Hong Kong’s Cheng billionaires miss a gold ticket

Shuli Ren, Bloomberg

The succession drama of Hong Kong’s billionaire Cheng family has been in the spotlight lately, largely because of its distressed real estate developer New World Development Co.

There are two main debates going on. First, will the developer be willing and able to repay its debt? Investors are worried about local banks’ exposure and how the builder’s unravel might affect the city’s financial stability. As of last June, New World had about HK$127 billion ($16 billion) of bank loans, and HK$61 billion of bonds and perpetuals outstanding.

Second, how did New World, until recently an iron-clad blue-chip, get to this point? The company is cash-strapped because Adrian Cheng, a Harvard-educated third-generation heir, leveled up before the pandemic to launch ambitious projects. His signatures include 11 Skies, a retail and entertainment complex near the airport, and Kai Tai Sports Park across the harbor from the Central Business District. Did Adrian mismanage somehow or was he simply caught at the wrong end of the business cycle?

Integral to these two discussions is Chow Tai Fook Jewellery Group Ltd., the sister company. The retailer is a useful cash cow that can bail out the developer. In the fiscal year ending March 2024, the jeweler paid out almost its entire operating cash in dividends, worth HK$12.5 billion. That money would have come in handy when the family injected capital into New World. But more importantly, Chow Tai Fook gives us another glimpse into the younger generations’ business acumen.

Unfortunately, the score card for Chow Tai Fook is not great either. Same-store sales have been on the decline, while the company is rushing to close shops in the mainland. As gold continues its relentless rally, the jeweler’s outlook only looks dimmer. Consumers may just balk at the price surge and hit the pause button, analysts warn. Gold products account for about 80% of total sales.

By comparison, a younger, trendier retailer has benefited tremendously from the gold rally. Laopu Gold Co., with only 38 retail outlets in Greater China, has almost doubled its share price this year. Laopu now boasts a higher market cap than Chow Tai Fook, which has over 7,000 stores in the mainland. Chinese consumers line up outside Laopu’s shops even though an entry-level butterfly necklace would set them back about $1,500.

While Chow Tai Fook coasted on China’s economic rise and consumers’ cultural preference for gold products, the young upstart founded in 2009 was more innovative. The brand introduced the “heritage gold” technique, which uses traditional craftsmanship to inlay small diamonds on pure gold. Modern jewelry utilizes 18-carat gold, which is less pure but harder and better to hold precious stones. As a result, Laopu’s products are heavier, and the company can market to consumers who appreciate fashion but also jewelry’s intrinsic value.

Adding some China chic to its designs, such as butterflies and gourds that are symbols of luck and peace, Laopu can charge premium fixed prices for its pieces. That shields the retailer from a commoditized marketplace, where most gold items are sold by weight plus a thin processing fee.

Chow Tai Fook has finally come around to the heritage-gold concept, pushing out designs that resemble those worn by aristocratic women of the past. In the six months ending September, fixed-price gold jewelry accounted for 12% of total sales, versus 5% a year prior. But is it too little, too late? Gold products sold by weight still contributed two-thirds of total sales. While analysts forecast 42% top-line growth at Laopu this year, sales at Chow Tai Fook are expected to be largely flat.[Abridged]

Courtesy Bloomberg/Shuli Ren