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

Good evening, ladies and gentlemen. Welcome to the investor and analyst presentation of Chow Tai Fook Jewellery Group to discuss our annual results for the financial year 2023. Let me introduce the management team who will conduct the presentation today. They are Mr. Conroy Cheng, Vice Chairman, he's dialing n today; and here on the stage, we've Ms. Sonia Cheng, Vice Chairman; Mr. Kent Wong, Managing Director; Mr. Hamilton Cheng, Executive Director and Chief Financial Officer. Firstly, Mr. Conroy Cheng will present the annual results highlights; then Mr. Hamilton Cheng will talk about financial review. Mr. Kent Wong will give updates on business development. Finally, Ms. Sonia Cheng will conclude the presentation with market outlook and strategies. After that, we will have a Q&A session. This hybrid event will be conducted primarily in English. We will provide simultaneous interpretation services for any content presented or questions answered in Mandarin. Online participants can choose your preferred audio channel, either the floor audio or English/Mandarin interpretation by selecting from the language bar located at the top right corner of the webcast platform. Now I would like to hand the time over to your first presenter, Mr. Conroy Cheng. Conroy, please.

Good evening, ladies and gentlemen. I'm pleased to announce our annual results for the financial year 2023. The year was characterized by ongoing geopolitical tensions, economic headwinds and lasting impact from the pandemic. Nevertheless, the group has demonstrated resilience. The group's revenue declined by 4.3% to HKD 94.7 billion in the year. Revenue of our Mainland business was down by 6.1%, mitigated by the Hong Kong, Macau and other markets, which increased by 8.8%. In line with the slowdown in revenue, core operating profit fell 5.6% to approximately HKD 9.4 billion. On constant currency basis, core operating profit dropped slightly by 0.5%. With an increase in, one, a noncash-related item, namely the unrealized loss on gold loans as gold price surged in the second half; and two, a net ForEx loss resulted from a weakened RMB. Profit attributable to shareholders declined by 19.8% to HKD 5.4 billion. The Board has proposed a final and a special dividend of HKD 0.28 and HKD 0.72 per share, respectively, totaling HKD 1 per share. Special dividend was proposed out of our commitment to improve shareholders' return. Hamilton would elaborate in detail later. Without the special dividend, full year dividend amounted to HKD 0.50, representing a payout ratio of 92.9%. On profitability, our commitment on disciplined cost management and pricing strategy optimization, yielded resilient underlying performance in the year. We were also encouraged to see a sequential COP margin enhancement in the second half despite the unprecedented challenges we faced. Our calibrated expansion strategy, coupled with the support from our franchise partners, put us 2 years ahead of our schedule to exceed the 7,000-store milestone in the Mainland. This shall position us favorably to capture post-pandemic recovery and growth. Net openings amounted to 1,631 stores in the Mainland during the year, bringing us to a total of 7,269 stores as at the end of March this year. We had a successful launch on Wonderful Life Collection during the year. The collection perfectly blends our explicit gold craftmanship and proprietary T MARK diamonds. Its sales exceeded our expectation and more importantly, the new offering built on and enhanced our existing strong customer goodwill. Last year, the group joined the ranks of other blue chip companies as a constituent stock of the Hang Seng Index and MSCI China Index, respectively. These developments not only led to an improved trading liquidity, but also supported further diversification and institutionalization of our shareholder base. The group is committed to enhance the quality of earnings by taking a proactive and responsive approach to our business. During the year, the Board initiated and endorsed 5 strategy priorities. Each priority is supported by key initiatives with a clear road map to deliver desirable goals. Now may I turn over to Hamilton to go through our financial performance.

