LUK FOOK HOLDINGS(00590.HK)：DOUBLE-DIGIT SALES GROWTH BOOKED ON THE CHINESE MAINLAND DURING FIRST WEEK OF JULY AMID IMPROVING COVID-19 CONDITIONS-格隆汇

机构：中金公司
研究员：Wenhui SONG/Haiyan GUO/Runbo YANG

　　What's new
　　Luk Fook Holdings announced same-store sales (SSS) for 1QFY23 (April-June 2022): Overall SSS fell 1% YoY. Specifically, SSS of self-operated stores and licensed stores on the Chinese mainland declined 28% and 15% YoY. SSS in Hong Kong SAR and Macao SAR combined rose 2% YoY. In the same period, retail sales value dropped 10% YoY on the Chinese mainland and 1% YoY in Hong Kong SAR and Macao SAR combined.
　　Comments
　　COVID-19 resurgence weighed on 1QFY23 sales in the Chinese mainland and in Macao SAR; SSS in Hong Kong SAR grew rapidly. Chinese mainland: The firm’s overall retail sales value fell 10% YoY due to COVID-19 resurgence in 1QFY23. Specifically, self-operated stores’ SSS declined 28% YoY, and a net four stores were closed. SSS of licensed stores dropped 36% YoY in April, 13% YoY in May and rose 3% YoY in June. The overall SSS of licensed stores slid 15% YoY in 1QFY23, with 40 net store openings. In addition, online sales reported strong performance. In 1QFY23, sales value from e-commerce channels increased 30% YoY. Hong Kong SAR and Macao SAR: Retail sales dropped 1% YoY and SSS rose 2% YoY in 1QFY23. SSS grew 40% YoY in Hong Kong SAR, mainly reflecting improving COVID-19 conditions and consumption vouchers distributed by the Hong Kong SAR government to boost consumption. In contrast, SSS fell 43% YoY in Macao SAR in the same period due to COVID-19 resurgence on the Chinese mainland. However, the SSS improved notably in June thanks to growing number of visitors to Macao SAR as COVID-19 subsided on the Chinese mainland.
　　Gold products outperformed fixed-price jewelry in sales. In 1QFY23, retail sales of gold products and fixed-price jewelry fell 7% and 14% YoY on the Chinese mainland. Online retail sales value grew 38% YoY for gold products and dropped 3% YoY for fixed-price jewelry. In addition, SSS of gold products rose 9% YoY. Specifically, SSS of gold products increased 15% YoY in Hong Kong SAR and Macao SAR combined, but fell 26% YoY for self-operated stores and 13% YoY for licensed stores on the Chinese mainland due to COVID-19 resurgence. Overall SSS of fixed-price jewelry slid 19% YoY. The SSS of fixed-price jewelry dropped 34% YoY for self-operated stores and 20% YoY for licensed stores on the Chinese mainland, and slid 21% YoY in Hong Kong SAR and Macao SAR combined.
　　SSS on the Chinese mainland improved in the first week of July; falling gold prices drove recovery in demand for gold products. Falling gold prices have driven recovery in demand for gold products. This, coupled with easing COVID-19 conditions on the Chinese mainland, has helped narrow the decline in the SSS of self-operated stores to 11%, and drive the SSS of licensed stores up slightly during the first week of July (July 1 -7, 2022). Overall retail sales value booked low-double-digit growth on the Chinese mainland. In the same period, SSS in Hong Kong SAR advanced 116%, with that of gold products surging 161%. However, SSS dropped 76% in Macao SAR due to strengthened COVID-19 containment measures.
　　Financials and valuation
　　We keep our FY23 and FY24 EPS forecasts unchanged at HK$2.76 and HK$3.22. The stock is trading at 7x FY23e P/E and 6x FY24e P/E. We maintain a NEUTRAL rating and our TP at HK$24.57, implying 9x FY23e P/E and offering 26% upside.
　　Risks
　　Sharp fluctuations in gold prices; lingering COVID-19; disappointing end-market retail environment.