Move to cheaper jewellery by mainland Chinese hits stores
Share prices below targets as growth slows, sales are hit by anti-corruption drive and average price of items sold falls
High-end jewellers in Hong Kong are shifting their focus to lower-priced gem-set products as the price of gold fluctuates and the mainland's anti-corruption drive hits sales.
Chow Tai Fook saw 63 per cent year-on-year revenue growth for the three months ending June 30 as consumers snapped up gold bangles, coins and bars. However, customers are opting for cheaper items than in the previous year.
The chain's managing director, Kent Wong, said yesterday that he expects gold products to account for 60 per cent of group sales this year.
"If gold prices fluctuate between US$1,100 and US$1,200 an ounce, it'll boost consumer spending and motivate people to enter our gold shops," Wong said.
Mainland customers accounted for 78 per cent of Chow Tai Fook's total sales, with most of their purchases being mass luxury products that cost less than HK$100,000.
In Hong Kong and Macau, same-store sales rose by 68 per cent, while on the mainland they rose by 32 per cent during the quarter. Overall, the company's first-quarter same-store sales rose by 48 per cent.
David Lau, an analyst at UBS Securities, said: "The high-end watch and jewellery sector was particularly hit by lower consumer spending and anti-corruption measures on the mainland. Recovery is still under way and it might take longer than six months."
The average price of items sold by Chow Tai Fook in the quarter ranged from HK$12,000 to HK$13,000, down from HK$15,000 to HK$16,000 last year.
The price of shares in companies in the Hong Kong luxury goods sector are 16 per cent below consensus targets.
Retail sales growth slowed by almost half to 34.5 per cent in May, from 68.5 per cent in April, according to Bloomberg. Chow Tai Fook achieved HK$56.6 billion in annual revenue, followed by HK$18.3 billion for Chow Sang Sang and HK$14.7 billion for Heng Deli.
Tanuj Shori, an analyst at Nomura, said: "Although Hong Kong jewellery brands like Chow Tai Fook and Luk Fook are focused on mass luxury, Chinese traffic is falling.
"Investor sentiment may remain low in the short term because gold products make up the majority of [their] sales."
Nomura gave a buy rating to Chow Tai Fook, with a 12-month price estimate of HK$10.50.
Wong said: "We anticipate having positive same-store sales growth in the mainland this fiscal year, and we're moving into younger shopping districts and boosting our online stores."
The company is now tapping into lower-tier cities and looking to open 200 new stores to reach a target of 2,000 stores by 2014.
For Chow Sang Sang and Luk Fook, mainland customers made up 71 per cent and 60 per cent of sales respectively. While Chow Sang Sang plans to add 15 more shops this year, Luk Fook plans to open 200 franchised stores every year.
Nancy Wong, executive director of Luk Fook, said: "Mainland consumers' spending ability is still growing, especially in second- and third-tier cities."
The company is also shifting its focus to diamond jewellery, because of the volatile gold market.