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An excellent analysis from Mak1421 at valueinvestorclub
(25-01-2015, 04:14 PM)bmann025 Wrote: [ -> ]An excellent analysis from Mak1421 at valueinvestorclub

I tend to agree with most of points in this analysis report.

Here is my opinion:

Corporate Governance: LF's CM and MD role by same person vs CTF's separate role for CM and CEO.
Also LF's top two ED's salary much higher vs CTF, relative to profit.
Minus points for LF.

Growth Potential: China good growth potential for LF vs CTF. Asset light business model is scalable business.
Balance Sheet: Very strong due to Franchise model, requiring low inventory and low borrowing.
Gold Price fluctuation risk: Though CTF has high hedging, risk is high again due to high inventory of gold.

Attached detail of above based on Fy14.

Overall: I prefer LF vs CTF due to franchise model, asset light model, low risk of gold price fluctuation risk, less reliant on borrowing. This can sustain dividend and growth for LF.

This is only my person opinion. I am vested.
Just 2 notes, and 2 questions:


There was a downgrade by Macquarie this week, stating:
"However, it noted that Luk Fook has the highest exposure to HK, which accounted for 74% of group profit."

That statement is wrong.

In the interim report (page 12) results from retail HK+Macau (563 mill) combined is only 58% of total profit (973 mill). Including "wholesale HK" (62 mill) it would be 64%.

The contribution of HK alone (without Macau) would be roughly around 50%.

Question 1:
Anybody knows what external customers are connected with the "wholesale HK" segment?

2. Chow Tai Fook

Again there were varying views on CTF's Chinese New Year (CNY) data. HK/Macau continued the slump from last December, but China turned around impressively.

Overall, there was a significant improvement, compared with the last reported quarter from -10% to +9%.
Gemset same store sales growth went from -12% to +26%, due to the sensational 62% increase in China.

Question 2: Anybody knows how this 62% increase in gemset sales came about?

CNY Retail Sales Value growth (in brackets 0ct-Dec 2014)
China 22% (-6%)
HK/Macau -24% (-16%)
Combined: +9% (-10%)

GemSet Same Store Sales Growth
China 62%
HK/Macau -17%
Combined +26% (-12%)
Due to the slowdown in HK and Macau retail sales, various estimates have been revised.

Here is my guesstimate for Oct 14 - March 15:

For Luk Fook HK/Mac, data (Oct-Dec, 18 days around CNY, 2-3 new shops) indicates a decrease in revenue of about 10%-15%, while earnings may decrease about 15% due to higher cost at a slightly improved sales mix.

The new 3D Gold wholesale business may compensate for about 5% (3D revenue was 9% of Luk Fook revenue in last reports), so the mainland business would have to compensate a 10% decrease in HK/Macau.

Last year Mainland retail/wholesale/license contributed about 27% of earnings (perhaps 30% including overseas, scrap mainland, online mainland ?), so mainland income would have to increase by about 23% (=70/30*10%) to compensate.

Which is possible with the 10% increase in overall mainland jewelry market Oct-Dec, continued market share gains and the formidable 65% increase of gemset sales reported for the 18 days around CNY (and similar for Chow Tai Fook).

There is likely additional pressure from the declining gold price, but this is a one time effect.

The contribution of non HK/Macau business would then leap to contribute almost 40% of earnings.

The next interesting data point will be China retail sales for January+February on March 11. It will be interesting to see if the increases in sales reported by Luk Fook and Chow Tai Fook are consistent with the overall market, or not.

UOB attributed the increase in gemset to Valentine's day which this year also fell into the CNY reporting period. However, there was no such increase for gold and no similar gemset only effect in HK, and in 2013 with the same constellation, no such huge effect as well. So I have another theory, that in part, Luk Fook and Chow Tai Fook managed to bring customers, not willing to travel to HK this year, into their mainland shops.
Look like a perfect storm for HK retailers : Lower currency elsewhere, Occupy Central, Slower Chinese economy, Clampdown on corruption...
(16-03-2015, 04:29 PM)Contrarian Wrote: [ -> ]Look like a perfect storm for HK retailers : Lower currency elsewhere, Occupy Central, Slower Chinese economy, Clampdown on corruption...

With PE at 8 or so, non Hk/Macau business contributing now around 40% of earnings (my guess), Macau likely to recover with new hotels, HK business appears to be valued now at around 0.
Luk Fook 590 appears to be still misunderstood by some analysts.

One of them wrote last month:

'We believe Luk Fook has limited exposure to China (74% of its total revenue came from HK/Macau (1H FY3/15) versus
42% for Chow Tai Fook (1H FY3/15) and 56% for CSS (1H14)).'

Revenues are separated geographically on page 12 of the interim report:

Retail HK/Mac contributes 73.8% of revenue but including wholesaling HK, that revenue is even 77.9%. However the main interest is not revenue but earnings. Significant earnings arise from Mainland China licensing, which contributes 0 to revenue. If we look at earnings,
Mainland Retail + Mainland Wholesale + Mainland Licensing contribute 36% to earnings before tax.

Compare THIS figure with Chow Tai Fook:

CTF does not report the splitted figures, but I think they may be roughly estimated from the taxes paid and the tax rates given in their report, page 60:

(check the subsequent computations by yourself, these are estimations and I can not give guarantee for correctness)

Taxes paid:
HK tax 274 Mio @ tax rate 16.5% -> earnings 1661 Mio
Macau tax 23 Mio @ tax rate 12% -> earnings 192 Mio
Mainland tax 398 Mio @ tax rate 25% -> earnings 1592 Mio

(The sum of earnings is 3445 Mio, matching well with 3440 pre-tax profit given in the report, despite some additional adjustments made and a lower tax rate for some businesses in China)

HK then contributes 48.2% to CTF's earnings.
Macau contributes 5.6% to CTF's earnings.
Mainland China contributes 46.2% to CTF's earnings.

Compare it to Chow Sang Sang:
Again computed from the taxes paid and tax rates given, page 14 of their last report

Taxes paid:
HK tax 130 Mio @ tax rate 16.5% -> earnings 788 Mio
Elsewhere tax 152 Mio

Profit before tax 1362 Mio

HK contributes 57.8% to CSS's earnings.
Elsewhere contributes 42.2% to CSS's earnings.

Elsewhere is Mainland China, Macau and a Taiwan combined. I did not find further information to separate the 3 regions. But simply assuming a similar contribution from Macau like CTF and neglecting Taiwan, Mainland China would contribute about 37% to CSS's earnings.

Here the numbers again:

Estimated contribution of Mainland China to earnings

Luk Fook 36%
Chow Sang Sang 37%
Chow Tai Fook 46%

the Shanghai listed jewelry company's 2014 profits were slightly lower than Luk Fook's and during the last 12 months, revenue estimates have been revised downwards very similarly as well.

However, this stock has just doubled in the last 12 months and its PE is now about 3 times higher than Luk Fook's.

... Just another angle to conclude that Luk Fook's main business in HK and Macau, is now valued at 0.
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