Key points of investment

Performance: 24Q2 revenue -21%, profit -31%. Short-term performance was under pressure. The dividends were as bright as always, 24H1 revenue +1.5%, and net profit to mother -18.7%. Weak sales of gold and jewelry dragged down performance in the first half of the year. 1) 24H1: Revenue of 8.2 billion yuan (YoY +1.5%, same below), net profit of 0.6 billion yuan (-18.7%) to mother, net profit of 0.59 billion yuan (-17.3%) after deducting non-return net profit of 0.59 billion yuan (-17.3%). 2) 24Q2: Revenue of 3.13 billion yuan (-20.9%), net profit of 0.26 billion yuan (-30.5%) to mother, net profit of 0.25 billion yuan (-29.0%) after deducting non-attributable net profit of 0.25 billion yuan (-29.0%).

A cash dividend of 3 yuan will be distributed for every 10 shares in the medium term. In mid-2024, the company plans to pay a cash dividend of 3 yuan for every 10 shares and a cash dividend of 0.33 billion yuan. After the implementation of the mid-term dividend in 2024 is completed, the total cash dividend will reach 1.03 billion yuan during the year.

Revenue structure: Diamond inlay is declining, and high and wide fluctuations in gold prices affect terminal consumption and franchisee replenishment demand. Looking at channels, 24H1 achieved 0.96/5.93/1.19 billion yuan revenue respectively, +16%/-0.7%/+3.1% over the same period last year, accounting for 12%/72%/15%. The demand for replenishment of franchisees was clearly affected.

By product, 24H1 plain gold jewellery/inlaid jewelry/other jewelry/brand usage fees achieved revenue of 69.9/0.37/0.29/0.36 billion yuan, respectively, +3%/-29%/+66%/-15%, accounting for 85%/5%/4%/4%. Inlaid jewelry is still undergoing in-depth adjustments. Plain gold jewelry is under pressure in the short term, and the company has made efforts to achieve certain results in other jewelry such as pearls and colored treasures.

Profitability: Gross margin increased due to rising gold prices and inventory appreciation. Opening new self-operated stores increased sales expenses 24H1 gross margin -0.1 pp year-on-year, and net interest rate -1.9 pp. 1) 24H1: gross profit margin 18.4% (-0.1pp), net profit margin 7.3% (-1.9pp), sales expense ratio 6.5% (+1.6pp); 2) 24Q2: gross profit margin 22.9% (+3.9pp), net profit margin 8.3% (-1.1pp), sales expense ratio 8.9% (+3.5pp). 24Q2 gross margin benefited from the increase in inventory value brought about by the rise in gold prices. The opening of new direct-run stores increased sales expenses, and the net interest rate declined somewhat.

Channels continued to expand, boosting national treasures. The industry adjustment period focused on product strength and brand strength, and the net increase of 24H1 stores was 124 to 5,230, including a net increase of 112 franchised stores and a net increase of 12 self-operated stores. The company continued to expand its channels. During the industry adjustment period, the company continued to increase its IP cooperation. In 2024, Chow Tai Sang exclusively named “National Treasure” for the fourth season. Chow Tai Sang's National Treasure theme store opened well. IPs such as National Treasure and Chow Tai Sang International Art Jewelry have become popular categories in the industry.

Profit forecasting and valuation: With the promotion of the provincial model and the improvement of the store-type matrix, the expansion of stores is progressing steadily, and IP research and development of gold products promotes product strength and brand strength. Considering the pressure on pure gold and mosaic sales, the profit forecast was lowered. Revenue for 24/25/25 is expected to be 16.5/18.9/21.5 billion yuan, up 1.16%/14.85%/13.81% year over year; net profit to mother is 1.21/1.35/1.48 billion yuan, up -8.4%/11.7%/9.9% year over year, corresponding to PE 9.89/8.85/8.06X, maintaining the “buy” rating.

Risk warning: Gold prices fluctuate; store expansion falls short of expectations; industry competition intensifies, etc.