Check on China: Fuqi International, Inc.
No more powerful symbol of China's new prosperity exists than Shanghai, the cosmopolitan city of gleaming futuristic skyscrapers. Money has clearly found its way here, as five-star hotels, swanky boutiques, stylish art galleries and trendy cigar bars have supplanted rundown Mao-era commercial and government buildings. Shanghai today serves as the luxurious standard to which the rest of China aspires.
In fact, luxury is a white-hot market in China, which has become the world's third-largest consumer of luxury goods. China's new generation, in particular, has been seduced by flash. Merchandise with a high-end feel is being successfully marketed to the wealthy, borderline wealthy and middle-market consumers who are eager to sample the good life. Taking a cue from the West, conspicuous indulgences and creature comforts, ranging from designer clothing to diamond engagement rings and status-rich automobiles, are increasingly coveted by China's ever-growing relatively affluent middle class.
These newly-acquired expensive tastes play right into the hands of Fuqi International, Inc. (Nasdaq: FUQI), a company that designs, manufactures, markets and distributes precious metal jewelry to the Chinese luxury goods market. Fuqi, which currently has a design database of over 20,000 products, specializes in producing jewelry in a wide range of styles using gold, platinum, diamonds, and other precious stones and materials.
The jewelry maker's extensive distribution network, spanning almost all of China's 22 provinces, gives it an important advantage over rivals, allowing the company to test-market, promote and sell its products directly to wholesalers, distributors and retailers nationwide.
After raising $63 million in an IPO priced at the top of its $7 to $9 forecast range, Fuqi made a heady market debut on Oct. 23, with its stock opening at $10.01, or 11% higher, before rising as high as $11.75 in afternoon trading. While shares fell back to earth on Nov. 7, closing at $6.32, the stock has since been rising somewhat steadily. It closed at $8 on Wednesday.
Third-quarter financials, released on Nov. 14, reported net earnings of $2.73 million, or $0.21 a share, up from $905,378, or $0.08 a share, in the same period in 2006. Revenues surged 90% to $36.2 million from $19.1 million. Gross profits rose to 12.4% from 7.5% on higher selling prices for new jewelry designs and the favorable cost of raw materials in precious metal market. The company expects to post fourth-quarter earnings per share of $0.14 to $0.18 a share on revenue of $43 million and gross profit margins between 11.5% and 12%.
Fuqi says its wholesale expansion and retail strategy plans are on track. The company expects to penetrate 20 department store counters and two additional retail stores by year's end (and to add another 60 to 80 counters and eight to 10 stores in 2008).
Poised for a strong retail push, Fuqi recently created a new position, director of retail operations, and brought in some high-powered industry talent. Jianying Li, who has a broad background in upscale jewelry and extensive retail sales management experience with top-flight brands such as Cartier, Chanel, The Estee Lauder Companies Inc. (NYSE: EL), Lancome, Montblanc, Salvatore Ferragamo, and Bally and Dunhill, among others, has stepped into to role.
In a statement, company chairman Yu Kwai Chong remarked: "We are very pleased to have Ms. Li join our company in this newly created position. Over the past 25 years, Ms. Li has developed in-depth product knowledge of the jewelry category. She also has strong experience in the retail industry with brand promotion, store organization and procedural setup, business planning, operational review and control, vendor relationships and staff training. She will be a notable asset to our team as we begin to expand our retail presence in China. We are confident that Ms. Li will serve us well in this newly established position and we look forward to her contributions in the coming years."
Merriman Curhan Ford and Brean Murray both initiated coverage on Fuqi with a “buy” on Dec. 3. Wall Street believes Fuqi's core wholesale jewelry business will propel growth going forward and also expects some upside from the company's retail expansion efforts, noting that the company’s recent IPO provides adequate financial flexibility. Analysts contend jewelry consumption in China is sustainable since the country has a unique set of cultural, social and economic factors that support it. Brean Murray's Alex Xu calls Fuqi "a good play on the growing middle-class population and robust consumer spending in China."
In China, as in the United States, Europe and Japan, premier luxury items (like fine jewelry) are now embraced not only by the top echelon of spenders, but by the upwardly mobile with discretionary income and middle-class consumers willing to stretch their budgets. That, along with the fact that there is a growing number of well-to-do in China, helps make the prospects for FUQI’s future very encouraging. (According to Merrill Lynch and Boston Consulting Group, China already has over 300,000 citizens with a net worth over $1 million, excluding property, which control a total of approximately $530 billion in assets.)
Analysts at Brean Murray have set a one-year target of $13.
