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

Good afternoon, I'm your MC today, Heidi. Welcome to Chow Tai Fook Jewellery Group Limited Interim Results Announcement 2023/'24. I will first introduce members of the management to you. We have Mr. Conroy Cheng, Vice Chairman; Ms. Sonia Cheng, Chairman; Mr. Kent Wong, Managing Director; Mr. Hamilton Cheng, Executive Director and CFO. Ms. Sonia Cheng will take us through the highlights of the performance and group strategies. And then Mr. Wong will take us through the latest business situation to be followed by Mr. Hamilton Cheng, who will take us through the financial highlights. Finally, Mr. Conroy Cheng will talk about market overview to be followed by a Q&A session. Over to Madam Sonia Cheng.

Good afternoon. I'm pleased to announce our interim results for the financial year 2024. First of all, I would focus on some important highlights. Despite the macro challenges, the group has managed to deliver a strong set of interim results due to our transformation strategy being very effective and good progress with reform work. We are happy to see that core operating profit increased 37.7% to HKD 6 billion. On a constant currency, it was up 44.3% year-on-year. Our revenue rose 6.4% to HKD 49.5 billion. On a constant currency basis, the growth is 11.3%, validating our clear focus towards higher value growth. Profit attributable to shareholders in the first half increased by 36.4% to HKD 4.6 billion. With a rise in profit, the Board has declared an interim dividend of HKD 0.25 per share. Payout ratio is about 54.9% for the first half, in line with our business seasonality, we expect stronger cash flow in the second half. Overall payout ratio will stay between 70% and 80%. During the first half, we achieved great progress in terms of revamp of our brand. We successfully unveiled HUA collection products with our first-ever 360-degree global market campaign which received overwhelming response in terms of media coverage and engagement with targeted audience. We're committed to delivering quality growth and adopting a bottom-up approach centered on the 5 strategy -- strategic priorities: brand revamp, product optimization, operational efficiency enhancement, talent cultivation and accelerated digitalization to sustain our growth trajectory. As we steadily transition into a new phase of higher value growth, we are focused on enhancing earnings quality and return to equity and capital. During the first half, we were encouraged to observe a continued improvement in mobility and retail activity in our key markets. We'll continue to optimize the return to our shareholders. When it comes to flow of traffic of our customers and retail activities, things continue to improve. Our RSV in Hong Kong, Macau and other markets surged by 58.5%, while that in Mainland China, it increased by 10.8%. Building on the positive momentum observed in preceding quarters to sustain profitability enhancement, we stay focused on executing an optimized pricing strategy and cost management, coupled with strengthening gold price, we adjusted gross profit margin increased by 140 bps to 23.8%. At the same time, SG&A ratio improved by 140 bps. As a result, core operating profit margin expanded by 280 bps to 12.1%. For financial year '24 in the first half, we have implemented the following measures. We formulated our centralized global marketing campaign strategy last year. To ensure consistency and maximize synergy and impact, we kicked off our first-ever 360-degree global marketing campaign. On top of HEARTS ON FIRE VELA collection, another signature diamond collection namely the Chow Tai Fook Dancing Lily was developed. We continue to deepen our natural diamond strategy, and will also continue to be the pioneer and craftsmanship. This effectively raises diamond awareness among our customers. And it is validated by the very good response to our diamond exhibition in September. Following great success, we are going to launch another exhibition in Beijing. In terms of our strategies, I want to focus on a number of highlights for the second half. We will focus on the 5 major strategies, underlining sustained growth trajectory. The brand transformation underscores Chow Tai Fook's unwavering commitment to upholding a culture of creativity and innovation. And coming summer, we are going to have refreshed store images, so that we can offer something very brand new in terms of display to our customers. Hopefully, you will all come and visit us. Other than enhancing productivity and customer experience, will also launch a new customer loyalty program. Through diversified services, we can cater to our customers with different lifestyles and personalities. To stay responsive to emerging customer trends, we are also rationalizing our product portfolio and optimizing product planning process to boost our sales and expand gross profit margin. We're excited with signature and fashion collections cater to respective target audiences to drive demand will be unveiled as we steer along this transformation journey. With the 5 key initiatives, we are confident that we will progress steadily towards our goals in the medium term. I will now turn it over to Kent.

