Chow Tai Fook Jewellery Group Limited Interim Results Presentation 2014/2015
Financial Highlights
1H2015 Highlights Revenue decreased 22.4% to HK$29.3 billion, mainly due to the gold rush in 1H2014, resulting in a high base of comparison over the same period last year Same Store Sales (SSS) for the Group declined by 31.2% (1H2014: 33.0% increase). SSS in Mainland China and Hong Kong, Macau & Taiwan down by 20.4% and 40.9%, respectively Gross profit margin increased 540 basis points to 31.8%, mainly attributable to an improvement in product mix Profit attributable to shareholders amounted to HK$2.7 billion in 1H2015, down 23.3% over the same period last year Basic earnings per share decreased by 23.3% to HK26.9 cents. Interim dividend was declared at HK13.0 cents per share 2
Summary Income Statement For the period ended 30 September (HK$ m) 1H2013 1H2014 1H2015 1H2015 / 1H2014 Change Revenue 25,436 37,768 29,320-22.4% Gross profit 6,706 9,978 9,328-6.5% Gross profit margin 26.4% 26.4% 31.8% +5.4% pts Selling, general, administrative and other expenses (4,145) (5,598) (5,891) +5.2% Operating profit (EBIT) 2,637 4,550 3,541-22.2% EBIT margin 10.4% 12.0% 12.1% +0.1% pts Net profit 1,893 3,603 2,736-24.0% Net profit margin 7.4% 9.5% 9.3% -0.2% pts Profit attributable to shareholders Basic earnings per share 1,825 3,509 2,693-23.3% HK18.2 cents HK35.1 cents HK26.9 cents -23.3% Dividend per share HK6.0 cents HK17.0 cents HK13.0 cents -23.5% 3
Summary Balance Sheet (HK$ m) 1H2014 As at 30 Sep 13 FY2014 As at 31 Mar 14 1H2015 As at 30 Sep 14 1H2015 / FY2014 Change 1H2015 / 1H2014 Change Non-current assets 4,012 4,263 6,359 +49.2% +58.5% Fixed assets 1 3,347 3,512 4,805 +36.8% +43.6% Current assets 49,310 57,554 52,851-8.2% +7.2% Inventories 35,615 42,544 39,051-8.2% +9.6% Trade and other receivables 3,665 4,873 5,084 +4.3% +38.7% Bank balances and cash 2 9,862 9,972 8,693-12.8% -11.9% Total assets 53,322 61,817 59,210-4.2% +11.0% Bank borrowings 3,270 6,300 7,344 +16.6% +124.6% Gold loans 8,690 10,787 6,828-36.7% -21.4% Total liabilities 17,099 23,365 20,138-13.8% +17.8% Total equity 36,223 38,452 39,072 +1.6% +7.9% 1 Include Property, plant and equipment, Prepaid lease payments, Investment properties and Deposits paid for acquisition of property, plant and equipment 2 Include Bank balances and cash, Pledged bank deposits and Short-term bank deposits 4
Summary Movements in Cash Flows For the period ended 30 September (HK$ m) 1H2013 1H2014 1H2015 Operating profit (EBIT) 2,637 4,550 3,541 (Increase) / decrease in inventories (2,012) (8,300) 3,493 Net cash from / (used in) other operating activities 540 1,136 (904) Capital expenditure (525) (835) (1,697) Net change in gold loans 2,093 4,277 (3,583) Pro forma free cash flow 2,733 828 850 Net change in bank borrowings (6,201) 2,270 1,044 Dividend paid (1,039) (1,618) (2,090) Other movements (107) 52 (1,083) 1 Net (decrease) increase in bank balances and cash 2 (4,614) 1,532 (1,279) 1 Include payment for the acquisition of Hearts On Fire 2 Include movements for Bank balances and cash, Pledged bank deposits and Short-term bank deposits 5
Adjusted Gross Profit and EBIT Margins For the period ended 30 September 1H2013 1H2014 1H2015 1H2015 / 1H2014 Change Gross profit margin 26.4% 26.4% 31.8% +5.4% pts Operating profit (EBIT) margin 10.4% 12.0% 12.1% +0.1% pts Excluding unrealised hedging (gain) / loss on gold loans and bullion forward contracts 2.7% 0.4% (1.7%) N/A Adjusted gross profit margin 1 29.1% 26.8% 30.1% +3.3% pts Adjusted operating profit (EBIT) margin 2 13.1% 12.4% 10.4% -2.0% pts 1 Adjusted gross profit margin = Gross profit margin excluding the impact of the unrealised hedging gain / loss on gold loans and bullion forward contracts 2 Adjusted operating profit (EBIT) margin = Operating profit (EBIT) margin excluding the impact of the unrealised hedging gain / loss on gold loans and bullion forward contracts 6
