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IBD article on FUQI
August 29, 2008
China Jeweler Up On Wealth, Rising Inflation
By DONALD H. GOLD
Consider a nation that embraces the free market (sort of) after decades of poverty. Suddenly, real wealth appears for the first time in most people's memories.
What will they demand with their first taste of consumer power? The answers so far are food, clothing, shelter, cell phones and jewelry.
Well, you seem surprised at the last two items. But you already knew that China Mobile (CHL) was a star from 2003 though 2007.
That makes sense. In a country as vast as China, where infrastructure is years behind the times, a land line can be expensive, hard to get — or simply unavailable.
But jewelry?
People from regions with histories of hyperinflation, as China suffered 60 years ago, often rely on gold and precious stones to protect their wealth.
Also, natural disasters, civil wars and invasions can force millions onto the road. Diamonds can be sewn into a pocket lining. Gold is the ultimate currency, wherever you end up.
So, combine a people that distrusts cash with the sudden influx of wealth and the highest inflation in years, and Shenzhen-based jewelry maker Fuqi International (FUQI) is sitting pretty.
Fuqi came public at $9 in October, as the stock market topped.
More recently, Fuqi formed a cup with handle, with a 10.91 buy point.
Fuqi posted triple-digit earnings growth in four of the past five quarters. Sales also have been strong.
Analysts predict Fuqi will boost its net 36% this year, 30% next year.
Return on equity is 17%, meeting the desired minimum. But margins are slim — about 8%.
What's more, Fuqi is a microcap, valued at $232 million. It trades 232,000 shares a day — not quite as liquid as you'd like to see. And, at $10 a share, it's a low-priced issue.
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