Summary of LUK FOOK Holdings Conference Call Company Overview - **Company**: LUK FOOK Holdings - **Date**: January 16, 2026 Key Industry Insights - **Market Dynamics**: The adjustment of value-added tax (VAT) in mainland China and the appreciation of the Renminbi have enhanced the price competitiveness of the Hong Kong and Macau markets, attracting more mainland tourists, which benefits LUK FOOK's retail business in these regions. Approximately 75% of tourists in this market are from mainland China [2][7]. - **Product Differentiation**: LUK FOOK has introduced differentiated products such as ice diamonds and IP collaboration items, with gold-inlaid diamond products showing particularly strong performance, effectively driving overall sales growth and achieving double-digit growth in the mainland market [2][5]. Financial Performance - **Sales Growth**: The company expects double-digit growth in both revenue and profit for the full year, with profit growth anticipated to outpace revenue growth [3][25]. - **Gold Price Impact**: The demand for fixed-price gold products remains strong, with average transaction prices increasing by 50-60% due to rising gold prices, leading to increased sales volume [2][8][10]. Store Network Strategy - **Store Management**: LUK FOOK has been optimizing its store network by reducing the number of stores in lower-tier cities while increasing the number of direct-operated and premium brand stores. The company has accelerated its overseas expansion, expecting to complete the goal of opening 50 new stores within three years ahead of schedule [2][6][20]. - **Store Closures**: In the first three quarters of 2025, approximately 200 stores were closed, with a net closure of over 170 stores in the first half of the fiscal year [6]. Pricing Strategy - **Price Adjustments**: LUK FOOK has raised gold prices twice in the fourth quarter, with an 8% increase in weight-based gold prices due to VAT changes. The sales differences before and after price adjustments are gradually decreasing [11][21]. Product Performance - **Gold and Diamond Sales**: The sales of K-gold and diamond products are recovering, but the sales increase of weight-based gold products has been more significant due to recent gold price hikes [10]. - **New Product Launches**: The Tang Palace Night Banquet series has performed well, accounting for about 1% of overall sales, with plans to introduce more IP series in the next three years to maintain market competitiveness [12][29]. Overseas Market Insights - **Market Performance**: The overseas market is performing better than the mainland, with North America showing significant sales levels comparable to Hong Kong. The company plans to open more brand franchise stores in the U.S. and Southeast Asia [2][18][20]. - **Profitability**: Most overseas direct-operated stores are profitable, with a profit margin reaching double digits [30]. Consumer Behavior - **Tourist Spending**: The price difference between the Hong Kong/Macau markets and the mainland positively impacts sales, with an increase in tourist numbers and a decrease in purchasing through agents [7]. Future Outlook - **Growth Projections**: The company anticipates that the overall performance will exceed previous expectations, with a focus on maintaining a stable growth trajectory through strategic store openings and product differentiation [25][30]. Additional Considerations - **Dividend Policy**: The dividend policy remains unchanged, with a minimum dividend of HKD 1.1, and a payout ratio of 45% for amounts exceeding this threshold [26].

Summary of LUK FOOK Holdings Conference Call Company Overview - **Company**: LUK FOOK Holdings - **Industry**: Jewelry Retail Key Points and Arguments Impact of VAT Reform - The VAT reform in mainland China has benefited LUK FOOK, as small gold shops faced significant challenges, leading consumers to shift towards branded gold shops for weight-based gold purchases, thus boosting sales for LUK FOOK [2][4] - Despite the challenges, the fixed-price gold segment remains the primary growth driver, with expectations of continued popularity [4] Sales Performance - In October and November 2025, LUK FOOK experienced strong performance in the mainland market, with fixed-price gold sales more than doubling in October due to a price increase announcement [3] - November data showed that weight-based gold sales outperformed fixed-price gold, indicating that the price adjustments did not negatively impact sales significantly [10] Pricing Strategy - The company has raised prices by 7%-8% due to the VAT reform, which is expected to reflect positively in gross margins in the second half of the fiscal year [7][15] Market Expansion Plans - LUK FOOK aims to expand its overseas presence, targeting the opening of 50 new stores in three years, with eight new stores already added by mid-2025, including a new store in Vietnam [8] - The overseas market is performing well and is a key focus for future growth [8] Local Market Strategies - To counteract the decline in tourist spending in Hong Kong, LUK FOOK plans to enhance local consumer marketing strategies [6] - The company is focusing on promoting local consumption to mitigate the impact of reduced mainland tourist spending [6] Performance in Duty-Free Shops - The Hainan duty-free shops have shown exceptional performance, with sales in October and November increasing by approximately 70% year-on-year, particularly in weight-based gold products [12] Challenges and Adjustments - The mainland market saw a net reduction of 179 stores in the first half of 2025, with an expected total of over 200 closures for the year, but a return to net growth is anticipated in fiscal year 2026 [4][18] - The company is also addressing the increased costs from the VAT reform by adjusting pricing strategies to maintain competitiveness [9] Product Performance - The ice diamond series currently accounts for about 4% of total revenue, with growth seen in gold-inlaid diamond products, while 18K gold-inlaid diamond products are experiencing a decline [13] Profitability Outlook - Despite a rise in gold prices in 2025, the increase in gross margin is not expected to match that of 2024. However, the company anticipates that gross margins in the second half of the fiscal year may exceed those in the first half [15][23] Consumer Behavior Insights - The company has noted that consumer sensitivity to price increases is manageable, as evidenced by the performance of weight-based gold sales post-price adjustment [10] Regional Market Differences - The Macau market benefits from a price advantage of over 20% compared to mainland China, attracting more tourists, while Hong Kong's performance is more subdued due to a lower proportion of mainland tourist spending [11] Future Expectations - The company expects strong sales performance during the upcoming Chinese New Year, particularly if Valentine's Day coincides with the holiday, which could further boost sales [24]

