CHOW TAI SENG JEWELLERY(002867)：SOLID EARNINGS GROWTH IN 1Q22 DESPITE HEADWINDS

2021 and 1Q22 results in line with our expectations

    Chow Tai Seng Jewellery (Chow Tai Seng) announced its 2021 and 1Q22 results: 2021 revenue surged 80% YoY to Rmb9.16bn, and attributable net profit rose 21% YoY to Rmb1.22bn. 1Q22 revenue soared 138% YoY to Rmb2.75bn, and attributable net profit grew 23% YoY to Rmb290mn. The results were in line with expectations.

    Trends to watch

    Offline business grew rapidly; growth of e-commerce business slowed slightly from a high base. The firm’s 2021 revenue from offline self-operated and franchise stores rose 75% and 104% YoY to Rmb1.26bn and Rmb6.52bn. We attribute the rapid growth of offline business revenue to the strong sales of gold products, especially premium gold. In addition, Chow Tai Seng launched provincial service centers in 3Q21, enhancing its marketing through the sales model of gold exhibition. The firm opened 324 franchise stores on a net basis in 2021. Its e-commerce business revenue grew 18% YoY to Rmb1.15bn, with growth slowing slightly mainly due to a high base in 2020 and the impact of changes in the business model of some platforms. By category, the firm’s 2021 revenue from pure gold soared 232% YoY to Rmb5.57bn, and that from gem-set products rose 1% YoY to Rmb2.23bn. We see stronger demand for gold products than for gem-set products.

    Operating cash flow fell due to increased inventory and accounts receivable. The firm saw structural changes in costs and expense ratios after launching its provincial agency model in 3Q21. 2021 gross margin fell 13.3ppt YoY to 26.3%. SG&A expense ratio dropped 6.4ppt YoY to 8.7%. Net profit margin fell 6.6ppt YoY to 13.4%. Meanwhile, the firm’s inventory increased 15.8% YoY due to stocking of gold, and it offered short billing period services to franchise customers for gold exhibition business. As a result, the firm’s accounts receivable grew 403% YoY to Rmb682mn, and therefore, its net operating cash inflow fell 86% YoY to Rmb197mn in 2021.

    1Q22 profit growth solid; accounts receivable dropped sharply QoQ. The firm’s 1Q22 revenue rose 138% YoY to Rmb2.75bn. Specifically, revenue from self-operated offline, franchise and online stores grew 4.3%, 229% and 91% YoY to Rmb359mn, Rmb2.06bn and Rmb281mn. During the 2022 Chinese New Year holiday, demand for jewelries, especially gold products, was robust, but COVID-19 resurgence since mid-March has weighed on the firm’s sales. The firm temporarily closed about 600 stores, and customer traffic in those stores staying open dropped significantly. The firm’s 1Q22 attributable net profit grew 23.3% despite the negative impact of COVID-19 resurgence. We think this shows the firm’s strong resilience. Accounts receivable decreased 56% QoQ compared to end-2021, reflecting solid collection of credit sales.

    Financials and valuation

    Considering the impact of COVID-19 resurgence, we lower 2022 and 2023 EPS forecasts 4% and 4% to Rmb1.29 and Rmb1.47. The stock is trading at 10x 2022e and 9x 2023e P/E. Maintain OUTPERFORM. We cut TP 4% to Rmb19.4, implying 15x/13x 2022/23e P/E with 45% upside.

    Risks

    Fluctuations of gold prices; lingering COVID-19; intensifying competition.