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Chow Tai Fook Profit Misses Estimates on Hedging, Demand

Chow Tai Fook Jewellery Group Ltd., a Hong Kong-based chain with more revenue than Tiffany & Co., reported first-half profit that missed analysts’ estimates amid hedging losses on gold contracts and slower consumer spending.

Net income dropped 32 percent to HK$1.82 billion ($235 million) for the six months ended Sept. 30, lagging the median estimate of HK$2.02 billion of four analysts compiled by Bloomberg News.

Unrealized hedging loss on gold loans and bullion forward contracts caused gross profit margin to decline by about 2.7 percent in the fiscal first half, the company said in a Hong Kong stock exchange filing yesterday. Same-store sales at the group fell 1.7 percent as economic growth slows and third-quarter gross domestic product rose at its slowest pace in three years.

“While we expect the sector outlook to gradually improve, albeit slowing, we believe CTF’s recovery pace will continue to lag its peers,” Phoebe Wong, an analyst at BoCom International, said in a note to clients today.

Chow Tai Fook shares dropped as much as 5.2 percent to HK$10.30 in Hong Kong trading, headed for the biggest decline since Nov. 9. It traded 2 percent lower as of 10:47 a.m. local time. The stock has fallen 24 percent this year, compared with a 20 percent gain in Hong Kong’s benchmark Hang Seng Index.

Political Uncertainties

Political and economic uncertainties in China have restricted demand. Still, Hong Kong sales showed signs of recovering in November, Finance Director Hamilton Cheng told reporters at a press conference.

“Hong Kong has already shown some signs of recovery, while sales in China should recover once the political and economic uncertainties are cleared,” Chairman Henry Cheng said at the media briefing.

Chow Tai Fook plans to reduce its hedging to about 70 percent of total gold inventory from an “almost fully hedged level,” according to Hamilton Cheng. Gross margins may improve in the second half as the effects of existing hedges are reversed, he said.

The world’s biggest jewelry retailer by market value raised about HK$16 billion in a public offering last December and joins companies including Burberry Group Plc and Prada SpA in betting on China’s demand for luxury goods.

Revenue climbed 6.5 percent to HK$25.4 billion and the jeweler said it will stick to plans to add 200 outlets a year to reach a total 2,000 by the end of fiscal 2014.

Chow Tai Fook has expanded in China to profit from an increasingly affluent middle class. Sales of discretionary goods in China will grow by a compounded annual rate of 13.4 percent between 2010 and 2020, as shoppers in the world’s largest economy after the U.S. become richer, McKinsey & Co. said in a report in March.

Founded in 1929 in the southern Chinese city of Guangzhou, the jeweler was named after founder Chow Chi Yuen. “Tai Fook” means “big blessing” in Chinese.

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