HK’s Sitoy Targets China Taste For Luxury
A Hong Kong manufacturer called Sitoy Group is trying to position itself as a play on China’s booming market for luxury goods, making handbags for an all-star line-up of big names like Coach and Prada (HKEx: 1913). But anyone wanting to buy into this company, which is revving up for a Hong Kong IPO expected to raise nearly $100 million (English article) might want to take a look at the fine print in its prospectus before plunking down their hard-earned investment dollars. In fact, Sitoy’s top line does look quite attractive, with revenue nearly doubling to an expected HK$2.49 billion this year from HK$1.35 billion in 2009 as the company and its peers ride a boom in demand from newly affluent consumers in China, which is expected to soon overtake Japan to become the world’s leading luxury goods market. (company prospectus) But a closer look at the fine print, on page 86 of the prospectus to be exact, shows that Sitoy’s fashionable handbags sell to its big-name customers for a relatively modest HK$80-$640 each, or about US$10 to $80. That contrasts quite sharply with what the big names charge, with the cheapest bag on Coach’s web site priced at $300, while the cheapest offerings on Prada’s site are mostly in the $1,500 range and higher. Clearly the big-name brands are making a lot more profit off the luxury goods boom than manufacturers like Sitoy, which instead are simply playing a volume game to fuel their top and bottom line growth. I suspect that Sitoy and others who manufacture for the big luxury brands may be able to keep their sales volume growing for another year or so, as millions of newly affluent young Chinese urbanites satisfy their appetite for luxury goods. But look for a sharp slowdown after that, probably in the next 2-3 years, after which Sitoy may look much more mundane than luxurious.
Bottom line: Manufacturers like Sitoy that produce for big luxury brands may see strong growth for the next year on booming demand from China, but could see a sharp slowdown after that.
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