Revenue Breakdown Revenue by operation model (HK$ m) Revenue by product (HK$ m) Revenue by geography (HK$ m) 37,768 37,768 37,768 17.6% 29,320 29,320 29,320 25,436 86.5% 86.9% 84.6% 25,436 22.7% 55.5% 65.2% 28.3% 49.6% 25,436 55.2% 51.4% 29.0% 58.0% 23.7% 24.0% 13.5% 13.1% 15.4% 15.9% 5.9% 13.2% 16.1% 4.0% 6.1% 21.1% 19.6% 18.0% 1H2013 1H2014 1H2015 1H2013 1H2014 1H2015 1H2013 1H2014 1H2015 Retail Wholesale Gem-set jewellery Gold products Platinum / Karat gold products Watches Mainland China Hong Kong, Macau and other markets (Revenue settled in RMB or China UnionPay) Hong Kong, Macau and other markets 7
Same Store Sales Growth ( SSSG ) SSSG (%) SSSG by product (%) VOL: 33.3% VOL: 64.9% 47.0% VOL: 44.2% 33.0% VOL: 71.7% 56.0% 21.0% VOL: 0.1% 3.4% VOL: 0.2% 2.0% VOL: 16.7% 5.3% VOL: 3.5% 1.1% -1.7% -6.3% VOL: VOL: 0.5% 1.2% -20.4% VOL: -18.6% -40.9% VOL: -34.4% -31.2% VOL: -25.1% -10.1% VOL: 6.2% -46.8% VOL: -40.6% 1H2013 1H2014 1H2015 1H2013 1H2014 1H2015 Mainland China Hong Kong, Macau & Taiwan Overall Gem-set jewellery Gold products 8
Selling, General, Administrative and Other Expenses Selling, general, administrative and other expenses (SG&A expenses) (HK$ m) Rental expenses / Concessionaire fees structure 1 (%) 16.3% 14.8% 20.1% 5,598 5,891 10.1% 9.5% 9.9% 4,145 5.5% [ 6.9% 6.8% ] 6.2% 5.5% 3.2% 3.5% 3.8% 1.7% 1.6% 0.9% 2.8% 1.7% 1.3% 0.8% 2.3% [ 2.9% ] [ 2.0% ] [ 1.1% ] [ 3.7% 3.8% ] 3.2% 3.1% 1H2013 1H2014 1H2015 1H2013 1H2014 1H2015 Staff costs Concessionaire fees Rental expenses Advertising and promotion Depreciation Other SG&A As % of Revenue Rental expenses - Hong Kong and Macau Concessionaire fees - Mainland China ¹ Rental and concessionaire fees structure represents the % of rental expenses in HK/Macau and the concessionaire fees in Mainland China to their respective retail revenue 9
Operational Profit (EBIT) & Segment Profit Operating profit (EBIT) (HK$ m) Segment profit 2 and Segment profit margin 3 13.1% 12.4% 10.4% 12.0% 12.1% 10.4% 13.0% 13.8% 11.4% 11.5% 8.9% 10.2% +72.6% 4,550-22.2% 3,541 1,941 2,555 1,876 1,989 2,637 1,211 1,430 1H2013 1H2014 1H2015 1H2013 1H2014 1H2015 Operating profit (EBIT) Operating profit margin Adjusted operating profit margin 1 Segment profit - Mainland China - Jewellery Segment profit - Hong Kong, Macau and other markets Segment profit margin - Mainland China - Jewellery Segment profit margin - Hong Kong, Macau and other markets 1 Adjusted operating profit (EBIT) margin = Operating profit (EBIT) margin excluding the impact of the unrealised hedging (gain) / loss on gold loans and bullion forward contracts 2 Segment profit = Operating profit (EBIT) before the elimination of the inter-segment profit 3 Segment profit margin = Segment profit / segment revenue (inclusive of inter-segment sales) 10
Inventory Analysis Inventories (HK$ m) Inventory turnover days¹ 35,615 % 42,544 % 39,051 % 373 19,057 44.8% 16,683 46.8% 21,118 54.1% 207 227 285 12,686 35.6% 15,537 36.5% 10,393 26.6% 152 171 3,224 9.1% 4,029 9.5% 4,108 34 2,988 8.4% 62 3,859 9.1% 94 3,338 10.5% 8.5% 55 56 88 1H2014 FY2014 1H2015 Gem-set jewellery Gold products Platinum / karat gold products Watches Packing materials 1H2014 FY2014 1H2015 Finished goods Raw materials ¹ Inventory turnover days = Average inventory balances / cost of goods sold x 183 (for 1H figures) or 365 (for FY figures) 11
Bank Balances, Borrowings and Net Gearing Ratio Bank Balances¹ and Borrowings 2 (HK$ m) Net gearing ratio 3 (%) 17,087 18.5% 14,172 14.0% 11,960 9,862 9,972 10,787 8,693 6,828 8,690 5.8% 6,300 7,344 3,270 1H2014 FY2014 1H2015 1H2014 FY2014 1H2015 Bank balances Gold loans Bank borrowings Net gearing ratio 1 Bank balances = Bank balances and cash, Pledged bank deposits and Short-term bank deposits 2 Excludes amounts due to non-controlling shareholders of subsidiaries 3 Net gearing ratio = (Bank borrowings + Gold loans Pledged bank deposits Short-term bank deposits Bank balances and cash) / Total equity 12
