Uncertainty lifted and upside of Chow Tai Fook may be unlimited

Chow Tai Fook (CTF) Jewelry Group (SEHK: 1929) is one of the legacy brands in Hong Kong. It is known for manufacturing, designing and marketing jewelry and other luxury goods. The iconic brand “Chow Tai Fook” has a multi-brand strategy that comprises the Artrium, Jewelria and CTF Watch brands, in addition to other artisan products.

The business has been affected by the political unrest in Hong Kong and COVID-19. The retail landscape in the city has been eerily quiet since 1Q 2020.

Given this situation, this article will look at how this jewelry giant is coping with the current headwind. We will also look at how Chow Tai Fook is using innovative digital strategies to sustain its growth in the long term.

Sales and earnings revitalize in China

Luxury brands have been packing up and leaving Hong Kong as demonstrations batter the retail sector. Today social distancing measures are causing retail sales to continue their downward slide. As of March 2020, sales of jewelry and watches have dropped 75.2% year-to-year. This considered Chow Tai Fook is facing a challenging business environment in the immediate future.

Luckily, Chow Tai Fook has a good mix of products (gold, gem, platinum, and watches), as well as a range of sales locations. The company has been developing a relationship with mainland Chinese customers since 2017, with 68.5% of revenue coming from mainland China in the first quarter of 2020. This revenue shift shows Chow Tai Fook’s plans to shift some of its business focus to China, increasing sales and e-commerce partners in 2nd and 3rd tier cities in the mainland.

Beyond this, gold and gem products comprised 82.1% of Chow Tak Fook’s total revenue in the first quarter of 2020. The defensive nature and resilience of gold prices have allowed profit margins for gold sold in China to remain high – 31.9% compared to to Luk Fook’s 25% (SEHK:590) and Chow Sang Sang (SEHK:116)’s 26.9%.

This indicates that Chow Tai Fook’s gold Jewellery business in China is one of the company’s most profitable revenue streams. The recent reopening of cities in China may act as a major catalyst for growth for next quarter’s sales.

Digitalization of retail sales

In addition to the company’s plan to promote sales in China, Chow Tai Fook has stepped out of its comfort zone by launching an online sales platform. Executive Director Liao Zhen said in an interview that COVID-19 has indeed become an opportunity for the company to accelerate the use of technology, ultimately improving user experience.

After closing some stores in the first quarter, the company shifted its position to online channels and launched “Cloud Merchant 365” in China.

This has attracted more than 4.7 million browsers to Chow Tai Fook’s official website, accounting for 35% of the company’s total sales in the first three months post-launch. Beyond increasing sales, the implementation of a digital platform will help ease the pressure of high rental cost, which was reduced by 84.7%, from HKD 769 million to HKD 118 million in first-quarter 2020.

Conclusion

Even as retail sales of luxury goods decline in Hong Kong, Chow Tai Fook has made bold sales plans and established digital strategies. Betting on the domestic demand in China’s 2nd and 3rd tier cities, rather than Chinese tourists shopping in Hong Kong seems logical.

Despite the challenging situations, the fundamentals of the Chinese economy remain fairly steady, when compared to Hong Kong’s economic contraction.

While COVID-19 and trade tensions may not abate in the short term, retail investors could look at spending indicators, such as buying of luxury goods by Chinese consumers, which will stimulate Chow Tai Fook’s business performance in the next quarter.

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