Chow Tai Fook Jewellery shares fall after profit warning
Shares in Chow Tai Fook Jewellery fell yesterday as alarmed investors shed their holdings after a profit warning, which came within a year of its listing.
The stock dropped 5.6 per cent to HK$10.18, a day after the company announced that its gross profit margin could contract by 2 to 3 per cent for the six months to September, citing losses related to gold hedging and a slowdown in the retail market as the key reasons for the poor earnings outlook.
With yesterday's fall, the company's stock was down 32 per cent from December's initial public offering price of HK$15. The benchmark Hang Seng Index has risen 17 per cent over the same period.
Analysts, however, said the reasons cited for the profit warning would be short-lived and the losses incurred from gold hedging would only be a temporary overhang on the shares price.
"In theory, the hedging loss in Chow Tai Fook will be recovered in the second half of next year despite its short-term impact," said Anne Ling, a consumer analyst at Deutsche Bank, in a research note.
But Ling also slashed Chow Tai Fook's target price to HK$12.58 from HK$15.68 as she expects the firm's net profit to fall by 30 per cent in the first half next year on the back of a paltry 7 per cent increase in revenue.
Ling said the current environment might hurt gold and jewellery players and the tough conditions might return after next year, given the cautious spending pattern among Chinese consumers amid a slowing economy.
Echoing Ling's view, CLSA Asia-Pacific Markets said the firm's underlying business is under "real short-term pressure with slow sales growth".
Before the firm's profit-warning, Citi had warned that the increase in gold prices would result in a higher cost of making gold products. The bank also trimmed its earnings forecast by up to 12 per cent and lowered the target price to HK$12 per share from HK$13.
Chow Tai Fook has rolled out a bold store expansion plan, under which it aims to have 2,000 stores by 2014, from the current 1,600.
The company's annual net profit jumped by 79 per cent for the year to March 31 after it raised US$2 billion in the IPO.