Chow Sang Sang (0116.HK)

[weijian]

Hi bmann025,
Thanks for the clarification. I have went to Luk Fook's thread to look at your posts again.

(1) It looks like you have added the hedges gain/losses to the actual fiscal year's profit, and then the aggregation (avg and std dev) to achieve your conclusion. I suspect it is more nuanced than that. I reproduce CTF's hedges and inventories turnover from its AR23 as below:

Gold loans are settled at maturity which is usually in 1 to 6 months from date of inception and any fair value change is immediately recognised in profit or loss

Inventory turnover period (day)  299 381 312 272 294 (2019 to 2023)

So hedges are closed over short duration, while the time to mfg/sell the jewellery is pretty long at 8-11 months. As such, adding the hedge gain/loss and profit for the same fiscal year is probably not accurate due to the longer duration required to sell the jewellery and record the revenue. There is a ~6-10months' kind of time lag and so hedging gain/loss for this year needs to be paired with next year's profit, rather than the same year as you have done. Looking at the years before covid-19 lockdowns messed Mgt estimates, it does seem that for both CTF/LF: If this FY had hedging gains, the corresponding FY would have lower profit. And vice versa.

(2) You have mentioned that book value of the inventory fluctuates with the price of gold. That is not accurate. I have reproduced their COGS accounting principle as below:

On the other hand, the gold inventory would not be revalued at market price as it is measured at  weighted average cost, unless an impairment indicator exists

Revenue fluctuates with the price of gold but its COGS is fixed based on the earlier cost to buy/produce them. This is why when gold prices rise and sales is kept constant, they will have higher profitability 10 months down the road when they sell the gold jewellery by recording a higher revenue due to higher gold price, but record a lower COGS due to lower gold price earlier.

(3) From my last AR check on both CSS/CTF, both of them have total borrowings that are ~40-60% of equity, and majority are bullion loans for hedging purposes. If we look at their balance sheet composition, the majority is inventory. So from another angle, we can say that they geared up 40-60% to expand their equity base by 40-60% and allow more working capital (in this case inventories) to support business expansion. So besides hedging, their gearing also helps in opening more branches and showing display products to sell.

[bmann025]

Yes, I look at value, not short term accounting side effects. That's why I looked at the result of hedging over a 10 year period, where specific accounting practices should not matter much.

[specuvestor]

Just to sidetrack a bit cause hedging is not as simple as finance 101 especially if you take into account PnL accounting and actual cashflow from putting up margins etc

Cases in point would be SIA as mentioned above which hedged it's operational need but COVID crashed the amount of fuel that they needed and ended as a mismatch; and the Chinese company Tsingshan holdings that produces nickel and keep shorting to lock in price in future but got short squeezed (and the abnormal saga of CME had to cancel the trades) which actually they will be able to deliver once they produce the Nickel in the future

But end of day hedging helps confirm your input or sale price to determine margins and hence ROA/ ROE from a management point of view to reduce surprises but if your business the sale and cost price are highly correlated, say to one variable eg gold then hedging might not be optimal cause you are fixing one leg of the transaction and the other leg is variable. Same thing why if you buy Japan stocks then hedging with Japan loans might be more optimal to let both leg be variable and cancel out but be careful that the PnL and cashflow can be different in the short term to what one expects

[karlmarx]

The reason why it has been taking hedging losses for the past 10 years is very simple: because gold prices has been moving up over the past 10 years. So if gold prices continue to move up, you can expect CSS to continue to take hedging losses.

Purchasing raw gold/gm is currently around 540rmb. CSS marks up 30% to cover its operating expenses, so its selling price per gm will be around 700rmb. In a scenario where gold prices come down sharply, where say CSS was selling gold/gm at 700rmb yesterday but selling price fell to 500rmb today (raw gold would have fallen to around 380rmb) which is 40rmb lower than how much it paid for -- that means it is selling losing 40 rmb on each gm of gold it sells. So the more it sells, the more it losses; hence, lower selling prices but high volumes does not actually help the business. 

Granted, the probability of falling from 540rmb to 380rmb is very low, but if it does happen, it can wreck havoc on the company. Consumers will make a rush for their goods and perhaps, either they will go broke if they try to lower prices to competitive levels, or they will keep selling prices above their costs (which means no customers), while their more nimble (fully hedged) competitors are able to continue selling.

So is CSS' hedging a good thing? Well, if they had known 10 years ago that gold is going up, they wouldn't have hedged.

And all those hedging losses would have been profits. But nobody knows such things for sure. 40% hedging is quite alright, because it means 60% of their gold inventories (which is a significant amount) are still exposed to market movements.

We could see profit/margin improvements in HY24 if sales volume is maintained, as gold prices are up around 12% YTD.

===

There are lots of other cheap stocks in HK. Many of them at multi year lows, especially those exposed to HK consumption like REITs and F&B (worries that more HKers are going to SZ for consumption is the new normal), many yielding around 7%-9%. Langham just announced that they are working on a privatisation deal.

[Behappyalways]

Should be doing well. In Singapore, I starting to see some customers visiting jewellery shops...

Not vested....

