Thai Investment and Securities Co analyses the five jewelry stocks traded on the Stock Exchange of Thailand. The report, prepared in late October, covers the first half of 1993.
After facing several traumas during the past few years, the jewelry and ornaments sector is expected to see a smoother path ahead now that the world economy has shown significant signs of recovery. The US Section 301, which had been a trade sanction threat hanging over the sector for quite some time, was also retracted. We have therefore revised our recommendation for jewelry and ornaments from an under weighing to a neutral position at the moment. While most companies in the industry are expected to bottom out now, they are not expected to see a sudden surge within 1993 or 1994. We expect the industry’s growth to be something of a gradual process, as countries need time to improve their economies.
In the long run, we feel quite optimistic toward this sector. As Thailand still has several comparative advantages over other countries, not only in terms of abundant gemstones, especially rubies and sapphires, but also in terms of our skilled craftsmen. The ASEAN Free Trade Area (AFTA) program to be implemented soon should also benefit the country in terms of expanded export opportunities. Nevertheless, the government sector holds the key to the success of this industry. A number of trade barriers, for example, import duties, value added tax, and others, are under the process of consideration by concerned parties to be removed of loosened in order to promote the industry. Once these barriers are removed, the industry should find it easier to achieve its goal of becoming one of the largest jewelry centers in this region.
Recent developments
The US moving Thailand off the Priority Foreign Country (PFC) list to Priority Watch list (PWL) status has been one of the most soothing measures for the gems and jewelry industry. Prior to this, the sector had been the first candidate expected to receive punitive actions by the US as a counter-action for Thailand’s violating US intellectual property rights, as the US has been at the top of Thailand’s gems and jewelry export destination list for several consecutive years, and the volume has also been increasing substantially during the past few years. Though most jewelry items have been excluded from the Generalized System of Preference (GSP) list since 1990 and are subject to normal tariff rates of 6.5-27.55 percent, many operators forestalled their investment decisions, as they were uncertain over the prospects of the industry, considering the possible punitive measures to be implemented by the US on Thai products. The US’s recent decision to take Thailand off the PFC list has helped eliminate worries among these operators, and should therefore help spur investment and trade in these industries.
Thai gems and jewelry exports saw an impressive 37 percent year on year growth during the first half of 1993. After two consecutive years of scant growth rates in exports, the Thai gems and jewelry industry is expected to see double-digit growth for 1993, based on its satisfactory half-year performance. Total exports during the first six months of 1993 amounted to B20.8 billion (US$832 million), a 37 percent increase from the same period in 1992. The export target for 1993 has been set at B42 billion ($1.68 billion). The figures were revised downward from B45 billion ($1.8 billion) by the Department of Business Economics early in 1993 after evaluating the effect of the value added tax (VAT) which had been introduced in 1992.
ASEAN countries’ decision to speed up tariff cuts under AFTA should mean a faster benefit to Thai gem and jewelry exporters. As Thailand has a strong competitive edge over other countries in this region, it is expected to benefit from its access to a wider market base with no tariffs once AFTA comes into effect. Gems and jewelry are now under the fast-track items list, where tariffs are to be eliminated within seven years starting January 1, 1993.
Many operators seek investment in neighboring countries where labor costs are more competitive, while raw material supplies are also abundant; this is a new alternative being used by a number of both local and foreign operators. As Thailand is now losing its advantage in terms of labor costs, many operators are turning to our neighboring countries such as China, Vietnam and other Asian countries where labor costs are much cheaper. One way that
Thailand can maintain its lead in this region is to make its goods more competitive in the world market.
The government sector plays an important role in contributing to the success of the industry. Currently, there are a number of trade barriers that have become problems hindering the growth of the industry and that need to be rectified. Examples of the problems that have been raised and are still under the government’s consideration to find solutions to are the import duty on some jewelry items, the value added tax, the ATA carnet system, and others. We believe that once these barriers are removed or eased, the industry’s goal of becoming a regional jewelry center should draw closer.
Half-year results
The jewelry and ornaments sector managed to perform quite satisfactory during the first half of 1993. The sector saw its sales grow 29.3 percent from the corresponding period of the preceding year. Nevertheless, earnings dropped 16.6 percent and earnings per share fell 10.5 percent. These were attributed to a slight decline in gross profit margin and the increase in operating expenses from penetrating new markets. Among the five companies listed, three—BIJOUX, ESSEX and SAWANG—recorded earnings growth, while the remaining two—O-LAP and PRANDA—posted earnings declines.
