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Largest Jewellery Retailer In HK, Macau, China – Chow Tai Fook
Corporate Digest | 14 August 2014
By: Louis Kent Lee
Articles (199) Profile

We have been expanding our investment radar, and it is of no surprise that we are onto Hong Kong, especially with all the buzz of the Shanghai Hong Kong connect.

As you know, Hong Kong is the place to shop, and eat, and shop, and eat. So how can we not start the Hong Kong market off with a retail stock yes?

Company Background
Chow Tai Fook (CTF) was founded in 1929 and is the largest jeweller in Greater China (including Hong Kong & Macau). It is backed by a strong brand name and enjoys stellar brand recognition due to its extensive network of 2077 stores as at the end of March 2014.

One of the many CTF stores

CTF’s products include gold products, gem-set jewellery (includes diamonds and gemstones), platinum/karat-gold products, and luxury watches.

CTF had an estimated 12.6 percent market share in China and an estimated 20.1 percent market share in Hong Kong and Macau in 2010.

Business Model And Strategy
CTF either self operates or franchises stores. In Hong Kong and Macau, all the stores are self-operated whereas in China, only 70 percent of its stores are self-operated while 30 percent of its stores are under the franchised model.

CTF’s franchised stores are typically in lower tier cities in China to tap on the franchisee’s local knowledge and also build brand presence at a faster pace in these markets where the growth of the market is expected to be faster due to growth in disposable incomes.

CTF is a DTC Sightholder and a Rio Tinto Select Diamoantaire and this allows them to source for rough diamonds at significant cost advantages.

This vertically integrated model gives them better margins over their competitors (approx close to 30 percent).

They also adopt a prudent hedging strategy which has resulted in stable margins over the past 3 years despite the highly volatile gold prices.

    Key Drivers

  • Opening of new stores and the continued gain in market share which drives topline growth.
  • Strong integrated value chain that enables CTF to produce its products at significant cost advantages.
  • Improvement in product mix with a shift towards gem-set jewellery which commands superior margins of 40-45 percent versus 10-15 percent for gold jewellery

    Key Risks

  • Decline In Mainland Tourist Numbers To HK And Macau
  • CTF’s jewellery retail business in HK and Macau is highly dependent on mainland tourists’ expenditure on luxury items within HK and Macau. A dip in such tourists’ travel flow could have drastic impact on the jewellery retail sales in HK and Macau. 40 percent of CTF’s revenue still comes from Hong Kong & Macau. The profit contribution from these stores are also likely to be proportionately higher where diamonds accounts for 45 percent of the product mix versus 30 percent in China.

  • Decrease In Gold Prices
  • A fall in gold prices will reduce the demand of gold as an investment, leading to a fall in revenue. Gold still accounts for 70 percent of the product mix in China.

  • Impaired Brand Equity, Loss Of Market Share
  • CTF’s market share and size of its POS network is one of its most important competitive advantages, as consumers recognise its products for its brand. Any direct connotation that results in negative goodwill on CTF’s brand equity could cause a loss in market share, which would have significant impact on its top and bottom line.

  • Increased Competition
  • Increased competition will lead to declined store productivity and hence poorer returns for CTF.

SI Research Takeaway
CTF is the largest jewellery retailer in China and Hong Kong & Macau with a strong brand name in the mass affluent jewellery retail segment.

The company is able to enjoy strong topline growth as it penetrates into lower tier cities and will enjoy margin expansion due to the shift towards gem-set jewellery as disposable income rises.

This, we feel, is going to have direct impact on same store sales growth, and coupling this with its increasing point of sales strategy, this is looking to be a sustainable and good catalyst.

In our opinion, CTF’s market share should continue to be robust and grow, based on its guidance of adding 200 more point of sales this year.

Lower tier cities in China remains one of the key growth drivers for CTF and we will be looking at its penetration rates and same store sales growth closely.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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