Investment advice
The company's 1HFY24 revenue increased by 34% to HK$7.5 billion, and net profit from its parent increased by 43% to HK$900 million. The performance was better than our expectations, mainly due to gross margin performance that exceeded expectations. Benefiting from the rapid recovery of business in China, Hong Kong and Macao, the company's fundamentals continued to improve, and we raised the company's rating to outperform the industry.
The reasons are as follows:
Business in Hong Kong, Macao and overseas in China has achieved rapid recovery. Revenue from retail business 1HFY24 increased by 56% to HK$6 billion. Among them, Hong Kong, Macao and overseas regions of China benefited from improved passenger flow after customs clearance between Hong Kong and Macao, and revenue increased by 67% to HK$4.7 billion; revenue from mainland China also increased 24% to HK$1.3 billion. The net number of stores opened during the retail business period ranged from 6 to 159. Revenue from the wholesale business of 1HFY24 also fell 21% to HK$900 million. Among them, revenue from Hong Kong, Macao and overseas regions of China also increased by 10%. Mainland China was dragged down by relatively weak demand for diamond products, and revenue also fell 23%. The net opening of the wholesale business ranged from 178 to 3,130. The revenue of the brand business 1HFY24 was HK$500 million, which was basically the same as the previous year.
The rise in gold prices and the increase in the share of retail business led to an increase in gross margin. By category, benefiting from rising gold prices, the revenue of 1HFY24 gold and platinum products increased 55% to HK$4.9 billion, which was the main driving force for the company's revenue growth; price-priced jewellery revenue also increased 9% to HK$2.1 billion. In terms of gross margin, benefiting from the increase in gold prices, the gross margin of 1HFY24 gold and platinum products increased by 3.8ppt; due to the increase in the share of retail business with high gross margin, the gross margin of priced jewelry products increased by 5.9ppt. The company's 1HFY24 gross margin increased by 1.7ppt to 27.8%. Although government subsidies were reduced during the period (1HFY24 HK$39.94 million vs. 1HFY23 HK$96.13 million), the operating leverage-driven sales and management expenses ratio also decreased by 0.3ppt, and the operating profit margin increased by 0.5ppt to 15.2%.
Since October, the Hong Kong and Macau business has continued to grow rapidly. From October to the first three weeks of November, the company's Hong Kong and Macau business continued to grow at a high rate, with the same increase of 50% + under a low base; the mainland business with the same store was basically the same year on year, with the same double-digit increase in the first three weeks of November. The company plans to actively promote price-priced gold and other products to improve the sales performance of price-priced jewelry and increase its efforts to expand overseas markets.
What is our biggest difference from the market? The company was the Hong Kong stock jewelry company with the highest share of revenue from Hong Kong and Macao before the pandemic. We believe that benefiting from the continued recovery of Hong Kong and Macao business, it is expected to show better operating leverage than that of its peers.
Potential catalysts: China's Hong Kong and Macau business continues to recover rapidly, the share of direct business increases, and combined operating leverage brings performance that exceeds expectations; the company continues to pay dividends with a high dividend rate.
Profit forecasting and valuation
Considering the rapid recovery of the company's business in China, Hong Kong and Macau and the gross margin performance that exceeded expectations, the company's FY24/25 EPS forecast was raised by 11%/9% to HK$3.04/3.45. The current stock price corresponds to 7/6 times the FY24/25 price-earnings ratio. It was upgraded to outperform the industry rating, and the target price was raised by 11% to HK$27.36 accordingly, corresponding to 9/8 times the FY24/25 price-earnings ratio, with 25% room for growth compared to the current stock price.
risks
The price of gold fluctuated greatly, competition in the industry intensified, and the terminal retail environment fell short of expectations.