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

Good evening, ladies and gentlemen. Welcome to the live audio webcast of analysts or investors session on Chow Tai Fook Jewellery Group's annual results for the financial year 2021. Let me introduce our management today. They are Mr. Kent Wong, the Managing Director, Corporate and Hong Kong, Macau and overseas; Mr. Chan Sai-Cheong, the Executive Director, Mainland China; Mr. Hamilton Cheng, the Executive Director, Hamilton is responsible for the finance and information functions of the group; 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 retail technology applications and productions management; and Ms. Danita On, the Director of Investor Relations and Corporate Communications. Firstly, Mr. Hamilton Cheng will present the annual results, operational highlights and financial review. Mr. Chan Sai-Cheong and Mr. Kent Wong will talk about business updates in Mainland China and Hong Kong, Macau and other markets, respectively. Mr. Bobby Liu will give updates on the group's smart retail strategy and conclude the presentation with the group's business outlook and strategies. After that, we will have a Q&A session. This session will be conducted in English generally. But Mr. Chan Sai-Cheong shall speak in Mandarin with English interpretation afterwards. Now may I invite Hamilton to present? Hamilton, please.

Thank you. Good evening, ladies and gentlemen. I'm pleased to announce our fiscal year 2021 annual results. The group's revenue rose by 23.6% to HKD 70 billion in the year, driven by our retail expansion in Mainland China and a solid recovery there during the second half of the year. Same-store sales in Mainland China rose by 32%, while that of Hong Kong, Macau declined by 41%. Core operating profit, excluding the impact of unrealized gain or loss on gold loans and foreign exchange, which better reflects the underlying operational performance of our business, grew strongly by more than 50% year-on-year to HKD 8.6 billion. This increase was mainly attributed to a well contained SG&A and operating leverage. Profit attributable to shareholders surged to HKD 6 billion, more than doubled last year. Basic earnings per share amounted to HKD 0.60. The Board has proposed a final dividend of HKD 0.24 per share. Full year dividend amounted to HKD 0.40, representing a ratio of around 66%. Operational highlights. In the year, we embarked on our Dual Force Strategy to seek further market penetration in Mainland China and create greater synergy through smart retailing. Under our retail expansion strategy, we opened a net of 669 Chow Tai Fook stores in Mainland China during the year, bringing the total number there to 4,098 at the end of March. Momentum of our CTF • HUÁ collection continue to be robust. Its contribution to gold products RSV in Mainland China further expanded to almost 40% during the year. For T MARK, its contribution to our diamond products RSV increased to nearly 25% in Mainland China, while that in Hong Kong, Macau was lifted to 31%. Under our smart retail strategy, RSV of our e-commerce and O2O related business in Mainland China surged more than 90% in the year, contributing to 7.1% by value and 14.7% by volume to our mainland China operations. Here, I will walk you through some major financial ratios. Adjusted gross profit increased by around 18% in the year, as supported by the revenue growth and adjusted GP margin decreased by 140 bps to 28.2%, due to a higher sales contribution from our wholesale business, gold products and watch retail business. This was partially offset by a favorable market mix with promising growth in Mainland China. SG&A expenses was well-managed at $11.8 billion, and the ratio contracted by 350 bps year-on-year to under 17% due to operating leverage. Core operating profit, which excluded the impact of unrealized gain or loss on gold loans and foreign exchange, increased by 51.7% year-on-year to HKD 8.6 billion, and its margin widened by 230 bps to 12.3%. Revenue from Mainland China jumped 46% during the year, supported by new openings, improving consumer sentiment and softened gold price in the second half as well as low base is contribution to group's revenue reached 85% in the year. In Hong Kong, Macau and other markets, revenue shrank 35% year-on-year as the challenging macros, pandemic and closure of major border crossings weighed on consumer spending. Revenue of gold products was up by 26% in the year despite that international gold price hike deterred retail demand during the first half. Sales of this product category rebounded significantly in the second half when gold price softened. Its contribution to the group's revenue expanded to 68% in the year. Watches also registered a strong growth of 55% in the year, fueled by a buoyant domestic demand in Mainland China and amid the international travel restrictions. Same-store sales growth in Mainland China. Same-store sales revived and turned positive in the second quarter amid an easing pandemic situation there, coupled with the receding demand and an exceptionally low base of comparison. Our same-store sales growth accelerated to over 140% in the fourth quarter in Mainland China. As a result, same-store sales in Mainland China increased by 32%. In Hong Kong Macau, however, muted customer traffic led to a 41% drop in same-store sales during the year. Yet, same-store sales rose over 30% in the fourth quarter, attributable to a recovery of low coal consumption. An update for the April and May in the past 2 months. During April and May, same-store sales growth in Mainland China sustained a positive trend at around 50%, while in Hong Kong, Macau, same-store sales growth lifted further to nearly 160%, driven by local consumer spending. And this slide shows the same-store sales growth of major products in both markets. First, in Mainland China, as mentioned, our sales was benefited from the softened gold price in the second half. This happened mainly in Mainland China as the appreciation of renminbi made gold price even more attractive. This growth depends on demand and thus, gold products outperformed gem-set during the year. And in April and May, gold products stayed resilient with same-store sales growth of more than 70%, continuously outperformed gem-set. While in Hong Kong, Macau, gold products phenomenon didn't happen. Instead, our promotional efforts successfully attracted local customer spending on gem-set, and same-store sales growth outpaced gold products in the year. Yet in April and May, both gold and gem-set rebounded significantly, largely because of the very low base last year. Profitability analysis. In Mainland China, our core operating profit recorded a strong growth of 61% during