20160624-美银美林-Still_attractively_valued；reiterate_Buy_13页_764kb

FY16 Results Summary: Luk Fook Holdings

Core Content Overview

Luk Fook Holdings (LF) reported FY16 earnings that fell by 40.6% to HK$959 million, primarily due to a 7% decline compared to BofA Merrill Lynch (BofAMLe) estimates and a 5% drop in sales. Despite the earnings miss, the company retained a Buy rating due to the expectation of earnings bottoming out and a favorable 8.5x forward P/E. Additionally, the Price Objective (PO) was retained at HK$18.70, with the valuation lifted to 10.5x FY17E P/E, aligning with the 1x PEG on a 10% CAGR in FY17–19E EPS and peer trading averages.

Key Financial Performance

• Sales:

  • FY16: HK$14.03 billion (-11.9% YoY)
  • FY17E: HK$13.46 billion (-4% YoY)
  • FY18E: HK$13.68 billion
  • FY19E: HK$14.295 billion

• Earnings:

  • FY16: HK$959 million (-40.6% YoY)
  • FY17E: HK$1.043 billion (+9.0% YoY)
  • FY18E: HK$1.177 billion (+12.9% YoY)
  • FY19E: HK$1.268 billion (+7.8% YoY)

• EPS:

  • FY16: HK$1.63
  • FY17E: HK$1.78
  • FY18E: HK$2.00
  • FY19E: HK$2.16

• Dividend per Share:

  • FY16: HK$1.10
  • FY17E: HK$0.92
  • FY18E: HK$1.00
  • FY19E: HK$1.08

• Free Cash Flow per Share:

  • FY16: HK$3.44
  • FY17E: HK$3.87
  • FY18E: HK$1.70
  • FY19E: HK$2.35

Margin and Cost Trends

• Gross Margin:

  • FY16: 23.2%
  • FY17E: 23.2%
  • FY18E: 23.0%
  • FY19E: 23.0%

• Operating Margin:

  • FY16: 8.6%
  • FY17E: 9.6%
  • FY18E: 10.4%
  • FY19E: 10.6%

• Net Margin:

  • FY16: 6.8%
  • FY17E: 7.7%
  • FY18E: 8.6%
  • FY19E: 9.0%

• Net Margin Expansion:

  • Expected to increase by 90 basis points to 7.7% in FY17 due to recovery in gross margins and reduced operating expenses.

• Operating Expenses:

  • Opex ratio is expected to fall to 14.7% of sales in FY17, driven by lower staff and A&P costs.
  • Rental cost is expected to remain stable with new store openings, but street-level shops saw a 30–40% drop in costs.

Cash Flow and Valuation

• Free Cash Flow:

  • FY16: HK$2.022 billion
  • FY17E: HK$2.273 billion
  • FY18E: HK$999 million
  • FY19E: HK$1.381 billion

• Net Debt:

  • FY16: -HK$2.032 billion
  • FY17E: -HK$3.508 billion
  • FY18E: -HK$3.987 billion
  • FY19E: -HK$4.809 billion

• Valuation:

  • P/E: Increased from 9.0x to 10.5x for FY17E.
  • Free Cash Flow Yield: Rose from 19.7% to 22.2% in FY17E.
  • EV/EBITDA: Reduced to 5.8x in FY17E from 6.2x in FY16.

Investment Rationale

• The company is rated Buy due to earnings bottoming out, recovery in margins, and improved cash generation.
• Gold price trends are expected to benefit LF, as it has a lower hedging ratio (15–20%) compared to peers.
• Re-rating is anticipated as sentiment towards gold stocks improves.
• Dividend payout ratio increased to 67.5% in FY16, a 10-year high, and is expected to remain at 40% in FY17.

Company Description

• Founded in 1991, LF is a leading jewelry retailer in Hong Kong and the PRC.
• Engages in sourcing, designing, wholesaling, and retailing of gold, platinum, gemset, gemstones, and jadeites.
• Has 1,383 POS in China (90% licensed), 63 in Hong Kong/Macau and North America.
• HK/Macau accounts for 75% of revenue and 66% of EBIT.
• Listed on HKSE in 1997.

Sales and Market Trends

• SSSG (Same Store Sales Growth):
  • FY16: -12%
  • FY17E: -4%
  • FY18E: -1%
  • FY19E: +1%
• Mainland Visitors to Hong Kong: Expected to narrow the decline in FY17, with SSSG expected to decline to 10%, representing 60% of LF's sales.
• Wholesale Revenue: Still under pressure but expected to improve with continued store openings.
• Retail Sales Growth in China: Expected to increase by 15% due to self-operated store expansion.

Inventory and Dividend

• Inventory Balance: Fell by 14.2% to HK$6.35 billion.
• Inventory Turnover: Increased from 209 to 238 days.
• Dividend Ratio: Increased to 67.5% in FY16 and is expected to remain at 40% in FY17.

Key Metrics and Ratios

• ROE:
  • FY17E: 11.7%
  • FY18E: 12.4%
  • FY19E: 12.6%
• ROA:
  • FY16: 8.7%
  • FY17E: 9.7%
  • FY18E: 10.5%
• P/B (Price to Book Value): 1.1x

Valuation Comparison

• Luk Fook:
  • P/E 2016: 10.7x
  • PEG 2017: 1x
  • P/B 2015: 13.6
• Peer Comparison:
  • Chow Tai Fook: P/E 15.4x, PEG 18%
  • Chow Sang Sang: P/E 20.0x, PEG 18%
  • Hengdeli: P/E 12%, PEG 15%
  • Lao Feng Xiang: P/E 2.411x, PEG 6%

Summary of Key Changes

Analysts and Contact Information

• Tina Long, CFA: Research Analyst, Merrill Lynch (Hong Kong), +852 3508 3732, tina.long@baml.com
• Chen Luo, CFA: Research Analyst, Merrill Lynch (Singapore), chen.luo@baml.com
• Kevin Zhao, CFA: Research Analyst, Merrill Lynch (Hong Kong), kevin.zhao@baml.com

Disclaimer

• The report is not registered/qualified as a research analyst under FINRA rules.
• Conflict of Interest: BofA Merrill Lynch does business with issuers covered in its research reports.
• Important Disclosures: Refer to pages 11 to 13 for more information.