Chow Tai Fook Jewellery Group Limited (1929) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to the live audio webcast of analysts and investor session on Chow Tai Fook Jewellery Group's interim results for the financial year 2021. Let me introduce the management today. They are Mr. Kent Wong, the Managing Director; Mr. Hamilton Cheng, the Executive Director. Hamilton is responsible for the financial management and corporate operations; Mr. Peter Suen, the Executive Director. Peter is responsible for the Hong Kong, Macau and overseas business; Mr. Bobby Liu, the Executive Director. Bobby is responsible for the sustainable development and innovation; and Ms. Danita On, the Director of Investor Relations and Corporate Communications. Firstly, Mr. Hamilton Cheng will present the interim results, operational highlights and financial review. Kent will present the business update. Bobby will give us an update on the group's individual brands, e-commerce and O2O related business and customer relationship management. Finally, Kent will conclude the presentation with the group's business outlook and strategies. After that, we will have Q&A session. Now may I invite Hamilton to present. Hamilton, please.

Thank you. Hi, good evening, everyone. I'm pleased to announce our interim results for the first half fiscal year 2021. The group's revenue declined by 16.5% to $24.7 billion in this period. Business in Mainland China witnessed a steady recovery on back of the easing COVID-19 situation, especially in the second quarter, whereas performance in Hong Kong, Macau and other markets remained sluggish. Same-store sales in Mainland China stayed flat, and that of Hong Kong, Macau declined by more than 65%. Core operating profit excluding the impact of unrealized gain or loss on gold loans and foreign exchange, which better reflects the operational performance of our business, grew strongly by 15.6% year-on-year to $4.1 billion. The increase in core operating profit was mainly boosted by the margin expansion as gold price rose. Profit attributable to shareholders surged 45.6% to $2.2 billion. Basic earnings per share amounted to HKD 0.22. The Board has declared an interim dividend of HKD 0.16, representing a payout ratio of around 72% in this period. Operational highlights. We opened a net of 303 POS during the period, bringing the total number of POS to 4,153 at the end of September, which included 3,847 Chow Tai Fook Jewellery POS. Net openings in Mainland China reached 310 POS, and we closed a net of 5 POS in Hong Kong, Macau and 2 POS in other markets during the period. Retail sales value of our e-commerce and O2O related business in Mainland China surged 21.8% in the period, accounting for 5.6% in terms of RSV and 14.3% in terms of volume of our Mainland China business. CTF HUÁ collection continue to receive buoyant demand. Its contribution to our gold jewelry and product RSV in Mainland China further expanded to 35.6% during the period. For T MARK, its contribution to our diamond product RSV expanded to 22.3% in Mainland China during the period while that of Hong Kong, Macau stayed above 27%. Here in the income statement summary, I'll walk you through the major financial ratios. And first, it is about adjusted GP margin that improved notably by 440 bps to 35.1% in the period, benefiting mainly from the like-for-like margin improvement in both retail and wholesale business as gold price surged. SG&A expenses decreased by 14.3% to $4.9 billion. However, SG&A ratio increased slightly by 50 bps year-on-year to 20% due to operating deleverage. Core operating profit increased by 15.6% year-on-year, and its margin widened by 460 bps to 16.5%. Our revenue breakdown, first by reportable segment. Revenue from Mainland China increased by 4.9% during the period in light of the easing COVID-19 situation. Its contribution to the group's revenue reached 86% during the period while in Hong Kong, Macau and other markets, revenue contracted nearly 63% year-on-year as business suffered due to challenging macros and the closure of major border crossings during the period. Our revenue by product. Revenue of gold jewelry and products shrank by 21.2% during the period as gold price surged, deterred retail demand for gold jewelry. Its contribution to the group's revenue reduced to 60.9% during the period. On contrary, watches delivered a robust revenue growth of 17% during the period, boosted by strong domestic demand in Mainland China amidst international travel restrictions. Here is a same-store sales growth trend for the past 6 quarters. In Mainland China, same-store sales stayed flat in the period. Same-store sales rebounded to a positive growth of 11% in the second quarter versus a double-digit decline in the first quarter as business activities and consumer sentiment revived while in Hong Kong, Macau, same-store sales was down by more than 65% during the period as customer traffic remained stagnant, yet this decline leveled to -- leveled in the second quarter, thanks to a lower base of comparison. An update for the first 7 weeks in this quarter. So during the period -- for the quarter to date, same-store sales growth in Mainland China sustained a positive trend at 12%, similar to the second quarter while in Hong Kong, Macau, same-store sales growth demonstrated a continuous improvement and has narrowed to a decline of around 24%. An analysis by major products. For gold jewelry and products, as mentioned, demand for gold jewelry in both Mainland China and Hong Kong, Macau was affected by surge in average international gold price, especially during the first quarter. However, ASP of these gold products was lifted by around 16% in Mainland China. In converse, ASP of these gold products in Hong Kong, Macau dropped 13.6% due to a shift of sales mix towards lower ASP products. For gem-set, platinum