Good evening, ladies and gentlemen. Welcome to Chow Tai Fook Annual Results Analyst Presentation for the Financial Year 2017. Let me introduce the management on stage. They are Mr. Kent Wong, the Managing Director, Mr. Hamilton Cheng, the Finance Director, and Ms. Danita On, the Director of Investor Relations and Corporate Communications. Mr. Hamilton Cheng will present end results, operational highlights, and financial review. Mr. Kent Wong will present our business update. Ms. Danita On will present e-commerce, marketing, and branding. Finally, Mr. Kent Wong will conclude the presentation with the group's business outlook and strategies. After that, we will have Q&A session.
Now, may I invite Hamilton to present. Hamilton, please.
Okay, thank you. Good afternoon, everyone. I am pleased to announce our fiscal year 2017 annual results. Despite the challenging business dynamics, we continue to strive for excellence in our products and services in the year. Encouragingly, our operations saw signs of stabilization during the second half. Revenue totaled HKD 51.2 billion, down 9.4% year-on-year. Despite a negative full-year sales growth, the tide began to turn in the second half, and our revenue resumed to 4.4% growth in the second half. Same-store sales growth in Mainland China decreased by 5.2%, while same-store sales in Hong Kong and Macau was down by 12.4% in the year. Thanks to the improving sales trend in the second half, the decline in core operating profit in the year narrowed to 7.9%, a significant improvement versus 24.5% drop last year.
Profit attributable to shareholders increased by 3.9% year-on-year to HKD 3.1 billion, with basic EPS of HKD 0.306. The board has proposed a final dividend of HKD 0.10 per share and a special dividend of HKD 0.20 per share. For the full year, regular and special dividends were HKD 0.16 and HKD 0.35 per share, respectively, totaling HKD 0.51 per share. Excluding special dividend, payout ratio approximated 52% in the year. Some operational highlights for the year. We opened a net of 62 POS during the year, bringing the total number of POS to 2,381 as at end of March. During the year, we opened a net of 67 POS in Mainland China while closing a net of seven POS in Hong Kong and Macau.
Chow Tai Fook T MARK diamond brand, a disruptive innovation launched in August last year, was well received by the market. As at end of March, 75 POS in Mainland China and 27 POS in Hong Kong and Macau carried T MARK products. In Mainland China, our e-commerce business grew steadily by 41.4% in the retail sales value and contributed 9.3% of our retail sales volume in China. We have been expanding the presence of Hearts On Fire, primarily in shop-in-shop or counter-in-shop format through our extensive retail network. As at end of March, Hearts On Fire was present in 187 shop-in-shop or counter-in-shop, 21 POS, and 509 retail locations globally.
Then we will have our summary of income statement. For the full year, revenue declined by 9.4% to HKD 51.2 billion, with an improving trend looked at in the second half that I just mentioned. As operations stabilized, the second half revenue grew 4.4%, which is a remarkable improvement versus the decline of 23.5% in the first half. Reported GP margin improved by 160 bps, mainly due to an unrealized hedging gain of more than HKD 300 million recorded during the year compared to a loss of more than HKD 700 million last year. Adjusted GP margin dropped by 40 bps year-on-year with a less favorable product mix, partially offset by an expansion in GP margin of gem set.
SG&A expenses decreased by 11.3% to HKD 10.3 billion. Full year SG&A ratio managed to improve by 40 bps to 20.1%. Core operating profit margin, which mainly excluded the impact of unrealized gain or loss on gold loans and net foreign exchange loss, also rose by 20 bps to 9.1%. Our revenue contribution from Mainland China increased steadily over the past few years and contributed over 60% of total revenue in the year. Both reportable segments showed encouraging signs of turnaround in the second half. Hong Kong and Macau and other markets returned to a revenue growth of 0.8% during the second half, while Mainland China recorded an even stronger rebound of 6.8% year-on-year.
Product mix, however, worsened in the year with the higher revenue contribution from gold products, especially during the second half as gold price weakened. Gold products revenue contribution reached 60.1% in the second half, up 420 bps year-on-year and 650 bps when compared to the first half. During the year, same-store sales growth recovery in both markets were driven by an increase in ASP. Same-store sales volume was down by 16% and 19% in Mainland China and Hong Kong and Macau, respectively. Mainland China has consistently outperformed Hong Kong and Macau in terms of same-store sales growth trend over the past eight quarters, signifying a stronger recovery momentum.
