Chow Tai Fook Climbs to 5-Month High on 32% Profit Rise

Chow Tai Fook Jewellery Group Ltd. jumped the most in five months in Hong Kong trading after saying profit grew 32 percent last fiscal year, driven by sales of gold products in China.

Shares of the world’s biggest listed jewelry chain jumped 5.8 percent, the most since Jan. 8, to close at HK$11.66. The stock has gained 32 percent in the past year, compared with a 9.2 percent advance for the benchmark Hang Seng Index.

The company, which is buying diamond jewelry maker Hearts On Fire for $150 million, expects demand for jewelry to continue to rise as it joins luxury goods retailers including Burberry Group Plc and Coach Inc. in courting China’s growing middle class. Disposable income per capita for urban households in the world’s second-largest economy has almost doubled from March 2008 to 8,155 yuan ($1,310) in the first quarter of this year.

Chow Tai Fook will probably “experience a faster pace of recovery than peers on stronger gem-set product sales,” Jefferies Hong Kong Ltd. analysts, including Edwin Fan, wrote in a note today reiterating a buy rating on the stock. “Chow Tai Fook’s marketing effort should escalate and expect a growing sales mix from gem set jewellery which has higher margins than gold products.”

The company reported net income for the year ended March climbed to HK$7.3 billion ($942 million) from HK$5.51 billion a year earlier. That compared with the HK$7.23 billion average of 25 analysts’ estimates compiled by Bloomberg.

Diamond Jewelry

It will pay cash for Hearts On Fire, which has a retail partner network with more than 500 locations in 31 countries, Chow Tai Fook said in a statement to Hong Kong’s stock exchange today. Hearts on Fire, with net sales of $105 million last year, “will introduce an exclusive and unique high value luxury diamond jewellery line” to Chow Tai Fook’s stores in China and the rest of Asia, the company said.

Same-store sales, or revenue at outlets open at least a year, increased 19 percent, the Hong Kong-listed company said yesterday. Revenue climbed to HK$77.4 billion, compared with the HK$76.1 billion average of 24 analysts’ estimates.

Gem-set jewelry sales rose 24 percent to HK$16.3 billion during the year, accounting for 21 percent of total revenue. Sales of gold products climbed 44 percent to HK$47.4 billion, contributing 61 percent of total.

Lower-Tier Cities

Chow Tai Fook expects to benefit from lower-tier inland Chinese cities where economic growth are strong, the company said yesterday. Demand for traditional jewelery, both gold and gem-set alike, for special occasions and celebrations will stay strong in the medium to long term, it said.

“The mid- to long-term outlook remains robust as there’s strong customer demand,” Chow Tai Fook Chairman Henry Cheng said yesterday at a press conference in Hong Kong. “But we have a very high base from last year, and the economic uncertainties may limit our near-term growth.”

Cheng said the company will probably post a slower pace of sales growth this fiscal year on weaker economic expansion and as a government anti-corruption campaign deters some buyers.

Chow Tai Fook added 241 shops last fiscal year, bringing the total number of stores to 2,077 as of March 31. It plans to open a net of 200 jewelery points of sale annually mainly in lower tier cities in mainland China, it said.

The company expects to more than double expenditure this year to as much as HK$4 billion from HK$1.37 billion in year-earlier period, Finance Director Hamilton Cheng said yesterday. It will spend about HK$1.8 billion on a Chow Tai Fook Jewellery park in China’s Wuhan and about HK$1 billion in acquiring an industrial building in Kwai Chung area in Hong Kong, he said.

Annual spending will probably be about HK$2 billion in the next fiscal year, Cheng said.

Founded in 1929 in the southern Chinese city of Guangzhou, the jeweler was named after founder Chow Chi-yuen. “Tai Fook” means “big blessing” in Chinese.

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