Overseas Expansion Will Broaden Appeal To Gen Z And Middle-Class Weddings

Key Takeaways

• Expansion into overseas markets, driven by rapid growth and retail initiatives in Mainland China, could boost revenue and diversify earnings.
  
• Operational efficiency via supply chain transformation and targeted brand strategies might enhance net margins and widen market appeal.
  
• Significant revenue challenges due to declining gold sales, operational losses, store closures, and weak market conditions threaten financial performance and profitability.

Catalysts

An investment holding company, engages in sourcing, designing, wholesaling, trademark licensing, and retailing various gold and platinum jewelry, and gem-set jewelry products.

• Luk Fook is optimistic about the immense growth potential in overseas markets, planning a net addition of approximately 15 shops in the current financial year, expected to positively impact future revenue growth.
  
• The company is reallocating resources to expand its footprint globally, with the overseas market having a higher growth rate than others, potentially boosting overall earnings and revenue diversification.
  
• The Mainland Chinese government's policies to boost domestic demand and support retail sentiment might improve macroeconomic conditions, aiding in the retailing business's recovery, thereby potentially increasing revenue and net margins.
  
• Luk Fook is enhancing operational efficiency through supply chain transformation and automation, which might improve net margins by reducing costs over time.
  
• The company is focusing on brand strengthening and expanding its multi-brand strategy to appeal to various market segments, such as middle-class weddings and Gen Z, which could drive revenue growth through broader consumer engagement.

Luk Fook Holdings (International) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Luk Fook Holdings (International)'s revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 13.3% in 3 years time.
• Analysts expect earnings to reach HK$2.2 billion (and earnings per share of HK$2.98) by about February 2028, up from HK$1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, down from 6.5x today. This future PE is lower than the current PE for the HK Specialty Retail industry at 9.2x.
• 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 8.2%, as per the Simply Wall St company report.

Luk Fook Holdings (International) Future Earnings Per Share Growth

Risks

• The significant decrease in revenue by 27.2% due to a decline in sales of gold products could continue to affect the company's future revenue streams and overall financial performance.
  
• The substantial loss of HK$230 million from gold hedging and increasing operational expenses are impacting operating profits, indicating potential challenges in maintaining net margins.
  
• Weak macroeconomic conditions in the Mainland market and continued sluggish demand for diamond products have already decreased revenues and may further lower earnings if recovery is slow.
  
• The closure of numerous stores and the potential slowdown in new store openings may hinder the company's revenue growth and expansion efforts, impacting its ability to increase earnings from retail operations.
  
• Economic uncertainties and high gold prices affecting consumer sentiment could further suppress sales, impacting the overall profitability and posing a risk to revenue recovery.

Valuation

• The analysts have a consensus price target of HK$17.807 for Luk Fook Holdings (International) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$22.08, and the most bearish reporting a price target of just HK$16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$16.6 billion, earnings will come to HK$2.2 billion, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of HK$13.96, the analyst price target of HK$17.81 is 21.6% 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.