china/hk gold & jewellery...

Deutsche Bank Markets Research

Asia

China

Consumer

Industry

China/HK Gold & Jewellery Retailers

Date

22 July 2015

Industry Update

Record-low gold price does not trigger gold rush so far

Buy CTF

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Anne Ling

Research Analyst

(+852) 2203 6177

[email protected]

Top picks

Chow Tai Fook (1929.HK),HKD8.05 Buy

Source: Deutsche Bank

Companies Featured

Chow Tai Fook (1929.HK),HKD8.05 Buy

2015A 2016E 2017E

P/E (x) 19.3 15.9 13.9

EV/EBITDA (x) 14.6 11.1 9.7

Price/book (x) 2.1 1.9 1.7


With the recent gold price hitting a five-year low of USD1096.68/oz on 20 July, investors wonder if the gold rush could occur again as in 2013. We would like to reiterate our view that 1) historical data shows that there are more factors causing a gold rush than just gold price volatility; 2) demand of gold and jewelry items are more co-related to economic cycles as shown in Figures 8 and 9. While short-term gold and jewelry retailers in HK/China will still experience weak SSS growth and operating deleverage especially in HK, we expect performance to improve from 4Q15 on a low base. Within the space, we like CTF due to its strong brand equity on a 12-month view.

Deutsche Bank expects gold price to be USD1172/oz in 2015 The gold price was at a five-year low of USD1096.68/oz on 20 July, with expectation of a strong USD and China’s gold reserve below expectation. Deutsche Bank expects the gold price in 3Q15/4Q15 to be USD1150/USD1125 per ounce, a 3.8%/5.9% decline from its 2Q15 level of USD1195.

No gold rush yet from retail customers in both HK and China According to statistics of World Gold Council (WGC), consumer demand of gold in Greater China tumbled 8% to 290.4 tonnes in 1Q15 (vs. -3% globally). While among the total consumption, jewelry demand slid 11% to 228.6 tonnes in Greater China. Despite a five-year low gold price these past few days, there is no sign of a gold rush in HK and China, according to CTF.

In fact, gold price trend is not the key reason that drives consumer demand The historical gold rush in China shows that it is more than just gold price movement that guides consumer demand. Three out of four gold rushes happened when the gold price was on the rise, as consumers anticipate gold will hedge inflation or there is real demand. If we take the gold and jewelry sales trend together, we note that its sales performance has more correlation with GDP as shown in Figure 8 and Figure 9.

Sensitivity of CTF to every 10% decline in gold sales – 6.9% drop in NP In the case of CTF, every 10% decline in gold sales will result in a 5.4% decline in sales and a 6.9% decline in NP. While gold sales account for 53.2% of sales in FY15, it has a GPM of only ~15% (vs. group level of 29.7%). Thus, we estimate that gold products accounted for only ~28% of GP as of FY15.

We favor gold and jewelry sector in HK/China in mid to long term In the mid to long term, we like the gold and jewelry sector in HK/China thanks to the emergence of a middle-income class. Demand for gem-set jewelry set to increase over time, as seen in other markets. We also like the sector because new players need a long time to build their brand equity and ensure consistent raw material sourcing, such as diamonds, which is not easy.

Valuation and risks We use DCF, P/E-to-growth, and relative P/E to value the sector. DCF captures the future cash flow of consumer companies, while PE/G and relative P/E show a company’s relative value vs. peers. Downside risks: higher-than-expected raw material prices, SSS growth failing to pick up, and intense competition. Upside risks: a greater-than-expected rise in overall SSS growth or sales volume, higher operating leverage, and weaker-than-expected input costs.

22 July 2015

Consumer



Industry update

Gold price slumped; hitting five-year low

Gold price at five-year low

Gold spot price slumped as much as USD40 in minutes to below USD1,100/oz

when the Asian market opened on 20 July, hitting a five-year low. This is

mainly due to 1) a strong US dollar that soared after Janet Yellen, federal

reserve chief, reaffirmed last week expectations of an interest rate hike within

this year; 2) the Chinese government’s lower-than-expected gold reserve. The

People's Bank of China said on 17 July that the government’s gold reserve rose

by 60% to 1,658 tonnes by the end of June 2015 from April 2009, when the

figure was last released last. This news failed to lift the gold price as it was

only 50% of what markets expected.

