Jul 26, 2020 (Thomson StreetEvents) — Edited Transcript of Chow Tai Fook Jewellery Group Ltd earnings conference call or presentation Thursday, June 11, 2020 at 10:00:00am GMT

Chow Tai Fook Jewellery Group Limited – GM of the Mainland China Management Centre & Executive Director

Chow Tai Fook Jewellery Group Limited – Finance Director, Joint Company Secretary & Executive Director

Good evening, ladies and gentlemen. Welcome to the live audio webcast of analysts and investor session of Chow Tai Fook Jewellery Group’s annual results for the financial year 2020. Let me introduce the management today. They are Mr. Kent Wong, the Managing Director; Mr. Hamilton Cheng, the Executive Director. Hamilton is responsible for the financial management and corporate operations. Mr. Chan Sai-Cheong, the Executive Director. Mr. Chan is responsible for the Mainland China business. Mr. Peter Suen, the Executive Director. Peter is responsible for the Hong Kong, Macau and overseas business. Mr. Bobby Liu, Executive Director. Bobby is responsible for the sustainable development and innovation. And Ms. Danita On, the Director of Investor Relations and Corporate Communications.

Hamilton will present annual results, operational highlights and financial review. Kent will present the business update. Bobby will give the update on customer experience, e-commerce and CRM.

Finally, Kent will conclude the presentation with the group’s business outlook and strategies. After that, we will have Q&A. With no further ado, may I invite Hamilton to present.

Ping-Hei Cheng, Chow Tai Fook Jewellery Group Limited – Finance Director, Joint Company Secretary & Executive Director [2]

Okay. Thank you. Good evening, ladies and gentlemen. I’m pleased to announce our annual results for the fiscal year 2020. The group had a stable performance in the first half as supported by steady growth in Mainland China, while it was overshadowed by macro uncertainties and COVID-19 epidemic in the second half.

For the full year, revenue amounted to $56.8 billion, down 14.9% year-on-year. Same-store sales in Mainland China, in Hong Kong, Macau declined by 15.1% and 38.7%, respectively. Core operating profit, excluding the impact of unrealized gain or loss on gold loans and foreign exchange, which better reflects the operational performance of our business, fell 18.4% year-on-year to $5.7 billion.

Profit attributable to shareholders dropped by 36.6% to $2.9 billion, and unrealized loss on gold loans of $711 million was recorded as international gold price surged and gold loan borrowings increased during the financial year.

Basic earnings per share totaled HKD 0.29. The Board has proposed a final dividend of $0.12 per share. Full year payout ratio approximated 82.7%, supported by our strong cash flow and financial position.

Operational highlights. We opened a net of 716 POS during the financial year, bringing the total number of POS to 3,850 at the end of March. Net openings in Mainland China reached 711, while Hong Kong, Macau had net additions of 4 POS, mainly stores for multi-brands. There was also 1 net opening in other markets. CTF HUÁ collection continued to be well received by our customers. Its sales reached CNY 8.2 billion during the year and its contribution to our gold products retail sales value in Mainland China further expanded to 32% versus 18% in last year. As of March this year, there were total of 929 counter-in-shop and 4 T MARK specialty stores. In the year, T MARK contributed 19.3% and 27.8% of diamond products retail sales value in Mainland China and Hong Kong, Macau, respectively. Retail sales value of our e-commerce business in Mainland China was up by 3.4% year-on-year, accounting for 5.2% in terms of value and 14.4% in volume of our Mainland China operations in the year.

Here in the income statement summary, I’ll walk you through the major margins and ratios. Adjusted GP margin improved by 170 bps to 29.6% in the year, benefiting from the like-for-like margin improvement in both retail and wholesale versus as gold price surged. SG&A expenses decreased by 3.9% to $11.6 billion. Nevertheless, SG&A ratio increased by 240 bps year-on-year to 20.4% due to operating deleverage. Core operating profit, which excluded the impact of unrealized loss on gold loans and foreign exchange, decreased by 18.4% year-on-year and margin declined 50 bps, yet it managed to stay at 10%, despite the very challenging environment surrounding our key operations.