Hong Kong and Macau same-store sales growth returned to positive in the fourth quarter. This is the first time Hong Kong and Macau recorded positive same-store sales growth after 12 consecutive quarters of decline since the fourth quarter of our fiscal year 2014. For the products, the same-store sales growth of gem set in Mainland China stabilized from the third quarter onwards, reflecting a recovery in fundamentals. Full year ASP at the same store level in Mainland China rose steadily by 6% to reach HKD 6,200 level. Hong Kong and Macau gem set same-store sales growth, on the other hand, was still under pressure, as affected by a year-on-year decline in customer traffic. For gold products, same-store sales growth in both Mainland China and Hong Kong and Macau had a remarkable rebound since the second half.
Full year ASP of gold products in Mainland China and Hong Kong, Macau was up by 15% and 19%, respectively. The lift in ASP was partly due to an increase in average international gold price of around 9% during the year. Regarding the profitability, Mainland China contributed to over 75% of the group's core operating profit in the year. Thanks to the business turnaround in the second half, Mainland China's COP delivered a 13.7% growth in second half, resulting in a 6% growth for the full year. For adjusted GP margin in Mainland China was uplifted by 50 bps, primarily due to margin improvement on gem set jewelry. On a full year basis, COP margin of Mainland China improved by 150 bps to 11.5%, helped by the expansion of GP margin and reduction of operating expenses.
Hong Kong and Macau, and other markets also achieved an encouraging profit improvement in the second half. The segment recorded an 80% growth in COP during the second half, compared to an 81% decline in the first half. On the other hand, adjusted GP margin in Hong Kong and Macau dropped by 180 bps, mainly due to an increase in gold product mix and jewelry trading income. Hong Kong and Macau COP margin fell by 210 bps to 5.3% on a full year basis, while for the second half, COP margin improved to 7.9%, up by 610 bps from 1.8% in the first half as business stabilized and the benefit of operating leverage kicked in. With effective cost-saving measures, we managed to trim SG&A expenses by 11% to HKD 10.3 billion, with all components recording a year-on-year decline.
Thanks to the sales rebound during the second half, SG&A ratio fell to 18% in the second half from 23% in the first half. On a full year basis, SG&A ratio improved slightly by 40 bps to 20.1%. A&P expenses were reduced by 28%, as some marketing activities have been deferred. For the coming year, we expect the A&P ratio to return to around 1.2%. Other SG&A, which included bank charges for sales transaction settlement, royalties on licensed products, diamond certificate expenses, packing materials, and utilities, is broadly tied to transaction volume. This expense item also fell by 13% in this year. Staff costs, concessionary fees, and rental expenses altogether accounted for nearly 70% of the total SG&A. I will walk through the details in the next two slides.
In Mainland China, staff costs contracted by 12% to HKD 2.1 billion, and the average headcount also reduced by similar magnitude of around 10.4%. While in Hong Kong and Macau, staff costs dropped by 5%, while average headcount reduced by 13.6% as a result of POS consolidation. For the concessionary fee in Mainland China, a slight decline in the ratio was mainly due to the closure of some high-cost POS. While for Hong Kong and Macau, rental expenses were down by 14% due to consolidation of POS and rental renewal reduction. Rental ratio also edged down slightly by 20 bps to 8% in the year. We achieved an average reduction on rental renewal of around 35% in the year with street-level stores rental renewal reduction amounted to about 40%, while shopping malls rental stayed nearly flat.
We expect average rental renewal reduction of about 20%-25% in the coming year, with about 30% reduction for street-level stores and around flat for shopping mall POS. For inventory, the balance decreased over the past two years and stood at around HKD 29 billion as at end of March. The reduction was partly attributable to our continual optimization of inventory balances and some high-value unique collectibles were reclassified to non-current assets on our balance sheet. On a four-year basis, inventory turnover was around 294 days, 15 days longer than last year. We expect for the coming year, inventory balances shall be similar to or slightly higher than that of the current year. Assuming a stable growth of business, inventory turnover days shall be shortened to around 280-290 days. CapEx amounted to HKD 862 million in the year, slightly down compared to fiscal year 2016.
Some projects, productions and office-related CapEx were pushed back as a result of the weak market. However, we expect some of those projects will resume in the coming year, therefore, the CapEx plan for the coming year will be around HKD 1.2 billion to HKD 1.5 billion. Regarding the capital structure, some major changes were bank deposits and cash were lowered to HKD 7.9 billion, mainly due to payment of dividends and repayment of some bank borrowings and gold loans. Gold loans were down by nearly half to HKD 3.2 billion as we revised our gold hedging policy in the second half, which I shall explain in detail later. Net gearing ratio stood at about 6% as at end of March, and which will increase to around 17% post payment of final and special dividends proposed. Operating cash flow before movements in working capital amounted to HKD 5.7 billion, down 1.5% year-on-year.
