2018)

Source:LVMHAnnualReportFigure4.RevenuebySegment(2018)

Source:LVMHAnnualReport

CompanyOverview

LVMH is the largest luxury Maison in the world with the highestrevenueat€9.9bnin2018ascomparedtoitscompetitorsinthesameindustry; suchasKeringwithan incomeof€3.7bn.LVMH isownedbytheArnaultfamilywithinwhich,comprisesof75differentluxuryhouses that belong 6 segments; Wines and Spirits,Fashion andLeather Goods, Perfume and Cosmetics, Watches and Jewellery,Selective Retailing, and Other Activities. Other activities includejournalism and preservation of culture through the acquisition ofbuildingssuchastheLaSamaritaine.LVMHprovidesadiversifiedofferingofgoodsandservices,notonlyinthefashionmarketbutalsointheluxuryhotelmarket.InQ2FY19,thecompanyacquiredBelmondwiththepurchaseof$25perClassAsharesinanall-cashacquisition..Thetotalequityvalueamountedto$2.6billionwiththeenterprisevalueat$3.2billion.Assuch,thisaddsluxury hotels to the company’s diversified portfolio, on top of itscurrent product offerings with Belmond operating 46 propertiesglobally.InQ2FY17,LVMHacquiredChristianDiorCouturewith€12.1billion.Thelatterhasbeenestablishedasastrongfashionbrandwith€2.5billion innetprofits inFY18,a13.9%growth fromFY17.ThisacquisitionincreasesthesynergiesbetweenChristianDiorandLVMHforagreatergrowthpotential.TheresultofwhichwasanLVMHshareincreaseof4.9%post-acquisition.3Q19EarningsReview● Yeartodaterevenuegrew16%comparedto2018, reaching

€38.4billion● Organicrevenuegrowthup11%comparedtothesameperiodin

2018 reflecting continuing trends of strength in Chineseconsumersdespiteeconomicuncertainty

● GrowthlargelyattributedtooutstandingperformanceinFashionand Leather Goodswith 18% organic growth in 1st 9 monthsincludinga4%positivecurrencyimpact

● 6% revenue growth in selective retailing segment; DFS storesrecently opened in Hong Kong curbed by protests, but wasbolstered by strong response by Sephora’s online sales andinauguralstoreopeninginAuckland

● On track to produce good results in Q4, Hong Kong riots torepresentedalessthansignificantimpact

IndustryOutlook

Luxury in fashion remains a strong sector of growth amidfluctuationsRecentpessimismarisingfromtheUS-Chinatradewarandtariffsoffashionproductshascauseduncertaintyinthemarket.Additionally,theincreasingpresenceofeCommerceasadisruptortothe industryhas forced smaller players out, while larger players havecircumvented this challenge by adopting an omni-channel salesapproach.However,challengeshaveshowntobemoresignificantinthemid-marketsectorastheyappealtomiddle-incomegroups,whoaremorepricesensitive.However, larger luxuryplayers like LVMHhavethesizeandversatilityto“self-disrupt”andcontinuetotarget amarketwhichislessprice-sensitive.(adddetails)ChinaremainsasastronggrowthdriverforluxurygoodsChina’s luxuryspendinghasplayedanincreasingly largerole in theglobal luxury market in the last 5 years. Consumers of thisdemographic have been increasing in relation to the proportion ofotherworldwideconsumers,frommakingup19%ofthetotal luxurymarketin2012to31%in2018.

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Figure5.FashionMarketSegmentsandGeographicOutlook

Source:McKinsey‘StateofFashion”Figure6.GrowthinChina’sUpper-Middleclasshouseholds

Source:McKinseyreportFigure7.ChannelbreakdownforluxuryspendinginChina

Source:Bain&Companyreport

Growthinspendingamongupper-middleclasshousehold ThetotalChineseluxuryspendingisforecastedtoincreaseby1.6x in2025, to RMB 1,227 billion, constituting 40% of the globalluxurymarket. This is associated to the drastic increase theupper-middleclass householdswith a growth of an estimated 28% onanannualbasis and350million people in China earningbetween$2,600and$3,500permonthby2025.In Asia, the burgeoning middle-class households have greatlycontributedtothegrowthoftheluxurymarket.It isforecasted thatthe total participation in themarket (inclusive of second andthirdtiercountries)willincreaseto400millionby2020.ShiftinChineseluxurydemographic:

1. Post80’sChina’spost80’sgenerationisakeyplayerinthe country’sluxury goods market, fueling the consumption of luxuryproducts.This‘GenerationY’makesupmorethanhalfof thetotal expenditure on luxury in 2018, amounting to 10.2millionluxuryconsumersandRMB415millionspent,withanaverageper-capitaexpenditureofRMB41,000peryear.

2. Post90’s

China’s post 90’s generation is currently following in thefootstepsofitsearliergenerationinitsluxury consumptionbehaviour.Withluxuryproductssuchasstreetweartargetingthis generation, they spendRMB25,000 per yearon luxuryproducts; As upper-middle class parents support theirchildrenluxuriousspendingswithaconstanttopofofatleastRMB4,000permonth.

