1HFY25 results are in line with our expectations

The company announced 1HFY25 results: revenue decreased 20% year over year to HK$39.4 billion; net profit to mother fell 44% year over year to HK$2.5 billion, in line with our expectations. The company declared a dividend of HK$0.2 per share, corresponding to a dividend rate of 79%; at the same time, it announced plans to repurchase shares not exceeding HK$2 billion.

High gold prices affect the same store, superimpose channel network optimization, and affect revenue performance. Consumer demand was pressured by high gold prices in the first half of the fiscal year, and the company's revenue fell 20% year over year. Among them, revenue from the mainland market fell 20% year on year, with net closing of 239 stores to 7,205 in the first half of the fiscal year, and 25%/20%; revenue from Hong Kong, Macao and other markets was -28% year over year; revenue from Hong Kong, Macau and other markets was -28% year over year, and the three net customs stores and the same store in Hong Kong and Macau in the first half of the year were -31% on a high basis. By category, revenue from weighted gold and inlay products fell 30% and 20% year on year, respectively. Revenue from priced gold jewelry bucked the trend and increased sharply by 118% year on year, and its share of total revenue rose rapidly to 12% (the share stabilized at 4-6% in 2020-2023).

The sharp increase in gross margin led to an increase in operating profit margins, but losses on gold loans affected net profit. Due to the rise in gold prices and the increase in the share of high-margin single-price products, gross margin increased sharply by 6.6ppt to 31.4% year on year; operating deleveraging increased the total sales and management expenses ratio by 2.8ppt year on year; and operating profit margin increased sharply by 4ppt year over year. However, the sharp rise in gold prices caused gold loans to record a loss of approximately HK$3.1 billion (small income in the same period last year), causing net profit to mother to fall 44% year over year.

Increase brand influence through brand transformation and differentiated product lines. The company's Chuanfu series of products launched in April 2024 contributed more than HK$1.5 billion in sales in the first half of the fiscal year, exceeding management expectations, and plans to continue to launch more one-price products with high gross margins and product differentiation in the future to consolidate its leading position in the industry through product innovation.

Development trends

From October 1 to November 18, 2024, Chow Tai Fook's turnover in mainland China, Hong Kong, Macau and other regions fell 14% and 20% year-on-year, with same-store sales falling 19% and 19% respectively. Management expects the decline in same-store sales to narrow in the second half of the fiscal year, and the pace of store closures will also slow down, and business fundamentals are expected to improve compared to the first half of the year.

Profit forecasting and valuation

Due to excessive fluctuations in gold prices, the company's FY25 EPS forecast was lowered by 18% to HK$0.48, and the FY26 EPS forecast was basically maintained at HK$0.69. The current stock price corresponds to 14/10 times the FY25/26 price-earnings ratio, maintaining the outperforming industry rating. Considering that the reduction in the company's net profit is mainly due to the non-cash program of gold loan losses, the operating profit performance has shown resilience, keeping the target price of HK$7.84 unchanged, corresponding to the 16/11 times FY25/26 price-earnings ratio, with 14% room to rise 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.