Goldman Sachs: Luk Fook Holdings (00590) beats expectations with profit, which includes structural and one-time factors. Maintains "neutral" rating.

Goldman Sachs released a research report stating that it maintains a 12-month target price of HK$27 for Luk Fook Holdings (00590), based on a 9 times average forecasted P/E ratio for the 2026 to 2027 fiscal years, and compared to the 40% discount given by Chow Tai Fook, maintaining a "neutral" rating. The report pointed out that looking ahead, although the expectation of lower-cost inventory will continue to bring profit margin benefits in the first half of the 2027 fiscal year, the price of gold will be a key factor affecting profit margins. Luk Fook Holdings announced a profit pre-announcement for the end of the 2026 fiscal year after the close of trading on June 10th, expecting a year-on-year increase of about 80% to 90% in net profit before deducting non-controlling interests, indicating a net profit of HK$1.9 billion to HK$2 billion, which is 14% to 20% higher than the bank's expectation of HK$1.7 billion. In the second half of the 2026 fiscal year, its net profit reached HK$1.3 billion to HK$1.4 billion, higher than the bank's expectation of HK$1.1 billion. The company stated that the strong profit growth in the 2026 fiscal year was mainly driven by the rise in gold prices, the increase in the proportion of sales of priced products, and operational leverage. Goldman Sachs believes that Luk Fook's better-than-expected performance in the 2026 fiscal year is mainly driven by profit margins, which include structural and one-time factors. On one hand, the increase in the priced product mix and operational leverage driven by same-store sales growth provided support; However, the bank also pointed out that other profit-driving factors include: the company's use of the first-in, first-out (FIFO) inventory accounting method, which benefited the gross profit margin in the significantly rising gold price 2026 fiscal year; Since the implementation of the value-added tax policy in November 2025, the company has passed on the impact of the value-added tax to customers, but still enjoys inventory on the sales cost side that is not affected by the value-added tax, providing a positive benefit to the gross profit margin in the mid to high single digits; In addition, the company's lower hedging ratio allows it to earn more profits during a rising gold price cycle.