TheproportionofGenerationZspendersmakeup6.7millionspendersthattotaluptoRMB170billionin2018.

Chineseconsumermarketrepatriation In2018,domesticChineseexpenditurerepresented27%of Chineseluxurygoodsspending,withremainingpurchasesconducted abroadto avoid an average 35%markup in China. Chinese government isclamping down on travellers returning with luxury products.According to the McKinsey report, 70% of the upper-middle classhouseholds who splurge on luxury products, often purchase theiritems fromabroad.Sales inKorea’sDuty-freeshopswere primarilyattributed to Chinese tourists, where the same group was the keydriverforthegrowthofthecountry’sduty-freeshopstoan all-timehighof$13.6billion.Thegovernmentaimstopreventdaigou; smalltimearbitrage for luxurygoodspurchasesabroadwithnewlaws in2019whichfinesuchactshavebeenputinplaceacrosseCommerceplatforms(Taobao&WeChat)asastepuptokeepthespendingwithinthe country. The clampdown will affect the global luxury market,decreasingluxurycompanyshares.OnOctober10 2018,LVMHandKeringsharesfellby7.7%and9.7%,respectively,Assuch,aBain&Co.reportprojectsthatby2025,domesticspendingwillriseto50%oftheChinese luxury goods expenditure, leaving greater opportunity andincentiveforluxurybrandstotailortheirproductsandpricerangetocaptureasmuchoftheChinesemarket.However,evenwith the implementationof lawsagainstdaigou, theChinesedomesticmarketforluxurygoodswillcontinuetogrow andabsorb the difference as there remains a strong demand for topbrands as “luxury staples”. In China, top luxury brands like LouisVuitton,GivenchyandChanelremainastrongformofsocialcurrencyespeciallywithnewentrantsmiddle-upper income class. Similarly,demandforluxuryitemsasasymbolofstatusamongsttheaffluentisnotexpectedtobediminishedbytheselaws,as fashion-forward

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Figure8.Expenditureofoutboundtouristsfrom2015to2020

Source:McKinseyreportFigure9.Luxurymodelin2017

Source:BostonConsultingGroupFigure10.Emergingtrendsintheluxurymarket

Source:CBInsightsFigure11.Porters’FiveForces

Source:NUSInvestmentSocietyestimates

piecesatahigherpricepointwillstandasthedifferentiating factorbetweentheaffluentandupper-middleincome.ShiftingofLuxuryConsumptionPatternsIncreasedMillennialExpenditure In2025,millennial(born1978to1992)expenditureisprojected toconstitute 50% of the global luxurymarket in 2025, up from 32%today.Inaddition,theGenerationZ(bornin1993to2001)isexpectedtohaveagreatinfluenceonthechangesthatwilloccur intheluxurymarket.Whiletheyonlymakeup4%ofthemarket,theyareestimatedtoincreaseto8%by2020.Shiftingofluxuryconsumptionpattern Withmillenials taking an increasingly larger percentage of fashionretail consumption, it has brought rise to the ‘sophisticated’consumer. Sustainable sourcing has become an increasinglypopularisedconceptwhenitcomestothepurchaseofaluxury good.Astudyshowedthat73%ofsurveyedmillennialsweremorewillingto spend more on products that promote sustainability and socialresponsibility.LuxuryvsTechnology Consumersareincreasinglydemandfora‘phygital’experience whenpurchasing luxury goods. Luxury brands are alsoattemptingtouseCGI or AR to attract the tech-savvy Generation Z shoppers. Forexample, Balmain used CGI models to show off its 2019 pre-fallcollections as ameans to incorporate into shoppers’ experience tocreate a memorable experience and immerse consumers into thebrands’evolvingstories.ExperienceOverMaterialWiththegrowthexperiencedbythemarket,luxuryexperienceisalsoontherisewiththegrowthofluxuryhospitality,gourmetfood andfine dining, and luxury cruises at 5%, 6% and 7%, respectively.Asmore millennials start to opt for the luxury experiences, theexperientialsegmentisestimatedtoaccountfor⅔ ofthegloballuxurymarketby2022.Shiftinfashiontrends AsGenerationZormillennialsmakeupanincreasingproportion ofconsumers in the luxury market, luxury streetwear is gainingpopularitywherebrandssuchasSupremeandStussyhavedevelopedacult-likefollowing.Inaddition,luxurybrandssuchasGucciandLouisVuittonareadoptingandembracing characteristicsfromstreetweartocatertothepreferencesofGenerationZ andmillennials.Assuch,theformer’stotalsalesdoubledin2018,ofwhich55%wasattributedtoconsumersundertheageof35.Porter’sFiveForces

