A customer looks at gold bracelets in a Chow Tai Fook jewelry store in Hong Kong. [Photo/Agencies]

Hong Kong-based retailer saw net income slump as mainland tourists go elsewhere

Chow Tai Fook Jewelry Group Ltd plans to expand in the US market by selling diamonds to retailers there, as it seeks to offset effects of a slowdown in China that has hurt luxury sales and led profits to plunge.

The world's largest publicly traded jewelry chain plans to start the new US wholesale business within a year and has set up a team to conduct feasibility studies, Chow Tai Fook Managing Director Kent Wong said. Unlike the company's US unit Hearts on Fire, which mainly sells its own-branded diamond jewelry to franchisees, Chow Tai Fook will sell polished and rough diamonds to other retailers, he said.

"We are interested in the US market because it has the largest demand for diamonds in the world. It contributes 40 percent of diamonds sales," Wong said.

Chow Tai Fook in 2014 bought Hearts on Fire for $150 million in a bid to introduce the US luxury diamond brand to China, a move that's met challenges as the country's slowdown damped the buying habits of high-end consumers. The Hong Kong-based retailer saw net income slump 46 percent for the year ended March 2016, as mainland tourists also began to skip the city for other shopping destinations.

Low margins

Chow Tai Fook's venture into the US may come with challenges, said Hannah Li, a senior analyst in UOB Kay Hian Ltd based in Hong Kong. She said its strategy reflects the jeweler's "lack of confidence" in the China market.

"The company's not expanding into a familiar market but it's considering a lower-margin, wholesale business in a new market where it needs a lot of time to expand its business networks."

Hong Kong-listed Chow Tai Fook rose as much as 1.4 percent in Hong Kong trading on Tuesday. It has gained 18 percent this year, after plummeting to a record low in January. The city's benchmark Hang Seng Index was little changed.

Since acquiring Hearts on Fire, the company has expanded the brand in the China market with about 140 sales locations, Chow Tai Fook reported in June. About 80 percent of Hearts on Fire's revenue are from its wholesale business to franchisees, according to the company.

Rather than breaking into a brand-new retail market on its own, the new wholesale business will allow Chow Tai Fook to test the waters, said Wong. "We will seek to partner with local retailers who know the market well."

Bloomberg