the year. It continued to be our major profit contributor to and accounted for over 95% of the group's operating profit. And adjusted GP margin in Mainland China contracted by 250 bps to 28% with the higher contribution of wholesale business, gold products and watches in retail, which are relatively lower margin segment. SG&A ratio decreased by 380 bps to 15% in the year, thanks to our cost-saving relief received from government and operating leverage. As a result, COP margin was lifted by 130 bps to 13.8%. Now for Hong Kong, Macau, adjusted GP margin improved remarkably by 200 bps to 29.4%, driven by better product mix and like-for-like margin improvement, both in retail and jewelry trading business. SG&A ratio deteriorated from 25% to around 28%. However, COP margin stayed positive at around 4% in the year. And then we have an analysis on the half yearly profitability. In Mainland China, in general, our second half adjusted GP margin is lower than our first half due to a higher gold mix during the festive season. Our adjusted GP margin in the second half was down by 490 bps year-on-year to 24.3%, mainly due to a higher sales contribution from gold products and wholesale business as well as like-for-like margin decline in gold products as gold price was decreasing in the second half. Yet COP margin stayed at 11%, a similar level as second half last year. For Hong Kong, Macau and other markets, during the second half, adjusted GP margin was down by 120 bps year-on-year to around 25% due to the impact from jewelry trading. However, it was partially offset by like-for-like margin improvement and more favorable product mix. Thanks to our effective cost control and gradual business recovery in the second half this year, segmental SG&A ratio improved significantly to around 21% and COP margin was lifted to 5.4% in the second half versus a negative of 1.4% in the second half in the previous year. For SG&A, expenses was well-managed to increase by just 2.5% to $11.8 billion in the year, and SG&A ratio contracted by 350 bps to 16.9% due to operating leverage and our effective cost control. In particular, A&P was down by 15% and packaging materials was almost flat during the year. For the major items like staff costs and lease expenses, I shall walk you through in the next 2 slides. First is staff cost. It rose by 14% in Mainland China, and it was down by 21% in Hong Kong, Macau. The expenses increase in Mainland China was mainly attributable to the increase in variable portion, which was in line with business growth. Fixed cost decreased by 4% during the year as there was a government relief and a lower calculation basis on social insurance contribution. In Hong Kong, Macau, variable staff costs shrank by 28% in the year, largely in line with the drop in revenue, fixed staff costs and also declined by 17% due to attrition and a reduction on certain allowances. During the year, we also received HKD 160 million from employment support scheme, which was recognized in other income in the financial statement. And then lease-related expenses. In Mainland China, concessionaire ratio edged down to 8% in the year, mainly due to the shift of sales mix towards gold products, which are subject to lower rates. Lease-related expenses ratio also went down to 4.1% amid operating leverage. In Hong Kong, Macau, lease-related expenses fell by 31% during the year due to the consolidation of POS and rental renewal reduction. Yet this corresponding ratio expanded by 100 bps to 8.3%. In the year, we renewed leases of 46 POS, and the average reduction was around 40% relative to the last contract. Inventory and CapEx. Overall inventory balances stay at a similar level as last year. However, average gold price increased by 24% versus last year. And the balance of gold products by weight was actually reduced by more than 20%. Inventory turnover period shortened by 69 days compared to the prior year. While we are expanding our presence in Mainland China, we believe that inventory balances shall increase by 10% by March next year, with inventory turnover period to improve to below 300 days. CapEx in the year totaled HKD 839 million and major CapEx were spent on our POS covering renovation of existing stores and new openings in Mainland China. CapEx in the coming year is expected to increase to around HKD 1.5 billion as a result of POS expansion and renovation, investment in our smart retail projects as well as expansion of Wuhan smart manufacturing center. And then this slide illustrates a few major items that affected our profits during the year. In our core operating profit, that included one-off income, totaled HKD 232 million, which arose mainly from the government grants received in Mainland China and Hong Kong. And as gold price softened near the financial year-end and unrealized gain on gold loans was recorded versus the loss in the previous year, this led to another year-on-year increment of nearly HKD 1 billion. And there was also HKD 518 million year-on-year increase in other gains and losses, which was mainly due to a net foreign exchange gain on renminbi of more than HKD 300 million and rent concession of HKD 128 million. The increase in other expenses was partially due to the impairment on these assets based on situation in Hong Kong, Macau. Also, there was an impairment on goodwill, arose on the acquisition of HEARTS ON FIRE a few years ago as we decided repositioning of the brand so as to maintain the identity and heritage of the brand while better serve the need for us to penetrate into the high end segment. Capital and return. In the year, we conservatively manage our balance sheet in times of uncertainty. Hence, we lowered our gold inventory balance by weight and lower our bank borrowings as well as gold loans during the year. As a result, net gearing ratio was reduced to around 19% from 57% a year ago, while our gold hedging ratio decreased to 38% as of March this year, which is largely a risk off approach. Return on equity was lifted to 20% in the year, mainly due to enhancement in net profit margin and asset turnover. And lastly, cash flow movements. Operating cash flows before movements in working capital, net with leases paid was, around HKD 10 billion in the year, an increase by around 46% from last year. After cash used for inventories and CapEx, pro forma free cash flows was around HKD 7 billion for the year. Other major cash flow items included a HKD 5 billion decrease in bank borrowings and HKD 2.8 billion used for payment of dividends. As of March this year, the company's cash and bank balances stayed at a healthy level of around HKD 6 billion. And then I'll turn over to Cheong and Kent for the business development in the respective markets.