Thank you, Conroy. Good evening, everyone. I'll first walk you through some major P&L items and key financial ratios. Despite the challenging business environment, the group's revenue remained resilient, down around 4% to HKD 94.6 billion for the year. We maintained a steady and positive momentum with store openings in the Mainland, while gold products demonstrated strength during the year. In line with our push for quality expansion, adjusted GP margin edged up 30 bps to 23.7% as the like-for-like retail margin enhancement offset impact of increased gold and wholesale revenue contribution. With disciplined cost management, SG&A expenses decreased by 2% in the year, and SG&A ratio edged up 40 bps to 14.5%, amid operating deleverage in the Mainland during the second half, of which we expect normalization in the coming year with a sustained recovery that we've seen so far. COP dropped 5.6% while its margin was stable at 10%. At constant currency basis, core operating profit would be down slightly by less than 1% year-on-year, demonstrating excellent resilience in our operating performance. Revenue breakdown by segment. Revenue from the Mainland reduced by 6% during the year and its contribution to the group's revenue amounted to more than 86%. Within the Mainland segment, share of wholesale revenue expanded to more than 54%, up from around 50% level last year, thanks to the steady opening of new stores and continuous support from our franchise partners. While in Hong Kong, Macau and other markets, revenue rose by nearly 9%. The segment benefited from Mainland's border reopening since fourth quarter of the fiscal year. Meanwhile, pent-up bridal demand was supported by the relaxation of social distancing measures in Hong Kong. As such, revenue of the segment in the fourth quarter recovered to more than 70% and of the corresponding fiscal year '19 levels. Revenue breakdown by product. Despite gold price volatility, we observed a strong demand for gold products. Revenue of gold -- of this product category stayed flat for the year, while that of gem set and watches declined by teens as such spending was weakened under the macroeconomic volatility. As a result, gold revenue contribution expanded by 320 bps to nearly 77%. Nevertheless, as mentioned by Conroy earlier, we are encouraged by the performance of Wonderful Life Collection, which demonstrated the healthy progress we have made in meeting customers' desire for gem-set jewelry. Going forward, which shall devote more resources in developing and marketing our gem-set collections. We expect a strengthened gem-set strategy will boost sales in gem-set jewelry in the future. Looking into the past same-store sales growth trend of the 2 major markets. ASP in both markets continued a resilient upward trend during the year despite a divergence of same-store sales performance. In the Mainland, same-store sales declined by 13% during the year amid the pandemic, and impact was particularly notable in the third quarter. However, the market gained footing in the last quarter following the government's policy shift. We had observed a sustained recovery with same-store sales returning to positive growth since March and that of April and May sustained at nearly 17%. In Hong Kong, Macau, the return of the Mainland visitations and bridal demand, coupled with the low base effect, we saw same-store sales almost doubled in the fourth quarter. This resulted in an 18% same-store sales growth for the full year. And the same-store volume was negative due to the marketing campaign for low-ticket items last year, creating a high base of comparison. And ASP for this year returned to a normal level. For April and May, same-store sales of Hong Kong and Macau remained buoyant at over 60%, underpinning our confidence with the sustained recovery. This slide shows the adjusted GP margin movements. As mentioned, we witnessed a retail like-for-like margin improvement of 150 bps during the year. This more than offset the impact from higher gold and wholesale revenue mix and resulted in an overall 30 bps enhancement. While we benefited from the surge in gold price, such like-for-like improvement was also driven by our pricing strategy optimization. This has validated our focus on quality expansion as we make progress on our planned initiatives. We are confident that such improvement will be sustained in the coming 2 or 3 years, supported by our initiatives on launching premium and iconic jewelry pieces that better suit our target customers. SG&A analysis. We continued to maintain a disciplined cost management approach during the year, which led to an SG&A decline of 2%. Its ratio was effectively managed to 14.5%, despite operating deleverage expected in the second half due to the pandemic. In terms of cost structure, half of our SG&A was fixed in nature. Increase in fixed costs during the year was mainly due to staff costs, which will be explained in a latter slide. We will remain highly selective in spending with a clear focus on expected returns. For example, we managed to lower the cost of packaging materials by about 13% and further cost optimization on this and other items are expected in the coming year. Therefore, we believe SG&A ratio is going to improve over time. Staff costs. In the Mainland, staff costs was down by 4%, driven by the reduction in variable component as retail sales declined. Headcount and fixed staff costs increased by 3% or 4% in the year were mainly for the new store openings. In Hong Kong and Macau, we reviewed and revised the salary structure during