CTFJ's 1HFY25 (Apr - Sept 2024) revenue was down 20% while NP was down 44% YoY, largely in-line with the previous prelim figures. While retail sales have demonstrated sequential improvement in Oct - Nov 2024, we believe QTD performance is weaker than market expectations. Given weaker consumption, CTFJ is also scaling down its store network, and we estimate there will be a net closure of c.400 stores, or 5% YoY reduction of total store count in FY25. While we believe CTFJ would eventually gain foothold in the industry with its industry-leading products, we believe a challenging retail environment, combined with the volatility of gold price, could weigh on its near-term earnings visibility. Still, CTFJ has demonstrated its commitment to protect shareholders' return by maintaining high dividend payouts and announcing HK$2bn of buybacks, which could limit downside risk.

Key Factors for Rating

Weak 1HFY25 in-line as gold consumption under pressure. CTFJ's revenue was down 20% YoY to HK$39.4bn, while NP was down 44% YoY to HK$2.53bn, largely in-line with the prelim figures given in Oct 2024. The overall performance reflected weak retail sales value (RSV) in 1Q & 2Q (down- 20%/21% respectively), and some operating deleverage.

New hedging treatment affecting reported margins. It should be noted that CTFJ has adopted a new accounting treatment so that fair value changes of its gold loan (a hedging tool of its gold inventory) would no longer be included in COGS, but is now reported in "other gain/loss" below the line of OP. Hence, CTFJ's 1HFY25 GPM expanded strongly by 6.5ppts to 31.4%, thanks to strong gold price. OPM also expanded strongly by 4.0ppts because of this, and OP grew by 4.0% YoY. Still, NP was still down 44% YoY, as CTFJ recorded a total of HK$3,065m of fair value loss and revaluation loss related to gold loan. While this new treatment has no impact to the overall NP figures theoretically, we believe it could take time for the market to comprehend. On the other hand, in view of a more volatile gold price, CTFJ will also adjust down its hedging ratio to 50%- 60%, which also takes time to be reflected in future earnings.

Some sequential improvement in 3Q but not a strong rebound. During 1 Oct - 18 Nov 2024, same store sales growth (SSSG) of mainland China franchised stores/HK & Macau stores was down 12%/19%, showing some improvement over 2Q (-20%/31%). However, this reflected some worsening of performance versus the Golden Week (RSV down mid to high S.D), which may disappoint some investors. We believe the strength during early Oct could come from the short-term euphoria from a strong stock market performance, but consumer sentiment then subsided along with the market. We also view that an early Double-11 event in 2024 has also weighed on the figures in Nov.

Initiatives to lift RSV but short-term impact likely limited. Since 3Q, CTFJ has introduced more fixed-price products, as well as lifting its product pricing to maintain its healthy GPM and appeal supplicated consumers. For example, it has launched the CTF Rogue Collection with a RSV of HK$1.5bn within weeks of launch, which could be an encouraging sign of its recent product reform. However, we believe the overall willingness to buy gold among Chinese consumers may still be weak in 3QFY25 and 4QFY25, as it could take time for the stimulus to be effective, while consumers to be willing to buy more gold products at record gold prices.

Prudent guidance in view of challenging market. With the QTD performance in 3QFY25, mgmt. has given the follow guidance:

Revenue YoY decline will narrow in 2HFY25 (Oct 24 - Mar 2025) to low-teens. Hence, full year revenue may be down high-teens YoY.

Full year GPM will expand 450-500 bps under the new accounting treatment, due to higher gold price

OPM expansion will be 250-300 bps under the new accounting treatment, due to higher GPM but also operating deleverage

Full year net store closure in mainland China will be around 400, implying 2HFY25 closure will be fewer than 1HFY25 of 239.

Protecting shareholder return with stable payout and buybacks. CTFJ proposed an interim dividend payout of HK$0.2, or a payout ratio of 79%. We view this not bad, and expect the full year ratio could be maintained at similar level, as 2HFY25 cash flow would be better under seasonality. CTFJ also proposed a HK$2bn share buybacks scheme, which we view it positively. This is another rare occasion that CTFJ has proposed a buyback, which could reflect the confidence of the mgmt. Hence, we see it could limit the downside risks of the share price despite a tough retail landscape.

Key Risks for Rating

Downside risks: (1) unsuccessful multi-brand strategy; (2) deteriorated retail sell-through for core brand; (3) unexpected spike in spending, and (4) higher costs related to transactions.

Upside risks: (1) stronger-than-expected demand on gold jewellery; (2) strong gold price that allows higher-than-expected GPM; (3) strong cost control, and (4) unexpected gains related to hedging.

Valuation

We cut our FY25/26/27 EPS forecast by 3%/7%/6% to reflect weaker retail sentiment since Nov 2024, and the larger-than-expected store closure in FY25.

We view the industry consolidation of jewellery retailers could be longer than expected, given a more challenging macro environment. Hence, CTFJ, despite being an industry leader in both scale and product offerings, would still suffer in the near term, from both decline of RSV and store network scale. Maintain HOLD.

Our TP is lowered to HK$7.1, based on 10x FY2026 P/E (unchanged).