Considering the industrial tailwinds stated above, we analysedLVMH’s unique position as a well-diversified conglomerate viaPorter’s Five Forces diagram. It is observed that the expectedcompetitionwithin the industrywill be low as LVMHhasamarketshare far greater than its competitors. Due to the high barriers toentryforthismarket,itisunlikelythattherewillbenewentrantstothemarketinthenearfuture.Wealsoseeatrendinconsumersthatthey demand for higher quality products, sustainably-producedproductsinanomni-channelplatform,whichinturnwillincreasetheexpectationsofahigher-pricedproductfromLVMH.Competitionwithinindustry-LowLVMH remains the world’s largest luxury conglomerate ahead ofpeersRichemontGroupandKeringGroupbymarketcapitalisation.€200billionagainst€40.8billionand€65.7billion.LVMHisalsotheonly luxury conglomerate to include the 5 business segments,with

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Figure12.TotalIncomecontributionbySegmentsfrom2013to2018

Source:FitchSolutionsFigure13.TIFnetincomegrowthinQ42019ascomparedtoindustrygrowth

Source:CSIMarketFigure14.Belmond’sglobalfootprintinthetourismindustry

Source:sec.govFigure15.GlobalMarketshareofbrandsorconglomeratesinLuxuryJewelleryspace

Source:Bloomberg

Kering in only 3. As LVMH continues to build its track record ofstrategicacquisitions,weexpectthemtocontinuallycapture greatermarket share with relative ease, while reducing their competitor’sshareintheoverallluxurymarket.Threatofnewentrants-LowRenownedluxurybrandsofteninvolvearichhistoryandhigh brandequitybuiltbyyearsofqualityandapristinereputation.Hence,itisunlikely that there are any new entrants to themarketwhichwilldevelop with enough speed to rival LVMH as awhole, in the nearfuture.Threatofsubstitutes-ModerateThere is a threat of substitutes with the saturation of the luxurymarket. However, LVMH brands have strong brand equity hencecustomerloyalty,commonintheluxurymarket.Customerloyaltyalsodecreases the power of substitute threats, with 86% of luxuryconsumers being part of at least one loyalty program, resulting inbetterretentionrates.However,theirretentionratesarealsoafactorof their brands being able to spot and set fashion trends ahead ofpeers.Thiscanbedifficultcomparedtothethefast-fashionmarketastrends flow from luxury couturebrandsdownward,with adelayinmarketfeedback.Bargainingpowerofbuyers-LowLVMHconsumersrangefrommiddletohighincomeclasseswho areabletoaffordtheproductofferings.Inaddition,brandsunderLVMHareluxurycompaniesthatproducequalityproducts.Thiswill reducebargainingpowerastheywillbecomelesspricesensitiveastheyfocusmoreonqualitythanprice.Bargainingpowerofsuppliers-LowThesuppliesLVMHneededarefairlystandardisedfortheproductionof its products. This means that switching costs will be low andsuppliershaverelativelylowbargainingpoweroverthecompany asitiseasyforLVMHtoswitchitssuppliers.Furthermore,someofthecompany’s suppliers such asArteCadwere acquired by LVMH.Thiscausesbargainingpowerof suppliers tobeofamuchweaker forcebecausetheinputsarenowdirectlyownedbythecompany.InvestmentThesis

1. StrongtrackrecordofacquisitionstoboostmarketshareLVMHisfinanciallywell-positionedtoexecutestrategicmergersandacquisitionsofkeyplayerswithinbusinesssegments,which hasresultedinadiverseandbalancedportfolio.Theoutcometodayis 75luxury brandswithin 5 segments,where organicgrowthduetothesuccessoftheirluxurybrandsarecomplementedbypipelineacquisitions to capture a greatermarket shareinlackingsegments.Thefollowingexamplesaimtoexemplifythecompany’sabilitytoshadowcompetitorsbysheersizeandfinancialability,therebyincreasingtheirleadasthelargestnameinluxury.Tiffany&Co.AcquisitionDiscussions LVMH is currently undergoing discussions for an acquisition ofJeweller,Tiffany&Co.SinceTiffany&Co.hasbeenprofitableandFCFpositiveforthelast10yearsandhasamanageableD/Eof31%,theacquisitionwoulddirectlyaddtorevenuestreamsfromthe WatchesandJewellerysegment.AnacquisitionwillalsoallowLVMHtoentertheWatchesandJewelleryspaceatadifferentpricepointfromtheirexisting rangeunder theBulgariname,at theveryhighend.Asthetargetdemographicshiftstowardsayoungercrowd,Tiffany&Co.willbeabletobuildmarketingsynergieswithLVMH’s existingexpansivenetworkoutsideofUS,andeffectivemarketing strategies.Tiffany&Co.hasremainedahome-grownbrandofUS,ageography

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Figure16.GrowthinLVMHcompanysharefrom2012to2017,Top10luxurycompanies

Source:EuromonitorFigure17.GlobalcomparisonChina’swinemarketvolumewithChinaasthirdhighestwinerevenuein2019

