Chinese Jewellery: Market Growth in an Expanding Economy

Vincent Chow

Chow Sang Sang, 2012 GDP by Country (World Bank)

USD Billion 80,000

71,666 70,000

60,000

50,000

40,000

30,000

20,000 16,690 15,685

8,227 10,000 5,960 3,400 2,613 2,435 2,253 2,015 - World EU US China Japan Germany France UK Brazil Russia China’s GDP (World Bank)

USD Billion Growth 9,000 12.0%

8,000 10.4% 10.0% 9.6% 7,000 9.2% 9.3%

6,000 8.0% 7.8%

5,000 6.0% 4,000

3,000 4.0%

2,000 2.0% 1,000

- 0.0% 2008 2009 2010 2011 2012 Urban Disposable Income (National Bureau of Statistics of China)

USD Growth 4500 12.0%

4000 10.0% 9.8% 9.6% 3500

8.4% 8.4% 3000 8.0% 7.8%

2500 6.0% 2000

1500 4.0%

1000 2.0% 500

0 0.0% 2008 2009 2010 2011 2012 China's Consumer Retail Spending ( NBSC)

USD Billion Growth 3,500 25.0%

22.7% 3,000 20.0%

18.3% 2,500 17.1%

15.5% 15.0% 2,000 14.3%

11.4% 1,500 10.0%

1,000

5.0% 500

- 0.0% 2008 2009 2010 2011 2012 2013 1H 2012 Volume: Gold Jewellery and Platinum Jewellery in China

• Gold consumption for jewellery 518.8 tonnes [WGC]

• Plantinum consumption for jewellery 1.5 m ounces [GFMS] or 42.5 tonnes

12:1

• One company’s experience, in dollar terms

8:1 China Annual Consumption of Gold for Jewellery & Other Uses (China Gold Association [CGA], World Gold Council [WGC])

Tonnes Growth 900 45.0% 43.6% 800 40.0%

700 35.0%

600 30.0%

500 25.0%

400 20.0%

300 15.0%

200 10.0%

100 5.0%

0 0.0% CGA WGC CGA WGC CGA WGC CGA WGC 2010 2011 2012 2013 1H

CGA Jewellery CGA Other Uses WGC Jewellery WGC Other Uses CGA Jewellery YoY Annual Jewellery Consumption of Gold (GFMS)

Tonnes 700

600

500

400

300

200

100

0

2010 2011 2012 What is Gold Jewellery in China

• WGC webpage:

“Chinese consumers look for the very highest level of purity; more than 80% of gold jewellery in China is made from pure 24 carat gold.”

• Our Company’s experience:

in China and Hong Kong, only 1 to 3% in 18K gold, not counting gem-set 18K gold.

An Assortment of Gold Jewellery Gold Wafers 10g each

Bridal Bangle 60g for China Bridal Bangles 112g each

Necklace 124g

Choker 72g

Longevity 10g

Rings 6g each Rings 4 to 6g

Ring 9g

Beads ~1g each Figures 4 to 5g each Dragon 144g Estimating the Number of Retail Jewellery Outlets

• China Gold Association: 60,000 to 70,000 jewellery outlets

• China Commerce Association for General Merchandise: 9,000 department stores. Say average 5 jewellery outlets in each then 45,000 outlets plus those in shopping malls and street-level shops. Who are the Players

• International Brands

• National chains based in Hong Kong (~6)

• National chains based in Shenzhen, Shanghai etc (~10)

• Regional chains (?)

• Franchisees [some of whom are department store operators] (?)

• Independents (?)

Taxes Give Hong Kong Price Advantage

China Hong Kong Value Added Tax 17.5%* – Consumption Tax 5% – Import Duty if applicable 14~40% –

Corporate Income Tax 25% – Profits Tax – 16.50%

*VAT not applicable to gold content in pure gold jewellery Mainland Chinese Arrivals at Hong Kong (Hong Kong Tourism Commission)

Arrival Count Growth 40,000,000 30%

35,000,000 25% 24% 24% 30,000,000

20% 20% 25,000,000

20,000,000 15%

15,000,000 10%

10,000,000

5% 5,000,000

0 0% 2010 2011 2012 2013 1H

Hong Kong’s Population: 7.6 million Chow Sang Sang Total Jewellery Sales Distribution by Customer Domicile

