Chow Tai Fook Seeks Chinese Tourists Abroad as Profit Drops

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Photographer: Billy H.C. Kwok/Bloomberg
  • Sees challenging Hong Kong and Macau markets in year ahead
  • Company sees growth opportunities in Taiwan and South Korea

Chow Tai Fook Jewellery Group Ltd. is chasing Chinese tourist dollars overseas as the economic slowdown in China crimps luxury sales and contributed to a 46 percent drop in full-year profit for the world’s largest publicly traded jewelry chain.

The jeweler was hurt by weak retail sentiment in Hong Kong and Macau, and a decline in tourism, especially from mainland China due to the stronger U.S. dollar. The company said it expected market conditions in the region to stay challenging in the coming year.

By contrast, retail sales outside of its traditional bases, including newer markets such as the U.S., Taiwan and South Korea, grew 26 percent in the fiscal year ending 2016. Chow Tai Fook’s strategy is to “expand footprint in overseas market to grasp opportunities from the booming Chinese outbound tourism,” it said.

The jeweler is aiming to capture a shift in Chinese shopping habits as the country’s slowdown has damped the demand for luxury goods. Hong Kong retailers were also hurt as mainland Chinese tourists, who account for almost a third of luxury spending globally, skip the shopping mecca for other destinations. The government’s crackdown on corruption also caused big-spending Chinese to avoid neighboring Macau, causing a two-year gambling decline in the world’s largest casino center.

“The increasingly affluent and sophisticated Chinese consumers continue to look for more personalised products and shopping experience,” the company said in a statement Tuesday. “Lifestyle and leisure spending becomes the trend, with strong outbound tourism boosting the consumption abroad.”

Little Benefit

Chow Tai Fook shares fell as much as 3.7 percent in Hong Kong trading on Wednesday, the biggest drop in more than a month, paring the previous day’s 4.8 percent gain. The jeweler reported net income fell to HK$2.94 billion ($379 million) for the year ended March 31, compared with the HK$3.19 billion average of 11 analyst estimates compiled by Bloomberg.

The retailer’s efforts to grow beyond mainland China, Hong Kong and Macau may reap little benefit for now, as its overseas presence remains small relative to those core markets, said Bloomberg Intelligence analyst Catherine Lim. “The inclination of Chinese travelers to buy jewelry from a brand readily available in Hong Kong and China may be low, as they are more likely to buy international brands or even try local brands from their destination,” she said.

Hong Kong retail sales fell 12 percent in the first quarter, with jewelry and watch sales plummeting nearly double that, contributing to Chow Tai Fook’s lowest profit since 2010. Mainland Chinese tourists to Hong Kong, who accounted for more than 70 percent of the total in the first four months this year, have dropped 13 percent in the period compared to a year ago, according to the city’s tourism board.

Chow Tai Fook’s retail network expanded to 2,319 sales locations as of end-March, including a net opening of 62 in the fiscal year, according to Tuesday’s statement. Of these, 2,179 locations are in mainland China, with the remainder in other markets, which the jeweler doesn’t break down into specific countries. It opened six sales locations in Taiwan and South Korea during the period, according to the statement.

* Full-year sales fell 12 percent to HK$56.6 billion
* Mainland China sales at stores opened before April 1, 2014 fell 10 percent
* Sales at such stores in Hong Kong and Macau fell 22 percent

Mainland China contributed 60 percent of Chow Tai Fook’s sales in fiscal 2016, with the remainder from Hong Kong, Macau, and other markets, which the retailer doesn’t break down. The company still sees growth in China, it said.

“Taking into account the relatively stable fundamentals, continuous urbanisation and the ever-growing middle-class in the region, we believe that Mainland China will stay the course on sustainable growth,” it said.

Lower Rents

Chow Tai Fook plans to shut as many as eight sales locations outside mainland China in the current financial year, said Managing Director Kent Wong at a briefing Tuesday. The retailer managed to lower rental expenses by 13 percent for sites in Hong Kong and Macau that it renewed contracts for in the last fiscal year, Finance Director Hamilton Cheng said.

The company expects net opening of stores in mainland China -- after accounting for closures -- to be similar to the last fiscal year, Wong said. Chow Tai Fook had a net opening of 55 locations in mainland China in fiscal 2016.

Still, jewelers such as Chow Tai Fook “will continue to face a challenging business environment in the Greater China region” as they grapple with weak consumer sentiments, said Zhang Jialin, an analyst at ICBC Intl Research Ltd.

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