Swatch partner Hengdeli speeds store openings on 35pct growth

Hengdeli Holdings Ltd, the retail partner of Swatch Group AG in China, is accelerating the pace of watch-store openings after increasing demand for luxury goods is projected to have boosted first-quarter sales by 35 per cent.

“The Chinese people were holding back from spending money last year because they weren’t confident of the economic outlook,” Chairman Zhang Yuping told reporters in Hong Kong today. “Now, they’re starting to buy luxury watches again,” he said. The company plans to open at least 50 stores in China this year, 10 in Taiwan and as many as two in Hong Kong, Zhang said.

Hengdeli hopes to benefit from surging demand for Swiss watches in China, where a quarter of all Internet searches for brands last year were for Swatch Group’s Omega compared with Rolex’s 18 percent, according to research firm IC-Agency, publishers of the World Watch Report. China and Hong Kong last year consumed a fifth of total Swiss watch production.

“A visible uptick was observed in second half 2009 with retail turnover increasing,” Emily Lee, an analyst at Kim Eng Securities Ltd. in Hong Kong, wrote in a note to clients today. Lee recommends holding Hengdeli stock. “Potential import duty cuts on luxury watches and lowering of luxury consumption tax will continue to be key catalysts for the stock,” she said.

Hengdeli fell 2.4 per cent to close at HK$3.31 in Hong Kong trading, the lowest value since March 11. The stock has risen 13 per cent this year compared with the benchmark Hang Seng Index’s 2.9 per cent drop.

Net income last year fell 21 per cent to 364.8m yuan ($53.4 million), or 0.094 yuan a share, the company said yesterday. Profit, excluding currency exchange and the effect of fair-value valuation on convertible bonds, rose 6.5 per cent to 458.2m yuan, while sales gained 6.9 per cent to 5.9bn yuan, according to the statement.

China’s government is reviewing its tariff policy on luxury products and may cut the tax as soon as this year in a bid to boost local consumption, Zhang said.

Hengdeli will spend up to 400m yuan ($58.6m) this year on store openings and may consider acquisitions to boost outlet numbers, Zhang said. The company is also in talks with potential retailers on acquiring existing stores, especially in second and third-tier cities in China, he said.

Hengdeli added 60 stores last year, taking its total to 270 outlets. The cost of opening a store in China ranges from 6m yuan to 8m yuan, unchanged from a year ago, Zhang said.

Hengdeli is also looking at expanding its jewelry business, which accounts for 1 per cent of sales, and is seeking foreign partners, Zhang said. The company wants jewelry sales to account for as much as 30 per cent of revenue in five years, he said.

“Luxury watches are very closely tied to jewelry,” Zhang said. “The margins for jewelry are also much higher.”