Capital Expenditure Capex by nature (HK$ m) Capex by function (HK$ m) 1,697 404 1,697 78 172 525 333 416 368 549 669 155 12 37 39 75 1H2013 1H2014 1H2015 Furniture, fixtures and equipment & leasehold improvements Investment properties Land and buildings & construction in progress Prepaid lease payments 835 Plant and machinery & motor vehicles 835 57 1,147 168 525 56 86 117 137 524 215 300 1H2013 1H2014 1H2015 Productions Offices Projects POS 13
Inventory Ownership Unification Key changes Retention of inventory ownership until the sales transactions completed with retail customers Inventory dispatch to franchised POS upon the receipt of deposits at value equivalent to the prescribed inventory level Wholesale revenue is recognised at the prevailing price when the sales transactions are completed with retail customers Key objectives Promptly address the needs of customers across the whole retail network through inventory pooling Strengthen the stability of our retail network through gold hedging mechanism to manage the price risk on gold inventories at our franchised POS Facilitate the development of omni-channel retailing and O2O (online-to-offline) interactions through enhanced inventory mobilisation 14
Inventory Ownership Unification Financial impact: Transition period (FY2015 - FY2017) Long term Retail sales value No impact No impact Revenue Decrease ~HK$4-5 billion in total No impact Inventory balances and turnover Increase ~10%-12% Increase ~10%-12% Working capital No impact No impact ROE Minimal impact No impact 15
Business Update
Retail Network Update Mainland China 99 net Jewellery POS openings in 1H2015 Hong Kong, Macau and other markets 7 net POS openings in 1H2015 10 Hearts On Fire POS were included post acquisition Location 1H2014 FY2014 Reclassification FY2014 (Reclassified) Addition 1H2015 Reduction Mainland China 1,844 1,965-1,965 158 (61) 2,062 Jewellery POS 1,734 1,828-1,828 151 (52) 1,927 Tier I cities 232 234 (4) 230 17 (7) 240 Tier II cities 811 847 165 1,012 76 (31) 1,057 Tier III and other cities 691 747 (161) 586 58 (14) 630 Watch POS 110 137-137 7 (9) 135 Hong Kong, Macau and other markets 110 112-112 20 (3) 129 Hong Kong 85 86-86 7 (3) 90 Macau 15 16-16 2-18 Other markets 1 10 10-10 11-21 Total 1,954 2,077-2,077 178 (64) 2,191 Total 1 Included 8 and 2 Hearts On Fire self-operated POS in Taiwan and US, respectively 17
CTF Jewellery POS Network Mainland China 99 Net openings in 1H2015 Tier I 10 POS 10% Luoyang, Henan Province Tier III & others 44 POS 45% Tier II 45 POS Shanghai 45% Jiaozhuo, Henan Province Yuyao, Zhejiang Province Chengdu, Sichuan Province 18
CTF Jewellery POS Network Mainland China By tier of cities (Total: 1,927 POS) By geography (Total: 1,927 POS) By operation model (Total: 1,927 POS) 17.2% 10.6% 17.9% 23.0% 32.7% 12.4% 10.8% 19.0% 19.5% 17.7% 17.8% 18.7% 30.4% 37.7% 53.8% 58.8% 54.9% 15.6% 16.1% 18.6% 10.8% 8.5% 59.8% 17.7% Tier I Tier II Tier III & others % of % of POS RSV 1 Eastern Southern Western Northern Central Northeastern % of % of POS RSV 1 Self-Operated (Concessionaire) Self-Operated (Others) Franchised % of % of POS RSV 1 Retail network management Target 200 net Jewellery POS openings in FY2015 Lever franchisees to further our penetration in lower tier cities Facilitate omni-channel retailing and O2O interactions ¹ RSV = Retail sales value is measured at the ending price (VAT inclusive, if any) of products sold to customers in self-operated POS and franchised POS 19
POS Network Hong Kong / Macau POS in Hong Kong / Macau (Total: 108 POS) Selection of POS openings in 1H2015 Nathan Road, Mongkok 27.4% 34.3% 65.7% 72.6% New Town Plaza, Shatin Touristic area Other area % of % of POS RSV 1 Retail network management Remain flexible in POS expansion in Hong Kong / Macau Consolidation of some POS continues to enhance store productivity ¹ RSV = Retail sales value is measured at the ending price (VAT inclusive, if any) of products sold to customers in self-operated POS and franchised POS 20
