Equity Research Consumer Discretionary Hold (maintained) Target price: HK$8.50 Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk +852 3719 1010 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Solid RSV growth in 1QFY18 Maintain Hold CTF reported +11%/+5% SSSG in and HK & Macau in 1QFY18. While these SSS growth rates are similar to 4QFY17 (+12%/+ in /HK & Macau), retail sales value ( RSV ) growth in /HK & Macau improved compared to 4QFY17. Also, the company s product mix improved QoQ. We see the +17%/+7% RSV growth rates in /HK & Macau as a good start by comparing these figures to FY18 revenue growth guidance of high single-digit growth/flat, respectively. We revise our FY18/19 net profit estimates upwards by after fine tuning our revenue and opex assumptions, and raise our target price from HK$8.20 to HK$8.50, still based on 23x FY18E P/E. We think the company is unlikely to see re-rating as SSSG is likely to moderate in 4Q2017 due to a high base. Also, Tiffany s (TIF US, NR) 23x FY18E P/E might cap CTF s P/E upside potential. HK & Macau SSSG +5% SSS of gold products rose 9% (vs. +19% in 4QFY17), while gem-set SSS declined (vs. -17% in 4QFY17). SSSG of gold products was led by 5% volume growth and ASP growth. The gem-set SSS decline was driven by a 16% ASP decline which was partly offset by double-digit volume growth. RSV grew 7% (vs. +1% in 4QFY17) despite the fact that store number dropped around 1 YoY, suggesting improvement of store efficiency. SSSG +11% Gold product SSS jumped 16% (vs. +17% in 4QFY17), driven by ASP growth. Gem-set SSS increased 3% (vs. +5% in 4QFY17), led by 2%/1% ASP/volume growth, respectively. RSV climbed 17% (vs. +16% in 4QFY17) thanks to 11% SSSG, 5% store growth and 14 growth of e-commerce. We note that CTF held promotional events with Tmall during 1QFY18. Product mix improved QoQ In, the gold product sales mix, in terms of RSV, declined from 58% in 4QFY17 to 5 in 1QFY18, while the gem-set sales mix improved from 25% in 4QFY17 to 27% in 1QFY18. In HK & Macau, the gold product mix rose 1pp to 61% but the gem-set mix dropped 1pp to 23%. Stock performance Store number Total store number grew YoY to 2,409 as at 30 June 2017. In HK, there was a net closure of four stores in 1QFY18. In, store number increased by 29 to 2,275. Three stores (two in Japan and one in US) were added overseas during the period. 6 5 4 3 1-1 - Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 HSI CTF Source: Bloomberg Key data Jul 12 close 8.26 Shares in issue (m) 10,000 Major shareholder Cheng Family (89.3%) Market cap (HK$ bn) 82.6 3M avg. vol. (m) 4.78 52W high/low 9.17/5.23 Source: Bloomberg Stock valuation Year-end March Turnover (HK$ m) Net profit (HK$ m) EPS EPS YoY P/E Yield BPS P/B ROE 2015 64,277 5,456 0.546-25 15.1 3.4 3.9 2.2 14.2 2016 56,591 2,941 0.294-46 28.1 9.7 3.5 2.4 7.9 2017 51,246 3,055 0.306 4 27.0 6.2 3.2 2.7 9.2 2018E 54,772 3,700 0.370 21 22.3 2.2 3.2 2.7 11.6 2019E 57,265 4,072 0.407 10 20.3 2.5 3.4 2.5 12.3
Figure 1: Peer comparison of SSSG Calendar Year 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Avg gold price (US$) 1,219 1,194 1,126 1,105 1,181 1,259 1,335 1,217 1,218 1,259 Avg gold price YoY -6% -8% -12% -8% -3% 5% 19% 1 3% SSS trend -16% -15% -3% -15% -26% na na na na na -9% -7% 6% -6% -25% -17% -22% 12% 11% HK and Macau -26% -2-13% -23% -27% - -3-2% 5% Luk Fook (590 HK) - -18% -6% -25% -27% -2-37% -1 2% -5% 2% -1-19% -2-23% 5% 11% HK and Macau -22% -19% -7% -26% -28% -2-39% -11% 1% Chow Sang Sang (116 HK) ------ 5% ------ +ve sd -11% ------- -ve 5% ----- -ve low to mid-teen mid to high sd high sd high sd HK and Macau ----- -ve 12% ------ +ve low sd -ve high-teen ----- -ve 26% ----- ----- -ve 3 ----- -ve 7% -ve lsd -ve lsd RSV trend -3% 9% -6% -25% -13% -17% 7% 16% 17% HK and Macau -21% -16% -5% - -26% -22% -33% -6% 