Broker's View

Jeweller Chow Tai Fook set to see mild but bumpy recovery in 2017, say analysts

Earlier Lunar New Year boosted same-store quarterly sales in mainland 4pc while in Hong Kong and Macau they slipped 2pc

PUBLISHED : Monday, 16 January, 2017, 4:11pm
UPDATED : Monday, 16 January, 2017, 10:28pm

Chow Tai Fook Jewellery, China’s largest jeweller by market value, is expecting a mild but bumpy recovery this year, despite a strong sequential uptick in same-store sales in mainland China, Hong Kong and Macau during the October to December period last year.

Hong Kong-listed Chow Tai Fook said its same-store sales compared with the same period last year in mainland China during the period rose four per cent while in Hong Kong and Macau they slipped two per cent, showing a strong improvement from the first half of the financial year 2017, according to the company’s latest quarterly figures.

Morgan Stanley said in a research report that although the increase seemed decent in the short term, they viewed it as “lower-quality” recovery as it was mainly driven by the sale of more gold items, an earlier Lunar New Year , as well as a lower gross profit margins, all of which are unsustainable, according to two of its analysts, Edward Lui and Lillian Lou.

“The improvement is encouraging, but it was helped by declining gold prices during the quarter. That’s lower quality in our view”, their report said.

As gold prices dipped 9 per cent during the quarter, gold jewellery buyers gave a 7 per cent boost to Chow Tai Fook’s mainland sales. This compared with a 27 per cent decline in the previous quarter, according to separate reports by Morgan Stanley and the Bank of America Merrill Lynch.

Similarly, in its shops in Hong Kong and Macau, there was an eight per cent increase in gold product sales year on year from October to December.

In addition to lower gold prices, an earlier Lunar New Year has also meant a rush of sales which helped the short-term rebound, Morgan Stanley analysts said.

“The Chinese New Year is 11 days earlier this year {January 28] which may have shifted some gold jewellery sales from the March quarter into the December quarter,” wrote analyst Edward Lui.

Despite the promising growth in sales, analysts remained cautious, however, about the outlook for the company in 2017, with tourist number visiting Hong Kong from the mainland , and those going to the mainland continue shrinking, while gold prices are also expected to rise in the next quarter, according to the reports from Morgan Stanley and the Bank of America Merrill Lynch.

The improvement is encouraging, but it was helped by declining gold prices during the quarter. That’s lower quality in our view
Morgan Stanley research report

“47 per cent of third quarter sales in 2017 are expected to come from mainland tourists compared with 51 per cent a year ago, and we expect this trend to continue,” said Tina Long, an analyst at the Bank of America Merrill Lynch in a note.

Both Bank of America Merrill Lynch and Morgan Stanley are predicting Chow Tai Fook to see contractions in sales in the second half, citing an unfavourable product mix and rising gold sales that would dilute its gross profit margin, and a recent decline in lower-value diamond prices.

“We expect gross margins to fall to 28.9 per cent in the second half of 2017 fiscal year,” said analyst Tina Long at the Bank of America Merrill Lynch.

Chow Tai Fook announced in a January 9 statement that sales between October and December would improve and that the performance was considered “generally in line” with expectations.

Last year, the company saw a 46 per cent decline in full-year profit for the financial year ended March 2016 – the lowest yearly profit since its listing in 2011, according to a Reuters report.

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