Luk Fook Holdings (International) Ltd

HKEX:590

Good evening, everyone. Thank you for joining the call. I am Stephanie from the IR team of Luk Fook.

Today, we have the pleasure to have Dr. Kathy Chan, Executive Director and CFO; and Ms. Nancy Wong, Executive Director and Deputy CEO of the Group, as speakers to talk about our financial year 2019 to '20 Q1 operational results. We will start with a brief presentation on the figures, followed by the Q&A session.

Now may I pass the time for Kathy to read the presentation, please.

Okay. Thank you, Stephanie. Good afternoon, everybody. We have just announced our first Q 2020 sales data. You can see that we've got overall drop of 10% mainly because of the high base and continuing impact of the U.S. trade war under market sentiment but we still enjoyed a positive 4% same-store sales growth for gem-set jewelry against the negative 19% overall for gold, and gold is having a very high base actually in the first quarter of last financial year.

So the high base, actually mostly in Hong Kong and Macau market. And when you look at Hong Kong/Macau, we've got an overall negative 10%; and gold, negative 20%, but we have positive 34% in FY 2019 first quarter and for gem-set jewelry still enjoy a positive 6%, even though we've got a positive 19% same period last financial year.

So for the gem-set jewelry in Hong Kong, actually, we sell very well the low-value items like the 18-karat gold and the Goldstyle products. The Goldstyle is a fixed-price gold -- pure gold product. So although we've got a very much drop of double digit for the average selling price there, for the gem-set jewelry products, but we have very good increase in volume so that we still enjoy a positive growth for gem-set jewelry in Hong Kong/Macau market.

And then for Mainland China, it's both single-digit drop for gold and gem-set jewelry. But you know that for Mainland China, actually self-operated shop only contribute about maybe 7% or 18% of the profits. So most important for us in Mainland market is actually the licensing business and the wholesaling business.

So we have to look at the performance of the licensed shops, and they are doing quite well in the gem-set jewelry category. They've got a low double-digit growth for gem-set jewelry but because of the gold performance is a low single-digit drop. So overall speaking, the -- so the licensed shop is only -- have a low single-digit same-store sales growth overall for Mainland licensed shops.

And then for this -- for the first quarter, these 3 months, we've had net-net addition of 33 shops, of local shops, and it's mostly licensed shops. We've got net-net addition of 37 Mainland licensed shops with 2 self-operated reduction -- 2 reduction for Mainland self-operated and 2 reduction for Hong Kong market.

But then for Hong Kong market, actually we target to have a net-net growth of maybe around 3 shops here in this financial year. So basically, it's only a temporary drop. We should expect that to be going back to growth -- grow again in later stage in this financial year.

And then you may have much interest in the performance in July. So basically, in the first 2 weeks of July, you know that the U.S. trade war is still there, and then we've got the high gold price, and then of course, we need to mention about the demonstration in Hong Kong. So basically, we should not expect good performance in July. And we've got the high base too in Hong Kong/Macau market.

So basically, we've got double-digit drop for same-store sales in both Hong Kong/Macau and Mainland markets in the first 2 weeks of July. But relatively speaking, gem-set jewelry is still doing better than gold products. And then for gem-set jewelry, actually it's kind of a positive figure actually, a little bit of growth in Hong Kong/Macau market in these first 2 weeks of July. And then for Mainland market, it's only a low single-digit drop in our self-operated shops and licensed shops for the first 2 weeks of July.

So basically, that's what I want to talk about.

Thank you, Kathy. Moderator, please open the floor for questions now.

[Operator Instructions] The first question is from Emily from Nomura.

Just a very quick one. Just wondering what's the month-on-month performance in April to June for Hong Kong since the protests started in June? Just wanted to see if June actually deteriorated quite a bit versus what we saw in April to May?

In fact, for Hong Kong/Macau market, June performance was the worst out of the 3 months. And then for both Hong Kong/Macau and Mainland markets, actually, May was the best out of the whole quarter. So for -- and then for Hong Kong market -- for Mainland market, it's actually April was the worst.

Okay. Can I also ask about the rents? Because we mentioned how Hong Kong, we're planning to have a net-net of 3 stores by the end of the year. How should we be looking at the rental situation currently?

In fact, we are going to have 22 renewals in this financial year. And then we expect that to be kind of this low single-digit drop, overall speaking, because for the shopping malls, we're still enjoying kind of a quite good growth. So the rental, we're talking about kind of a double-digit increase. But for the street level or those tourist areas, they have mostly kind of a rental drop. I think that's why Causeway Bay or Mong Kok, they have kind of a rental drop. So that's why, altogether, we expect that to be a low single-digit drop for all those renewals altogether.

Emily, anymore follow-up questions?

No, I'm good.

Your next question is from George from JPMorgan.

I just have a follow-up question about your performance in June. Could you give us some color about -- what's the decline magnitude for -- of the June performance this year? And what's the base last year in June, the year-over-year growth?