[Foreign Language], Hamilton. [Foreign Language]

Okay. Before we turn to Kent, let me recap Mr. Chan's presentation in English. We embarked on our Dual Force Strategy to seek further market penetration in Mainland China and create greater synergies through smart retailing. Under our retail expansion strategy, we will continue to expand our business in Mainland China through 2-pronged strategy. We will continue to upgrade our stores to offer greater retail experiences in Tier 1 and Tier 2 cities, while penetrating further into the lower-tier and county-level cities by leveraging our franchisees. In fiscal year 2021, we opened a net of 669 Chow Tai Fook Jewellery POS in Mainland China. Half of these openings were located in Tier 3, Tier 4 and other cities where they achieved a stronger RSV growth than our Tier 1 and Tier 2 cities. All net openings in fiscal year 2021 were in franchise formats where we net closed 54 self-operated POS. In the coming fiscal year, we expect to open at least 700 net openings of Chow Tai Fook Jewellery store. We will also continue to execute differentiation strategies to make inroads into diverse customer segments. CTF • HUÁ collection remain popular among the younger customers and its contribution to our gold product RSV further expanded to 39.5% in fiscal year 2021. And our Guardian of Life collection also helped us gain market share in the diamond engagement ring market, and it contributed around 8.7% of our diamond RSV during the year. Now, I'll pass to Kent to talk about Hong Kong, Macau segment.

Okay. Thank you, Danita. In Hong Kong, Macau and other overseas market, RSV sharply declined during the year as the pandemic weighed on international travel and tourist-related consumption. In Hong Kong, Macau, we closed a net of 5 point-of-sale in the year, mainly in touristic areas such as Tsim Sha Tsui and Causeway Bay. Our plan on the retail network in Hong Kong will largely depend on the recovery upon border reopening and the outcome of negotiation with landlords. About 10 to 15 point-of-sales are under observation in financial year 2022. In other markets, we opened 5 duty-free point-of-sale in Hainan province during the year so as to serve our travel retail consumers that have been affected by the suspension of international travel. We will focus on countries with a higher domestic consumption at the moment and continue our expansion strategy when international travel resume. I will turn over to Bobby to share with you our smart retailing strategy, business outlook and other strategy.

