A sum-of-the-parts valuation is our preferred method of valuation given the co-existence of various brands and two distinct divisions. In Watches & Jewelry (including the Production activities), we value the different segments separately to reflect different margin and growth prospects. We value: Breguet and Blancpain at a 10% discount to luxury sector long-term average EV/EBIT multiple to reflect weaker medium-term outlook; Omega in line with the luxury sector EV/EBIT to reflect scale, a return to a healthy revenue growth profile and margin recovery potential albeit still lagging key competitors; the high range and middle range brands at a 30% discount (both highly competitive segments, macro-sensitive price points particularly for Longines and Tissot); the iconic but loss-making Swatch brand at a multiple of 2x EV/sales to reflect brand rejuvenation with the launch of successful collaborations (with Omega and Blancpain) but continued competition from smartwatches in the entry-level segment; and the smaller Prestige brands (including US jewellery brand Harry Winston and Swiss watch brands Glasshutte, Jacquet Droz and Leon Hatot) at a multiple of 3x EV/sales. Finally, we apply a 30% discount to the Electronic Systems division relative to its Semiconductors sector peers to reflect lack of scale and margin prospects, lower innovation, and overall higher volatility. While it appeared as one of the group’s key strengths over a decade ago, we see Swatch’s conglomerate structure as less attractive today given the combination of disparate profit-generating units –– from the entry-level watch segment facing considerable volume pressures (Swatch brand and the middle range including Tissot) to a potentially oversized industrial backbone post COMCO agreement (limited demand from third-party brands for ETA’s mechanical movements) and the non-core, low-margin activities (Electronic Systems). On that basis, we apply a 10% conglomerate discount to our SOTP valuation, which drives a fair value of CHF143. It implies ~17x FY27E P/E.

The following risks could cause the shares to deviate from our target price: 
Changes in luxury demand are correlated to the macroeconomic environment and the health of consumer spending patterns. Thus, any major change in the external political or economic environment that may directly or indirectly affect consumer confidence is a risk to the group's sales performance, both to the upside and downside.
Swatch Group’s sales are over-indexed to Greater China vs. the luxury sector, which could negatively impact revenues in case of any material slowdown in China. 
Swatch Group's prestige brands segments are exposed to international travel patterns. Shocks such as terrorism, wars, and epidemic diseases could severely impact travel revenue.
Swatch Group has some degree of exposure to mass-market consumer watch brands such as Swatch and Tissot. The middle and lower range segments account for 22% and ~5% of Watches & Jewelry sales and EBIT, respectively. A material slowdown or acceleration in these segments could negatively or positively impact the Watch division's sales and earnings, and the level of capacity utilisation in Production. 
We think there is a renewed wallet share threat from consumer Technology (particularly from wrist-worn wearables).
Swatch Group has a relatively illiquid investment in Hong Kong listed watch retailer Hengdeli (9.4% stake).
Swatch Group's sales and earnings are exposed to Swiss franc movements, which are largely unhedged. Deterioration in the EUR, USD, HKD, or CNY would adversely affect sales and earnings forecasts. Currency fluctuations against the Swiss franc have been sufficiently reflected in our numbers, in our view.
Swatch Group's Electronic Systems division sales and earnings are volatile. Further price pressure would adversely affect sales and earnings forecasts.