20180628-中国银河国际证券-六福集团-00590.HK-FY18_Results_Better_Than_Expected._U_G_to_BUY_7页_927kb

Luk Fook Holdings [590.HK] Summary

Core Content

Luk Fook Holdings (590.HK) reported FY18 results that exceeded expectations, with an EPS of HK$2.33, representing a 35% year-over-year increase. The company's performance was positively influenced by operating cost improvements due to negative rental reversion in Hong Kong. The outlook for FY19E and FY20E has been upgraded, with EPS forecasts adjusted to HK$2.49 and HK$2.63, respectively, implying 6.7% and 5.8% YoY growth. The target price (TP) has been raised to HK$37.3 from HK$33.6, while the target 2019E PER remains at 15x. The rating has been upgraded to BUY, citing a good trading opportunity following a 20% drop from recent highs.

Main Points

• FY18 Performance:

  • Revenue increased by 13.8% to HK$14,578m.
  • Net profit rose to HK$1,369m, up 34.7% YoY.
  • GPM reached 25.7%, while OPM expanded by 1.0 ppt to 11.1%.
  • One-off items contributed to the positive net profit, including a tax adjustment (HK$37m) and a net exchange gain (HK$37m).

• Hong Kong Market:

  • Performance in Hong Kong improved significantly, with a full-year SSSG of +9% (FY17: -20%).
  • Operating leverage played a key role in the improved performance.
  • Preliminary Q1 FY19 SSSG exceeded 20%, indicating continued momentum.
  • Rental reversion benefits may decline, but the segment is expected to perform well due to recovering tourist arrivals.

• Mainland China:

  • Revenue growth was driven by store expansion.
  • SSSG was relatively weak in 2H FY18.
  • GPM for gold products was negatively affected by the normalization of gold prices.
  • The company engaged in a price war in its wholesaling business, which reduced GPM for gem-set products.
  • Intensified competition from peers like Chow Tai Seng may pressure margins in the future.

• Financial Forecast Adjustments:

  • EPS forecasts for FY19E and FY20E were raised by +11.2% and +8.7% respectively.
  • The company is expected to maintain a stable dividend of HK$1.1/share, with a payout ratio returning to around 40%.

• Key Financials (FY18):

  • Total revenue: HK$14,578m
  • Net profit: HK$1,369m
  • Basic EPS: HK$2.33
  • Net margin: 9.4%
  • Operating margin: 11.1%
  • ROE: 13.6%

• Market Data:

  • Market Cap: US$2,248m
  • Shares Outstanding: 587.1m
  • Free Float: 54.7%
  • 52-Week Range: HK$25.15–HK$37.75
  • 6-Month Average Daily T/O: US$4.26m

• Key Assumptions:

  • Total POS (points of sale) increased to 1,641 in FY18.
  • The company plans to resume expansion in FY19E with no more than five new stores.
  • SSSG in Hong Kong and Macau was strong in the first quarter of FY19.

Key Information

• Dividend Policy: Luk Fook maintains a stable dividend payout of HK$1.1/share, which is expected to remain consistent in future years.
• GPM Pressure: The gross margin for gold products is expected to normalize to 13–14%, while gem-set products may face mild margin pressure due to competition.
• Investment View: The company's forward-looking performance and stable dividends make it an attractive investment, especially after the recent price correction.
• Risk-to-Reward Ratio: The current valuation appears attractive, with the TP at HK$37.3, representing a 24.1% increase from the close of HK$30.05 on June 27, 2018.

Summary Table

Investment Highlights

• Positive Surprise: Better-than-expected FY18 results due to lower operating costs and one-off gains.
• Regional Outlook:
  • Hong Kong and Macau are expected to perform well due to improved tourist arrivals and rental reversion benefits.
  • Mainland China will continue to expand through a wholesaling/franchising model, despite margin pressures.
• Valuation:
  • The company's current TP is HK$37.3, with a 15x target PER for FY19E.
  • The price has dropped over 20% from its recent high, making it an attractive entry point.

Disclaimer

This report is issued by Galaxy International Securities and is not intended for distribution to any person or entity in jurisdictions where it would be unlawful. The report is based on information believed to be reliable but not guaranteed. No representation or warranty is made regarding accuracy or completeness. Past performance is not indicative of future results.

Analyst Certification

The analyst certifies that the views expressed in this report reflect their personal opinion and not necessarily the views of China Galaxy International. No part of their compensation is tied to the specific views in the report.

Equity Rating Explanation

• BUY: Indicates that the share price is expected to rise by more than 20% within 12 months.
• SELL: Indicates that the share price is expected to fall by more than 20% within 12 months.
• HOLD: Indicates no clear catalyst for a change in rating.