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Why Investors Should Be Wary of Prada’s Surging Stock

Italian fashion house Prada’s shares jumped on Friday after profit doubled in the first quarter but one expert says earnings growth is set to fall later this year and investors should be cautious after a 40 percent surge in the stock this year.

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Daniel So, securities strategist at Sun Hung Kai Financial says most of Prada’s sales come from Chinese consumers, either on the mainland or via sales to tourists in Europe. With China’s economy now slowing, So says, Chinese consumers are unlikely to continue to spend freely.

“Investors can’t be too upbeat by the first-quarter earnings. China's spending power is not unlimited,” So told CNBC’s “The Call”. “We see that from Hong Kong retail sales and Macau gaming, revenue is slowing down in recent weeks and so I expect the same moderate slowdown in Prada’s sales – in their mainland business or European business."

In all he estimates that Prada’s earnings growth for the entire year will slow to 20 to 30 percent.

The fashion company’s Hong Kong-listed shares have racked up big gains despite slowing growth in Europe and China, two key markets for the company. The current share price has "more or less reflected” the bright outlook for luxury consumption and Chinese spending, So adds.

He says the shares are “fairly valued” at about 20-times earnings, roughly in line with its peers.

But Dickie Wong, executive director at Kingston Securities, says Prada’s shares are still a buy as they aren’t expensive. He thinks Prada’s growth won’t be powered by China alone, rather it will be driven by the Middle East and other developing countries such as India, which also has a growing middle class.

British bank Barclays has also got an overweight call on Prada. Friday’s results prompted Barclays to raise its 12-month price target to HK$65, about 33 higher than its current traded price.