Deutsche Bank’s forecast of gold price

Deutsche Bank maintains a bearish outlook on gold price going forward, given

Fed tightening and a stronger US dollar. Based on the latest Deutsche Bank

forecast dated 30 June 2015, the gold price in 3Q15/4Q15 is estimated to be

USD1150/1125 per ounce. Gold price in 2015/2016/2017 is expected to be

USD1172/1100/1100 per ounce, respectively (source: Commodities Quarterly -

Timing A Reallocation Into Commodities, published on 30 June 2015).

Figure 2: Gold price movement (quarterly) and Deutsche Bank forecast

1632

1417

13301272 1292 1300 1284

1201 1219 119511951150 1125

1000

1100

1200

1300

1400

1500

1600

1700Gold price movement Gold price movement-DB forecast

USD/oz

Source: Deutsche Bank estimates, Bloomberg Finance LP, forecast on 30 June 2015

Figure 1: Gold price

0

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1200

1400

1600

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Gold Price (USD/ounce)

Source: Deutsche Bank, Bloomberg Finance LP

22 July 2015

Consumer



No gold rush yet

No gold rush yet from retail customers in both HK and China

Despite a five-year low gold price, there is no sign of a gold rush in HK and

China, according to CTF. Huang Weichang, the CEO of Luk Fook (0590.HK,

NR) said that gold sales remained soft, gold consumption sentiment is still

weak, according to HKEJ. Ronald Leung, the vice general manager of Lee

Cheong Gold, commented that it is hard to say whether this gold price slump

will affect gold and jewelry consumption in the coming weeks. He expects that

the gold price will not rebound until the US dollar stops strengthening after the

US presidential election in 2016. Sales people at Chow Sang Sang (0116.HK,

NR) also cited that no gold rush has occurred yet, according to HKEJ.

Jewelry demand declines in volume as gold price drops in 2015 ytd

According to statistics of the World Gold Council (WGC), consumer demand of

gold in Greater China tumbled 8% to 290.4 tonnes in 1Q15. Among the total

consumption, jewelry demand slid 11% to 228.6 tonnes, worse than the 3%

yoy decline for the global total.

Figure 3: SSS growth trend of jewelry companies

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2012 2013 2014 2015 13CNY 14CNY 15 CNY

HK/Macau 9% 33% -24% HDD(7d) na -low teens

PRC 5% 20% -12% HDD(7d) na high teens

Total 41% 7% 25% -28% na 9% -21%

HK/Macau 41% 7% 22% -28% 42%(14d) 7% -25%

PRC 25% 7% 46% -30% 32%(14d) 12% 15%

Gem-set na 3% 5% -14% na -1% -10%

Gold na 10% 36% -34% na 16% -29%

Total 40% -3% 19% -24% -2% 15% -4%

HK/Macau 48% -4% 20% -33% 5% 11% -29%

PRC 32% -3% 17% -16% -7% 18% 11%

Gem-set 32% -10% 8% 5% na 13% 26%

Gold 48% 0% 28% -24% na 19% -14%

Company YE2013

CSS

(116.HK)Dec

55% 11%

31%

-19%na 23% 10%

Festive Seasons

9% -20%

-32%

2014

-14%

-4%

Annual (#)

9% -10% -54%

-52%

29% 86% 30% 6% -12% -54%

14% 115% 70% 36% 1%

na 90% na

na 134% 56% 19% -15%

-40%

4% 68% 26% 7% -9% -50%

11%-2% 48% 18%

-4% -2%

8% 14% 2%

14%

8% 77% 32% 14% -2%

-5%

-56%

15% -28%

-16% 7% 3%

32% 12%

-65%

4%

-15%

-18%

-33%

-21%

-20%

-30%

-6%

-28%

-20%

-29%

-12%

0%

Luk Fook

(590.HK)-20%

Mar

-16%

-26%

-9%

-6%

-19%

-21%

-20%

-5%

-22%

-7%

-6%

-11%

-8%

-6%

-21%

-12%

-21%

Mar CTF

(1929.HK)