Source:StatistaFigure18.SteadyincreaseinMainlandChina’sluxurymarketbeyond2018

Source:Bain&Companyreport

which LVMH is intending in pushing growth in. Thus, it will addsignificantdiversificationasoneofthelargestjewellerycompaniesinthe world in the relatively small portfolio of LVMH’s watches andjewellerysegment.This is apt as it allows LVMH to increase segment revenue in asegmentwhichsawpercentageofrevenuedecreasing(9.2%to8.7%).With LVMH’s consolidated market share for Jewellery standing at10.8% compared with its biggest rival, Richemont, at 14.8%, thesuccessfulacquisitionofTiffany&CowouldpositionLVMHasmarketleader,withacombinedmarketshareof18.4%.LVMHwouldbeabletoregainastrongerfootingintheUSmarket,currentlyrepresenting25%ofrevenue,throughTiffany&Co.’sestablishednetwork.ThispropsLVMHintobeingthemarketleaderforanotheroneofitssegments,andelucidateshowLVMHcontinuouslyattemptstoboostitsmarketshareandsolidifyitsmoatsgoingforward.LVMHpossessestheabilitytoacquireandexpandTiffany&Co,unlikecompetitorswhomay stand to benefit from acquiring the companythemselves,butare currently unable to. Apart from regaining strength the USdomesticmarket,andacquiringstrategicretailrealestatethatTiffany& Co sits on in New York, LVMHwill also be ableto utilise theirnetworks to drive aggressive expansion in China to combatnewChineselawsregardingconsumerrepatriation;anareatheycurrentlyhaveexpertisein.BelmondLtdAcquisitiontopenetrateluxuryhotelandleisure market InAprilFY19,LVMHacquiredBelmondwhichoperatesluxuryhotels,luxurytrainservices,andrivercruisesintwodozencountries for$2.6ball-cash.PropertiesunderthisincludeHotelCiprianiinVeniceand locations likePortofino,andRiode Janeiro.Activities followingtheacquisitionwillbereported inQ419andit isexpectedthat thisaddssignificantlytoLVMH’sextensiveportfolioviaexpansionintheluxuryleisuresegment.Thisisinlinewithcleartrendsintheluxuryindustrytowardsexperientialratherthanmaterialpurchases.Suchanexpansionintheluxuryhospitalitysectorfurther synergisestheircurrentportfolio,withluxuryluggagebrandRimowaalsounderLVMH’s belt. Belmond’s heritage, its innovative services andexcellence in execution resonates well with LVMH’s values, whiledirectly complementing their own Cheval Blanc maisons and theBvlgari hotel activities. As such, Belmond will be able to takeadvantageofawiderrangeofexperientialpackageswithintheLVMHluxuryhospitalityrangetofurthersolidifythebrandexperienceinagrowing market of experiential luxury, ahead of material luxury.LVMH will gain an edge ahead of competitors in this sector,whilediversifying its portfolio with new businesses and high-value realestatewhichBelmond’shotelssiton.GeographicalDiversification LVMH’sstrategicacquisitionsincreatingawell-diversified portfolioinbrandandbusinesssegmentisfurtherbolsteredbyadiversificationof geographical risk. This ensures that cash receiptsare receivedfromdifferentgeographiesandpotentiallyservesasanaturalhedgefor LVMH - which in turns reduces margin fluctuations due tocurrency exchange fluctuations. This also aids LVMH in reducingexposure to tradewar tariffsandretaliatoryboycottswhichenableLVMHtomaintainmarketdominanceoverother revenuesegmentsand geographies. As such, LVMH has not suffered any significantdetrimentalimpactasaresultofthetradewartariffs,andis able tobenefit from the expenditure in both regions.Hence, this helps stabilize operating cash flow as net incomefluctuationsintheforexmarkethasalimitedeffect

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Figure19.AoYunWine

Source:Millesima.sgFigure20.ForecastofChina’swinerevenueuntil2023

Source:StatistaFigure21.SHIBORinterbankrate

Source:NationalInterbankFundingCenterFigure22.NetsalesgrowthonSephora.comfrom2016to2019