and karat gold products, same-store sales of these products in Mainland China declined by 1.9% in this period whereas gem-set ASP was lifted slightly to INR 6,400 (sic) [ $6,400 ] during the period while in Hong Kong, Macau, ASP of gem-set jewelry recorded a notable increase to $13,400 from $11,000 in the same period last year. An update for the first 7 weeks in this quarter. Same-store sales growth of gold jewelry and products in Mainland China rebounded strongly to around 13% and outperformed that of gem-set and karat gold products as gold price stabilized. But in Hong Kong, Macau, same-store sales growth of gem-set and karat gold products rebounded to a positive growth of 39%, boosted by a favorable comparison base, our promotional efforts and improved traffic. An analysis of our operating profit and profitability. In Mainland China, our COP recorded a strong growth of 42.5% while COP of Hong Kong and Macau and other markets also turned around to a gain of $28 million versus a loss of $94 million in the second half last year, thanks to the margin improvement. Mainland China continued to be our major profit contributor and accounted for almost 100% of the group's operating profit in this period. And in terms of adjusted GP margin, in Mainland China, the margin expanded by 270 bps to 34.6% in the period as like-for-like GP margin improved while SG&A ratio decreased by 190 bps to 16.5% in the period, thanks to relief received on major SG&A items, cost savings and operating leverage. As a result, COP margin in Mainland China was lifted by 500 bps to 19.1%. For Hong Kong, Macau and other markets, adjusted GP margin improved significantly by 10 percentage points to 38.1%, driven by both the surge in gold price and the like-for-like margin improvement in jewelry trading. SG&A ratio increased substantially from 21.8% to 41.6% due to operating deleverage. COP margin stayed positive at 0.8% in the period, benefiting from the government subsidies received, which were recorded as other income. SG&A expenses decreased by 14.3% to $4.9 billion in the period as we managed cautiously while SG&A ratio increased slightly by 50 bps to 20%. For the major SG&A components, I'll walk you through in the following 2 slides. And first, it's about the staff costs and related expenses. In Mainland China, the staff cost was down by 4.7%, and in Hong Kong, Macau, it is down by 32%. The expenses reduction in Mainland China was mainly driven by the decrease in fixed portion as there was government relief on social insurance contribution of $30 million due to the COVID-19 situation. In addition, the calculation basis of employers' contribution on the social insurance was also adjusted down by the government as compared to the same period last year. But in Hong Kong, Macau, variable staff costs shrank by 51% year-on-year in the period, which was largely in line with the drop in revenue. Fixed staff costs also declined by 17% due to attrition and reduction on some allowances. During the period, we also received $107 million from employment support scheme, which was recognized in other income. And then an analysis of rent and concessionaire fees. In Mainland China, concessionaire ratio edged down to 8.2% in the period, mainly due to the rate reduction from the shopping malls and department stores. In Hong Kong, Macau, these related expenses reduced by 21.5%, yet the corresponding ratio expanded by 740 bps to 13.6%. During the period, we renewed leases of around 27 POS, and the average rental renewal reduction was around 45% relative to the last contract. Moreover, rent concession of $76 million was granted from landlords in the period, which was recognized as other gains in the P&L. For the full year, we believe that we shall achieve an average reduction of around 40% to 45% upon rental renew, and overall rental costs in Hong Kong, Macau shall see a reduction of around 20% to 25% for the full year. As mentioned before, you may have heard of, I mean, quite some situations and quite some figures that were specific to this period, for example, the improvement in margin of gold products due to the increase in gold price. For example, the one-off government subsidies and also the rent concession and also the foreign exchange gains. There are also an impairment on the right-of-use of assets and also our fixed assets for the stores in our -- in Hong Kong. So these items may or may not repeat in the future, which has -- which formed the major components that's affecting the change of profits in the period. So this is an analysis for your easy understanding of the major drivers of the increase of 45% of the net profit during the period. And then we'll turn to inventory analysis. The overall inventory balance increased by about 2% to $43 billion as of end of September, mainly due to gold price increase. By weight, our inventory balance of gold products was actually trimmed by more than 9% year-on-year. So together, with the 2% or 3% reduction on the inventory of gem-set and karat gold, on a constant-price basis, our inventory would have decreased by about 5%. Inventory turnover period was prolonged by 97 days compared to the last fiscal year due to slow sales in Hong Kong, Macau. However, as of end of September, approximately 17% of the inventory balances were actually consigned inventories that will help for the franchised POS, which represent around 80 days in terms of turnover. While we are expanding our presence in Mainland China under our stringent procurement policy, we believe that inventory balances shall maintain at around $42 billion by March next year, which would be similar to the level of last financial year, and inventory turnover period should also improve to around 380 days, again, similar to the level of last year. And then CapEx, which totaled around $350 million in this period were