1% 7% SSS trend by category Gold products -19% -12% 13% -1-27% na na na na na -1-2% 22% -3% -29% -22% -27% 7% 17% 16% HK and Macau -32% -25% -2-25% -12% -36% 8% 19% 9% Gem-set jewellery -6% -1-13% -12% -23% na na na na na 3% - - -7% -2-12% -17% - 5% 3% HK and Macau -17% -16% -2-16% -22% -27% -23% -17% -17% - Luk Fook (590 HK) Gold and platinum products -21% -18% 5% -25% -28% -26% -47% -11% -1% -1-7% -1% -1-27% -29% -3 2% 16% HK and Macau -22% - 6% -26% -28% -25% -49% -12% -5% Gem-set jewellery - -18% -26% -26% -25% -19% -1-11% 11% 23% 13% 2% -8% -3% 6% HK and Macau -22% -19% -28% -27% -27% - -1-5% 12% Chow Sang Sang (116 HK) Gold and platinum products ------- -ve 13% ------- ----- -ve 27% ----- +ve lsd +ve 6-7% +ve low teens HK and Macau -49% -ve msd +ve +ve mid sd Gem-set jewellery high sd ------------- 8% -------------- low-teens dd, less than LF mid-teens +ve sd HK and Macau better than LF -ve low-teen -ve hsd -ve hsd Chow Sang Sang s (116 HK) quarterly figures are GF Securities (Hong Kong) estimates Figure 2: Quarterly SSS trend Figure 3: SSS growth 8 6 67% HK & Macau 6 5 4 35% 48% 4 - -4-6% -11%-5% 31% 26% 11% 13% 1 7% -9% -28% -12% -15% -9% -7% 6% -6% -17% -25% -22% -13% -21% -29% -26% -2-23% - -27% -3 12% 11% -2% 5% 3 1-1 - -3 16% 32% 15% 32% -3% - 17% -16% -1-22% -5% -12% 6% 3% -6 3QFY13 4QFY13 1QFY14 2QFY14 3QFY13 4QFY14-5 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18-4 -33% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E HK & Macau Sources: Company data, GF Securities (Hong Kong) 2
Figure 4: FY17 revenue breakdown by market Figure 5: FY17 core operating profit breakdown by market HK, Macau & other Asian markets 39% HK, Macau & other Asian markets 23% 61% 77% Sources: Company data, GF Securities (Hong Kong) Figure 6: Store number trend 3,000 2,500 2,000 1,500 1,000 500 0 22% 2,499 2,602 2,257 2,319 2,381 15% 2,077 1,836 1,627 1,358 1,179 13% 13% 9% 3% 3% 5% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Total stores Growth 25% 15% 1 5% Figure 7: Key assumptions (HK$m) FY15 FY16 FY17 FY18E FY19E Total revenue 64,277 56,591 51,246 54,772 57,265 growth % -17. -12. -9. 6.9% 4.6% - HK, Macau and other Asian markets 26,435 22,921 20,226 20,991 21,136 growth % -26.2% -14.9% -11.8% 3.8% 0.7% store growth 18.8% 5.3% -3.6% -1.5% 2.3% SSS -32.8% -21.7% -12. 4. 0. - market 37,842 33,670 31,019 33,781 36,130 growth % -10.2% -11. -7.9% 8.9% 7. store growth 8.1% 2.6% 3.1% 5.3% 4.2% SSS -16.1% -10.3% -5.2% 6. 3. Gross profit 19,072 15,641 14,963 15,836 16,710 Gross margin 29.7% 27.6% 29.2% 28.9% 29.2% Sales mix gold 53.2% 55.8% 57. 55.7% 56. gem-set 27. 26.8% 25.3% 25.9% 26.5% platinum and karat gold 14. 12. 11.5% 11.5% 11.3% watches 5.3% 5. 5.7% 6.9% 6.2% SG&A expenses ratio 19.2% 20.5% 20.1% 19.8% 19.5% Operating profit 6,899 4,028 4,649 5,327 5,852 growth % -25.5% -41.6% 15. 14.6% 9.9% OP margin 10.7% 7.1% 9.1% 9.7% 10.2% Net profit 5,456 2,941 3,055 3,700 4,072 growth % -25. -46.1% 3.9% 21.1% 10.1% Net profit margin 8.5% 5.2% 6. 6.8% 7.1% Payout ratio 51% 272% 167% 5 5 3
Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Company report Figure 8: P/E band 20 18 16 14 12 10 8 6 4 27x 23x 19x 15x 11x 2 Sources: Bloomberg, GF Securities (Hong Kong) estimates Figure 9: Financial statements Income Statement Balance Sheet Year-end Mar 31 (HK$ m) FY15 FY16 FY17 FY18E FY19E Year-end Mar 31 (HK$ m) FY15 FY16 FY17 FY18E FY19E Revenue 64,277 56,591 51,246 54,772 57,265 Fixed assets Cost of sales (45,205) (40,950) (36,283) (38,936) (40,555) PPE 4,443 4,750 4,666 5,159 5,323 Gross profit 19,072 15,641 14,963 15,836 16,710 Prepaid lease payments 238 212 185 171 157 Investment properties 509 273 250 236 221 Other income 302 306 330 362 381 Deposit paid for acquisition of PPE 294 133 53 53 53 SG&A expenses (12,344) (11,623) (10,307) (10,821) (11,188) Investment