Thank you, Sonia. I want to share with you what happened in the Mainland business. We opened a net of 189 Chow Tai Fook Jewellery stores during the period, mostly in franchised format. New openings were mainly located in shopping malls. As of end of September, there were 7,458 stores in the Mainland, where 76.9% were franchised POS. During the period, RSV, our franchised POS in the Mainland rose by 17.1%, driven by the rapid store opening over the past 12 months and an overall ramp-up of store productivity. The group is fully committed to enhancing store productivity and customer experience. We will achieve greater high-value growth. We expect within the financial year of 2024, there will be a net opening of 300 to 400 stores in Mainland China. We will stay agile and nimble to effectively calibrate our resources to capture new growth opportunities. In terms of e-commerce, during the recent Double 11 festival, we sell very well on Tmall and JD.com. In jewelry category, we ranked #1. And GMV transaction strongly grew by close to 90%. During this period, our e-commerce contributed to 4.6% to RSV in Mainland China and 12.2% (sic) [11.2%] in volume. ASP increased from HKD 1,800 in the first half of '23 to HKD 2,100 in first half '24. Enhancing digital customer engagement has always been one of our focuses. We continue to boost our online presence through targeted digital marketing initiatives. For Hong Kong and Macau and other markets during the first half, they continue to benefit from the progress of return of Mainland tourists. RSV increased by 58.5% during the first half, driven by the return of Mainland tourists, the average daily traffic at our storefront in Hong Kong and Macau increased by 51.1% year-on-year. RSV in Hong Kong grew by 36.6% and 105.5% in Macau in the period. In terms of retail network management strategy, we'll continue to execute effective cost management to enhance profitability while continuing to assess market opportunities for potential additions. As for other markets, we expanded our retail network in Thailand and Canada to capture retail tourism and increase in local demand during the first half. We have also added in Hainan, Beijing and Shanghai, our new duty-free store network. During the period, we focused on gold and diamond products. In August, we have relied on the inspiration by the Tang Dynasty to come up with this new HUA collection offering, bringing new experience to our customers. With exclusive craftsmanship, creative and innovative designs, the HUA collection continues to evolve with consumer preference to sustain its popularity and strong brand positioning. It contributed about 37.3% to gold products RSV in the Mainland during the period. Our global marketing campaign also helped promote sales in Hong Kong and Macau with RSV surging by over 350% in the period. If you have not yet had the chance to meet our latest designs, let me show you this video. [Presentation]

Now let's talk about diamonds. We continue to enhance and optimize our product offerings. During the first half, we enriched our gem-set product offerings with the launch of a new diamond collection under the HEARTS ON FIRE brand, the VELA collection, touting the unparalleled sparkle of signature cut diamonds featuring a French cut pave setting. In late September, we kicked off our Diamond brands global marketing campaign, led by our diamond-themed exhibition Beyond Time, held in Tai Kwun, Hong Kong. As mentioned earlier, this exhibition is one of our key initiatives to champion our pioneering legacy and leadership in craftsmanship in natural diamond jewelry design. It also effectively raises diamond awareness and enhances consumer desirability of gem-set jewelry. The exhibition showcased dazzling and vibrant diamond art pieces, alongside art installations that celebrated the beauty of these precious stones. Now I would invite you to look at another video. [Presentation]

To conclude, we will continue to strengthen our brand positioning and enhance our brand desirability. We stay relevant ahead of the industry curve with a clear vision to serve our targeted audience with timeless jewelry pieces. Now I will turn over to Hamilton to go through our financial performance.

