CTFJ continued to report stressed 4QFY25 (Jan - Mar 2025) numbers, as group level retail sales value declined by 11.6% YoY, while total number of stores reached 6,643, a higher-than-expected net store closure of 406. However, we see that March sales improving sequentially a positive sign, and we expect higher gold price under the second Trump administration could prompt Chinese consumers to buy more gold. CTFJ also demonstrated good progress of adapting to the latest consumer trend and offered more fixed-price gold products. We see this act successful to stabilise its margins. We expect CTFJ may see better performance in FY26 with such direction, and lower comps should also help CTFJ to re-rate. Upgrade to BUY with a TP of HK$11.2.
　　Key Factors for Rating
　　4QFY25 numbers still weak but sequentially improving. The overall retail sales value (RSV) of CTFJ dipped 12% YoY in 4QFY25, actually an improvement versus 3Q (-14% YoY). Mgmt. commented that sales decline in March narrowed to around low teens, an improvement over Jan-Feb combined (mid-teens). Total number of stores declined by 406 to 6,643 during the quarter, implying a 15% YoY drop of total stores, a slight disappointment. However, comparted to the 12% decline in RSV, it suggests improvement in same-store sales (SSS), reflecting effective strategy on optimising store mix and shutting down underperforming stores.
　　Strong premium gold sales beating expectations and guidance. As CTFJ ramped up premium, fixed-price gold product offerings such as Rouge Collection, & Palace Museum Collection, sales contribution from such high-GPM products jumped from 9% in 4QFY24 to 26% in 4QFY25, exceeding mgmt. expectations. Hence, mgmt. expected full year GPM & OPM will exceed the previous guidance of 400-500/250-300bps expansion. We see this positively, and a strong indication that CTFJ has managed to stabilise earnings despite weak RSV which mainly stemmed from the lower-tier mass market.
　　Store closure not yet over but the worst is likely over. CTFJ would continue to execute the strategy to optimise store network, and expect more net store closure in FY26, and may go back to net expansion in FY27. While we see this may still weigh on near term sales in 1HFY26 due to lower store count, we expect improving SSS growth, combined with strong offerings of premium fixed-price gold products, especially when Chinese consumers have been lured by the recent hike of gold price, would mean a better FY26 sales. We also expect RSV numbers should soon turn positive in mid-FY26 on lower comps in FY25.
　　Updates on hedging losses under new accounting practice. Since Jun 2024, CTFJ adopted a new accounting rule. In the past, P&L resulting from revaluation of gold loans were accounted for in COGS, impacting GPM and OPM.
　　Starting from FY2025, to better reflect core underlying operational performance without the impact of hedging activities, CTFJ reclassified gold loan revaluation P&L from COGS to “other gains and losses”. In 1HFY25, the hedging losses combined were HK$3.1bn. Due to escalating gold prices, mgmt. expected the hedging losses in 2HFY25 would be similar or higher than that of 1H. Under this new practice, we also expect hedging losses in FY26 & FY27, but this will not affect our latest core earnings calculations.
　　Key Risks for Rating
　　Downside risks: (1) unsuccessful multi-brand strategy; (2) deteriorated retail sell-through for core brand; (3) unexpected spike in spending; and (4) higher- than-expected hedging losses.
　　Valuation
　　We revised down our reported EPS estimates by -37%/10%/13% for FY25/26/27E to reflect: (1) a total of HK$6.2bn hedging losses in FY25; (2) higher GPM assumptions on FY26-27E under the new accounting practice, and higher contribution from premium gold products, and (3) improving SSS growth assumptions in FY26.
　　After our downgrade since Jun 2024, CTFJ has faced considerable pressure in FY25. Yet we expect the worst is over for CTFJ in FY26, and expect sequential improvement of RSV figures in FY26. We also expect there would be room for reported earnings to beat if CTFJ could manage the hedging losses better and enjoy further upside in rising gold prices via strong GPM.
　　Upgrade to BUY. Our TP is lifted to HK$11.2, based on 15x FY26 P/E (previous: 10x). We believe a re-rating of CTFJ would be ongoing and justifiable thanks to: (1) improving industry and company fundamentals after industry consolidation; (2) higher consumer demand on gold under 2nd Trump administration, and (3) improving investor sentiment on gold jewellery retail sector.