Chow Tai Fook's golden touch is lost on investors
Rated a top consumer stock pick by CLSA, Chow Tai Fook nonetheless continues to lag the general market as it fails to sell its story to investors
Chow Tai Fook Jewellery has an investor relations problem. The stock has only traded once above its IPO price since listing in December 2011, and trading volumes are slowing.
When it listed, it was a standard bearer for the year's most compelling equity investor story: mainland luxury goods consumption. Instead, the stock has been a laggard.
What went wrong? In an October 2012 note, CLSA analyst Aaron Fischer said the firm was "massively burdened by highly unrealistic expectations around the IPO". The firm guided investors to expect a net profit of HK$6.3 billion for the financial year ending March 2012 - a year-on-year rise of 79 per cent. It met that target by pulling out all stops, and then found it had few moves left for financial year 2013, when earnings dropped 13 per cent.
The company also said in its prospectus that retail gold jewellery sales would grow at a compounded annual rate of 40 per cent from 2010-15. That's proven too optimistic - Hong Kong retail and watch sales have grown at an annual compound rate of 20 per cent since 2010.
We will invest more in investor relations to grow the transparency of the company
Kent Wong, Chow Tai Fook's managing director, said the company's exuberant IPO profit forecast was an outcome of the firm's long track record of outsized growth. Management is always bullish about its prospects, which has oriented the firm over the decades towards aggressive expansion. The approach has almost always paid off: the firm over the past decade averaged year on year sales growth of nearly 30 per cent.
"The management is always optimistic," said Wong. "An investor might think we are too aggressive, but according to our past record, in the past three decades, we can achieve."
The company grew smartly during the 1980s, riding Hong Kong's economic boom. In the 1990s, as the mainland economy liberalised and embarked on its own boom, the firm eyed expansion across the border.
The People's Bank of China at the time prohibited foreign companies from selling gold in the mainland, viewing the metal as a rival currency that undermined their capital controls.
Wong was given the job of opening up that market. In 1992 he opened a showroom in Guangzhou where customers could inspect jewellery, mark down the model number, and then ask a friend or relative to pick up the item in Hong Kong.
In 1998, the firm opened a diamond jewellery franchise in Beijing. In 2003, the mainland lifted its restrictions on gold sales, letting foreign jewellery shops deal in the metal for the first time. Chow Tai Fook expanded rapidly, leveraging on the brand recognition and customer goodwill built over the years, and fully captured the boom in consumer spending power in the 2000s.
Today, the firm has more than 1,700 outlets on the mainland. Even though almost half of Chow Tai Fook sales are still generated in Hong Kong, this is thanks to streams of mainland visitors that shop in the Hong Kong stores because it is such a prominent brand in their home market.
The firm today confronts the twin challenges of China's slowing economic growth and an anti-corruption drive that discourages the giving of expensive gifts to officials. Wong said the anti-corruption campaign has had a big impact on the sale of luxury items on the mainland, acknowledging that before the crackdown it was commonplace for people to buy expensive gifts for the elite.
"The [sale of] gold Swiss watches of more than HK$300,000 has been highly affected. No government official dares wear a shiny watch. They would get into trouble," said Wong.
Chow Tai Fook is back on the path of outsized growth. In its most recent results, for the six months ending September 2013, the firm declared a 92 per cent rise in profit attributable to shareholders. CLSA rates the stock as one of its top consumer picks, describing it as one of the few regional players that compares favourably with global peers.
Nevertheless, the share price continues to lag the general market - it has underperformed the Hang Seng Index by 34 per cent since listing. This suggests the company needs to do more to connect to investors, to make sure its rosy growth forecasts are fully heard and believed.
"We are a newly listed company, and we will invest more in investor relations to grow the transparency of the company," said Wong.
"Why did we list? To be more transparent."
