LF had a weak 1HFY25 as revenue and NP declined by 27%/54% YoY.

This set of results reflected the issue of high gold price: consumers are hesitant to buy gold products while LF also suffered from higher hedging losses from its gold loan. Although there are signs of improving SSSG since October and November, and the impact of high base in CY2023 may no longer be applicable, we expect LF's 2HFY25 would still be challenging, and store closure could cause short-term pain. Given the uncertainties related to the Chinese market, LF has turned its focus to overseas markets. We believe the contribution in the near term will be limited. Downgrade to HOLD as we believe catalysts would be needed under the current environment, such as its next three-year plan.

Key Factors for Rating

Weak 1HFY25 results below our expectations. 1HFY25 revenue was down 27% YoY to HK$5,449m, as same store sales growth (SSSG) was down 34% YoY during Apr - Sept 2024. Although GPM benefitted from higher gold price and expanded 4.9ppts, hedging losses of HK$230m combined weighed on net profit (1HFY24: gain of HK$50m). Hence, NP was down 54% YoY, worse than our expectations. The results also reflected issues such as: (i) higher admin cost after acquiring the 3DG Jewellery brand in Jan 2024, and (ii) weak wholesale business in mainland China as restructuring was needed.

Some sequential improvement but unlikely material. According to the mgmt., SSSG has demonstrated some sequential improvement when compared to the overall SSSG in 2QFY25 (Jul-Sept 2024), which was down 35% YoY. If this trend persists, mgmt. also expected the overall SSSG of 4QFY25 (Jan-Mar 2025) may also turn positive, given that the impact of high base in CY2023 may no longer be applicable. However, this is also dependent on macro factors such as Chinese economy and gold price movement. We view that Chinese consumers have acted slower than expected in terms of the time needed to adapt to gold price movement when compared to previous cycles, which could weigh on their willingness to spend under harsher economic conditions. Hence, we expect full year same store sales could be slightly below FY23 level.

Faster overseas expansion while China is facing more closures. In 1HFY25, LF had a net store closure of 175, making its total store count to 3,408m still a 4% YoY increase. Yet, we expect net store closure will still be occurring in 2HFY25 given weak sentiment, so total store count is estimated to reach 3,331 by end of Mar 2025, or a 7% YoY decline. To offset that, LF will open more overseas store (+15), but we view that the near-term contribution will be limited.

Key Risks for Rating

n Key downside risks include: (1) prolonged weak consumer sentiment in China; (2) volatility in gold price leading to decline in GPM; (3) store opening below expectation; and (4) likely higher-than-expected SG&A due to competition.

Upside risks: (1) stronger-than-expected demand on gold jewellery; (2) strong gold price that allows higher-than-expected GPM; (3) strong cost control, and (4) unexpected gains related to hedging.

Valuation

We cut our FY25-27 EPS forecast by 13-14% to reflect: (i) weaker consumer sentiment in general, in both Hong Kong, Macau and mainland China; (ii) worse- than-expected impact of high gold price on sales volume, (iii) operating deleverage, and (iv) the hedging losses in 1HFY25 of HK$230m.

Despite stable dividend expected, we believe the near-term valuation will be weighed on the low earnings visibility caused by weak retail market in China and gold price volatility. Downgrade to HOLD. We view that catalysts would be needed for a re-rating, such as the new three-year plan since FY2026, which may be announced in June 2025.

Our TP is lowered to HK$14.7, based on 7x FY2025 P/E (previous: 9x). We believe LF would trade in a lower multiple in the near term, despite already in a depressed valuation, given the uncertainty related to the industry amid an industry-wide down cycle of store count downsizing.