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Edited Transcript of 590.HK earnings conference call or presentation 28-Nov-19 10:00am GMT

Half Year 2020 Luk Fook Holdings International Ltd Earnings Call

Kowloon Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Luk Fook Holdings International Ltd earnings conference call or presentation Thursday, November 28, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* So Kuen Chan

Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director

* Stephanie Chan

Luk Fook Holdings (International) Limited - IR & Corporate Communications Officer

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Conference Call Participants

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* Mavis Hui

DBS Vickers Research - Analyst

* Shirley Ng

Value Partners Group Limited - Senior Analyst

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Presentation

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Stephanie Chan, Luk Fook Holdings (International) Limited - IR & Corporate Communications Officer [1]

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Good evening, everyone. Thank you for joining the call. I'm Stephanie from the IR team of Luk Fook. Today, we have the pleasure of Dr. Kathy Chan, Executive Director and CFO; and Ms. Nancy Wong, Executive Director and Deputy CEO of the group, as speakers to talk about our financial year 2019 to '20 interim results. We will go through the corporate presentation, which we have already uploaded onto our corporate website, followed by the Q&A session.

Now may I pass the time to Kathy for the presentation, please?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [2]

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Okay. Thank you, Stephanie. Ladies and gentlemen, thank you for joining Luk Fook's FY 2019/'20 Interim Results Conference Call. I would like to start with looking at our financial highlights, followed by financial review, then our future plans and strategies. The details are recorded in the corporate presentation, which has been uploaded to our website. We'll go through that with you on the phone now.

With a relatively high base, strong gold price and the continuing impact of Hong Kong's social incidents and U.S.-China trade war on market sentiment, revenue decreased by 19.8% to HKD 6.3 billion while operating profit decreased by 21.2% to HKD 660 million. And profit attributable to equity holders decreased by 25.4% to HKD 496 million. The basic earnings per share decreased by 24.8% to HKD 0.85.

The group proposed an interim dividend of HKD 0.50 per share, which -- with dividend payout ratio of 59.1%, which is higher than our official dividend payout policy of 40% to 45%. The group had a net increase of 129 Lukfook shops during the period under review, out of which 126 were in Mainland, including net additional 131 licensed shops, a net reduction of 5 self-operated shops. We also net added 3 shops in Hong Kong and Macau.

With the adoption of multi-brand strategy, we have net added 6 Goldstyle and 3 Dear Q individual shops, which were 2 independent brands developed from our popular product collections. We also have net reduced 1 3D-GOLD shop in the period under review. As of today, including the brands, the group has more than 2,000 shops worldwide altogether.

Now let's go into the details of our financial performance. During the period under review, despite a drop in revenue, overall gross margin increased by 6.2 percentage points to 29.9% attributable to the substantially increased gold price and high sales mix of gem-set jewelry products. Gross profit, therefore, rose by 1.2% to HKD 1.9 billion. On the other hand, the total operating expenses decreased by 8.2%. With revenue decreasing faster than the operating expenses, the TOE-to-revenue ratio, therefore, increased to 17.2%. Besides, with the decline in diamond sales leading to the reduction in diamond purchases, which resulted to significant decrease of VAT refund in relation to diamond import in Mainland by approximately HKD 122 million.

The turnaround of the gold hedging profits of HKD 62.5 million same period last year to a loss of HKD 96.6 million this year contributed by the high gold price, together with an impairment provision of HKD 57.1 million as a result of Hong Kong Resources Holdings' failure to redeem the convertible bond issued to the group on the maturity date. Operating profit, therefore, decreased by 21.2% to HKD 660 million. Our operating margin maintained a stable level of 10.5% and net margin decreased slightly by 0.6 percentage points to 7.9%.

The group's financial position remains healthy. By following our keen target in reducing inventory balance, our inventory decreased by 13% during the period under review against the margin balance and returned to a lower level of HKD 8.1 billion, which is even lower than the level in September 2018. However, with the fastest drop of revenue, average inventory turnover days grew by 99 days to 371 days. With this satisfactory drop in inventory level, the group went back to a net cash position with a balance of HKD 763 million. ROE was 9.6%, which was 3.8 percentage points lower than the same period last year.

The group's NAV per share was HKD 17.63 at the end of September 2019, which was 4.1% higher than the balance as at the same date last year. During the period under review, despite the double-digit drop in revenue benefiting from the substantially increased gold price and higher sales mix of gem-set jewelry products, the overall gross margin increased to a record high of 29.9%. Meanwhile, the operating margin and the margin in the past period remains at a quite stable level.

With the impact from high gold price, high base effect, recent social incidents and U.S.-China trade war, Hong Kong, Macau and Overseas revenue recorded significant decline of 26.1% to HKD 3.6 billion, which accounted for around 57.6% total revenue. With a slightly improved segment profit margin to 8.9%, the respective segment profit decreased by 21% only to HKD 324 million, accounting for 38.8% of the group's total.

In the Mainland market, the revenues declined at a relatively milder manner by 9.2% to HKD 2.7 billion and segment profit improved by 16% to HKD 510 million. Retail business was our primary revenue source. As explained earlier, due to continuously weakening retail sentiment, retail revenue decreased significantly by 25.3% to HKD 4.5 billion, representing around 71.2% of the total. However, its segment profit decreased by much lower magnitude of 10% only to HKD 357 million, mainly due to the high gross margin, led by the significant increase in gold price and a high gem-set sales mix. Its segment profit contributed to more than 40% of the group's total.