Okay. Thank you, Kent. Okay. So I'll go to further introduce our smart retail strategy. And every customer expect nothing less than being treated as the single most important person by us. To that end, our omnichannel retailer aims to offer customers widely array of choices and the greater convenience. Our staff provide people to people engagement with digital tools and data to engage customers and helping them to enjoy their seamless shopping experience. We also doubled down on the increasing public domain visibility. More contact points, together with a more diversified smart retail experience, which could bring new customer and business opportunity to us. Meanwhile, a streamlined supply chain is key to our smart retail strategy. Not only did it improve our customization capability, but also drives higher operational efficiency that would differentiate us in the jewelry industry. Our RSV of our e-commerce and O2O-related business in Mainland China grew strongly at 92% in the year, mainly attributable to our O2O platforms. E-commerce and O2O-related business contributed more than 7% of our RSV in Mainland China and big thanks to our smart retail applications. Average selling price of these application was roughly 3x that of the e-commerce platform as they enable a closer connection and a more stronger trust with our customers. And also driving the brand ASP of our e-commerce and O2O-related business to HKD 2,800 in FY 2021 versus HKD 1,400 on last year. In terms of volume, share of the business amounted to almost 14.7%. And now, in this showcase, this is our smart retail applications. Our staff cemented their success with our smart mobile tool, CloudSales 365. In the year, more than 40,000 staff in our self-operated store and franchise store used our CloudSales 365 to reach more than 3.7 million customers. Not only did it attract new customers, also CloudSales 365's ASP and sales conversion rate, which is 80% higher than and 10x in our e-commerce platform performance, respectively. As at March this year, over 40% of our points of sale have already installed CloudKiosks in Mainland China. While at a physical store, customer can look up a wide product selection online and shorten their transition time. A gamified experience also offered at the kiosk. This kind of smart retail application were also introduced in the Hong Kong and Macau market, which with adjustment according to the different geographic needs and coming soon. Together with the initiative in enhancing the automation level of our supply chain and establish various digital platforms, we strive to deliver unparalleled customer experience. What is very most important of our new tools we call D-ONE, our pioneering digital jewelry customization platform, and one of our C2M initiative was introduced to cater to the demand for customization, product and exclusive experiences. It is encouraging to see that ASP of product customized through D-ONE was more than double the same-store gem-set jewelry ASP in Mainland China. In our production process, we make full use of the IoT, the Internet of Things, kind of technology to enable high level of automation and seamless connection with customers. With D-ONE, both customized products are ready for delivery within 24 hours as committed. An incredible fulfillment speed is the signature of this kind of platform. Various brands and products such as HEARTS ON Fire and T MARK were introduced to D-ONE during the year. In February this year, we also launched CHOW TAI FOOK TIAN HUANG DI LAO Collection on D-ONE featuring rings that transformed the reflection of light into personalized message, thanks to our use of the innovative laser diffraction technology. Our customer relationship management system is integrated with CloudSales 365 and partnered with K Dollar reward system of New World Development to broader our customer base and boost our recurring spending. As of March this year, we had over 3 million members in Mainland China with a repeating purchase ratio of more than 29% in this year. In Hong Kong, Macau, the number of members was above 1.2 million and which repeat purchase ratio was lift up to 44%. So to conclude, our Mainland China business continued to deliver strong growth performance in FY 2021 despite a challenging business environment. With the government dual circulation strategy, we expect jewelry industry in Mainland China could benefit from the growth in domestic consumption. Therefore, we are optimistic about the mid- to long-term prospects of the jewelry market in Mainland China. And in Hong Kong and Macau market, are facing multiple challenges. We believe that the domestic market has bottomed out at the pandemic situation and is expected to become more stable. When the major border crossing reopen, the retail market would recover gradually. In the coming future, we will focus on our Mainland China's business development. On one hand, we will continue our retail expansion strategy through penetration into lower-tier cities use our franchise model. On the other hand, we will push forward our smart retail strategy through enhancing the retail experience and focus on O2O channel integration to take advantage of the digital transformation. In order to cope with future development and C2M, in particularly, we will further enhance our automation level to meet the product mix. And this conclude our presentation today. Thank you.

Thank you, Kent, Chan, Hamilton and Bobby.