Rising gold prices take the shine off Chow Sang Sang

Key Takeaways:

• Chow Sang Sang said its profit fell between 33.5% and 39.5% in the first half of the year compared with a year earlier
• Gold accessory consumption declined around 27% year-on-year in the first half of the year across China, according to an industry association 

By Lee Shih Ta

Rising gold prices that can translate to higher sales as people hedge against economic uncertainties are providing a goldmine for some jewelry brands mining the capital market lately for IPOs. But those same rising prices also have a darker side, dampening demand for jewelry made using the increasingly expensive metal. 

Chow Sang Sang Holdings International Ltd. (0116.HK) is rapidly discovering the downside of sky-high gold prices, warninglast week that its profit fell between 33.5% and 39.5% in the first half of the year to between HK$500 million ($64 million) and HK$550 million, reflecting strains the sector is feeling.

The company attributed the decline mainly to falling jewelry and watch sales due to record gold prices, as well as challenging economic conditions that have resulted in weak consumer spending. The company also blamed unrealized losses on mark-to-market revaluation of bullion loans for the period, compared to an unrealized gain last year.

In a slightly ironic twist, shares of Chow Sang Sang and its peers rose the day after the warning, as investors flocked to the stocks as a safe haven the same day Asian stock markets saw one of their worst meltdowns in recent months. Chow Sang Sang rode that wave to gains of about 4% over the next two trading days, though its shares are still down around 27% so far this year.

Chow Sang Sang was founded in the city of Guangzhou in 1934 by Chow Fang-pu, who came from the nearby city of Shunde. His name and the name of his store sound similar to another Hong Kong-listed jewelry chain, Chow Tai Fook (1929.HK), which was founded five years earlier by Chow Chi-yuen, though the two are not related. 

Chow Sang Sang, whose name derives from a sentence in the classic “I Ching,” or “Book of Changes,” became Hong Kong’s first listed jewelry company with its IPO in 1973, giving it more than 50 years of history of public trading. 

The company had 977 stores across Mainland China, Hong Kong, Macao and Taiwan at the end of last year. Though far smaller than Chow Tai Fook and several other rivals, Chow Sang Sang sets itself apart by operating all of its stores directly, swearing off a franchise model used by many of its larger competitors. Most of its revenue comes from selling gold accessories, jewelry and watches, with gold accessories accounting for 79% of the total and jewelry and watches another 9%. The rest comes from sales of platinum and other gold products. 

Sector slump 

Chow Sang Sang is hardly alone in suffering from plunging profits. Chow Tai Fook reported its retail sales fell 20% year-on-year during the three months to June, as its same-store sales fell 26.4% on the Chinese Mainland and an even steeper 30.8% in Hong Kong and Macao. 

Chow Tai Fook closed 180 stores across China in the first half of this year, equaling a closure nearly every day. Luk Fook(0590.HK) underwent a similar wave of closures, shuttering 108 stores on the Mainland year-to-date. In its fiscal quarter through June, Luk Fook reported an 18% decline in total retail sales and a whopping 34% drop in same-store sales. 

Surging gold prices, fueled in part by geopolitical tensions, are a primary culprit behind the companies’ woes. By the end of June, London spot gold was selling for $2,330.90 per ounce, up 12.3% from $2,074.90 at the beginning of the year. Prices weakened for a while early in the second half of the year. But then they soared to a new record of $2,500 per ounce at the beginning of August after the assassination of Hamas leader Ismail Haniyeh. 

Falling consumption 

The high prices have dampened demand for gold accessories. A recent report from the China Gold Association said around 523.8 tons of gold were consumed in China during the first half of this year, down 5.6% year-on-year. Gold jewelry consumption took the biggest hit, down 26.7%, while gold bar and coin consumption actually rose 46%. That shows that recent demand for gold is being driven more by its nature as a safe-haven investment product, rather than its attraction as a consumer product. 

In Hong Kong and Macao, demand for big-ticket items including jewelry and watches has remained depressed, even as tourism has rebounded post-pandemic. Sales of jewelry, watches, clocks and valuable gifts in Hong Kong plunged by 23.1% year-on-year in June, while sales of jewelry and watches in Macau tumbled 34.9% year-on-year in May. 

Chow Sang Sang’s latest annual report shows that Mainland China was its primary market. Its Mainland sales reached around HK$15.83 billion last year, accounting for 63% of its total. Hong Kong and Macao accounted for around 36%, while the rest came from Taiwan and other regions.  

In the first half of the year, China’s total retail sales of consumer goods reached 23 trillion yuan ($3.2 trillion), up 3.7% year-on-year. But the growth rate in June slowed to just 2%, the lowest since February 2023. Against a backdrop of growing consumer caution, even people who want to purchase gold are tending to buy less expensive bricks and bars, further depressing gold accessory sales. 

Gold jewelry brands typically make money from processing gold into final accessories, and consumers often have difficulty differentiating products from local brands like Chow Tai Fook, Zhou Liu Fu, Chow Sang Sang and Chow Tai Seng. Many consumers see such brands as simply sellers of gold products, unlike foreign brands such as Cartier, Dior and Tiffany that are better known for their distinctive design philosophies. 

Gold jewelry stocks have generally slumped since the start of the year. Similar to Chow Sang Sang, Luk Fook is down 27% and Chow Tai Fook is down an even larger 42.7%. None of the names trade at very high price-to-earnings (P/E) ratios. Chow Sang Sang is the laggard of the group at just 4.2 times, well behind the 10.2 times of Chow Tai Fook and also trailing the 5 times for Luk Fook. 

Newly listed Laopu Gold (6181.HK), which says it makes gold accessories using traditional techniques, has become an investor darling in its brief history as a listed company, with a P/E ratio of 28.8 times. But it could just be just a matter of time before this newcomer fades as well and investors give it a multiple closer to the others.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.