Chinese Jewelry Designer Gets Dolled Up For Nasdaq

What are the upscale Chinese doing with their newfound wealth? Recent new issues have offered many possibilities. There are hotels (Home Inns & Hotels HMIN), private schooling (New Oriental Education EDU), investment advice (Xinhua Finance Media XFML) and real estate (E-house Holdings EJ). Some of those stocks have done better than others, but Fuqi International is testing the market’s appetite for the ultimate luxury good: jewelry.

According to Global Industry Analysts, China’s jewelry industry totaled $18 billion last year, up 35% from 2001. It is the third largest consumption item among Chinese, after automobiles and housing. By 2010, the country is expected to have the biggest jewelry market in the world.

Fuqi has taken advantage of this trend, achieving an average 57% annual sales growth rate in the last five years. So far it has sold its products wholesale to retailers and distributors. But now the company wants to open its own retail shops, and the U.S. initial public offering will help pay for it.

THE COMPANY

Fuqi was founded in 2001. It has built up a design database of over 20,000 products, mostly made from platinum, gold and other precious metals. Its wholesale markup ranges from 10% to 12%, which can climb as high as 30% by the time it gets to the consumer.

Not surprisingly, Fuqi would like more of that margin. Its retail plan is to open 20 counters and two stores this year and open 60 to 80 counters and eight to 10 stores next year. It also will shift its product line toward finished gemstone items. Historically, this hasn’t been a very big part of the business, but the firm says it has higher margins than the strictly metal pieces.

In November, Fuqi went through a reverse-merger transaction with visitalk.com, a firm in Chapter 11 bankruptcy. However, the deal does not seem to have left the firm with significant long-term debt.

RISKS/CHALLENGES

Investing in China isn’t for the risk-averse, as previous market tremors there this year have shown. As a highly discretionary item, jewelry is perhaps more vulnerable to economic fluctuations than most products.

Much of Fuqi’s working capital comes from accounts receivable, i.e., orders that have not been paid. Major defaults could seriously hurt the company’s cash supply.

Fuqi is vulnerable to commodity prices of the metals and gems it uses. Historically, it has not hedged against this, but it plans to do so in the future. The supply is also heavily regulated by the Chinese government.

It’s hard to tell how the retail strategy will work out, since the firm has never done it before. It also will need to expand geographically, since sales are now concentrated in a few northern provinces.

Fuqi has about $16 million outstanding in short-term borrowings.

THE RESULTS

Sales have ramped respectably in the company’s short life, totaling $92.4 million last year. In the first six months of this year sales gained 12% to $54.2 million, while net income rose 21% to $3.4 million.

USE OF PROCEEDS

Fuqi has not set terms for the offering, but it plans to spend the proceeds on expanding retail operations and product lines and for general corporate purposes.

THE MANAGEMENT

Yu Kwai Chong

President, chief executive, chairman

Founded the company and has headed it since 2001. Founded the first jewelry manufacturing and sales firm in Shenzhen over 20 years ago.

Ching Wan Wong

Chief financial officer and director

Joined in 2004 after two years as a tax consultant. Previously he served as finance director for MindShare China and Carat Media. He holds bachelor’s degrees from both the Chinese University of Hong Kong and Southern Queensland University.

Lie Xi Zhuang

Chief operating officer and director

Co-founded the company after seven years at Shenzhen Ping Shen Gold and Silver Jewelry Co. Holds a management degree from Hunan Xiang Tan University.