Source:Statista

2. SteadyexpansionofbusinessinChinaChinacurrentlyrepresents29%ofLVMH’srevenue,followedby24%in the USA. With forecasts of a burgeoning middle class in China,increased consumer expenditure on luxury goods and a largepopulation, China’s market represents significant opportunity forLVMH.ChinaWineLVMHisintheprocessofpenetratingtheChineseluxurywinemarketwithAo-Yun,hand-growninShangri-Lacityandsoldasanhigh-endwinewithVineyardsinChina,withbottlesretailing atUSD$500andabove.Followingitsfirst2013vintage,thereleaseofthe2015vintageinfine-diningrestaurants,luxuryhotelsandhigh-endwineshopswillcome in Q419, coinciding with China’s alcohol market’s shift inpreference.Themarkethadoncebeenstiff,butthepost-80sandpost-90sgenerationaresignificantlymoreopento trying new brands ofalcoholthanthebaby-boomergeneration.Hence,growthisexpectedto be derived from China’snewwaveofaffluent class, in line withtheir desire and willingness to spend on experiential luxury.Furthermore,AoYunappeals to the increasingnumber ofhigh-net-worth individualswhile elevating the status ofhome-grownluxury,a piece of nationalistic pride for Chinese consumers LVMH mayattempt similar projects to capture this portion of the Chinesealcoholic beveragemarket for other ranges of products, and hencefurtherexpandtheirmarketshareintheChinesemarket.In2018,the20%ofproductionforAoYunwassoldinChinawiththeother80%soldworldwide,however,China’sdemandplaysakeyroleinbuildingAoYun’sbrand.AsthewineoriginatedfromvineyardsthatspannedacrossAdong,Xidang,SinongandShuori, the localproductwill be able to easily gain the support of Chinese throughnationalpride.Whiletherearemanyregionssuitableforvineyards,muchof itis either exported or used by China-domiciledwineries.ThelargestcompetitorinChangyuwhichownsmajorityof theChineseredwinemarketshare.However,with the changing tastes in the risingmiddle-upperclassandGenerationZChinese,andwithAoYuntargetinganichemarket,LVMHissettopenetratetheChinesemarketwithauniqueapproach.Furthermore,theincreasingproportionofdomesticspendinginChinawillhelptopromotethesalesgrowthforAoYun.Inaddition,LVMH’shistoricexpertiseinthewineanddistilleryprocesswillenableAoYuntosucceedatahigherrateoverexistingcompetitors.ControlledDigitalExpansioninChinaInJune2019,LouisVuittonlaunchedaMiniProgrammeonWeChat;asub-appwithintheWeChatapplication.TheMiniProgrammeservedasaneditorialandpromotionalprogrammetargetedtocreateamorepersonal relationship with real-time customer service, and buildbrand awareness. Currently, WeChat captures 79% of the Chineseinstant messaging market, boasting 1.1B Monthly Active Users, ofwhichmorethan80%areMillennials.To capture the growthofmillennial luxury expenditure amidst theeCommercetrend,apromotionwasruntogarnernewsubscribers,reflected potential for growth, gaining LVMH 35,000 page viewswithinamonth.InsteadofcreatingitsowneCommercechain,LVMH’sminiprogrammeentails specific functions - editorial content, retailstoreinformationandcustomerservicetocomplement andcompleteecosystem.With theadded informationgained from the customerswhen subscribing, theyare also able to analyse their demographicandanychangingpreferences,allowingLVMH to furthercustomisetheirproductstosuitinterests.

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Figure23.HistoricalNetIncomefrom2012to2018

Source:NUSInvestmentSocietyEstimatesFigure24.HistoricalbarchartofLVMH’srevenuebysegmentsince1990s

Source:BloombergFigure25.ProjectedNetIncome

Source:NUSInvestmentSocietyEstimates

Known to take a cautionary approach in digital expansion toavoidbrand deterioration, this move by LVMH displays their aggressiveexpansion into the Chinese market to create a strong foothold.Currently,theChineseluxurymarketisstatus-driven,whichLVMHistryingtoshiftawayfromastrendspointtowardsamoresophisticatedfutureconsumer.WeexpecttoseemoreLVMH brandsadoptsimilarstrategies following thispilotprogramme, considering its relativelylow cost compared to a standalone application, and the ease ofaccessibilityforChina’sexistingWeChatusers.Meanwhile,themini-programme remains new and we are expecting to see a steadyincreaseinusageandexposureontheone-billion-userplatforminthenextyear.Overall,withaddedindustrytailwindssuchasChina’spolicy easinganddecreasesintaxestoaidconsumerrepatriation,weviewdigitalexpansionasastrongmeansofattractingandboostingsales withinChina.Theadoptionofanomni-channelstrategywillfacilitate newerconsumersenteringtheluxurymarket,andretainsaleswithinChina.3. Increasing net income and free cash flow withoutoverextendingtheirbalancesheetOverthepast10years,LVMHhasbeensteadilyincreasingtheir netincomeatarateof15%CAGRwhilealsoincreasingcashflows. Grossandoperatingmarginshavealsoremainedsteadyat65%and 20%respectivelywhile gearing has not increased significantly(hoveringbetween25-35%forthepast10years).LVMHhasachievedall thisin the face of continuous acquisitions throughout the past decade,mainly through all-cash acquisitions of companies which holdsignificantmarketshareandbrandequity.LVMH’slongtrack recordofgraduallyaccretingtotheirtotalequitywithouttakingonexcessivedebt is indicative of stellar management and inherent structuraladvantagesintheirdecision-makingculture.WebelieveLVMHwillbeabletocontinuedoingso,withROICprojectedto growfrom17.56%to 20.89% indicating better use of future investments into thebusiness.Comparedwithothercompetitorslike,Richemont,whosenetincomehasfluctuatedsignificantlyoverthepast10years(includinga 30%decrease in net income from 2013 to 2017), LVMH also boastsconsistent increases in itsnet incomeasmentionedabove.LVMH isprojectedtocontinuedoingso,withnetincomeprojectedto increaseatslightlyover10%CAGRforthenext5years.LVMHalsoregularlyconductssharebuybacksandhasbeenincreasingannual dividendsby 14% YoY for the past 5 years. This ensures LMVH’s future netincomegrowthwillbetranslatedintoEPSgrowth.Asaresult,whileFY18 EPSstandsat11.13,and1HFYEPSat11.41,weexpectthistogrowinthenext12M.Sincestockpriceincreasesgenerallyfrom anincreaseinEPS,andinturn,netincome,westronglybelieveLVMH’sstabilitycomparedwithcompetitionanditspotentialtoincrease netincomeandcashflowswillbeafundamentaltailwindthrusting thecompanyinthenearfuture.Catalysts

● Plans toacquireTiffanyandCo. inanall-cashacquisitionof$14.5bn will strengthen LVMH’s position in its Watches &Jewellery segment.Thisacquisitionwillallowthecompany tohaveanestablishedbrandinthesectortocompetewithotherestablishedandwell-knownbrandssuchasCartier.In addition,Tiffany has thepotential for a growthof 11%and15%of itstotalrevenueforAsiaandJapan.

