Chow Tai Fook Jewellery Company

Strong China makes up for weak HK during Chinese New Year´s. Chow Tai Jewelry retail sales grew 9% y/y in CNY (vs overall sales 10% y/y decline in 3QFY15 and JPMorgan estimate of +2% y/y for 4QFY15 which covers the CNY period). As per CTF, the CNY period covers 5 Feb to 22 Feb (18 days) this year compared with the period during 17 Jan to 3 Feb (18 days) in 2014. The pick up was mainly helped by a strong China with retail sales up 22% y/y, despite a weak HK (-24% y/y). Product wise, gem-set jewellery SSSG rose +26% y/y (vs +13% y/y last year) and gold products declined 14% y/y (vs +19% y/y last year).

JP Morgan Believes potential upside to our FY15E top line estimates. We are currently forecasting 2% y/y revenue growthand 7% y/y decline in SSSG in 4QFY15 (Jan-Mar 2015). Given CNY (18 days) covers 17% of 4QFY15, CTF’s +9% sales growth and 4% SSS decline in CNY implies flattish growth during the rest of the period based on our estimates, which we believe is achievable and might lead to an upside potential to our FY15E top line estimates. Maintain OW. We reiterate OW on CTF, given  an expected turnaround in earnings momentum in FY16, supported by product mix improvement and sales momentum, the company’s immunity to the structural pressure posed by e-commerce on offline retailers in China, and thus no risk to margin, in our view. 

CTF’s vertically integrated model (which leads to short lead times and quick response to consumer demand),  the company’s majority self-owned store network (better brand control), v) CTF’s expansion strategy in China (driven by market share gains),  the company’s gold hedging policy (which leads to lower levels of margin volatility).

Valuation: Our Mar-16 PT of HK$11.80 is based on a 1x PEG and a 19% two-year earnings CAGR after Mar-16. The main downside risks to our view include a faster-than-expected pace of “normalization” in sales growth levels, a sudden slowdown in gem-set sales, an inability to keep the cost-plus model, and unexpected pressure on margins from promotions and costs.

Analysis: JP Morgan Chase
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