Earnings Call: H1 2014

Nov 26, 2013

Good afternoon. Welcome to Chow Tai Fook Jewellery Group Limited's 2013 to 2014 interim result announcement press conference. I would like to introduce to you members of the management team on stage, Dr. Henry Cheng Kar-Shun, Chairman; Mr. Kent Wong Siu-Kee, Managing Director; Mr. Hamilton Cheng Ping-Hei, CFO; and Mr. Adrian Cheng Chi-Kong, Executive Director. Dr. Cheng will take you through highlights of the interim results. Mr. Hamilton Cheng will take you through the financial highlights. After that, Mr. Wong will talk about business operations and the latest developments. Mr. Adrian Cheng will talk about e-commerce, marketing and promotion, and brand strategy. Dr. Cheng will talk about company strategy and market outlook. Finally, there will be a Q&A session. Now I will defer to Dr. Cheng. Good afternoon, ladies and gentlemen. Welcome to our interim result announcement. I would like to announce the interim result for H1 2014 of Chow Tai Fook. In H1 2014, our group recorded revenue of HKD 37.8 billion, up by 48.5% year-on-year. Basically, this is mainly due to the increase in sale of gold products and improvement in the wholesale business. During the period, our same-store sales increased by 33.2%. In H1 2013, it's down by 1.7%. In the period, same-store sales growth in Mainland China was 21.5%. In Hong Kong, Macau, and Taiwan, it's 47%. Our gross profit margin was flat at 26.4%. Operating profit margin benefited from operating leverage, so it increased by 160 basis points to 12%. In H1 2014, net profit amounted to HKD 3.6 billion, an increase of around 90% over the same period of last year. Basic earnings per share were HKD 0.351, an increase of 92.3% over the same period of last year. The board proposed an interim dividend of HKD 0.17 per share. As of September 30, 2013, our retail network expanded to 1,954 POS. During the period, a net of 118 POS were added. Now I will defer to Mr. Hamilton Cheng to talk about our financial performance. Thank you, Chairman. Our revenue was HKD 37.8 billion, up by 48.5% year-on-year, due to strong sales in gold products and improvement in wholesale business. Gross profit grew in line with revenue. Our gross profit margin was at 26.4%. Operating profit, EBIT, increased significantly by 72.6%, mainly due to our economies of scale. Net profits attributable to shareholders increased 90.4% to HKD 3.6 billion. Basic earnings per share were HKD 0.351, and our dividend payout is around 48.4%. Adjusted gross profit margin, together with adjusted operating profit margin, EBIT, are provided to illustrate the unrealized hedging gain or loss on our gold loans and bullion forward contracts. In the same period of last year, we recorded a bigger than normal unrealized hedging loss. As a result, the reported gross margin was relatively lower. In the first half of this year, the unrealized loss is relatively small, equivalent to 0.4% of our revenue. Adjusted gross profit margin as compared to last year declined by 2.3%. This is mainly because the product mix changed. We sold more gold products. Our operating profit margin was only down by 70 basis points to 12.4%. Because of our cost control, the gap was narrowed. If you look at our balance sheet, inventories increased to HKD 35.6 billion, up 30.4% over March 2013 level. Usually in September, we have higher inventory level to prepare for the peak season in the second half of the year. Trade and other receivables decreased 7.7% from March. Bank borrowings increased to HKD 3.3 billion. This is because of the favorable low interest rate environment, so we made use of loans to increase our liquid cash and return. Gold loans increased by about 80% to HKD 8.7 billion. This is in line with our inventory increase. Bank balances and cash amounted to HKD 9.8 billion, up 18.5% from March. Retail revenue accounted for 87% of our total revenue. Wholesale revenue contributed 13% of our group's revenue. In the period, gold products are the major driving force. They are selling very well. Besides, franchisees are more optimistic in their inventory procurements. In the period, gold sales drove our business, especially in April. The contribution of gold sales to overall revenue increased from 55.5% of last year to 65.2% this year. Gem-set jewelries revenue contribution declined to 17.6%. For our Hong Kong and Macau operations, revenue contribution increased to 48.6%, because growth in Hong Kong and Macau is stronger than that in mainland China. In Hong Kong and Macau's revenue, PRC tourists-related revenue accounted for almost 60% of Hong Kong and Macau's revenue. Because in Hong Kong, there are more mainland tourists coming under the Individual Visit Scheme. That is why there is this growth. Next, same-store sales growth. In the first half, same-store sales growth was 33.2%. Hong Kong is stronger than mainland China. Hong Kong, Macau recorded growth of 47%, and mainland China 21.5%. Volume growth at same-store level was 44.6%. This is because in the market, there is bigger demand for mass products. That is why we responded to market demand, and we increased the supply of this segment. Same-store sales growth of gold products was 56.4%. For gem-set jewelry, 5.4%. As of the end of September, we had 1,954 POS. There is net opening of 118 POS in the first half, representing a 6.4% growth in store count. Expenses and operating profits. In the first half of the year, sales growth was big. So