The best performer was BIJOUX, which registered a splendid growth on both sales and profit during the first half of this year. Its sales grew 33.5 percent, and earnings surged 46.9 percent. The company attributed this to its success in expanding into new markets.
The worst performer was PRANDA, which saw a 43.4 percent drop in its earnings despite a 4.6 percent sales growth. This was attributable mainly to the declining gross margin as well as to the increase in its operating expense.
Stock recommendations
Bijoux D’Amour (BIJOUX)
Hold—Bijoux’s performance for the first half of 1993 was encouraging. Sales grew 33.5 percent, while earnings surged 46.9 percent. The company attributed this to its successful market expansion into North America, which had been planned since early 1993
As the Japanese market, which currently accounts for more than one0third of BIJOUX’s exports, is facing a serious downturn, BIJOUX is now trying to reduce its dependency on this market by expanding into other promising markets such as the US and Europe. Nevertheless, we expect the company to spend quite some time before it gains a firm foothold in these new markets. Considering Japan’s economy, whose recovery is still in question, as well as the country’s declining import volume from Thailand (Japan was one of the only three countries from the top-tem export markets of Thai gems and jewelry that saw a drop in their imports from Thailand during the first five months of 1993), we expect the company to see its sales partly affected by this slow recovery. Nevertheless, considering the company’s additional revenue to be derived from new markets, we therefore recommend a “hold” strategy for the company’s stock at the moment.
BIJOUX—First-half performance
1992 1993
Sales 147 196
Cost of sales 109 140
Gross profit 38 55
Operating expense 29 39
Other income 3 1
Net profit before tax 12 18
Income tax 0 0
Net profit after tax 12 18
Gross profit margin (%) 25.7 28.3
Net profit margin (%) 8.2 9.0
Baht in millions
Essex international (ESSEX)
Buy—ESSEX’s first half performance was impressive Despite worldwide economic recession, the company managed to record a sales growth of 43.2 percent over the same period of 1992, while net profit increased 22.8 percent. This was attributable mainly to the economic recovery in the US, which has always been the company’s major market.
ESSEX is a subsidiary of Town & Country of the US which holds 70 percent of the total shares. The company’s products are exported mainly to the US, which accounts for 70 percent of total exports while the remainders are sent to Europe, Japan and Australia. ESSEX plans to set up a factory in China, where labor costs are cheaper. The company wills also apply for promotional privileges from the country’s Board of Investment. However, details have yet to be finalized. With the US economy beginning to recover, we expect the company to register a strong growth in its sales during 1993 and 1994. Nevertheless, the company’s earnings are not expected to grow as much in 1993, as the BOI’s promotional privileges for its plant expired in September, 1993. ESSEX’s new plant is also under BOI privileges. Considering the company’s stock.
ESSEX—First half performance
1992 1993
Sales 236 338
Cost of sales 187 274
Gross profit 49 64
Operating expense 22 27
Other income 6 4
Net profit before tax 32 41
Income tax 0 2
Net profit after tax 32 39
Gross profit margin (%) 20.7 19.0
Net profit margin (%) 13.4 11.5
(Baht in millions)
Oriental lapidary (O-LAP)
Sell—O-LAP’s half-year sales for 1993 grew 18.9 percent, while earnings dived 42.1 percent. Gross margin also fell, from 24.9 percent to 22.4 percent, due mainly to the decline in diamond prices. The company’s other income, which is comprised mainly of interest income, also dropped sharply, from B15.8 million ($632,000) to B4 million ($160,000), as the company’s affiliates repaid their loans to O-LAP and the company used the amount to pay for the construction of the O-LAP Tower.
Foreseeing that the prospects for the diamond industry remain bleak, O-LAP has tried to diversify into the property development market through the development of O-LAP Tower, which is still under construction. However, this seems to be the wrong move, as local office space is still facing a serious oversupply and is not expected to see any marked improvement within the upcoming years. Intense competition also results in serious rate cuts. We therefore expect no returns from such investment within the years to come. Looking at the company’s grim prospects during the next two years, our recommendation is therefore to sell the stock.
