Luk Fook - Post-results NDR takeaways
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- Strong momentum sustained into Oct-Nov 2025, citing 40%+ y/y mainland China SSSG, and a double-digit SSSG in HK/Macau & overseas markets. Rapid wholesale expansion also supports solid earnings visibility.
- Recent price hikes in Mainland China (subsequent to new VAT policy since Nov 1) should sustain margin advantages, given the lower-cost pre-VAT inventories, as well as rising product-mix from high margin fixed-price jewelleries.
- Luk Fook’s target to enter into three more overseas countries in FY26 (e.g., Vietnam), and opening 50 new overseas stores by FY28 should also open up more growth opportunities ahead. We lifted earnings by 8-9% for FY26-27 and raised TP to HDK31.31. Maintain BUY.
Financial resilience despite hedging impact. Management clarified that Luk Fook’s Mainland China retail segment’s negative 0.9% segmental margin in 1H FY26 was distorted by non-cash hedging loss, with over half occurring in Sep 2025 alone. Excluding this accounting item, underlying profit from the Mainland retail business reached HKD182mn, translating into 12.1% segmental profit margin. The company expects most of the hedging-related profit reversal to be recognized when the affected inventory is sold during 2H FY26.
Wholesale business transformation. Revenue from the Mainland China wholesale business increased 203.4% y/y in 1H FY26, mainly driven by a newer strategy to centralize certain exclusive, promotional, and licensee-focused products for transactions through the group’s wholesale system. This replaces the previous model in which licensees often sourced directly from Luk Fook’s approved external suppliers. Management believes this approach will continue to raise wholesale contribution and improve licensee performance.
Margin strength via product-mix and operating leverage. The company achieved a 2ppt y/y jump in gross margin to 34.7% in 1H FY26, the highest on record. Gross profit rose 32.2% to HKD2.4bn, supported by stronger sales of fixed-price jewelry products. Operating expense ratio also improved by 2.2ppt to 19.1% of sales, mainly attributable to a 0.6ppt decline in rentals to 2.9% of sales, 0.6ppt decline in staff costs to 8.2%, 0.3ppt drop in depreciation & amortization to 1.6%, and 0.3ppt fall in advertising & marketing to 1.1%. As a result, operating profit increased by 45.4% to HKD780mn, with operating margin up 1.6ppt to 11.4%.
Latest sales revealed strong momentum. From 1 Oct to 21 Nov 2025, the group recorded strong double-digit growth in overall retail sales. In Mainland China, same-store sales growth (SSSG) reached over 40%, with Nov alone achieving growth above 30% post-VAT policy change. Macau also performed strongly, recording 30%+ SSSG in Nov, while Hong Kong saw a single-digit growth. Overseas markets continued to deliver strong double-digit growth, consistent with the trend seen in 1H FY26.
VAT policy to create margin benefits and market share gains. The new VAT policy on gold in Mainland China, effective on 1 Nov 2025, has not dampen consumer activities so far. Instead, most leading players in the industry have been able to raise retail prices of gold-by-weight products (1H FY26: 64% of Luk Fook’s total revenue) immediately after the policy change, while still selling the inventories purchased before the new tax took effect, creating a temporary margin benefit until the old stock ran out (average inventory days of gold products in 1H FY26: 382 days). Hence, management expects higher gross margins for the remainder of FY26 due to the cost-price mismatch. Besides, smaller competitors struggled to adjust to the new VAT requirements, allowing Luk Fook to gain market share in gold-by-weight products.
Overseas expansion progressing ahead of schedule. Luk Fook is now operating 39 stores across 9 overseas countries and aims to enter three additional markets during FY26-FY28. The plan also includes adding 50 new overseas shops as its three-year target. With the company’s latest entrance into Vietnam during 1H FY26 and opened two stores there, management currently expects to roll-out a total of 20 new overseas shops for FY26, focusing on self-operated stores in the US, Canada, Australia, Malaysia, and new entrants in Europe, while Southeast Asia will mainly feature licensed shops.
Domestic network optimization. The company recorded a net reduction of 174 shops in 1H FY26, reducing its global network to 2,590 shops. Most closures were lower-productivity licensed stores in Mainland China. Luk Fook expects a full-year reduction of around 200 shops, most of which have already taken place. The company aims to return to net store additions by FY27, supported by a healthier licensee network and stronger wholesale support.
Healthy inventory management supports margin stability. Inventory is managed by weight for gold-by-weight products and by unit count for fixed-price items, with daily replenishment based on store-level consumption. Inventory value increased by 24.4% y/y to HKD12.3bn as of Sep 2025, mainly due to higher gold prices rather than volume growth. Inventory turnover also improved by 14 days in 1H FY26. The company also continues to benefit from lower-cost inventory purchased before the VAT change and before the latest gold price increases.
Product innovation continues to drive sales. Demand has remained strong across both value-preservation (investment) and daily-wear categories. In particular, the company’s 3D-hard gold technology remains popular due to its ability to create larger-looking and more sophisticated products with less gold nowadays, as compared to traditional designs and know-hows. As such, fixed-price jewellery sales grew 67.9% y/y in 1H FY26. Further price adjustments on fixed-price gold products are also expected in the near-term, in view of the ascending gold prices and VAT policy changes in mainland China, while any price lifts will likely be in the single-digit range.
Diamond business saw steady underlying performance. E-commerce growth slowed due to a high base in the prior year, which included one exceptionally large transaction, but underlying growth remains solid. In the diamond segment, pure-gold diamond products outperformed traditional 18k gold diamond jewelry. The group has no plans to enter the lab-grown diamond market, viewing it as a distinct segment that does not align with its brand strategy. Luk Fook still focuses more on product differentiation that is supported by its dedicated in-house design teams for each of its product line.
3D Gold Strategy. The “3D Gold” subsidiary targets younger customers with more affordable price points and higher product mark-ups. The brand currently operates over 200 shops, with a goal to exceed 400 shops in the next 2–3 years. Luk Fook expects the subsidiary to return to profitability within two years, supported by targeted product development and controlled expansion.
Positive outlook. Management remains confident in achieving double-digit SSSG for 2H FY26 despite a relatively stronger base effect as compared to 1H FY26. The accelerated overseas expansion, strong wholesale recovery, favorable VAT-driven margins, and optimized store network should all support a sound performance. Luk Fook also continues to maintain a minimum annual dividend of HKD1.1 per share or 45% payout, whichever is higher, reinforcing its financial discipline and consistency. Overall, we believe the company’s enriching product designs, scalable mainland China and wholesale/licensing platforms, and solid cash generation and dividend payout all provide a strong foundation for sustainable growth and resilient shareholder returns. Its strong SSSG into 2H FY26 so far, higher gross margins from recent price hikes and better operating leverage should all enhance earnings quality. We lifted our FY26 / FY27 projections by 6% / 3% in sales and 9% / 8% in earnings, and upgraded our TP to HKD31.31 as we continue to benchmark its 10x average PE on a 12-month rolling basis.
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