Core Viewpoint - Dongwu Securities has initiated coverage on Luk Fook Holdings (00590), a leading jewelry retailer in Hong Kong and mainland China, with a "Buy" rating following its successful acquisition of a controlling stake in King Fook International Holdings in 2024, enhancing its multi-brand portfolio [1] Group 1: Financial Performance - As of FY2025, Luk Fook achieved revenue of HKD 13.34 billion, reflecting a year-on-year decline of 13.0%, and a net profit attributable to shareholders of HKD 1.1 billion, down 37.8% year-on-year [2] - The company reported inventory levels for gold and platinum/price jewelry at HKD 5.46 billion and HKD 5.28 billion, respectively, with increases of 22.9% and 3.0% year-on-year, benefiting from rising gold prices [2] Group 2: Revenue Breakdown - In FY2025, revenue from retail, wholesale, and brand businesses was HKD 11.03 billion, HKD 1.41 billion, and HKD 0.90 billion, showing declines of 13.5%, 8.8%, and 12.6% year-on-year, with respective contributions of 82.7%, 10.5%, and 6.8% to total revenue [3] - Revenue from mainland China and Hong Kong/Macau accounted for 39.5% and 60.5% of total revenue, with respective year-on-year changes of -0.2% and -19.6% [3] Group 3: Brand Strategy - Luk Fook has established a comprehensive multi-brand matrix, including Luk Fook Jewelry, King Fook, and others, catering to diverse consumer needs across various segments [4] - The core brand, Luk Fook Jewelry, had 2,805 stores globally by the end of FY2025, with a new product line "Ice·Diamond Light Shadow Gold" launched in November 2024, utilizing CNC color technology [4] Group 4: Expansion Plans - As of March 2025, Luk Fook operates 3,287 stores across 11 countries and regions, with plans to enter three new countries and add 50 overseas stores over the next three years [5] - The company is focusing on expanding its presence in mainland China through various store styles and enhancing e-commerce sales via celebrity collaborations and IP partnerships [5] Group 5: Profit Forecast - The company is expected to see a steady recovery in performance from FY2026 onwards, with projected net profits of HKD 1.52 billion, HKD 1.73 billion, and HKD 1.93 billion for FY2026 to FY2028, representing year-on-year growth of 39%, 13%, and 12% respectively [6] - The latest closing price corresponds to a price-to-earnings ratio of 10x, 9x, and 8x for FY2026 to FY2028 [6]

Core Viewpoint - The company, a leading Hong Kong jewelry brand, is experiencing operational efficiency improvements and positive same-store sales growth despite challenges from rising gold prices and changing consumer environments [1][2]. Group 1: Company Overview - Established in 1991 in Hong Kong, the company primarily operates under the brand "Luk Fook Jewelry" and has a multi-brand matrix including "Gold to Respect" and "Luk Fook Boutique" [1]. - For the fiscal year 2025, the company achieved revenue of HKD 13.341 billion, with 39.5% from mainland China and 60.5% from Hong Kong, Macau, and overseas markets [1]. - Retail income from offline self-operated stores and e-commerce accounted for 82.7% of total revenue, with a projected increase in fixed-price gold products exceeding 15% [1]. Group 2: Market Trends and Consumer Behavior - The consumption logic for jewelry has evolved to emphasize both fashion and value retention, driven by innovative design and craftsmanship that enhance the fashion appeal of gold [1]. - The company has seen same-store sales growth of 5% and 10% in the second and third quarters of 2025, respectively, indicating a recovery in gross margins and potential stock price appreciation [1]. Group 3: Growth Strategies - The company is actively developing differentiated products that meet market demands, achieving high double-digit same-store growth in gold jewelry sales [2]. - The domestic store optimization focuses on enhancing sales service capabilities and targeting core business districts to sustain same-store growth, while plans to add 50 overseas stores aim to expand global reach [2]. - The recent gold tax reform in Hong Kong is expected to benefit the company by enhancing its brand and price competitiveness, attracting more mainland consumers [2]. Group 4: Financial Projections and Valuation - The company is projected to achieve net profits of HKD 1.501 billion, 1.787 billion, and 2.028 billion for the fiscal years 2026, 2027, and 2028, representing year-on-year growth rates of 36.48%, 19.08%, and 13.44% respectively [2]. - The current market capitalization corresponds to a price-to-earnings ratio of only 9.7X for the fiscal year 2026, with an average dividend yield of 6.26% over the past three years, indicating a favorable investment proposition [2]. - The estimated fair stock price range is set between HKD 31 and HKD 36.5 per share, with an initial coverage rating of "outperform the market" [2].

Investment Rating - The report assigns an "Outperform" rating to the company for the first time, with a target price range of HKD 31.00 to HKD 36.50 per share [5]. Core Insights - The company is a leading Hong Kong jewelry brand that has shown operational efficiency and positive same-store sales growth despite facing challenges from rising gold prices and changing consumer environments. The company achieved a revenue of HKD 133.41 billion in FY2025, with 39.5% from mainland China and 60.5% from Hong Kong, Macau, and overseas markets [1][3]. - The jewelry consumption logic has shifted towards a dual value proposition of "fashion + value preservation," driven by innovative design and craftsmanship, which has enhanced the appeal of gold jewelry. This trend is expected to support margin recovery and drive stock price appreciation [1][3]. - The company is actively developing differentiated products that meet market demands, with a focus on optimizing sales capabilities in domestic stores and expanding overseas [2][3]. Summary by Sections Financial Performance - The company reported a revenue of HKD 133.41 billion for FY2025, a decrease of 12.95% year-on-year, and a net profit of HKD 1.1 billion, down 37.77% year-on-year. Adjusting for gold hedging losses and one-time gains from acquisitions, the decline in profit was narrowed to 6.3% [13][31]. - The forecast for net profit for FY2026 to FY2028 is projected at HKD 15.01 billion, HKD 17.87 billion, and HKD 20.28 billion, representing year-on-year growth rates of 36.48%, 19.08%, and 13.44% respectively [3][4]. Market Trends - The jewelry market is experiencing a shift towards gold products, which are expected to account for 80% of sales by 2024. The demand for gold jewelry is being driven by its perceived value preservation attributes amid rising gold prices [48][53]. - The company plans to open 50 new overseas stores in the coming years, capitalizing on the growing demand from overseas Chinese consumers and the global trend of seeking value-preserving investments [66][68]. Product and Channel Strategy - The company is focusing on product innovation and channel optimization, with a significant portion of revenue coming from self-operated and e-commerce retail, which accounted for 82.7% of total revenue in FY2025 [20][23]. - The introduction of high-margin fixed-price gold products has contributed to margin recovery, with the gross margin for gold and platinum products increasing to 26.35% in FY2025 [31][60]. Competitive Landscape - The jewelry industry is characterized by intense competition, with major players like Chow Tai Fook and Lao Feng Xiang dominating the market. The company holds a market share of 0.7%, ranking tenth among competitors [73].