Revenue breakdown analysis. The group revenue declined by 14.9% during the year, mainly attributable to the COVID-19 epidemic in the fourth quarter, a surge in international gold price that dampened the retail demand for gold products and weak performance in Hong Kong. In Mainland China, revenue was down slightly by 3.9% in the year. Our store expansion strategy and steady same-store sales growth there supported a decent revenue growth of 12% during the first half, which buffered a 15.9% decline in the second half in the backdrop of the epidemic. Mainland China’s contribution to the group revenue was lifted to 71.8% in the year. In Hong Kong, Macau and other markets, revenue dropped by 34%, and its contribution to the group’s revenue fell to around 28% accordingly.

And then revenue breakdown by products. Revenue of our gold products decreased 16% in the year as a result of high comparison base and gold price volatility. Gold products contribution to the group’s revenue was reduced by 120 bps year-on-year to 59.9%. Revenue of gem-set jewelry also fell 17.5% year-on-year during the year due to challenging macros. On the other hand, our platinum and karat gold products demonstrated a relatively better performance backed by the successful launch of more contemporary collections and fixed-price gold jewelry in the year.

Here is an illustration of our same-store sales growth in the past 2 financial years, plus a recent update for the — for April and May this year. The epidemic and volatile macro environment inevitably affected both Mainland China and Hong Kong, Macau, in particular, during the fourth quarter. Same-store sales growth in Mainland China in the first 9 months of the year stayed positive at 2%, while it plummet to negative 49.5% in the fourth quarter. As a result, same-store sales in Mainland China dropped by 15.1% during the year, yet same-store ASP, average selling price, stayed on a favorable trend in the year with 11.7% increment. Same-store sales in Hong Kong, Macau declined by 38.7% during the year as volumes declined, shadowed by the sluggish business environment in Hong Kong.

An update for April and May, same-store sales in Mainland China gradually recovered and declined level to 15%, while same-store sales in Hong Kong, Macau dropped to negative 80%, similar to the February and March level. The group’s retail sales value dropped by 22.6% during the period. And China’s contribution to the group’s retail sales value was around 89%.

And then same-store sales by products. For our gold products, the surge in international gold price dampened consumer demand in both Mainland China and Hong Kong, Macau, yet both markets enjoyed a teens growth in ASP during the year. ASP was lifted by 17% in Mainland China, thanks to the rising gold price and success of CTF HUÁ collection. While in Hong Kong, Macau, ASP of gold products also up by 14.2%.

For gem-set, same-store sales in Mainland China declined by 12.4%, mainly dragged by the fourth quarter weak numbers, while ASP increased slightly to HKD 6,400 from HKD 6,300 last year. In Hong Kong, Macau, sluggish demand has resulted due to the situation in Hong Kong, and same-store sales of gem-set jewelry was down by 42.4%, while ASP stood at around HKD 11,000 level similar to last year.

For April and May, both gem-set and gold products delivered a sequential improvement in Mainland China with gem-set having better performance, while in Hong Kong, Macau, same-store sales trend of both products remained sluggish.

Well, profitability analysis. In Mainland China, our core operating profit recorded a growth of 1.2%. Hong Kong, Macau and other markets registered a 70% decline. Mainland China continued to be our major profit contributor and accounted for almost 90% of the group’s core operating profit in the year versus around 55% 5 years ago. Adjusted GP margin in Mainland China improved sharply by 170 bps to 30.5% in the year as like-for-like GP margin improved when compared to last year. And SG&A ratio increased by 110 bps to 18.7% in the year due to operating deleverage. Full year core operating profit margin expanded by 70 bps, demonstrating a continuous improvement across the previous 3 financial years. For Hong Kong, Macau and other markets, adjusted GP margin grew by 110 bps to 27.4%, driven by both a surge in gold price and an improvement in the GP margin of our jewelry trading business. SG&A ratio rose by 600 bps due to operating deleverage. Therefore, COP margin of Hong Kong, Macau segment contracted 440 bps to 3.7%.

An analysis of our SG&A. The total operating expenses decreased by 3.9% to around $11.6 billion, whereas the second half portion dropped 10.8% year-on-year as we further tightened our expenses, yet full year SG&A ratio worsened by 240 bps to 20.4% due to operating deleverage.

For the major components, including staff costs, concessionaire fees and lease expenses, like in the past, I shall walk you through separately in the next 2 slides.

And here, we are focusing on, first, on the depreciation and amortization. As we first adopted the IFRS 16 for this year, this has led to a significant increase in depreciation and amortization and a decrease in rental expenses. If such impact was excluded, depreciation and amortization will increase by 8.8% year-on-year.

