20181129-中国银河国际证券-六福集团-00590.HK-Good_1HFY19_Earnings_but_Lower_Earnings_Visibility—HOLD_6页_816kb

Luk Fook Holdings [590.HK] Summary

Core Content

Luk Fook Holdings reported its 1HFY19 earnings, showing strong performance in both Hong Kong and mainland China. The Company's revenue increased by 25.1% YoY to HK$7,859m, with a notable 40.9% YoY growth in mainland China. This growth was attributed to the expansion of its franchising business and strong demand from franchisees and its wholesaling operations. The Company's EPS for 1HFY19 rose by 27% to HK$1.13, exceeding market expectations.

However, the report highlights a decline in Same-Store Sales Growth (SSSG) in early-Q3 FY19, which may indicate a slowdown in consumer demand. This uncertainty, combined with the weak performance in October and early November 2018, has led to a cautious outlook. The Company maintains its guidance for double-digit SSSG in Hong Kong and single-digit in mainland China for FY2019, along with a store opening pace of over 120 stores for the full year.

Main Points

• 1HFY19 Earnings Highlights:

  • Revenue increased by 25.1% YoY to HK$7,859m.
  • EPS rose by 27% to HK$1.13, better than market expectations.
  • Mainland China revenue grew by 40.9% YoY, driven by franchisees and wholesaling.
  • Hong Kong benefited from tourist demand, while mainland China's SSSG was flattish.

• Challenges and Concerns:

  • Gross Profit Margin (GPM) fell by 2.5ppt to 23.7%, primarily due to a product mix shift (gold has lower GPM) and margin pressure from the wholesaling business.
  • The SSSG decline in early-Q3 FY19 raises concerns about the sustainability of growth.
  • Investors are expected to remain cautious due to the lower earnings visibility and the need to assess the impact of the mainland China franchising expansion.

• Financial Forecasts:

  • Revenue forecasts for FY19E and FY20E were raised by 3% due to the better-than-expected franchise business.
  • EPS forecasts were revised slightly to HK$2.49 and HK$2.65 for FY19E and FY20E respectively.
  • The target price was lowered to HK$24.9, based on a 10x FY19E PER, reflecting the higher equity risk premium due to uncertainty.

• Key Financials (FY2016–FY2020E):

  • Revenue: HK$14,031m (FY2016) to HK$18,648m (FY2020E)
  • Net Profit: HK$959m (FY2016) to HK$1,556m (FY2020E)
  • Net Margin: 6.8% (FY2016) to 8.3% (FY2020E)
  • Basic EPS: HK$1.63 (FY2016) to HK$2.65 (FY2020E)
  • PER: 15.4 (FY2016) to 9.5 (FY2020E)

• Investment Highlights:

  • Strong growth in both regions, but concerns about SSSG and margin pressure.
  • The Company's guidance for FY2019 remains unchanged.
  • Free cash flow was negative in FY19E, indicating potential liquidity concerns.

Key Information

• Market Cap: US$1,883m
• Shares Outstanding: 587.1m
• Auditor: PwC
• Free Float: 54.7%
• 52-Week Range: HK$23.65–HK$37.2
• 6-Month Average Daily T/O: US$3.21m
• Major Shareholding: 39.89%
• Analyst: Tony Li, CFA
• Head of Research: Wong Chi Man, CFA
• Investment Rating: HOLD (downgraded from BUY)
• Target Price: HK$24.9 (-0.8% from close of HK$25.10)
• Equity Risk Premium: Justified due to lower earnings visibility

Financial Ratios

• Gross Margin: 23.2% (FY2016) to 23.5% (FY2020E)
• Operating Margin: 8.6% (FY2016) to 9.8% (FY2020E)
• Net Margin: 6.8% (FY2016) to 8.3% (FY2020E)
• ROA: 9.0% (FY2016) to 10.5% (FY2020E)
• ROE: 11.1% (FY2016) to 13.2% (FY2020E)
• Quick Ratio: 1.5x (FY2016) to 0.7x (FY2020E)
• Current Ratio: 5.3x (FY2016) to 4.3x (FY2020E)
• Basic BPS: HK$14.89 (FY2016) to HK$20.04 (FY2020E)

Store Growth and SSSG

• Total Stores (1H FY19): 1,725 (Self-operated: 223, Licensed: 1,502)
• SSSG Trends:
  • Overall: -37% (2Q FY2017) to 14% (2Q FY19)
  • Gold: -47% (2Q FY2017) to 23% (2Q FY19)
  • Gem-set Jewellery: -14% (2Q FY2017) to 18% (2Q FY19)
  • Mainland China: -23% (2Q FY2017) to 4% (2Q FY19)
  • Hong Kong & Macau: -39% (2Q FY2017) to 17% (2Q FY19)

Conclusion

Luk Fook Holdings experienced strong 1HFY19 earnings due to robust retail performance in Hong Kong and rapid expansion in mainland China. However, the lower earnings visibility and the SSSG decline in early-Q3 FY19 have led to a cautious outlook and a downgrade to HOLD. The Company's growth in franchising is expected to mitigate some of the weakness in mainland China, but the impact of margin pressure and the uncertain economic environment remain key concerns. The revised target price reflects a more conservative valuation due to these factors.