China’s Jewelry Rush

Sometimes, finding good topics for this blog can prove quite challenging. So, I’m always thankful for the readers who send in great material – some of which I am using in today’s post.

First, you should know that the luxury goods and services market in China is growing at an astronomical rate. Forecasts indicate that Chinese luxe will grow at a rate of 20% CAGR by 2015, at which time it will be the second largest market in the world.

One sector of luxury in China that is doing very well is jewelry. Estimated at a worth of $39 billion, the Chinese jewelry market is growing at around 15% per year. Growth has been fueled by a couple of factors:

  • A growing middle class living outside of the tier one cities are spending more on gems and gold.
  • Rising inflation concerns in the region are making gold more attractive as a hedging instrument; and
  • Lastly, the wealthiest segment of the Chinese population are been getting richer.

What is most surprising is the fact in spite of the availability of world renowned jewelry manufacturers and retailers such as Swarovski and Cartier, Chinese consumers are paying increasing attention to homegrown brands – specifically Chow Tai Fook (CTF). The company, owned by billionaire Cheng Yu-tung recently went public. With 1500 outlets and 2010 sales of $4.5 billion, CTF is twice the size of Tiffany & Co.

I’ll leave you with a graphic from The Economist, developed by George Washington University and L2 (a think-tank). It asserts that CTF, as a brand, outperforms well-known international brands in the hearts and minds of Chinese consumers.

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Aman Resorts: A Tough Sell for DLF

Amangiri – Utah, USA

Two weeks ago, there was some news that China-based conglomerate, HNA, had sent in a bid to buy Aman Resorts, a collection of unique luxury resorts in some of the most sought-after destinations in the world. Aman Resorts, which is owned by DLF, an Indian development company, represents the company’s biggest non-core asset.

To bring you up to date, DLF currently has a net debt of more than $4 billion and is looking to raise as much as $650 million to shore up its debt levels and put some cash on its balance sheet. In 2007, the company had bought a 97% stake in Aman Resorts based on a $400 million valuation, while the remaining three percent was held by Aman founder Adrian Zecha. Considering that the purchase was made right before the global financial crisis, DLF has been desperately looking for a buyer for this property.

HNA Hotels and Resorts is part of China-based HNA Group. With assets exceeding $30 billion, the group has its tentacles in airlines, hotels, airport management, real estate, retail, financial services, logistics, and tourism. Annual revenues are around $10 billion (as of Dec. 2011). The hospitality segment of the group consists of a total of 43 luxury hotels and resorts in China and Europe (40 in China and three hotel assets in Brussels and Belgium).

Reports are out that HNA is out of the bidding process for Aman Resorts, since it never received any feedback on its undisclosed bid. Reuters reports that “bids came in the $300-$315 million range”, which means that the market feels these luxury assets are overpriced. This is a huge setback for DLF considering the list of companies interested in Aman Resorts. They include:

  • Malaysian sovereign wealth fund, Khazanah
  • LVMH, and
  • Kingdom Holdings, which owns a 47.5% stake in the Four Seasons chain of luxury hotels

It’s looking bleak for DLF, but maybe some other group will step up to take over Aman.

Adding Value – Train Rides and iPads

Train rides are very enjoyable for me because I get the chance to remain terrestrial. I’m not driving myself, nor am I on a bus going pretty much the same way I would have driven myself. Since train tracks do not always follow “car routes”, I get to take a more scenic view, stumbling upon sights that don’t come into my view on a regular basis. I also like to take trains at times they are sparsely occupied, so that I have a lot of space to myself. The combination of those components makes the ride an enjoyable one. However the real luxury experience can be summed up in one picture from my last trip on Amtrak: Continue reading

Luxonomics

Today’s post focuses on luxonomics (luxury economics). Since luxury goods embrace the concept of rarity, it would be an obvious deduction to assume that the more scarce a luxury product or service becomes, the more demand it enjoys. Consequently, prices can appreciate – to levels that can be absorbed by few.

Some of the factors affecting supply include:

  • Input Prices
  • Technology or Government Regulations
  • Number of Firms
  • Substitutes in Production
  • Taxes
  • Producer Expectations

Today I want to show you some “scarce” luxury products, whose supply has largely been affected  by government regulations. As the cited MSN Money slideshow states, all the products listed are affected by legal restrictions limiting their production, distribution, and sale in parts of the world. Much of the reasoning behind these bans is aimed at protecting the environment. Continue reading

Swatch: Creating a Shakeout in the Swiss Watch Industry

30-day Challenge – Day 24

A watchmaker at Edox, one of the Swiss companies challenging Swatch's decision to stop selling timepiece components.

For a company with revenues in excess of $6.5B, Swatch is considerably the worlds largest watchmaker. The Swiss company recently received approvals from the regulatory agencies to stop supplying competitors with the movements they use to make their timepieces. This is an ironic twist of events, because I am forced to ask myself, “why didn’t Swatch’s competitors invest in producing their own inner workings?”

Continue reading

Morningstar: Luxury Firms are Overvalued

30-day Challenge – Day 23

Luxury brand valuations – from Morningstar  

Aside from writing on this blog, I’ve got some other nice skills, particularly in the areas of financial analysis and valuation. I am also fortunate to be part of a select group of MBA students, who manage approximately $500K for the Mason School of Business. In my duties as an equity analyst for The Batten Fund, I cover the consumer staples & discretionary sectors, and as such all the securities associated with luxury firms fall under my purview.

Yesterday, Francesco Lavecchia, an equity data analyst with Morningstar Italy published an opinion piece on the biggest decision luxury brands are facing in their bids to enter the growing Asian market. There are two choices lux companies have in conquering Asia: Continue reading