Chow Sang Sang (0116.HK)

[dreamybear]

Hence, an investment in CSS -- or any gold retailer with little/no hedging on gold price -- will necessitate a belief that gold (jewellery) will continue to be in popular consumer demand, so as to allow continued gold price appreciation. 

Zhou Liu Fu Jewellery has recently filed its application proof, an opportunity for VBs to understand more about the business/industry e.g. industry overview (pg86).

https://www1.hkexnews.hk/app/sehk/2024/1...700764.pdf
"...According to Frost & Sullivan: 
• As of December 31, 2023, we ranked fourth in terms of the number of offline stores in China and third in terms of number of offline stores in the southern area of China, among Chinese jewelry brands; 
• In 2023, we ranked first among jewelry companies with nationwide operations in China in terms of online sales revenue proportion ....."

Once branded a copycat jeweler, Zhou Liu Fu seeks gold in Hong Kong
https://thebambooworks.com/once-branded-...hong-kong/

[bmann025]

For a while, first thing I am looking at in results are gain/losses from gold loans.
According to page 13 of the interim report, CSS made a loss of 429 million in first half, which is 10% of their market cap... My goodness, what a waste! And even despite that, they earned 77.6 cents per share, which annualized would be PE of approx. 4. Tells you what a profitable business that is permitting such misallocations.
https://www1.hkexnews.hk/listedco/listco...700838.pdf

Main surprise is that they now announced a share buy-back of up to 100 million HKD, which is of course the best investment possible at a P/B ration of just 0.35. Surprise is that CSS is doing this (after CTF did it in the past), not Luk Fook or anyone else.. So much better than destroying value with real estate deals, let alone connected transaction real estate deals.

[dreamybear]

Valuations are currently certainly not as low, but outlook was very bad when it was that low. Something could happen sending valuations down again. Never say never.

https://www.valuebuddies.com/thread-9276...#pid163324
"Really regretted selling shares of a resilient business especially after I managed to pick them up at compelling valuation for an established brand name during Mar 2020. Given the kind of resilient performance during such a difficult time like Covid and its ability to generate a quick  subsequent rebound, it is unlikely the mkt will price it at depressed levels again."

I suppose karlmarx was at least in part referring to my post. 

Well, the share price of CSS is even more attractive now. Though we have since transitioned to living with Covid, it wld be hard to imagine such a scenario at that point in time when Covid is in some ways unprecedented in the world and the future then was very uncertain.

So why is bear still sitting on the sidelines this time round ? While China has benefited from globalization in the past, I am worried we cld only be at the beginning of the new world order, and thus, it's hard to predict the implication for Chinese population's consumer spending when things are never going to be the same.

[karlmarx]

Hence, an investment in CSS -- or any gold retailer with little/no hedging on gold price -- will necessitate a belief that gold (jewellery) will continue to be in popular consumer demand, so as to allow continued gold price appreciation. 

Zhou Liu Fu Jewellery has recently filed its application proof, an opportunity for VBs to understand more about the business/industry e.g. industry overview (pg86).

https://www1.hkexnews.hk/app/sehk/2024/1...700764.pdf
"...According to Frost & Sullivan: 
• As of December 31, 2023, we ranked fourth in terms of the number of offline stores in China and third in terms of number of offline stores in the southern area of China, among Chinese jewelry brands; 
• In 2023, we ranked first among jewelry companies with nationwide operations in China in terms of online sales revenue proportion ....."

Once branded a copycat jeweler, Zhou Liu Fu seeks gold in Hong Kong
https://thebambooworks.com/once-branded-...hong-kong/

Thanks for sharing. ZLF is an interesting company. The man behind it is quite good.

The company grew rapidly in such a short period of time.

Almost all of the stores are franchised. However, from the prospectus, it seems like ZLF charges very low fees and royalty, compared to leaders like CTF. This may explain its rapid franchisee growth.

It holds almost no inventory, so it is not burdened with expenses associated with the cost of owning physical assets. It also does not manufacture its products so there is no factory overhead and management issues as well. 

My guess is that most of its earnings are from its e-commerce channels, where the product does not overlap with the franchise stores. So the company gets major marketing through franchisee physical store presence, but does not have to pay for it. The marketing effort builds consumer trust and mindshare, which finds its way to e-commerce channels.

An e-commerce retailer that is asset-light with free marketing.

But since it does not own its supply chain, its biggest problem will be quality control, which impacts brand reputation. Reputation is everything for a gold retailer. Too many complaints will bring the whole model down.

[karlmarx]

Valuations are currently certainly not as low, but outlook was very bad when it was that low. Something could happen sending valuations down again. Never say never.

https://www.valuebuddies.com/thread-9276...#pid163324
"Really regretted selling shares of a resilient business especially after I managed to pick them up at compelling valuation for an established brand name during Mar 2020. Given the kind of resilient performance during such a difficult time like Covid and its ability to generate a quick  subsequent rebound, it is unlikely the mkt will price it at depressed levels again."

I suppose karlmarx was at least in part referring to my post. 

Well, the share price of CSS is even more attractive now. Though we have since transitioned to living with Covid, it wld be hard to imagine such a scenario at that point in time when Covid is in some ways unprecedented in the world and the future then was very uncertain.

So why is bear still sitting on the sidelines this time round ? While China has benefited from globalization in the past, I am worried we cld only be at the beginning of the new world order, and thus, it's hard to predict the implication for Chinese population's consumer spending when things are never going to be the same.

The China story is changing. Money and manufacturing is moving to India and other ASEAN countries. Most commenters and experts are not positive sentiments China's future. My own take is that the market is far too pessimistic.

