Loss in non-core business and lower than expected performance in 2019

The company reported 2019 results: revenue of HK $17.736 billion, down 5.7% from a year earlier, and net profit of HK $644 million (HK $0.95 per share), down 36.4% from a year earlier, lower than our expectations, mainly due to a loss of HK $372 million from the brokerage business. Jewelry retail accounted for 92% of revenue, retail sales fell 5%, and profits increased 6% compared with the same period last year.

From a regional point of view, sales in Hong Kong and Macao fell 16 per cent year-on-year, and same-store sales fell 12 per cent year-on-year (gold and non-gold jewelry same-store sales fell 16 per cent and 21 per cent respectively, mainly due to a decline in passenger traffic in the second half of 2019). Much lower than the level of the first half (overall growth of 2%, mainly due to the contribution of watch sales, gold products and jewelry same-store sales growth fell 4% and 2%, respectively). Mainland sales (in renminbi) rose 9 per cent year-on-year, accounting for 60 per cent of jewelry revenue in 2019 (54 per cent in 2018), while same-store sales fell 1 per cent year-on-year.

The rise in gold prices has delayed consumption, and the decline in gem jewelry sales narrowed month-on-month in the second half of 2019. The total number of stores at the end of the year was 606 (120 new stores opened and 20 stores closed in 2019). E-commerce accounts for about 16% of domestic sales.

Financial profile: gross profit margin rose 2.3 percentage points to 26.9%. The operating cost ratio increased 1.6ppt to 19.6%. The cash turnover period was extended by 39 days to 247 days.

Trend of development

Due to the epidemic, although most stores in Hong Kong and Macao are still open from January to March, their business hours have been shortened. Same-store sales fell 44 per cent in the first two months of 2020, partly offset by store rent reductions. 77% of the stores in the mainland were closed in the first two weeks of February, and same-store sales fell 45% in the first two months of 2020. More than 95% of the stores resumed business in late March, but the business hours of some stores were shortened. In addition, the company has adopted stricter cost and inventory controls and is renegotiating store rents.

Profit forecast and valuation

Taking into account the impact of the epidemic, we lowered our 2020 earnings forecast by 14% to HK $1.25 per share and introduced a profit forecast of HK $1.43 per share in 2021. The current share price corresponds to 6.2 times 2020 and 5.5 times 2021 earnings. We maintain our neutral rating, lowering our target price by 9% to HK $8.76 (corresponding to 7 times 2020 price-to-earnings ratio), which is 12% upside from the current share price.

Risk.

Retail environment remains in the doldrums