Chow Tai Fook Jewellery : TRANSCRIPT (trans241126 en)

2024/2025 Interim Results Investor Presentation

Tuesday, 26 November 2024

Introduction to Management

MC

Good evening, Ladies and Gentlemen, welcome to the Investor and Analyst presentation of Chow Tai Fook Jewellery Group Limited to discuss our interim results for the financial year 2025.

Let me introduce the management team who will conduct the presentation today. They are Mr. Kent Wong, Managing Director, Mr. Hamilton Cheng, Executive Director and Chief Financial Officer and Ms. Danita On of Investor Relations and Corporate Communications.

Firstly, Mr. Kent Wong will present the Interim results highlights and group strategies, as well as to give business updates. Then, Mr. Hamilton Cheng will then talk about financial review and conclude the presentation with market outlook. After that, we will have a Q&A session.

This hybrid event will be conducted primarily in English. We will provide simultaneous interpretation services for any content and questions answered in Mandarin.

For on-site participants at HKCEC requiring translation assistance, please raise your hand, and a headset will be provided to you. Online participants have two options available. You can select English, or Mandarin interpretation in the language bar located at the top right corner of the webcast platform.

Now, I'd like to hand the time over to the first presenter, Mr. Kent Wong.

1H2025 Highlights

Slide 2 - (1H2025 Highlights)

Mr. Kent Wong - Managing Director

Good afternoon, ladies and gentlemen. Thank you for joining us in our interim results for financial year 2025.

The business environment continued to be affected by macro uncertainties and externalities in

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the first half. Record gold prices in particular have continued to impact consumer sentiment, resulting in a slowdown of demand for gold jewellery. During the period, the Group's revenue decreased by 20.4% to HK$39.4 billion.

In order to help the market better understand the underlying operational performance of our business and separate the impact of hedging, we have reclassified the gold loan fair value changes, including all settled and unsettled contracts, from "cost of goods sold" to "other gains or losses" from this financial year. Hamilton will elaborate on this in later section.

Operating profit remained resilient at HK$6.8 billion, up by 4% year-on-year. Profit attributable to shareholders decreased by 44.4% to HK$2.5 billion. The decrease was mainly due to a HK$3.1 billion loss arising from the revaluation of gold loan contracts amid considerable volatility in gold prices during this period, versus a gain of HK$33 million in the same period last year.

On profitability, the Group's gross profit margin expanded significantly to 31.4% during this period and operating profit margin improved to 17.2%. The resilient performance in the first half validates our diligent execution of the five strategic priorities, which have sustained the Group's momentum towards quality earnings.

The Board has declared an interim dividend of HK20 cents per share, representing a payout ratio of nearly 80%.

The Board also announced a Proposed Share Buy-back with a total amount not exceeding HK$2 billion from internal resources. This takes into careful consideration the capital requirements of the business to invest in growth and our commitment to enhance total shareholder returns. This also reflects our confidence in the long-term business prospects.

Slide 3 - (1H2025 Highlights)

Mr. Kent Wong - Managing Director

Let me now share our four key highlights during the first half of FY2025.

Our brand transformation continued to gain positive momentum in this period.

We proactively optimised our product portfolio and pricing strategies to suit consumer demand with product offerings with different value propositions.

The Group's gross profit margin was enhanced by 650 bps in the first half, thanks to gold price increase and a higher contribution of our higher margin fixed-price gold products. We remained disciplined on our cost and capex spending. SG&A expenses decreased nearly 3% year-on-year. As a result, operating margin grew by 400 bps year-on-year against a challenging macro backdrop.

As part of our enduring commitment to preserve Chinese culture and heritage, we announced a strategic partnership with the Hong Kong Palace Museum to launch the five-year "Chinese Gold Craftsmanship Heritage Education Programme".

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Slide 4 - (Brand Transformation)

Mr. Kent Wong - Managing Director

In September, we celebrated the grand opening of our first concept store in Central, Hong Kong, marking a significant milestone in our brand transformation journey.