In fact, June was the highest base. Last financial year, like Hong Kong/Macau market is obvious talking about 30% growth, same-store sales growth. And then for this financial year, actually, we're talking about a 20% drop in June itself. So it's not really that bad actually. We've given the various macro factors that's affecting the Hong Kong market.

I see. So can I confirm that you said that in June 2018 the growth was about like 30% growth but for the whole quarter, in 2018, it was 26%, which means that actually in June 2018, it doesn't -- it didn't outperform a lot to April and May last year, right?

Because like April, we've got 26% growth and May, we've got 24% growth, so basically, it's the best month, but actually is -- all 3 months was talking about 20-something percent growth in Hong Kong/Macau market in 2018.

2018. I see. So that's pretty balanced the last year but this year on Q1, the weakest.

That's right.

[Operator Instructions] Your next question is from Chris from Templeton.

Just one, you mentioned that the first 2 weeks of July both the Hong Kong and China had double digit, right? So for Hong Kong, are you seeing a similar magnitude as what you have seen in June? Or should we expect that July is actually not as good as June? And then for China, are you referring to your licensed shops or only the self-operated store?

In terms of June, actually, we've got quite high base as well. It's kind of 18% for Hong Kong/Macau market in the last -- in 2018. So basically...

No, no. I mean July, July, July.

Yes, sorry, it's July. I'm talking about July. For the whole month is 18% same-store sales growth the Hong Kong/Macau markets in 2018. So basically, we don't expect very good performance already because actually for all the first half, it's kind of a high base anyway. So we don't expect that to be good anyway. And then with the U.S.-China trade war going on plus the high base and plus the -- really the high gold price, actually you have much more impact than the demonstration itself. So basically, you can see that actually the drop was mainly coming from the gold sales. And for gem-set, it's not really that bad actually. And then for the Mainland market, it's mainly -- what I mentioned just now is that mainly -- is including actually licensed shops and self-operated shops for the 2 -- first 2 weeks of July. They performed quite similarly. But actually, when we talk about the full quarter, these 3 months, so it's just 2 weeks' time, we don't really -- it's not too representative at the moment. For Mainland market, it can be very volatile, even in a very short period of time. So it's not representative at all for the just 2 weeks' performance when we -- to project it for the whole quarter.

Of course, of course. And you say July is -- the double digit, is it as bad as June or you -- just want to get a sense of how the...

You mean the first 2 weeks?

Yes, yes, yes.

I think it's a little bit worse than June but not too much, not too much.

Your next question is from Tiffany from Citigroup.

My question is regarding the gold performance. So in Hong Kong/Macau, I see the volume declines much in line with value decline. But in Mainland China, volume declined more than value. So is there any product mix change in Mainland China?

In fact, for Mainland China, we have to look at the renminbi as well because the same-store sales growth that we have in the announcement is actually talking about local currency for the regions. But for the overall, of course, it's more converted into Hong Kong dollar. So basically, that's why with the renminbi depreciation -- I'm sorry -- and then -- yes, with the renminbi depreciation, actually the international gold price is kind of -- especially in June, it kind of increased by much so with the depreciation in renminbi. The local renminbi gold price will be high, will be kind of on an increased trend. That's why the volume will be much lower than -- the gold price drop will be less than the volume drop, the weight drop.

Okay. So there's no -- I mean the base question...

It's not because of the product mix, not because of that. And you look at Hong Kong/Macau market, it is actually -- gold price in average is not -- it's kind of only minimal difference, minimal drop for the full quarter altogether. So basically, that's why when you look at the volume and the value, it's almost the same.

[Operator Instructions] Next question is from [ Hugo ] from Macquarie.

So first I want to check with you that our gold product performance in July is double digit for both HK and China, right?

Yes.

Okay. And my second question is regarding the GP margin trend for this year. How should we look at the gross profit margin for this financial year?

Of course, with the higher gold price, we should expect -- for short term, the gross margin for gold products should be a bit higher, especially for the first half. But for the full year because we always talk about -- with daily replenishment system, so that's -- for longer-term, actually the gold price will be a bit -- the gross margin or gold sales will be quite stable. That's why in the past 3 years, actually when you look at half year-wise, gross margin may be quite volatile. But when you look at the full year, it's always talking about 15% for the past 3 years. So basically, we should expect kind of a quite -- more stable gold -- gross margin for gold sales for the full year, but for the first half this year, we should expect maybe a higher margin.

I see. How about for gem-set?

Gem-set, it's really quite stable overall speaking.

Your next question is from Shirley from Value Partners.

Actually, I have a question on the Hong Kong side again. You have mentioned about actually the June performance is related to several factors. But if -- can you give us some like -- if you have any sense of like how much impact is really from the Hong Kong protests? For example, on the date of protests, actually how much business you have lost from that? Is there any like numbers you can share with us?

In fact, when you look at those few days, actually we've got only kind of an earlier closure of the shop's operation in those specific areas. Only maybe earlier by maybe 2 hours than normal. So basically, the impact should be minimal. I mean the overall impact should be minimal. So we always talk about the high base and maybe the relatively high gold price would be the major factors for the recent performance.

