Boom time: Luxury watches soar in China

LIAO Xinhai wants to splurge on a status symbol - a new watch. Rather than buy an imitation out of a suitcase on a Hong Kong street corner, the Chinese financial adviser went two blocks away to check out genuine US$3,800 Piaget Polo watches.

"It has to be perfect," Liao said, as he admired the gold watch on his wrist. Piaget maker Cie Financiere Richemont SA's sales of luxury watches are surging in China, as consumers snub domestic timepieces to show they can afford the real thing, Bloomberg News reported.

To cater to such cravings, Richemont will spend 20 million euros (US$27.7 million) to open stores and advertise in China this year, more than its total spending in the nation since 2004.

That's led some investors to buy more stock, said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania.

China is "just such a promising market," Russo said. He has invested five percent of the more than US$3 billion he manages in Richemont shares, making it one of his top five investments. "It's money worth spending."

Richemont sales in China will jump by as much as 25 percent a year through 2010, about three times as fast as sales at the rest of the company, estimates Thane Duff, an analyst at Investec Securities in Sandown, South Africa. China, the source of about eight percent of Richemont's sales, will become a bigger market than the US by 2010, he said. Richemont's profit will increase by more than a quarter to 1.8 billion euros by 2010, according to analyst estimates compiled by Bloomberg.

The switch to luxury watches is a departure in China. Watches made in a Chinese factory cost US$1 on average in 2005. That compares to US$469 for Swiss watches, according to the Swiss Watch Federation.

Investors don't have to wait until 2010 to get better returns. Increased demand for Richemont watches will help drive the share price 18 percent higher to 90 euros a share in the next year, estimates Jon Cox, an analyst at Kepler Equities in Zurich.

"Demand now is for the premium watches, and the more expensive the better," said Cox. Hong Kong, where many people from the Chinese mainland go to buy luxury goods, topped the US as the biggest market for Swiss watches in March for the first time.

Eighteen analysts rate Richemont a "buy," while eight suggest investors "hold" onto their shares and one recommends selling. The shares have almost tripled in the past five years.

The boom in Asia helped boost Swiss watch exports by 15 percent in the first half, on track for the fastest growth in at least seven years, according to Swiss Watch Industry Federation statistics.

Love affair

"The population is so large and you've got such a wide progression in wealth," said Jacques-Antoine Demaurex, head of asset management at Banque Bonhote & Cie. in Neuchatel, Switzerland, which oversees the equivalent of about US$2 billion.

"Everybody is loving these little luxury items." He owns Richemont shares and expects them to rise at least 20 percent within a year.

Watch exports to Hong Kong have grown at a faster rate than exports to the US in two of the past three years as the economy expands.

China's economy grew 11.9 percent in the second quarter, the fastest pace in 12 years, the nation's statistics bureau said July 19.

Watches costing more than 3,000 francs are driving export growth from Switzerland as consumers opt for more expensive models of brands such as Richemont's Jaeger LeCoultre.

Swiss watchmaking is enjoying the best sales environment since the so-called "quartz crisis" that drove many watch makers out of the business in the 1970s. Employment dropped to 30,000 in 1987 from 90,000 in 1970 due to the advent of electronic quartz watches, sold by companies such as Japan's Seiko, and an economic downturn.

Now, the biggest risk to Swiss watch makers like Richemont is not being able to keep up with the demand.

"When you have growth going quite fast in this industry, you hit into capacity constraints," said Scilla Huang Sun, who manages about 300 million euros in a luxury-goods fund at Clariden Bank in Zurich, including Richemont shares. When that happens, "you're always running behind." She remains "quite positive" on Richemont.

Swiss watch sales are highly correlated to financial markets and there is a risk that any prolonged decline could damp demand, which is one of the largest risks for the industry, Kepler's Cox said. The industry suffered a slump after the September 11 terrorist attacks, the Iraq war and the spread of Severe Acute Respiratory Syndrome, or SARS.

Richemont Chief Executive Officer Norbert Platt said he expects strong demand to continue this year, though he warned it won't last forever. "We are all dancing on top of the volcano. There's an excess of cash," he said May 24.

Liao, the Chinese financial adviser, doesn't see the trend ending any time soon. Watches now reflect personality, he said.

"Women use earrings and dresses to show who they are. Men use watches," he said.