Showcasing jewellery collections in a gallery-like aesthetic, the concept store embodies refreshed operating standards and an enhanced store ambience that resonates with the essence of our refreshed brand.

We are delighted to receive positive feedback so far and we look to efficiently allocate resources for a progressive rollout of refreshed stores over the next five years. This will be calibrated and aligned in accordance to market conditions.

Slide 5 - (Optimisation of Product Offerings)

Mr. Kent Wong - Managing Director

We continue to optimise our product portfolio with exquisite design and craftsmanship. The new collections we launched in the first half generated strong sales momentum and traction with customers, resulting in the lift of higher margin fixed-price contribution to gold product RSV to 14.2% in Mainland China, doubling its contribution versus a year ago. This validates our pivot in product and pricing strategy in response to market dynamics.

In celebration of Chow Tai Fook Jewellery's 95th anniversary, we unveiled signature CTF Rouge Collection. This new collection has generated remarkable sales of over HK$1.5 billion since its debut in April, beyond our expectations.

In collaboration with the Palace Museum in Beijing, we released the Chow Tai Fook Palace Museum Collection in August. This new collection differentiates with its unique representation of Chinese heritage and craftsmanship, featuring jewellery pieces designed for daily wear.

Building on our expertise in diamond jewellery, we also launched a new line of wedding jewellery, the CTF Bond Collection in September. This collection features a diverse range of jewellery pieces, with the highlight being the elegant 2-Prong Bond Ring.

Let me use this opportunity to show you videos about our latest Rouge and Palace Museum collections.

We expect to enrich SKU offerings in our key collections such as HUA, Palace Museum and CTF Rouge Collection and launch new differentiated collections, spanning fixed-price gold to gem-set. Our strengths in product innovation will sustain our leadership in this industry.

Slide 6 - (Chinese Gold Craftsmanship Heritage Education Programme)

Mr. Kent Wong - Managing Director

Over the years, we have applied and enhanced delicate techniques and exquisite craftsmanship in our jewellery making. This new partnership with Hong Kong Palace Museum aims to preserve the rich traditions, artistic features, and cultural significance of Chinese gold craftsmanship while educating the younger generation about its importance, fostering their

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understanding and appreciation of Chinese gold artistry.

This serves as a testament of our strong commitment to preserving Chinese cultural heritage.

Business Update

Slide 8 - (Mainland China - CHOW TAI FOOK JEWELLERY POS)

Mr. Kent Wong - Managing Director

As of September this year, we had almost 7,000 CHOW TAI FOOK JEWELLERY stores in the Mainland, of which 77% were franchised.

With an emphasis on improving earnings quality, our current priorities are to maximise the overall financial health of our retail network and sustain our market leadership.

Due to the softer demand amid the gold price volatility, self-operated stores and franchised stores recorded an RSV decrease by 26% and 18% respectively in the first half. Year-on-year sales performance was generally similar across different tier of cities.

Slide 9 - (Mainland China)

Mr. Kent Wong - Managing Director

In Mainland China, we net closed 239 CHOW TAI FOOK JEWELLERY stores during the first half. Based on the recent trends and market conditions, we expect net store closures to be lower in the second half than this period.

We shall remain agile in response to market dynamics and optimise our store network by streamlining underperforming stores while focusing on maximising store productivity.

At the same time, we continue to open new stores on a selective basis, with 166 new POS being added to our retail network in the first half. We adopt a data-driven approach and strategically open stores in promising locations where new POS can generate higher revenue and profit than the closure of an underperforming POS. This strategy not only mitigates revenue shortfalls but also ensures healthy growth on a collective basis to maintain and grow our market share.

We are committed to enhancing shopping experience for our customers, which is integral to our brand transformation. During the period, we hosted customer engagement events to promote our collections and seize festive periods to drive foot traffic.

