• We revise up our FY26 and FY27 gross margin by 0.5ppt and 0.25ppt, respectively, to 35.1% and 35.6% along with strong gold demand and higher gold price (up 30%+ since Oct 2025)
• Riding on a much lower gold hedging ratio (25%) and its strongest exposure in HK/Macao versus major peers, the company stands at one of the best position to seize better sales momentum and operating leverage, especially given the gold price uptrend amid mounting macro uncertainties, and widened price gap between Mainland China and HK/Macau as RMB strengthens. 
• Structural catalysts also including accelerated expansion of higher-margin overseas operations, completion of store network optimization in Mainland China by end-FY26, distinctive brand positioning and competitive differentiation versus peers. We revise up FY26-FY27 earnings by 5-8% and upgrade our Target Price to HKD36.74.

Key takeaways of recent group call with management 

Major growth drivers. Three factors fueled the exceptional performance of HK/Macao: 1) Recent VAT regulation change in Mainland China to cut VAT rebates from 13% to 7% prompted price hikes, further widening the price advantage for gold products in HK/Macao; 2) Successful concerts and events in HK/Macao attracted Mainland visitors; 3) RMB appreciation. Positive sales trend in 3Q FY26 has continued into Jan 2026, with expectations for a strong Chinese New Year holiday sales next month. Luk Fook also had a net reduction of 40 shops in 3Q FY26, primarily closing underperforming stores in lower-tier mainland cities. The company anticipates a return to net store addition in Mainland China by FY27. Overseas expansion is also accelerating, with 9 new licensed shops opened in 3Q FY26, and an aim to open over 30 net new overseas shops in FY27, to meet its 3-year target of 50 new shops. Overall, management expects double-digit revenue and faster profit growth for FY26, supported by record high gross margins along with strong sales volume and lower-cost inventories following the swift gold price surge. 

Latest financial performance & gold price dynamics. Management confirmed strong Jan 2026 trends, with HK/Macao growth supported by a lower base and favourable dynamics, while mainland sales were impacted by a high base from the prior Chinese New Year. In response to record-high gold prices, the company plans further price increases for fixed-price gold products in mainland China, following adjustments in Oct and Dec 2025. Margins remain robust: standard gold product margins are stable at 20-25%, while fixed-price gold items enjoy margins around 40% or more. Despite rising gold prices, its low hedging ratio (c.25%) means the majority of inventory benefits from the rally, and there are no plans to alter this long-term policy.

Growth catalysts: near-to-medium term drivers. Luk Fook's compelling growth trajectory is underpinned by a multi-pronged catalyst framework that differentiates the company from major peers. Sustained high gold prices (with the company's low 25% hedging ratio acting as a structural tailwind), a strengthen RMB to augment price gaps between Mainland China and its HK/Macao operations that the company enjoys one of the highest exposure versus competitors, and the exceptional performance of its Hainan duty-free business (8 stores) provides immediate earnings momentum. Luk Fook’s strategic pivot to overseas expansion (targeting 30+ net new licensed shops in FY27, with international revenue contribution set to rise from 9% to 10-15%) also diversifies revenue streams while reducing Mainland China dependency. Its unique brand positioning - leveraging Hong Kong heritage, IP collaborations, and social media engagement - creates sustainable competitive moats. These catalysts are not merely cyclical but structural for the medium term, positioning Luk Fook to outperform peers who lack either the geographic diversification, margin resilience, or brand differentiation strategy.

Q&A Summary

Q1: Can you quantify the growth trends for January (Q4 FY26) across different markets?

A:​ In January, Hong Kong & Macao saw high growth due to a lower base last year and the three positive drivers mentioned. Mainland China saw a drop due to a very high base from last Chinese New Year (which was in January last year versus February this year). Overseas markets saw double-digit growth early in January, moderating to low single-digit growth later in the month due to a high base. The true picture will be clearer after combining January and February figures.

Q2: With rising gold prices, when and by how much will you raise prices for fixed-price gold products?

A:​ Pricing is adjusted irregularly based on market movements. In Hong Kong/Macao, adjustments are almost automatic. In mainland China, prices were raised in late October 2025 and again in December due to the VAT change. Another increase is planned for January 2026 due to recent record-breaking gold prices.

Q3: What are the margins for standard gold products and fixed-price gold products?

A:​ The margin for standard gold products (sold by weight) is stable at around 20-25%. For fixed-price gold products, margins are higher, typically around 40% or more, though they are affected by gold price fluctuations as retail prices are adjusted.

Q4: Are you concerned about selling less gold by weight? Are you considering changing hedging ratios?

A:​ Our business focuses on earning the spread, so nominal sales value growth is satisfactory. We replenish inventory daily based on weight sold to maintain stable stock levels. We are very unlikely to change our hedging policy (around 25% of inventory) unless our long-term view on gold prices changes, as we do not gamble on price movements.

