Chow Tai Fook Jewellery Group Earnings Dragged by Retail Sentiment in Hong Kong, Gold Price Jump

Equity Research October 20, 2019 Chow Tai Fook Jewellery Group Earnings dragged by retail sentiment in Hong Kong, gold price jump Company Update Maintain OUTPERFORM What's new Ticker 01929.HK Chow Tai Fook (CTF) announced 2QFY20 (year ends March 31) CICC investment rating OUTPERFORM operating data with RSV growing 4% on the Chinese mainland China Last close HK$6.58 and falling 35% YoY in Hong Kong and Macau. SSSG declined 7% in on CICC target HK$7.97 the Chinese mainland and 42% in Hong Kong and Macau (1QFY20: up 11% on the Chinese mainland and down 11% in Hong Kong and 52wk price range HK$8.31~5.62 Macau). SSS volume fell 21% and 44% on the mainland and in HK and Market cap (bn) HK$66 Daily value (mn) HK$46.11 Macau. CTF also announced that it would record an unrealized loss Shares outstanding (mn) 10,000 of HK$800–HK$1bn in 1HFY20, amid the rising mark-to-market value Free float (%) 100 of its gold loans due to rising international gold prices, and this could Daily volume (mn sh) 7.08 weigh on interim results. Business sector Gaming & Luxury Goods Comments 01929.HK HSCEI By products: SSSG of gem-set jewelry was flat on the mainland and 140 declined 35% in Hong Kong and Macau. The SSSG of gold products fell 130 15% on the mainland and 49% in Hong Kong and Macau. 120 Price and volume: The ASP of gem-set jewelry rose 5% and 11% on 110 the mainland and in Hong Kong and Macau while sales volume of fell (%) Value Relative 100 5% and 42% YoY; and the ASP of gold products rose 26% and 8%, with 90 the sales volume declining 32% and 53%. Average international gold 2018-10 2019-01 2019-04 2019-07 2019-10 prices rose 21% YoY. By channel: CTF opened 242 offline shops in 2QFY20, with the total (HK$ mn) 2018A 2019A 2020E 2021E number of POS reaching 3,490. On the Chinese mainland, online Revenue 59,156 66,661 67,683 71,816 retail sales value grew 9%, while volume declined 4%. (+/-) 15.4% 12.7% 1.5% 6.1% Impact of rise in gold prices: Gold loan contracts, aiming at hedging Net profit 4,095 4,577 4,192 4,809 against gold price fluctuations (with a hedging ratio of around 60%), (+/-) 34.0% 11.8% -8.4% 14.7% were revalued amid rising gold prices. The loss was partially due to a EPS 0.41 0.46 0.42 0.48 BPS 3.34 3.08 2.89 3.17 timing difference on the recognition of the impact of changes in gold price between gold inventories and loans. Core operating profit DPS 0.42 0.60 0.21 0.24 remained in line YoY for 5MFY20. CPS 0.23 0.55 0.84 0.39 P/E 16.1 14.4 15.7 13.7 Valuation and recommendation P/B 2.0 2.1 2.3 2.1 We cut our FY20 and FY21 EPS forecasts 17.5% and 10.6% to EV/EBITDA 9.7 9.1 9.3 8.2 HK$0.42 and HK$0.48 (-8.4% and +14.7% YoY) on sluggish consumer Dividend yield 6.4% 9.1% 3.2% 3.7% sentiment in Hong Kong and rising gold prices. CTF is trading at 16x ROAA 7.7% 7.6% 6.9% 7.6% and 14x FY20e and FY21e P/E. Maintain OUTPERFORM on attractive ROAE 12.6% 14.3% 14.0% 15.9% valuation, rich brand equity, and a resilient trend on the Chinese mainland. We cut our TP 18.5% to HK$7.97 (19x FY20e P/E) on earnings forecast adjustment. Our target offers 21% upside. Risks: Fluctuations in gold prices; terminal sales slowdown. Source: Wind, Bloomberg, Corporate filings, CICC Research Haiyan GUO Jinfeng QIN Wenhui SONG Analyst Associate Associate [email protected] [email protected] [email protected] SAC Reg. No.: S0080511080006 SAC Reg. No.: S0080519060001 SAC Reg. No.: S0080119080073 SFC CE Ref: AIQ935 Please read carefully the important disclosures at the end of this report CICC Research: October 20, 2019 Financial summary Financial statement (HKD mn) 2018A 2019A 2020E 2021E Financial ratios 2018A 2019A 2020E 2021E Income statement Growth ability Revenue 59,156 66,661 67,683 71,816 Revenue 15.4% 12.7% 1.5% 6.1% COGS -42,943 -48,059 -49,744 -52,282 Operating profit 34.0% 10.7% -8.9% 14.4% Selling expenses -8,239 -9,038 -9,205 -9,767 EBITDA 29.1% 11.2% -4.9% 