Hong Kong's big retailers suffer massive earnings drop in April to September period

But here's an explanation behind this fall.

It has been observed that the risk reward of Hong Kong gold & jewellery retailers appears to be turning more favourable, supported by easing impact of Occupy Central, improving sales trend , and easing rental pressure.

According to a research note from Maybank Kim Eng, meanwhile, Chow Tai Fook and Luk Fook’s 1H15 (Apr-Sep) net earnings contracted by 23.3% and 16.6% YoY.

The weak results were mainly due to sales decline given a very difficult YoY comparison. The gold rush last year following the slump in gold price created an exceptionally high base for 1H15.

However, both companies’ margins remained stable thanks to gross margin improvement, driven by higher contributions from gem-set sales, which offset the rise in rental and labour expenses.

Luk Fook’s management expects sales to further improve in the coming quarter given recent strong demand for gold products as gold price
softened; peak wedding season this quarter; and easing impact from Occupy Central.

The company saw SSSG improve in Sep but it declined by a single digit in Oct due to the impact of Occupy Central. SSSG in Nov returned to positive.

Here's more from Maybank Kim Eng:

Good risk reward among discretionary space: The risk reward of HK gold & jewellery appears to be turning more favourable.

1) SSSG should continue to improve in the coming months with better YoY comparisons.

2) Easing rental pressure: Luk Fook renewed seven rental contracts for its HK stores. The renewal rental rose by 20-30%, much lower than its expectation of 50%. Overall rental cost increased by 16% YoY in 1H15 (Apr-Sep), representing 4.8% of total sales and the company expects the ratio to fall in 2H15.

3) Less impact from e-commerce: Gold and jewellery sales are in general more resilient to the impact from the online retailers. In fact, Luk Fook & Chow Tai Fook increased their high-margin low-ticket item sales via their e-commerce channels.

4) Valuation: Luk Fook is trading at 8.5x 12M forward PER, 5% below its historical average and lower than department store, shoes maker and apparel peers at 11-16x.

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