HKRH shares soar on plans to sell 3D-Gold to Luk Fook Jewellery

Stock hits 9-month high after firm says it will sell 50pc stake in jewellery arm to Luk Fook

PUBLISHED : Wednesday, 06 November, 2013, 4:54am
UPDATED : Wednesday, 06 November, 2013, 4:54am

Shares of Hong Kong Resources rose as much as 95.6 per cent before closing at a nine-month high on the announcement that the company plans to sell a 50 per cent stake in its jewellery subsidiary arm that operates 3D-Gold to Luk Fook Jewellery.

The two companies yesterday entered into a non-binding memorandum of understanding, under which Luk Fook will pay HK$301 million to acquire half of the share capital in China Gold Silver and will subscribe to a HK$57.08 million convertible bond that will mature in five years and carries an interest rate of 3 per cent. The conversion rate is 18 HK cents per Hong Kong Resources share.

Hong Kong Resources closed 46.7 higher at 27 HK cents after hitting a peak of 36 HK cents.

3D-Gold sales for the year ended June totalled HK$4.69 billion.

The brand has more than 400 shops in operation across Hong Kong, Macau and the mainland. Luk Fook will lend its expertise in the jewellery and gold business to 3D-Gold for an initial period of three years, the announcement said.

"In terms of sales, 3D-Gold seems like a good brand," Nomura analyst Tanuj Shori said. "They have an operating loss but the cost margins are okay.

"Luk Fook should be able to reduce that and have a good turn out. It's not a very expensive acquisition."

The proposed deal will help extend Luk Fook's network on the mainland to more than 1,400 stores, up from 1,068, and would help it catch up with market leader Chow Tai Fook, which has 1,743 stores. However, the two companies remain distinct in their focus, with Chow Tai Fook an even higher end offering compared to Luk Fook and 3D-Gold.

"It will help them go into new cities faster but in terms of positioning, it will still be different. 3D and Luk Fook are quite mass market," Shori said.

Luk Fook's second-quarter same-store sales rose 70 per cent on the mainland and 30 per cent in Hong Kong, beating the market expectations. However, overall gross margin continued its low single-digit drop because lower-margin gold products made up a substantial portion of sales.