After repeated failures and setbacks, Chow Tai Fook Jewellery Company Limited ("Chow Tai Fook"), a jewelry merchant, has launched a new attack on the capital markets. This time, the company chose Hong Kong Stock Exchange as its destination.

According to the Zhikua Financial News APP, as early as April 2019, Chow Tai Fook began preparing for an A-share IPO. In the past four years, the company has submitted plans for listing on the A-share market three times, all of which ended in failure. In November 2023, Chow Tai Fook voluntarily withdrew its IPO application for listing on the A-share market.

After a six-month hiatus, Zhou Lefu's listing plan has been restarted. According to the Hong Kong Stock Exchange on June 27th, Zhou Lefu submitted an application for listing on the main board of the Hong Kong Stock Exchange, with China International Capital Corporation and China Securities Co., Ltd. as its joint sponsors.

So, what highlights does Chow Tai Fook bring to the Hong Kong Stock Exchange this time?

Steadily increasing revenue and net profit

According to the prospectus, Chow Tai Fook was established in 2004. The company mainly provides high-quality and rich jewelry products through its offline stores and online sales channels. As of December 31, 2023, the total number of the company's offline sales network stores has reached 4,383 (including franchise stores and self-operated stores), covering 31 provinces, 301 prefecture-level cities and administration zones. According to Frost & Sullivan's report, as of December 31, 2023, the number of Chow Tai Fook's stores ranked fourth among Chinese jewelry brands.

In terms of business model, the company says its business model integrates the development and design of jewelry products, procurement and supply, joining, and brand operation, creating an open and win-win, mutually beneficial commercial model that efficiently links the upstream and downstream of the industry value chain.

In terms of performance, Chow Tai Fook's revenue has continued to grow in recent years, with revenues of RMB 2.783 billion, RMB 3.1 billion, and RMB 5.15 billion in 2021, 2022, and 2023, respectively, with a high compound annual growth rate of 36.03%.

The company's products are mainly sold through franchise mode, self-operated stores and online sales channels.

Among them, the franchise model has contributed more than 50% of the company's revenue. According to the Zhikua Financial News APP, the revenue of this model comes from sales of products to franchise stores and service fees charged to franchisees. In 2021, 2022, and 2023, the company's revenue from sales of products to franchise stores was RMB 1.075 billion, RMB 843 million, and RMB 2.02 billion, and the revenue from service fees was RMB 592 million, RMB 798 million, and RMB 833 million, respectively, accounting for a total of 59.9%, 52.9%, and 55.4% of total revenue. It is worth noting that during the reporting period, Chow Tai Fook had 3,694, 3,974, and 4,288 franchise stores, accounting for 98.1%, 98.1%, and 97.8% of the total number of stores.

In addition, the revenue and proportion of online sales channels have gradually increased in recent years, becoming another sales channel that receives the most attention in the company's business. During the reporting period, revenue from this channel increased from RMB 739 million in 2021 to RMB 1.745 billion in 2023, and its proportion of total revenue increased from 26.6% to 33.9%, with a high compound annual growth rate of 53.7%. However, it should be noted that the company mentioned in the risk factors that consumer traffic of its online sales channels depends on the advertising and promotional activities it invests in on e-commerce platforms, which may be costly or ineffective and could directly affect the company's business and performance.

Self-operated stores are usually opened in department stores or high-end shopping centers, mainly to establish the company's brand image, enhance the brand's visibility and promote the synergy of sales networks. However, Zhikua Financial News APP noticed that although the revenue of the company's self-operated stores has increased in recent years, the proportion of revenue from self-operated stores has continued to decline as the proportion of revenue from online channels has increased. During the reporting period, the revenue of self-operated stores was RMB 343 million, RMB 362 million, and RMB 487 million, and the revenue proportion decreased from 12.3% in 2021 to 9.5% in 2023. The company had a total of 70, 78, and 95 self-operated stores during the reporting period.