11.7% Administrative expenses -2,682 -2,987 -3,033 -3,218 Net profit 34.0% 11.8% -8.4% 14.7% Other ops income (expense) -48 -57 -58 -62 Profitability Operating profit 5,995 6,640 6,046 6,914 Gross margin 27.4% 27.9% 26.5% 27.2% Finance costs -163 -288 -208 -218 Operating margin 10.1% 10.0% 8.9% 9.6% Other income (expense) 0 0 0 0 EBITDA margin 11.5% 11.4% 10.7% 11.2% Profit before income tax 5,832 6,352 5,837 6,696 Net margin 6.9% 6.9% 6.2% 6.7% Income tax 1,629 1,668 1,547 1,774 Liquidity Minority interest 108 107 98 113 Current ratio 2.38 1.96 1.96 1.87 Net profit 4,095 4,577 4,192 4,809 Quick ratio 0.69 0.52 0.66 0.58 EBITDA 6,816 7,582 7,211 8,056 Cash ratio 0.38 0.28 0.40 0.34 Recurrent net income 4,095 4,577 4,192 4,809 Liabilities / assets 40.8% 49.5% 49.5% 51.8% Balance sheet Net debt / equity net cash 7.7% 0.9% net cash Cash and bank balances 7,944 7,641 10,298 10,843 Return Trade and bill receivables 6,410 6,639 6,610 7,448 RoA 7.7% 7.6% 6.9% 7.6% Inventories 34,929 39,486 33,562 40,922 RoE 12.6% 14.3% 14.0% 15.9% Other current assets 28 12 12 12 Per-share data Total current assets 49,312 53,778 50,483 59,225 EPS (HKD) 0.41 0.46 0.42 0.48 Fixed assets and CIP 5,341 5,488 5,545 5,512 BPS (HKD) 3.34 3.08 2.89 3.17 Intangible assets and others 2,917 2,971 2,810 2,762 DPS (HKD) 0.42 0.60 0.21 0.24 Total non-current assets 8,258 8,459 8,355 8,274 Cash flow per share (HKD) 0.23 0.55 0.84 0.39 Total assets 57,570 62,237 58,838 67,499 Valuation Short-term borrowings 5,823 7,460 7,960 7,960 P/E 16.1 14.4 15.7 13.7 Trade and bill payables 2,508 3,205 2,708 3,507 P/B 2.0 2.1 2.3 2.1 Other current liabilities 12,388 16,806 15,113 20,150 EV/EBITDA 9.7 9.1 9.3 8.2 Total current liabilities 20,719 27,471 25,781 31,617 Dividend yield 6.4% 9.1% 3.2% 3.7% Long-term borrowings 2,100 2,597 2,597 2,597 Other non-current liabilities 653 767 767 767 Total non-current liabilities 2,753 3,363 3,363 3,363 Total liabilities 23,472 30,834 29,144 34,981 Share capital 10,000 10,000 10,000 10,000 Retained profit 23,423 20,751 18,943 21,656 Shareholders' equity 33,423 30,751 28,943 31,656 Minority interest 674 652 750 863 Total liabilities & equity 57,570 62,237 58,838 67,499 Cash flow statement Pretax profit 5,832 6,352 5,837 6,696 Depreciation & amortization 821 943 1,165 1,142 Change in working capital -4,358 -2,460 2,763 -2,361 Others 3 657 -1,339 -1,556 Cash flow from operations 2,298 5,492 8,426 3,921 Capital expenditure -1,084 -1,392 -1,061 -1,061 Others 80 83 139 159 Cash flow from investing -1,004 -1,309 -922 -901 Equity financing 0 0 0 0 Bank borrowings 1,131 2,134 500 0 Others -2,424 -6,619 -5,347 -2,474 Cash flow from financing -1,293 -4,486 -4,847 -2,474 Foreign exchange gain (loss) 0 0 0 0 Net changes in cash 1 -303 2,657 546 Source: Corporate filings, CICC Research Company description Chow Tai Fook Jewellery Group Ltd. was listed on the HKEx in December 2011 and has become the largest pure-play jeweler in Greater China by number of outlets. Their core business is manufacturing and sales of mass luxury and high-end luxury jewelry including gem-set products and gold products. The Group’s vertically integrated business model gives it an effective and tight control over the entire operation chain from raw material procurement, design, production, to marketing and sales through its extensive retail network. Please read carefully the important disclosures at the end of this report 2 CICC Research: October 20, 2019 Figure 1: Retail sales value growth by region 50% Sales growth HK and Macau Mainland China 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Note: Overall retail-sales value growth has not been disclosed since 1QFY17 Source: Company filings, CICC Research Figure 2: SSSG, by region 80% Overall SSSG HK and Macau Mainland China 60% 40% 20% 0% -20% -40% -60% Note: Overall retail-sales value growth has not been disclosed since 1QFY17 Source: Company filings, CICC Research.

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