Lower gold price leads to unexpectedly better 2QFY16 for Chow Tai Fook

But overall HK retail conditions continue to slide.

Chow Tai Fook has released key operational data for 2QFY16 (July-to-September 2015) which revealed improving trends in sales in both Hong Kong and China.

According to a research note from CCB International, the company saw 5% retail sales and a 13% SSS decline in Hong Kong, versus 16% and 24% declines in 1Q16.

The recovery in China sustained resulting in 9% positive growth in retail sales backed by 6% SSS growth, compared with flat retail sales and a 7% SSS decline in 1QFY16. CTF cited lower gold price as the reason for its 2QFY16 performance adding that the positive effects “faded” in September as gold prices began to stabilize.

Sales of gold products contributed 57% of CTF's 2QFY16 sales, up 8ppt YoY. SSS of gold products was up 13% YoY, while gem-set jewelry SSS fell 13% YoY.

Here's more from CCB International:

Hong Kong retail market takes a turn for the worse. Better-thanexpected 2QFY16 sales from CTF did not affect our fundamental view that Hong Kong’s retail market remains highly challenging given the deteriorating operating environment, in spite of softening retail rents.

We believe weak trading conditions in Hong Kong will continue to weigh on CTF’s share price and that the positive effect on earnings from higher sales of gold products in 2QFY16 was limited due to the low margins for gold jewelry.

Recovery in China not enough to offset Hong Kong weakness. We maintain our Neutral stance on CTF, as (1) the mild recovery the in China market is unlikely to be sufficient to offset the decline in Hong Kong and (2) Chow Tai Fook’s valuation is undemanding at 10x calendar 2016 P/E.

We make no changes to our forecasts but we lower our target price from HK$10.30 to HK$6.90 based on 10x calendar 2016 P/E (15x previously) to reflect the deteriorating outlook for the Hong Kong retail market.