Chow Tai Fook eyes closing 7-8 stores in Hong Kong

But around 55 stores are to be opened in the pipeline.

It has been noted that Chow Tai Fook delivered poor FY16 results. It is also believed the operating environment is unlikely to improve meaningfully in the NT, but product mix change and cost saving measures could mildly ease margin pressure.

According to a research note from Jefferies, further, with higher Capex budget and stable inventory level guided, we believe the likelihood of further special dividend is low. We revise down earnings by 11%. Maintain Hold with PT of HKD4.9.

Revenue declined 12% to HKD56.6bn (4.5% below consensus and Jefferies' estimates), mainly driven by -21.7% SSSG in HK/Macau and -10.3% SSSG in mainland China. GPM contracted 2ppt to 27.6% mainly due to unrealised hedging loss and product mix change.

Here's more from Jefferies:

Excl. unrealised hedging loss, adj. GP margin contracted 0.3ppt to 28.9%. 3) OPM contracted 3.6ppt to 7.1% due to GPM contraction and operating de-leverage. 4) Net profit dropped 46.1% to HKD2.9bn (vs. profit warning of 40-50% decline), 10-12% below consensus and our estimates. Net margin contracted 3.3ppt yoy to 5.2%. 5) It declared dividend of HKD0.3/share (incl. special dividend of HKD0.22).

Management guidance. 1) Management guided mid to high teen revenue decline for HK/Macau and flattish to low single digit decline for mainland China. 2) Management expects rental reduction of 20-30% upon renewal in HK in FY17e, vs. 13% reduction in FY16. 3) It plans to close 7-8 stores in HK; and net addition of c55 stores in mainland China in FY17e. 4) Mgmt. guided Capex of HKD1.5bn in FY17e, vs. HKD1bn in FY16. 5) It reduced inventory by HKD8.4bn in FY16, which freed up capital for special dividend. Management do not expect further reduction in inventory.

Our views and earnings revision. We expect the market to remain challenging, but see product mix change, part reversal of unrealised hedging loss and cost savings to mildly ease margin pressure. We believe likelihood for further special dividend is low given higher Capex and inventory level. We cut sales by 8.7% to HKD52.9bn (-6.6% yoy); cut net profit by 11.1% to HKD3.2bn (+8.8% yoy, 6.1% net margin).

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