We believe the market is disappointed at CTF's performance, as FY24 earnings were 14% below our estimates. Even unrealised loss on gold loans is excluded, the earnings and recent performance reflect a much weaker sales momentum in both mainland China and Hong Kong and Macau since 2024. We believe FY25 earnings may see challenges on few aspects: (i) a high base of FY24 due to pent-up demand; (ii) the overhang of Fed rate cuts and its impact on gold price; (iii) weak consumer sentiment, and (iv) CTF's own strategic transformation, especially on store opening. Hence, we believe a macro-driven turnaround is needed. Still, considering its generous dividend payout, we believe the downside risk would be limited after the recent share price correction. Downgrade to HOLD.
Key Factors for Rating
FY24 earnings a miss due to unrealised loss. Despite a rather resilient top-line (FY24 revenue +15% YoY; 2HFY24 +23% YoY), CTF's FY24 NP of HK$6,499m is 14% below our estimates. A key issue is the unrealised loss on gold loans of HK$2,489m, a mark-to-market accounting item related to CTF's gold hedging. It dragged reported GPM by 441bps to 16.8%. Excluding this, CTF's core operating profit was up 29% YoY to HK$12,163m, largely in-line and not bad in our view.
A very weak start for FY25. For Apr-May 2024, CTF's group retail sales value declined by 20%, with mainland China/HK& Macau segment declined by 19%/29% respectively. For same-store sales growth (SSSG), both region recorded -28%/-32%. Despite a high base in 2023, we believe this is much weaker than what the market expected, reflecting weak consumer sentiment. Mgmt. attributed it to high and staggering gold price, and expected it could take 1 or 2 quarters for the sentiment to recover. Hence, mgmt. expected SSSG for the full year of FY25 may record a mid-SD decline.
More complications unfolded under weak momentum. With regard to the HK$2,489m unrealised loss recorded in FY24, we believe it is not that concerning if sales momentum were good in FY25 as this could translate into good GPM when gold products are sold. Yet, we believe now it could take longer time to digest after weak 1QFY25. On top of that, operating deleverage could arise, at least in 1HFY25 when CTF maintains branding efforts and spending.
Wait for a turnaround in 2HFY25 as visibility fades. CTF also provides no guidance on its store expansion, emphasising the need of opening larger stores to lift store productivity. Hence, even CTF targets to achieve 100-200bps of organic GPM expansion, we believe the earnings visibility would be very limited in FY25, and its turnaround would largely depend on macro such as gold price.
Key Risks for Rating
Key downside risks: (i) keen competition among retailers resulting in higher retail discount; (ii) slower store expansion; and (iii) volatility in gold price leading to unexpected hedging losses.
Key upside risks: (i) much stronger same store sales with CTF's branding effort; (ii) strong store expansion; and (iii) unexpected hedging gains or strong GPM due to gold price movement.
Valuation
We cut our FY25 and FY26 EPS by 18%/16% to mainly factor: (i) weak sales momentum, as reflected by Apr-May 2024 SSSG figures, and (ii) slower store expansion for FY25-26. We now expect CTF to have a net addition of 45 stores in FY25, a much slower pace compared to FY23 (+1,574 stores) and FY24 (+136 stores)
Downgrade to HOLD on disappointing industry performance and CTF's limited earnings visibility. Our TP is lowered to HK$8.4, based on 12x FY25 P/E (previous: 18x). We apply a lower multiple as we believe a de-rating would occur given a much slower earnings growth (BOCIe: FY25-26: +8%/+9%). We believe CTF still deserves to be traded at a premium over peers, and hence we applied a PEG ratio of 1.5x when peers in retail segment may be traded at 1x PEG or below.
Nonetheless, we expect CTF would maintain a generous dividend payout to make its DPS to be at least HK$0.55, and this could limit its downside of share price.