100%

80% 70.5% 71.5% 66.3%

60% 32.6% 32.9% 30.4%

40%

20% 35.9% 37.9% 38.6%

0% 2011 2012 2013

Mainland China Sales Hong Kong Sales to CN Visitors Hong Kong Sales to Locals Other Sales Mainlander Total Gold Consumption, Gm per Capita (GFMS)

Population in 2012 2010 2011 2012 million Adjusted*

China 1,338.6 0.34 0.38 0.39 0.40

Hong Kong 7.6 2.71 3.64 3.45 1.73

Taiwan 23.0 0.34 0.30 0.30 0.30

Singapore 4.7 1.83 1.90 1.99 1.99 Saudi 28.7 2.49 1.94 1.64 1.64 Arabia UAE 4.8 14.50 12.11 10.38 10.38

Other Gulf 7.7 2.86 2.48 2.20 2.20 Gold Consumption, Gm per Capita (GFMS)

Population in 2012 2010 2011 2012 million Adjusted*

China 1,338.6 0.34 0.38 0.39 0.40

Hong Kong 7.6 2.71 3.64 3.45 1.73

Taiwan 23.0 0.34 0.30 0.30 0.30

Singapore 4.7 1.83 1.90 1.99 1.99 Saudi 28.7 2.49 1.94 1.64 1.64 Arabia UAE 4.8 14.50 12.11 10.38 10.38

Other Gulf 7.7 2.86 2.48 2.20 2.20

*2012 Adjusted by attributing one half of Hong Kong consumption to China Hong Kong

The 2013 Gold Rush Hong Kong

The 2013 Gold Rush

The Aftermath: empty shelves and grumpy faces 2013 Chow Sang Sang Same Store Growth in Gold Weight Hong Kong, China & Combined

Growth % USD/oz

250% 1,700

1,650

1,600 200% 1,550

1,500 150% 1,450

% 1,400

100% 1,350

1,300

1,250 50% 1,200

1,150 0% Jan Feb Mar Apr May Jun Jul Aug Sep 1-14 1,100 1,050

-50% 1,000

Hong Kong China HK CN Combined Gold Price China Annual Consumption of Gold for Jewellery & Other Uses (China Gold Association [CGA], World Gold Council [WGC])

Tonnes Growth 900 45.0% 43.6% 800 40.0%

700 35.0%

600 30.0%

500 25.0%

400 20.0%

300 15.0%

200 10.0%

100 5.0%

0 0.0% CGA WGC CGA WGC CGA WGC CGA WGC 2010 2011 2012 2013 1H

CGA Jewellery CGA Other Uses WGC Jewellery WGC Other Uses CGA Jewellery YoY 39 Chinese Cities with 2012 GDP ≥ USD 48b (RMB 300b) & Growth over 2011 ≥ 10% Heilongjiang

✪Daqing ✪Harbin Shanghai 321b 7.5% Jilin Beijing 284b 7.7% Inner Mongolia ✪Changchun Hangzhou 125b 9.0% ✪Shenyang Xinjiang Liaoning Hebei ✪Baotou ✪Tangshan Beijing ✪Dalian ✪Erdos ✪Tianjin ✪Shijiazhuang ✪Yantai ✪Dongying Gansu ✪Weifang ✪ ✪ ✪ Ningxia Shanxi Handan Jibo Qingdao Qinghai ✪Jining Shandong ✪Linyi ✪Zhengzhou ✪Xuzhou Shaanxi ✪Luoyang ✪Yancheng Jiangsu ✪Nantong Henan ✪Changzhou ✪Xian Anhui ✪Wuxi Tibet ✪Suzhou ✪Hefei ✪Nanjing Hubei Shanghai ✪Chengdu ✪Wuhan Sichuan ✪Chongqing Zhejiang

Hunan ✪Nanchang Guizhou ✪Changsha Jiangxi ✪ ✪Kunming ✪Quanzhou Guangdong ✪ Taiwan Reference: public data published by Yunnan Guangxi ✪Shenzhen municipalities and compiled by www.elivecity.cn. Hong Kong

Hainan