Core Viewpoint - The new tax policy on gold, announced by the Ministry of Finance and the State Taxation Administration, aims to differentiate between investment and non-investment demand for gold, leading to significant market reactions and price fluctuations in gold products [2][5]. Market Reactions - The gold market has shown a clear division, with investment gold bars experiencing price increases and some products being taken off the shelves. For instance, the price of investment gold bars at certain stores has risen by over 100 yuan per gram compared to pre-policy levels [2][3]. - Different brands exhibit varied strategies; for example, Chow Tai Fook maintains its online prices while others like Century Origin have suspended sales of investment gold bars entirely [3]. Price Adjustments - The price of diamond-studded gold jewelry is also being adjusted due to rising raw material costs and the new tax policy. Some brands are temporarily halting sales to reassess pricing structures [4]. - The overall increase in gold prices has a cascading effect on related products, with some brands reporting price hikes of 5%-8% for gold jewelry [7]. Consumer Impact - The new tax policy has led to increased costs for consumers, particularly for those purchasing investment gold through non-exchange channels, where additional VAT burdens are passed on to buyers [6][7]. - Consumers are advised to consider purchasing gold through banks or exchange platforms to benefit from lower tax burdens and better pricing [7]. Tax Policy Details - The new tax policy specifies that from now until the end of 2027, transactions involving standard gold through the Shanghai Gold Exchange will be exempt from VAT, which is expected to influence market dynamics significantly [8]. - The policy also differentiates between investment and non-investment gold, applying different VAT treatments based on the nature of the transaction [8].

Core Viewpoint - The recent adjustments in tax rates for gold and diamonds are expected to directly impact the pricing of jewelry products promoted by leading brands, with a notable increase in consumer costs anticipated due to these changes [1][3]. Tax Policy Changes - The announcement from the Ministry of Finance and the State Administration of Taxation regarding gold tax policies was released on October 29, effective from November 1, 2023, until December 31, 2027, replacing previous tax regulations [1]. - The new tax policy categorizes gold usage into investment and non-investment types, with more significant tax adjustments for non-investment purposes [3]. Impact on Retail and Consumer Behavior - Retailers, such as Chow Tai Fook and Lao Pu Gold, have already adjusted prices multiple times this year, and the uncertainty surrounding further price changes due to the new tax policies adds pressure on brands [4]. - The introduction of a 7% tax on processed gold products, including jewelry, is expected to increase costs for consumers, although immediate price changes were not observed on the first day of the new policy [3][6]. Market Dynamics and Consumer Trends - The trend towards fixed-price gold products, particularly those featuring diamond inlays, has shown strong revenue potential, as evidenced by Chow Tai Fook's recent financial performance [4]. - The adjustment in tax policies may lead to a shift in consumer purchasing behavior, with potential growth in "goldsmith" shops that offer processing services for investment-grade gold purchased directly from banks [8]. Industry Implications - The new tax structure is likely to affect various segments of the gold supply chain, particularly wholesalers and retail stores, as they may be compelled to raise prices in response to increased costs [6][8]. - The retention of tax incentives for investment-grade gold at trading exchanges is expected to keep domestic gold prices aligned with international rates, minimizing extreme price fluctuations [9].

