20161123-招商证券_香港_-周大福-01929.HK-Dividends_and_possible_turnaround_support_share_price_11页_1mb_1mb

Summary of Chow Tai Fook (1929 HK) Company Report

Core Content

This report provides an analysis of Chow Tai Fook's (1929 HK) financial performance and outlook, highlighting key financial metrics, earnings revisions, and the potential for a turnaround in the coming fiscal years. The report also discusses the company's dividend policy, operational performance, and valuation in comparison to peers.

Main Points and Key Information

Financial Performance in 1H17

• Revenue Decline: Total revenue fell by 23.5% YoY to HK$21,526 million, with both HK/Macau/others and Mainland China (MC) experiencing declines.
  • HK/Macau/others: Revenue dropped 24.3% YoY to HK$8,675 million, with a -26% SSSG decline.
  • Mainland China: Revenue declined 22.9% YoY to HK$12,851 million, with a -21% SSSG decline.
• Gross Margin Expansion: Hedged gross margin improved by 3.8ppts YoY to 31.7%, driven by a reduced sales mix of lower-margin gold products and improved gold product GPM.
• SG&A Expenses: SG&A expenses decreased by 15% YoY due to cost-cutting measures and store closures, contributing to an 1.5ppts YoY improvement in EBIT margin to 8.8%.
• EBIT Decline: EBIT declined by 7.9% YoY to HK$1,893 million, but excluding gold hedging, the decline would have been 28% YoY.
• Net Profit: Recurring net profit fell by 21.5% YoY to HK$1,222 million, with a recurring net margin of 5.7%.

Earnings Revisions

• Estimates Downgraded: The report lowered FY17E–19E earnings forecasts by 23% / 22% / 25%, primarily due to lower revenue.
• Revised Forecasts:
  • Revenue: HK$49,605 million (FY17E), HK$50,851 million (FY18E), and HK$54,422 million (FY19E).
  • Gross Profit: HK$14,725 million (FY17E), HK$15,220 million (FY18E), and HK$16,289 million (FY19E).
  • Recurring Net Profit: HK$2,784 million (FY17E), HK$3,099 million (FY18E), and HK$3,269 million (FY19E).
  • Recurring EPS: HK$0.28 (FY17E), HK$0.31 (FY18E), and HK$0.33 (FY19E).

Dividend Policy

• Special Dividend: CTF proposed an interim special dividend of HK$0.21, with a 172% payout ratio, which could support the stock price despite the current valuation.

Turnaround Potential

• Improved Outlook: The report suggests that the worst may be over, with a higher possibility of a FY18E turnaround due to the end of the high base effect and continued cost-cutting.
• Earnings Recovery: It is expected that the earnings decline will narrow in 2H17E, and the group may see a turnaround in FY18E.

Valuation and Target Price

• Current P/E: The recurring P/E is 20.8x for FY17E, and 18.7x for FY18E, compared to the average of 15x–18x for peers.
• Target Price: The report upgraded the target price to HK$5.58 (12-month), maintaining a NEUTRAL rating.
• Price Performance: 1H29 HK showed a 4.6% increase over 1 month, 11.9% increase over 6 months, and a -5.0% over 12 months.

Balance Sheet and Cash Flow

• Inventory Days: Increased to 407 days in 1H17 from 336 days in 1H16, due to reduced sales and increased gold inventory.
• Cash Position: Decreased to HK$8 billion from HK$13 billion in FY16, despite a HK$2.5 billion increase in operating cash flow.
• Net Gearing: Rose to 16.7% in 1H17 from 4% in FY16, mainly due to increased gold loans and reduced cash balance.
• Dividend Payments: Dividend paid in 1H17 was HK$3 billion, contributing to the reduction in cash.

POS and Sales Trends

• Store Adjustments: CTF closed 4 POS in HK/Macau/others and opened 11 POS in MC.
• SSSG Trends:
  • HK/Macau/others: Continued decline in SSSG, with a -24% in 1H17.
  • Mainland China: SSSG declined by -22.9% in 1H17, but with stable growth expected in the coming year.
• Product Mix: The sales mix shifted slightly, with gold products making up 51-54% of revenue in 1H17.

Valuation Comparison

• P/E Ratio: The company's recurring P/E is 19x for FY18E, while the average for peers is 15x–18x.
• P/B Ratio: The P/B ratio is 1.7x for FY17E, compared to the average of 1.6x for peers.
• ROAE: ROAE was 7.9% in 1H17, compared to 13.8% in FY15, indicating a decline in return on average equity.

Historical and Forecast Profit and Loss

• Profit Trends: The company's reported net profit declined significantly in 1H17, with -42.2% YoY.
• Profit Margin: Recurring net margin was 5.7% in 1H17, compared to 6.5% in 1H16.
• Profitability by Segment: Mainland China segment contributed 88.4% of total operating profit in 1H17, showing strong performance.

Key Data and Shareholding

• Market Cap: HK$58,000 million.
• Avg. Daily Volume: 4.68 million shares.
• Shareholding Structure: Cheng Yu Tung Family (Holdings) Ltd. holds 89.3% of shares.
• Free Float: 10.6% of shares are free float.

Related Research

• The report references previous analyses with "SELL" and "NEUTRAL" ratings, indicating ongoing uncertainty in the market.

Conclusion

The report presents a mixed outlook for Chow Tai Fook, noting the challenges in the first half of 2017 but also the potential for a recovery in FY18E. The company's special dividends and cost-cutting measures are seen as supportive of the stock price, although the valuation remains high compared to peers. The analysis highlights the importance of the product mix and the potential for improved gross margins in the future.