Zhou Dafu's First Quarter Sales Decline, What's Wrong With Hongkong's Retail Industry?

Zhou Dafu, who surprised investors last fiscal year, seems to have been defeated in the face of the sluggish retail market in Hongkong, 01929.HK. Recently, Zhou Dafu announced its first quarter sales.

　 Sales slump in the two quarter

In July 16th, Zhou Dafu announced that retail sales in mainland China increased by 24% in the 3 months ended June 30, 2019, retail sales in Hongkong and Macao decreased by 6%, sales in the same stores in mainland China increased by 11%, sales in the same stores in Hongkong and Macao decreased by 11%, sales in the same stores in the mainland decreased by 3%, and sales in Hongkong and Macao decreased by 14% in 01929.HK.

It is worth noting that the same store sales in mainland China have maintained growth momentum and recorded an increase of 11% in the quarter. However, the market in Hongkong and Macao is affected by the high base number and the uncertain macroeconomic environment, which makes the consumption atmosphere prudent, leading to a decline in same store sales.

Jewelry store sales in mainland China grew steadily, with an increase of 8%. The increase in the contribution from new retail outlets has also increased the retail value of jewellery jewelry to 18%. The same store sales of jewellery and jewelry in Hongkong and Macao fell by 16% during the quarter, due to consumer restraining consumption. The average selling price of jewellery inlaid jewelry in mainland China is HK $6200, while the average selling price of jewellery and jewelry in Hongkong and Macao is HK $10100.

Due to the increase in the average single weight of gold products sold and the success of the Zhou Dafu heritage series, the sales of Chinese gold products in the same quarter increased by 12% during the quarter. The average selling price of gold products in mainland China jumped to HK $4800 in the quarter, while the average selling price of gold products in Hongkong and Macao was HK $8600. Compared with the same period last year, the average international gold price in the quarter was flat.

　　 It is not a good thing that gold prices are soaring.

In fact, through the historical re stock of Zhou Dafu's stock price, we can find that the correlation between Zhou Dafu's stock price and the overall sales growth rate of Zhou Dafu is relatively large, showing a positive correlation. From 2014Q2 (-40%) to 2016Q3 (-25%) Zhou Dafu same store sales growth period is negative, stock prices and sales growth of the same store fell, the highest decline of 60%, and later with the same store negative growth narrowed, stock prices slowly picked up. 2016Q4 Zhou Dafu same store sales growth (2%) back to 2018Q3, maintained two digit growth, stock prices also showed good performance.

Since its listing in 2011, stock price volatility has been related to the rise and fall of gold prices in addition to the Hang Seng index market. Gold terminal demand sales performance is greatly influenced by gold price, reflecting the value of stock price fluctuation. Gold prices have risen 20% since the second half of 2018. Since the beginning of the year, Zhou Dafu's share price has also risen with the international gold price rising since June.

It is worth noting that the soaring price of gold has led many people to expect the gross profit margin of Zhou Dafu and other jewellery companies. In fact, despite the fact that gold products have a certain value of appreciation, consumers often choose to cut down on optional consumption in the economic downturn, including luxury goods, jewelry and so on. Therefore, the rise in gold prices will not necessarily stimulate consumption of gold products, or even have some inhibits. This seems to explain why gold prices are rising, but Zhou Dafu's overall sales have declined.

Of course, this can not be entirely attributed to soaring gold prices. The volatility of Hongkong's retail market itself is the main factor.

　　 Weak retail market in Hongkong

Hongkong's retail weakness is also on the other hand: during the May 1 period, retail sales of Hongkong retailer Sasa (00178.HK) in Hong Kong and Macao fell by 3.9% over the same period. In a month after the Jingdong 618 carnival, sales grew by more than 26% over the same period.

Among all the consumer categories, the biggest impact is luxury consumption. For a long time, the luxury goods market in Hongkong is entirely dependent on Chinese mainland tourists, which accounts for more than 10% of the retail trade, which is almost regarded as a barometer of Hongkong's retail and Asia Pacific region, and even the global economy.

In April, sales of jewellery, clocks and watches and precious gifts in Hongkong retail industry plummeted by 11.4%, the worst in December 2016. Sales of this category also fell for another three months. In the past six months, five months showed negative performance, with only 4.1% growth recorded in January with the help of holiday effect.

Earlier, the census and Statistics Department of Hongkong released the latest retail sales figures. The estimated value of total retail sales in May 2019 was 40 billion yuan, down 1.3% from the same period last year. The revised estimate of total retail sales value in April 2019 decreased by 4.5% compared with the same month in 2018. In the first five months of 2019, the provisional estimate of total retail sales value fell by 1.8%.

Data show that after deducting price changes, the provisional estimate of total retail sales in May 2019 dropped by 1.7% over the same period last year. The revised estimate of total retail sales in April 2019 dropped by 5% over the same period last year. The provisional estimate of total retail sales in the first five months of 2019 dropped by 2.2% over the same period last year.

The provisional estimate of sales value according to the main categories of retailers was analyzed from high to low. In May 2019, the sales value of jewellery, watches and clocks and precious gifts decreased by 2.7% over the same period last year.

A spokesman for the Hongkong government said that although retail sales in May narrowed, it was partly due to the late labour Festival holidays this year, which led to a significant year-on-year increase in the number of visitors to Hong Kong in May. But overall, retail sales remained weak in recent months. Consumer sentiment is still prudent under the uncertainty of the global economic environment. In the short term, it is likely to puzzle the retail sales prospect.

Since mainland China consumers are the largest customers in the global luxury industry, and 2/3 of luxury goods come from overseas consumption, Hongkong is also the main destination and luxury consumption place for mainland tourists. The downturn in this category almost reflects the overall economy and consumer desire in China. Besides, tax cuts, tax cuts and weak renminbi have exacerbated the downturn in Hongkong's tourism retail market.

After a number of Hongkong retailers announced their performance in June, the market began to take a cautious view of those larger retailers in Hongkong. From April 2019 to the beginning of June, sales growth of most retailers in Hongkong was flat or slightly down. This is due to the deterioration of consumption sentiment of local residents and mainland tourists. However, after many incidents in Hongkong since mid June, retailers' sales performance will obviously deteriorate.

The Zhou Dafu announcement shows that there are 115 retail outlets open in mainland China in the quarter, including a net opening of 113 Zhou Dafu jewelry retail outlets (18 of which are direct stores and 95 franchisees), 3 MONOLOGUE retail outlets, 3 SOINLOVE retail outlets, and 3 3 Zhou Dafu watch retail outlets and 1 HEARTSONFIRE retail outlets. In Hongkong, Macao and other markets, the group has opened 3 Zhou Dafu jewelry retail outlets, located in Singapore, Korea and Philippines, and closed 4 HEARTSONFIRE retail outlets in Taiwan. In June 30, 2019, the group had 3248 retail outlets.

Along with the gradual improvement of Zhou Dafu's layout in the first tier cities, he joined the deep ploughing and low line market in the two or three line cities. Zhou Dafu is still expected to maintain sound growth by virtue of high reputation, rich product lines and accelerated expansion of the mainland market.