the year to attract and retain talent, and overall staff costs was up by 13%, which was in line with year-on-year change of retail revenue in the segment. And then leases and concessionaire fees. Concessionaire arrangement or turnover rent was still the major format of lease arrangement in the Mainland. Its amount decreased by 21% due to the decline in retail revenue and a change in sales mix. Its ratio stayed at 7.9%. Ratio of lease expenses edged up slightly by 40 bps due to operating deleverage. In Hong Kong and Macau, we closed a net of 9 stores during the year, as we made a right-of-use asset impairment in fiscal year '21, the ROUA depreciation was at a relatively low level in the fiscal year '22. Thus, overall, lease expenses fell by 4% only because of the low base effect. When stripping off the impairment impact, lease expenses would have reduced by around 18% year-on-year. Profitability analysis. Overall, GP margin trend was stable for both reportable segments as our pricing optimization efforts and rising gold price yield significant margin enhancement in the second half. In the Mainland, core operating profit decreased by 8% during the year. It continued to contribute over 90% of the group's COP, and its OP margin was fairly stable at close to 11%. In Hong Kong, Macau and other markets, adjusted GP margin was steady at around 26%, and COP surged 56% and COP margin improved by 150 bps to 5% as business was recovering in the second half. For the half year profitability trend, you may refer to Appendix 2 of this deck. Here are the major movement below the COP level. I would like to highlight 2 items, namely ForEx loss and unrealized loss on gold loans, which are noncash items. The year was full of uncertainty hanging over the macro economy, capital markets, currencies and commodities. As for renminbi, it depreciated by over 10% in the year and then rebounded 3% in the second half. This led to a ForEx loss of over HKD 300 million versus a gain of more than HKD 100 million last year. Meanwhile, the international gold price surged to almost $2,000 at the end of March. This price at the time was about 8% higher than the preceding 5-month average, and unrealized loss of HKD 1.2 billion was resulted from the mark-to-market value of our outstanding gold loan contracts at the end of March. Such loss on gold loans should be able to recover by a corresponding gain on gold inventories when they are subsequently sold assuming gold price staying at the year-end level. For an illustration on the unrealized gain or loss on gold loans, you may refer to Appendix 4 of this deck. Inventory and CapEx. Inventory was well planned and controlled with its balance increase by less than 4% comparing to last year. Turnover period lengthened by 22 days as business was seriously impacted in the third quarter. However, it's worthwhile highlighting that there was a half-on-half improvement against first half as inventory turnover days shortened from 318 days in the first half to 294 for the full year. This was possible given our prudent inventory management. With the recent recovery, we believe that we will be on track to restore turnover to around 270 days in the coming year. CapEx. Other than the recurring items and those for POS openings, additional CapEx was mainly for projects such as production capacity expansion in Wuhan and purchase of staff quarter during the year. We have been closely and carefully revisiting our investment and expect the CapEx next year to be similar to the fiscal year '23 level that is around HKD 2 billion. And then a summary of cash flows. Operating cash flows net with leases paid was close to HKD 11 billion, similar to last year's level. This is the major reason why we maintained the full year dividend at the same level as last year. Payout ratio versus net profit looks high just because of the two noncash items we just discussed. Under normal circumstances, without these items, our payout ratio would still be around 70% to 80% level similar to our usual practice. Pro forma free cash flows amounted to HKD 6.2 billion in the year, which is in line with our expectation and is more than sufficient to cover the full year dividend payment. With a strong cash balance and cash flow generation, this allowed us to repay some of our bank loans while maintaining a cash-rich position as of March. And lastly, capital structure highlights. During the year, bank borrowings reduced by over HKD 3 billion as we repaid some of the bank loans. Net gearing ratio edged down slightly to less than 28%. When excluding gold loans, we were in a net cash position of around HKD 6 billion. During the past 3 years, we were taking a more conservative approach in managing our capital structure. Now as the pandemic is over and market is gradually recovering, we believe it's time to revisit our capital structure and make more efficient use of our financial resources. Also, earnings quality, operational efficiency and ROE enhancement are some important initiatives based on our current strategy. Therefore, after careful consideration, we propose a special dividend to increase our shareholders' cash return. This will also improve ROE in the future. After the final and special dividends, we believe our net gearing, excluding gold loans, will still be at a low level by the interim period end and we'll return to a net cash position at the end of this fiscal year. And we expect ROE to improve to around 25% to 30% for the fiscal year '24. So this concludes my part. And I will turn over to Kent for business update. Thank you.

