Luk Fook - a Growth Story with Further Re-Rating Potentials

Topics: Retailing, Gold as an investment, Mainland China Pages: 20 (4836 words) Published: December 27, 2010

Date: 5 November 2010 HSI: 24,535.63 Share Price: HK$20.55 Target Price: HK$28.10 Potential Return: +37%

A Growth Story with Further Re-rating Potentials
High growth stock at ex-growth valuation – Despite its 98% share price rally since its better-than-expected FY10 results reported in July 2010, Luk Fook remains undervalued in our view, as it is still only trading at 13.9x FY3/11 earnings with a FY10-13 EPS CAGR of 24.7%. At our target price of HK$28.10, which implies a potential upside of 37%, the counter would still be trading on 19.0x FY3/11 PE, which we believe is attainable, as contemporary HK retailers expanding rapidly in China are trading at well over 20x. An overlooked China consumer play – Sasa (178 HK), I.T (999 HK) and Emperor Watches (887 HK), all being HK based retailers expanding rapidly in China, are trading at an average 25.7x PE for the current year, with similar growth outlook as Luk Fook. Another luxury play, Hengdeli (3389 HK), a leading retailer of international brand watches in China, is trading at 30.5x PE for the current year with a 3-year EPS CAGR of 29.5%. Compared with such peers, we believe Luk Fook’s growth potential is under-appreciated and further re-rating exist. Licensing model helps rapid and low-cost China expansion – Luk Fook’s expansion in China through the licensing model allows much faster expansion with minimal capex requirements. In addition, this licensing model makes good use of Luk Fook’s “know-how” and its licensees’ “know-who” in 2nd and 3rd tier cities, thus allowing synergies. The company targets to add ~100 outlets in China every year, implying ~20% YoY growth. Growing number of mainland tourists and their wealth are the strong tailwind to luxury retail sales in HK – For the first nine months in 2010, visitor arrivals to HK rose 23.7% YoY to 26.18m, of which 63.0% are mainland tourists. During the same period, retail sales of jewellery, watches & clocks, and valuable gifts rose 37% YoY, thanks to the increasing wealth of mainland tourists visiting HK and their desires to buy luxury goods. Luk Fook, being an established HK brand trusted by mainland customers, is well poised to benefit from such ongoing trend. COMPANY BACKGROUND: Luk Fook is a leading jewellery retailer in HK and China. The company opened its first retail outlet in HK in 1991, and became listed in 1997. Luk Fook engages in the sourcing, designing, wholesaling and retailing of a variety of gold jewellery, gold ornaments, gem-set jewellery, jadeite, gemstones and other accessory items. The company currently has over 600 retail outlets in HK (37 self-operated stores), Macau (6 self-operated stores), Canada & US (3 self-operated stores) and China (~560 outlets, which comprises ~40 self-operated stores and ~520 licensee stores). EARNINGS DATA Year to 31 March Net profit

HK & China Retail
SHARE INFORMATION Ticker 590 HK Market cap HK$10,121m Issued shares 492.5 m Ent value HK$10,148m Net debt to equity 0.01x 3-year EPS CAGR (FY10-13) 24.7% PEG 0.56x BVPS HK$3.38 Price/BVPS 6.1x 6-mth avg daily turnover HK$18.5m Estimated free float 41.3% ROE 32.0% ROA 17.4% 12-mth high/low HK$21.00/4.46 Major shareholder Mr. Wong Wai-sheung - 51.8% Exchange rate RMB1 = HK$1.16 SHARE PRICE CHART HK$ 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 m shares 10 5 0 Nov Jan Mar May Jul Sep Nov Luk Fook HSI (rebased)



YoY% YoY%

2010A 531.6 1.079

+81.3 +81.3

2011E 729

+37.1 +37.1

2012E 874



+20.0 +20.0

2013E 1,030


+17.8 +17.8

Source: Bloomberg, South China Research
1 mth 3 mths 6 mths 12 mths Share price chg +17.8% +59.8% +130.4% +339.1% Relative to HSI +8.6% +40.4% +95.0% +286.8%

Consensus EPS DPS PE EV/EBITDA Yield EARNINGS FORECAST Year to 31 March Turnover EBITDA Depreciation & amortization EBIT Net finance expenses Associate Profit before tax Tax Minority interests Net profit...
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