Packaging materials expenses increased 19.5% in this year as we enhanced our product packaging to lift brand value and provide better customer experiences.

And then staff costs. Staff and related expenses was up by 6.1% in Mainland China, while down by 14.4% in Hong Kong, Macau.

Incremental expenses in Mainland China were mainly attributable to the increase in variable performance-based portion in the first 9 months of the year as business growth was positive during the period. Such variable component was trimmed by over 40% year-on-year in both — in the fourth quarter as business was adversely affected in light of the epidemic. In Hong Kong, Macau variable staff costs shrank by 27% in the year and second half — and especially in the second half, this variable staff cost dropped nearly 50%.

And then rental. In Mainland China, concessionaire ratio added up slightly to 8.4% due to the shift in sales mix towards gem-set jewelry. In Hong Kong, Macau, these related expenses ratio expanded by 240 bps to 7.3% due to operating deleverage. In the year, we renewed leases of around 20 POS, and the average rental renewal reduction was around 14% relative to the last contract. On the other hand, rental relief from landlords of more than $30 million was received during the year.

In the coming year, we believe that we will be able to achieve an average reduction of around 25% to 40% upon rental renewal. Overall, rental costs in Hong Kong, Macau should see at least 10% to 15% reduction versus this year.

And inventory analysis. Inventory balances excluding packaging materials increased by 7.7% and reached $42.3 billion as of end of March, which is mainly due to the business disruption in the fourth quarter. Inventory turnover period was prolonged by 82 days when compared to that of last year. As of March this year, approximately 13% of the inventory balances were consigned inventories that were held for franchise POS, which is equivalent to around 50 days in terms of turnover.

With the stringent procurement policy and gradual business recovery in Mainland China, we target to have inventory balances back to around $39 billion by March next year, similar to the fiscal year ’19 level. Inventory turnover period in the coming year should improve to around 320 days.

CapEx totaled around HKD 1 billion in the year. Major CapEx was spent on our POS covering new openings and renovation of existing stores. In the coming year, we expect CapEx to stay at a similar level of around $1 billion to $1.1 billion.

And then changes in our capital structure. Major change come from bank borrowings and gold loans, which were up by $1.4 billion and $3.3 billion, respectively, as inventory balances and gold price increased. Gold hedging ratio by weight was 63% as of March this year. Net gearing ratio, including gold loans, was 57% as of March this year. When excluding gold loans, net gearing ratio would be around 16%.

And then lastly, cash flow. Operating cash flows before movements in capital, net with leases paid, was around $7.1 billion, a decrease of around 8% compared to demand last year on the same basis. After cash used for inventories and CapEx, our pro forma free cash flows was around $5.2 billion for the year. Other major cash flow items included a $1.4 billion increase in bank borrowings and $6 billion used for payment of dividend for last year. As of March 2020, the company’s cash and bank balances stayed at a healthy level of $7.2 billion.

So here, I conclude my part, and I will turn it over to Kent for the business update.

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Siu-Kee Wong, Chow Tai Fook Jewellery Group Limited – MD & Executive Director [3]

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Okay. Thank you, Hamilton. Let me share with you our retail network. In Mainland China, we opened a net of 711 point of sale during the financial year, among which 623 point of sale were Chow Tai Fook Jewellery point of sale.

Following the completion of ENZO acquisition in January 2020, 59 point of sale were add to the group. As of March this year, we had 3,699 point of sale in Mainland China.

This slide show the retail sales value and point of sale network under Chow Tai Fook Jewellery point of sale, which contribute 90% of our RSV in Mainland China.

By tier of cities, as we have been leveraging franchisee to expand our presence in lower tier and county level city, about 53% of the net opening in FY ’20 were located in Tier 3, 4 and other cities. In general, these cities has a stronger RSV performance than Tier 1 and Tier 2 during the financial year.

By operation model, all net opening during the financial year were in franchised format, while we closed a net of 14 self-operated point of sale. As of March 2020, franchised point of sale account for over 56% of our point of sale in Mainland China. 34% out of these franchised point of sale will operate under the sell-in model. By self-operate model, during financial year 2020, we consolidate 3 self-operate stand-alone stores and 39 stores in department store, while we add a net of 28 point of sale in shopping mall. As a result, RSV contribution from shopping malls increased from 37.3% in FY ’19 to 41.5% in FY ’20.

