RAPAPORT... The pending initial public offering (IPO) of Chow Tai Fook, expected to close before the end of the year, is a significant event for the diamond and jewelry industry. While the timing may be questionable for the company, it may well provide the industry with the boost it needs in the current market volatility. Either way, as China’s largest jewelry retailer, the company seems destined to become a bellwether of investor sentiment toward the industry in the Far East, and possibly, by default, the global market.
The company recently submitted an application to list on the Hong Kong Stock Exchange and local analysts expect it could raise between $3 billion (HKD 23.4 billion) and $4 billion (HKD 31.2 billion) for the 15 percent to 20 percent stake said to be on offer. At the higher end, that would value the company at about $20 billion to $27 billion.
Chow Tai Fook’s strength lies in its dominant position in China having opened its thousandth store on the Mainland in 2010. It has around another 300 stores spread among Hong Kong, Macau, Taiwan, Malaysia and Singapore and is planning to increase its total stores to over 2,000 by 2016. Funds from the IPO are expected to facilitate that growth and other expansion. The company is also a De Beers Diamond Trading Company (DTC) sightholder and Rio Tinto Select Diamantaire, with two diamond cutting and polishing facilities in South Africa and one in China. Its jewelry design and manufacturing each are done at a factory in China and Hong Kong.
In May, as the company unveiled its IPO plans, Chow Tai Fook reported annual sales of around $3.9 billion. In perspective, the numbers are impressive. When you consider that Signet Jewelers raked in sales of $3.5 billion and Tiffany & Co. had sales of $3.09 billion in fiscal 2010, the IPO would value Chow Tai Fook well above both those companies that are considered the largest public jewelry companies around. Chow Tai Fook’s listed competitors in the Far East, Luk Fook Holdings and Chow Sang Sang, had revenues of $1.04 billion and $1.8 billion respectively in the most recent fiscal year.
With its focus solely on the Far East region, and in particular China where it enjoys an estimated 13 percent stake in the market, Chow Tai Fook’s story is highly representative of the industry there. In a presentation given in late 2010, Kent Wong, managing director of Chow Tai Fook, estimated that China’s jewelry market grew by about 14 percent to a value of around $37.8 billion in 2010 and is set to grow by about 20 percent a year through 2014. According to the National Bureau of Statistics of China, combined retail sales of gold, silver and jewelry increased by 49 percent year on year to $16.48 billion (CNY 105.2 billion) in the first seven months of the year.
Not to belabor a much repeated point, but Chinese luxury consumers have emerged as the primary growth drivers for the diamond and jewelry industry today as they have become increasingly wealthy, sophisticated, brand-conscious, and geographically extended. Bridal is the main driver of growth with an estimated 10 million couples who get married every year in China; an estimated 65 percent seal the deal with a diamond ring. However, Wong believes that the real opportunity lies in fashion jewelry and the company last year partnered with Rio Tinto to develop a fashion jewelry category in China.
These factors present tremendous opportunities for those companies like Chow Tai Fook, Luk Fook and Chow Sang Sang already entrenched in the market and for those with viable plans to penetrate it.
Potential investors should be suitably impressed. But the question remains whether they will be willing to come to the party to the extent at which analysts – and the company – expect, especially in face of recent stock market volatility. Hong Kong’s Hang Seng Index has lost 12 percent in value since the beginning of August and investors may be loath to commit their money to the company in such an environment. Investors will be looking at safe and sustainable companies and industries at this time.
That may well be the Chinese jewelry sector and it will be up to Chow Tai Fook to convince investors of just that as it embarks on its proverbial road show. While the company may be marketing its own worth, it will likely be selling the diamond and jewelry story in China. The success of its IPO may well tell that story, and reassure the industry of its own worth and growth potential.
The writer can be contacted at avi@diamonds.net.
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Source:diamonds