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China’s Battered Jewelry Stocks Offer Long-Term Value: Analysts

Hong Kong-listed jewelers have been battered in recent months by concerns over a slowdown in sales growth in the mainland along with rising risk aversion among investors.

Aaron Tam | AFP | Getty Images

Shares of the world’s biggest jewelry retailer Chow Tai Fook and rival Luk Fook , for example, have declined 30 and 40 percent year-to-date. Jewelry sales growth, meantime, has more than halved in the first five months of the year, from 40 percent in 2011.

Despite this, investment strategists recommend accumulating jewelry stocks, citing their historically cheap valuations and expectations of surging demand in the longer-term.

“While the sector is seeing a near-term cyclical slowdown, investors should look through the cycle for long-term value,” Lina Yan, Consumer Analyst at HSBC said in a report.

Candy Huang, an analyst at Barclays Capital agrees that the demand fundamentals in the jewelry sector are favorable, forecasting the market will continue grow in the low teens for the next five years.

Part of this growth will come from engagement ring purchases, says Huang. At the moment, around 30 percent of engaged women receive a diamond ring, compared with 80 percent in the U.S. and Japan.

However, this could grow to 50 percent by 2020, according to estimates by HSBC, particularly as more of the Chinese population enters a marriageable age.

Alrosa, the world’s largest company engaged in the exploration, mining, manufacture and sale of diamond,s forecasts China’s diamond and jewelry market will grow at a 12.5 percent compound annual growth rate (CAGR) over 2010-2020.

Yan adds that Chinese consumers, who typically make their purchases of gold and diamonds during vacations in Hong Kong, will increasingly buy jewelry in their home market – a positive for retailers with a wide presence in the mainland.

“Growth in jewelry demand is shifting from Hong Kong to China over the long term…Hotel bills and meals per overnight China visitors grew more than 40 percent in 2011. This eats into the spending power of visitors to Hong Kong, deterring mainland visitors,” she said.

Both Yan and Huang identify Chow Tai Fook as the most attractive stock among China’s jewelry retailers, due to its healthy financial position and aggressive growth strategy.

Chow Tai Fook, which listed on the Hong Kong Stock Exchange in December 2011, reported a 79 percent jump in profit for the full year after the market close on Tuesday. The shares jumped nearly 6 percent on Wednesday.

Net profit rose to HK$6.34 billion ($817 million) from HK$3.54 billion a year earlier.

Huang forecasts the company will double its revenue in the next five years, driven by its plans to launch 200 new outlets per year to take its total number of stores to 2,000 by 2014

In addition, Yan says the company’s stores are 30 to 40 percent more profitable than its local peers.

On a valuation basis, Chow Tai Fook is trading at a price-to-earnings ratio of 13 - much cheaper than other Hong Kong-listed luxury companies such as Prada and L'Occitane which are trading at 20 times earnings.

Huang says the company has a large amount of cash and inventory and if you subtract those, Chow Tai Fook’s stock is trading at an even cheaper valuation.

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