Enhanced Technology at POS Level Overhead People Counter Smart Tray Patented Technology + Sales transaction record Analysis Analysis Foot traffic trend Conversion rate ASP per transaction No. of pieces per transaction Average customer serving time Popularity by SKUs Conversion rate by: Products and SKUs Nationality, gender & age group Purpose of purchases, etc 21
Updates on Hearts On Fire ( HOF ) Company background A luxury branded diamond company offering premium bridal and fashion jewellery products using The World s Most Perfectly Cut Diamond Less than 0.1% of the world s diamonds are qualified to become HOF s diamonds and proprietary cutting and polishing formula at 10x of the industry standard Stores of retail partners reached over 523 covering 28 countries, with 8 self-operated POS in Taiwan and 2 selfoperated POS in US, respectively Acquisition of 100% of HOF was completed on 31 August 2014 at a consideration of approximately US$150 million funded internally Roll-out of HOF POS Retail network expansion focusing in Tier I and Tier II cities in Mainland China and Hong Kong, Macau and other markets HOF products will be sold through standalone stores and via CTF s existing distribution network in Greater China in shop-in-shop and counter-in-shop formats 3 standalone stores currently in pipeline Lorelei Collection Photo of celebrity Aerial Collection 22
Updates on E-commerce RSV 1 of e-commerce grew approximately by 47.6% over the same period last year Over 153,000 unique daily visitors in major e-commerce channels, up 39.1% compared to 1H2014 Creative marketing strategies to extract O2O synergy Collaboration with Tencent Games GunZ Dash Exclusive GunZ Dash Collection Over 1.5 million followers on our Company s official Sina / Tencent Weibo and WeChat accounts Continue to ranked Best Selling Jewellery Brand on Tmall Discount QR coded coupons distributed via WeChat ¹ RSV = Retail sales value is measured at the ending price (VAT inclusive, if any) of products sold to customers in self-operated POS and franchised POS Source: Data from Tmall, JD.com, Sina / Tencent Weibo, WeChat as at 30 September 2014 23
Marketing and Branding
Customer Loyalty Programme Hong Kong & Macau 180,000 members as at 30 September 2014 Repeat purchases from members accounted for 17.6% of the RSV 1 in Hong Kong & Macau in 1H2015 Mainland China 1,485,000 members as at 30 September 2014 Repeat purchases from members accounted for 30.5% of the RSV 1 in Mainland China in 1H2015 Membership tiers Annual qualifying spending Membership tiers Annual qualifying spending Diamond HK$1,000,000 Diamond RMB500,000 Platinum HK$500,000 Platinum RMB150,000 Gold HK$200,000 Gold RMB60,000 Basic Member HK$30,000 Basic Member RMB10,000 ¹ RSV = Retail sales value is measured at the ending price (VAT inclusive, if any) of products sold to customers in self-operated POS and franchised POS 25
Marketing and Branding Mass Luxury Wedding promotion series Chow Tai Fook 85 th anniversary masterpieces Marriage proposal campaign Dance of Harvest WGC The Guardian of Love Forevermark CTF Wedding Club Organise workshops, information sharing and discount coupons, etc Fountain of True Beauty PGI Nature s Glow Rio Tinto Wedding expos Collaboration with World Gold Council (WGC), Platinum Guild International (PGI), Forevermark and Rio Tinto for the design and production of the masterpieces The signature Nature s Glow jewellery piece raised RMB1.1m at BAZAAR Charity Night 2014 85 th anniversary party to be held in November 2014 in Shanghai 26
Marketing and Branding - High-end Luxury & Youth Line High-end Luxury One-of-a-kind jewellery collection Youth Line Exclusive CTF x G-Dragon Collection Reflections of Siem Collection Exclusive jewellery previews G-Dragon encounters and multi-channel coverage 27
The Outlook
