Future bright for China's bling king


At first blush, Chow Tai Fook (CTF) may seem to be in a spot of bother. The secretive Hong Kong-based chain of jewelry stores, which by some measures is the world's largest, has long wanted to float shares on the Hong Kong stock exchange. Alas, this week it was forced to scale back both the valuation and the size of its planned offering. Market rumors now suggest it will float about $3 billion-$4 billion-worth of shares next month.

That may be less lucrative than it hoped for, but do not shed any tears for Cheng Yu-tung, the firm's billionaire boss. The weakness of this deal (which would still rank as one of the bigger placements this year) has more to do with market turmoil than any specific snags confronting CTF.

Though almost unknown in the West, the firm is a goliath, with a reported $4.5 billion in sales last year, leaping ahead at a rate of over 50 percent a year. It is already more than twice the size of Tiffany & Co., a posh American jeweller. A recent analysis by George Washington University and L2, a think-tank, found the brand is better known in China than Rolex, Bulgari or Tiffany.

Considering the booming market in China, where most of the firm's 1,500 or so outlets are located, the future positively glisters for CTF. On some estimates, China's jewelry market is already a $39 billion business, growing at perhaps 15 percent a year. Part of the growth comes from the surge in wealth among the very richest.

The firm's real strength, however, lies in its ability to reach the rising middle classes who live outside the biggest cities and who are also splashing out to buy gems and gold. The World Gold Council reckons that China is the world's fastest-growing market for gold jewelry and the second-biggest after India. There are now signs that Chinese consumers, confronted with rising inflation, are buying gold as a hedge.

It is true that CTF has rivals, but it seems better positioned to conquer China. Luk Fook, for example, is another Hong Kong jeweller expanding rapidly on the mainland -- but its strategy relies chiefly on using franchisees, whereas CTF ensures high quality and branding by directly controlling its far-flung outlets.

Foreign firms are also expanding -- Prada had a $2.5 billion stock placement in Hong Kong earlier this year, and Cartier has more than 110 bustling stores on the mainland -- but they rarely stray outside the big cities.

Indeed, CTF could even profit by offering global rivals a distribution channel in remote regions. Local knowledge matters, for tastes differ widely: Jade is popular in interior provinces, for example, while coastal regions prefer simple designs.

CTF has just struck a deal with De Beers to market one of the diamond company's brands in its outlet in Changsha, the capital of Hunan province. Global markets may be punishing CTF today, but the heartland of China looks likely to reward its investors for years to come.

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