Chow Tai Fook profit slump eases as jeweller gets rent cuts

[HONG KONG] Chow Tai Fook Jewellery Group Ltd reported first-half profit fell 22 per cent, a smaller decline than a year earlier as the world's largest publicly traded jewellery chain negotiated lower rents and shuttered weaker stores amid tepid Chinese demand for luxury goods.

Net income dropped to HK$1.22 billion (S$224.2 million) for the six months ended September, from HK$1.56 billion a year earlier, Chow Tai Fook said in a statement Tuesday. Sales and profit have slumped two and a half years straight, cutting its market value by more than half since early 2014.

The retailer, which operates more than 2000 jewellery and luxury watch outlets mainly in Greater China, has shut some of its outlets in Hong Kong and Macau amid an economic slowdown that has damped Chinese appetite for jewelry and luxury watches. In Hong Kong, where Chow Tai Fook is based, retail sales has been falling for 19-straight months through September as tourism declined.

Chow Tai Fook aims to cut rental rates on its stores as much as 30 per cent on average and will shutter a net seven to eight outlets in Hong Kong and Macau this fiscal year, managing director Kent Wong said in a briefing after the results. It negotiated new leases for street-level shops that were 30 per cent cheaper in the first half, according to finance director Hamilton Cheng.

The retailer reported revenue fell 24 per cent to HK$21.5 billion in the first half. Sales for stores open more than a year was down 26 per cent in Hong Kong and Macau, and dropped 21 per cent in mainland China.

Chow Tai Fook shares have risen 16 per cent this year, outperforming the 3.5 per cent gain in Hong Kong's benchmark Hang Seng Index.

Hong Kong's retail industry slump may be reaching a bottom, and the jeweller is optimistic that its revenue decline will ease in the second half of the current fiscal year, Chow Tai Fook chairman Henry Cheng said at the briefing.

The company declared an interim dividend of 6 Hong Kong cents per share, and a special dividend of 15 Hong Kong cents per share. Last November, it had declared a special dividend of 42 Hong Kong cents per share, the first since it went public in 2011.

The jeweller, which started in mainland China in 1929, is rethinking its direction amid the downturn, and is shifting focus to target younger consumers, executive director Adrian Cheng said in an interview last week.

"It's a reset as to the next 10 years," said Mr Cheng, whose family's Chow Tai Fook Holding controls the jewellery chain.

"We need to look at the basics of what retail really means and what types of products are relevant today," said Mr Cheng. Chow Tai Fook will introduce new brands with different price points, or new lines of products to target millennials - those in their mid-30s and under - as soon as the end of next year, he said.

Chow Tai Fook's retail network expanded to 2,326 points of sales as of end-September, with a net addition of 7 during the period, it said Tuesday. Of these, 2,190 locations are in mainland China.

In Hong Kong, once seen as a shopping paradise for Chinese tourists, visitor arrivals from the mainland fell 8.7 per cent for the first nine months this year, compared with a 3 per cent decline in 2015, as the stronger US dollar also made the city more expensive to shop in.

"The retail market in Hong Kong hasn't reached the bottom amid the declining visitation and spending," said Eva Yip, an analyst at China Everbright Securities (HK) Ltd, before the results. The ability to cut costs, especially its high rents, would be key for Chow Tai Fook to narrow the profit decline, Ms Yip said.

BLOOMBERG