Chow Tai Fook FY26 Net Profit Up 52%; FY27 Guidance Beats Expectations

Overview

Morgan Stanley issued an earnings commentary on Chow Tai Fook Jewellery Group, noting that the company's FY26 net profit grew 52% year-over-year to HKD 9.0 billion, in line with prior forecasts and market expectations. The report's core view is that although Chow Tai Fook's FY27 guidance appears conservative on the surface, it implies actual operating profit growth higher than market consensus when combined with hedging gains. Coupled with strong recent operational data showing robust comparable store sales in April-May and an attractive dividend yield, the institution has maintained an "Overweight" rating and a HKD 19 target price.

Core views

Regarding results and guidance, FY26 dividends were HKD 0.67 per share with a payout ratio of 73%, both meeting expectations. For FY27, the company provided guidance for high single-digit revenue growth, with Mainland China and HK/Macau expected to see high single-digit and low double-digit growth in comparable store sales respectively. While gross margin guidance (26.5%-27.5%) and operating profit margin guidance (14%) appear flat, considering expected hedging gains of HKD 500 million to 800 million, FY27 actual operating profit is projected to reach HKD 14.3 billion to 15.0 billion, representing 14%-20% YoY growth, significantly outperforming the market consensus of 10%. Recent operational data highlights continue to validate the recovery trend. From April to May, retail value in Mainland China grew 10% year-over-year, with comparable store sales up 19.7%. In the HK/Macau region, retail value grew 44% year-over-year, with comparable store sales up 40.6%. Growth was even stronger for priced gold products, reaching 35% in Mainland China and 57% in HK/Macau, demonstrating underlying demand resilience in core categories. Shareholder returns and product strategy are also key focal points. The company maintained its unchanged payout ratio guidance of 70-80%. Based on the current share price, this implies a forward dividend yield of approximately 6.6%-6.9%, offering significant attractiveness. Regarding product mix, management plans to increase the retail value share of priced jewelry from 35.4% in FY26 to 36-38% in FY27. Although gold price volatility may cause short-term impacts, a more favorable product and store mix is expected to support structural expansion in margins. Additionally, the successful launch of new collections such as DAWN and improved productivity from new stores have bolstered institutional confidence in the company's operational resilience.

Analysis framework

The report adopts an analytical framework of "Guidance Decomposition + High-Frequency Data Validation." Instead of stopping at the surface numbers provided by the company, the institution added back expected hedging gains to restore the core operating profit growth rate, compared it against market consensus, and identified undervalued growth potential. Simultaneously, using the latest April-May comparable store sales data as a leading indicator, the feasibility of FY27 guidance was cross-verified. On the valuation front, a P/E approach was used based on expected EPS for FY2027, applying a multiple of 19x. This multiple is 0.5 standard deviations above the historical average since 2016, reflecting the strategic shift from rapid expansion to improving profitability quality through same-store sales.

Methodology notes

• Valuation MethodPE/PEG valuation

  Historical relative valuation based on forward P/E

  The report uses the forward P/E for FY2027 for valuation, setting the target multiple at 0.5 standard deviations above the historical mean. This method is commonly used for mature consumer stocks to determine reasonable premiums by comparing current valuation against its own historical center, combined with future earnings growth expectations, reflecting institutional recognition of improved profitability.

• Fundamentals and Financial FrameworkProfit Quality Analysis

  Distinguishing between core operating profit and non-recurring items (e.g., hedging gains)

  When analyzing profits for jewelry retailers, it is necessary to strip out fair value changes caused by gold borrowing or hedging. The report calculates the contribution of hedging gains to operating profit separately to restore the true operating profitability after removing the interference of gold price fluctuations, thereby more accurately assessing the company's endogenous growth drivers.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Comparable Store Sales Growth (SSSG) and Product Mix Analysis

  A core analytical metric in the retail industry is comparable store sales growth, which excludes the impact of new store openings to reflect the true prosperity of existing stores. The report further decomposes SSSG into performance of priced gold versus priced jewelry, as the former is mainly driven by gold prices and weight, while the latter better reflects brand premium and design capability. Structural changes in these two directly affect future gross margin trends.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chow Tai Fook Jewellery Group (1929.HK)

  Core coverage target benefiting from same-store sales recovery, product structure optimization, and high-dividend defensive attributes

  Strengths

  Significant rebound in comparable store sales in April-May; Increased share of priced jewelry supports improvement in margin structure; Stable payout policy with attractive dividend yield; Positive response to new product collections

  Weaknesses

  Falling gold prices may drag down short-term operating profit margins; Guidance tends to be conservative under macroeconomic uncertainty

  Risks

  Macro-economic slowdown and decline in disposable income; Intensifying competition for gold products in Mainland China; Falling gold prices dragging down profit margins

Key data

• FY26 Net ProfitHKD 9.0 billion52% YoY growth, within the forecasted range of HKD 8.6-9.2 billion
• FY27 Implied Operating Profit Growth+14% to +20%Estimated to reach HKD 14.3 billion-15.0 billion including hedging gains, outperforming the market consensus of 10%
• Mainland Comparable Store Sales (Apr-May)+19.7%Priced gold product comparable store sales showed stronger growth at +35%
• HK/Macau Comparable Store Sales (Apr-May)+40.6%Priced gold product comparable store sales reached +57%
• Forward Dividend Yield6.6%-6.9%Calculated based on 70-80% payout ratio guidance and current share price
• FY27 Target Share of Priced Jewelry36%-38%Actual in FY26 was 35.4%; increasing the share supports structural gross margin expansion

Impact & implications

The report believes Chow Tai Fook is in a critical transition period from network expansion to improving profitability quality through same-store sales. While FY27 guidance remains consistently prudent in its profit margin assumptions, the actual profit growth potential is underestimated. Strong recent sales data and a clear product upgrade path indicate that the company retains strong operational resilience even amidst gold price volatility. For investors, the current valuation not only provides a high safety margin (reflected through high dividend yields) but also includes option value for upside earnings surprises.

Risks

• Macroeconomic slowdown leading to reduced disposable income, suppressing jewelry consumption demand
• Intensifying competition in Mainland China's gold and jewelry market, potentially compressing profit margins
• Significant decline in gold prices could negatively drag on operating profit margins

What to watch

• Whether comparable store sales growth in the Greater China region continues to exceed expectations
• Gold price trends and their actual impact on gross margins and hedging gains/losses
• Execution of brand restructuring strategies and sustainable improvement in ROE