Asia L/S Equity PM/Macro/Thematic Idea Generation

Rikki Malik

Equity Bottom-Up

Luk Fook Holdings Intl / Equity Bottom-Up

<ul>
<li>March Same-Store sales in China disappoint mainly due to diamond jewellery demand</li>
<li>Overall, gold demand in China continues to rise both in the retail and the official sector</li>
<li>Visitor arrivals to Hong Kong pick up but are still ~40% below pre-Covid levels.</li>
</ul>


March Same-Store sales in China disappoint mainly due to diamond jewellery demand
Overall, gold demand in China continues to rise both in the retail and the official sector
Visitor arrivals to Hong Kong pick up but are still ~40% below pre-Covid levels.


<ul>
<li>Stock price starting to recognise the increase in  Chinese demand for Gold.</li>
<li>Helped by a bottoming and a revival in Hong Kong retail sales and tourist arrivals.</li>
<li>
<a href="https://www.smartkarma.com/entities/spdr-gold-shares" target="_blank" data-smartkarma-citation="entities:8632:1" rel="noopener">SPDR Gold Shares (GLD US)</a> close to a new all time high</li>
</ul>


Stock price starting to recognise the increase in  Chinese demand for Gold.
Helped by a bottoming and a revival in Hong Kong retail sales and tourist arrivals.

SPDR Gold Shares (GLD US) close to a new all time high


Starting to Glitter (Luk Fook Holdings 590.HK)

Forensic Analyst

Jason Yap, CFA

<div>
<p>In this insight, we discuss a long-short pair trade idea (long <a href="https://www.smartkarma.com/entities/luk-fook-holdings-intl-ltd" target="_blank" data-smartkarma-citation="entities:19054:1" rel="noopener">Luk Fook Holdings Intl (590 HK)</a> and short <a href="https://www.smartkarma.com/entities/chow-tai-fook-jewellery-group" target="_blank" data-smartkarma-citation="entities:549:1" rel="noopener">Chow Tai Fook Jewellery (1929 HK)</a>) amongst HK listed jewelers.  As China and HK based bitcoin holders scramble to protect their crypto assets in light of latest regulations, we build on a hypothetical premise that these investors would shift their crypto assets into an asset class that is both tactile and familiar to the <a href="https://www.kitco.com/news/2021-08-31/Chinese-gold-demand-from-millennials-picks-up.html" target="_blank" rel="noopener">Chinese</a> - that is, physical gold / jewelry. </p>
</div>
<p>There are two major reasons why we believe this is an attractive long-short pair trade: </p>
<p><strong>1) Relative Valuations </strong>- CTF has outperformed LF in the past year.  Year to date, CTF is up 56.3% while LF is up only 9.2%.  As a result, LF has become more attractive than CTF on a relative valuation basis: </p>
<div>
<div>
<ul style="list-style-type: disc;">
<li>LF trades at a forward P/E of 9.8x, which is 56% discount to CTF's  forward P/E of 22.2x. LF is also trading at EV/EBITDA of 5.3x, which is 63% discount to CTF's EV/EBITDA of 14.3x. We believe this valuation discount is too excessive for LF as compared to CTF.</li>
<li>LF trades at a discount of 3% to past 3 year historical average P/E (10.1x) whereas CTF trades at a premium of 41% to past 3 year historical average P/E (15.8x).</li>
<li>Similarly,  LF trades at a discount of 17% to past 3 year historical average P/B (1.2x) whereas CTF trades at a premium of 72% to past 3 year historical average P/B (2.9x). Hence, CTF appears overvalued relative to its historical average P/E and P/B multiples. </li>
<li>LF generates higher operating margins than CTF. LF generated operating margin of 11.5% versus 8.8% for CTF for last 12 months ended 31 March 2021.  Although, on an ROE basis, CTF beats LF (21.1% versus 9.4%) due to higher asset turnover (1.1x versus 0.6x) and higher debt leverage (43.2% versus 13.3%).  </li>
</ul>
</div>
</div>
<div>
<p><strong>2) G</strong><strong>radual improvement in HK and Macau, which benefits Luk Fook more</strong></p>
</div>
<ul>
<li>Mainland China sales account for 85% of CTF's sales and 60% of LF's sales. with the balance generated mainly from HK and Macau. CTF's larger exposure to Mainland China likely explains its share price outperformance relative to LF given stable pandemic conditions in China, albeit these factors now appear fully discounted into CTF's price.</li>
<li>Since 23 September 2020, China reinstated tourist visas, through which majority of visitors enter Macau, for all provinces and which is for quarantine free travel.  Visitors from greater China make up over 90% of tourists to the former Portuguese colony of Macau.</li>
<li>On 23 September 2021, HK <a href="https://news.cgtn.com/news/2021-09-22/Hong-Kong-s-Come2hk-scheme-to-boost-cross-border-travel-13LtdBJ6zny/index.html" target="_blank" rel="noopener">announced</a> quarantine free exemptions for non-HK residents travelling from Guangdong and Macao.  Returning visitors to China and Macau after HK visits remain subject to quarantine.  Nevertheless, this signals potential further easing of travel measures among China and the 2 Chinese territories. </li>
<li>The upcoming October 2021 Golden Week would be a good barometer of visitor traffic to HK under current travel measures. If the pandemic situation remains stable after the massive passenger flows expected during this period, this could boost optimism of earlier and fuller relaxation of intra Greater China travel measures. </li>
<li>In short, as visitor traffic to HK and Macau ramps up, LF stands to benefit more due to its larger exposure to these markets, with potential upside from further easing of travel measures.</li>
</ul>


