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Chow Tai Fook Profits Drop

The largest jeweler in China said that net profit for the six month period ending in September declined due to slower sales in China.

HONG KONG — Chow Tai Fook, the largest jeweler in China, said Thursday that net profit for the six month period ending in September declined by 33 percent due to slower sales in China, losses from gold hedging and higher operating costs.

The company posted a net profit of 1.82 billion Hong Kong dollars, or $234 million, down from 2.69 billion Hong Kong dollars, or $347 million, a year ago. Revenue rose 6.5 percent to 25.44 billion, or $3.28 billion, fueled by the jeweler’s growing retail network. Overall same store sales declined by 1.7 percent as weak consumer sentiment in Hong Kong, Macau and Taiwan slowed sales and caused a 6.3 percent drop in same store sales.

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The first half of the year was “full of challenges,” Chow Tai Fook’s chairman Henry Cheng, said in a press conference Thursday, “the group still generated steady growth despite market adversity,” he said.

Looking ahead, Cheng said that macroeconomic uncertainties could continue to affect the company’s outlook for the short term. “Yet we see some positive signs in the retail market and believe that Hong Kong and mainland China’s luxury spending will pick up gradually.”

Chow Tai Fook has continued its aggressive expansion plan in China, with a focus on their tier two, three and lower tiered cities. Company executives said they remain optimistic about the company’s goal open increase its point of sales network by 200 new locations a year to 2,000 by the end of fiscal year 2014. Nearly 95 percent of Chow Tai Fook’s point of sales are in mainland China, contributing 55.2 percent of the company’s total revenue. Executives also said they remain optimistic the company will be able to double sales by fiscal 2015.

Gross margin declined to 26.4 percent from 29.9 percent a year ago mainly because of gold hedging losses. Chow Tai Fook, which gets 55.5 percent of sales from gold and gold jewelry items, hedges the commodity risk of gold through short positions such as gold loans and bullion forward contracts. The company said that the hedging positions should cancel out over time through the sales of gold products, but that there was a “short timing difference” as the cost of gold increased rapidly in recent months, cutting into profit margin.

The company said it would be changing its gold hedging policy, relaxing its hedging level from almost fully hedged to about 70 percent of total gold inventories. This change, the company said, was due to the increasing scale of gold hedging activities and the potential change of regulations regarding hedging instruments in mainland China.

Sales of gem-set jewelry rose 2.4 percent to make up 22.7 percent of total sales while sales of gold products increased 11.3 percent. Sales of watches decreased from 7.7 percent of total sales to 5.9 percent. Though gold sales make up the majority of sales, Chow Tai Fook has been marketing gemstone and diamond jewelry because the other categories have higher profit margins and higher price points. The unfavorable economic climate though appears to be squeezing customers and the company said both local and mainland Chinese customers in Hong Kong and Macau switched spending to from high-end luxury pieces to mass luxury products with an average selling price of 2,000 Hong Kong dollars, or $258, to 100,000 Hong Kong dollars, or $12,903, and tended to spend on jewelry items for special events such as gold wedding jewelry.

Chow Tai Fook warned on Friday last week that profits for the first six months of the fiscal year would be lower than last year, causing shares of the company to fall by 5.6 percent. Shares are now trading about a third below its initial public offering price from December 2011.