The Outlook 1 Cautiously optimistic in 2HFY2015 2 Continue our penetration into the lower tier cities, backed by our unified inventory management 3 Promote the development of omni-channel retailing and O2O (online-tooffline) interactions 4 Focus on enhancing shopping experience and creating differentiations on our product offerings 5 Committed to innovating and improving our technology and infrastructure 29
Q&A Session
Thank You
Disclaimer These materials have been prepared by Chow Tai Fook Jewellery Group Limited (the Company ) solely for use at this presentation and are not for public dissemination. The slides and any other materials used in this presentation are the property of the Company and must be treated as such. The information contained in this presentation is being furnished to you solely for your information and may not be forwarded, published or distributed, directly or indirectly, to any other person (whether within or outside your organisation/firm), in whole or in part, for any purpose and may not be reproduced in any manner whatsoever. Any forwarding, publication, distribution or reproduction of this document in whole or in part is unauthorised. The information contained in this presentation does not constitute or form part of any offer for sale or subscription of or solicitation or invitation of any offer to buy or subscribe for any securities or other interests of the Company or its holding Company or any of its subsidiaries in any jurisdiction or an inducement to enter into any investment activity, nor shall it or any part of it form the basis of or be relied on in connection with any contracts, commitment or investment decision whatsoever. This presentation contains forward-looking statements. Such forward-looking statements are based on a number of assumptions about the operations of the Company and other factors, many of which may be beyond the Company s control. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Accordingly, the Company s actual results may differ materially from those expressed or implied by such forward-looking statements. The Company has no obligation and does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The information contained in this presentation has been compiled as of the date of this presentation, speaks as of the date of this presentation (or earlier, if so indicated) and will not be updated to reflect material developments which may occur after the date of this presentation, and is subject to change, including substantial changes, without notice. This presentation may include measures of financial performance which are not a measure of financial performance under IFRS, such as EBIT. These measures are presented because the Company believes they are useful measures to determine the Company s operating cash flow and historical ability to meet debt service and capital expenditure requirements. EBIT should not be considered as an alternative to cash flows from operating activities, a measure of liquidity or an alternative to net profit or indicators of the Company s operating performance on any other measure of performance derived in accordance with IFRS. Because it is not an IFRS measure, EBIT may not be comparable to similarly titled measures presented by other companies. The information contained in this presentation has not been independently verified. No representation, warranty, or undertaking express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of any information or opinion contained herein. It is not the intention to provide, and you may not rely on this document as providing, a complete or comprehensive analysis of the Company s financial or trading position or prospects. None of the Company or any of its directors, officers, employees, agents, shareholders, affiliates, subsidiary, advisors or representatives shall be in any way responsible for the contents hereof, or shall be liable (in negligence or otherwise) for any loss howsoever arising from any use of this document or the information contained in this presentation or otherwise arising in connection therewith.