Core Viewpoint - The recent adjustments in tax rates for gold and diamonds are expected to directly impact the pricing strategies of leading jewelry brands, particularly those promoting diamond-studded gold products. The announcement of these tax changes has created a sense of urgency and uncertainty in the market, especially with the sudden implementation of the gold tax policy on November 1, 2023 [3][7]. Tax Policy Changes - The announcement from the Ministry of Finance and the State Administration of Taxation regarding gold tax policies was released on October 29, 2023, and is effective from November 1, 2023, until December 31, 2027. This announcement also repeals previous tax regulations from 2002 and 2008 [3][7]. - The new tax policy categorizes gold usage into investment and non-investment types, with more significant tax adjustments for non-investment purposes. Non-investment gold transactions will be exempt from VAT and can issue ordinary invoices, allowing buyers to deduct 6% of the invoice amount as input tax [7][15]. Market Reactions - Initial observations from jewelry stores in South China on the day of the new tax policy's implementation indicated that the price adjustments had not yet been reflected in the products available for sale [8][10]. - Leading jewelry brands, such as Chow Tai Fook and Lao Pu Gold, have been pushing fixed-price gold products, which are not directly tied to fluctuating gold prices. These products have shown strong revenue-generating capabilities, as evidenced by Chow Tai Fook's recent financial performance [8][10]. Industry Impact - The new tax policy is expected to have a cascading effect on the entire gold industry supply chain, particularly affecting wholesalers and retail stores. The increase in tax burden on raw materials will likely compel retailers to raise prices [10][12]. - The potential rise of gold processing shops is anticipated, as consumers may seek to purchase investment-grade gold directly from banks and then process it independently, circumventing the new tax implications [12][15]. Consumer Behavior - Despite the uncertainty surrounding price adjustments due to the new tax policies, consumer interest in gold-studded products remains high, with significant foot traffic observed in stores on the policy's implementation day [10][12].

Core Viewpoint - The adjustment of gold and diamond tax rates is expected to increase the cost of purchasing jewelry, impacting leading brands' pricing strategies in the market [1][2]. Group 1: Tax Policy Changes - The announcement regarding the adjustment of gold tax rates was made on October 29, effective from November 1, 2023, until December 31, 2027, which has led to the cancellation of previous tax policies [1]. - The diamond tax rate adjustment was announced earlier, allowing the market to prepare, while the gold tax policy change was more sudden [1]. Group 2: Impact on Jewelry Brands - Leading jewelry brands like Chow Tai Fook and Lao Pu Gold have been pushing fixed-price gold products, which are not directly tied to fluctuating gold prices, indicating a shift in pricing strategy [2]. - The recent tax adjustments have created pressure on brands, although it remains unclear if they will raise prices in response to the new tax policies [2]. Group 3: Industry Chain Effects - The impact of the new gold tax policy is anticipated to be most significant on the B-end of the gold industry chain, including suppliers, wholesalers, and retail stores [3].

Core Viewpoint - The recent adjustments in tax policies for gold and diamonds are expected to increase the cost of jewelry for consumers, impacting major brands that have been promoting diamond-studded gold products. The announcement of these changes has created pressure on retailers, although immediate price adjustments have not yet been observed in stores [1][4][10]. Tax Policy Changes - On October 29, the Ministry of Finance and the State Administration of Taxation announced changes to gold tax policies, effective from November 1, 2023, until December 31, 2027. This includes the cancellation of previous tax exemptions for diamonds, which will now be subject to a 13% VAT [1][4]. - The new gold tax policy categorizes gold usage into investment and non-investment types, with more significant tax adjustments for non-investment purposes. Non-investment gold transactions will be exempt from VAT, allowing buyers to deduct 6% of the invoice amount as input tax [4][18]. Market Impact - Retailers, such as Chow Tai Fook and Lao Pu Gold, have reported feeling pressure from the new tax policies, although they have not yet raised prices in response to the changes. Store employees indicated uncertainty about future price adjustments due to the recent tax changes [9][10]. - The adjustments are expected to affect the entire gold industry supply chain, particularly impacting wholesalers and retail stores. The new tax structure may force retailers to increase prices to maintain margins as they face higher costs for raw materials [13][16]. Consumer Behavior - Observations from retail locations indicate a significant consumer interest in gold products, particularly those that have undergone multiple price increases this year. However, many customers are hesitant to make immediate purchases, reflecting uncertainty in the market [13][10]. - The introduction of the new tax policies has led to a temporary halt in price adjustments by retailers, as many are choosing to observe market reactions before making changes [16][10]. Future Trends - The new tax policies may lead to a rise in the popularity of gold processing shops, as consumers might seek to purchase investment-grade gold directly and process it themselves to avoid higher retail prices. This shift could challenge the traditional pricing models of established jewelry brands [16][18]. - The tax policy retains certain benefits for investment-grade gold, which may help stabilize prices in the market and prevent extreme fluctuations compared to international gold prices [18].