Pro forma free cash flow reached about HKD 2 billion in the year. After the payment of dividends and repayment of bank borrowings and gold loans during the year, the company still had an abundant cash and bank position of HKD 7.9 billion as at end of March. The board, after considering our gearing position, cash flows, and near-term working capital requirement, decided to return the excessive cash to shareholders and therefore propose final and special dividends of HKD 0.10 and HKD 0.20 respectively. Here I will elaborate the changes for our gold hedging mechanism. In the past, we managed our gold inventory uniformly and applied a constant hedging ratio of 70% by weight across the entire gold inventory pool. The mechanism had been effective for many years.
However, in the past few years, business environment has been rapidly evolving and following a review in the second half, we decided to handle the gold price risk using a new targeted approach. Specifically, we now classify our gold inventory into three parts according to their nature and apply different hedging ratio. The three parts of the inventory are base inventory. This represent the minimum level of inventory needed for normal course of business. The second part will be seasonal inventory, which represents the inventory top-up needed to satisfy seasonal demand. Thirdly, consigned inventory and others mainly represent the inventory held by franchise POS under the new inventory pooling system. Base inventory is considered as our long-term cost of capital, and we are not concerned about the short-term fluctuation in commodity price to our continuing operations. Thus, we will apply a zero hedging on the base inventory.
The other two categories are of short-term and more volatile in nature and with thinner margin. To protect our profit margin, we hedge in full 100%. In summary, the hedging ratio will change from a fixed 70% to a floating hedging ratio in a range of about 20%-50%, depending on seasonality. Our key rationales and choice of timing for the change are as follows. First, our reliance on Mainland China operations in the past few years has been increasing, where seasonality is more prominent. Second, the balance of consigned inventory has been increasing since we started our inventory pooling mechanism about two years ago. Thirdly, on top of these key changes surrounding our business, the gold price movement over the past few years also prompted us to believe that the recent gold price is a cycle low.
As such, we think that now is a suitable timing to start the new hedging mechanism. After implementation of this new mechanism, we believe we will have the following key benefits. First, we can address the risk more precisely towards different parts of the gold inventory. Second, with the lower hedging ratio compared to before, volatility of our reported earnings will be reduced. Lastly, there will be a saving in finance costs resulting from the reduction of gold loans.
H ere concludes my part, and I will pass to Kent to continue on the business update.
Okay, thank you, Hamilton. I would like to here to highlight some business update. In financial year 2017, we opened 235 stores. However, we closed 168 doors so that net open is 67 in Mainland China. In Hong Kong, we continue to optimize our retail networks. We will focus on enhancing per store productivity. That a net of seven stores shut down this year. In other markets, we have three point of sale open, which is in Korea, Malaysia, and the U.S. Actually, this is a kind of a strategy to capture China tourist footprint. Next, I would like to share our retail sale value and the distribution networks of the jewelry business in China. By tier of cities, Tier 1, 2 cities continue to be more resilient in terms of performance compared with other tiers.
By operation model, I think we have shopping mall which is the one of the hot destination for shopping. That we opened kind of 76 net open. However, the department store which continue to tie the footprint, so we have a net close of 39 point of sale. Overall speak by terms of sales performance, shopping mall show a better performance than other kind of model. We would like to share with our strategy in Mainland China. In terms of point of sale networks management, we will continue to open the store. However, we will be very selective to open the store. We anticipate to open a net of [audio distortion] [70]- 100 point of sale under Chow Tai Fook branch in 2018.
I think as customer sophistication become more sophisticated, so we steer to enrich customer experience through our primary Tier 1 and Tier 2 city full store differentiation and multi-brand strategy. Store differentiate, we continue to upgrade some of the, what we call gem set driven store. But upgrade the store into luxury and elegant style. This year, we will conduct two new brands into the market, which target to different buying segments, like the wedding jewelry store called SOINLOVE, and also another which target to young millennial called MONOLOGUE. That has been launched this year as a pilot. I would like to share some RSV settle in Hong Kong and Macau. In terms of RSV payment, paid by renminbi and UnionPay , we can see Hong Kong has contributed 46% compared with last year, 52%, which has dropped a lot.
In terms of tourist area in Hong Kong and Macau, the performance which is show that a drop of 20% when compared with last year, 22%. That mean Hong Kong tourist area is still under pressure. Point of sale network management. The strategy in the long run that we shall continue to close a kind of 9- 10 point of sale. At the same time, we shall open four-five stores in residential areas which targeting to local customer. A net closure will be a kind of five point of sale. Other markets, especially overseas market, we will continue to expand cautiously overseas by leveraging our business partners. In rental cost management, in 2017, our average rental renewal was down by a kind of 35%. We expect the rental deduction trend will be continuing this year.
