Short-term terminal demand fluctuated, and FY2025Q2's RSV fell 21% year over year. The company disclosed the terminal retail sales situation in July-September 2024. The Group's RSV fell 21% year on year, with Mainland RSV falling 19.4% year on year, and RSV in Hong Kong, Macao and other markets falling 31% year on year.

The company simultaneously disclosed the FY2025H1 performance forecast: The company expects revenue to fall 18% to 22% year on year and net profit to fall 42% to 46% year on year from April to September 2024. After not considering the impact of the revaluation of gold loans, net profit fell 12% to 16% year on year. Fluctuations in terminal demand had a negative impact on the company's revenue. However, benefiting from the optimization of the product structure and the improvement of cost control efficiency, the adjusted profit margin will still improve year on year.

Mainland: From July to September 2024, Mainland RSV fell 21% year on year. We determined that the decline in RSV was due, on the one hand, to a decline in same-store sales due to weak consumption, while channel optimization led to a net closure of stores in Q2.

Same store: Fluctuations in the consumer environment compounded high gold prices, and same-store sales declined significantly. 1) By channel: Store efficiency helped to climb the slope, and the decline in sales of franchised stores was weaker than that of direct management. From July to September 2024, sales at direct stores in mainland China fell 24.3% year on year, and franchise stores fell 20.3%. We judge that the performance of the franchise business was superior to that of direct sales, mainly due to the opening of many new franchisees in the past, which led to a faster rise in store efficiency.

2) By product: High gold prices have put pressure on Kezhong jewellery sales, and the sales performance of priced products is excellent. In July-September 2024, same-store sales of gold jewelry and products fell 24.7%, while same-store sales of jewelry settings, platinum and K gold jewelry fell 27.6% year on year. Since 2024, the overall economic environment has fluctuated, and consumers' willingness to spend is weak. At the same time, facing a trend of high gold prices (gold prices rose 8% + in July-September), the sales performance of high-priced gold products declined sharply. Compared with the sales performance of one-price gold products during the period increased 7.8 pcts to 12.8% year on year. We judge that one-price products increased 7.8 pcts to 12.8% year on year. On the one hand, excellent sales performance mitigated the decline in terminal retail sales, and on the other hand, promoted an improvement in the company's gross margin.

Store opening: Store structure optimization, focusing on single store operation. By the end of September 2024, the company had 7113 Chow Tai ?$#@$ jewelry brand stores worldwide (6968 in the Mainland, 84 in Hong Kong and Macau, 61 in other markets), and in July-September, the company cleared 145 Chow Tai ?$#@$ jewellery stores in the Mainland. The company gradually slowed down the pace of opening stores, made careful decisions to open stores, and at the same time assessed existing stores and closed some inefficient stores.

Hong Kong, Macao and other regions: Short-term demand fluctuates, and subsequent consumption is expected to gradually improve. From July to September 2024, RSV in Hong Kong, Macau and other regions fell 31% year on year, sales at direct stores in Hong Kong and Macau fell 30.8% year on year, and same-store sales fell 36.1% year on year. According to the company's disclosure, the Hong Kong and Macau markets were affected by summer vacation trips and changes in the consumption patterns and preferences of mainland travelers during the period, leading to a sharp decline in sales.

FY2025's revenue is expected to decline 16%, while net profit to mother falls 10%. Fluctuations in the short-term consumption environment and high gold prices have had a negative impact on residents' jewelry consumption to a certain extent. However, according to our tracking since October, as the consumption environment improved marginally, the company's terminal sales decline may have narrowed compared to July-September; at the same time, in the face of high gold prices, the company continues to promote sales of high-margin pricing products. Taken together, we expect the revenue decline in the second half of the year to narrow compared to the first half of the fiscal year. Benefiting from the optimization of the product structure and the increase in gold prices, the annual profit margin is expected to improve year over year.

Profit forecast and investment advice: As a leader in the jewelry industry, the company emphasizes single-store operation, product-side optimization design, and consumer reach. We adjusted the company's net profit forecast for FY2025-2027 to 5.844/6.337/6.913 billion HK$5.844/6.337/6.913 billion, corresponding to FY2025 PE by 13 times, maintaining a “buy” rating.

Risk warning: risk of gold price fluctuations; increased risk of market competition; risk of exchange rate fluctuations.