the curious case of Chow Tai Fook Jewellery (HK:1929)–Tiffany (TIF), too

…toss in Wynn Macau (HK: 1128), as well.

Chow Tai Fook

Chow Tai Fook is a Hong Kong-based jeweler that IPOed there last December.  The company’s main business is chuk kam (24 karat) gold objects, the stuff that’s sold by weight, not market up by 100% (or more) over direct costs.  It’s not only decoration, but you can bury it in the back yard if you’re wary of banks.  And you can wear your wealth to work, in case you find out you have to flee the country right away.   (You wouldn’t chuckle if you’d lived through 1940-1960s China.)

The firm has expanded from the SAR into the mainland, and from chuk nam to high-end “fine” jewelry designed to flaunt your wealth, not hide/preserve it.  In recent years, the latter has become an increasing percentage of Chinese jewelry consumption.

a December 2011 IPO

The IPO was anything but a rousing success.  The stock was priced at HK$15, to raise US$ 2 billion.  But it came to market just as Beijing’s efforts to slow down the domestic economy were causing affluent mainlanders to cut back consumption.

The issue closed on day one at $13.80–and headed south from there.  It finally bottomed some months ago at HK$8.40.  Ouch!!

…so, what’s curious?

Here’s the thing.

The economic evidence over the past few months is that China is slowing further, despite signals from Beijing of its change to a more expansive government economic policy.

The EU is a mess.

US industry is slowing down and the “fiscal cliff” is getting closer.  Burberry and Tiffany have revised down earnings, in large part because of disappointing sales in China.  So too have tech companies like Intel.


since July 27th,

Chow Tai Fook share are up by 26.5%–vs. the Hang Seng index up 6.9%

BTW, Wynn Macau shares are up by 30.0% over the same time span

TIF began rising a little earlier in the month, but has gained almost 25% from its low–compared with about an 8% rise in the S&P 500.

why this good performance?

It’s a little like the case of Benjamin Button, whose body went through the opposite of what nature usually does.


–If this were ten or fifteen years ago, I’d say investors are seeing through current weakness and beginning to discount in advance the recovery that the government policy change will likely bring.

But reacting to government cues is not the winning strategy it once was.  That’s partly because the economic problems the world faces today are more structural than cyclical.  Also, the rise of hedge funds has reoriented markets sharply in the direction of short-term trading than they have ever been.

Besides, luxury goods makers like Hermes and LVMH haven’t experienced the same stock price lifts.

–new bets on China?  But, if so, why no response from Hermes, LVMH or Coach?  Also, why would UK-US (lower-end) jeweler Signet be having better stock performance than the other three?

–influence of EU investors?  My impression has been that a lot of the damage to Hong Kong stocks during the middle months of 2012 was due to panicky selling by EU-based investors.  The clear new bullishness emanating from Europe may be resulting in portfolio managers plowing back into Asia.  That might explain why 1929 or 1128 are doing well.  But why TIF?  …or why SIG and not LVMH?

–minimizing exposure to the EU?  For aesthetic reasons, I like this better than “bets on China,” because it’s a more sophisticated wager–one based on avoiding a bad experience rather than necessarily having a good one.  Still, why TIF?

You could build a “synthetic” TIF-ex-the-EU, by combining SIG +1929.  Not a perfect replacement, but if the main idea is to avoid the EU probably an acceptable one.

my take

I’m sure there’s a method to the apparent madness.  At this point, however, I don’t know what it is.

I could say that professional investors are shifting their portfolios toward secular growth areas (as opposed to more cyclical ones) where they see profit growth will be the strongest next year.  Yes, that’s true, but it’s what most managers always do.  So it’s flirting with tautology.  The crucial question is why jewelry and casino gambling?

Is there something special about these two areas?  …or is there something awful about everything else?

One thing I am convinced of is that solving the puzzle correctly can bring investing rewards.

I own 1128 and 1929 but none of the rest of the names I’ve mentioned here.  I have no burning desire to add to any–although if I can figure out what’s going on I might develop one.

If someone were forcing me to buy  one of the names, it would probably be 1929.  The fact that it’s the most speculative of the stocks is not a coincidence.  I should knock off the caffeine instead.

LVMH’s acquisition of Bulgari

The LVMH bid

About a week ago, LVMH announced a successful bid for control of the publicly traded Italian jewelry manufacturer and retailer, Bulgari.  Bulgari’s offerings, many of which reflect the founding family’s Greek heritage, mostly range in price from $2,000-$10,000.

The terms:

LVMH will issue shares of its stock in exchange for the 51% of Bulgari controlled by the Bulgari family.  It is offering €12.25 in cash for the 49% held by third parties.

what’s in this for Bulgari?

1.  A significant part of Bulgari’s business is high-end watches, the most extremely cyclical category in the fine jewelry business.  Watch sales are especially difficult to monitor, since wholesalers play such a large role in their distribution.  As a result, economic downturns have tended to be white-knuckle events for the company–and its stock.  Being part of a larger, more stable conglomerate will mean less wear and tear on management’s stomach linings.

2.  The Bulgari family gets two seats on the LVMH board, so it retains a management presence in luxury goods.

3.  Younger-generation family members who don’t want to be involved in the business and would rather have their inheritance right now and in cash will be able to sell without endangering the Bulgari family’s control position.

4.  Francesco Trapani, a Bulgari nephew and the current Bulgari CEO, will become head of the LVMH watches and jewelry business, an organization twice the size of Bulgari.

…and for LVMH?

1.  The larger fine jewelry business means LVMH will be in a stronger competitive position versus other luxury goods conglomerates like Richemont.

2.  The willingness of an entrepreneurial luxury goods family like Bulgari to join the LVMH fold contrasts sharply with the frosty reception of the Hermès management when it learned LVMH had acquired a large ownership position.  The Bulgaris, fellow entrepreneurs, may be able to smooth ruffled feathers in a way that Bernard Arnault has been unable to.

3.  The Bulgaris will likely also be instrumental in convincing other European luxury goods families to follow their lead.

What’s next?

Wall Street rumors have TIF (I own it) as the next target of LVMH and Mr. Trapani.

I don’t agree.  The main attraction of TIF would be the fit between its business and Bulgari’s.  TIF is a dominant factor in “statement” jewelry costing $25,000-$50,000 or more.  The company is unique in its ability to–at the same time–be a leader in the market for jewelry and other gifts that retail for $500 and below, without diluting its brand image (i.e., alienating the very big spenders).   I don’t know why, but TIF has never been very good in the middle; Bulgari would fill the doughnut hole in Tiffany’s offerings.  That’s the positive side.

On the other hand,  Europeans don’t regard TIF as a legitimate luxury brand.  That’s partly because it’s an American company, partly because of its lower-end business.

What is Mr. Arnault’s game plan?  I think it’s to collect up as many small, inefficiently run European family luxury goods businesses as he can over the next few years.  He’ll doubtless be able to use the brand names he acquirers more effectively than their current owners.  And he’ll enjoy manufacturing, distribution and marketing synergies.

His main selling points will be two:  the positive experience of the Bulgari family, and the ego appeal of joining a very exclusive club.  Were he do anything so déclassé as acquiring an American “quasi-luxury” company like TIF, a lot of the positive effect of the Bulgari merger on potential European luxury acquisition candidates would be lost.  Yes, TIF is doing a land office business in Europe currently.  But that’s because the affluent there are trading down.

TIF may eventually be on the Arnault to-do list, but I think he’s gunning for smaller, local game first.