Overseas Expansion And E Commerce Shift Will Drive Strong Long Term Upside

Catalysts

About Luk Fook Holdings (International)

Luk Fook Holdings is a leading jewelry retailer and wholesaler with a growing global footprint and multi-brand portfolio focused on gold and gem-set products.

What are the underlying business or industry changes driving this perspective?

• Accelerating expansion in overseas markets, including entry into Vietnam and planned penetration into additional Asian and European countries, is expected to broaden the revenue base, lift overall sales growth and enhance earnings resilience through geographic diversification.
• Rapidly scaling and higher ticket e-commerce operations in Mainland, with online revenue already a large share of Mainland retail and higher average selling prices, are poised to drive structural revenue growth and may improve net margins through a more asset-light channel mix.
• A shift toward higher margin fixed-price jewelry and differentiated proprietary collections, supported by successful IP collaborations and premiumization, is expected to support strong gross margins and expand operating profit over time.
• Structural market share gains from smaller gold retailers in Mainland, following VAT policy changes and rising gold prices, position Luk Fook to capture incremental volume at attractive pricing, which may support same-store sales growth and bolster gross profit and earnings.
• A company-wide focus on operational efficiency, including automation, big data and AI applications, tighter inventory management and lower rental renewals, is likely to further leverage operating expenses and improve operating margin and return on equity.

Assumptions

This narrative explores a more optimistic perspective on Luk Fook Holdings (International) compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Luk Fook Holdings (International)'s revenue will grow by 13.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.7% today to 10.3% in 3 years time.
• The bullish analysts expect earnings to reach HK$2.2 billion (and earnings per share of HK$3.81) by about December 2028, up from HK$1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the HK Specialty Retail industry at 11.5x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business is benefiting from unusually high gold prices that have pushed gross margin to a record 34.7%. However, if gold prices stabilize or fall over the long term while hedging remains at 20 to 25 percent, the tailwind from inventory revaluation and premium pricing could reverse and compress gross margin and earnings over time.
• Inventory days have stretched to over 490 days alongside a significant build in gold products, and net borrowings have risen 282 percent to around HKD 1.1 billion driven by gold loans. If demand normalizes or weakens, the group could face working capital strain, higher financing costs and potential write downs that pressure net margin and return on equity.
• Long-term consolidation in Mainland China, including a currently guided net reduction of about 200 shops in the full year and sustained closures of weaker licensed stores, may limit physical distribution scale and dilute the franchise effect. This could slow revenue growth and reduce the high margin licensing contribution to group earnings.
• The strategy to rely more heavily on wholesaling and licensed shops in Mainland China and overseas exposes the company to partners that may underinvest in brand, service and in-store execution over time. This could erode brand equity, reduce pricing power and weigh on both retail revenue growth and group operating margin.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Luk Fook Holdings (International) is HK$40.35, which represents up to two standard deviations above the consensus price target of HK$31.26. This valuation is based on what can be assumed as the expectations of Luk Fook Holdings (International)'s future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$40.35, and the most bearish reporting a price target of just HK$23.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be HK$21.7 billion, earnings will come to HK$2.2 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of HK$24.86, the analyst price target of HK$40.35 is 38.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.