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Luk Fook Holdings (590 HK) Summary

Core Content

Luk Fook Holdings (590 HK) is a company with a current share price of HK$22.35 and a Neutral rating. The target price (TP) has been adjusted to HK$21.55, reflecting a revised earnings forecast for FY16E-18E due to the ongoing challenges in the HK/Macau market. The company's performance is heavily influenced by its exposure to this region, which accounts for 70% of its revenue and 60% of its earnings. Despite a slight improvement in the mainland (MC) SSSG (Sales, Service, and Supply Growth) forecast, the overall outlook remains cautious due to the political instability and declining consumer spending and arrivals in China.

Main Points

• Earnings Forecast Adjustment: The earnings forecast for FY16E-18E has been lowered by 7% due to the weaker-than-expected SSSG decline in HK/Macau, which was revised from 0% to -10%.
• Mainland Recovery: The MC SSSG forecast was raised from 0% to 3%, indicating a better-than-expected recovery.
• EPS Projections: The FY16E-18E EPS are projected to be 0%, +2%, and +3% respectively, compared to the consensus.
• Rating and TP: The rating remains Neutral, with a new TP of HK$21.55 based on an unchanged FY16E target P/E of 8x. The company's valuation is considered low, but it is expected to remain suppressed due to lack of catalysts and ongoing uncertainties in HK/Macau.

Key Information

• Market Exposure: HK/Macau accounts for a significant portion of the company's revenue and earnings.
• Valuation: Despite the low P/E ratio, the company's valuation is not expected to improve immediately due to the uncertain environment.
• Analyst: The analysis is provided by Eugene MAK.

Macroeconomic Data Comment (2Q15)

• GDP Growth: Q2 GDP grew by 7.0% YoY, flat with Q1, and QoQ growth was 1.7%, up by 0.3 percentage points.
• Industrial Growth: June saw a significant rebound in industrial growth, reaching 6.8% YoY, which was better than expected.
• Tertiary Industry Contribution: The tertiary industry's contribution to GDP increased, rising to 49.5% and driving GDP growth by 4 percentage points.
• Consumer Spending: June consumption grew by 10.6% YoY, better than expected, and is expected to be a key driver for economic stabilization in the second half of the year.
• Fixed Assets Investment: Fixed assets investment in the first half grew by 11.4% YoY, stabilizing after a decline, with a rebound in the source of funding.
• Economic Outlook: Infrastructure investment and consumption are expected to continue driving demand, helping maintain a 7.1% YoY economic growth. However, the impact of the stock market crash on the financial sector and the disappearance of stock market wealth effects on real estate and commodity sales must be considered.

What to Watch

• Economic Data: Key data points include U.S. CPI, China house prices, and other macroeconomic indicators.
• Company Events: Upcoming financial results and dividend announcements are important for tracking performance and investor sentiment.

Research Coverage List

• Auto & Auto Parts:
  • BAIC Motor (1958 HK): BUY, TP HK$13.25, 68% upside.
  • Fuyao Glass (3606 HK): BUY, TP HK$22.7, 30% upside.
• Oil and Gas:
  • Sinopec Oilfield Service (1033 HK): NEUTRAL, TP HK$3.4, 35% upside.
  • China Oilfield Services (2883 HK): NEUTRAL, TP HK$11.9, 13% upside.
• Property:
  • China Resources Land (1109 HK): BUY, TP HK$27.7, 20% upside.
  • KWG Property (1813 HK): BUY, TP HK$7.8, 26% upside.
  • Country Garden (2007 HK): NEUTRAL, TP HK$3.4, 7% upside.
• Technology, Media & Telecom:
  • China Telecom (728 HK): BUY, TP HK$5.4, 24% upside.
  • China Unicom (762 HK): NEUTRAL, TP HK$12.6, 16% upside.
  • China Mobile (941 HK): BUY, TP HK$105.0, 8% upside.
• Retail:
  • Sinomax (1418 HK): BUY, TP HK$1.49, 52% upside.
  • Chow Tai Fook (1929 HK): NEUTRAL, TP HK$7.87, -1% upside.
  • Luk Fook Holdings (590 HK): NEUTRAL, TP HK$21.55, -4% upside.
• Alternative Energy:
  • Datang Renewable Power (1798 HK): SELL, TP HK$0.83, -28% upside.
  • China Wind Power (182 HK): BUY, TP HK$0.78, 47% upside.
  • Xinjiang Goldwind (2208 HK): BUY, TP HK$14.23, 64% upside.
• Banking:
  • ABC (1288 HK): BUY, TP HK$4.76, 30% upside.
  • ICBC (1398 HK): BUY, TP HK$7.51, 32% upside.
  • Minsheng (1988 HK): SELL, TP HK$8.1, -12% upside.
• Gaming:
  • Wynn Macau (1128 HK): NEUTRAL, TP HK$17.0, 11% upside.
  • Sands China (1928 HK): SELL, TP HK$27.6, -13% upside.
  • Galaxy Entertainment (27 HK): BUY, TP HK$38.8, 12% upside.
• Environmental Protection:
  • Technovator (1206 HK): BUY, TP HK$8.2, 48% upside.
  • CT Environmental (1363 HK): BUY, TP HK$8.4, -18% upside.
• Industrial Goods:
  • TK Group (2283 HK): BUY, TP HK$2.21, -15% upside.
  • Wason Group (3393 HK): BUY, TP HK$16.1, 47% upside.

Conclusion

Luk Fook Holdings faces significant challenges due to its heavy reliance on the HK/Macau market, which is plagued by political instability and reduced consumer activity. The company's earnings forecast has been adjusted downward, and its valuation remains subdued. However, there are signs of recovery in the mainland market, which could provide some relief. Investors should monitor the company's performance and the broader economic conditions in HK/Macau closely.