Ming Fung is targeting the PRC retail jewelry sector

MING FUNG JEWELRY (HK: 860) sees its planned strategic marketing agreement with high-end watch retailer Hengdeli Holdings (HK: 3389) as a glittering example of its more aggressive expansion strategy in the PRC.

Hengdeli, with 302 stores in Greater China and 252 in the PRC alone, is the ideal candidate to help Ming Fung – a wholesaler and distributor of diamonds, platinum, gems and gold products – further penetrate the mainland market, beginning with Tier 1 city markets.

The research report by Deutsche Bank said that the strategic alliance with Hengdeli expected to be finalized by year end was very likely to drive Ming Fung’s expansion going forward.

The German investment bank learned from Ming Fung management of its operational review and key initiatives going forward, specifically with relation to the recent strategic alliance with Hengdeli.

“Management is optimistic about the new alliance as it offers the company a retail platform in the booming China jewelry market. In the past few years management found retail expansion to be challenging in the mainland and mainly focused operations close to the company’s base in the Guangdong region,” Deutsche said.

Ming Fung said that that many details still need to be discussed between the two parties, but it has been decided that the deal will be based on a consignment model.

“Ming Fung expects Hengdeli to offer certain spaces as 'jewelry sections' displaying Ming Fung brands. For smaller stores, management expects jewelry to be displayed alongside watches. We believe that Hengdeli will start with Tier 1 city Prime Time format as trial for the jewelry business.”

Ming Fung is also currently in discussions with a few international brands, the research report added.

“Management believes that this third-party jewelry business will be based either on complete consignment (unlikely with high-end jewelry brands) or direct sales with options to swap old inventory. This would to some degree alleviate working capital drag that might occur with outright direct sales model for international brand distribution.”

However, management is currently unwilling to disclose which brands the company is in talks with.


Bands of Friendship: Hengdeli Chairman Zhang Yuping purchased a 5.6% stake in new partner Ming Fung in July. Photo: Ming Fung

The German group added that Ming Fung is also weighing the benefits of adopting additional brand names for different product lines the company will be selling in Hengdeli stores, besides its current SAVANTI brand name used in the China market.

And there can be no doubt of the commitment of the two partners to the new alliance, as Hengdeli Chairman Mr. Zhang Yuping purchased a 5.6% stake in Ming Fung in July.

“After not being able to find a breakthrough for its China business over the past few years, Ming Fung believes that, with the signing of the new partner Hengdeli, it has gained an important partner in mainland expansion.”

Ming Fung has three methods of PRC expansion in the works in addition to the Hengdeli platform:

Strategic alliance with other retailers: Similar to the deal signed with Hengdeli, Ming Fung is also looking to establish relationships with other retailers that have extensive jewelry/watch brand networks in order to build business together.

M&A in lower tier cities: Acquisition of lower-tier city retailers that already have existing networks but are struggling with product offerings. Ming Fung commented that in lower tier cities the valuation will be less demanding and would therefore offer more value.

International brand boutiques: Company will help international companies to open single brand boutiques to boost brand image – the company is still at the discussion stage with a few international brands.

All That Glitters Isn’t Gold

Ming Fung market cap: 1.35 bln hkd; price: 0.54 hkd; 52-wk range: 0.36-0.74; P/E (trailing): 42x.  Photo: Company

Ming Fung focuses on diamond, platinum, gem and gold products wholesaling and distribution, but compared to traditional peers in the jewelry trade, the Hong Kong-listed firm has a much lower gold offering.

“This enables the company to charge a higher overall margin and put more effort into R&D and design to differentiate itself. The current product mix is predominantly skewed towards diamond and platinum,” Deutsche said.

In the future, Ming Fung will launch additional product categories such as varieties of gem, as well as jade, to broaden its offering and drive differentiation, the note added.

Currently Ming Fung’s average selling price (ASP) range is quite wide, from 500-50,000 yuan, compared to the industry average in the PRC of 7,000-8,000 yuan, thus exhibiting Ming Fung’s lower reliance on gold products than its peers.

Besides being an ODM wholesaler (which accounts for one-third of the China business), Ming Fung has over 40 retail outlets mainly in the Guangzhou region under the brand ‘SAVANTI’.

“Management commented that retail operations in Beijing and Shanghai were too expensive to run which resulted in the company closing down stores in both regions in recent years. Management believes that the new strategic alliance will help them solve two challenging problems it faced earlier in its China expansion.”

These were the facts that selection of good locations for new stores in China is relatively challenging, and rental costs have been too high.

Ming Fung has been an OEM/ODM supplier to some of the leading department stores/jewelry retailers overseas, such as JCPenney, Sears, Fred Meyer, Daniel’s and Ch. Abramowicz, but management believes that in the future, the export portion will continue to shrink for three reasons: 1) sluggish export demand, which has not picked up, 2) greater capacity commitment towards the China business, which has a higher margin, and 3) intense competition from other exporters such as India.

In the first half of this year, 63% of the total sales came from the China region versus FY2008 when only 39% was from China and the balance from the export market.


“Currently, Ming Fung manufactures its entire product at its Shunde, Guangzhou factory. Management believes not having a third party OEM manufacturer and relying on its own factory will enable it to better control the quality of its products,” Deutsche added.

The Shunde factory has a total area of 5,800 square meters and a total of four production lines. In the next year or two, the company might upgrade and expand its existing capacity in order to accommodate higher volume, depending on the pace of expansion.

However, at the moment, Ming Fung does not yet have a capex budget for its expansion plans.

As for its gold mining business, Ming Fung will look for an appropriate contractor/partner to work on the mining business and, by giving the partner a stake in the mine, Ming Fung hopes it will not have to incur further cash outflow for the operation costs of the mining development.

Ming Fung acquired its Inner Mongolia and Anhui gold mines for a total of 270 mln hkd. The Inner Mongolia mine will start production by next year at the earliest.

Management stressed to Deutsche Bank that it will continue to focus on the retail business and on expansion in China.

“Therefore, it will not further gold mine acquisitions; however, if the China retail business development goes according to plan, the company might consider the possibility of acquiring diamond/gem mines in the future.”

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