不是蔬果特賣! 中國超市"賣黃金"也掀搶購潮 零售掛牌價破700人民幣! 搶金人潮不卻步 Costco賣金條! 意外大受美國年輕人歡迎│記者 姚懷真│【國際大現場】20240408│三立新聞台
https://m.youtube.com/watch?v=7AgqJ5ePB88

[bmann025]

CTF managed to produce hedging losses even in years with slightly decreasing gold price. 
The gold price long term goes up due to inflation, so long term, hedging will produce losses.

And regarding earnings volatility, a closer look makes the results even worse:

CTF earnings increased in the past couple of years due to rapid store expansion. Yes, increasing earnings is also an increase in volatility, respective a increase in variation from the mean.) The increase was partly destroyed by hedging losses. Great  
Don't tell me, that's what anyone really wants to achieve.

[gzbkel]

China’s young people are rushing to buy gold
https://www.economist.com/china/2024/04/...o-buy-gold
(Paywalled)

China’s gold market, which accounts for about a fifth of global sales, used to attract an older crowd. Many buyers were middle-aged women looking to add to their nest-eggs or buy chunky bracelets. But these days Chinese gold shops regularly serve customers in their 20s. Xiaohongshu, a social-media site favoured by “Generation z” (those born between 1997 and 2012), is buzzing with talk of the precious metal.
[...]
Gold jewellery is also increasingly popular as a luxury good that, unlike handbags or shoes, might increase in value. “You feel like you’re spending money without spending money,” one enthusiast told local media. Young women are snapping up “China chic” designs, which feature national symbols, says a salesman in Beijing. Some companies have started embossing their products with Japanese cartoon characters that were popular in the 1990s.
[...]

[gzbkel]

For the past few months, Chow sang sang stock has not been doing well, I assume its because of the elevated gold price that resulted in:
- Reduced consumption of gold jewelry in China (People prefer to buy bars/coins)
- Losses from their gold hedging

Last Monday there was a profit warning, but this profit warning seems to suggest it has turned around, if we compare the last 3 halves:
- 24 first half projected profit attributable to shareholders: 500-550m (As stated in profit warning)
- 23 Second half profit before tax: 475m
- 23 First half profit before tax: 882m

Perhaps people have gotten used to the high gold prices and decided to buy more gold jewelry? (As compared to 23 2nd half). Despite the recovery in earnings, share price is still at >10 year low, even lower than the peak of lockdown in China.

If current profit level stays the same, full year profit will be about 1B, which is about EPS of 1.48, or PE of 4.4. Price to book ratio is at 0.36. This seems excessive, considering that most of the book value is from the inventory, which can be melted down for gold even in extreme situations.

Is the market pricing in some other risk that I am missing?

[karlmarx]

Market seems to be suggesting that FY24 profit will come in at around HK$600-700m, which will put current p/e at around 6-7, and yield at around 5.5-7%. Assuming that the weak gold jewellery sales trend for first half continues into the second half of the year -- and latest July PRC retail sales data seems to suggest so -- this is not an unrealistic scenario.

There is also the cash burning LGD startup, which based on the results available so far, does not look likely to achieve profitability soon (if at all).

The gold hedging losses (or gains) should not be a cause for worry/concern (or elation), as as losses (or gains) in one period will more or less be offset in the long-term. As gold price has been rising since the start of the year, it only makes sense that they experience hedging loss. These losses will be offset when they sell gold to customers at a higher price (assuming that they don't absorb the gold price increase), or when gold price comes down in the second half of the year.

So current market price is indeed cheap based on p/b. But the market will only re-rate if profit/dividends recover meaningfully. So whether the company can recover and continue to grow in 2025, 2026, and beyond, is the key.

CTF revealed in its latest results that, for the first time in many years, its number of outlets has reduced. So this might be good for industry players' long-term sustainability as they reduce the ramp up of outlet expansion over the year to better match demand.

All in all, current price still looks like a great bet on Chinese gold jewellery retailing. But there’s also a lot of good hk/prc stocks with similar quality, valuation and yields.

[weijian]

hi gzbkel,

I believe there is seasonality between 1H and 2H for retail jewellers. In the Asian part of this world, peak season is generally from Oct-March. As for gold jewelry retailers focused in Greater China, the traditional peak is in the 1st calender year quarter (Jan-March) due to CNY and Valentine's Day. 1H24 might be affected by non-retail driven impact like bullion hedging losses but Mr Market's reaction is suggesting otherwise. So unfortunately, your H2H comparison below is probably not robust.

Last Monday there was a profit warning, but this profit warning seems to suggest it has turned around, if we compare the last 3 halves:
- 24 first half projected profit attributable to shareholders: 500-550m (As stated in profit warning)
- 23 Second half profit before tax: 475m
- 23 First half profit before tax: 882m

hi karlmarx,
Indeed, it is not hard to see something is cheap. But altogether another thing for a re-rating on the upside to happen. Unfortunately, after re-rating on the downside starts, more in the same direction tend to happen more often than not. Of course, at some point - things will get better but making money as an OPMI is another matter.

So current market price is indeed cheap based on p/b. But the market will only re-rate if profit/dividends recover meaningfully. So whether the company can recover and continue to grow in 2025, 2026, and beyond, is the key.