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China's Biggest Jeweler’s IPO Plans Create Buzz

China's biggest jewelry chain plans to list soon on the Hong Kong stock exchange, leading analysts and investors to speculate over what kind of valuations it would bring and whether it would be oversubscribed.

Models stand next to cabinets displaying limited edition watches at the opening of a Chow Tai Fook store in Hong Kong.
Bloomberg | Getty Images
Models stand next to cabinets displaying limited edition watches at the opening of a Chow Tai Fook store in Hong Kong.

According to Hong Kong's The Standard newspaper, Chow Tai Fook - controlled by one of Hong Kong's richest men, Cheng Yu-tung, - has applied to launch a $4 billion dual offering in Hong Kong dollars and in yuan by the year-end.

China has a huge appetite for gold, silver and diamond jewelry - consumption of which surged 49.4 percent year on year to $16.6 billion between January and July 2011.

According to HSBC, Chow Tai Fook is the largest player in a huge but highly fragmented gold jewelry market with a market share of 6.25 percent.

Chow Tai Fook also has the largest network of stores in the greater China region. It has 1,400 stores, compared to around 700 for competitor Luk Fookand 240 for another rival Chow Sang Sang , according to Ben Cavender, Associate Principal at China Market Research Group, a market intelligence and consultancy based in Shanghai.

"Their strength comes down to the number of stores they operate in greater China and their positioning in the market,” says Cavender. "They've been able to establish a pretty strong branding and loyalty."

That's key because many Chinese consumers tend to go abroad or to neighboring Hong Kong or Macau to shop for luxury items such as jewelry.

Cavender says Chow Tai Fook has been able to lure Chinese to shop at home because of its mid- to upper-end positioning.

Investors and analysts have already begun to speculate on what kind of valuation this share sale could fetch.

Edwin Fan, Associate Director of Consumer Goods at Bank of China International in Hong Kong, says the valuation the company achieves will depend largely on the market sentiment, which is mixed at the moment. He, however, thinks it could get a valuation of 30-times earnings, much higher than what rivals Chow Sang Sang and Luk Fook are currently trading at.

It would also be a significant premium to jewelry retailer Tiffany's price to earnings (PE) ratio of 19 times and Prada , which listed in Hong Kong in June with a PE of 23.

"There’s lots of hype and anticipation about this listing," says Eddie Tam, chief executive and founder of the Hong Kong-based hedge fund, Central Asset Investments.

Tam's hedge fund, which gave a return of 40 percent in 2010, bought shares of rivals Luk Fook and Chow Sang Sang when they were out of favor with investors last year.

Another reason, Chow Tai Fook could get a rich valuation is because the company owns several diamond cutting facilities in South Africa.

Diamond consumption is growing rapidly in China, with many Chinese exposed to diamond jewelry because of increased travel abroad, says Ben Cavender.

"From a consumer perspective the concept of buying diamond engagement rings and diamond jewelry has really taken off in the last couple of years," he adds.

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