China Demand for Bling to Boost Jewelry Stocks: Experts

With China poised to overtake India as the word’s largest gold consumer this year, stock analysts recommend gaining exposure to mainland jewelry retailers, which are set to benefit from the increase in consumption.

Aaron Tam | AFP | Getty Images

“The gold and jewelry sector is one of the few sub sectors of the Chinese retail space that has the potential to see new highs for the stocks in the next few years, as the Chinese disposable income continues to rise,” Eddie Tam, CEO of Central Asset Investments told CNBC on Friday. “Chinese jewelry brands are likely to continue to grow and dominate the market place.”

China’s overall demand for gold is expected to rise 20 percent in 2012, according to the World Gold Council, with jewelry consumption set to climb 10 percent this year. China eclipsed India’s demand for gold jewelry for a second straight quarter in the October-December period, consuming 131.5 metric tons of the precious metal adornments, compared to India’s 103 metric tons.

The increase in jewelry demand is coming from China’s 3rd and 4th tier cities, according to the World Gold Council’ Far East managing director Albert Cheng, who says improvements in infrastructure have allowed retail chains to expand their network of stores and tap into the growing pool of local buyers.

Dickie Wong, Research Director of Investment at brokerage firm Kingston Securities, recommends buying shares in the country’s largest gold jewelry retailer, Chow Tai Fook. With over 12 percent market share in China, Wong says the company has an extensive retail network of 1400 stores that are strategically located in densely populated areas and prime shopping districts.

Shares of Chow Tai Fook

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[1929.HK  Loading...      ()   ], which listed on the Hong Kong Stock Exchange in December, are fairly valued at the moment, he says. Wong expects a further 10 percent upside for the stock in the first half of the year.

Wong is also bullish on smaller rival Emperor Watch & Jewellery

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[0887.HK  Loading...      ()   ], which is currently focused on growing its presence in the mainland. 52 of the company’s 73 stores are located in China’s 1st, 2nd and 3rd tier cities.

“The high margin jewelry products enable the group to improve the overall profitability. The price-hike of both watches and jewelry products also help to relieve the upward rental pressure,” he said. Wong expects the stock to gain 40 percent this year.

Emperor generated revenue of HK$2.6 billion ($335 million) for the first-half of 2011, up 48 percent from the year before, while net profit climbed by 160 percent to HK$255 million.

Discussing overall demand for jewelry this year, Wong says that the Lunar year of the Dragon, considered auspicious by many Chinese, will also provide a boost to jewelry sales.

“In the year of Dragon many Chinese want to get married or have babies, so it will boost up consumption in jewelry,” he said.