Price increases suppress consumption, making it difficult to sell Chow Tai Fook's gold jewelry

After the surge in gold prices, market concerns about the industry leader CHOW TAI FOOK (1929.HK) are becoming increasingly pronounced.

On June 13, CHOW TAI FOOK released its 2024 fiscal year financial report ending on March 31, with annual revenue of HKD 108.1 billion, a year-on-year increase of 14.8%; achieving a net profit of HKD 6.5 billion, a year-on-year increase of 20.7%.

Despite recording profit growth last year, CHOW TAI FOOK saw an increase in revenue but not in profit in the second half of the 2024 fiscal year. Revenue increased by 22.9% year-on-year to HKD 59.2 billion, but net profit decreased by 4.9% year-on-year to HKD 1.95 billion.

TradeWind01 sent a letter to CHOW TAI FOOK inquiring about the reasons for the decline in net profit in the second half of the fiscal year, but as of the time of publication, no response has been received.

As a gold and jewelry retailer, CHOW TAI FOOK can raise prices in line with the rising gold prices, but this also leads to a significant increase in its gold procurement costs, making hedging trading on the futures side more challenging.

The fair value change of gold borrowing in mainland China for CHOW TAI FOOK in the 2024 fiscal year was -HKD 391 million, with the loss amount increasing significantly by 88.89% year-on-year.

In terms of products, in the 2024 fiscal year, revenue from gold jewelry products for CHOW TAI FOOK saw a significant increase of 22.5% year-on-year, with the proportion increasing by 5.1 percentage points to 82% year-on-year;

Revenue from jewelry inlaid products decreased by 13.3% year-on-year, with the proportion decreasing by 4.2 percentage points to 12.4% year-on-year; revenue from watch products saw a slight increase of 0.5% year-on-year, with the revenue proportion decreasing by 0.7 percentage points to 4.6% year-on-year.

CHOW TAI FOOK attributed the soft consumption of jewelry inlaid products to challenges in the external macroeconomic environment.

Due to the way CHOW TAI FOOK's gold jewelry products confirm income through pricing or processing fees, the gross profit margin is low, while high-margin jewelry and watch products are somewhat stagnant in sales. This also led to a year-on-year decrease in CHOW TAI FOOK's overall gross profit margin by 1.9 percentage points to 20.5%.

In terms of store opening progress, in the 2024 fiscal year, CHOW TAI FOOK added a net of 143 stores in mainland China and 10 stores in other regions such as Hong Kong, Macau, bringing the total number of stores to 7,782.

It is worth mentioning that the operating data disclosed by CHOW TAI FOOK for April-May 2024 showed a 20.2% year-on-year decline in overall retail sales of gold jewelry, with a 18.8% year-on-year decline in retail sales in mainland China and a 29% year-on-year decline in retail sales in Hong Kong, Macau, and other markets.

Given the situation where the high gold prices are suppressing consumer demand for gold jewelry, CHOW TAI FOOK's management stated in the performance briefing after the financial report release that in the 2025 fiscal year, the company will "focus on high-quality new store openings rather than quantity growth," planning to open 50 self-operated stores in lower-tier cities throughout the year.

The management expects that CHOW TAI FOOK's annual revenue will remain stable or slightly increase.

One of the market's concerns about CHOW TAI FOOK is the succession of management.

The current Chairman of the Board of CHOW TAI FOOK, Cheng Kar-Shun, who is now nearly 80 years old, holds a total of 87.6% of the company's shares through the Cheng family A private equity investor in East China expressed to Xin Feng (ID: TradeWind01) that the main concern in the market regarding CHOW TAI FOOK at the moment is who Zheng Jiachun will choose as his successor. It seems that his children are not very "enthusiastic" about succeeding Zheng Jiachun.

Earlier, Zheng Jiachun's public statement seemed to confirm this view, as he bluntly stated when discussing the family's successor: "It may not necessarily require a successor."

After the financial report was released, on June 14th, CHOW TAI FOOK's stock price fell by more than 10% intraday, closing down 8.88% at HKD 8.62 per share, with a year-to-date decline of 25.82%