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3 Things You Should Know About Chow Tai Fook Jewellery

Chow Tai Fook Jewellery Group Ltd (SEHK: 1929) is a well-known company among dividend investors with its high dividend yield of now close to 10%.

Investors who are looking to invest in the company should understand its financial track record and growth prospects ahead. With that, here are three things to know about Chow Tai Fook before you invest in the company.

Business background

Chow Tai Fook, which was founded in 1929 and is an investment holding company. It is mainly engaged in the business of manufacturing and selling of high-end luxury, mass luxury and youth line jewellery products. Some of those products include gem-set jewellery, gold products and platinum/karat gold products.

Chow Tai Fook is also involved in the distribution of various watch brands. As of 31 March 2019 (its financial year-end), the group had 82 point-of-sales (POS) outlets in Hong Kong, 19 in Macau, and 2,988 in Mainland China.

The following chart summarises Chow Tai Fook’s business model:

Source: Chow Tai Fook 2018/2019 annual report

Financial track record

No investment analysis is complete without looking at the company’s financial track record. Here, let’s explore Chow Tai Fook’s revenue, core operating profit, and earnings per share. The core operating profit shows the profitability of its businesses without unrealised losses or gains on gold loans.

Over the past five fiscal years from FY2015 to FY2019, revenue grew from HK$64.3 billion (US$8.2 billion) to HK$66.7 billion. The growth has been dismal as revenue took a fall in both FY2016 and FY2017. Similarly, core operating profit increased from HK$6.77 billion in FY2015 to around HK$7 billion in FY2019 but with dips in FY2016 and FY2017.

Source: Chow Tai Fook 2018/2019 annual report

The slowdown in FY2016 and FY2017 was mainly due to softness in the luxury retail market in Greater China. The negative same-store sales growth (SSSG) in Mainland China, Hong Kong and Macau during those years confirms this.

Source: Chow Tai Fook 2018/2019 annual report

The tide began to turn in the second half of FY2017. In that period, revenue grew by 4.4% year-on-year, which marked a vast improvement compared to a 23.5% year-on-year decrease in the first half of FY2017.

In FY2019, Chow Tai Fook’s revenue and core operating profit grew 12.7% and 24.4%, year-on-year, respectively.

Looking ahead

In Chow Tai Fook’s FY2019 annual report, Dr Cheng Kar-Shun, Henry, Chow Tai Fook’s chairman, said the following regarding the business outlook (emphases mine):

“As we traverse 1HFY2020, we expect that the US-China trade tensions would continue to be volatile while the global economic growth remains soft. While noting the mixed signs of progress in the latest stage of the trade talks, I am indeed pleased to see some signs of recovery of consumer sentiment in Mainland China over recent months which boosted our growth there.

The Group will adhere to its thorough planning of gaining a foothold in Mainland China, especially in lower tier and county level cities to fully capture the rising purchasing power of consumers. In addition, our biggest market Greater China is seeing healthy economic trends with the fruits of decades of urbanisation turning into rising middle class consumption.

Being the world’s key economic powerhouse, the Chinese government will continuously roll out multiple stimulus measures to bolster its domestic consumption and tackle current macro-economic challenges. Indeed, measures such as tax cuts and reduction on value-added tax should mitigate short-term negative impact and boost local consumption. …  At all events, we remain optimistic and confident about the long-term prospects of the jewellery market”

Even though the US-China trade war doesn’t seem to be abating any time soon, there is some recovery of consumer sentiment in China. Over the longer term, the jewellery group is confident of doing well, and that should bode well for Chow Tai Fook’s shareholders.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.