Historically, manufacturing has always moved to lower-cost countries. It may probably only be a matter of time before ASEAN/India takes over China's place as manufacturer of the world. But so far China has been holding up because it is still more efficient. Whether they can maintain pole position depends on whether they can keep improving their efficiency, with robots/AI or whatever. 

As for the housing crisis, it is the worst that the country has gone through in recent history. It has gone on for so long that most have lost hope that the bottom is near. This crisis is negatively impacting consumption. But surely it will end at some point? By that time, the animal spirits of property investment/development may have been put to sleep, at least for some time. Less spending on multiple properties may translate to more retail spending. This is speculation, of course.

With slower consumption, the gold jewellery retailing industry is contracting after years of expansion, like F&B and most other retailers. This is certainly good for the stronger players as it will mean less competition for them when the recovery comes. CTF and CSS have strong brands and balance sheets. It is not likely that the current gold retailing recession will hurt their strategic/financial position in the long term.

For CSS, this could mean lower profits this year and the following year. But will CSS profits continue to be as depressed? Will the Chinese economy and consumer sentiment not improve at some point? Or is China as a country next to be isolated like Russia? Current valuations of CSS seem to suggest the company is in terminal decline. For now, these scenarios seem unlikely and too pessimistic to me. 

P/B of around 0.3 (and forward P/E of around 6) for a business which has been profitable and paying dividends every year for at least the past 2 decades, that is one of the market leaders, in an industry which does not yet face any long-term threats. Is this cheap? Different investors will have different take. Will CSS' profits, in say 2028, be $500m, $1,000m, $1,500m, or $2,000m? No idea, but it will probably be an improvement if the dark clouds surrounding real estate pass. CTF, the market leader, is yielding close to 10% with P/E around 10. This also looks cheap to me.

Way back in 1998, there were racial riots in Jakarta and Suharto soon fell after. Many big name stocks were selling at P/E of around 4-6 at the time, and have gone up 10-20 times since. What a shame we may say to ourselves. Of course, things are always different and not exactly comparable. China's situation could get worse. Or it could take a very very long time to recover.

[dreamybear]

Hi karlmarx,

Thanks for your detailed reply. My view is the Chinese population had prospered via exporting to western developed countries. With rising trade tensions, the Chinese exports wld have to find alternatives and the candidates seem to be developing countries. Assuming this is the new normal, what wld be the normalized income levels of the Chinese population ? Internal factors could include aging population and low birth rate. How much do these impact the spending level of consumers in this industry/CSS and consequently, what would be the new normalized earnings/dividends for CSS ? 

For stock prices to appreciate, there has to be buyers, and naturally, the more the merrier. Wld geopolitical tensions dampen the enthusiasm of western money ?
https://www.reuters.com/world/china/inve...023-02-24/

So to me, the environment moving fwd, is likely to be markedly different from what we have seen or familiar with, and some of the changes cld be permanent. 

As you have mentioned in your other post, there are other cheap stocks in HK. That said, I do believe there are investment merits for CSS as you have rightly pointed out. Perhaps I may initiate a position soon enuff, never say never. 

As an aside, regarding CTF, it might have been affected in part by the situation at New World development.
https://www.reuters.com/world/china/shar...024-09-02/

[bmann025]

With slower consumption, the gold jewellery retailing industry is contracting after years of expansion, like F&B and most other retailers. This is certainly good for the stronger players as it will mean less competition for them when the recovery comes. CTF and CSS have strong brands and balance sheets. It is not likely that the current gold retailing recession will hurt their strategic/financial position in the long term.

I think jewelry is doing well given the 41% price of gold increase over the past 12 months. Other luxury areas suffer similar sales declines but without underlying price increases.
 
CTF and CSS may be heading towards another not so great half year due to hedging, as the POG increased another USD 330 since end of March and USD 250 since end of June.
Luk Fook though may benefit most with low hedging, and increasing POG will compensate part of their reduced revenue.

[karlmarx]

Certainly, if you are a gold retailer and you did not hedge your inventory this year, you will have done very well even if you did not sell much of your gold. But not every year will be like this year, and that is why the more prudent gold retailers will hedge. CSS only hedges 40% of its inventory, so it still has the expectation that gold price will generally appreciate. Otherwise, it would have hedged 100%. I think if you want to be in the gold retailing business for a long time, it is bad idea to not have any hedging.

As for the big questions regarding China's trade, economy, and consumption, I do not have any good answers. ChatGPT seems to think consumption will continue to grow in the long-term. As mentioned, the majority of the market must be having the same big doubts, otherwise the China/HK stocks would not be priced at where it currently stands. Nobody knows anything for sure, hence the importance of diversifying one's portfolio.

[bmann025]

@karlmarx

This is simply untrue.

1) Hedging produces losses long term as well. This is established by a POG history over thousands of years.
2) Worse, hedging does not reduce earning volatility
3) Worse, retailers love to waste capital (also) allocated from hedging loans for real estate.
4) Only exception are highly leveraged companies, which may not afford a significant decline in inventory value.
5) There is a risk and cost free alternative to hedging by buying the same amount of raw gold, which they sell at the end of every day.

China gold/silver/jewelry sales declined by only 12% in August 2024, despite a 41% increase in POG. This looks rather resilient to me. How would car sales do after such a price increase, certainly much worse imv.

[weijian]

hi bmann025,

You are right as an accountant on paper, but wrong as a businessman in practice. An accountant (or CFO) is clever to optimize and squeeze every last cent out. He is absolutely right as that is his job and he is doing it well.

An owner who had exchanged their health/relationships/time to achieve his/her dreams, will probably emphasize on the survival of their dreams and to pass them for generations to come. Less optimization and leaving more cents on the table, is a negligible price to pay. These owners figured out black swams long time ago before Taleb popularized it.

Does one decide not to buy any personal insurance because human history has shown that human mortality rates are in a "long term bull market"?