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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 thousands of brand new slot machines.

“Thousands of wealthy Asians are packing its casino, filling their hotel rooms, and sending earnings blasting up an average of 91% a year for the past 2 years.

“At the rates they charge, they hate to turn away business, so they’re building a huge, new hotel wing and greatly expanding their gambling area. At around 60¢ a share, this is an opportunity to quadruple your investment over the next 3 years.”

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I reckon that it caught my eye because, well, this has been our favorite gambling stock for quite a long time around here — this must be NagaCorp (3918 in Hong Kong, NGCRF on the pink sheets). I don’t own this one personally, unfortunately, but it’s been doing extremely well and is indeed expanding. They’ve got some insider dealing that’s not exactly tasteful (they bought their expansion property from their controlling shareholder), but they also do pay a decent dividend and they are very nimble in managing for the shifting winds of Asian casino junketeer competition and don’t seem to have lost out despite the fact that their Cambodian casino (NagaWorld) is certainly overshadowed by the Singapre and Macau giants.

NagaCorp is still decent looking on a valuation basis, even after hitting multi-year highs recently — PE ratio around 10, decent growth, and a dividend yield in the neighborhood of 5% now. I wouldn’t go “all in” on this one at this price, since I fully expect that they’ll take a hit at some point along the way as they invest in expansion and/or emerging market stocks just get sold off en masse for little or no reason at some point, which happens every now and again, but if I owned the shares I’d certainly hold on to them … and if I didn’t but wanted a nibble, well, who could quibble with a tiny position while you watch it? I’ve written about NagaCorp a few times over the years, including a previous Tycango tease of the pick way back in 2008 …all those past notes are here if you’re curious.

Our schedule will remain a bit odd as I keep posting notes and thoughts from the Value Investing Congress for the Irregulars, but I’m sure we’ll be back on track and sniffing out more teasers soon, so keep those teaser ads coming!

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qwa2
Irregular
October 2, 2012 1:10 pm

As a tourist this summer I ended up shopping at a Chow Tai Fook store in Shanghai this past summer with the help/translation assistance of another shopper. I was interested in a golden dragon pendant – by the way all of their jewelry is 99% gold and you are given a certificate to ‘guarantee’ this. They also offer many small and interesting golden figurines in little display boxes, often of little anime characters, dogs, panda, Chinese zodiac symbols, and an assortment of religious figures as well as the traditional chains, bars, coins etc. They have both very luxurious looking free standing stores as well as counters in higher end department-type stores. The way the gold is sold is at so much per gram (it was a bit confusing converting yuan to USD – but I think the pricing was about 22% above the actual price of gold at the time) and then with a flat “workmanship” fee for the object. An elaborate pendant might have a “fee” of $100, while a chain might carry a $50 “fee.” The marketing and packaging of the figurines would seem to aimed at females who presumably would prefer cute panda bears and dog figurines made out of gold to coins and bars – probably a wise offering (and something done by their competitors as well. One really interesting offer the make, which apparently applies only to shoppers in the mainland, is if you make a purchase of something from their store, you can take it back to any other of their mainland outlets (I never understood if there was any time limit on this offer, but it was indicated that certainly within a year would be fine), with the certificate, and exchange it for any other more expensive item with absolutely no penalty. You simply pay the for the additional amount of gold (at the current rate per gram for the additional weight) and any difference in manufacturing “fee” for the new item (as I understood it, if the fee was less, that was okay, and that difference would also be credited to the additional gold cost). This seems a great strategy to retain customers.

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John F
Irregular
John F
October 2, 2012 1:27 pm

I like Sands China (Hong Kong 1928, avoid pink sheets) at least as much as this name. While I have a lucky entry point back in June, would buy some today with yield ~4%, The 6 Macua operators appear to be rational. The bet is capacity absorption, growth in mass market (vs VIP), and government assited infrstruture. To me growth of middle class is an undeniable secular trend with lots of volatile. US$ market cap ~30 million depending on what day it is. Certainly not mutually exlusive.

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Shawry
Member
Shawry
October 4, 2012 4:00 am

As a Hong Kong resident, CTF are certainly everywhere. They do more than just gold though, but they definitely aim at the Mainland Chinese visitor with their designs, which are more “bling” than perhaps some of their more sophisticated rivals. It’s not a bad policy, as jewelry can be nearly twice as expensive on the mainland due to sales tax, luxury taxes etc, so there’s a steady stream of mainland tourists heading here for that. However this is really a play on the continuing growth in China and the Chinese tourists’s ability to spend big. The housing markets in HK is similarly fuelled by Mainland money and has taken a bit of a hit in recent months, so I’d treat with a little caution.

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hommie
Member
hommie
October 4, 2012 10:55 am

China has been caught in the European financial crisis and together with other problems has seen its economy grow slower. This is having a negative impact on the casinos in SE Asia and may also affect the gold market but in a different way as people buy more gold as an investment strategy against a bear market. This should make the casino stocks cheaper but gold related stocks more expensive. I live in Singapore where they are already calling for a “Technical Recession”. This is also the home of one of he SANDS casinos (although residents must pay $100 SGD to enter the casinos in effort to keep the local money at home).

Thanks Travis for all your hard work and very interesting articles. It is a real education and because of it I have been part of the SAND wave . Only wish I had invested more. Cheers

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