Chow Tai Fook: Emerging market stock of the day

Hong Kong-based jeweler Chow Tai Fook (CJEWF, quote) reported earnings below estimates overnight. How did investors react to these underwhelming numbers and what can we extrapolate from the company’s results about the health of the Chinese consumer?

Image Courtesy: Flickr User tallkev

A Chow Tai Fook outlet

While Hong Kong shares (EWH, quote) opened mostly flat, shares moved higher as the day went on, finishing up about half a percent.

The major news story in Hang Seng trading to close the week was the performance of Chow Tai Fook. After reporting earnings that came in below analyst expectations, shares in the jeweler maker dropped a couple of percentage points. Traders initially hammered the stock, in spite of the fact that Chow Tai Fook had issued a warning to investors a few weeks earlier that results would be underwhelming this quarter.

However, as investors took a deeper look into the results, Chow Tai Fook’s shares reversed abruptly, ending the day up more than 4%. As it turns out, the company’s earnings miss was not the result of Chinese consumer trends working against the company; rather, Chow Tai Fook merely engaged in poor gold hedging strategies. These unrealized losses made the company’s results appear worse than the fundamentals indicate.

While investors never like to see a hedging strategy backfire, such a misstep is not necessarily indicative of future losses for the firm. The company’s core markets remain intact, and demand from Hong Kong has already started to rebound. Chow Tai Fook executives remain confident that demand from Mainland China (FXI, quote) will return once political and economic uncertainty wanes.

With signs that Chinese manufacturing growth may be finally exiting its prolonged slump, Chinese consumer sentiment could see a concomitant incremental rise. If definitive signs of growth manifest themselves over the next month, this could potentially be a boon to Chow Tai Fook prior to Chinese New Year, a traditional gift-buying season in China.

Investors in stocks tied closely to Chinese consumer discretionary spending should keep an eye on companies like Chow Tai Fook to assess the health of the mid-to-high end Chinese consumer.


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