Buy this ASX 200 stock for its 'massive' China opportunity

This rapidly growing stock has a huge opportunity in China according to Bell Potter.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The China market is one of the most lucrative in the world. If a company can gain a foothold in the world's second largest economy, it has the potential to supercharge its sales and profits.

One ASX 200 stock which recently embarked on an extension into the country is fashion jewellery retailer Lovisa Holdings Ltd (ASX: LOV).

It opened its first store in China late last year and this could be followed by significantly more in the future.

That's the view of analysts at Bell Potter, which have been digging deep into its expansion plans.

girl holding out a Chinese flag through a window

Image source: Getty Images

What is the broker saying about this ASX 200 stock?

Bell Potter is very positive on the company's opportunity in the country. It highlights that China's fashion jewellery market is estimated to be worth US$13 billion a year, which is 25 times the size of Australia's market. It commented:

While China's fashion jewellery market alone estimated at ~US$13b is ~25x as that of Australia, we estimate a China based store network opportunity of 15-20x as Australia's total 550-600 stores retailing fashion jewellery. We've seen international fast fashion brands such as H&M and Zara growing their footprint to ~375 and ~200 respectively within 15-20 years since opening the maiden store in Mainland China.

The good news is that the early signs are positive for the ASX 200 stock in the massive market. Bell Potter notes that consumer feedback has been encouraging. It said:

We have assessed the latest customer reviews for Lovisa from Mainland China on the dominant social media app, Xiaohongshu (Little Red Book), since opening of the first Chinese store in December. Majority of the reviews are favourable, focusing on the attractiveness of styles/designs, price point and perceiving Lovisa products as value for money while the less conductive feedback driven by product durability and a close comparison to unbranded online substitutes.

Based on the above, Bell Potter believes that Lovisa could reach 100 stores in the country within 4 to 6 years. It adds:

We believe a 4-6 year timeline to reach 100 stores in Mainland China is justified given the US market blueprint and management experience in the region.

And if it does, the broker says it could add an estimated $40 million to $50 million to group revenues. Furthermore, due to lower operating costs, this could have a greater impact on its profitability.

Should you invest?

In light of the above, Bell Potter has reiterated its buy rating with an improved price target of $26.50. This implies potential upside of 13% for investors.

It also expects a 2.6% dividend yield in FY 2024, boosting the total potential return beyond 15%. It concludes:

We view LOV's premium to the peer group as justified (~25x FY25e P/E, BPe), considering the gross margin outlook, store opportunity upside and ability to execute as a strong player in the fashion jewellery market, maintain BUY.

Motley Fool contributor James Mickleboro has positions in Lovisa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa. The Motley Fool Australia has recommended Lovisa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Broker Notes

Smiling man sits in front of a graph on computer while using his mobile phone.
Broker Notes

Buy, hold, sell: Collins Foods, Netwealth, and Pro Medicus shares

How does the broker rate these popular shares this month?

Read more »

A smiling florist gets some good news on his laptop and tablet.
Broker Notes

What is Morgan's view on Navigator Global Investments shares after update

Morgans sees further upside for this stock.

Read more »

Cheerful businessman with a mining hat on the table sitting back with his arms behind his head while looking at his laptop's screen.
Broker Notes

What are brokers predicting for BHP shares over the next 12 months?

Have the mining giant's shares reached their peak? Or can they keep climbing? Let's find out.

Read more »

A young woman wearing a red and white striped t-shirt puts her hand to her chin and looks sideways as she wonders whether to buy ASX shares
Broker Notes

Buy, hold, sell: Aristocrat, Lovisa, Bendigo Bank shares

Here's what some experts think.

Read more »

A businesswoman on the phone is shocked as she looks at her watch, she's running out of time.
Broker Notes

Is this ASX 200 share a sell after announcing a $30-40 million EBITA hit?

Morgans has lowered its outlook on Worley shares.

Read more »

Buy, hold, and sell ratings written on signs on a wooden pole.
Broker Notes

Should you buy BHP shares ahead of the miner's production update?

BHP shares could see some big moves after the miner reports its March production results this week.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Broker Notes

Buy, hold, or sell? Coles, Wesfarmers, BHP shares

ASX 200 shares are in the red as the global oil shock continues to concern investors.

Read more »

Health professional working on his laptop.
Broker Notes

Are Orthocell shares a buy after crashing 7% yesterday?

These healthcare shares could be on discount right now.

Read more »