Okay. Okay. Got it. So actually, there's some news about a lot of retailers are complaining about the protests. But those would be more on the kind of like fast-moving retailer than like gold and gem-set. This is kind of more luxury products, right?

Maybe because when -- by the time we have closed those shops, that actually is only maybe 2 hours before the normal closing hours. So basically during -- mostly during that kind of time -- period of time, the business was not really that hot. So it's not really affecting us too much.

There are currently no more questions in queue. [Operator Instructions] Your next question is from Chris from Templeton.

Kathy, just a follow-up question on the franchise store additions. Are you -- like how should we think about like first quarter, there are 37 stores, right? So is this normal? The first quarter addition should be lower on a -- than the other quarters? Or this is a good reference for the remaining...

Normally, I think we should expect high additions in the third quarter.

Third quarter? Third quarter, July to September?

Or first?

Third quarter should be October to December, our third quarter, fiscal year third quarter.

Okay. Okay, okay. So basically in terms of the addition-wise, we should see the highest number in the third quarter and then followed by first quarter or second quarter?

I have to check. I don't have that.

Okay. So first quarter is not a good reference for -- on the full year basis.

Either way, we talk about targets of 120 net-net. So basically, if you divided that equally over among those 4 quarters, we haven't chased the targets.

[Operator Instructions] Your next question is from Mavis from DBS.

With the view that those later sales trends and also we are seeing very low visibility in near term, what do we see in our cost management front? For example, have we revised our budget in terms of like operating expenses such as advertising and promotional cost and other cost items, please?

We actually monitor the [ equity ] A&P budget from time to time and I would -- usually like below 1% in the past. So then we are closely monitoring these sales and then if there is any change in the expected sales, we'll actually revise the budget for A&P as well.

In fact, I would also say our total operating expense is 70% of that would be most -- would be rental and staff costs. So for rental and staff costs, maybe around -- maybe at least 70% of that will be fixed. So for the variable part, it would be fluctuated in accordance with the fluctuation of the revenue. So basically, we are very cost-conscious company. So basically, we -- apart from this -- actually, for the fixed-cost parts, we don't have much too room to squeeze that. Of course, we would look at that, but you won't see too much room to squeeze that. And then I guess, for the licensing business, because it's kind of often increasing -- growing trend and it's growing quite well, especially we've got quite good targets of net-net additions each year for licensed shops, so basically, I think the growth of the licensing business and the wholesaling business would help -- would be helped -- very helpful in offsetting or reducing the negative impact because of the drop in the retail sales.

Right. Do you mind also share with me the latest plans for wholesale and licensing growth into the first 2 weeks of July, please?

Oh, we don't actually announce that kind of figures. But then we mentioned about the license -- the performance -- the licensed shops. So it would be helpful in indicating or help us to get a [ bit about ] the of performance the wholesale and Licensing business. So basically, for the first quarter, we've opened 37 licensed shops net-net in Mainland China. So that would be helpful for the Licensing business and the wholesale revenue for the growth of those 2 business.

And then the other parts for the existing licensed shops, we have to look at these same-store sales growth figures for the licensed shops in Mainland China. So basically, for the first 2 weeks of July, we got kind of a double-digit drop for licensed shop as well, but then when you look at just the gem-set jewelry, it's kind of a low single-digit drop only.

Right. And lastly on e-commerce sales, could you give us an account as to performance in recent months, in the first quarter?

Well, target is to grow by 20% compared to last year and then in the first quarter, actually exceeded that by a certain amount. So we're on track. Yes.

Your next question is from [ Hugo ] from Macquarie.

Kathy, I just want to follow up to check if you're going to maintain the full year gross target? Last time, you mentioned it's flattish growth for both HK and China.

The growth target, you mean...

Yes, for the full year.

For the -- the growth target is -- we'll talk about the -- at shop -- the shops, the net-net additions. We have a full year target of -- actually 150 net-net, but then about -- around 120 will be coming from the Luk Fook -- existing Luk Fook shops and around 30 will be coming from new brands. So basically, we haven't changed any plan for that. We will still stick to that. And then we actually expect that to -- expect that our real figure -- actual figure will be better than that. That's our minimum.

And then for the same-store sales growth, actually, we talk about having a very high base in the first half and a low base in the second half. That's why we expect for the first half, we make kind of a drop, and second half, we should have somewhat -- some kind of growth. That's why for the full year, we are talking about maybe -- altogether, maybe kind of a flattish growth. And we still want to maintain kind of a profitability in FY 2019.

There are currently no more questions in queue. [Operator Instructions] There are currently no more questions in queue. I'd like to hand the call over back to Stephanie. Please continue.

Thank you, moderator, and thank you to our speakers. At the moment, we don't have any questions. And thank you, everyone, for joining the call and have a nice evening.

Thank you. Buh-bye.

Thanks, bye.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.