HONG KONG— Chow Tai Fook Jewellery Group Ltd. is buying U.S. diamond company Hearts on Fire Co. for $150 million, as the mass-market Hong Kong jeweler hopes to expand its catalog of high-end gems for Chinese consumers.
It is Chow Tai Fook's biggest acquisition since it went public in Hong Kong almost three years ago. The world's biggest jeweler, as ranked by its $15 billion market value, has the bulk of its vast retail network in mainland China. Chow Tai Fook's average selling price per transaction is roughly 4,000 yuan, or about $640, said company executive director Adrian Cheng.
Established in Boston in 1996, Hearts on Fire has a retail-partner network with more than 500 locations in 31 countries. Its outlets include 11 of the company's own boutiques: two in the U.S. and nine in Taiwan.
About 75% of the jewelry sales at Hearts on Fire last year were priced between $1,000 and $10,000, with most of the remainder carrying price tags above $10,000. Hearts on Fire had audited net sales of $104.8 million in 2013, up 5.5% from $99.3 million a year earlier.
"This is a premium, luxury product," said Chow Tai Fook Jewellery Managing Director Kent Wong on a conference call Wednesday. "This will expand our sales of premium gem-set products in the long run."
Chow Tai Fook will sell Hearts on Fire products in its retail network and will open the first branded boutique in China six months after the deal is completed.
The deal's closing date wasn't immediately available.
Chow Tai Fook, controlled by Hong Kong tycoon Cheng Yu-tung, who also controls real estate and other department stores in Hong Kong, currently has 2,077 points of sale, ranging from small stands in department stores to stand-alone boutiques. They are located mostly in mainland China's smaller second- and third-tier cities to meet demand from the country's growing middle class. Adrian Cheng said about 80% of sales are derived from these lesser cities, with the rest coming from the major cities such as Hong Kong, Beijing and Shanghai.
The retailer, based in Hong Kong, on Tuesday posted a 32% increase in profit to 7.3 billion Hong Kong dollars (US$942 million) for the fiscal year ended March 31.
Results were helped by strong sales of gold products earlier in the year, when the spot price of the precious metal fell into a swoon and spurred a rush of buying. Same-store sales of gold products rose 28%, while gem-set jewelry, such as diamond engagement rings, increased a more modest 8%.
On the conference call, Mr. Wong said growth for the group lies in the lower-tier inland Chinese cities. The company aims to open 200 new stores in mainland China this year, almost exclusively in smaller cities, the company said in its earnings statement Tuesday.
CLSA analyst Aaron Fischer remains bullish on the company, saying that the Hearts on Fire deal was "a positive surprise" and the gem category was integral to future profit growth.
"We're positive on the gem segment and its higher margins over gold products," he said, adding that he expects gem sales at the company to rise 10% this year. "Not many Chinese consumers know Hearts on Fire now, but if Chow Tai Fook markets the brand appropriately, they will."
However, Mr. Fischer doesn't expect the acquisition to have an immediate impact, as he expects the company to record lower revenue this year because of a decline in the number of tourists visiting Hong Kong from the mainland, an important source of shoppers.