In this insight, we discuss a long-short pair trade idea (long Luk Fook Holdings Intl (590 HK) and short Chow Tai Fook Jewellery (1929 HK)) amongst HK listed jewelers.  As China and HK based bitcoin holders scramble to protect their crypto assets in light of latest regulations, we build on a hypothetical premise that these investors would shift their crypto assets into an asset class that is both tactile and familiar to the Chinese - that is, physical gold / jewelry. 

There are two major reasons why we believe this is an attractive long-short pair trade: 
1) Relative Valuations - CTF has outperformed LF in the past year.  Year to date, CTF is up 56.3% while LF is up only 9.2%.  As a result, LF has become more attractive than CTF on a relative valuation basis: 



LF trades at a forward P/E of 9.8x, which is 56% discount to CTF's  forward P/E of 22.2x. LF is also trading at EV/EBITDA of 5.3x, which is 63% discount to CTF's EV/EBITDA of 14.3x. We believe this valuation discount is too excessive for LF as compared to CTF.
LF trades at a discount of 3% to past 3 year historical average P/E (10.1x) whereas CTF trades at a premium of 41% to past 3 year historical average P/E (15.8x).
Similarly,  LF trades at a discount of 17% to past 3 year historical average P/B (1.2x) whereas CTF trades at a premium of 72% to past 3 year historical average P/B (2.9x). Hence, CTF appears overvalued relative to its historical average P/E and P/B multiples. 
LF generates higher operating margins than CTF. LF generated operating margin of 11.5% versus 8.8% for CTF for last 12 months ended 31 March 2021.  Although, on an ROE basis, CTF beats LF (21.1% versus 9.4%) due to higher asset turnover (1.1x versus 0.6x) and higher debt leverage (43.2% versus 13.3%).  




2) Gradual improvement in HK and Macau, which benefits Luk Fook more


Mainland China sales account for 85% of CTF's sales and 60% of LF's sales. with the balance generated mainly from HK and Macau. CTF's larger exposure to Mainland China likely explains its share price outperformance relative to LF given stable pandemic conditions in China, albeit these factors now appear fully discounted into CTF's price.
Since 23 September 2020, China reinstated tourist visas, through which majority of visitors enter Macau, for all provinces and which is for quarantine free travel.  Visitors from greater China make up over 90% of tourists to the former Portuguese colony of Macau.
On 23 September 2021, HK announced quarantine free exemptions for non-HK residents travelling from Guangdong and Macao.  Returning visitors to China and Macau after HK visits remain subject to quarantine.  Nevertheless, this signals potential further easing of travel measures among China and the 2 Chinese territories. 
The upcoming October 2021 Golden Week would be a good barometer of visitor traffic to HK under current travel measures. If the pandemic situation remains stable after the massive passenger flows expected during this period, this could boost optimism of earlier and fuller relaxation of intra Greater China travel measures. 
In short, as visitor traffic to HK and Macau ramps up, LF stands to benefit more due to its larger exposure to these markets, with potential upside from further easing of travel measures.


HK Jewellers Pair Trade - All That Glitters Not Crypto, But Gold?

HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>There is an increasing likelihood that the duty-free quota of mainland tourists visiting Hong Kong will rise to Rmb30,000 from Rmb5,000. This will benefit many retail-related sectors.</li>
<li>
<a href="https://www.smartkarma.com/entities/luk-fook-holdings-intl-ltd" target="_blank" data-smartkarma-citation="entities:19054:1" rel="noopener">Luk Fook Holdings (590 HK)</a> is the best play among jewellery retailers given it has 65% of revenue from Hong Kong. <a href="https://www.smartkarma.com/entities/sa-sa-international-hldgs" target="_blank" data-smartkarma-citation="entities:20143:1" rel="noopener">Sa Sa International (178 HK)</a> is the cosmetics play.</li>
<li>Property investors including <a href="https://www.smartkarma.com/entities/wharf-holdings-ltd" target="_blank" data-smartkarma-citation="entities:51:1" rel="noopener">Wharf Holdings (4 HK)</a> and <a href="https://www.smartkarma.com/entities/hysan-development-co" target="_blank" data-smartkarma-citation="entities:14169:1" rel="noopener">Hysan Development Co (14 HK)</a> will gain from the shopping malls in major tourist areas in Hong Kong.</li>
</ul>


There is an increasing likelihood that the duty-free quota of mainland tourists visiting Hong Kong will rise to Rmb30,000 from Rmb5,000. This will benefit many retail-related sectors.

