Luk Fook (0590)

[bmann025]

Revenue decreased by only 25.1% after last year's 70% increase.
Thus, compared with 2012, revenue increased by 27%, another significant gain of market share.

3 dollars appear to possible for the year - again.

Seems very weird to base market share gain on percentage gain. If comparing with 2012, Luk Fook's sales increased by 1.6bn while Chow Tai Fook's sales increased by 3.8bn. So it seems that Chow Tai Fook is gaining market share more..

(Of course investors look for % increases in the first place)

Retail sales numbers in above postings show an increase of jewelry sales Apr-Sep 2014 vs 2012 of approx.

26% in PRC
4% in HK

Luk Fook's revenue increased by 27%,

Chow Tai Fook's revenue increased by 15% during that period.

Hence Luk Fook grew faster ... again ... and despite depending more on the HK market.


BTW the other points ... I don't know. Analysts at CLSA liked CTF's move of centralizing inventory ownership and called it best practice. I would expect that the major players would copy best practices, if they work.

[bmann025]

A few other notes

1. The dependence on HK has further decreased.

The contribution of HK & Macau retail was 57.8% to the result (see "result of reportable segment" on page 12). As Macau contributed 14.6% of total revenue, the HK retail market now probably generates less than 50% of earnings.

2. Both gross and net margins have increased. Earnings fell less than revenue. That is remarkable, again particularly in comparison with Chow Tai Fook. It is also remarkable, because the gold price fell during the period and Luk Fook hedges less than competitors.

3. The 3D Gold business surprisingly produced significant earnings in the whole sale segment. Whole sale earnings increased by 72 Mill. Without 3D Gold that segment would have likely declined, so the 3D contribution may have been even higher.


http://www.hkexnews.hk/listedco/listcone...126278.pdf

[specuvestor]

Revenue decreased by only 25.1% after last year's 70% increase.
Thus, compared with 2012, revenue increased by 27%, another significant gain of market share.

3 dollars appear to possible for the year - again.

Seems very weird to base market share gain on percentage gain. If comparing with 2012, Luk Fook's sales increased by 1.6bn while Chow Tai Fook's sales increased by 3.8bn. So it seems that Chow Tai Fook is gaining market share more..

(Of course investors look for % increases in the first place)

If market size is $100 and Chow has 3/4 market share and Luk has 1/4 market share, then Chow has to grow $7.50 revenue and Luk $2.50 revenue just to keep up with market growth of 10%. Looking at revenue gain in % terms is correct interpretation of market share gain/loss, not absolute number.

And btw, in Chow Tai Fook's latest filing, it said:

To cope with the ever-changing consumer preferences and retail environment in Mainland China, we have started to optimise our inventory management mechanism. Previously, inventory ownership would be transferred to franchisees, and the amount would be recorded as our wholesale revenue upon inventory delivery to franchisees. Under the optimised mechanism, inventories are dispatched to franchised POS upon the receipt of deposits at value equivalent to the prescribed inventory level. We would retain inventory ownership until sales transactions are completed with retail customers, upon which wholesale revenue is recognised at the prevailing price...

In both Luk Fook's and Chow Tai Fook's annual report, both have similar language for revenue recognition, i.e. revenue is recognised when inventory is delivered to wholesalers. That is until Chow Tai Fook announced the above.

Just wondering,

1. Is Luk Fook's going to change its revenue recognition policy too?
2. If assuming that there was no inventory return policy for the franchisees/wholesalers to begin with, does this mean that Chow Tai Fook is offering to take on inventory risk? Effectively, this makes it really attractive to sign on as a Chow Tai Fook franchisee/wholesaler. Chow Tai Fook is really going all out for market share.

Given the change in accounting policy, I won't be surprised if Luk Fook "outperforms" again in 2H.

(not vested in both)

Interesting highlight because I think originally they don't take inventory risk is that jewelry is high value "transportable" quasi-cash. AFAIK they usually do COD in China for very obvious reasons. Chow inventory risk should be minimal if "receipt of deposits at value equivalent to the prescribed inventory level"?

I am more intrigued by this statement "upon which wholesale revenue is recognised at the prevailing price" which means the franchisee will take on gold price risk cause originally the price been fixed at the wholesale transaction?

[bmann025]

Luk Fook ... surprise ? ... surprise !

Analyst statements have been all over the place, from "in line" (Guotai, Jefferies), "slightly higher than market estimates" (Credit Suisse), "beat estimates" (Merril Lynch, Bocom) to "re-evaluation is expected" (Morgan Stanley). So which was it ?


Actually, no half year estimates had been given in advance, only full year estimates, and the analysts' consensus was 2.67 $ for the year.

http://www.4-traders.com/LUK-FOOK-HOLDIN...revisions/


Looking closer at this estimate, it was inflated by a "fun" estimate of an unknown research house of 3.55 $ in October, when many others had just revised their estimates downwards. The average of the others was 2.57 $.


