Luxury Goods in China Report Interpretation

Overview

This sector update assesses Chinese luxury demand after BofA's China fieldtrip. The institution sees the worst of the demand downturn as likely past, but argues that recovery will be slow rather than V- or U-shaped, prompting lower sector forecasts for 2027-28.

Core views

BofA lowers its assumptions for Chinese luxury demand in 2H26 and 2027 after fieldtrip feedback showed limited evidence of a broad recovery. It forecasts global luxury growth of 4% constant FX in 2027, comprising 3% for soft luxury and 6% for hard luxury, while Chinese luxury demand is expected to rise only 1% constant FX. Chinese spending was estimated flat in 2024, down 6% in 2025 and up 1% in 1H26. Summer trading weakened sharply in July and early August, partly because of weather disruption, tax-policy changes and tougher comparisons, before becoming less negative in late August and early September. BofA views weather as a temporary operational headwind, but sees weak consumer conditions, limited wealth effects and fiscal tightening as more persistent constraints. The revision translates into modest revenue but larger profit reductions. BofA makes minimal changes to 2026 estimates, cuts 2027-28 sector revenue forecasts by about 1%, lowers EBIT and EPS estimates by 2-3%, and places its 2027-28 EPS forecasts 3% below consensus. It models about 4.0% constant-FX sector revenue growth in 3Q26, a 270bp slowdown from 2Q; excluding Richemont, the deceleration is 220bp. Hermès is expected to be the only covered luxury company without a 3Q slowdown, supported by its UK New Bond Street store, high jewellery and resilient leather goods. BofA reduced the Brunello Cucinelli price objective by 5% to €95 and Prada's by 2% to HK$43 because of estimate changes. China remains central because Chinese consumers generate an estimated 29% of luxury-sector revenue, including 19% spent in Mainland China and 10% abroad. BofA identifies Swatch, Moncler and Hermès as having the greatest Chinese-consumer exposure, while Pandora, Hugo Boss and Brunello Cucinelli have the lowest. Hong Kong has benefited from offshore Chinese spending: visitation was up 11% year-to-date, luxury prices are relatively attractive in RMB terms, and the city has a growing ultra-high-net-worth population. At LANDMARK Hong Kong, very important clients represented 85% of FY25 luxury tenant sales; their revenue rose 17% year-on-year in 1H26 versus 11% for total sales. This concentration supports Hong Kong luxury demand but also highlights its reliance on affluent consumers. Category evidence is uneven. Greater China Swiss watch exports were down 0.3% year-on-year through August and about 22% below 2019 levels; constant-FX momentum slowed from 8% in 1Q26 to 3% in 2Q and negative 2% in 3Q26TD. Mainland China was the principal drag, while Taiwan remained stronger. Supply-constrained brands such as Rolex and Patek Philippe continued to outperform, helping retailers with favourable brand allocations. Emperor Watch & Jewellery reported 5% group revenue growth in 1H26, with watches up 9.8%, while Oriental Watch's 2026 revenue was down 1% after a 9% second-half recovery. In Mainland China, 3Q26TD watch and jewellery sell-out fell 10% while sell-in fell 26%, reducing inventories by 16% year-on-year and indicating renewed channel destocking. Jewellery presents a more divergent picture. China was a €112bn jewellery market in 2025, but luxury jewellery was only about €6bn, or 6% of the total. Gold accounts for roughly 60% of the market, and elevated gold prices—up about 32% in 2026-to-date versus the 2025 average despite falling from their peak—have constrained affordability and volumes. Yet heritage-gold products remain a major domestic trend: their share rose from about 5% in 2018 to 31% in 2023, and BofA cites projected 22% CAGR for 2024-28E. Chow Tai Fook's Mainland China same-store sales improved to 20% and Hong Kong/Macau to 42% in 1QFY27, while Laopu Gold reported preliminary 1H26 revenue growth of 60% to RMB19.8bn. These company results contrast with broader Mainland China jewellery sales, which fell 14% year-on-year in 3Q26TD after a 12% decline in 2Q. BofA's macro and survey work supports a cautious sector view. Its weighted measure of Chinese luxury demand, based on LVMH Fashion & Leather and Burberry, improved to 1% growth in 1H26 from negative growth in 2025, but consumer confidence remained subdued at 89 in 2Q26 and July, well below pre-Covid levels around 120. Macau GGR is the indicator BofA finds most correlated with Chinese luxury spending; GGR was down 5% in 3Q26TD after being flat in 2Q. The August consumer survey showed only 36% of respondents had gone out and spent more in the preceding two months, down from 52% in June, while 39% expected to increase spending over the following six months. High-income households held up better, and trade-up intentions rose, but luxury purchase appetite weakened across apparel, bags, jewellery and watches. The report also emphasizes the redistribution of Chinese spending geographically. Luxury products were estimated 9-20% cheaper in major Asian shopping destinations than in Mainland China, with average discounts of 20% in Macau, 18% in Japan, 13% in Hong Kong and 9% in Korea. Better availability and lower overseas prices are encouraging outbound buying. The Mid-Autumn Festival's 25 September timing could support reported 3Q growth versus 2025, but BofA characterizes this as demand pulled forward from 4Q rather than a signal of stronger underlying momentum. Finally, it argues that recent cross-border tax tightening could dampen high-net-worth sentiment and make offshore spending flows to Hong Kong, Japan and Europe more difficult.

Analysis framework

BofA combines fieldtrip discussions with companies and industry experts, company disclosures, retail and export data, proprietary consumer-survey findings, macro indicators, store-network analysis and cross-market price comparisons. It then translates its Chinese-demand assumptions into sector revenue, EBIT, EPS and selected price-objective revisions.

