Chow Tai Fook Jewellery Group Ltd - the world's largest jewelry retailer by market value - says weak sales of gold products have led to a 23-percent plunge in the group's half-year profit for this year. Provided to China Daily

Hong Kong jewelry retailer Chow Tai Fook Jewellery Group Ltd will change its inventory management system through a transitional period from 2015 to 2017 - centralizing inventory ownership from branch stores to the group - to accelerate goods circulation and better prepare for the company's online-to-offline (O2O) business expansion on the mainland.

Before the change, there would be a deduction in inventory on the balance sheet once goods were wholesaled to branch stores. Under the new system, the deduction would only be charged when the goods are sold to consumers. Meanwhile, wholesale revenue is only recognized after sales transactions are completed with retail customers.

"The mainland remains our principal market and its performance is usually better than that of Hong Kong and Macao as the e-commerce expansion trend continues on the mainland," Henry Cheng Kar-shun, chairman of Chow Tai Fook, said on Tuesday when announcing the group's latest interim results.

"The change of inventory management will help the company promote O2O interactions when tapping into three-to-four tier cities in mainland markets."

The group opened 158 new stores on the mainland during the six months ended Sept 30 this year, and may open another 100 in the second half of the year.

Mainland business accounted for 58 percent of the group's total revenue in the first half year of 2014. And 57 percent of the revenue recorded in Hong Kong, Macao and other markets were settled in renminbi or through China UnionPay, the group's finance director Hamilton Cheng said.

The retail sales value through e-commerce grew by 47.6 percent, compared with the same period last year.

"The strategy is preparing Chow Tai Fook to adapt to the trend of the O2O business model," said Kent Wong Siu-kee, managing director of Chow Tai Fook.

He also believed it's also good news for franchised store owners. "They won't be exposed to the risk of gold price declines, thus avoiding the risk of profit shrinkage of gold stocks. At the same time, franchised stores will share the same stock with directly-managed stores which will strengthen their investing confidence in Chow Tai Fook," Wong said.

During the three-year transitional period, although the group believes there will be minimal impact on its gross profit margin and hardly any impact on retail sales value, it still forecasts a decrease in net profit of 1 to 2 percent, year-on-year, with a decline in revenue of between HK$4 billion and HK$5 billion in total.

The group's revenue and net profit fell by 22.4 percent and 23.3 percent for the first six months ended Sept 30 to HK$29.32 billion and HK$2.69 billion, respectively, compared with the same period last year.

The decline in revenue was attributed to the high base effect resulting from robust gold sales following a sharp fall in the international gold price during the same period last year.

The mainland's anti-corruption campaign further eroded consumption capacity on the mainland in the first half-year.

Chairman Cheng said he believed the second-half year's performance would outperform that of the first-half.

He also pointed out that the impact from the illegal "Occupy Central" protests is almost over and Chow Tai Fook's business has been recovering since early November along with the local retail market.

gladdy@chinadailyhk.com

(HK Edition 11/26/2014 page9)