Tuesday, December 13, 2011

Chow Tai Fook Jewellery (CTF stock code 1929.hk) IPO Stock Analysis

Chow Tai Fook Jewellery Group (CTF stock code: 1929.hk), the leading luxury jeweler in PRC, Hong Kong and Macau markets, is soon to issue 1050 million of new shares to raise HKD$ 15.75 billion in its IPO (Initial Public Offering) listing.

Chow Tai Fook Jewellery Group (CTF), headquartered in Hong Kong and led by local billionaire Cheng Yu-Tung, director of New World Development (NWD stock code: 17.hk), is active in both jewelry retail and wholesale markets of platinum/karat gold products, gem-set jewellery, gold products and watches. The group now operates over 1500 jewellery and watch POS (Points-of-Sale) network including stand-alone stores, joint-venture POS and concessionaire counters. Due to its strong promotional activities, Chow Tai Fook (CTF) has a sound performance in same store sales (SSS), a common profitability indicator in the retail industry measured at constant exchange rates. The group achieved a very strong same store sales (SSS) growth rate of 61.9% in the first-half of 2012 (from April 1 to September 20, 2011), higher than its annual same store sales (SSS) growth rate of 33.6% in 2011. As per definition of Chow Tai Fook (CTF), same store sales (SSS) refer to the turnover of its self-operated POS that have been opened for no less than 24 consecutive months.

Chow Tai Fook Jewellery Group (CTF stock code: 1929.hk) will start listing on the Hong Kong Stock Exchange (HKEx stock code: 388.hk) on 15 December 2011. Joint global IPO sponsors are Goldman Sachs (Asia) LLC, J.P.Morgan Securities (Asia) and HSBC (Hong Kong and Shanghai Banking Corporation). There is no cornerstone investor currently involved in this IPO.

Please see below our detailed stock analysis of CTF (Chow Tai Fook):

Attributable Profits (HKD$ million)Total Number of Shares (million) in issue Earnings per Share (in HKD$)Price-to-Earnings Ratio (P/E)

(Source of Chow Tai Fook Jewellery IPO Prospectus: Hong Kong Stock Exchange)


(1) As stated in the IPO Prospectus, net profit attributable to Chow Tai Fook Jewellery (CTF) shareholders will not be less than HKD$ 6300 million in 2012 (please note that financial year of CTF finishes by the end of each March). However, it should be alerted that Chow Tai Fook Jewellery (CTF) may not be able to meet this profit target mainly due to its increasing costs of goods sold as indicated on the Accountant's Report of the CTF's IPO Prospectus.

(2) J.P.Morgan Securities, the IPO Stabilising Manager, is authorized by the international underwriters to exercise an over-allotment option (greenshoe) and also an offer size adjustment option during the first 30-day stock price stabilisation period. Both the over-allotment option and the offer size adjustment option, however, involve only selling of existing shares and do not involve issuance of any new shares. As a result, no matter how many over-allotment option or offer size adjustment option can be finally exercised, total number of CTF's shares in issue will be 10K million in 2012 (was 8.95K million of shares before the IPO).

(3) The calculated earnings per share for Chow Tai Fook Jewellery (CTF) will be HKD$0.63 (same for either basic or dilutive earnings) in 2012. This calculated stock valuation, by the way, may not be realized due to some basic risk factors. Chow Tai Fook Jewellery (CTF) is basically exposed to the asset deterioration risk of its valuable brand name 'Chow Tai Fook' (in Chinese: 周大褔), commodity price risks (CTF currently hedges gold prices fluctuations by bullion forward contracts and gold loan arrangements), quality control risks (if the group fails to oversight and control overall quality of its franchisees effectively, this may damage reputation of its brand name, the most valuable asset of CTF), and POS concentration risk (sales of CTF are now heavily affected by general economic conditions, free independent travelers and overall tourism industry in the Pearl River Delta region) etc.

(4) Stock price of Chow Tai Fook Jewellery (CTF) for this IPO listing is decided to be HKD$15 per each share, the lowest side of its proposed offer price range. At this stock price level, the 2012 forward Price-to-Earnings ratio (P/E) of Chow Tai Fook Jewellery (CTF) is calculated as 23.81 times. Regarding CTF's dividend policy, the group currently intends to pay not less than 20% of its annual profits (after tax) as dividends.

Use of IPO Proceeds:
(i) About 50% will be used for sourcing and procurement of raw materials and inventory (including diamonds, gemstones, precious metals and watches etc).
(ii) About 36.5% will be used for repayment of debts and bank loans.
(iii) Remaining will be used for other corporate purposes including POS (Points-of-Sale) expansion and construction of new office building in Shenzhen.

Our Conclusion of CTF Stock Analysis: owing to the factors stated above, we conclude not to recommend a buy for this Chow Tai Fook Jewellery Group (CTF stock code: 1929.hk) IPO. The 2012 expected 23.81 times Price-to-Earnings ratio (P/E) means that stock valuation of Chow Tai Fook Jewellery (CTF) is much more expensive than its major competitors. It is because CTF's major competitors Luk Fook Holdings Intl. Ltd. (LF stock code: 590.hk) and Chow Sang Sang Holdings Intl. Ltd. (CSS stock code: 116.hk) have their expected 2012 P/E ratios at a range of just 13-15 times.

It should also be noted that Chow Tai Fook Jewellery (CTF) has had a sudden expansion of its POS (Points-of-Sale) network just prior to this IPO. The group opened 148 POS from April 1 to September 20, 2011, much faster than its average opening of 90 POS per half year before April 1, 2011. The rapid expansion can certainly help boosting its IPO market value, but investors should worry that CTF may not be able to keep this POS network growth rate right after the IPO.

More Stock Analysis:
Table of Summary: All Stock Analysis Reports from Mr China


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