Core Viewpoint - The gold jewelry industry is facing significant challenges due to rising gold prices, leading to a decline in sales for most companies, while Lao Pu Gold stands out with strong performance [1][5]. Company Performance - Chow Tai Fook's revenue for the fiscal year 2025 was HKD 89.656 billion, a decrease of 17.5% year-on-year, primarily due to external macroeconomic factors and high gold prices affecting consumer spending [1][11]. - The net profit attributable to shareholders was HKD 5.916 billion, down 8.98% year-on-year, with operational profit increasing by 9.8% to HKD 14.746 billion after excluding losses from gold lending contracts [1][4]. Product Segmentation - Revenue from gold jewelry products increased by 105.5% to HKD 12.782 billion, while weight-based gold jewelry revenue fell by 29.4% to HKD 57.955 billion [2]. - Diamond-studded products saw a decline of 13.8%, but gold-studded diamond products experienced over 100% growth [2]. Store Operations - Chow Tai Fook closed 905 stores, ending the fiscal year with 6,644 stores, while improving average monthly sales per store to over HKD 10 million from HKD 9 million [4][11]. - The gross margin for the fiscal year was 29.5%, an increase of 5.5 percentage points, attributed to a higher proportion of high-margin products and rising gold prices [4]. Market Trends - The overall gold jewelry industry is underperforming, with A-share companies reporting a revenue decline of 4.73% to CNY 171.91 billion and a net profit drop of 17.75% to CNY 4.907 billion [5][6]. - In Q1 2025, the industry saw a revenue decline of 25.22%, but some companies showed significant profit improvements, indicating a recovery in overall profitability [5][6]. Strategic Transformation - Chow Tai Fook is shifting its strategy from rapid store expansion to enhancing store quality and product differentiation, launching new series that cater to diverse consumer preferences [11][12]. - The company is also focusing on high-end product offerings and collaborations with popular IPs to attract a broader customer base [11]. Financial Strategies - Following a high dividend announcement, Chow Tai Fook issued a 5-year convertible bond to raise HKD 8.8 billion for business development and store upgrades, despite a decline in cash flow [12]. - The market reacted negatively to the financing move, with Chow Tai Fook's stock price dropping by 7.29% [12]. Conclusion - The fiscal year 2025 is seen as a critical period for Chow Tai Fook, as it attempts to transform its business model by focusing on high-margin products and strategic partnerships, while navigating the challenges posed by rising gold prices and market saturation [13].

Investment Rating - The investment rating for the company is "Outperform the Market" [5][3]. Core Views - The company's revenue for the fiscal year 2025 was HKD 89.556 billion, a decrease of 17.75% year-on-year, while the net profit attributable to shareholders was HKD 5.916 billion, down 8.98% year-on-year. The decline in revenue was primarily due to high gold prices suppressing end demand and losses from gold lending contracts. However, after excluding the impact of fair value changes in gold lending, the operating profit was HKD 14.746 billion, reflecting a strong operational resilience with a year-on-year increase of 9.8% [1][9]. - The retail value decline narrowed to 1.7% year-on-year in April-May, compared to a 11.6% decline in January-March. Notably, same-store sales of gold jewelry and products in mainland China (excluding Hong Kong, Macau, and Taiwan) achieved a positive growth of 0.9% [1][9]. - The company has seen a significant increase in high-margin priced products, with revenue from priced gold jewelry products growing by 105.5% year-on-year to HKD 12.782 billion, accounting for 14.6% of total retail sales, an increase of 8.8 percentage points [2][11]. - The average monthly sales per store exceeded HKD 10 million, up from HKD 9 million the previous year, despite a net closure of 905 stores, bringing the total to 6,644 stores [2][11]. Financial Summary - The company's gross margin for fiscal year 2025 was 29.5%, an increase of 5.5 percentage points year-on-year, benefiting from a higher proportion of high-margin priced products and rising gold prices. The sales expense ratio was 9.7%, up 0.95 percentage points, influenced by declining revenue and increased marketing expenses [2][15]. - The company forecasts net profits for fiscal years 2026 and 2027 to be HKD 7.062 billion and HKD 8.104 billion, respectively, with a new forecast for fiscal year 2028 at HKD 9.049 billion, corresponding to P/E ratios of 18.3, 16, and 14.3 times [3][19].