FY24 core operating profit meets our expectations
The company's FY24 (April 2023 to March 2024) revenue also increased 15% to HK$108.7 billion (19% increase excluding exchange rate effects), and core operating profit increased 29% to HK$12.2 billion, in line with our expectations. However, due to unrealized losses on gold loans, net profit to mother also increased 21% to HK$6.5 billion.
The company declared a final dividend of HK$0.30 per share, corresponding to the annual dividend rate of approximately 85%.
The performance of joining in mainland China was better than self-employment, and the gold category drove revenue growth. 2HFY24 revenue in mainland China increased 20% to HK$49 billion at a lower base. By channel, 2HFY24 own/franchise revenue increased by 11%/29%, respectively. Among them, 3QFY24 own/franchised stores also increased 23%/32%, respectively, but 4QFY24 increased -3%/+8% year-on-year after the base of 4QFY24 increased. 2HFY24 Mainland Chow Tai ?$#@$ jewellery retail outlets opened 6 self-operated stores and joined Jingguan 52. By category, the retail value of FY24 gold products increased by 23%, accounting for 82% of the total retail sales in the Mainland (vs. FY23 78%); the retail value of mosaic categories and watch products was -6%/+6%, respectively. The revenue of 2HFY24 in Hong Kong, Macau and other regions of China also increased 36% to HK$10.2 billion. Among them, 3-4QFY24 stores in Hong Kong and Macau, China increased 67%/5%, respectively, and 2HFY24 had a net increase of 4 stores.
Product structure affects gross profit performance, but operating leverage is obvious. Although the company's optimized pricing strategy and the rise in gold prices had a positive impact on gross margin, due to an increase in the share of gold products and franchise businesses with lower gross margins, the adjusted gross margin of 2HFY24 decreased by 3.0ppt to 22%. Benefiting from operating leverage (especially in Hong Kong and Macau), the 2HFY24 sales and management expense ratio decreased by 3.0ppt to 12%, and the core operating profit margin also decreased by 0.2ppt to 10%. An unrealized loss of HK$3 billion on 2HFY24 gold loans dragged down profits (vs. 2HFY23 of HK$1.8 billion), and the net profit margin also decreased by 1.0ppt to 3.3%.
Inventory turnover has accelerated, and operating cash flow has increased dramatically. By the end of FY24, the company's inventory turnover dropped by 20 days to 274 days, mainly due to good sales of gold products and seasonal holiday marketing and promotion activities. FY24's operating cash flow also increased 37% to HK$13.8 billion.
Development trends
High fluctuations in gold prices since April have affected consumer sentiment. In April-May, the Group's retail sales fell 20%, with retail sales in mainland China falling 19% (28%/19% for ownership/franchisees), while retail sales in Hong Kong, Macao and other markets also fell 29% (the same store in Hong Kong and Macau fell 32%). Management plans to improve the quality of store operations, but considering the current volatility in gold prices, FY25 revenue is expected to remain flat or increase slightly year over year.
Profit forecasting and valuation
Considering the negative impact of high gold prices on sales, the company's FY25/26 EPS forecast was lowered by 20% to HK$0.70/0.78. The current stock price corresponds to 13/12 times the FY25/26 price-earnings ratio, maintaining the outperforming industry rating. Considering the impact of short-term sales pressure on the valuation, the target price was lowered by 29% to HK$10.76, corresponding to 15/14 times the FY25/26 price-earnings ratio, with 14% upside compared to the current stock price.
risks
Gold prices fluctuated greatly, industry competition intensified, the retail environment fell short of expectations, and channel expansion fell short of expectations.