We leverage on AI in digital marketing for tailored content and imagery, facilitating sales with bespoke product recommendations to our customers.

Our e-commerce business in this period was largely stable compared to the same period last year. Its contribution to Mainland RSV rose by 1 percentage point to 5.6%, compared to the same period of last year. ASP growth of e-commerce was impressive with a 14% increase to HK$2,400 in this period.

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Slide 10 - (Hong Kong & Macau of China and Other Markets)

Mr. Kent Wong - Managing Director

Now, let's turn to Hong Kong, Macau and other markets.

In Hong Kong and Macau, business was impacted by uncertain macro-economic conditions, local outbound travel and changes in Mainland tourists' spending patterns and preferences. RSV declined by 26% and 42% in Hong Kong and Macau respectively, in the first half.

We closed 3 POS in Hong Kong and Macau in the first half. Given the current challenging environment, we will stay agile in managing the evolving business dynamics. We continue to evaluate individual store location, scale, and productivity to ensure margin resilience.

Slide 11 - (Hong Kong & Macau of China and Other Markets)

Mr. Kent Wong - Managing Director

In other markets, we had 61 Chow Tai Fook Jewellery POS as of September, with 1 duty free store in China and 2 stores in Japan added in the first half. Excluding China duty free stores, other markets' RSV delivered an encouraging growth of 8.5% in the first half.

Singapore delivered the strongest RSV growth of about 14% year-on-year during this period. Other key markets like Malaysia, Thailand, Japan, and Canada also observed steady RSV growth, thanks to the resurgence in travel retail and domestic demand for jewellery products. These further strengthen our confidence in the growth prospects of overseas markets.

We will proactively seek new growth opportunities in overseas markets, led by our recent appointment of Ms. Ferreira as the General Manager for international markets in September. She is empowered to drive our growth strategies in Southeast Asia, leveraging her extensive experience in luxury retail. We aim to strategically expand our presence in popular tourist destinations and in areas with a significant population that appreciates Chinese culture. This builds on the success of our existing investments overseas, of which we will share more details of our overseas expansion strategy in due course.

This concludes my part and I will now turn over to Hamilton for financial review and market outlook.

Financial Review

Slide 13 - (1H2025 Income Statement Highlights)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Thank you, Kent. Good evening everyone. Let me start with key P&L items and ratios.

As mentioned by Kent earlier, the macro-economic externalities and high gold price volatility weighed on consumer demand in our key markets in 1HFY2025. The Group's revenue declined by 20% year-on-year to HK$39.4 billion during this period. On the positive, the increase in

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gold prices improved gross profit and profitability. Coupled with a shift in sales towards our exquisite, higher-margin fixed-price products, the Group's gross profit was up slightly to HK$12.4 billion and its gross profit margin expanded considerably by 650 bps to 31.4% during this period.

We also benefited from our disciplined cost management. The Group's operating profit was up 4% to HK$6.8 billion and the operating profit margin expanded 400 bps to 17.2% in the first half, which is a testament to our focus on earnings quality.

Slide 14 - (Revenue Breakdown)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Revenue in the Mainland declined by 19% in the first half, contributing 83.8% of the Group's revenue.

Franchised stores outperformed self-operated stores in general. The share of wholesale revenue rose to 58% within the Mainland segment, compared to 56% a year ago.

Revenue in Hong Kong, Macau and other markets declined 28%, making up 16.2% of the Group's revenue.

By product, we continued to execute pricing optimisation and launched product offerings with different value propositions to meet customer preferences. Despite an overall weakened demand in the first half, the use of exquisite craftsmanship with a meticulous blend of different precious materials in our fixed-price gold jewellery sustained strong sales momentum in this period, with its revenue surging 118% year-on-year.

Slide 15 - (Same Store Sales Growth ("SSSG") - Major Markets)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

On a same store basis, Average Selling Price ("ASP") across product categories in the Mainland remained resilient in the first half. SSSG of Mainland self-operated stores declined by 25% with similar performance across different city tiers. Franchised stores, which represented around 77% of our POS in Mainland, outperformed self-operated stores with a smaller SSS decline of 20% during the same period, thanks to a higher proportion of newer stores.

