China/HK Gold & Jewelry Retailers:Slower tourist traffic might be an additional reason for HK slowdown

On 16 April, Luk Fook (LF) announced a 10% yoy decline in SSSg for 4QFY14,with China and HK/Macau +1% (4QFY13: 14%) and -12% (4QFY13: 29%),respectively. The SSSg of gold products was -15% and that for China and theHK/Macau market was -3% and -18% respectively; while SSSg for gem-setjewelry was -2%, with 23% for China and -3% for the HK/Macau market.

    Gem-set – doing better. The SSSg in volume terms for gold products was+26%/-1% for the mainland and HK/Macau; while gem-set jewelry saw positiveSSSg in volume for both China and HK/Macau at +18%/+4% over the sameperiod. Given the customer portfolio change (more customers come fromlower-tier cities), lower-price gem-set items (under HKD100,000) grew muchfaster than higher-ticket items, leading to lower ASP in HK, while ASP for gemsetsin China did not experience any dramatic change, according tomanagement during today’s analyst conference call.

    Weaker performance in March might be due to slower tourist traffic in HK. LFexplained that the SSSg decline was due to a high base effect (SSSg for4QFY13 was 27%). By region, HK is weaker than China and Macau, mainly dueto a decline in tourists’ spending (60% of total HK sales). It also experienced aslowdown in traffic post CNY in HK. Management is trying to find a reasonbehind March’s performance and is waiting for more color from theannouncement of HK March retail sales data and March tourist arrivals data.

    Meanwhile, Macau is better, with a slight SSSg decline for gold and positiveSSSg for gem-sets. Comparing to self-owned stores, licensed stores saw asimilar trend or a slightly better performance, thanks to growth in gem-sets.

    GPM to improve with higher sales mix from gem sets. LF commented thatGPM for gold products remains at 10%, and for gem-sets, lower-priced itemsenjoyed a higher GPM. The overall product mix has normalized to 65%/35% forgold and gem-sets. The impact of the rental increase in HK is not expected tobe high, as only a small number of stores were renewed. No clear guidance isavailable for FY15 until June when it announces FY14 annual results. However,LF disclosed that it will only open 4-5 stores in HK in FY15 vs. FY14’s 8 stores.

    Deutsche Bank view. Both LF and CTF (1929.HK Hold), noticed a slowdown instore traffic post CNY. We are worried about a potential slowdown in HK retailsales in general. We maintain our Hold on CTF as we expect tough comps forgold and jewelry retailers in 1QFY15 to be reflected in the share price.