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.
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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.