In Hong Kong and Macau, SSSG declined 31% in the first half, with Hong Kong and Macau down by 28% and 41% respectively. ASP trend across product categories also stayed resilient.

Quarter to date, we were encouraged to see a narrowing decline in SSS for both Mainland and Hong Kong and Macau markets. Based on current observation, we expect this momentum to sustain and support our view that operations in the second half of our financial year shall improve sequentially.

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Slide 16 - (SG&A Analysis (HK$M))

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

SG&A analysis.

SG&A expenses declined by 3% in the first half. Aside from staff costs and Advertising and Promotion ("A&P"), all other expenses line recorded year-on-year decrease, thanks to our effective and disciplined cost management.

We are investing in our brand for the long term. Coupled with marketing campaigns for the key collections launched during this period to celebrate our 95th anniversary, the A&P ratio was well managed at 1% of revenue in the first half, remaining largely stable compared to the average ratio over the previous financial years.

For staff costs, we will elaborate in later slides.

We shall maintain our discipline on cost management and remain agile in response to evolving business dynamics. This ensures that we are maximising the value on every dollar spent.

Slide 17 - (SG&A - Staff Costs and Related Expenses (HK$M))

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

We continue to invest in and retain talent for the Group's long-term growth. This not only honours the legacy of Chow Tai Fook but also aligns with our strategic priority on talent cultivation.

Staff costs remained relatively flat in the Mainland and in Hong Kong and Macau where the variable component decreased in line with the retail revenue decline.

The fixed component increased year-on-year in both key markets, mainly because we revised staff renumeration packages for improved welfare and the addition of strategic hires essential for driving sustainable business growth.

Slide 18 - (SG&A - Concessionaire Fees and Lease-Related Expenses (HK$M))

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Moving on to concessionaire fees and leases.

Mainland's rental costs decreased by 18% in the first half, mainly due to a 24% decline in concessionaire fees, broadly in line with the retail revenue trend. The concessionaire fees ratio increased by 20 bps to 8.2% due to a shift of sales mix towards higher margin products.

In Hong Kong and Macau, lease-related expenses declined by 4% with variable rental expenses decreasing by 46% due to the revenue decline in the first half. The rental expense ratio expanded to 5.4% due to the operating deleverage.

We are observing a trend of rental reductions during lease renewals in Hong Kong and Macau and we expect it to materialise from FY2026 onwards, as we negotiate with landlords.

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Slide 19 - (Reclassification of Gold Loan P/L Impact)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

As mentioned by Kent earlier, starting from FY2025, we have reclassified fair value change of gold loan from "cost of goods sold" to "other gain and loss", which is below operating profit. This is part of our preparation for the adoption of IFRS 18 for enhanced disclosure in financial statements.

Allow me to provide some background on the reclassification. It's part of the Group's usual business practice to use gold loans (which are short positions in gold) to mitigate the financial impact of gold price fluctuations on gold inventories (which are long positions). Over time, the effects of long and short positions are expected to offset through the sale of gold inventories. Our disciplined execution of hedging over years has proven effective to manage our risk in commodity price movements.

Per accounting standards, gold loan contracts are revalued at market price at the end of each financial reporting period or upon settlement, while gold inventories are not. This disparity leads to temporary accounting gains or losses. Previously, these gains or losses were included in the cost of goods sold, affecting reported gross and operating profit. After the reclassification, the fair value change of gold loan will be moved to other gains or losses, which is below operating profit. EBIT and net profit remain unchanged before and after the reclassification.

With this change, we intend to better reflect the core underlying operational performance and separate the impact of hedging. You will note in Appendix II on Page 30 that regardless of the reclassification, the underlying trends of key performance indicators stay similar based on the analysis of historical data over the last five years.

