The allure of gold as a safe haven investment has created a double-edged sword for jewelry brands. While rising gold prices can attract investors seeking to hedge against economic uncertainties, they also deter consumers from purchasing gold jewelry due to its increasing cost. This phenomenon is reflected in the recent financial performance of Chow Sang Sang Holdings International Ltd. (0116.HK), a prominent Hong Kong-based jewelry retailer.
Chow Sang Sang, established in Guangzhou in 1934, has been a public company since 1973. The company boasts a vast network of 977 stores across Mainland China, Hong Kong, Macao, and Taiwan. However, despite its impressive reach, Chow Sang Sang has been hit hard by the current market trends. Last week, the company issued a profit warning, revealing a decline of 33.5% to 39.5% in the first half of the year compared to the previous year. This drop, which translates to a profit range of HK$500 million ($64 million) to HK$550 million, is primarily attributed to falling jewelry and watch sales. The record high gold prices, coupled with sluggish consumer spending due to challenging economic conditions, have dampened demand for gold accessories.
While the company’s shares initially rose the day after the warning, likely fueled by investors seeking safe haven assets amidst market volatility, they remain down about 27% for the year. This trend mirrors the broader struggles within the gold jewelry industry. Chow Tai Fook (1929.HK), another prominent Hong Kong-listed jewelry chain, reported a 20% year-on-year decline in retail sales during the first half of the year, with same-store sales plummeting by 26.4% in China and 30.8% in Hong Kong and Macao. The company has responded by closing 180 stores across China, averaging nearly one closure per day.
Luk Fook (0590.HK), another major player in the market, has also experienced similar difficulties, closing 108 stores on the Mainland. The company’s fiscal quarter ending June saw an 18% drop in total retail sales and a staggering 34% decline in same-store sales. The surging gold prices, driven by geopolitical tensions, are a significant contributor to these woes. By the end of June, London spot gold reached $2,330.90 per ounce, a 12.3% increase from the beginning of the year. Although prices temporarily weakened in the early part of the second half of the year, they rebounded to a record high of $2,500 per ounce in August following the assassination of Hamas leader Ismail Haniyeh. This price surge has further dampened demand for gold accessories.
Data from the China Gold Association reveals a significant decrease in gold consumption in China during the first half of the year. Total consumption stood at 523.8 tons, representing a 5.6% decline year-on-year. This decline is particularly pronounced in gold jewelry consumption, which has dropped by 26.7%. Meanwhile, gold bar and coin consumption has experienced a 46% surge, highlighting the shift in consumer preference towards gold as an investment asset rather than a consumer product. In Hong Kong and Macao, the demand for luxury items such as jewelry and watches remains depressed, despite the rebound in tourism following the pandemic. June saw a 23.1% year-on-year decline in sales of jewelry, watches, clocks, and valuable gifts in Hong Kong, while Macau experienced a 34.9% drop in jewelry and watch sales in May.
Chow Sang Sang’s latest annual report indicates that Mainland China remains its most significant market, accounting for 63% of its total sales. Hong Kong and Macao contribute around 36%, with the remaining sales coming from Taiwan and other regions. While China’s total retail sales of consumer goods increased by 3.7% year-on-year in the first half of the year, the growth rate slowed to 2% in June, its lowest point since February 2023. This consumer caution, combined with the rising gold prices, has led consumers to opt for less expensive gold bricks and bars, further depressing gold accessory sales.
Gold jewelry brands, whose profits rely heavily on the processing of gold into final accessories, are facing a significant challenge in differentiating themselves. Local brands like Chow Tai Fook, Zhou Liu Fu, Chow Sang Sang, and Chow Tai Seng are often perceived by consumers simply as sellers of gold products. This contrasts with foreign brands like Cartier, Dior, and Tiffany, which are recognized for their distinctive design philosophies. As a result, gold jewelry stocks have generally suffered since the start of the year. Chow Sang Sang, Luk Fook, and Chow Tai Fook are down 27%, 27%, and 42.7%, respectively, while their price-to-earnings (P/E) ratios remain relatively low. Newly listed Laopu Gold (6181.HK), known for its traditional gold accessory manufacturing techniques, has enjoyed a strong start, boasting a P/E ratio of 28.8 times. However, it remains to be seen whether this newcomer can sustain its current appeal or if investors will eventually align its valuation with other players in the market.
The future of the gold jewelry industry remains uncertain. While the allure of gold as a safe haven investment persists, the rising prices pose a significant obstacle to consumer demand. Jewelry brands will need to navigate this complex environment carefully, focusing on innovation, differentiation, and cost-effective strategies to remain competitive in this challenging market.