Wholesale business in the U.S., we just start this business. Which I think the objective, which is leveraging on our vertical integrated model, which we are strong in sourcing and manufacturing. We may gradually reach out to brand retailer to solicit wholesale business in the U.S. market. Let me also just update some Hearts On Fire development. We have a very good process to integrate the operation, and then we successfully bring in the brand into China and Hong Kong, which is well accepted by the high purchase customer. Hearts On Fire represent a kind of 2.2% of diamond sale in China and also a kind of 3.6% in Hong Kong and Macau.
We'd also like to share our disruptive, differentiate exclusive product called Chow Tai Fook T MARK, which is a breakthrough to the current industry practice. We launched it pilot six months ago. The feedback is very good. The sales represent a kind of 2.8% of diamond sales in mainland and a kind of 5.2% in Hong Kong. So, we are targeting to open another 300 point of sale of T MARK counter in shop in Chow Tai Fook store in this year.
H ere is my conclusion. May I pass to Danita?
Yeah. Thank you, Kent. Let me quickly go through some operational data of e-commerce in Mainland China. In fiscal year 2017, retail sales value of Mainland China e-commerce business recorded a robust growth of 41.4%, contributing to close to 3% of our RSV and around 9% of retail sales volume in Mainland China. Average daily online traffic reached 364,000 unique visitors, and our numbers of followers on Sina, Tencent Weibo, and WeChat accounts also reach around 3 million. It is worth noting that the pace of our e-commerce business growth accelerated in second half of our fiscal year 2017, mainly thanks to our strengthened cooperations with major online partners. Notable example is our online order distribution initiatives, which we partner with JD.com and Tmall. Orders on online platforms are routed directly to our physical stores nearby the customers.
By mobilizing our extensive physical retail network, we can fully achieve O2O interactions and enhance customer experience by shortening delivery time and cost. Effective marketing programs continue to enhance our engagement with different segments of our customers. Our highlighted auction event with our first high jewelry collection inspired by modern abstract arts was auctioned in November last year. Around 440 selected high-tier members and guests were invited to the event. In April 2017, we participated in Franco-Chinese Branding Forum in Paris. We are delighted to make use of this platform to exchange ideas with prominent artists from the West. During this event, we signed up with six up-and-coming French designers for the collaborations of new collections, which will be launched later in fiscal year 2018.
During the year, we further partnered with Disney to launch licensed products such as the Disney Beast and the Beauty collections. We also opened a POS at Disneytown of Shanghai Disney Resort and Hong Kong Disneyland Resort in fiscal year 2017. For our wedding segment, which continues to be a major pillar of our business, during the year, we launched a wedding gift card to provide customers with full-trained convenience with various wedding privileges. We also lever on the social medias to market this card. Here is an update on our customer relationship management. As at the end of March 2017, we had over 1 million members in Mainland China, with a repeat purchase ratio of 27%.
Members in the top three tiers accounted for 3.6% of total, while contributed 9% of the repeat purchase, reflected its much higher spending power. In Hong Kong and Macau, following the revisions of the membership requirement of basic members, the number of members reached 590,000, with a repeat purchase ratio of close to 30%. Members of the top three tiers represented 2.4% of total and deliver a repeat purchase ratio of 12%.
I shall pass to Kent for the business outlook and strategies. Thank you.
Okay. Thank you, Danita. Although we believe that talking about fully recovery at this stage, it's too early. However, we are optimistic in the long run. However, we should continue to focus in steering for sustainable growth in the future. We have theming areas that have to focus. First, in lieu of the changing retail landscape, we shall pay particular attention to market developments by, say, continue to explore good opportunity to open some point of sale in mainland. In terms of Hong Kong and China, we continue to refine our point of sale location, so that I think we can further enhance our productivity per store. Second, in terms of long-term initiative, we are reaching out to some business opportunity in developing some wholesale business overseas, especially in the U.S.
Secondly, to cater the increasingly sophisticated customer looking for emotional approach, we shall further enrich the consumer experience. Our product offering will be strengthened with different brand, Chow Tai Fook brands, Hearts On Fire and licensed fashion jewelry collections. Store differentiations, some stores should be upgrade so that we can differentiate the shopping environment. Multi-branch strategy should be deployed, like targeting to different buying demand or some regional demand. O2O interaction should be further foster and encouraged in our business, so leverage on our wide point of sale over China. Firstly, we recognize the importance of innovation by utilizing technology in our operation and so carry on with our Smart+ initiatives.
We will continue to leverage smart device, like RFID, Smart Tray, to support O2O and seamless shopping experience. We will further invest into big data analysis, deep learning, AI, robotic, so that we get a better understanding of customer performance, so that we can well prepare for the fast-changing landscape. We firmly believe that by executing this initiative consistently and persistently, we shall be able to rise to challenge and hope that we can have a bright future. Thank you. This is my conclusion of the presentation.