Luk Fook Holdings (590 HK) is the best play among jewellery retailers given it has 65% of revenue from Hong Kong. Sa Sa International (178 HK) is the cosmetics play.
Property investors including Wharf Holdings (4 HK) and Hysan Development Co (14 HK) will gain from the shopping malls in major tourist areas in Hong Kong.


Increasing HK Duty Free Quota: The Beneficaries

China Tourism Group Duty Free / Equity Bottom-Up

<ul>
<li>Our earnings projections for <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corporation-limited" target="_blank" data-smartkarma-citation="entities:36229:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (1880 HK)</a> are 14% and 18% below market consensus respectively. We think these are more realistic expectations.</li>
<li>At IPO price of HK$158, CDFC H-share sits on 23.9x FY23F PER. We think it is difficult to trade above 22x - the average for top consumer discretionary names.</li>
<li>Weakened visitor appetite to Sanya, potentially higher discounts, increase in border opening, higher fixed cost and uncertainties for duty free policies beyond 2025 are negative earnings factors.</li>
</ul>


Our earnings projections for China Tourism Group Duty Free Corp Ltd (1880 HK) are 14% and 18% below market consensus respectively. We think these are more realistic expectations.
At IPO price of HK$158, CDFC H-share sits on 23.9x FY23F PER. We think it is difficult to trade above 22x - the average for top consumer discretionary names.
Weakened visitor appetite to Sanya, potentially higher discounts, increase in border opening, higher fixed cost and uncertainties for duty free policies beyond 2025 are negative earnings factors.


CTG Duty Free (1880 HK): Our Earnings Forecasts and Views on H-Share Fair Value

Hong Kong

Luk Fook Holdings (International) Limited retails jewellery. The Company engages in the sourcing, designing, wholesaling and retailing of a variety of platinum and gold jewellery, gold ornaments, gem-set jewellery, natural jadeites, gemstones, and other related products. Luk Fook offers its products in Hong Kong, Mainland China, Macau, Singapore, the United States and Canada.

Luk Fook Holdings Intl (590 HK)

Luk Fook 590.HK – Losing Its Shine?

Despite temporary hiccups, the company is geared to the rising trends of rising gold prices and demand by Chinese consumers. Sales are at a pre...

Rikki Malik

Starting to Glitter (Luk Fook Holdings 590.HK)

A consumer stock with an attractive valuation and growing earnings as well as a play on Chinese demand for gold and a higher gold price.

Rikki Malik

HK Jewellers Pair Trade - All That Glitters Not Crypto, But Gold?

We discuss a long-short trade for HK jewelers (CTF and LF). As HK/China bitcoin holders scramble to protect crypto assets, such investors could...

Jason Yap, CFA

Increasing HK Duty Free Quota: The Beneficaries

Potential increase in duty-free quota for mainland visitors to Hong Kong to benefit retail sectors, with Luk Fook as the top jewellery play, Sa Sa...

Osbert Tang, CFA

Luk Fook 590.HK – Losing Its Shine?

Despite temporary hiccups, the company is geared to the rising trends of rising gold prices and demand by Chinese consumers. Sales are at a pre...

Rikki Malik

Starting to Glitter (Luk Fook Holdings 590.HK)

A consumer stock with an attractive valuation and growing earnings as well as a play on Chinese demand for gold and a higher gold price.

Rikki Malik

HK Jewellers Pair Trade - All That Glitters Not Crypto, But Gold?

We discuss a long-short trade for HK jewelers (CTF and LF). As HK/China bitcoin holders scramble to protect crypto assets, such investors could...

Jason Yap, CFA

Increasing HK Duty Free Quota: The Beneficaries

​Potential increase in duty-free quota for mainland visitors to Hong Kong to benefit retail sectors, with Luk Fook as the top jewellery play, Sa Sa...

Osbert Tang, CFA

CTG Duty Free (1880 HK): Our Earnings Forecasts and Views on H-Share Fair Value

CDFC's H-share lPO is priced too high relative to fair value based on our earnings forecasts. There are potentially better entry levels when the...

Osbert Tang, CFA

Potential increase in duty-free quota for mainland visitors to Hong Kong to benefit retail sectors, with Luk Fook as the top jewellery play, Sa Sa...