Q5: How far along is the mainland China store restructuring? What is the FY26 target and outlook for FY27?

A:​ The net reduction is slowing. We expect a net reduction of over 100 shops for the full FY2026. For FY2027, we anticipate a net addition of shops in mainland China.

Q6: What is your competitive positioning in mainland China and Hong Kong?

A:​ We regard the other major Hong Kong brands as our direct competitors. We position ourselves as a Hong Kong brand, which differentiates us from local mainland competitors.

Q7: Do you expect operating margin to reach a new record high in H2 FY26? Can you elaborate on operating leverage?

A:​ We expect double-digit growth, with H2 margins likely higher than H1's record level. Operating leverage will come from rental cost declines (especially in Hong Kong with downward renewals) and slower growth in operating expenses relative to revenue.

Q8: Which fixed-price gold product series were top performers in Q3, and what was their revenue contribution?

A:​ Fixed-price gold products with diamonds were top performers, with same-store sales growth of 57% in Q3. Fixed-price jewelry contributes about 15% of total retail sales value; within that, about half (7% of total) comes from items with diamonds.

Q9: Given the rapid gold price increase, should we expect higher hedging losses in H2? Would you consider reducing the hedging ratio?

A:​ With strong revenue and profit growth, the impact of hedging losses will not be significant. We hedge only about 25% of inventory, so 75% benefits from rising gold prices. We do not plan to change the hedging ratio as we do not speculate on gold prices.

Q10: Can you provide an update on Hainan duty-free operations and outlook?

A:​ Our Hainan stores are all licensed shops, so they don't contribute to retailing revenue but have outstanding performance with SSSG several times higher than the group average. We have shops in all 8 major duty-free departments there and will add more if new locations open.

Q11: Which overseas markets will you focus on for expansion in the next 12 months?

A:​ We will continue opening shops in the four countries where we have self-operated shops (USA, Canada, Australia, Malaysia) and focus more on opening licensed shops in Southeast Asian countries, which have high potential. We also plan initial entry into the European market.

Q12: What is the dividend policy and latest payout target?

A:​ The policy is unchanged: a minimum of HKD 1 per annum. If profits exceed a certain threshold, the payout ratio is 45%. This has resulted in consistent payouts around HKD 1.1 per share for over a decade.

Q13: What is the business model for licensed shops? Do they benefit from gold price increases?

A:​ Licensed shops buy products from the group or approved suppliers; it is not a consignment model. Their cost structure is similar to self-operated shops except for a single-digit royalty fee. Therefore, they also benefit from margin expansion when gold prices rise.

Q14: Do you expect inventory days to improve by FY26 year-end?

A:​ It's difficult to say. While sales value is growing, the weight of gold sold is not increasing fast. Inventory value is rising due to higher gold prices, so inventory days may not change significantly.

Q15: What are the inventory days by region and product?

A:​ As of the first half, inventory days were: Gold products ~200-300 days; Fixed-price jewelry ~700 days. By region: Hong Kong/Macao ~207 days; Mainland China ~400+ days; Overseas markets are in between.

Q16: What is the long-term revenue contribution target from international markets?

A:​ Currently at 9%, we expect it to reach a double-digit percentage, likely between 10-15% in the future.

Q17: What are the capex plans for FY26 and FY27?

A:​ For FY26, capex is modest (HKD 49M in H1), likely around HKD 100M for the full year. FY27 plans will be detailed when FY26 final results are released in June 2026.

Q18: Is growth in fixed-price gold products driven more by volume or ASP?

A:​ Both volume and average selling price are growing. However, recently (Dec-Jan), sales of standard gold products (by weight) have been growing faster as consumers focus on investment.

Q19: Are you actively looking at M&A?

A:​ We are open to opportunities but have no concrete targets currently.

Q20: What are the challenges for the mainland China market, and how do you differentiate?

A:​ The main challenge is consumption shifting to Hong Kong/Macao. We differentiate by emphasizing our Hong Kong brand heritage, enhancing product design (using IP collaborations), and boosting promotion on social media.

Q21: What is the outlook for the "3D Gold" subsidiary?

A:​ We aim to expand 3D Gold to 500 shops as fast as possible (currently 20+), and to 1,000 in 2-3 more years. It operates at a high hedging ratio (currently 60%), which leads to hedging losses. It is expected to remain loss-making for the full FY26. Our goal is to eventually lower its hedging ratio to match Luk Fook's level.

Q22: How do you balance expansion between physical stores and digital channels?

A:​ In mainland China, e-commerce complements physical stores by attracting a younger demographic. Growth is stabilizing as costs rise. In Hong Kong, e-commerce is very small-scale and is primarily a testbed for future overseas e-commerce expansion, which is still under development.

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