Citibank: CHOW TAI FOOK (01929) Preliminary results in line with expectations, attractive valuation, maintain "buy" rating.

Citi released a research report stating that CHOW TAI FOOK (01929) has announced a profit increase, with an expected 45% to 55% growth in net profit for the fiscal year 2026, in line with the bank's and market consensus forecasts. The management attributes the expansion of gross profit margin to the rise in gold prices, improvements in the sales mix of retail business and priced jewelry, and operational leverage from careful cost management. Although investors are concerned that CHOW TAI FOOK's gross profit margin may have peaked, the bank believes that such risks are largely reflected in the stock price. The stock is currently valued at a forward P/E ratio of 12 times, with a dividend yield of 7%, making it an attractive valuation. The bank maintains a "buy" rating on CHOW TAI FOOK with a target price of 16.7 Hong Kong dollars. The bank forecasts a 1% increase in revenue for the group in the fiscal year 2027, slowing down from a 3% growth in the fiscal year 2026. In the mainland market, which accounts for 81% of the group's revenue, a 4% decline in revenue is expected, compared to a 1% growth in the fiscal year 2026, mainly due to the slowdown in same-store sales growth and continued store closures. For the Hong Kong, Macau, and overseas markets, revenue growth is expected to accelerate to 21%, up from 16% in the fiscal year 2026, mainly driven by favorable exchange rate movements and widening price differentials after changes in VAT policies, leading to an acceleration in same-store sales growth. The bank predicts that CHOW TAI FOOK's gross profit margin will decline by 5 percentage points to 27.6% in the fiscal year 2027, mainly due to the negative impact of a slower increase in gold prices. With the contraction of gross profit margin, operating profit margin is expected to drop by 5 percentage points from 20.3% to 15.2%. Hedging losses are expected to decrease from 6.7% of revenue to 1.3%, while financing costs remain largely stable. Therefore, it is expected that the net profit margin for the fiscal year 2027 will remain stable compared to the previous year.