Okay. Thank you, Hamilton. In the Mainland, we opened a net of 1,631 point of sales. As of March this year, there were 7,269 stores in the Mainland. During the year, lower tier cities delivered a relatively stronger RSV growth, mainly due to underserved market giving rise to growth opportunity to support our market penetration strategy and the impact of the pandemic in few key top tier cities. In terms of operation, franchise model made up approximately 90% of the net openings during the year. This drove a stronger RSV growth of franchise stores comparing to self-operated stores. As of March, franchise comprised about 77% of our store count in the Mainland. Here, in the ramp-up chart of our stores in the Mainland, which covers both self-operated and franchise stores. Although the average sales per store was affected by the pandemic in the year, we are encouraged to see that ramp-up of our stores was generally similar to last year. This demonstrated resilience and stability of a store operation. In general, new stores reached 50% to 60% of the average sales of same-store during the first 2 years of operations and evolved steadily to a mature store in 6 to 8 years. Our calibrated expansion strategy put us 2 years ahead of our original schedule to reach 7,000 stores in the Mainland, which positions us favorably to capture post-pandemic recovery and growth. This allows us to execute quality expansion trend going forward, focus on increasing store productivity and customer service enhancement across all stores. With that, we will review and monitor our existing franchisee, working with them closely and providing the necessary support to improve performance, as need. In terms of additions, we expect to have 600 to 800 net openings in FY '24, but we'll monitor the situation closely and revise our expansion plan accordingly. Meanwhile, digital customer engagement is an integral part of our omnichannel initiatives, which aims to drive both profit and private domain traffic as well as footfall at our physical stores. We have been consistently utilizing social media platforms and communities to maintain strong connection with our existing clientele and to provide a holistic online/offline customer experience as we expand our customer base. For instance, we ran a Douyin challenge to promote CTF-HUA Collection during the Lunar New Year, generating more than 140 million hits. On e-commerce business, its RSV decreased by 6% during the year, mainly attributable to a decline in sales volume. Its share to the RSV in the Mainland was relatively steady at about 5%. In terms of retail sales volume, its share was about 12%. As one of the strategic priorities, we will focus on upgrading omnichannel customer digital experience and enabling business performance. Here is an update of Hong Kong, Macau and other markets. Business in Hong Kong was recovering with an RSV growth of 24% during the year. Its RSV contribution in the segment lifted to almost 70% from 63% a year ago. On store network, we closed a net of 9 stores in Hong Kong-Macau to enhance operational efficiency. With 85 stores in Hong Kong-Macau, we believe that the current store network is sufficient to support our growth. We shall continue to closely the analyze data on store performance, leasing terms and the pace of visiting recovery to identify any emerging opportunities and adjust our plan as needed. All in all, we shall stay disciplined in cost and point-of-sale management. In other market, we net opened 9 stores, mainly in Southeast Asia. Other markets continued to benefit from an increase in cross-border mobility and rising local demand. We witnessed a strong sales recovery in Asian countries, including Singapore, Malaysia, Japan and Korea. While duty-free business in Hainan also rebounded significantly in the fourth quarter. We expect the Asian countries will continue to be supported by travel consumptions and robust local demand due to the recovering economy. We will explore opportunities in jewelry markets with strong retail demand. Our efforts in bringing customer a new and differentiated product experience continue to bear fruit. In response to the heightened highlighted appreciation for culture and aesthetics among younger customers, we unveiled Art of Himalaya, HUA, a new series under HUA Collection. The series expresses the unique beauty of Tibet by reinterpreting elements such as regional architecture, patterns and colors. The series received an overwhelming response in the Mainland while the CTF-HUA Collection overall contributed closely -- close to 40% of Mainland gold product RSV during the year. Meanwhile, Wonderful Life Collection perfectly showcases our innovative and exquisite craftsmanship. Given the physical characteristics of gold, this combination involves technological expertise built on our strength. This collection received continued demand since its launch in July last year. Following the encouraging demand and as part of our growth for next year, we expect to expand point-of-sale coverage and introduce more SKU. For HEARTS ON FIRE, its revenue was fairly stable in the year despite the macro challenges. Hong Kong was the strongest market, with sales rose by over 50%, while North America, which account for 53% of the brand's revenue, saw impact from higher inflation. New designs for the Aerial and Lorelei Collections were released during the year with excellent results. During the launch period, sales of each collection grew significantly year-on-year, with Aerial sales up more than 200% globally and Lorelei sales up over 80% in China. This concludes my part, and I will turn over to Sonia for market outlook and strategies.