in JV/associate 0 40 0 0 0 Other gains and losses (36) (245) (286) 0 0 Amount due from an associate 0 83 20 20 20 Other expenses (95) (51) (51) (51) (51) Loan receivables 40 38 66 66 66 Operating profit 6,899 4,028 4,649 5,327 5,852 Goodwill 258 258 258 258 258 Other intangible assets 397 408 356 315 274 Net finance cost (229) (88) (97) (60) (61) Jewelery collectibles 0 0 967 967 967 Others 0 0 (164) 0 0 Deferred tax assets 860 478 313 313 313 Share of profit/(loss) of JV (11) (4) (10) (12) (10) 7,038 6,670 7,133 7,557 7,652 Profit before tax 6,659 3,936 4,378 5,255 5,781 Income tax expense (1,123) (957) (1,227) (1,445) (1,590) Current assets Non-controlling interests (80) (38) (96) (110) (119) Inventories 39,798 31,377 29,259 30,457 31,723 Net profit 5,456 2,941 3,055 3,700 4,072 A/C and other receivables 5,785 4,605 5,057 5,405 5,651 EPS 0.55 0.29 0.31 0.37 0.41 Loan receivables 4 4 9 9 9 Others 18 18 0 0 0 Growth rates Pledged deposit 0 0 0 0 0 Revenue (17) (12) (9) 7 5 Term deposit 0 0 0 0 0 Net profit (25) (46) 4 21 10 Cash and cash equivalents 8,477 13,001 7,943 6,571 7,586 EPS (25) (46) 4 21 10 54,083 49,005 42,269 42,442 44,969 Margin & ratios Total assets 61,121 55,675 49,402 49,998 52,621 Gross profit margin 29.7 27.6 29.2 28.9 29.2 OP margin 10.7 7.1 9.1 9.7 10.2 Current liabilities Net profit margin 8.5 5.2 6.0 6.8 7.1 A/C and other payables 3,998 4,336 5,693 6,093 6,281 Effective tax rate 16.9 24.3 28.0 27.5 27.5 Amount due to non-controlling shareholders of subsidiaries 197 161 90 90 90 Payout ratio 51.3 272.0 166.9 50.0 50.0 Tax liabilities 596 433 596 650 715 Bank borrowing 6,751 7,320 6,193 6,100 6,100 Cash Flow Statement Gold loans 8,338 6,513 3,216 3,090 3,235 Year-end Mar 31 (HK$ m) FY15 FY16 FY17 FY18E FY19E 19,880 18,764 15,788 16,023 16,421 Profit before tax 6,659 3,936 4,378 5,255 5,781 Net finance cost 229 88 97 60 61 Non-current liabilities Share of (profit)/loss of JV 11 4 10 12 10 Bank borrowing 0 600 600 600 600 Others (354) 920 246 0 0 Deferred tax liabilities 457 318 286 286 286 Depreciation and amortization 762 873 817 836 864 Retirement benefit obligations 243 243 227 236 245 Impairment losses 0 0 164 0 0 700 1,162 1,112 1,121 1,131 Change of working capital 2,163 8,946 1,460 (1,146) (1,324) Tax paid (1,902) (870) (920) (1,336) (1,517) Equity Operating cash flow 7,568 13,897 6,252 3,681 3,874 Shareholders' equity 39,430 34,904 31,799 32,041 34,137 Non-controlling interests 1,111 846 703 813 932 Capex (2,686) (1,046) (862) (1,300) (1,000) 40,541 35,750 32,502 32,854 35,068 Interest received 128 112 122 98 96 Disposals 13 20 6 0 0 Total liabilities & equity 61,121 55,675 49,402 49,998 52,621 Acquisitions (1,188) 0 0 0 0 Change in term deposits 500 0 0 0 0 Financial Ratios Change in pledged deposits 5 0 0 0 0 Year-end Mar 31 FY15 FY16 FY17 FY18E FY19E Others 135 (131) (414) 0 0 Current ratio 2.7 2.6 2.7 2.6 2.7 Investing cash flow (3,093) (1,045) (1,147) (1,202) (904) Quick ratio 0.7 0.9 0.8 0.7 0.8 Change of bank borrowings 450 1,192 (1,112) (93) 0 Inventory turnover days 332 317 305 280 280 Change of gold loans (2,036) (2,161) (3,023) (126) 145 Dividend paid (3,534) (6,582) (5,148) (3,475) (1,943) Asset turnover 1.1 1.0 1.0 1.1 1.1 Interest paid (400) (257) (251) (158) (157) Total assets/total equity 1.5 1.6 1.5 1.5 1.5 Others 49 (200) (238) 0 0 Net gearing 16 4 6 10 7 Financing cash flow (5,472) (8,008) (9,771) (3,851) (1,955) ROE 14.2 7.9 9.2 11.6 12.3 Net change of cash flow (996) 4,845 (4,667) (1,373) 1,015 ROA 8.9 5.0 5.8 7.4 7.9 Forex changes 7 (321) (392) 0 0 4
Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1 Neutral Expected sector relative performance ranges between -1 and 1 Cautious Sector expected to underperform benchmark by more than 1 Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk 5