Chow Tai Fook Jewellery: Key operating metrics deteriorate; Trading at undemanding valuations

Key metrics worsen, offset by better hedging gains and FX. The recent F2Q operating data and investor calls indicate deterioration of all key operating metrics: China SSSG slowed to +2.2% in F2Q from +20% in F1Q and turned negative in October on a high base; POS net closures reached 500 in 1H and FY closures are likely higher than the original estimate; 1H GPM is likely behind the FY27 guidance of 26.5-27.5% on lower gold price and a lower mix of fixed price products. Weaker operating metrics should be offset by higher gold loan hedging gains and favorable FX from RMB appreciation. We cut our FY27E/FY28E EPS by 4%/10% and our PO by 4% to HK$13.6 from HK$14.2, and reiterate Neutral on CTF, which trades at an undemanding 11x FY27E P/E and a 7% yield. CTF will report 1H F27E results in late November and has already announced preliminary profit growth of 90-100% to HK$4.8-5.1bn; we estimate HK$5.0bn net profit and DPS of HK$0.35 on a 70% payout. Given recent gold price weakness, we see pot