20180312-广发证券_香港_-YTD_HK_market_stronger-than-expected_FY18_results_could_beat_9页_757kb

Jewelry Sector Summary

Core Content

The document provides an analysis of the Hong Kong (HK) jewelry sector with a focus on Chow Tai Fook (CTF) and Luk Fook (LF), and their potential performance in FY18 and FY19. It outlines the market conditions, financial forecasts, and valuation insights based on GF Securities (Hong Kong) research.

Main Points

• HK Market Performance:

  • The HK jewelry market has shown stronger-than-expected performance in 2018, with retail sales growth improving to 10% in January 2018 compared to high single-digit growth in 4Q17.
  • Despite the CNY holiday falling in mid-February, CTF experienced double-digit sales growth during the holiday, indicating strong consumer demand.
  • The momentum continued post-holiday, with both CTF and LF expected to post high single-digit sales growth in 4QFY18, which is higher than the previous low single-digit estimates.

• RMB Appreciation Impact:

  • The appreciation of the RMB against the HKD has positively influenced HK retail sales growth, as it increases the purchasing power of mainland tourists.
  • RMB has risen 10% against HKD year-to-date, which is more significant than its appreciation against other Asian currencies like JPY and SGD.
  • This trend is expected to continue, supporting retail sales in HK.

• Store Expansion:

  • Both CTF and LF are expected to expand relatively faster in FY19 to penetrate second and third-tier cities, following the expansion pace of their domestic peers.
  • The expansion is primarily through franchised stores, though the number of net openings may not match FY18 levels.

• Financial Forecast:

  • Chow Tai Fook (CTF):
    • Revised FY18 net profit estimate: HK$4,488m, up 46.9% from previous estimates.
    • Revised FY19 net profit estimate: HK$4,896m, up 9.1%.
    • Revenue growth: 7% in FY19 and 6% in FY20.
    • EPS growth: 9% in FY19 and 10% in FY20.
    • Target price (TP) raised from HK$8.50 to HK$10.30, based on 21x FY19E P/E.
    • The stock is trading at 17.9x FY19E P/E, below its historical average of 19.5x, suggesting a potential undervaluation.
  • Luk Fook (LF):
    • Revised FY18 net profit estimate: HK$1,226m, up 21%.
    • Revised FY19 net profit estimate: HK$1,345m, up 3%.
    • Revenue growth: 6% in FY19 and 7% in FY20.
    • EPS growth: 9% in FY19 and 10% in FY20.
    • Target price (TP) adjusted from HK$29.00 to HK$29.70, based on 13x FY19 P/E.
    • The stock has corrected from a previous downgrade, and the current valuation is considered fair.

• Sector Valuation:

  • The average P/E ratio for HK-listed jewelry companies is lower than the historical average, indicating potential undervaluation.
  • CTF is expected to outperform the sector with higher growth rates and improved profitability.
  • LF is expected to have moderate growth and a more stable valuation.

Key Information

• Catalysts:

  • Release of 4QFY18 data in April.
  • Release of FY18 results in June.

• Market Share:

  • Figures from 2015 show CTF and LF as significant players in the mainland China market.

• Financial Ratios:

  • CTF and LF are expected to maintain strong operating margins and net profit margins.
  • CTF's ROE is projected to increase from 13.9% to 14.4% in FY19, while LF's ROE is expected to rise slightly.

• Valuation Metrics:

  • CTF's TP is set at HK$10.30, reflecting its improved growth and earnings.
  • LF's TP is adjusted to HK$29.70, based on a more realistic P/E multiple.

Summary Table

Figures and Trends

• SSS Trend:

  • Both CTF and LF are expected to show improved sales growth in FY18 and FY19 compared to previous estimates.
  • CTF's SSS growth in HK and Macau is projected to be higher than LF's.

• Store Growth:

  • CTF and LF are expected to increase their store numbers in FY19, especially in second and third-tier cities.

• Valuation:

  • CTF is upgraded from Hold to Buy due to its strong earnings growth and undervaluation.
  • LF is upgraded from Sell to Hold as its valuation is considered fair after a correction.

This summary highlights the positive outlook for CTF and LF in the HK jewelry sector, driven by strong sales performance, RMB appreciation, and store expansion strategies.