In China, the Devil doesn't wear Prada

By Donny Kwok

HONG KONG (Reuters) - The Devil, it seems, wears anything but Prada in the eyes of Chinese bloggers determined to expose corrupt government officials flashing luxury labels way past their pay grades.

Prada is among a few premium brands reporting solid growth in the world's second largest luxury market even as a government campaign against conspicuous spending and gift-giving hurts firms with instantly recognisable brands like LVMH , Compagnie Financiere Richemont and Kering SA .

The logos on Prada's deluxe leather handbags, wallets and shoes are, by and large, low-key and these days, discretion is key in China.

This month, the government jailed a provincial official for 14 years for corruption after pictures of him wearing expensive watches - including what bloggers said was a Vacheron Constantin - became a hit on the Internet, earning him the nickname "Brother Watch".

Richemont owns several leading luxury watch companies including Vacheron Constantin, Cartier and Piaget, and earlier this month said demand in China had weakened.

"Some companies, like Richemont, had a lot of exposure to sectors that have taken a big hit in China this year, especially luxury watches," said James Roy, senior analyst at China Market Research Group in Shanghai.

"Many luxury clients here are moving away from more loud or bling-focused luxury brands like Gucci or Louis Vuitton, towards things that are a bit more subtle and sophisticated without the flashy logo," he added.

LVMH's Louis Vuitton and Kering-owned Gucci, which won over legions of fans with their visibly branded products, have recently moved away from the logo-look and are now offering more upmarket leather handbags.

Both companies do not comment on their rivals' performance.

Prada on Tuesday reported a nearly 8 percent increase in net profit for the six months ended July. The 308 million euros profit slightly lagged the 321.3 million euros average forecast by five analysts polled by Thomson Reuters.

"The greater China area (PRC, Hong Kong and Macau) generated net sales of Euro 396.7 million, contributing significantly to the development of the Far East market," Prada said in its earnings statement.

CRACKING CHINA

The shift away from in-your-face luxury brands is most prominent in big cities such as Shanghai and Beijing, where many companies have their biggest stores and where customer tastes are rapidly evolving.

Logos, however, are still very popular in China's vast interior, where luxury labels are still a novelty, analysts say.

"Prada really offers an alternative to Louis Vuitton and Gucci from a customer's choice perspective. They are a third choice, an understated choice for people who stay away from logos," said Franklin Yao, CEO of Shanghai-based consultancy SmithStreetSolutions.

Another plus factor for Prada is its pricing - many handbags and wallets are less expensive than the equally discreet offerings by Kering-owned Bottega Veneta, whose woven leather goods are also gaining popularity in China.

"What I am looking for is bags with great quality, low-profile, which means the logo should be smaller," said Chloe Chen, a 23-year-old college graduate in Shanghai.

"As for brands, I don't like those known by the majority, such as Burberry, Gucci, LV. Personally speaking, LV or Gucci are a little out of fashion."

Other luxury brands that are doing well in China include jeweller Tiffany & Co. , which has benefitted from the rising demand for diamonds among couples, Burberry Group Plc and leather goods maker Coach .

Investors sensing the shift in China's luxury market have also helped propel Prada's shares 8 percent higher so far this year, beating a 2 percent gain for the benchmark index .

Prada, at 23.6 times forward earnings, is more expensive than Burberry and LVMH but earnings growth expectations are higher: on average, analysts expect Prada's earnings to grow a fifth next year, or about 50 percent quicker than LVMH or Burberry.

"From a valuation perspective, we maintain that although the PE does not look appealing, Prada remains the most interesting stock in the luxury sector from a 'price to growth' point of view," HSBC wrote in a research note last month.

"Prada is an Asia Super Ten stock."

(Additional reporting by Vikram Subhedar and Alexandra Hoegberg in Hong Kong, Shanghai Newsroom and Astrid Wendlandt in Paris; Editing by Anne Marie Roantree and Miral Fahmy)