mainly spent on our POS, covering renovation of existing stores and also the new openings in Mainland China. The total CapEx for the year would be around $900 million to $1 billion, similar to last year's level. For the balance sheet item, we actually don't have a lot of changes. The major changes were from the reduction of bank borrowings and gold loans, which were down by $2.1 billion and $700 million, respectively. Gold hedging ratio was around 56% as of end of September while net gearing ratio, including gold loans, was 43.7% as of end of September. When excluding the gold loans, net gearing ratio would be around 7%. And now for operating -- or movement in cash flows. Operating cash flows before movement in working capital, net leases paid, was around $5.6 billion, which is similar to the amount for the same period last year. After cash used mainly for inventories and CapEx, pro forma cash flow was around $3.4 billion for this period. Other major cash flow items included $2.1 billion reduction in bank borrowings and $1.2 billion used for payment of final dividends last year. And as of end of September, we maintained a strong cash and bank balance of around $7.3 billion. So this concludes my presentation today, and I will turn it over to Kent for the business development and an update for our business ecosystem. Thank you.

Thank you, Hamilton. In Mainland China, we opened a net of 310 POS during the period, among which 286 were Chow Tai Fook Jewellery POS. As of September this year, we had 4,009 POS in Mainland China. Chow Tai Fook Jewellery POS contributed approximately 90% of our retail sales value in Mainland China. This slide further analyzes RSV and POS network by tier of cities. We continue our expansion strategy in Mainland China by leveraging franchisee. Approximately 51% of the net openings during the period were located in Tier 3, Tier 4 and other cities. RSV growth in Tier 3, 4 and other cities outpaced Tier 1 and 2 cities during the period, largely attributable to the new openings. By operation model, all net openings during the period were in franchised formats, whereas we closed a net of 45 self-operated point of sales. As of September 2020, 61% of our point of sales in Mainland China were in franchised formats. 38% out of these franchised point of sales were under the sell-in model. By store format, stand-alone stores and point of sale at shopping malls delivered a more resilient RSV growth during the period while point of sale at department store were under pressure. We continue to execute our 2-pronged strategy for the retail network in Mainland China. In Tier 1 and 2 cities, we offer curated retail experience to fulfill the needs of more sophisticated customers while in lower tier city and county-level cities, we expand presence and market share through the franchised model. A net of 286 Chow Tai Fook Jewellery point of sales were opened in the first half of FY 2021. We are confident that full year net openings shall reach 450 to 500. Over 90% were in franchised format. In terms of RSV and point of sale by geography, in Hong Kong, Macau and other markets, RSV recorded a steep decline during the period as the pandemic continued to weigh on international travel and tourist-related consumption. Share of RSV settled in China UnionPay, Alipay, WeChat Pay or renminbi in Hong Kong and Macau dropped to 12.1% from 39.7% in the last year period. Retail network management. In Hong Kong, Macau, we closed a net of 5 point of sales in first half FY '21, mainly in touristic areas, such as Tsim Sha Tsui and Causeway Bay. Some leases that we renewed or expect to renew had a short-term duration to take advantage of a more favorable trend. We expect the net closing this year will be around 5. Yet, improving store productivity and rationalizing retail networks and store-related costs shall remain our priority in the midterm. Other market and countries. We closed a net of 2 Chow Tai Fook Jewellery point of sale in Japan and Korea during the period. We shall explore opportunities to open stores in Southeast Asia when international travel resumes. With a strong foundation built through our Smart+ 2020 strategic framework, we are pleased to move forward with our Dual Force Strategy. We shall expand our footprint in an agile way while we should also focus on digital empowerment in order to deliver exceptional customer experience that create long-term brand differentiation and loyalty. This shall be achieved under our ecosystem. The retail-driven sector refers to the diversified product offerings and experience from our physical retail network. The digital empowerment sector is the omnichannel and smart tools that could complement our physical retail network and achieve quicker synergies as well as building up both public and private domains. The cooperation (sic) [ coopetition ] sector refers to our initiative to redefine the jewelry industry ecosystem through cooperation and cocreate. We continue to innovate and invest in product and experience of our flagship brand. In terms of product, Chow Tai Fook HUÁ collection stayed popular among the young customer in Mainland China. Its contribution to the gold jewelry and product RSV further expanded to 35.6% during the period, outperforming our generic gold products. In regard to T MARK diamond, its share of diamond product RSV in Mainland China was also lifted to 22.3% in first half of FY '21. We just made an announcement that our AI diamond-grading certificate for T MARK will be introduced in the first half of 2021. Empowered by AI and big data, the process of diamond color and clarity grading will take only a few minutes, offering customers a high consistency diamond appreciation experience, plus an extra assurance. I will turn over to Bobby to walk you through other individual brands and digital empowerment sector.