Thank you, Kent. Looking ahead, we expect FY 2024 to be a year of recovery and normality with same-store growth to resume growth in the Mainland and Hong Kong and Macau. The government's focus on getting businesses back in Mainland will be a positive catalyst to drive retail and economic activity in both the Mainland and Hong Kong and Macau and is supportive of our FY 2024 performance. We are very encouraged by the gradual resumption of business in our key markets seen in the last couple of months. We're committed to stay vigilant and nimble to the situation across our extensive network in order to recalibrate our resources and operations accordingly. In the Mainland, the 2 sessions in early March this year also signaled a clear shift towards growth, setting a higher target this year for the creation of urban jobs, a GDP target of around 5% and reiterating the importance of stimulating domestic consumption. Whilst we expect the near-term recovery in the Mainland may be gradual and uncertain global economic conditions, we are confident in the mid- to long-term prospects of the jewelry market and economy. In Hong Kong and Macau markets, the return of Mainland Chinese tourist spending will catalyze further recovery of our business. Issuance of consumption vouchers from Budget 2023 to '24 should support the recovery in retail activity and traffic in Hong Kong. With an expected uptick in foot traffic, operating leverage in Hong Kong and Macau shall improve, bolstering our profitability outlook in FY 2024. We're dedicating to strengthening our business by strengthening competitiveness, enhancing the quality of earnings and achieving sustainable value creation for all stakeholders in the long run. To guide our progress and foster collaboration at every level of our organization, we have set out 5 strategic priorities with clear work plans. These strategic priorities include: first, targeted brand positioning to increase brand desirability and build revenue resilience; second, product optimization to strengthen product differentiation, optimized product portfolio and reduce inventory days and turnover days; third, accelerated digitalization to promote data-driven culture and accelerate digital transformation to optimize business performance; fourth, enhancing operational efficiency and resilience to optimize competitiveness and efficiency. Last but not least, talent cultivation. People is always our greatest asset. Under this priority, we target to nurture a people-first culture and strengthen talent development in supporting our business growth. Key initiatives have been formulated, and we shall execute these diligently in the next 2 to 3 years, supporting the realization of our key goals, taking branding and products as examples. On branding, we are undergoing a brand transformation under which new store image, display, packaging will be rolled out gradually. You will be able to first experience our store with refreshed image in Hong Kong by summer next year. Furthermore, revamp of our loyalty program and centralized marketing strategy across our operating markets are underway to create the most impactful campaign and consistent experience to our customers. On products, we are in the course of rationalizing our SKU to focus on developing core assortments and signature collections. We target to reduce 30% to 40% of our SKUs in the coming 2 to 3 years. As a result, inventory turnover is expected to be improving to 240 days eventually. Meanwhile, we shall be unveiling new designs of CTF-HUA Collection by the summer, and we have a 3-year product launch plan to refresh our product experience continuously. With all of our key initiatives under our 5 strategic priorities, we are confident that we will progress steadily towards our goals in the coming 2 to 3 years. This concludes our presentation for today. Thank you.