China Consumer

Not such a gem

Chow Tai Fook revises its more bullish forecasts


Cheng’s less optimistic these days

“Within three years, I’m confident that Chow Tai Fook’s turnover will double,” declared Henry Cheng, chairman of the world’s largest jeweller (both by store count and market capitalisation). He gave that bullish assessment a year ago.

Since then Cheng has been forced to change his tone. “It is undeniable that the base for the fiscal year of 2012 is too high. As consumer sentiment has subdued considerably, it is impossible for Chow Tai Fook to achieve more than 70% in growth year after year. Doubling in three years or quadrupling in six years is just a medium-term goal,” a less ebullient Cheng told analysts.

Small wonder then that Chow Tai Fook (CTF) shares are now trading 45% below their IPO price in 2011.

In company filings last week the jeweller announced net profit for the year to March fell to $705 million, slightly below market expectations. Revenue rose 1.5% to $7.4 billion, but the small increase was mainly driven by new store sales. Same-store sales, or sales at stores open more than a year, fell 3.3%.

CTF has over 1,800 outlets in Hong Kong, Macau and mainland China, and opened 209 new stores last year. It plans to open another 200 in 2013. But sales expenses, as well as distribution, advertising and promotional costs have all been increasing. Due to the rapid expansion in store network, rental expenses were up 50%. That contributed to a slide in its net profit margin to 9.9% from 11.6%.

The jeweller blamed the profit decline on cautious consumer sentiment in the wake of a weakening economy and Beijing’s crackdown on corruption. Still, CTF reckons the worst is now behind it, claiming “remarkable same-store sales growth” in the past two months as demand for gold products surged as the price of gold fell (see WiC190).

Not that CTF expects the fillip to last long. “The management believes that the gold-buying spree would only be a short-term stimulation as people were drawn to buy gold products in advance,” Cheng said. More positively he added that, despite the uncertain economy, there were “signs of recovery” in Hong Kong’s retail market as the number of mainland tourists, especially those from lower-tier cities, was increasing steadily.

But some analysts are sceptical. Eugene Mak from OSK Group says it is unlikely that retailers of discretionary spend items like CTF will see a turnaround this year. “The outlook is still cloudy,” Mak told the South China Morning Post. “Consumer confidence in the economy remains weak and we expect this situation to persist until the end of this year.”

Similarly, HSBC’s retail analyst Lina Yan believes that the current demand for gold-related products has downsides too. Yan says CTF’s margins for gold products, admittedly a major source of revenue, are between 15%-18%. That compares poorly with the margin for jewellery sales, which can reach as much as 40%.

But perhaps CTF is already one of the brighter spots in China’s jewellery industry? The company hedged around 70% of its gold products in the first half of this year, which means that even if gold prices continue to drop – gold is now trading at under $1,200 an ounce – it will have little impact on the bottom line. The numbers don’t look so promising for CTF’s rival Luk Fook, which only has 20% of its gold products hedged, says 21CN Business Herald.

To maintain sales momentum, CTF has continued to open new stores in third and fourth-tier cities. It claims that consumers in more developed coastal cities have been quicker to rein in their spending. But residents in smaller cities are still spending, especially as their disposable incomes have closed some of the gap with their more sophisticated peers on the coast. “Middle-class incomes are still rising,” says Kent Wong, managing director of the jewellery firm.

In the meantime, the marketing drive in Hong Kong goes on. Luring Chinese spenders is no simple task. Last year, CTF transformed a ballroom in Hong Kong’s Grand Hyatt hotel into an elegant Parisian salon, flying in customers who spend more than $150,000 a year for a weekend of harbour cruising, wine tasting and fine dining.

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