our expenses ratio was down 150 basis points to 14.8%. Operating profits margin improved 1.6% to 12%. Major expenses, staff cost was at 5.5% as in last year. Concessionary fees ratio improved to 3.2%, because we sold more gold products with a lower concessionary fee. Besides, in new POS, they are mainly in tier 3, 4 cities, and concessionary fee was lower. In terms of rental expenses, basically related to Hong Kong and Macau business, was flat at 1.7% of sales revenue, because in the period, sales grew significantly. In the second half, when sales resumed to a more normal level, this rental expenses ratio may go up. Other expenses like advertising and promotion expenses dropped 30 basis points to 1.3%. Depreciation and other fixed expenses decreased 60 basis points due to strong revenue growth. Tax expenses. Our effective tax rate in the first half was 20.5%. This is because Hong Kong and Macau contributed more to profits, and tax rate in Hong Kong and Macau is lower. For net profit margin, it improved from 7.4% in the same period last year to 9.4% this year. Inventories. In the period, there is an increase of around 830 million, and HKD 5.8 billion was for increase of gold inventories. For gem-set jewelry and platinum carat gold products, there is an increase in inventories as well to gauge the demand for mass luxury jewelry. Inventory turnover days improved from 253 days, or for the whole year of 299 days in the first half of last year to 207 days in this period. We will maintain our strategy that our procurement will be focused on fast-moving, affordable luxury items to capture growth in the mass luxury segment. On high-end items, we will remain conservative in our procurements. For the whole year, inventory turnover days will be maintained at 210-220 days, around seven months. Borrowings. Bank borrowings and gold loans increased. Gold loans was at a stable level. It is around 70% of gold inventory. CapEx, in the first half, amounted to HKD 835 million. Most of it was spent on fixtures, furniture, and refurbishment of POS. Land and buildings and construction were in the first half of the year, we acquired a property in Chengdu, and we also incurred CapEx on Shenzhen headquarters building that will be completed soon. It can be commissioned soon. We expect that the CapEx for the whole year will be about HKD 1.5 billion. Finally, about cash flow. I have set out the major cash flow items here. EBIT, HKD 4.5 billion. We spent HKD 8.3 billion to increase inventory. For other movements, they refer to liquid cash and non-cash items. So our operating cash flow is that we have spent HKD 2.6 billion. That is a negative operating cash flow. After deducting CapEx of HKD 830 million, there is HKD 4.2 billion of gold loans increase. This is purely for the purchase of gold inventory. So this is to support our operating cash flow. It is a loan as well as a hedging. So, when we calculate the liquid cash flow, it is around HKD 828 million. We are confident that for the whole year this year, we are able to have positive free cash flow. I will pass the floor to Kent for business updates. Thank you. I will give an update on our business development. In the first half, we opened 118 POS. We have now altogether 1,954 POS. In mainland China, there are 113 POS. Tier 3, Tier 4 cities account for 60% of POS openings, i.e., most of the new POS are in Tier 3, Tier 4 cities and cities in central and western China. Here you can take a look at the details. In Tier 3, Tier 4 cities, for example, we are in cities with over 1 million population, and people are in the middle class, for example, in Gansu, Hubei. We are working very hard to develop the market. As for shops, basically for third to fourth line cities, basically they take up about 39% of the overall, and Tier 1 to 2, 61%. As for management of the POS, for our self-operated stores, 68%, and 32% for franchise stores. This is slightly higher than before. This is the policy of the company. If we can reach the target for self-operated stores, we will be more open and more flexible for distributors. We believe that for franchise distributors, the number should increase as we go along. As for the Hong Kong stores, 64% are in the Tsim Sha Tsui, Mong Kok, Causeway Bay area, the tourist areas. As mentioned just now, for the contribution from tourists, this is some 60%, mainly mainland tourists coming to Hong Kong to do their shopping, and 36% would be Hong Kong customers, local customers. We will want to adopt a flexible and market-appropriate policy. As for products, as consumption increases. Or rather, in the past period of time where sentiment was low in our product mix and our selection, we have been very flexible, in tune with the affordability of our customers. In our mainstream products, we have increased a few new lines, such as the patented crafted products. Also some patented cut, such as the Forevermark Magic Square, which have been very much welcomed by the market. Apart from the wedding products, some of the daily wear products at a price range that is affordable and attractive to the customers have also been very much welcomed by the young market as well. As for high-end products, we will focus on nurturing high-end customers, such as those from the Mainland. We have come up with some very unique one-piece only auction of products and other high-end products. Among the young customers, we have also adopted licensed collections such as