20180104-中国银河国际证券-周大福-01929.HK-Premium_Already_Priced_In._Initiate_with_HOLD._9页_932kb

Chow Tai Fook Jewellery Summary

Core Content

Chow Tai Fook Jewellery Group (CTF), listed on the Hong Kong Stock Exchange under the ticker [1929.HK], is a leading player in the Chinese jewellery market. The company has maintained its leadership position and is expected to continue doing so, driven by its expansion in smaller cities, the introduction of new brands like SOINLOVE and Monologue, and its e-commerce initiatives. These strategies are aimed at capturing the growing demand from the middle class in Mainland China. In Hong Kong, CTF has been actively reducing its POS network to improve margins and rationalize its store locations, focusing on residential areas rather than high-priced tourist spots.

Main Points

• Market Leadership: CTF has long been a market leader, with a No.1 market share in China's jewellery industry in 2015 and the largest Hong Kong-based jeweller in both Mainland China and Hong Kong & Macau.
• Expansion Strategy: The company plans to expand its POS in Mainland China, targeting smaller cities, and expects its total POS in the region to reach 2,396 by the end of FY2018. This is expected to drive organic growth.
• Cost-Cutting in Hong Kong: CTF has been reducing its number of POS in Hong Kong from 83 to 78 by the end of 2018, with a corresponding drop in rental expenses to revenue ratio to 5.7%. This strategy aims to improve net profit margin, which is expected to rise from 6.0% in FY2017 to 7.2% in FY2018E.
• EPS Growth: CTF is expected to see a strong EPS growth of +34.3% YoY in FY2018E, but this is expected to slow down to +12% in FY2019E and +9% in FY2020E.
• Valuation: The company's current valuation is considered to already reflect its fundamentals and premium position. The target price of HK$9.20 is based on a 20x FY2019E PER, which is close to its historical average. The current PER of 21.1x for FY2018E is seen as somewhat rich compared to its peers and international luxury leaders.
• Financial Position: CTF's financial position has deteriorated, moving from a net cash position to a net debt position of HK$3,030m in 1HFY2018. It is unlikely to return to a net cash position in the near future, and no substantial M&A is expected to boost earnings.

Key Financials

Key Assumptions and POS Network

Investment Highlights

• Product Diversification: CTF is expanding its product lines to capture both high-end and mass market demand. New brands like SOINLOVE and Monologue are targeting different segments, with Monologue focusing on younger customers and SOINLOVE on bridal markets.
• E-commerce: The development of e-commerce is expected to complement the expansion of physical stores and help CTF reach more customers.
• Financial Health: The company has moved from a net cash position to a net debt position, and its dividend payout is expected to return to a normal level. It is unlikely to see another special dividend or substantial M&A in the near term.
• Valuation Multiple: The target multiple of 20x PER is considered appropriate, reflecting the company's fundamentals and market position. The target price of HK$9.20 is based on this multiple and implies a 6.36% upside from the current close of HK$8.65.

Key Ratios

Investment Thesis

1. Market Leadership and Expansion: CTF is a market leader in China, with a strong presence in Mainland China and a focus on expanding its POS network in smaller cities.
2. Cost-Cutting Efforts: CTF has been actively reducing its POS network in Hong Kong, which is expected to lower rental expenses and improve margins.
3. Financial Position: The company's financial position has deteriorated, moving from a net cash position to a net debt position, and it is unlikely to return to a net cash position in the near future.
4. Valuation: The current valuation is considered to already reflect the company's fundamentals and premium position. A target multiple of 20x PER is more appropriate than the current high PER.
5. Earnings Growth: While there is a strong rebound in FY2018E, earnings growth is expected to normalize in subsequent years.

Conclusion

CTF is expected to maintain its leadership in the Chinese jewellery market through strategic expansion and product diversification. However, its financial position has weakened, and its earnings growth is expected to slow down after FY2018E. The current valuation reflects its premium status and fundamentals, and a target price of HK$9.20 is set based on a 20x PER multiple. Investors are advised to maintain a HOLD position given the current valuation and expected earnings trends.