In recent year, we have adopt our point of sale expansion strategy in lower-tier city and county level city in Mainland China to capture growth potential due to consumption upgrade. 623 point of sale brand under Chow Tai Fook Jewellery were opened in Mainland China in FY ’20.

COVID-19 inevitably affect our opening trend in first quarter of FY ’21. But as business recover over the last few months, we still expect to see a growth in store count in FY ’21. We expect the net open of FY ’21 shall reach approximately 400 to 450. Meanwhile, we will continue to enhance customer experience in Tier 1 and Tier 2 cities through our segmentation strategy.

In terms of RSV and point of sale by geography, the weak business environment in Hong Kong, coupled with the epidemic, led to a 32.1% drop in customer traffic in Hong Kong and Macau during FY ’20, result in a RSV decline in both Hong Kong and Macau.

Share of RSV settled in China UnionPay, Alipay, WeChat Pay or renminbi in Hong Kong and Macau, a positive sales contribution from Mainland tourists also lower from 46.5% in FY ’19 to 36.9% in FY ’20 as Mainland visitation dropped considerably, especially in second half FY ’20.

Retail network management in Hong Kong and Macau. A net of 4 point of sale were opened in FY ’20, including a net open of 1 Chow Tai Fook Jewellery point of sale and 3 point of sale for MONOLOGUE and SOINLOVE, our new brand. Going forward, improving store productivity and profitability and optimize store-related costs will be our top priority. We expect to consolidate 10 to 15 point of sale in FY ’21. At the same time, we shall continue to seek for a more meaningful cut in rental.

In other overseas markets, a net of 1 point of sale was opened in FY ’20, including 6 Chow Tai Fook Jewellery net opening. Other market RSV register over 80% growth during the year. We shall continue to explore opportunity to open store in Southeast Asia.

So I will — this is my sharing. So I would like to pass it to Bobby Liu. He is responsible for development on customer and e-commerce.

Thank you.

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Chun-Wai Liu, Chow Tai Fook Jewellery Group Limited – GM of the Mainland China Management Centre & Executive Director [4]

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Thank you, Kent. Let’s share our multi-brand strategy. We continue to diversify our product portfolio to better serve its unique consumer segment and create long-term differentiation and novelty.

In January 2020, we acquired ENZO, which enabled us to further venture into the colored gemstone market to complement the group’s multi-brand strategy.

JEWELRIA. JEWELRIA is a designers’ hub of international jewelry product offering. Annoushka and Kagayoi that have recently joined the JEWELRIA family and are 2 excellent examples that demonstrated JEWELRIA’s eclectic mix of oriental design, western style to international brand jewelry. Annoushka, a London-based jewelry house created by the renowned designer Annoushka Ducas, has been loved by members of the British Royal Family. Kagayoi, a heritage jewelry brand from Japan for over 150 years, brings forth the jewelry embodied with Kyoto’s unique aesthetic sense.

As of March 2020, there were 59 JEWELRIA points of sale in Mainland China, and we will continue to roll out JEWELRIA through both self-operated and franchisee point of sale in financial 2021.

ENZO is a creative and contemporary colored gem jewelry brand founded in 2004. It is renowned for its exceptional craftsmanship and jewelry creations about nature and emotions. Its average selling price range is around RMB 2,000 to RMB 5,000 and targeting to introduce and educate our potential customer about the beauty of colored stones. As of March 2020, ENZO has 59 points of sale in Mainland China, primarily located in Tier 1 and Tier 2 cities.

T MARK as of March 31, 2020, there were 865 counter-in-shop in Mainland China and 64 counter-in-shop in Hong Kong, Macau distributing T MARK diamond products. In our financial 2020, T MARK RSV was down by 9.2% in Mainland China and 41% in Hong Kong, Macau, as affected by the pandemic and the sluggish business environment in Hong Kong. We have been expanded coverage of the T MARK diamond to some hit collection with strong story-telling element, such as Guardian of Life Collections. In the coming year, T MARK diamonds will be extending to 8 points diamond and above with our patent inscription.

HEARTS ON FIRE is, as of March 2020, there were 11 HEARTS ON FIRE points of sale and 210 shop-in-shop or counter-in-shop in our group. The new Hayley Paige for HEARTS ON FIRE Collection was unveiled in October last year. We will further enrich the product offering and launch regionally marketing campaigns to boost brand awareness in the second half of the financial year of 2021.

