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Graff Plans Asia Expansion After $1 Billion Share Sale

Chairman and Founder of Graff Diamonds, Laurence Graff
Laurence Graff, chairman and founder of Graff Diamonds Ltd. Photographer: Jerome Favre/Bloomberg

Graff Diamonds Corp., the London-based jeweler founded in 1960, plans to open 11 new stores in Asia, including eight in China, in the next two years after a $1 billion initial public offering in Hong Kong.

Demand for high-end diamonds will grow in China and other Asian countries as the “super rich” increase, Chief Executive Officer Francois Graff said at a press conference in Hong Kong yesterday. Graff, which depends on just 20 customers for almost half its revenue, is offering as many as 311.2 million shares at HK$25 to HK$37 apiece, according to a sales prospectus.

Graff is pushing ahead with the offering even as investors shun new equity in volatile markets and jewelry sales growth slow in the Chinese city. With only $1.4 billion raised, Hong Kong’s IPO market is set for its slowest first half since 2009, according to data compiled by Bloomberg.

“We’re preparing to double the number of directly owned stores over the next three years with most new stores in Asia,” said Graff, son of chairman and founder Laurence Graff. “Showcasing our jewelry and watches at exhibitions in Asia will continue to be a core part of our sales and brand-building strategy.”

The company, which has 18 directly owned stores globally, plans to open five new stores in Hong Kong, Shanghai, Macau, Hangzhou and Tokyo this year, Francois Graff said. Another six stores will open next year in Macau, Beijing, Shenyang, Chengdu, Seoul and Singapore, he said.

Twenty Customers

The company aims to raise $850 million by selling new shares, the prospectus shows. More than half of the proceeds will be used to buy assets controlled by Laurence Graff, including a diamond store in Monaco and stones from another company, according to the document. Anne-Marie Graff, wife of Laurence Graff, also plans to sell shares for $150 million in the offering.

Graff’s business is “dependent on purchases by a relatively small number of high and ultra high net worth individuals,” the company said in the prospectus. One customer accounted for 13.2 percent of Graff’s $755.6 million in sales last year, while the top 20 customers accounted for 44 percent, the document shows.

“The reliance on a few key clients makes it highly vulnerable to externalities,” said Andrew Sullivan, a principal trader at Piper Jaffray Asia Securities Ltd.

Share Valuations

Sales of jewelery, watches and valuable gifts in Hong Kong rose 19 percent in March from a year earlier, slowing from 55 percent growth in March 2011, according to data compiled by Bloomberg.

Graff is offering the shares at a valuation similar to where Prada SpA is trading, people with knowledge of the matter said on May 18. The offering range is about 18 times to 24 times estimated 2012 earnings, they said.

Prada is trading at about 22 times estimated earnings for the year ending January 2013, after rising 16 percent from its June IPO through last week, Bloomberg data showed. Tiffany & Co., the world’s second-largest luxury jewelry retailer, LVMH Moet Hennessy Louis Vuitton SA and Cie Financiere Richemont SA, owner of the Cartier brand, trade at an average of 15 times the current year’s estimated earnings, the data show.

“It’s more of an art than science working out its valuation,” said Sullivan. “You can’t even compare it with Tiffany, as Tiffany tends to be more mass market-oriented.”

Biggest IPO

Graff’s IPO would be the largest in Hong Kong this year. With the city’s benchmark Hang Seng Index down 14 percent from its February high, companies have raised $1.4 billion in IPOs so far in 2012, compared with $7.3 billion in the same period a year ago, data compiled by Bloomberg show. China Yongda Autmobiles Services Holdings Ltd., the country’s biggest BMW distributor, today scrapped a Hong Kong IPO that may have raised as much as $430 million, according to two people with knowledge of the sale.

Chow Tai Fook Jewellery Group Ltd. has dropped 36 percent from its initial offer price after raising about $2 billion in December in Hong Kong. Chow Tai Fook currently trades at about 12 times estimated earnings for the year ending March 2013, Bloomberg data show.

Graff plans to start trading on June 7, according to the prospectus. Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley are managing the offering, the document shows.

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