Citi Research estimated that HK market accounts for about 20% of Chow Tai Fook Jewellery's (CTF)(01929) operating profit in FY2019, and it also expects HK operation to maintain profitable in FY2020 despite potential -27% SSSG in its model.
Therefore, the research house expects the earnings drag from HK operation to be manageable, and group earnings decline to be at a single digit in FY2020, given mainland China's growth.
In the worst case of a structural downturn in HK, Citi thinks store closure and inventory destocking could help release cash for the potential dividend payout. It expects HK to be less relevant to CTF over time (20%+ of revenue and 10%+ of OP in FY2020), and the China growth outlook to remain solid given CTF's strengthening product capability and
accelerating store penetration.
Citi maintained its "buy" rating on CTF, with a target price of HK$9.4.