Thank you, Ken. I will first walk you through some major P&L items and key financial ratios. Despite market uncertainties beyond our control, the group's revenue was up 6.4% to almost HKD 49.5 billion for the first half. On a constant currency basis, our revenue would have grown by 11.3%. Our efforts in optimized pricing strategy and operational efficiency enhancement coupled with benefit from gold price surge, yielded resilient underlying performance. Adjusted gross profit margin improved by 540 points to 23.8%. Core operating profit margin expanded by 280 points to 12.1%. Amid the improved and high operating leverage driven by strong sales growth in Hong Kong and Macau as inbound visitation recovered. Our SG&A ratio improved by 148 points to 12.4%. SG&A expenses decreased by 4.5% in the period due to our sustained efforts in cost management. In line with our commitment to enhancing earnings quality, COP grew 37.7% to HKD 6 billion, a much faster pace than our top line growth. On a constant currency basis, COP would have achieved an even higher growth of 44.3%, surpassing management's expectations. Next, let's look at some revenue breakdown with a steady ramp-up of stores and selection approach to new store openings. Wholesale revenue in the Mainland grew by 2% or 7.6% on a constant currency basis. It's share to the Mainland revenue arrived 56.4%, up 1% point from a year ago. By product, Mainland consumers demand for gold products was buoyant despite strength in gold prices, riding on a strong reception of the HUA collection. The launch of new designs together with our global campaign supported 12.8% increase in gold products revenue on top of the high base last year. As a result, gold products contribution to group's revenue further expanded by 450 points to 80.1%. Quality gem-set products were still well received by consumers. HEARTS ON FIRE brand distributed exclusively through Chow Tai Fook demonstrated a growth of 42%. It's a strong statement to the positive reception of our quality products curated for targeted audiences. Concerning same-store growth, ASP in both our major markets was resilient and exhibited positive growth in the Mainland from October 18th of November, same-store growth in Mainland China was up 6.7%. In the second half, we will continue to benefit from this low base figure. In Hong Kong and Macau, the market continue to benefit from the progressive return of tourists. Same-store sales growth of both places remained buoyant at 47.6%. As for SG&A sales, as we mentioned, we have optimized our efficiency, driving it down by 4.5%. And with better operational efficiency, the expenses further dropped in Hong Kong and Macau by 140 points to 12.4% because we have centralized global efforts to do promotion. We enjoy a drop of 46.3% in terms of our expenses. Now profitability analysis. In the first half, we enjoyed robust COP growth by 37.7%. Hong Kong, Macau and other markets, COP improved by 487% which is very encouraging. Profitability also enhanced significantly in our key segments. In the Mainland, COPM rose 250 points to 12.8%. While in Hong Kong, Macau and other markets, it jumped 650 points to 8.9%, achieving a record high since 2016. In terms of cash flow, we have generated very strong cash flow from our business after reduction of our rental expenses. The net flow amount was HKD 7.1 billion, up by 47% from the previous year compared with a negative HKD 3.3 billion figure, the pro forma free cash flow during the period was as high as HKD 6.5 billion. We are actively reviewing how to allocate our assets in a way to maximize return for our shareholders. We are confident that with the support of strong cash flow, we are going to create very good and sustainable dividend return for our shareholders. Finally, I would like to take you through the capital structure analysis. From time to time, we stay prudent and review our capital structure to maximize efficiency and return of available financial resources. Excluding gold loans, which reflects our true underlying gearing, we're in a net cash position. By the end of September, we have an ample liquidity of HKD 5.9 billion on our balance sheet. Thank you. I will now hand over to Conroy to talk about market outlook.

Thank you riding on a strong set of financial performance in the first half of '24, we expect continuous recovery and normality in the second half. The government's focus on domestic consumption will support retail and economic activity in the Mainland and Hong Kong, Macau. We are encouraged to observe resilient jewelry industry sales, outpacing overall retail sales growth between April and September in the Mainland and Hong Kong. In response to the current market conditions, our approach is to play to our strength of being vigilant and nimble to act. This includes effectively calibrating our resources to capture new growth opportunities as well as targeted and selective capital allocation to maximize capital efficiency and investment returns. In Mainland China, the economic policy adjustments reiterated expanding domestic demand and improving employment. We expect a gradual and uneven recovery amid uncertain global economic conditions, but remain confident in the mid to long-term growth prospects of the jewelry market and the economy. In terms of Hong Kong and Macau, inbound tourism and labor market continue to drive consumption demand and growth. The latest policy address laid down measures to boost tourism in Hong Kong, including enhanced collaboration with Mainland and the development of signature tourism products, touting Hong Kong's diversified cultural landscape, which will support further recovery. With a continued improvement in foot traffic and the push from government's favorable initiatives, we expect to sustain benefits from improved operating leverage. With our commitment of delivering sustainable, long-term stakeholder value creation, we have made clear achievements in the first half of financial year '24 along the journey of transformation. Transformation is on track. We drove quality earnings growth with 37.7% growth in COP to Hong Kong 6 billion in the first half of 24 and sustained profitability improvement with a 280 points improvement in core operating profit margin. In order to enhance our competitiveness and enhance earnings quality, we executed a clear and defined road map across 5 strategic priorities. We will continue to focus on the execution of pricing optimization strategy and cost management. We are charting steady progress in transition to a new phase of higher value growth to maximize return to our shareholders. That concludes our presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call].