O-LAP—First half performance
1992 1993
Sales 330 392
Cost of sales 248 304
Gross profit 82 88
Operating expense 41 55
Other income 32 9
Net profit before tax 73 42
Income tax 22 13
Net profit after tax 51 30
Gross profit margin (%) 24.9 22.4
Net profit margin (%) 15.5 7.5
(Baht in millions)
Pranda Jewelry (PRANDA)
Hold—PRANDA’s performance for the first half of 1993 was a bit disappointing. Sales inched up 4.6 percent, while earnings tumbled 43.4 percent. The company attributed this to the worldwide economic recession, which resulted in lower-than-expected sale, as well as to the increased selling and administration expenses from its heavy expansion into the European and the US markets and from employees’ salary adjustments. The company’s gross margin also dropped, from 34.4 percent to 26.2 percent. Net profit margin therefore sank to a record low of 13.5 percent, compared to 25.0 percent during the same period in 1992
PRANDA is actually one of the country’s best-managed jewelry companies. Not only being one of Thailand’s leading exporters of jewelry products, the company’s management has proved to be competent, with its long experience in the industry. Nevertheless, we do not expect to see any excitement in the company’s performance during the next two years. PRANDA’s tax-free privileges from the BOI for its first plant expired in 1992, and those for the super gold plant will expire after 1994. The company has already applied for BOI promotional privileges for its new plant in the Saranaree Industrial Zone, Nakorn Rachasima. This new plant, located in Zone 3, will be entitled to several privileges by the BOI under its policy to promote regional investment. PRANDA’s profit will also be squeezed by increases in its operating expenses incurred from heavy expansion both locally and abroad. These investments are expected to provide returns to the company in the long run. We therefore recommend current investors hold the stock for long-term investment, while those who are looking for growth stocks should turn to other stocks on our “buy” list.
PRANDA—First half performance
1992 1993
Sales 483 505
Cost of sales 317 373
Gross profit 166 132
Operating expense 46 75
Other income 5 11
Net profit before tax 125 68
Income tax 4 0
Net profit after tax 121 68
Gross profit margin (%) 34.3 26.2
Net profit margin (%) 25.0 13.5
(Baht in millions)
Sawang export (SAWANG)
Buy SAWANG’s half-year results were inspiring. Sales surged 78.9 percent, while earnings soared 33.1 percent over the corresponding period of the preceding year. This was attributed mainly to the inclusion of jewelry sales into the company’s account beginning in 1993. (Formerly, jewelry sales were under the book of Sawang Jewelry Manufacturer (SJM), its affiliate. However, following the group’s restructuring in the early part of 1993, SAWANG will engage SJM to manufacture jewelry only and will export the products itself.) In addition, SJM has recently increased its capacity, enabling SAWANG to supply increasing incoming orders.
Though SAWANG’s EPS is expected to drop sharply in 1993, mainly as a result of dilution incurred from the company’s recent capital increase, from B120 million to B240 million ($4.8 million-$9.6 million), the stock still rates a “buy.” The company is expected to register solid earnings growth during the next two years, mainly from the recent restructuring and from SJM’s capacity expansion. In addition, the company’s gross margin is expected to improve as jewelry products recently added to its product lines yield higher margin than its traditional gem products. The group has recently planned to increase its capacity by setting up a new jewelry manufacturing factory, with an investment of B100 million ($4 million). However, details have yet to be finalized.
SAWANG—First half performance
1992 1993
Sales 232 415
Cost of sales 198 333
Gross profit 34 82
Operating expense 11 25
Other income 35 30
Net profit before tax 58 87
Income tax 7 20
Net profit after tax 51 68
Gross profit margin (%) 14.8 19.8
Net profit margin (%) 22.0 16.3
(Baht in millions)
Thailand’s gem and jewelry exports
1991 1992 1993
US$ % US$ % Jan-Aug
(million) change (million) change $ (million)
Diamonds 425.12 +32.90% 379.50 -10.64% 311.87
Gemstones &pearls 513.32 -8.79% 444.86 -13.23% 308.95
Jewelry 498.59 -2.72% 640.96 +28.55% 419.81
Imitation Jewelry 57.73 +2.74% 70.21 +21.62% 43.55
Others 40.97 +32.21% 18.14 +55.72% 39.37
Total 1,535.73 +3.60% 1,593.67 +3.77% 1,123.54
Source: Department of Business Economics
US$ 1=B25
Thailand’s gem and jewelry imports
1991 1992 1993
US$ % US$ % Jan-Aug
(million) change (million) change $ (million)
Diamonds 832.46 +12.06% 492.96 -40.79% 414.36
Gemstones &pearls 882.74 +123.14% 138.88 -88.84% 105.30
Jewelry 183.97 -25.62% 223.78 +21.64% 187.03
Imitation Jewelry 34.34 -9.10% 53.68 +56.31% 29.22
Others 205.24 +415.28% 72.65 +64.60% 51.06
Total 2,141.75 +46.22% 981.92 +54.15% 786.98
Source: Department of Business Economics
US$ 1=B25