Swiss-Chinese Free Trade: And the Winners Are…

Swatch Store
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Watchmakers Swatch Group and Richemont as well as elevator maker Schindler are among Swiss stocks that stand to gain significantly from a potential free trade agreement between Switzerland and China, analysts told CNBC.

Switzerland's economy minister on Wednesday confirmed that China and Switzerland are moving closer to signing a free trade agreement. China is already Switzerland's sixth biggest export market and its importance is only set to grow under the new deal.

Exports from Switzerland to China have risen ten- fold in the last ten years.

Both sides have worked on the deal for nearly three years. It is designed to lift tariffs for a number of industries, such as chemicals, pharmaceuticals, watch manufacturing and agriculture.

Jon Cox from Kepler Capital Markets says watchmakers Swatch Group and Richemont will be the "clear beneficiaries, as it could help them win market share from other European luxury goods companies and may go some way to offsetting the clampdown on gifting which is hurting high end watch demand."

(Read More: What Richemont's Sales Miss Says About Luxury Sector)

Aside from the luxury stocks, Cox says verification and testing company SGS, and elevator/escalator maker Schindler are set to benefit from the free trade agreement with their respective 18 percent and 15 percent exposure to China.

Imported goods from Switzerland currently face an 11 percent import duty and luxury watches worth more than 10,000 yuan (1,500 Swiss francs) , such as Swiss watches, are subject to a 20 percent tax.

Luxury goods analyst Rene Weber from Vontobel says that although the exact terms of the free trade agreement with China aren't known yet and it is not clear to what extent the duties will be reduced or disappear, it is a "positive step" especially for Swatch Group as 20 percent of its sales are in mainland China , while Richemont's exposure to China is 10 percent. (The exposure to Greater China is 37 percent for Swatch and 26 percent for Richemont).

Weber adds that "due to Swatch Group's strong position with the low/mid-end brands Tissot and Longines, Swatch Group has market share in value terms of more than 50 percent and in units even 90 percent in Mainland China"

China is the third biggest export market for Swiss watches with a 7.7 percent share in 2012. Hong Kong featured as the top export market 20 percent of the pie while the U.S. came in second with 10.2 percent.

In the first quarter of 2013, Swiss watch exports to China were down 26 percent, as the crackdown on corruption intensifies and the economy lost some steam.

All in all, Weber believes that while the free trade agreement will strengthen the Swiss watch industry's position in China, the overall effect may not be as big; Prices for Swiss watches in Mainland China are much higher than elsewhere – and they may fall given the new trade agreement. Only if watchmakers manage to keep prices stable, their profits will see a boost.