Methodology notes

• Industry AnalysisSupply-demand framework

  Retail sell-out, supplier sell-in and inventory changes

  The report compares consumer sell-out with sell-in to assess whether watch and jewellery channels are restocking or destocking; falling sell-in and inventories in Mainland China indicate renewed destocking.

• Industry AnalysisVolume-price decomposition

  Volume, pricing and product-mix analysis

  BofA distinguishes volume, average selling price, gold-price effects and product mix to explain diverging watch and jewellery performance.

• Event-Driven and Behavioral FinanceExpectation Gap and Expectation Management

  BofA forecasts versus consensus

  The report benchmarks its 2026-28 revenue, EBIT and EPS estimates against consensus to show that its 2027-28 outlook is more cautious.

• Valuation methodsDCF (Discounted Cash Flow)

  Discounted cash flow valuation

  The report states DCF assumptions and price objectives for covered companies, using inputs such as revenue growth, terminal growth, terminal margin and WACC.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation

  For diversified groups such as Kering, LVMH and Richemont, BofA values major operating divisions separately and combines them with net debt or investment stakes.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Brunello Cucinelli

  Covered luxury company with a reduced price objective due to estimate changes.

  Strengths

  Understated-luxury demand, high-net-worth growth, China expansion and category expansion are cited as upside drivers.

  Weaknesses

  A shift toward fashion content, slower China development and margin pressure could weigh on results.

  Comparison

  Identified as among the companies with lower Mainland China and Chinese-consumer exposure.

  Risks

  Consumer weakness, lower store expansion, cost inflation, adverse FX and regulatory or reputational issues.

• Prada

  Covered luxury company with a reduced price objective due to estimate changes.

  Strengths

  Potential cost savings, advertising productivity and successful product launches could support performance.

  Weaknesses

  BofA applies a 20% DCF discount because of uncertainty around the Versace turnaround.

  Comparison

  The report identifies Prada as relatively exposed to weather-affected South China stores.

  Risks

  Weaker Chinese or US consumption, cost inflation and weaker product traction.

• Swatch Group

  Covered luxury company with high Chinese-consumer exposure and relative weather exposure in South China.

  Strengths

  Brand momentum, third-party production demand and Swiss-cost-base currency effects are cited as potential upside factors.

  Weaknesses

  Greater China watch-market weakness remains a material headwind.

  Comparison

  BofA identifies Swatch as one of the most exposed companies to Chinese consumers.

  Risks

  Macro slowdown, brand weakness, smartwatch substitution, cost inflation, inventory issues and FX.

• Hermès

  Covered luxury company expected to avoid a 3Q26 slowdown.

  Strengths

  New Bond Street store, high jewellery and resilient leather goods support relative resilience.

  Weaknesses

  Still exposed to broader luxury demand conditions and cost pressures.

  Comparison

  BofA identifies Hermès as highly exposed to Mainland China and Chinese consumers, but expects idiosyncratic factors to offset a near-term slowdown.

  Risks

  Industry slowdown, lower market-share gains, euro strength and cost inflation.

Key data

• Chinese consumer share of luxury-sector revenue29%19% spent in Mainland China and 10% abroad.
• Chinese luxury demand forecast for 2027+1% cFXBofA sees broadly stable spending rather than a broad recovery.
• Global luxury growth forecast for 2027+4% cFX3% soft luxury and 6% hard luxury.
• 3Q26 sector revenue growth forecast+4.0% cFX270bp slower than 2Q26; excluding Richemont, 220bp slower.
• Mainland China jewellery sales-14% YoY in 3Q26TDVersus -12% in 2Q26.
• Greater China Swiss watch exports-0.3% YoY through August 2026Approximately 22% below 2019 levels.
• BofA China Consumer Survey spending measure36%Respondents reporting higher spending over the preceding two months, down from 52% in June.
• China GDP forecast4.5% in 2026E; 4.2% in 2027E; 4.0% in 2028E2027-28 estimates were lowered for domestic-activity headwinds and delayed policy easing.

Impact & implications

BofA expects Chinese demand to remain a drag on global luxury growth, particularly for soft luxury and companies with higher China exposure. Hard luxury, supply-constrained watch brands, affluent Hong Kong consumption and heritage-gold demand offer selective support, but do not establish a broad China recovery.

Risks

• Broad Chinese consumer weakness, muted confidence and the absence of a sustained wealth effect could keep luxury demand subdued.
• Fiscal tightening and taxation of offshore wealth and trust income may dampen high-net-worth sentiment and cross-border luxury spending.
• Severe weather disruptions could temporarily reduce store traffic, travel, logistics and reported August revenue, particularly for brands with South China exposure.
• Higher gold prices may reduce jewellery affordability and volumes despite support for heritage-gold products.
• FX-driven overseas price discounts can shift Chinese luxury spending away from Mainland China.
• Weak global macro conditions, brand momentum deterioration, cost inflation and adverse FX remain risks for covered companies.

What to watch

• Whether late-August and early-September trading improvement becomes sustained rather than merely less negative.
• Chinese consumer confidence, Macau GGR and high-income consumer spending, which BofA views as important demand indicators.
• Mainland China jewellery sales, Swiss watch exports, sell-in/sell-out trends and inventory levels for evidence of further destocking or stabilization.
• Hong Kong tourism, luxury retail trends and the persistence of spending by very important clients.
• The timing effects of Mid-Autumn Festival demand in 3Q26 versus 4Q26.
• Further Chinese fiscal and cross-border tax measures and their effects on high-net-worth consumer behavior.