And now to our young brands, SOINLOVE and MONOLOGUE. We have been proactive in exploring innovative promotional channels and new product development to connect SOINLOVE and MONOLOGUE with younger customers. Riding on the sweeping trend to social media, we leverage the power of online marketing campaign to boost the sales of our new collections. Online sales accounted for around 60% of both SOINLOVE and MONOLOGUE RSV in Mainland China during the financial year of 2020, effectively tap this online surfing generation. Meanwhile, physical stores are essential to provide matching products and unique in-store experience to younger customers. In financial year 2020, we have 17 SOINLOVE point of sale, and 15 MONOLOGUE point of sale were opened, bringing the total numbers of point of sale to 44 and 53 as of March 31, 2020, respectively. Rollout of these 2 brands shall continue through both self-operated and franchised points of sale.

In view of the changing environment, we have taken steps to integrate technologies into our store and create seamless shopping experience over the past few years.

Cloud kiosk is our proprietary innovation, successfully empowered our customer with more flexibility in extracting their most comfortable shopping experience in our store and online channels by strategically linking e-commerce platform to selected physical locations.

Omnichannel retailing. Despite the epidemic has dramatically affected our store operations and customers’ demand and lifestyle in the last couple of months, it was also a prime opportunity for us to demonstrate our commitment to embracing technologies. We launched CloudSales 365, which connecting our online e-shop, customer management and back-end system. Through this program, we built up a WeChat Work — through the WeChat Work, our staff can engage and serve our customers best anytime and anywhere by simply accessing a mobile device. It can also effectively extend the reach of our social media marketing efforts.

Livestreaming events is another way we can — to focus a connection with our customer. We use — the connection focus also proved to be successfully in amplifying the sales of our online and CloudSales 365 in this period. The collaborative event with Austin Li Jiaqi, a top Chinese influencer, received an overwhelming response with around 5,000 pieces of products sold within 30 seconds for charity purpose.

Our e-commerce business delivered an RSV growth of 3.4% in the financial year of 2020. It contributed to 5.2% of our RSV and 40.4% of our retail sales volume in Mainland China. The average daily online traffic reached 739,000 unique visitors. The number of followers on our Sina, Tencent Weibo and WeChat accounts increased to 10.6 million. The average selling price on our e-commerce increased to HKD 1,400 in FY 2020 versus HKD 1,300 a year ago.

Here is an update on our customer relationship management. As of March 2020, we had approximately 2.5 million members in our membership program in Mainland China. The repeated purchase ratio was lifted to around 25% in FY 2020. In Hong Kong, Macau, the number of members reached 1.2 million, which — with a repeat purchase ratio increased to around 36%.

Now I will turn it over to Kent for the business strategies. Thank you.

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Siu-Kee Wong, Chow Tai Fook Jewellery Group Limited – MD & Executive Director [5]

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Okay. Thank you, Bobby. To conclude, FY ’20 was a challenging year, especially in fourth quarter FY ’20. The Hong Kong, Macau market will remain challenging in the foreseeable future. While in Mainland China, we have seen signs of recovery as business resumed. We remained cautiously optimistic about the short-term business outlook, but stay optimistic about the mid- to long-term prospect of the jewelry market in Mainland China. In Hong Kong and Macau, we shall continue to consolidate our retail network, rationalize cost structure and refine our business strategy. We shall also place an emphasis on transforming our current business model through innovation and technology to enhance retail experience, improve operational efficiency and strengthen our market leader position.

On the other hand, we shall continue our Mainland China expansion plan through franchise model as the situation stabilize. Customer experience shall be further diversified and satisfied through our channel innovation and our multi-brand strategy.

Going forward, we shall continue to implement our customer-centric strategy with the vision of achieving our 4 long-term goals: one, be the market leader through further market penetration; second, develop a comprehensive jewelry ecosystem; third, be a tech-empowered jewelry company through harnessing innovation and technology; four, improve operational efficiency through digital transformation. Our task will center on improving business model agility and organizational structure through technology and employee empowerment, which allow us to respond rapidly to change, strengthen supply chain capability through streamlining the processing, automation and data analytics and enhance our competitive edge to achieve long-term sustainable growth. This conclude our presentation today. Thank you.

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Operator [6]

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Thank you, Kent, Hamilton and Bobby.