Chow Tai Fook takes it slow in China after profit slump
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Chow Tai Fook Jewellery Group, the world’s largest listed jewelry chain, will be more “selective” in expanding in mainland China, after it posted on Tuesday the steepest decline in full-year profit since it listed locally due to the economic slowdown.
Listed in 2011, the jeweler saw its net profit plunge 46% to 2.94 billion Hong Kong dollars ($379 million) for the 12 months ended in March, in line with its profit warning issued on May 12. Full-year revenue fell 12% to HK$56.59 billion from a year ago. Its mainland business contributed more than half of its revenue.
“The market is still subject to short-term volatility,” said Chairman Henry Cheng Kar-shun, son of Hong Kong billionaire Cheng Yu-tung whose business empire includes developer New World Development and transport companies. “But we are cautiously optimistic about the long-term growth prospects in the greater China market.”
Chow Tai Fook’s retail network expanded to 2,300 points of sales in mainland China, Hong Kong, Macau, Taiwan and South Korea as of end-March, with a net addition of 62 from a year ago. Managing Director Kent Wong Siu-kee told reporters that net store openings will be similar to last year, but a majority of them will be in third- and fourth-tier Chinese cities, citing lower business costs there.
The group will shut down seven to eight stores in Hong Kong and Macau to cut cost, although it does not have large-scale layoff plans this year. Last year, it lost about 9% of its staff in Hong Kong and 6% in mainland China. “The pie [of luxury retail] is so much smaller than before,” said Cheng, but added that the retail downturn was cyclical rather than structural.
Hong Kong retailers still face challenges as sales fell for the 14th consecutive month in April, with a dwindling number of tourists from mainland China. Sales of jewelry and watches fell 16.6%, according to official statistics, although the decline has narrowed.
Michael Cheng, Asia-Pacific retail and consumer leader at PricewaterhouseCoopers, expects the luxury sector to recover in 2017 due to a low base effect. “Luxury is a sector so much subject to volatility in the macro market,” he said on Tuesday, adding that more luxury retailers would offer deeper discounts and turn to the “affordable luxury” segment for opportunities.
“But we are cautiously optimistic about the long-term growth prospects in the greater China market.”
Other retailers have a more aggressive China strategy. Rival Tse Sui Luen Jewellery reported a 40% fall in net profit last year, dragged down by a slackening retail market in Hong Kong. The Hong Kong-listed jeweler is counting on the domestic mainland market to drive revenue growth.
“At least half of our income will come from mainland China,” TSL’s Financial Officer Estella Ng told reporters in late May, adding that the group would open at least 100 sales points there in the next two years.
Chow Tai Fook’s shares closed 4.8% higher at HK$5.87 on Tuesday before the earnings announcement. Their shares have plummeted 34% from a year ago, widely underperforming the benchmark Hang Seng Index. Analysts at JP Morgan gave it an “underweight” rating with a price target of HK$3.50 as of mid-May, citing “no positive catalysts” for the stock in the short term.
Despite its weak earnings performance, the jeweler declared a special dividend of HK$0.22, bringing total dividends for the year — including its interim and final payout — to HK$0.8, up from HK$0.28 last year. Analysts said the special dividend was a sweetener to boost its share price, but the management justified it as a move to reward shareholders.
Nikkei staff writer Joyce Ho in Hong Kong contributed to this story.
Questions & Answers
Q.What contributed to Chow Tai Fook's significant profit decline this past year?
What contributed to Chow Tai Fook's significant profit decline this past year?
The company reported its steepest decline in full-year profit, falling 46% to HK$2.94 billion, primarily due to the economic slowdown. Its full-year revenue also decreased by 12% from the previous year.
Q.How will Chow Tai Fook's expansion strategy in mainland China change moving forward?
How will Chow Tai Fook's expansion strategy in mainland China change moving forward?
The company plans to be more selective in its mainland China expansion. While net store openings will be similar to last year, the majority will be in third- and fourth-tier cities due to lower business costs.
Q.Why did Chow Tai Fook issue a special dividend despite its weak earnings performance?
Why did Chow Tai Fook issue a special dividend despite its weak earnings performance?
The company's management justified the special dividend as a way to reward shareholders. Analysts, however, suggested it was intended as a sweetener to boost the share price.
Q.How does Chow Tai Fook's strategy for China differ from that of its rival, Tse Sui Luen Jewellery?
How does Chow Tai Fook's strategy for China differ from that of its rival, Tse Sui Luen Jewellery?
Chow Tai Fook is slowing its expansion and focusing on lower-tier cities. In contrast, Tse Sui Luen Jewellery has a more aggressive strategy, planning to open at least 100 sales points in mainland China over the next two years.
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