THE share price of Tse Sui Luen Jewellery has come down sharply since the middle of the year, reflecting a decline in interim earnings, but with the company's exposure to the Chinese gold-mania, and its strong balance sheet, the shares look to have significant upside. The company announced a net profit of $60.9 million for the six months to August, compared with $85 million a year earlier, which helped bring the share price down from its year's high of $5.17 to yesterday's close of $3.50. However, this fall was attributable to a reduction in one-off property sales, and the impact of the short-term Chinese austerity measures. Business is once more booming, and the company is looking at average compound earnings-per-share growth of more than 20 per cent for the year to August 1996. Yet at a time when China plays are once more in vogue, the company, which derives a large portion of its earnings from the mainland, is trading at a risible market rating. Vickers Ballas is forecasting net profit of $137 million for the year to February, which would put the shares on a price-earnings ratio of 7.78. This reflects a pick-up in China sales, and the increasing number of tourists visiting Hong Kong. The company currently has 19 retail outlets in Hong Kong and four large showrooms targeting the tourist market. Sales to Chinese tourists have been on the increase, as gold is a classic hedge against inflation and currency risk, and there has been a lot of both on the mainland. Vickers Ballas estimates that 10 per cent of jewellery sales in Hong Kong are settled in yuan, reflecting the substantial portion of business accounted for by mainland buyers. In addition, the group has been rapidly setting up outlets on the mainland, and its performance thus far has been impressive. The company's two outlets in Shataukok have been highly successful, and it has opened further outlets in Tianjin, Shanghai, Beijing and Guangzhou. In 1991, the company had net debt of $829 million, but a successful foray into property development has pared this down to $214 million, putting it in a strong position to expand its presence across the border. There is also a tranche of 1994 warrants, which, if converted, would also provide substantial funding. The exercise price is $4.96, and the management would clearly be anxious to gain the cheap funding. Vickers Ballas expects the expansion into China to bear further fruit in the year to February 1995, with Tse Sui Luen forecast to make a net profit of $175 million, putting it on a PE of 6.03. The current year has seen China retail stocks go crazy, despite the fact that most retailers have yet to generate any substantial returns there. Tse Sui Luen is one of the few companies that has, and its shares deserve to be rated accordingly.