Declining Mainland Demand And Margin Squeeze Will Weaken Luxury Sales

Key Takeaways

• Over-reliance on Greater China markets and slowing growth in high-tier cities exposes the company to long-term demand and revenue stagnation risks.
  
• Rising competition, lab-grown diamond adoption, and changing consumer preferences threaten margins, premium pricing, and future revenue expansion.
  
• Strategic initiatives in retail, digital, international expansion, and cost management are strengthening brand equity, driving revenue recovery, and supporting sustainable profitability and growth.

Catalysts

An investment holding company, manufactures and sells jewelry products in Mainland China, Hong Kong, Macau, and internationally.

• Chow Tai Fook's heavy reliance on Mainland China and Hong Kong, which together accounted for over 80 percent of group revenue, exposes the company to prolonged risks from declining birth rates and an aging population, likely leading to long-term structural demand erosion for luxury jewelry and potential revenue stagnation or contraction.
  
• With record volatility and rising prices in gold having driven a surge in fixed-price gold product sales and improved short-term margins, there is a risk that this tailwind will fade, and the company will face margin compression as consumer appetite weakens amid macro uncertainty or sudden gold price declines, ultimately threatening both gross profit margin and earnings quality.
  
• While management trumpets brand transformation and new image stores in higher-tier cities, the pace of growth in such markets is slowing, leading to a risk of store network saturation and limited incremental productivity gains, particularly as market penetration approaches maturity-likely constraining future same-store sales growth and revenue expansion.
  
• Increased consumer acceptance of lab-grown diamonds and synthetic gemstones is accelerating, which threatens Chow Tai Fook's ability to sustain premium pricing, puts downward pressure on average selling prices, and could significantly erode both net margins and long-term competitive advantage.
  
• Intensifying industry competition from nimble digital-native jewelry brands, coupled with shifting consumer preferences toward experiences or technology-driven purchases, risks redirecting discretionary spending away from traditional jewelry, ultimately dampening overall demand and putting downward pressure on revenue growth for years to come.

Chow Tai Fook Jewellery Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Chow Tai Fook Jewellery Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Chow Tai Fook Jewellery Group's revenue will grow by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.6% today to 9.2% in 3 years time.
• The bearish analysts expect earnings to reach HK$8.6 billion (and earnings per share of HK$0.86) by about August 2028, up from HK$5.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, down from 23.4x today. This future PE is greater than the current PE for the HK Specialty Retail industry at 12.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

Chow Tai Fook Jewellery Group Future Earnings Per Share Growth

Risks

• The company's strategy of rolling out immersive new image stores, expanding in high-tier cities, and launching differentiated signature collections is already showing significant improvements in product mix, higher-margin sales, and store productivity, which could underpin revenue recovery and profit margin expansion over the long term.
  
• The growth and success of e-commerce, including a robust in-house live-stream sales operation that led to Chow Tai Fook becoming the top jewelry brand on Tmall's Double 11, is effectively expanding the digital channel, increasing customer reach, and bolstering revenues beyond the traditional brick-and-mortar base.
  
• Early evidence of momentum in international expansion, particularly in high-growth Southeast Asian markets such as Singapore, Malaysia, and Thailand, supports potential revenue diversification and taps into the rising affluence and jewelry demand in these regions.
  
• The company's rigorous cost and capital management-involving reductions in inventory, strict control of expenditure, and healthy cash flows-has improved free cash flow, reduced financial leverage, and maintained stable return on equity, providing strong foundations for sustainable earnings and dividend support.
  
• Investments in sustainability, heritage-linked high jewelry collections, and retail experience innovation are enhancing brand equity and customer loyalty, potentially increasing pricing power and market share, which could help support margins and long-term earnings growth.

Valuation

• The assumed bearish price target for Chow Tai Fook Jewellery Group is HK$12.4, which represents two standard deviations below the consensus price target of HK$15.14. This valuation is based on what can be assumed as the expectations of Chow Tai Fook Jewellery Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$17.0, and the most bearish reporting a price target of just HK$12.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be HK$94.0 billion, earnings will come to HK$8.6 billion, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 8.6%.
• Given the current share price of HK$14.01, the bearish analyst price target of HK$12.4 is 13.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.