To partition these 2.57 $ into the 2 half years, one has to keep in mind that

a) the second half is usually the stronger half, because it contains the year's 3 strongest months, December, January, February. This seasonality hasn't been visible throughout all of the last couple of years, mainly due to the gold rush and other gold price fluctuations and, for individual companies, such as Luk Fook, due to waves of new store openings. However, the seasonality exists and should be included in a proper unbiased estimate.

b) H2 of 2013/14 is the best data point for the current H2 2014/15, because the effect of the gold rush was over and the consumer sentiment in HK sluggish and similar to present. Price of gold was declining slowly, also similar to present. Earnings in H2 2013/14 were 1.54 $.

A proper analysis would then have estimated H2 earnings similar to H2 2013/14, conservatively assuming no growth in HK/Macau at slightly increased cost compensated by growth in the PRC.

Subracting H1 2013/14 from 2.57 $ would then have left an estimate of 1.03 $ for H1 2013/14.

The reported earnings were 1.37 $. I would call this "beat estimates" or better.


But this is not all. ALL analysts expected that Luk Fook would perform much worse this year than its main competitors Chow Tai Fook and Chow Sang Sang.

There are 3 reasons for that, all speaking clearly against Luk Fook.

a) Luk Fook had profited much more than anyone else from the last year's gold rush. Expectation was therefore, that Luk had to give back more revenue and earnings than anyone else.

b) Luk Fook has a larger exposure to Hong Kong and Macau than its competitors. It was therefore expected that Luk Fook would suffer more from the sluggish retail climate in HK and profit less from the growing business in the PRC.

c) Luk Fook has by far the lowest hedging ratio. A further declining gold price was supposed to hurt Luk Fook more than its competitors.


Now the results are out and in contrast to ALL analysts' opinions, Luk Fook's earnings declined less than Chow Tai Fook's. A HUGE surprise.


Looking ahead, I would now go along with Bocom's estimate of 3.02 $ this year and 3.58 $ next year. I would also agree with Morgan Stanley that a re-evaluation should be expected. See:

http://www.bocomgroup.com/mediafiles/doc...085_en.pdf
http://www.aastocks.com/en/stocks/news/a...W.640508/1

[Tiggerbee]

More and more HK jewelry and watch retailers are setting up shop in Singapore. To them, it seems that the competitive environment here is less intense compared to HK retail land scape. Chow Tai Fook, Luk Fook, Chow Sang Sang and Emperor watch had expanded to Singapore. Will Hengdeli be next?

[bmann025]

Now on Bocom's 2015 top picks list
http://www.aastocks.com/en/stocks/news/a...W.643944/1

[bmann025]

NEARLY 160,000 PEOPLE PASS INTO HONG KONG AT SHENZHEN BAY, A NEW RECORD

... Mainlanders are apparently flooding into Hong Kong because of the Christmas sales ...

http://www.thenanfang.com/blog/nearly-16...ew-record/

[bmann025]

Number of Jobs advertised on jobsDB of selected companies

Luk Fook 21
Chow Tai Fook 11
Chow Sang Sang 8
Emperor Watch and Jewelry 6

Sa Sa Cosmetic 33
Bonjour 3
Veeko 2

Bauhaus 8
Bossini 5
Giordano 1

Perfect Shape 29
Modern Beauty 5

http://hk.jobsdb.com/HK/EN/Search/FindJo...SSRC=JSRSB

[bmann025]

China Retail Sales December 2014

Jewelry +7.3%

http://www.stats.gov.cn/tjsj/zxfb/201501..._671071.ht…

Month 2013 vs 2012 / 2014 vs 2013 / -> 2014 vs. 2012

Jan+Feb......+14.7%........+9.3%.......-> +25.3%
March..........xxx.........-6.1%
April........+72.2%.......-30.0%.......-> +20.5%
May..........+38.4%.......-12.1%.......-> +21.6%
June..........+30.2%.......-0.2%.......-> +29.9%
July.........+41.7%.......-11.7%.......-> +25.1%
August........+21.8%.......+7.3%.......-> +30.7%
September....+18.2%.......+11.4%.......-> +31.7%
October......+14.0%.......+11.7%.......-> +27.3%
November.....+14.8%.......+11.5%.......-> +28.0%
December.....+16.6%........+7.3%.......-> +25.1%

[bmann025]

The increases above between 2012 and 2014 are extremely similar, hence that comparison appears to be a good measure of long term growth excluding special events.

December was in-line as well and not worse, as might have been expected from Chow Tai Fook's recent quarterly update.

Actually CTF's performance wasn't bad anyways:

Mainland Sales Oct-Dec 2014 vs. 2012
-------------------------------------
China Jewelry Sales (average of 3 months)
+26.8%

Chow Tai Fook
-3% SSSG
+26% revenue growth (2013: +34%, 2014: -6%)

So, Chow Tai Fook's revenue increased at the same pace as the overall market in the 2 year period. A year ago, under the special circumstances, they gained market share, which they now gave back.


Luk Fook does not report revenue, only SSSG. These increased
+21% SSSG (only self operated mainland stores)
during Oct-Dec 2014 vs 2012.

However, the contribution of these stores to earnings is minimal and there is no data yet for the much more important franchise shops. From these, I would expect another market share gain over the 2 year period due to the stellar perfoirmance a year ago, the large increase in number of stores (>+30%) and, of course, an additional market share gain due to the new 3D wholesale business.