Meeting takeaways: Luk Fook’s FY22 interims outperformed peers

  • Luk Fook posted 124% y-o-y earnings growth for its FY22 interim results ended Sep 2021, which outperformed major peers and run in line with its profit alert that was released a week ago.
  • In its results briefing, management reinstated its accelerated expansion plans in China over the next 3 years; its hopes to maintain positive same-store sales growth (SSSG) in 2H FY22 despite a higher base; plus expectations of supportive profitability.
  • As HK/Macau operations returned to the black, potential re-opening of HK borders to Mainlander visitors over the next 6-12 months should help lifting segmental margin further. We maintain BUY with TP of HK$30.

Key takeaways from results briefing:

  • Luk Fook is very confident that by Mar 2022, the company should achieve its latest target to add 500 stores in China for the full-year of FY22. As the company continues to focus in the mass-luxury segment and sees ample room to open more stores, mainly in the form of licensed stores across lower tier cities of China along with the rise of middle class and the “common prosperity” policy, Luk Fook also targets to open at least 400-500 stores a year during FY23-FY25. 
  • As its e-commerce division continues to see sound growth (+56.8% y-o-y in 1H FY22), while its operating margin is also very comparable to group level, ongoing online performance should continue to bring lucrative returns to the company.
  • At the moment, it is quite difficult to provide guidances for 2H FY22 as visibility remains low. Recent SSSG has also seen a moderating y-o-y momentum for Nov 2021 versus Oct 2021 as the base effect continues to ascend. All in all, Luk Fook still strives to score a positive SSSG and supportive margins for 2H FY22.
  • Specifically, gross margin dropped by 6.4ppt to 26.8% in 1H FY22, mainly attributable to a gradually falling gold price (seeing gross margin of gold products down 9.7ppt to 18.3%) and more promotions to run down some slow-moving inventories (seeing gross margin of fixed price jewelleries down 2.7ppt to 24.5%). As management hopes that its gross margin for gold products could sustain at around a high-teens rate in 2H FY22, overall gross margin could remain supportive h-o-h at >25%.
  • With the change in business strategies to encourage front-line staff to focus more on the slightly higher end products, instead of mainly offering value-for-money jewelleries, average selling prices (ASP) across its fixed price jewelleries more than doubled in HK/Macau markets during 1H FY22 and lifted performance, turning operations back into the black. Specifically, across its self-operated stores in HK/Macau/China, fixed price products saw rising sales contributions from gem-sets (70%) than gold-related products e.g. hard gold jewelleries (30%) in 1H FY22, against 55%: 45% in 1H FY21. Riding on the success, Luk Fook will continue to refine its product-mix so as to help sustaining a gradual increase in ASP.

Summary of FY22 interim results (for Apr-Sep 2021):

  • Revenue up 67.2% y-o-y to HK$5.6bn, attributable to a 112.6% increase in HK/Macau & overseas revenue to HK$2.5bn, and 43.1% increase in Mainland China revenue to HK$3.1bn. Comparing to pre-pandemic 1H FY20, revenue was down by 28.9%. 
  • SSSG for HK/Macau scored 109% while SSSG for Mainland China (self-operated stores) reached 89%; e-commerce also saw 56.8% growth and contributed to 16.3% of group retail revenue, or 51.6% of China retail revenue.
  • In terms of sales performance by business segments: retailing up 102.6% to HK$3.5bn; wholesaling up 26% to HK$1.5bn; and licensing up 39.6% to HK$569m.
  • Operating profit up 101.5% to HK$780m, seeing operating margin also increased by 2.4ppt to 14%. Comparing to pre-pandemic 1H FY20, operating profit was down by 6.9%. 
  • Attributable profit up 124.6% to HK$654m, with net margin rising by 2.9ppt to 11.7%. Comparing to pre-pandemic 1H FY20, attributable profit was down by merely 1.7%.
  • Interim DPS reached HK$0.55, up 10%, at dividend payout of 49%, versus 100.8% payout a year ago.
  • A net opening of 235 stores during 1H FY22 to reach 2,366 stores as of Sep 2021. By 22 Nov 2021, total no. of stores increased further to 2,658, inclusive of 2,589 stores in Mainland China, 45 stores in HK, 15 stores in Macau, and 9 stores in overseas markets.