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We highlighted how the luxury industry was hit by China's 'common prosperity' goals back in August. 👇
With China's economic struggles coming into the foreground and the CCP's policies taking shape, the Veteran's taking a deeper look at China & Louis Vuitton...
China! Everything about it is confusing and operates on a phenomenal scale.
If I may I will steal and redirect a quote from Winston Churchill, who in 1939 described another communist superpower as:
“A riddle wrapped in a mystery inside an enigma”
A very apt description of the people’s republic, a country ruled by a single all-encompassing communist party that at the same time supports the worlds second-largest economy and more than 20 million private companies.
Make no mistake. China is not about to consign 73 years of communist rule to the bin any time soon. In fact quite the reverse is looking likely.
The Chinese Communist Party or CCP is looking to bolster its position through the implementation of an electronically monitored state in which individual citizens are given social credit scores.
Those that fall below expected standards or who are seen as a threat to society (the CCP) can be penalised by a throttling of their internet speed, travel bans or exclusion from higher education.
Bad driving, racking up excessive debts or acting outside of the CCPs social conventions are the sorts of behaviour that can get you downgraded.
One group of Chinese citizens that have had their wings clipped in the last year are the super-rich be they individuals or corporations.
Beijing has decided that the likes of Jack Ma, Tencent and Ant Group have been flying too close to the sun and they've been brought the down to earth with a resounding bump.
The (unbridled?) capitalist genie is to be put back into its bottle under the mantra of common prosperity: a policy aimed at narrowing the gap between the richest and poorest in society.
Something that unbridled capitalism (rightly or wrongly) leaves to the market and financial Darwinism - a decidedly shape up or ship out attitude.
The CCP, wants everyone in the country to progress together at the same pace and to remove or control exceptionalisms or outliers. As George Orwell said in his novel Animal Farm “All animals are equal, but some animals are more equal than others”
It's striking that the initials of the ruling and only political party in China are the same as the acronym for Central Counterparties, entities that settle, guarantee and underpin trading on modern exchanges.
Then again maybe its highly appropriate because the CCP wants to be the CCP for all aspects of Chinese life and to micro-manage through the use of technology to placate the population and keep itself in power.
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What do these social changes mean for western companies and their shareholders?
The impact could be very significant, don’t forget that in February this year China became the EU’s largest trading partner.
China / Europe trade in 2020 was worth $709 billion and that flow of goods and services isn’t one-way traffic.
Some of Europe's largest companies are big exporters to or have large operations in China. Some could be said to be dependent on it, perhaps none more so than that most frivolous of sectors... luxury goods.
“From each according to his ability, to each according to his needs”
Coined and popularised by Karl Marx, that phrase is a central tenant of communism. So it's somewhat ironic that the makers of $50,000 handbags and $100,000 watches are increasingly reliant on a communist country for their livelihoods.
The biggest of all the luxury brand groups Frances LVMH (MC PA) doesn’t break down their China sales, preferring to lump them in with the rest of Asia ex-Japan.
However, as we can see from this graphic, for the group’s Wine and Sprits sales “Asia” is their largest market. They had more than 1500 outlets in the region in 2020.
LVMH has been in China since 1992 and has a dedicated Chinese website since 2004.
The map below from Louis Vuitton’s website shows the physical locations of their stores in China.
Here's a geographical breakdown of fashion and leather goods sales by region in 2020:
This is LVMH’s perfume and cosmetics sales by region:
Can we see a pattern emerging? I think we can!
Luxury goods companies are very dependent on sales in a country that is seeking to promote greater equality.
Some key ratios for LVMH:
Year to date LVMH is up by 36.72% and over 52 weeks that figure climbs north of +42.0%
Here is the share price of LVMH in ratio to (or divided by) the Shanghai composite index.
Over the last 10 years the LVMH share price has made 78 new highs.
There have been five very good years for LVMH and its shareholders, but markets and the demand for Luxury Goods are cyclical.
Yes, as F Scott Fitzgerald said the rich are different and high end luxury is price inelastic to some extent.
However it's not the rich but the well off that LVMH covets as customers. After all it has perfected the concept of commoditized luxury: an oxymoron maybe but a very profitable one at that.
But is it a concept that a new "socially aware" China will buy into?
Given all the above perhaps like Icarus, LVMH are now flying to close to the sun themselves. And we know how that turned out!
At the time of publishing LVMH ($MC) is the largest stock in the CAC 40, with a weighting of 11.38% in the French index.
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