CHOW TAI SENG JEWELLERY(002867)：COVID-19 SLOWS STORE OPENINGS AND DELAYS AUTUMN TRADE FAIR

1H22 results in line with preannouncement
Chow Tai Seng Jewellery announced its 1H22 results: Revenue grew 82.8% YoY to Rmb5.1bn, and attributable net profit fell 4.1% YoY to Rmb585mn, in line with the preannouncement.
COVID-19 slowed revenue growth and store openings in 2Q22. Revenue grew 44% YoY to Rmb2.34bn in 2Q22. 1) Offline self-operated channel revenue fell 31% YoY to Rmb567mn due to the COVID-19 resurgence in eastern China and other regions. Revenue from gem-set products fell 48% YoY, and revenue from gold products fell 27%. In 2Q22, the firm reported a net opening of four directly operated stores. 2) Revenue from the offline franchise channel increased 82% YoY in 2Q22 due to the revenue recognition method change, but it fell 23% from 1Q22 as COVID-19 weakened franchisees’ need to increase inventory and slowed store openings. In 2Q22, the number of franchise stores increased by a net of 17. 3) Online revenue grew 12% YoY. Revenue from gem-set products and other products rose 25% and 1.5x YoY, while gold products fell 20% YoY.
COVID-19 brought negative operating leverage in 2Q22; inventory remains stable. The firm’s gross margin (GM) fell 16ppt YoY to 23% in 2Q22, partly due to the revenue recognition method change under the exhibition model. It also increased 4ppt QoQ due to higher brand usage fees since 3Q21. The selling and G amp;A expense ratio fell 3.5ppt YoY or rose 1.2ppt QoQ, possibly due to operating deleveraging in the COVID-19 spread. In 2Q22, net margin fell 10.4ppt YoY or rose 2.1ppt QoQ to 13%. Inventory increased 6% from end-2021 to Rmb2.9bn. The net operating cash inflow was Rmb735mn (vs. Rmb42mn of net outflow in 2Q21).
Trends to watch
The firm has been adjusting its partners and collaboration models since the introduction of provincial agents in 3Q21. However, its net store opening growth is slower than expected due to the COVID-19 resurgence. Furthermore, the autumn trade fair in September was postponed, which we think may drag the firm’s revenue growth. The management expects its net offline store openings to reach 100–150 in full-year 2022. The firm will also increase product marketing and expand channels online. It aims to make significant advances in key product categories, including gold-inlaid jade and fashion accessories.
Financials and valuation
As store openings missed expectations due to COVID-19, we lower our 2022 and 2023 EPS forecasts 8% and 8% to Rmb1.19 and Rmb1.35. The stock is trading at 11x 2022e and 10x 2023e P/E. Maintain OUTPERFORM. We roll over valuation to 2023e and cut our TP 3% to Rmb16.22 (12x 2023e P/E), offering 23% upside.
Risks
Store openings disappoint; COVID-19 resurgence; volatile gold prices.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。