Chow Tai Fook glitters as hedge against lower interest rates

China’s leading jewelry seller has benefited from spiking gold prices that reached an all-time high after Iran’s drone attack on Israel last week

Key Takeaways:

• Chow Tai Fook’s sales grew 12.4% in the first three months of this year, accelerating from the company’s 6% revenue growth in the six months through September 2023
• As China’s largest listed jeweler, Chow Tai Fook could benefit from gold’s recent rise to record high prices

By Edith Terry

In gold-crazy China, the showroom of Chow Tai Fook Jewelry Group Ltd. (1929.HK) in Hong Kong’s Central business district is a bit of fantasy land featuring the many different faces of the precious metal, from heavy gold jewelry, to Disney-themed petite earrings for babies.

Founded in 1929 in Guangzhou, the company transformed the industry in 1956 when it introduced a 999.99 percent standard of purity, later adopted by the Hong Kong government. Now, the company is hoping to tap a recent rally that has sent gold prices to record highs. It appears to already be reaping some benefits of that rally with relatively strong growth in the first three months of the year, according to a sales update released last week.

The company said its retail sales grew 12.4% in the three months through March, led by identical 12.4% growth in a Mainland China market that accounts for 88.6% of its overall sales. Sales in its other two main markets in Hong Kong and Macau were up by 12.8%.

Those numbers were well ahead of the 4.7% growth in China’s overall retail sales, which rose to 12 trillion ($1.66 trillion) during the first three months of this year, according to data released this week by the National Bureau of Statistics.

The news wasn’t all rosy, however. Chow Tai Fook’s same-store sales in Mainland China fell by 2.7% in terms of value and 6.9% in terms of volume in the three-month period. In Hong Kong and Macau, same-store sales grew 4.5%, both in terms of value and volume.

The update was relatively limited and did not include actual sales figures or other financial metrics. But the figures do give a view of how the company’s sales are trending, which can act as a gage for the broader Chinese gold and jewelry market.

Gold prices have risen by 48% over the last four years, while interest rates have also gone up. That has led some analysts to argue that higher interest rates may produce higher gold prices, as they did in the 1970s, when the price of gold rose sharply just as short-term interest rates were rising in the U.S. as the Fed attempted to tame inflation, similar to what’s happening now.

The rising prices are likely to benefit gold sellers like Chow Tai Fook, and investors will be looking for more signals to that effect when the company announces its detailed results for its full fiscal year through March 2024, most likely in June. 

Chow Tai Fook has come a long way from its early roots, and now acts as a sort of “gold standard” for the China jewelry market, including gold jewelry that is one of its mainstays. Cheng Yu-tung, son-in-law of founder Chow Chi-yuen, expanded the company as a modern retailer. When Cheng passed away at 91, his son Henry Cheng took over the reins.

Hedge against uncertainty

The last two years have seen gold prices rise due to perceptions of its value as a hedge against economic uncertainty, as well as the potential for lower returns from other investments if global interest rates start to fall as many expect they will.

The more noteworthy numbers in Chow Tai Fook’s latest quarterly update included a 19.5% drop in sales of gold and platinum jewelry containing gemstones in Mainland China, and an even larger 27.2% decline for the category in Hong Kong and Macau. That may reflect a falling taste for gemstones in the post pandemic era of slower economic growth.

But sales for gold jewelry and other gold products fared better, rising 3.4% year-on-year on the Mainland during the three-month period. In Hong Kong and Macau, such gold products did even better, with sales up 16.6%. The company closed 88 stores during the three-month period, but still added 153 for its entire fiscal year through March 2024, bringing its total to 7,548.

The double-digit sales growth in the latest quarter marked a strong uptick from the 6% year-on-year revenue growth the company reported for the six months through September last year, the first half of its fiscal year, when sales totaled HK$49.5 billion. Its sales actually fell by 4.3% to HK$94.7 billion in the previous fiscal year through March 2023, much of which saw retailers nationwide hamstrung by China’s tough pandemic restrictions.

The company’s profit for the six months through September rose 27% to HK$4.55 billion, as its gross profit margin strengthened by 1.3 percentage points to 24.9%.

The market didn’t find too much glitter in Chow Tai Fook’s latest numbers. The company’s Hong Kong-listed shares are down by 10% in the week since the announcement, and have lost 13% of their value since the start of the year. Its market cap of HK$100 billion makes it the world’s 12^th largest luxury company, just ahead of Pandora (PNDORA.CO) and just behind Prada (1913.HK; PRPO.F) in terms of company value. 

The company’s price-to-earnings (P/E) ratio of 16 trails Pandora’s 20 and Prada’s 26. But it’s well ahead of the P/E ratio of 5 for smaller Chinese peer Chow Sang Sang (0116.HK), which also has roots in in Guangzhou where it was founded in 1934, and became Hong Kong’s first listed gold and jewelry company in 1973.

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