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3 Things I Like About Chow Tai Fook Jewellery

Chow Tai Fook Jewellery Group Ltd (SEHK: 1929), or CTF, manufactures and sells jewellery products. The group has a multi-brand strategy that consists of brands such as ARTRIUM, JEWELRIA, and CTF WATCH, as well as an extensive retail network in China, Japan, Korea, Southeast Asia, and the US.

CTF is the market leader in jewellery and has a market capitalisation of around HK$68.6 billion (US$8.76 billion). The group has a wide array of brands and products and is also exploring new retail concepts such as pop-up stores, experience stores, and cloud kiosks.

The group is also investing in the latest technologies such as blockchain applications and data analytics in order to improve its process flow. With a fast-growing e-commerce business, CTF is implementing effective online to offline (O2O) strategies to capture more opportunities to grow its business. Given its exciting future, here are three things that I like about the business.

1. Recovering revenue and net profits

Investors may recall that the Chinese Government (under President Xi Jinping) announced a clampdown on luxury spending amid a wider anti-corruption drive that was widely implemented in 2014-2015 and had a negative impact on CTF’s business as revenue in FY 2016 fell from HK$64.3 billion to HK$56.6 billion.

Net profit that year also plunged nearly 50% from HK$5.5 billion to HK$3 billion. However, as CTF has a strong brand and market leadership, revenue and net profit have managed to climb back up in FY 2018 and FY 2019.

Although gross profit margins are still below the peak of close to 30%, it is heartening to know that the net profit margin has recovered from the low of 5.3% in FY 2016 and that net profit is seeing a rising trend for three consecutive years.

2. Consistent free cash flow

Even though CTF suffered from declining profits amid the anti-corruption crackdown, the group still managed to generate free cash flows (FCF).

To be fair, FCF did fluctuate significantly over the five-year period due to the drop in operating cash flow from FY 2016-2018 but recovered strongly in FY 2019. CTF’s ability to continue to generate FCF despite the volatile consumer environment is impressive.

3. Dividends

While CTF dividends have admittedly been volatile over the five-year period, with the fall in consumer demand due to the anti-corruption crackdown, the thing that I like is the group’s ability to continue paying out a dividend despite the headwinds.

Note that the total dividend was cut just once, from FY 2016 to FY 2017, but since then, the annual dividend has grown for two consecutive years in line with the recovery in profitability.

Proxy for growing consumer demand

CTF remains one of the best proxies for discretionary, luxury spending. Aside from the blip caused by the anti-corruption crackdown, I expect to see continued demand for CTF’s products as China’s middle-class segment continues to expand.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.