According to the site, CICC released a research report stating that due to significant hedging losses caused by gold price fluctuations, they lowered Chow Tai Fook's (01929) FY25 EPS forecast by 18% to HK$0.48. The basic FY26 EPS forecast of HK$0.69 is maintained, with an 'outperform industry' rating. Considering the company's net income adjustment is primarily due to gold loan losses, a non-cash item, the operating profit performance has shown resilience, maintaining the target price of HK$7.84.

From October 1 to November 18, 2024, Chow Tai Fook's mainland China, Hong Kong, Macau, and other regional sales declined by 14% and 20% year-on-year, with same-store sales down by 19% and 19% respectively. Management expects the same-store sales decline in the second half of the fiscal year to narrow, the pace of store closures to slow down, and anticipates an improvement in business fundamentals compared to the first half of the year.

CICC's main points are as follows:

1H FY25 performance meets the bank's expectations.

The company announced 1H FY25 results: a 20% year-on-year decrease in revenue to HK$39.4 billion; a 44% year-on-year decrease in attributable net income to HK$2.5 billion, in line with the bank's expectations. The company declared a dividend of HK$0.2 per share, corresponding to a payout ratio of 79%; and also announced a plan to repurchase shares worth no more than HK$2 billion.

High gold prices affecting same-store sales, combined with channel network optimization, impact revenue performance.

In the first half of the fiscal year, consumer demand was under pressure, combined with the rapid rise in gold prices, which suppressed the willingness to purchase jewelry. The company's revenue declined by 20% year-on-year, with mainland market revenue down by 19% year-on-year. The number of closed stores in the first half of the fiscal year increased by 239 to 7,205 stores, with a 25% / 20% decline in directly operated / franchised same-store sales; revenue from Hong Kong, Macau, and other markets declined by 28% year-on-year. In the first half of the year, there was a net closure of 3 stores in Hong Kong and Macau, with same-store sales declining by 31% on a high base. Looking at different product categories, revenue from weighted gold and inlaid products declined by 30% and 20% year-on-year respectively. The revenue from priced gold jewelry increased significantly against the trend, with a substantial increase of 118% year-on-year, rapidly rising to 12% of total revenue (stable at 4-6% from 2020 to 2023).

The significant increase in gross margin drove the improvement in operating profit margin, but net income was impacted by losses from gold borrowing.

Due to the rise in gold prices and the increased proportion of high-gross-margin fixed-price products, the gross margin increased significantly by 6.6 percentage points to 31.4% year-on-year; deleveraging operations resulted in a 2.8 percentage point increase in the total sales and management expense ratio year-on-year; the operating profit margin increased significantly by 4 percentage points year-on-year. However, the sharp increase in gold prices led to a loss of approximately 3.1 billion Hong Kong dollars from gold borrowing (compared to a small gain in the same period last year), resulting in a 44% year-on-year decline in net income attributable to equity holders.

Enhancing brand influence through brand transformation and differentiated product series.

The "Chuanfu" series products launched by the company in April 2024 contributed over 1.5 billion Hong Kong dollars in sales in the first half of the fiscal year, exceeding management's expectations. The company plans to continue launching more fixed-price products with high gross margin and product differentiation to innovate and solidify its leading position in the industry.

Risk

Significant fluctuations in gold prices, intensified industry competition, lower-than-expected retail environment, and slower-than-expected channel expansion.