2015

-12%

na

na

-18%

-19%

0%

-18%

-18%

-15%

-24%

-7%

-10%

Source: Deutsche Bank, Company data

Figure 4: Gold price yoy % vs. USD index Figure 5: Gold price yoy % vs. China CPI

60

65

70

75

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95

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105

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

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30.0%

40.0%

50.0%

60.0%

Jan

-08

Jun

-08

No

v-0

8

Ap

r-0

9

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-09

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-10

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c-1

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-11

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-11

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-12

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g-1

2

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-13

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-13

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v-1

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r-1

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-14

Feb

-15

Gold price yoy% USD index

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Jan

-08

Jun

-08

No

v-0

8

Ap

r-0

9

Sep

-09

Feb

-10

Jul-

10

De

c-1

0

May

-11

Oct

-11

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-12

Au

g-1

2

Jan

-13

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-13

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v-1

3

Ap

r-1

4

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-14

Feb

-15

Gold price yoy% CPI yoy%



22 July 2015

Consumer



Demand is driven by more than just gold price movement

Historical gold rush in China shows that it is more than just gold price movement that guides consumer demand

To recap, gold consumption rose strongly in the early 1990s mainly driven by

China’s GDP pick-up, higher disposal income, and inflation (double-digit CPI in

1993-1995) (Figure 11). Higher jewelry purchases across the board in jewelry

and investment-related consumption from 2007 to 2008 was mainly attributed

to high inflation and economic uncertainty. In 2013, gold consumption in

Greater China set a new record with 29% yoy as a result of a gold price slump

of 27% (Figure 2).

Figure 6 and Figure 7 show gold demand is not simply affected by gold price

movement.

Figure 6: Gold jewelry consumption demand (tonnes)

changes vs. gold price changes (Global and Greater

China)

Figure 7: Historical gold demand in Greater China

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

98

19

99

20

00

20

01

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02

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11

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13

20

14

1Q

15

Greater China Jewellery consumption YoY growth

Gold price change YoY

32%

20%

7%

29%

20%

6%

-11%

17%

-4%

15%

25%

-28%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-20%

-10%

0%

10%

20%

30%

40%

1992 2007 2008 2013

Gold jewellery demand yoy% - Greater China

Gold jewellery demand yoy% - Global total

Gold price yoy %

Source: Deutsche Bank, World Gold Council, Bloomberg Finance LP

Source: Deutsche Bank, World Gold Council

Figure 8 and Figure 9 show that gold and jewelry sales are more affected by

the economic cycle both in HK and China.

Figure 8: Nominal GDP, retail sales, gold and jewelry

sales growth rates comparison – China (2002-1H15)

Figure 9: Nominal GDP, retail sales, gold and jewelry

sales growth rates comparison – HK (2002-1Q15)

-10%

0%

10%

20%

30%

40%

50%

60%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15

China GDP nominal growth (LHS) China nominal retail sales growth (LHS)

Jewellery sales growth (RHS)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q15

HK GDP nominal growth (LHS) HK nominal retail sales growth (LHS)

HK Jewellery sales growth (RHS)

Source: Deutsche Bank, NBS

Source: Deutsche Bank, HK C&SD

22 July 2015

Consumer



Figure 10: CTF Gold price sensitivity – assumptions – gold price declined by 10% in a year, all other costs hold

constant, gold products 70% hedged

-10%

HK$m Gold Gem-set Platinum Watch Total Remarks HK$m Gold Gem-set Platinum Watch Total % change

Sales 35,070 17,640 8,724 3,496 64,929 Sales 31,563 17,640 8,724 3,496 61,422 -5.4%

COGS (29,634) (7,761) (5,671) (2,692) (45,758) COGS (26,893) (7,761) (5,671) (2,692) (43,017)

GP 5,436 9,878 3,053 804 19,172 Gold - 70% hedged; Gemset - not hedged. GP 4,670 9,878 3,053 804 18,406 -4.0%