Okay. Thank you, Kent. For HEARTS ON FIRE, we have launched the LORELEI REVERIE collection in July 2020 to broaden the reach of Lorelei collection. Going forward, the presence of HEARTS ON FIRE will focus on shop-in-shop and counter-in-shop under the flagship brand Chow Tai Fook. In order to penetrate into the high-end market in Mainland China, our natural-colored gemstone specialist, ENZO, has integrated with the group resources to promote its brand and products in all channels. As of September 2020, it had 55 point of sale in Mainland China. And our 2 young segments, we are talking about the brands SOINLOVE and MONOLOGUE, aim to offer innovative products and experience to younger customers and strive to enhance digital presence in first half of FY 2021. Online sales accounted for around 45% to 50% of both SOINLOVE and MONOLOGUE RSV in the Mainland China. We also collaborated with different brands, such as a Japanese comic character Detective Conan and Barbie to add newness to our product portfolio. A total of 5 SOINLOVE point of sale and 16 MONOLOGUE point of sale were opened in first half of FY 2021, mainly in higher-tier cities in Mainland China. We shall continue our expansion in higher-tier cities in order to connect more customers with our brands' personalities. In the digital empowerment sector, we aim to stay close to our customer by striking an optimal balance between technology and human touch. CloudSales 365 is a mini program that bridges our e-shop and customers, allows both of our staff and our franchisees' salespeople to proactively engage the customer by sending product, promotions and information to build a close connection and rapport with customers. We are delighted to see that the private domain traffic generally lead to higher sales conversion rates than the e-commerce platform. In the first half of FY 2021, we reached over 2 million customers through this tool. The CloudKiosk is an O2O hub, which allows customers to enjoy shorter transition time and wider product selection at the store front. As of September 2020, CloudKiosk were installed at over 1,000 spots, primarily in Mainland China. We shall continue to expand its coverage to 1,400 by the end of the financial year. Our e-commerce and O2O-related RSV in Mainland China surged by 21.8% during the period, thanks to our efforts in O2O retailing. We also enhanced our customer engagement via live streaming and short videos in third-party marketplaces. Its contribution to the RSV in Mainland China edged up to 5.6%, and it amounted to 40.3% in terms of volume. The average seeling price on our e-commerce and O2O-related business increased to HKD 1,700 in the first half of 2021 instead of the HKD 1,300 in the last year. Lastly, here is an update on our customer relationship management. As of September 2020, we had approximately 2.7 million members in our membership program in Mainland China. The repeat purchase ratio was lifted to around 28% in the first half of 2021 financial year. And in Hong Kong and Macau, the number of members was about 1.2 million with an encouraging repeat purchasing ratio of around 45% instead of 36% last year. And now I will turn to Kent for the business outlook and strategies. Thank you.

Okay. Thank you, Bobby. To conclude, first half FY '21 was a challenging period, but the COVID-19 pandemic is expected to be under control in the markets where we operate. Our business performance for second half FY '21 would improve steadily. As we expect Mainland China will continue to focus on domestic consumption growth, we are optimistic about the mid- to long-term prospect of the jewelry market in Mainland China. In Hong Kong and Macau, with a more stable pandemic situation, we believe that the domestic market has bottomed out. When the major border crossing reopens, the visitation and retail market would recover gradually. In Mainland China, we shall continue our market expansion strategy, fully franchised model and online/offline channel integration to take advantage of digital trends and to implement our differentiation strategy to better serve each unique customer segment. For Hong Kong, Macau, we shall continue to enhance our operational efficiency and refine our business strategies. We would leverage our retail networks and talent as well as our omnichannel capacities, credibility that we have developed in order to offer customer a seamless shopping experience at any time anywhere, with optimal balance between technology and human touch. We are delighted to see that we are steadily moving towards our 4 long-term goals: one, strengthen our market leader position through further market penetration; second, develop a comprehensive jewelry ecosystem; third, be a tech-savvy jewelry company through harnessing innovation and technology; lastly, improve operational efficiency through digital transformation. Going forward, we will implement our Dual Force Strategy to see us towards continued expansion of footprint and digital empowerment, which would enable our customers to experience a blissful fulfillment through jewelry. This concludes our presentation today. Thank you.