The company actively optimizes channels, improves product structure, and maintains ratings for increasing holdings
Chow Tai ?$#@$ announced FY25Q1 business data on July 23. Retail sales at the group level fell 20.0% year on year, with sales in mainland China, Hong Kong, Macau and other markets falling 18.6% and 28.8%, respectively. We believe that the decline in sales was mainly due to short-term broad fluctuations in gold prices, which suppressed consumer demand. As gold prices stabilized and consumer sentiment picked up, retail sales growth is expected to resume. FY25Q1 Chow Tai ?$#@$ implemented channel optimization and brand upgrade plans, while developing piecework gold products (Q1 sales increased by more than 100% year over year).
Short-term gold price disturbances will not change the steadiness of Chow Tai Fook's business as a leading industry leader. We continue to be optimistic about the intensification of industry competition and the continued increase in Chow Tai Fook's market share. We expect the company's net profit from FY25-27 to reach HK$59.9\ 64.0\ 6.76 billion. Referring to the comparable company Wind, we agree that 10.24 xPE in 2024 is expected to fully benefit from increased concentration in the current round of industry competition, maintain a target price of HK$10.80 (corresponding to 18xPE), and maintain an increase rating.
Gold price disturbances put pressure on same-store growth, but the product structure improved month-on-month FY25Q1. Chow Tai Fook's SSSG in mainland China/ Hong Kong and Macau and other markets was -26.4%/-30.8%, respectively. Among them, inlay/plain gold in the mainland market was -31.7%/-27.9%, respectively, and inlay/plain gold in Hong Kong, Macao and other markets were -31.3%/-33.0%, respectively. Due to the fluctuation in gold prices, the company's same-store sales were under pressure, but thanks to Chow Tai Fook's efforts in piece-rate products and the implementation of the brand upgrade plan, the product structure of regional stores improved: 1) piece-rate gold sales with high gross margin increased significantly in the mainland China market, accounting for 10.1 pct to 15.8% year on year; 2) the share of sales of pure gold products with relatively low gross margin in the Hong Kong and Macau market fell 1.7 pct to 74.0% year on year.
Competition in the industry has intensified, and the company has slightly optimized channels to better cope with future development and wide price fluctuations in industry prices, and since the jewelry industry franchise model is a typical “heavy asset, heavy operation, and heavy turnover” business model. At a stage where sales are slowing down, the industry will close stores to “reduce leverage.” FY25Q1 actively optimizes the store channel network, focusing on improving the sales and profitability of individual stores, opening 89 new stores, closing 185 stores, and closing 95 stores. As of FY25Q1, the company has 7504/375 stores in mainland China, Hong Kong, Macau and other regions. As survival of the fittest in the industry accelerates and stores are cleared, Chow Tai Fook's market share is expected to rise in the long term.
The increase in the board chairman's holdings shows confidence in the company's long-term development. The FY25 dividend rate reached 6.4% in June. Zheng Jiachun, chairman of the board of directors, continued to increase his holdings of the company's shares. As of June 24, Zheng Jiachun had increased his holdings of the company's shares by 10.756 million, demonstrating his confidence in the company's long-term development. As of July 23, the company's Hong Kong stock market closed at HK$79 billion. If we refer to the FY24 dividend rate of 85% and the expected net profit of FY25 to HK$5.99 billion, the dividend rate reached 6.4%, which already has a high allocation cost ratio.
Risk warning: Gold price fluctuations, company store adjustments, and consumer confidence recovery falls short of expectations.