Slide 20 - (1H2025 Movements in Gross Profit Margin)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

1H2025 movements in gross profit margin.

In the first half, the Group's gross profit margin expanded by 650 bps to 31.4%.

Key movements are namely:

1. Retail like-for-like margin improvement contributed 490 bps, mainly attributable to surge in gold price. This more than offsets the impact from a higher wholesale mix, which weighed down the margin by 80 bps in first half.
2. Product mix improvement with an increased share of higher margin fixed-price gold products, leading to 210 bps expansion in gross profit margin.

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Slide 21 - (Operating Profit and Profitability Analysis)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Profitability analysis.

Despite a slowdown in revenue, the Group's operating profit remained resilient, up 4% year- on-year as driven by Mainland China reportable segment.

Over a three-year trend, we are encouraged to see operating margin improvements across all operating markets in the first half.

During this period, operating profit margin increased by 420 bps in Mainland China and 300 bps in Hong Kong, Macau and other markets, respectively. These positive results are driven by our initiatives to enhance earnings quality and maximise value creation for our stakeholders. We are on track to maintain a relatively stable ROE of 20-25% in FY2025 which continues to represent a sustained improvement over our 5-year historical average levels.

Slide 22 - (Profit Before Taxation)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

This section reconciles the operating profit and profit before taxation.

Key item to explain the difference relates to the gold loan revaluation loss of HK$3.1 billion amid a 19% cumulative increase in gold prices during the first half. In the same period last year, gold price dropped by 5.5% and a gain of HK$33 million was recorded.

Slide 23 - (Inventory and Capital Expenditure (HK$M))

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Inventory and capex.

We continue to adopt prudent inventory and capex management amidst market uncertainty. We focused to streamline our SKU offerings and controlled inventory procurement in the first half. By seasonality, we typically increase inventories in September for the peak season in the second half.

As of this September, our inventory balance increased by less than HK$3 billion, or 4.6% increase compared to March level. Gold inventory by weight in September was fact 9% lower than the March level.

The inventory balance for gem-set and watches remained relatively stable compared to six months ago.

Due to the overall weak consumer demand and gold price surge, inventory turnover period extended to 457 days. While we continue to refresh our product portfolio and streamline SKUs to enhance gold inventory turnover with a focus on core collections, we anticipate inventory turnover to shorten to 330-360 days by March next year.

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While we are executing five strategies with a focus on brand transformation, we retain financial discipline on capex and defer non-core capex. Capex in the first half was HK$308 million.

Slide 24 - (Summary - Movements in Cash Flows (HK$M))

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Now, let's turn to our cash flows.

Thanks to the resilient operating profit in the first half, the Group continued to generate robust operating and free cash flows amid macro challenges.

Operating cash flows, net of lease payment in the first half amounted to HK$7.3 billion, slightly higher than the same period last year. Pro forma free cash flows amounted to HK$2.7 billion in this period. We are confident that the robust generation of cash flows from our business will continue to support our ability to deliver steady business growth and sustainable returns to our shareholders.

The two major cash outflows in this period was due to repayment of gold loans and payment of FY2024 final dividend.

Slide 25 - (Capital Structure Highlights)

Mr. Hamilton Cheng - Executive Director and Chief Financial Officer

Capital structure highlights.

We prudently manage our capital structure to ensure financial stability amidst the macro uncertainty while balancing total shareholder returns.

We managed our cash balance at a healthy level with HK$3.8 billion in bank deposits and cash equivalents in September while reducing bank borrowings to below HK$4.0 billion. Net gearing ratio excluding gold loans was only 0.4% at period end.

We use gold loans to hedge against commodity price risk. The hedging ratio at period end was below 67%, similar to the level a year ago.

Building on the free cash flows generation discussed in the earlier slide, the proposed share buy-back programme reflects our commitment to enhancing total shareholder returns. It will be financed through internal resources and will be carried out progressively from time to time, subject to market conditions.

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