cartoon characters, and these have been very popular, especially on the web among the younger generations. Apart from the traditional POS, online sales is also very important for us, and it is the area of highest growth. In e-commerce, last year, we have increased our sales growth by 64% during the first half of last year. Also we have an e-commerce platform with daily unique viewer or visitor at 110,000. For digital marketing, such as on Weibo, WeChat, Facebook, we have over 110,000 followers or fans, and this is very beneficial to our e-commerce business. Perhaps I'll ask Adrian to talk about the details of e-commerce. Thank you, Kent. In terms of e-commerce, we have put in a lot of resources. It is not only a platform, but we look upon it as an important tool to extract online to offline synergy and build relationship with our customers, especially the younger customers. Also to build our brand name and to get close to our customers. Also in order to increase the experience, enhance experience of our customers in the first half of the year, we have also increased and stepped up with the customers' understanding and management. Through this new system of customers management, we have over 110,000 followers or fans and 86,000 PRC customers. We have digested and farmed that data and relationship, and we have through other platforms such as Weibo and WeChat, et cetera, reached further followers and potential customers. In Hong Kong and Macau, in the first half of the year, we have exceeded 130,000 in terms of members, and it is about 16.8% of the overall turnover for Hong Kong and Macau. In April of this year, we have also heightened the members. For our PRC members, it is already 870,000 strong, and it is about 24.8% of our total sales in the Mainland. As we stepped up with our customer satisfaction and strengthened our customer loyalty, we have also at the same time strengthened our managers and officers for increasing customer management, so as to give our customers the best service. At the same time, we will continue with our marketing and branding, especially for the higher-end products, in order to raise the brand name. We have this year auctioned our 15 unique high-end jewelry. In the Mainland in H1 2014, we have come up with an Imperial Collection. The Imperial Collection draws its inspiration from the Imperial Court of China, and we have identified more potential customers. We have conducted a number of private events for viewing these jewelry pieces, inviting some of our members. Further wedding and proposals products are also a very important product for us. In H1 2014, we have come up with something very new, which is the wedding proposal campaign that is both in Hong Kong and also in the Mainland of China. Basically, wedding proposal video clips are uploaded on our campaign partners, YouTube, Youku, and on our own website to promote wedding proposal culture. Over 11 million views on Youku and other online channels have been recorded since the wedding proposal video clips have been uploaded. Also in the Mainland, we have also come up with floats or parades of Disney Princesses to showcase our Disney Princess Collection. For the younger generation, we have also through on and offline synergy. We have been pushing collections such as Angry Birds Collection. We have come up with a series of promotional events for Angry Birds Collection, and also we have developed some games using Angry Birds to attract more attention to our platform. At the same time, we have the Man of Steel Collection promotional events. This is the first time that we have promoted a new jewelry series through launching a movie in China. The members have been able to enjoy a series of movie shows, and at the same time, get the information concerning Man of Steel Collection product. For the outlook in H1 2014 for Hong Kong, Macau, and the Mainland of China, there have been signs of recovery. Our franchisees have been very optimistic in their orders, and therefore, our wholesale business had improved. The group expects in the rest of the year, for 2014, we will have continued steady growth. Our mass jewelry segment will continue to be the key growth driver for our same-store sales growth. We will focus on replenishing fast-moving inventories, and also we will speed up with the sales of these inventories. As for our product mix and also for our marketing promotions, very much we will be focusing on where there is demand in the market so that we will have steady volume growth for our sales. For the China market and also for the medium to long-term growth potentials, we are optimistic. The group will continue to leverage on our franchisees' strong local knowledge and also their network, in particular in the lower-tier cities, so as to further penetrate these markets. The group, at the same time, will further strengthen our partnerships and collaborations with world-class miners and suppliers, so as to forge a vertically-integrated business model and to strengthen our supply of products going forward. We expect the future to bring on more online to offline interactions and synergies. We believe e-commerce serves beyond being a transactional platform. It is also a key marketing, branding, customer relationship management channel. It helps with our effective interaction and attraction to the younger customer sector. These are the information that we would like to report to you for H1 2014. Thank you very much.