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Consumer

Chow Tai Fook Jewellery goes suburban, downmarket in China

Hong Kong-listed jeweler looks to diversify despite sales recovery

Chow Tai Fook has over 2,200 outlets in mainland China, like this one on Nanjing East Road in the center of Shanghai. (Photo by Kenji Kawase)

HONG KONG -- After three years of sales decline, Chow Tai Fook Jewellery Group, one of the world's biggest jewelry chains, is eyeing two growth opportunities in China -- affluent young shoppers and lower-tier cities in the country.

In a bid to diversify its customer base, Hong Kong-listed Chow Tai Fook said it had added two mid- to lower-priced brands to its network of some 2,000 luxury sales outlets in mainland China this year.

Chow Tai Fook Jewellery Group Executive Director Adrian Cheng Chi-kong, right, and Managing Director Kent Wong Siu-kee, deliver annual earnings on June 8. (Photo by Jennifer Lo)

One of the brands, Soinlove, targets mainly young couples planning a wedding. The other brand, Monologue, which sells jewelry at a third of the prices at Chow Tai Fook's flagship brands, caters to young people in the mass market. There are four Monologue shops on the mainland, for example in major cities like Shenzhen in southern China.

"We hope to keep our brand image younger with our multi-brand strategies," said executive director Adrian Cheng Chi-kong at an earnings briefing on Thursday, adding that the group would soon launch a third brand with a focus on higher-end lifestyle products.

Cheng was speaking on behalf of his father and group chairman Henry Cheng Kar-shun, who reportedly suffered a stroke in January. "He's recovering and will meet everyone soon," Cheng said of his father's health.

Chow Tai Fook will "selectively" open 70 to 100 shops on the mainland by the end of March next year, many of them in third- and lower-tier cities. "Fewer closures are expected as we're seeing an easing trend of consolidation in our sales network," said Managing Director Kent Wong Siu-kee.

In Hong Kong, Chow Tai Fook plans to shut about five more shops, after closing seven last year amid a retail downturn in the territory. But Wong said there were plans to open up to five shops in residential neighborhoods, where sales outperform those in traditional tourist districts.

The group's net profit rose 3.9% on the year to reach 3.06 billion Hong Kong dollars ($393 million) in the year ended in March. Revenue fell 9.4% to HK$51.25 billion, the lowest since it listed in 2011, although it grew 4.4% in the second half from a year ago, improving from a first-half decline of 23.5%.

Wong partly attributed the turnaround to the lower gold price stimulating demand for related products, suggesting that challenges remain in the retail sector.

"The road to full-fledged recovery is still a long one," he said, adding that the lower spending power of Chinese tourists would not be easily offset by the recent rebound in their arrivals to Hong Kong. The group projected a single-digit growth in sales in the second half of 2017.

Overall retail sales in Hong Kong grew modestly for the second consecutive month in April, rising 0.1% on the year after nearly two years of decline. As Chinese tourist arrivals began to stabilize in recent months, sales of luxury goods such as watches and jewelry -- products that are popular among this group -- edged up 0.5% in April, official data showed.

"We believe Hong Kong retailers are the key beneficiaries of the recovery trend -- for Chow Tai Fook, Luk Fook, Chow Sang Sang and Sa Sa. Over 50% of their Hong Kong revenue derives from [mainland] tourists," wrote Qian Yao, an analyst at Huatai Financial, in a report on Tuesday.

Citing Chow Tai Fook as its top pick in the sector, Huatai expects the group to benefit from continuous rental cuts of as much as 12% for the year. That compared with low- to mid-single digit declines for peers like Luk Fook and Chow Sang Sang.

Shares of Chow Tai Fook closed 1.7% higher at HK$8.35 on Thursday before the earnings announcement, outperforming the Hang Seng Index's 0.3% gain.

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