HONG KONG — Luxury goods companies are lining up to list on this city’s stock exchange and raise capital for expansion in the region, even amid escalating concerns that China is headed for a slowdown.
This story first appeared in the November 18, 2011 issue of WWD. Subscribe Today.
London-based jeweler Graff Diamonds is planning to raise as much as $1 billion in a listing next year, most likely in Hong Kong, according to a source close to the company. Also, Chow Tai Fook, a major jewelry player in Greater China, is planning a $3 billion initial public offering here before the end of the year. Coach is planning a secondary listing of its shares in Hong Kong; Italian motorcycle maker Ducati is reportedly eyeing an IPO here, as is Sitoy Group, a Hong Kong handbag company that supplies to Prada.
Prada, which raised nearly $2.5 billion in its Hong Kong IPO earlier this year, is looking at buying up to 20 percent of Sitoy’s share offer and would ultimately hold about 5 percent of the company as a “financial” investment, according to a person familiar with the situation. He stressed that Prada does not consider this a strategic acquisition.
Sitoy was established in 1968 and specializes in manufacturing handbags and other leather goods. The company has about 10,000 employees in Hong Kong plus factories in Dongguan and Yingde, according to the company.
The rush to do IPOs comes as companies look to expand their operations in China and elsewhere in Asia. By going public, companies not only raise capital for acquisitions and expansion but also increase their profiles in the region.
The timing of these listings isn’t ideal, given concerns about slowing growth in China. Factories in China’s Pearl River Delta have been seeing a slowdown thanks to uncertain outlooks in North America and Europe. The Federation of Hong Kong Industries last week warned that possible wage raises could put more than 20,000 Hong Kong-owned factories in the region at risk of closing or downsizing. Hong Kong’s economy grew by just 0.1 percent during the third quarter, only narrowly dodging recession.
Despite these concerns, market watchers say investor demand for IPOs could still be strong — if the price is right. China’s burgeoning luxury market is still doing well. Indeed, Hong Kong’s economy has been bolstered by Mainland Chinese shoppers, who show no signs of pinching pennies.
“I’m always astounded by demand for the luxury goods themselves; they’ve been a relentless outperformer and highlight the disposable income of new money in China,” said Ben Collett at Louis Capital Markets in Hong Kong.
To be sure, a slowdown would have some impact on China’s luxury spending. CLSA Asia-Pacific Markets analyst Aaron Fischer estimates that China’s demand for luxury goods could slow to 20 to 30 percent a year, down from 50 to 100 percent, mostly because of the larger base.
Still, investor appetite for luxury stocks appears fairly healthy.
“Luxury is doing quite well,” said Philip Mok, analyst at Phillips Securities in Hong Kong. Valuations in China’s retail sector are quite high at the moment, at around 28 to 40 times earnings, Mok said. Chow Tai Fook, as a leader in the jewelry market, is likely to price on the high end of valuations, above other local jewelers such as Chow Sang Sang, Empire Jewelry or Luk Fook. And while performance of the IPO market has been mixed as of late, luxury companies have fared relatively well. Prada shares performed better than expected while Hong Kong-based apparel maker Fornton Group, which listed in October, showed some gains in the first two days of trading.
Collett, for one, sees continued investor demand for both global and local luxury brand IPOs. “At the right price, local brands will probably be even more popular than global brands because of their familiarity,” he added.
Chow Tai Fook may not be a household name in the West, but in China the company is ubiquitous. According to a recent consumer survey by CLSA, Chow Tai Fook was the number-one jewelry brand in China in terms of name recognition. Swarovski and Chow Sang Sang came in a distant second and third, while Tiffany, Hermès and Cartier were at the bottom of the list.
The company, which is controlled by billionaire Cheng Yu-Tung, has a retail network of more than 1,500 points of sale in more than 250 cities in Mainland China, Hong Kong, Macau and elsewhere in Asia. Chow Tai Fook is the dominant jeweler in greater China, with a 57 percent market share on the mainland, according to people familiar with the company.
Sales for the fiscal year ended in March totaled $35 billion Hong Kong dollars, or $4.5 billion, up 52 percent from the year before. Sales are expected to reach $58 billion Hong Kong dollars this year, or $7.45 billion, up nearly 66 percent, according to people familiar with the company.
Chow Tai Fook plans to greatly expand its network — penetrating second-, third- and fourth-tier Chinese cities, averaging 200 new points of sale a year to reach 2,000 by 2016, according to the jeweler.
Chow Tai Fook, which translates roughly as “good fortune” in Cantonese, is controlled by one of Asia’s wealthiest families. Cheng’s son, Henry Cheng, oversees New World Development Ltd., a real estate and transportation conglomerate. The family’s businesses also include hotels, department stores, ports and others.
Like Chow Tai Fook, Graff is looking to expand in the region; the ultra-high-end jeweler is planning to open stores in Macau and Hangzhou, China, next year.
Luxury companies are banking more and more on Asian growth. CLSA forecasts that China will become a $101.4 billion market by 2020, making up 44 percent of the global market. For companies eyeing that growth, now is as good a time as any to make that move.
“It’s better sooner rather than later,” said Louis Capital’s Collett.