CHOW TAI FOOK JEWELLERY(1929.HK)：TRADING OFF STORE NETWORK FOR PROFITABILITY-格隆汇

机构：中银国际
研究员：Tony LI/Penny PENG

　　CTFJ continued to exhibit weakness in its 3QFY25 (Oct - Dec 2024) performance, as overall retail sales value declined by 14% YoY. While the decline is narrowing versus 2Q, we believe this still reflects weak discretionary demand of gold jewellery in the mass market under the challenging macro environment. The net store closure during 3Q is also higher than our expectations, and we now expect the YoY decline of total store count in FY25 will be close to 10% or 800 stores to just below 7,000. While the mgmt. emphasised they are now targeting quality growth, we believe this also reflects more challenging retail environment in offline channels and hence lower profitability for franchisees. We reiterate HOLD and now expect the turnaround of CTFJ may take longer, given it may still suffer from the double whammy of lower store count and weak same-store sales in the near term.
　　Key Factors for Rating
　　3QFY25 RSV decline narrowed but not much surprise. The overall retail sales value (RSV) of CTFJ dipped 14% YoY in 3QFY25 but improved from 2Q (- 21% YoY). This also suggested further improvement in Dec 2024, and also in both mainland China and HK & Macau segments. The overall trend suggests gold products were still under pressure due to high gold price and weak macroeconomic environment, and mass customers remained on the sidelines as the recent RSV is driven more by products with higher tag price, especially fixed price gold products.
　　Further shrinkage of store network may disappoint market. In 3Q alone, CTFJ had a net store closure of 259 stores, so the total store count reached 7,065 on 31 Dec 2024, down 10% YoY. Although the number of net store closure is lower than 2Q, we believe this could be a warning sign of weak retail market, pushing more franchisees off the market. Given 4Q is traditionally a peak season and hence store closure may taper, we still expect the store count may dip below 7,000 by end of FY25, or down 10% versus FY24. We believe this could lead to headwinds on CTFJ’s valuation, given the uncertainty of store count (no guidance given) and its market share.
　　FY25 guidance intact and more confident on maintaining margins. Despite weak RSV and same-store sales growth (SSSG), CTFJ maintained the guidance of FY25, i.e. 2HFY25 revenue to decline by low-to-mid teens YoY, while core COM (excluding gains/losses of gold hedging) would expand 250-300 bps in the full year of FY25, thanks to higher GPM from gold products. Given the strong sales of premium products such as the Rogue Collection, we believe this is still achievable. However, we believe the market would still be concerned on NP, which could be impacted by a highly uncertain gold hedging gains/losses under the new accounting standards since Nov 2024.
　　Key Risks for Rating
　　Downside risks: (1) unsuccessful multi-brand strategy; (2) deteriorated retail sell-through for core brand; (3) unexpected spike in spending, and (4) higher costs related to transactions.
　　Upside risks: (1) stronger-than-expected demand on gold jewellery; (2) strong gold price that allows higher-than-expected GPM; (3) strong cost control, and (4) unexpected gains related to hedging
　　Valuation
　　We cut our FY25/26/27 EPS forecast by 1%/4%/4% to reflect the larger-than- expected store closure in 3QFY25, as we believe lower store count may weaken the momentum of recovery in FY26-27 even if SSSG could be lifted.
　　Maintain HOLD as we believe the turnaround of CTFJ’s earnings is not imminent, but its commitment to shareholders return through dividends and buybacks could be supportive to its share price.
　　Our TP is lowered to HK$6.8, based on 10x FY2026 P/E (unchanged).