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Figure26.ProjectedEarningsperShare

Source:NUSInvestmentSocietyEstimatesFigure27.WACCCalculation

Source:NUSInvestmentSocietyEstimatesFigure28.GordonGrowthMethod

Source:NUSInvestmentSocietyEstimates

Alargepartofthisisowedtothe“repatriationconsumption”bytheChinesegovernment andasubsequentloweringofdomesticsalestax.Thus securinghigherrevenuesinWatches&Jewellerysegmentwhileexpandingmarketshareagainstcompetitors.

● China’splanstoincreasepolicyeasinginthenextfewquarters

byislikelytoimprovechineseconsumer sentimentandbolsterlanguishingeconomicgrowthinChina.Chinesecommercialbankcut medium-term loan rate for the first timesince2016.Statecouncilalsosignalledthatauthoritieswill easemonetarypolicywith targeted cuts to the reserve requirement ratio (RRR) forbankstoincreaseliquiditytothe chineseeconomy.Allthesecanleadtoincreasedconsumerspending onleisureandconsumerproducts, all of which LVMH is poised to capture from theirincreasingexposureinChina.

FinancialAnalysis

Overview:LVMHremainsinafinanciallystrongpositionwhichisgoverned bydiscipline,andaidedbyalargemarginsasaconsequenceofthenatureof their luxuryproducts.Most indicators yield apositive trend andsupportouroverallBUYrecommendation.LiquiditySupportedbyCashLVMHisalsoexpectedtoremaincashflowpositive,with operatingcashflowgrowingat13%CAGR,andfreecashflowgrowingat14%CAGR. This ties inwellwith their growing CAPEXwhile expandingtheirbusinessesbygeographyandnewsectorslikeluxuryhospitality.LVMH’sstrongpositionincashfurtheraidsinits liquidity,having astable current ratio of 1.4 in FY18 and 1.15 in 1H19, the lowestachieved in the last 10 years. In comparison, it’s competitor,Richemonthasacurrentratioof2.56in1H19.Considering LVMH’sliabilities of€16.8b, this ratio is reasonable, considerably so,whentakingintoaccountitscashbuffer.LowCreditSpreadLVMHmanagestomaintainaverylowcreditspreadof0.63%.Thisisattributedtothe issuanceofdebtatnear-0%couponrates. Gearingcurrently stands at 16.2%, allowing a large degree of flexibility topursuefurtheracquisitionstoexpandanddiversifyrevenuestreams.We expect LVMH to maintain levels of debt that are safe whileprovidingthemanextendedreach.WiderMarginsandReturnonAssetsThecompanyalsoboastsahighROAof9.79%attributedby agrowingnet incomemarginof13.57%.LVMH’stightdiscipline onpriceswhicharealmostneverdiscounted,andtheirproduct’saddedabilitytodemandhigher priceswill add to their ability to grow consistently.OperatingmargininFY18was21%,andweexpectthisupward trend to continueespecially with a further expansion intothedigitalretailspacewhichwouldaddtotheirstablein-storeretailsector.

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Figure29.ProjectedReturnonAssets

