Can’t resist a quick tease … Tycango’s Asian Gold and Gambling

By Travis Johnson, Stock Gumshoe, October 2, 2012

Bryan Tycango is pitching some picks for his Asian Growth Stocks newsletter, and I thought I’d take just a few moments to fill you in on them before I get back into chattering about the Value Investing Congress.

The pitch is that this is the “Jewelry company selling more gold than US Mint” — and that it was in early in China after gold ownership was legalized and is reaping the rewards. So who is it?

Well, a few clues:

“This company dominates the gold jewelry markets in Hong Kong and China, which are two of the world’s largest and fastest-growing gold markets. The company sold 1.5 million ounces of gold last year (about $2.6 billion worth). That was 50% more gold than the approximately 1 million ounces the US Mint sold….

“This company started 70 years ago in tiny Hong Kong, long before gold ownership became legal in China. It now dominates Hong Kong with 93 gold jewelry stores and 20% market share — more than twice as much as its nearest competitor.

“I recently strolled down Hong Kong’s famous Nathan Road shopping district, and I saw one of their stores on almost every block. They were all packed with customers.”

And we learn why this is appealing:

“… there’s a tidal wave of growth coming in China’s gold jewelry market. This company is one of the best ways for you to ride it.

“It’s already the market leader with a 12% share of the mainland Chinese market. They cleared $750 million in profits last year, with profits growing at a 50% annual clip over the last 3 years.”

And there was apparently some insider buying:

“the Chairman, who’s obviously in a position to know the company’s prospects, recently forked over $3.1 million to buy 1.9 million shares.

“Shortly after that, the shares sold off during a correction in gold. So right now, you can still get in for about 10% less than the Chairman paid. And given the huge size of the market, and the rate the company is growing, I expect shares to be worth 3 to 5 times more in 2016 than they are today.”

Well, gold ain’t exactly in a selloff right now … but what’s the company?

Well, the clues don’t match exactly — the profit for FY 2012 (ended in March) looks like it actually translates to US$812 million ($6.3 billion in HK dollars), and their HK market share bumped over 21%, but I can’t imagine there’s an alternative match for this one.

So I think it must be Chow Tai Fook, which is a major brand in China and Hong Kong and went public almost a year ago. Ticker is 1929 in Hong Kong, CJEWF on the pink sheets — it’s a big company, multi-billion-dollar market cap, but very illiquid on the pink sheets.

And I don’t know much about them — they seem to have a strategy to take over mainland China with a huge number of outlets that aren’t exactly owned stores … some combination of franchisees/agents/independent resellers that I haven’t looked closely enough to understand, so that is complicated enough to make me feel too lazy to research it given my difficulty in understanding corporate structures of Chinese companies on a good day. They are priced at a discount to their growth rate, as you can imagine, but they’re not dirt cheap (particularly compared to other Chinese companies, since people don’t even trust the ones that are probably legit) with a PE ratio of about 15 (forward estimate) and a price/earnings/growth (PEG) ratio of about 0.75.

So … I’m not jumping up and down, but it is a big company that is profiting from the Chinese taste for luxury and the demand for gold — the gold part is probably actually a pretty low margin business, since I bet they get more of the “price per ounce” jewelry pricing and less of the cachet of hot designs or tradition a’la Tiffany’s, but they do have a large and growing brand and they’re doubtless trying to turn that into more profitable sales, too.

And they tease one more that caught my eye:

“A 25-year monopoly on casinos in one of Asia’s most famous tourist destinations

“The company started out on a floating barge, with a couple of Mahjong tables and Chinese card games. Now they have a
508-room, 5-star hotel casino filled with Black Jack, Poker, Mahjong, and Roulette tables, plus thou