Incident: Chow Tai ?$#@$ disclosed FY25H1 results. FY25H1 revenue was -20% to HK$39.41 billion, and net profit to mother was -44% to $2.53 billion, in the middle of the previous performance guidance range.

FY25H1 revenue was weighed by high fluctuations in gold prices, but one-price products performed well: the company achieved revenue of HK$39.41 billion/ -20% YoY in the first half of FY25. By region, Mainland direct sales, Mainland wholesale, Hong Kong and Macau revenue were -22%, -16%, and -28%, respectively. According to product classification, gold jewelry, jewelry settings, and watches were -22%, -20%, and -13%, respectively. Among them, the price gold jewelry performed brilliantly +118% year-on-year, and its share increased rapidly from 4.4% to 12.0%.

Gross margin improved significantly due to the impact of gold prices and pricing strategies, and negative operating leverage dragged down the profit margin level:

FY25H1's gross margin increased 6.5 pct to 31.4% year over year, mainly due to higher gold prices and an increase in the share of single-price products with higher gross margins, but some were hampered by the increase in the share of the wholesale business. The company's sales and administrative expenses ratio was 15.2%, +2.8pct year-on-year. Mainly due to declining revenue and negative operating leverage effects, the company's rigid expenses accounted for about 60%. Driven by a sharp increase in gross margin, the company's FY25H1 OPM increased by 4.0pct to 17.2%, achieving net profit to mother of HK$2.53 billion, or -44% year-on-year. The corresponding net profit margin to mother was 6.4%, or -2.8pct year on year.

Terminal sales have been better than expected since October, and management expects the decline in revenue to narrow in the second half of the fiscal year: terminal sales performance in the Mainland, Hong Kong and Macau markets has been better than expected since October, and the growth rate has improved compared to FY25Q2, mainly due to price adjustments for pre-Double Eleven products and price adjustments in mid-late October to stimulate consumers to spend early and spread the word. Management anticipates a decline in revenue for the second half of the fiscal year for low teens, and for mid-high teens for the full year. It is expected that gross margin will continue to improve in the second half of the year. The gross margin for the whole year is expected to increase by 4.5-5 points year-on-year, while maintaining strict expenses. OPM is expected to increase by 2.5-3 points throughout the year. Furthermore, in terms of channels, management expects the number of net closing stores to be around 400 throughout the year, including 239 Chow Tai Fu Jewellery stores in mainland China in the first half of the fiscal year. It is expected that net customs will be kept within 200 during the peak season of the second half of the fiscal year.

Profit forecast and investment advice: In the short term, the company's flow is under pressure in an external environment with high fluctuations in gold prices and weak consumption, but gross margin is affected by product pricing strategy optimization and rising gold prices. At the same time, the company will continue to implement strict cost management and prudent capital management to ensure profitability and cash flow under challenging market conditions. In the medium to long term, the company's brand advantages are remarkable. Under the five major strategic policies of “brand transformation, product optimization, acceleration of digital transformation, improvement of operational efficiency, and strengthening talent development”, it is expected to maintain its leading position in the market through improved store efficiency. We expect the company's net profit to be HK$5.6.8 billion for fiscal year 25 and 26, maintaining a “recommended” rating.

Risk warning: the consumer environment continues to weaken; gold prices fluctuate sharply in the short term; industry competition intensifies