Source:NUSInvestmentSocietyEstimatesFigure30.ProjectedOperatingMargin

Source:NUSInvestmentSocietyEstimatesFigure31.ProjectedReturnonInvestedCapital

Source:NUSInvestmentSocietyEstimatesFigure32.LVMHLongTermGrowthRate

Source:NUSInvestmentSocietyEstimates

Valuation

ValuationPriceTarget:€481.26(+19.4%)DCFModelADiscountedCashFlowModelwasusedtoestimatetheintrinsicvalueof LVMH’s share. Themodel adopts a 5-year forecastperiod,giventhelimitationinprojectingChina’sgrowthwithintheluxurymarket,while taking into consideration the extent of impact on LVMH’srevenue. We also use a 5-year forecast as the likelihoodofLVMHmakingfurtheracquisitionsishigh,andwouldsignificantlyimpacttheprojectedvalueofthecompany.RelativeValuationAcomparablecompanyanalysiswasconductedasasensibilitycheckagainstourDCFModel.LVMHwascomparedwithother competitorsin the market which were considered luxury conglomerates, andcontest LVMH formarket dominance in similar business segments.Ourprimarycomparablemetricswerea+1FYP/Eratioanda+1 FYEV/EBITDAratio.RevenueGrowthRevenuegrowthforLVMHissupportedby1keydriver:acceleratedgrowthintheAsianmarket.WeforeseeLVMH’sincreaseinrevenuetobedrivenbythecompany’ssupplyanddemanddynamicssupportedbytheir positionas a well-diversified luxury conglomerate. On the demand side, webelievedthat LVMH will enjoy continued economic mobility within Asialeading to the increased percentage of the middle income andmiddle-upperincome,andconsequentlyhigherrevenuegrowthinthenearfuture.WithLVMHbeingaglobalconglomerate,therevenuemodelwasfirstsplitbygeographytoaccountfordifferentratesofgrowthindifferentcountries.Afterwhich,theyweredividedinto therespectiveproductsegment. In the Wines and Spirits segment, future revenue wasprojected based on estimated bottle volume sales in both theChampagneandCognacmarket.Forothersegments,suchasselectiveretailingandperfumesandcosmetics,revenuegrowthwasbased onan estimated increase in the number ofbrickandmortarstores. Asonline sales statistics is still not published by LVMH,weassociaterecentrevenueinstorestobeassociatedwiththeirdigitalexpansion.ThisisespeciallysinceLVMHstillmaintainalargenumberofstoresintheirselectiveretailingsegment.We expectrevenue to experiencethemost robust growth in the Fashion andLeatherGoodssegmentdue to continual strong demand from the Chinese market.Consequently,wehaveestimatedthatAsia(excludingJapan)willstillmaintainalargerpercentageofthemarketshare,aheadofEuropeandFrancewhereanysignificantincreaseinmarketshareislesslikely.On the supply side, LVMH benefits from their strongin-storeretaildemand andwill continue to adhere to demand trends by openingnew stores in Asia. Thiswill also be supported by growth in theironlinedigitalpresence,whichwillmaintainsynergiesbetweentheirin-storeretailbranches.Suchserviceswillservetoupdatethein-storeexperience of the new-age sophisticated consumer. LVMH’smanufacturingplantsarelargelybasedinEurope,andwillcontinuetosee growing cost increments proportional to their sales growth,without any alarming shifts as a result of being insulatedbyrecenttradetariffswhenshippingfromEuropetotherestoftheworld.Therecent opening of another factory in Texaswill also allow them toavoid any import tariffs to help boost their production and saleswithin the US, thus keeping costs stabilised in a growing luxurymarket.

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Figure33.InvestmentRiskMatrix

Source:NUSInvestmentSocietyEstimatesFigure34.10YearEurozonerates

Source:EuromonitorFigure35.DecliningconsumerconfidenceindexinEurozone

Source:Tradingeconomics.comFigure36.Growingmarketonusedluxuryproducts

Source:Bloomberg

Due to the strength of these drivers,we project consistent growthovertheforecastperioddespiteeconomicuncertaintyandareducedCCIamongdevelopedeconomies.Itisworthnotingthatexpectationsfor China’s accelerated growth were shown in a growth premiumwhichwas compared against a relatively stablegeography(EuropeexcludingFrance).Thisresultedinhigherrevenueacrossallsegmentsandhencehigherproductrevenue,butremainsin linewithcurrentprojectedtrendsinthemarket.TerminalGrowthIn our DCF model, a blended long-term growth rate of2.69%wasused.ThelongtermgrowthratesareweightedbyLVMHrevenuemixby region. The long term growth rate by regionswasderivedfromtheweightedGDPgrowthrateoftherespectiveregions.While LVMHis a global brand, its revenue is largely based in China, andisonacharted path for growth. Thus, thismakesLVMH’sterminalgrowthratemore sensitive to any changes in thelong-termgrowthrateofChina.WeightedAverageCostofCapitalTocalculateBeta,linearregressionofLVMH’sstockpriceswereranagainsttheCACindexforaperiodof2Yearsonaweeklybasisthenaveragedandadjusted.CAPMwasusedtoestimatetheCostofEquity,whilearisk-freerateandtheweightedaverageinterestrateof LVMHwasusedincalculationoftheCostofDebt.TaxshieldwastakenintoaccountasLVMHpaysincometaxfortheiroperations.InvestmentRisks

CountryRisk(C1)QE in Eurozone may not translate into increased consumerspending:TheEuropeanCentralBankannounceditsplanstochangeitsquantitativeeasingbypushinginterestratesintonegativeterritoryand cutting its bank deposit rates to -0.5%. To allow theECB topurchase€20billionworthofbondsto increasethebanks’reservesat a low interest rate. In addition, theECB also reduced forecastedinflationratesto1.2%and1%in2019and 2020,respectively.Whilethis programme is used to increase consumer spending with adecrease in inflation and an increase in banks’ excess reserves topromotemoneylending,theQEisnoteffectiveincreasingconsumerspending.Thisisbecausenegativeinterestrateswill leadtoamuchlowerbondyield,whichconsumersmaynotfeel safeholdingduetothemuchlesserreturnstheycanobtain(especiallyforpensionfunds).Furthermore,with theweakeningGDP from2.4% to2%,consumerconfidenceamongEuropeanshasbeendecreasingtoanindexof-7.4inOct2019.Whileitisestimatedtoincreaseto-3.4in2020,theindexstillfallswithinthenegativerange. Hence,indicatingthatconsumersinEurozonehavelesscertaintyabouttheirfinancialprospectsandwillmostlikelysaveratherthanspend.

