Hong Kong and Macau retail relayed the mainland wholesale business and became the main driving force for the company's growth, maintaining the FY24 results announced by the rating company on June 28. Revenue also increased by 28.0% to HK$15.3 billion, and net profit to mother rose 37.6% to HK$1.77 billion, slightly lower than Bloomberg's agreed expectation of HK$1.84 billion. We believe the main reason is that the rapid increase in gold prices led to FY24 gold loans recording a loss of HK$20.19 million (FY23 profit 38.43) million yuan). By business structure, FY24's retail/wholesale/brand business revenue was +45.3%/-28.3%/-1.8% year-on-year. Among them, retail sales mainly benefited from a 52.9% increase in Hong Kong and Macau business revenue to HK$9.89 billion, replacing the new growth engine for mainland wholesale business growth (FY24 mainland wholesale business fell 30.0% to HK$1.43 billion). Considering that the industry is under some pressure on sales and increased competition in the short term due to fluctuations in gold prices, we lowered the company's FY25-26 net profit forecast to 1.66 and 1.8 billion HKD (previous value 1.91 and 2.22 billion HKD), and added the FY27 net profit forecast of HK$2.03 billion to mother. The reference company averaged 10xPE over five years. Considering that the company's wholesale business in the mainland is still being adjusted, the company was given FY25 7.8xPE, maintained a target price of HK$22.08, and maintained an “gain” rating.
The company actively adjusted its business structure. Retail/gold replaced wholesale/price-priced jewelry as a new growth engine. Previously, Lukfu had an advantage in mosaic products, and completed the rapid expansion of stores in mainland China in combination with a flexible gold procurement supply chain. In recent years, gold products are popular, and the share of industry sales has gradually increased. The company has adapted to the trend and increased its own channels. Compared with FY22 and FY24, the retail/wholesale/brand business FY22 contributed 0.36/0.42/0.96 billion HKD, respectively, and FY24 contributed 1.24/0.19/0.72 billion HKD to segment net profit, respectively; by product, gold, platinum, and priced jewelry FY22 contributed 0.98/1.26 billion HKD, respectively, while FY24 contributed segmental net profit of HK$2/1.42 billion respectively. Overall, the company has flexibly completed the switching of growth engines.
The FY24 channel expanded steadily, adding 81/379 new owners/franchisees. The overall SSSG +31.9% increase in gold product strength enabled the company to maintain a fast pace of channel expansion in FY24. The number of self-operated stores/franchised stores added 81/379, including 67/376 new self-operated/franchised stores in mainland China, and 14/3 new self-operated/franchised companies in Hong Kong, Macao and other regions. Although the expansion of Hong Kong, Macao and other regions is slower than that of mainland China, comprehensive customs clearance has led to a rapid increase in passenger flow between Hong Kong and Macau. FY24 SSSG +39.6% in the Hong Kong and Macau market, which is significantly higher than the -2.4% SSSG in the mainland market.
Along with the stabilization of gold prices in the second half of the year, the company's same-store sales are expected to resume. The new brand is also expected to contribute additional volume. From April to June 21, the company's Hong Kong, Macau/Mainland SSSG is -35%/-20%, under some pressure. We believe it is mainly due to the continuous rapid rise/rapid decline in gold prices, which suppressed consumer demand in the short term. As gold prices stabilized, consumer wait-and-see feelings gradually disappeared, and we believe that sales are expected to resume. Furthermore, the company launched the secondary brand Love LUKFOOK JEWELLERY in May 23 and acquired the Gold Supreme brand in January '24. As the new brand business gradually matures, it is also expected to contribute new revenue growth to the group.
Risk warning: Gold prices are fluctuating, consumer confidence is slowly recovering, and store expansion plans fall short of expectations.