Platinum - avg price

Other income/expenses 282 Other income/expenses 282 0.0%

Opex (12,729) Opex (12,412) -2.5%

Rental (4,451) Rental (4,308) -3.2%

-China (2,645) concessionaire fees, variable -China (2,502) -5.4%

-HK (1,806) fixed lease expense -HK (1,806) 0.0%

Staff (4,047) Staff (3,909) -3.4%

-fixed (1,497) 35% in China, 40% in HK -fixed (1,497) 0.0%

-variable (2,550) 65% in China, 60% in HK -variable (2,412) -5.4%

Depreciation (863) fixed Depreciation (863) 0.0%

Other cost (3,369) 20% variable Other cost (3,333) -1.1%

EBIT 6,724 EBIT 6,275 -6.7%

Interest income/expense (212) Interest income/expense (212) 0.0%

Associates (11) Associates (11)

PBT 6,501 PBT 6,052 -6.9%

Tax (1,359) Tax (1,265) -6.9%

Min (78) Min (73) -6.9%

Net profit 5,064 Net profit 4,714 -6.9%

Common Size Gold Gemset Platinum Watch Total Common Size Gold Gemset Platinum Watch Total

Sales 54% 27% 13% 5% 100% Sales 51% 29% 14% 6% 100%

COGS -70% COGS -70%

GP 15.5% 56% 35% 23% 29.5% GP 14.8% 56% 35% 23% 30.0%

Other income/expenses 0.0% 0.4% Other income/expenses 0.5%

Opex 0.0% -20% Opex -20%

Rental 0.0% -7% Rental -7%

-China 0.0% -4% -China -4%

-HK 0.0% -3% -HK -3%

Staff 0.0% -6% Staff -6%

-fixed 0.0% -2% -fixed -2%

-variable 0.0% -4% -variable -4%

Depreciation 0.0% -1% Depreciation -1%

Other cost 0.0% -5% Other cost -5%

EBIT 0.0% 10.4% EBIT 10.2%

Interest income/expense -0.3% Interest income/expense -0.3%

Associates 0.0% Associates 0.0%

PBT 10.0% PBT 9.9%

ETR -20.9% ETR -20.9%

Min -0.1% Min -0.1%

Net profit 7.80% Net profit 7.67%

Base case (based on FY16E DB forecast) Case (based on FY16E DB forecast) - gold px decline by 10%

Base case (based on FY16E DB forecast) Case (based on FY16E DB forecast) - gold px decline by 10%


22 July 2015

Consumer



The author of this report wishes to acknowledge the contribution made by

Louise Li, employee of Evalueserve Research, a third-party provider to Deutsche

Bank of offshore research support services.

22 July 2015

Consumer



Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Chow Tai Fook 1929.HK 8.05 (HKD) 21 Jul 15 NA

Hengdeli 3389.HK 1.17 (HKD) 21 Jul 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Anne Ling

Historical recommendations and target price: Chow Tai Fook (1929.HK) (as of 7/21/2015)

1 2

34

5

6

7

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 22/10/2013: Buy, Target Price Change HKD13.30 5. 08/01/2015: Buy, Target Price Change HKD12.57

2. 27/11/2013: Downgrade to Hold, Target Price Change HKD13.10 6. 29/04/2015: Buy, Target Price Change HKD11.87

3. 17/06/2014: Upgrade to Buy, HKD13.10 7. 16/06/2015: Buy, Target Price Change HKD9.53

4. 16/10/2014: Buy, Target Price Change HKD12.61

22 July 2015

Consumer



Historical recommendations and target price: Hengdeli (3389.HK) (as of 7/21/2015)

1

2

3 4

0.00

0.50

1.00

1.50

2.00

2.50

Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 29/08/2013: Buy, Target Price Change HKD2.38 3. 19/08/2014: Hold, Target Price Change HKD1.58

2. 26/03/2014: Downgrade to Hold, Target Price Change HKD1.67 4. 18/03/2015: Hold, Target Price Change HKD1.35

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

52 %

38 %

10 %25 %18 %

14 %0

50

100

150

200

250

300

350

400

450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

22 July 2015

Consumer



Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

22 July 2015

Consumer



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22 July 2015

Consumer



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22 July 2015

Consumer



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Copyright © 2015 Deutsche Bank AG

David Folkerts-Landau Group Chief Economist

Member of the Group Executive Committee

Raj Hindocha Global Chief Operating Officer

Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Steve Pollard Global Head

Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

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Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

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Japan

Tel: (81) 3 5156 6770

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United Kingdom

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