PoliticalRisk(P2) RelianceonChineseconsumers:LVMHrevenue inAsiamarket ismostly reliant on Chinese consumers, of whichmost are from theupper-middleclass.70%oftheclassareoutboundChinesewhotraveloverseas to purchase luxury products. However, the recentclampdown on the purchase of overseas products to avoid importtaxeshasreducedthenumberofChineseconsumerswho purchasedtheirluxurygoodsinternationally,butincreaseddomestic spending.Inaddition,withtherecentUS-Chinatradewar,predictionwasmadein August 2019 that USwill impose a 25% tariff on US 300billionworthofChinaimports.Therefore,possiblycausinga0.4%decreasein China's GDP. Furthermore, 79% of respondents for a survey byChineseCentralBank said that theywould rather save, indicatingalackofconsumerconfidence.

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Figure37.TheRealRealWebsite

Source:therealreal.com/consign

Despiteso,thisriskcanbemaintainedasdemandforLVMH productremains stable with Chinese consumers still willing to purchaseproductsfromtheFrenchcompany;continuallyleadingconsumptionforluxuryproductsfrombothhomeandabroad.Consequently, thisover-reliance on the Chinese to generate revenue exposes thecompany to a country risk as a decrease in luxury consumptionordemand among the Chinese,may lead to a drasticchangeinLVMHrevenue.BusinessRisk(B3)Rise of ESG-aware consumers are growing as environmentalawarenessbecomesmorewidespreadamongstdevelopedcountries.According to an 2019 EU fashion report,recentdemandsreflectingpurchase spikes during seasonal releases has driven fast-fashionbrandssuchasZaratorelease24collectionsperannum,upfrom 2collectionsperannumonaveragein2000.Withthefashionindustry’semission expected to rise by 63% by 2030, trends show a shifttowards a circular economy; enhanced popularity for used-goodsconductedviagrowingresaleplatforms.Resale eCommerce platforms like ‘The RealReal’allowsecondhandluxuryproductstoretaintheirvalueamidsttheriseinpopularityforlandmarkdesignerpiecesknownas“grailpieces”.ThismayreducethesalesfornewreleasesbyLVMH’sfashionhousesandimpactrevenueasconsumerawarenesscontinuestorise.Nonetheless,theimpactofthisphenomenonmaybelimitedtomid-tierfashionhousesandfastfashion, as purchases of current products from high-end luxurybrandsarealsosubjecttospeculationoffuture priceappreciationontheresalemarketaslongasLVMHbrandsretaintheirbrandequityandstatus.Furthermore,thetargetmarketforluxury goods maynotview the novelty of used-goods in the samelightasotherincomegroups,andtheircontributiontoresalemarketmaybelimited.

DisclaimerThisresearchmaterialhasbeenpreparedbyNUSInvest.NUSInvestspecificallyprohibitstheredistributionofthismaterialinwholeorinpartwithoutthewrittenpermissionofNUSInvest.Theresearchofficer(s)primarilyresponsibleforthecontentofthisresearchmaterial, inwholeorinpart,certifiesthattheirviewsareaccuratelyexpressedandtheywillnotreceivedirectorindirectcompensationinexchange forexpressingspecificrecommendationsorviewsinthisresearch material. Whilst we have taken all reasonable care to ensure that theinformationcontainedinthispublicationisnotuntrue or misleading at the time of publication, we cannot guarantee its accuracy orcompleteness,andyoushouldnotactonitwithoutfirstindependentlyverifyingitscontents.Anyopinionorestimatecontainedin thisreportissubject tochangewithoutnotice.Wehavenotgivenanyconsideration toandwehavenotmadeanyinvestigation of the investmentobjectives,financialsituationorparticularneedsoftherecipientoranyclassofpersons,andaccordingly,nowarrantywhatsoever is givenandnoliabilitywhatsoeverisacceptedforanylossarisingwhetherdirectlyorindirectlyasaresultoftherecipientoranyclassofpersonsacting on such information or opinion or estimate. You maywishtoseekadvicefromafinancialadviserregardingthesuitability of thesecuritiesmentionedherein, taking intoconsiderationyour investmentobjectives, financialsituationorparticularneeds,beforemakingacommitment to invest in the securities. This report is published solely for information purposes,itdoesnotconstituteanadvertisementand is not to be construed as a solicitation or an offer to buy or sell any securities or relatedfinancial instruments.Norepresentationorwarranty,eitherexpressedorimplied,isprovidedinrelationtotheaccuracy,completenessorreliabilityof theinformation containedherein. The researchmaterial shouldnot be regardedby recipients as a substitute for theexerciseoftheirownjudgement.Anyopinionsexpressedinthisresearchmaterialaresubjecttochangewithoutnotice.

©2019NUSInvestmentSociety

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