Although revenue has been good, the company's profitability has fluctuated and declined. During the reporting period, the company's gross margin was 35%, 38.7%, and 26.2%, respectively. It is understood that in recent years, the company has implemented a more competitive pricing strategy to expand its online sales channels, which has not only promoted a sharp increase in sales, but also driven gross profit growth. However, this has led to a decline in overall gross margin. But thanks to the rapid expansion of business, the company's net profit has continued to rise during the reporting period, reaching RMB 425 million, RMB 575 million, and RMB 660 million, respectively.

"Chow Tai Fook" faces difficulties as gold prices surge

Zhikua Financial News APP noticed that behind Chow Tai Fook's high-growth performance, there are still "worries".

The company acknowledged in its risk factors that its store network consists mainly of franchise stores operated by franchisees, and its control over franchisees is limited.

As mentioned earlier, more than 50% of the company's revenue comes from franchise stores. Therefore, the company's income and business performance are affected by the performance of franchisees, and the company's success depends on its ability to maintain and strengthen its relationship with existing franchisees and continue to establish new relationships with other franchisees.

In addition, Chow Tai Fook also pointed out that the behavior of franchisees may affect the company's brand reputation. The company cannot guarantee that franchise stores will comply with all of Chow Tai Fook's policies and standards, which may lead to negative public opinion about the company's products.

At the same time, the rapid rise in gold prices has made life difficult for jewelry merchants.

Zhikua Financial News APP noticed that gold jewelry dominates the jewelry market, accounting for 63.2% of sales revenue in 2023. However, it is worth noting that demand for gold jewelry has been sluggish this year due to the rapid rise in gold prices.

The volatility of gold prices this year has far exceeded previous years. Shanghai Gold Exchange data shows that domestic gold prices hit a high of 577 yuan/gram on April 15 and then quickly fell, dropping to 544 yuan/gram on April 23. After the May Day holiday, gold prices climbed to a high of 578 yuan/gram on May 20, and then hovered around 550 yuan/gram since May 23.

From industry data, in the first quarter of 2024, the national gold consumption was 308.905 tons, a year-on-year increase of 5.94%. Among them, gold jewelry consumption was 183.92 tons, a year-on-year decrease of 3.0%. In addition, the cumulative retail sales of gold, silver, and jewelry was 99.6 billion yuan, an increase of 4.5% year-on-year, but the growth rate has slowed significantly compared to 2023. This is partly due to the higher base in the same period of 2023, and on the other hand, the higher gold price has to some extent suppressed consumer sentiment.

In response, the CEO of the World Gold Council in China, Wang Lixin, pointed out that the soaring gold price has inhibited consumption, and under the dual effects of seasonal factors and high gold prices, gold jewelry consumption may continue to be weak.

This has put many jewelers in a difficult situation. Taking Chow Tai Fook, the leader in gold jewelry, as an example, the company's same-store retail sales in mainland China fell by 2.7% year-on-year in the first three months of 2024, while same-store retail sales in Hong Kong and Macau increased by 4.5% year-on-year, but the growth rate slowed significantly from the previous quarter. In the short term, investors may be worried about the performance prospects of Saturday Fook, which is also a jeweler.

However, in the long run, the market is generally bullish on the future development prospects of the jewelry industry. With the increasing demand for self-gratification among consumers and their more sensitive fashion sensibilities, as well as the rise of digital retail and e-commerce, it is expected that the total sales revenue of the Chinese jewelry market will reach 1.14 trillion yuan by 2028, with a compound annual growth rate of 6.8%.

Overall, relying on the franchise model and online business expansion, Chow Tai Fook has achieved double growth in revenue and net profit. However, in the current situation of high and volatile gold prices, Saturday Fook's short-term difficulties are difficult to resolve. In addition, under the risks of declining profitability and dependence on franchisees for performance, what is the success rate of Saturday Fook's fourth attempt to enter the capital market? Let's continue to pay attention to Saturday Fook's listing story.