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Luk Fook Holdings (590 HK) Company Report Summary

Core Content

This report provides an analysis of Luk Fook Holdings (590 HK), a Hong Kong-based jewelry and watch retailer, focusing on its financial performance, operations, and valuation relative to its peers.

Main Points

Financial Performance

• Revenue: Increased by 14.2% in FY18E compared to FY17, with a forecast of 15,907 HK$ million.
• Recurring Net Profit: Rose by 17.4% YoY in FY18E to 1,193 HK$ million.
• Recurring EPS: Expected to increase to HK$2.03 in FY18E and HK$2.31 in FY19E.
• DPS: Increased to HK$1.15 in FY18E.
• P/E Ratio: Recurring P/E rose to 14.8x in FY18E from 13.3x in FY17.
• P/B Ratio: Decreased to 1.8x in FY18E from 2.0x in FY17.
• ROAE: Improved to 12.7% in FY18E from 11.5% in FY17.

Operations Update

• 2Q18E SSSG: Increased by 17% YoY with HK/Macau and Mainland China (MC) SSSG up by 18% and 11% respectively.
• Gold Sales: Surged by 21% in HK/Macau and 19% in MC due to increased sales volume despite a decline in gold prices.
• Gem-set Jewellery: Mixed performance with strong growth in HK/Macau (18%) and a decline in MC (-2%) attributed to a shift in the Mid-Autumn holiday timing.
• POS Expansion: LF opened one self-operated POS in San Francisco and 33 POS in MC (9 self-operated and 24 franchised), aiming for 80 net POS additions in FY17E.

Earnings Revisions

• FY18E/19E Earnings: Lifted by 4-5% due to higher SSSG.
• Key Revisions:
  • HK/Macau SSSG lifted from 3% to 6%.
  • MC SSSG lifted from 10% to 12%.
• Earnings Growth: Expected to continue, with 2H18E earnings growth at 22% YoY due to HK retail turnaround and HK rental decline.

Valuation Analysis

• Target Price: Raised to HK$33.74 from HK$30.10, with a potential upside of 12%.
• Valuation Gap: LF is valued at 15x P/E, below the sector average of 17x, while CTF trades at 23x P/E, in line with international peers.
• Valuation Comparison:
  • LF's P/E is 15x, while the sector average is 17x.
  • CTF's P/E is 23x, similar to international peers.

Key Information

Shareholding Structure

• Lee Shu Kuan: 46.41%
• Silchester International Investors LLP: 10.99%
• Brandes Investment Partners, L.P.: 5.97%
• Free Float: 55%
• Shares Outstanding: 587 million

Market Performance

• Share Price: Up 45% since the BUY rating was assigned in January 2017.
• CTF Share Price: Up 37% over the same period.
• 12-month Return: 590 HK up 57.4%, HSI up 21.9%.

Valuation Comparables

• HK-listed Peers:
  • Chow Tai Fook (1929 HK): P/E 23x, P/B 2.7x.
  • Chow Sang Sang (116 HK): P/E 15.4x, P/B 1.2x.
• Overseas-listed Peers:
  • Tiffany & Co (TIF US): P/E 26.5x.
  • Pandora A/S (PANDORA DC): P/E 11.1x.
  • LVMH (MC FP): P/E 30.3x.

Conclusion

• Rating: Maintain BUY.
• Valuation Gap: LF's valuation gap with CTF is expected to narrow.
• Growth Outlook: Despite a slowdown in 2H18E, earnings growth is expected to remain strong.
• Key Drivers: Improved consumer sentiment, low base effect, and expansion in POS.