Despite the increase in number of licensed shops with the drop in the wholesaling diamond products in Mainland, though the impact of which has been partially offset by the satisfactory sales of fixed price gold products, the group's wholesale revenue decreased by 6.4% to almost HKD 1.4 billion, which represented 21.8% of the group's total. Its segment profit decreased by [8.6%] to HKD 165 million, accounting for around 20% of the group's total. On the other hand, with increased number of licensed shops, the licensing income rose by 15.8% to HKD 442 million, which was 7% of the group's total. The segment profit increased by 14.4% to HKD 312 million, contributing to 37.4% of the group's total.

And with decrease in demand due to the high gold price, gold and platinum sales recorded a significant decline of 32.1% to HKD 2.7 billion, representing 46% of the overall sales. With the record-high gross margin of 20.9%, its gross profit increased by 6.9% to HKD 563 million, representing 35.9% of the group's total. On the other hand, sales of gem-set jewelry products fell by 9.7% to HKD 3.2 billion, accounting for 54% of the overall sales. Gross margin of gem-set jewelry products improved by 1.5 percentage points to 31.7% because of the high gold price as well. Its gross profit as a result only decreased by 5.2% to HKD 1 billion, accounting for 64.1% of the overall gross profit.

Now let's go to Slide 12. Consumption expenditure per capita in Hong Kong and Macau markets has been weakening. As a result of the high gold price, the high base effect, together with substantial decline in the number of visitors to Hong Kong due to the recent social incidents, retail revenue from Hong Kong, Macau and Overseas market decreased by 27% to HKD 3.5 billion, accounting for 97.5% of the market's total. Because of the increase in gross margin driven by the high gold price, its segment profit margin improved by 0.5 percentage points to 7.4%. This segment profit is reduced by 21.6% only to HKD 263 million.

The wholesale business revenue increased by 21.8% to HKD 58 million. However, there was a drop in product sales with high gross margin and reduction in profit arising from decrease of intersegment sales. The segment profit decreased by 49.3% to HKD 29 million with segment profit margin declining to 50.5%. As this segment profit of wholesale business included a profit of intersegment sales of self-operated shops, if including in the segment sales is the denominator, the adjusted segment profit margin would be 2.9%, which is a more stable level.

Apart from that, continuing to benefit from the increase in designated supplier consultancy services revenue due to the increase in number of licensed shops, Hong Kong licensing income increased by 92.8% to HKD 32 million. Its segment profit increased significantly by 87% to HKD 32 million.

The Mainland, with a high gold price and continuing impact of the U.S.-China trade war on macroeconomic conditions, retail revenue declined by 18.3% to HKD 943 million. However, contributed by rising gross margins due to the high gold price and high gem-set sales mix, its segment profit increased by 54.1% to HKD 94 million and segment profit margin improved by 4.7 percentage points to 10%.

Because of the unsatisfactory sales of diamond products, though impact of which has been partially offset by the satisfactory sales of fixed price gold products, revenue of the wholesale business in Mainland China market declined by 7.3% to HKD 1.3 billion. Due to the increased gross margin contributed by the high gold price, its segment profit increased by 10.5% to HKD 135 million. With an increase in number of licensed shops, licensing income in Mainland increased by 12.3% to HKD 410 million and its segment profit rose by 9.6% to HKD 281 million, enjoying segment profit margin of almost 70%.

Now let's go to Slide 14. During the period under review in terms of retailing business, the Hong Kong market recorded the most significant drop of 31.6% in revenue to HKD 2.57 billion due to the reasons explained earlier. With high gold price, the sales of gold and platinum products recorded a drop of 35.8% and 21.5% in Hong Kong, Macau and Overseas market and Mainland market, respectively, while gem-set product sales mix increased in all markets, reaching 45% and 34% in non-Mainland and Mainland markets, respectively.

Let's go to Slide 16 now. With high gold price, a relatively high base and the continuing impact of Hong Kong social incidents and U.S.-China trade war on market sentiment, our overall SSSG was negative 24% with Hong Kong/Macau markets recording negative 25% and Mainland recording negative 16%. Overall speaking, gem-set has better SSSG performance than gold and platinum products. Due to the strong gold price, gold and platinum sales recorded a decline in revenue and quantity but an increase in ASP in all markets. On the other hand, with the growing popularity of daily wear-appropriate pieces, such as Slim Waist in the Goldstyle collection, which was categorized under gem-set category, gem-set products enjoyed a volume surge and yet a substantial decline in ASP in Hong Kong/Macau markets.

Slide 17 shows same-store sales growth figures of sales office and licensed shops in different city tiers, regions in Mainland. Overall speaking, licensed shops performed better than our self-operated shops as licensed shops normally are located at better locations and have better gem-set sales mix in Mainland. During the period under review, the same-store sales growth of licensed shops was negative 6% while self-operated shops was negative 16%. The gem-set same-store sales of licensed shops recorded positive growth of 4% while that of self-operated shops was a negative 12% drop.

During the period under review, the SSSG in Hong Kong/Macau declined significantly as a result of a high base effect, strong gold price and continuing impact of social incidents in Hong Kong and U.S.-China trade war while Mainland market declined overall because of high gold price and the U.S.-China trade war. Up to date from October to the first 3 weeks of November, with a relative low base, Macau markets resumed their growth track attributable to an increase in gold sales. The same-store sales of both self-operated shops and licensed shops in the Mainland market saw a progressive narrowing decline. Meanwhile, the same-store sales drop in Hong Kong did not improve. Therefore, the downside risk of the group's business will continue into the second half of the financial year. The group therefore expects a double-digit drop in terms of annual revenue and profit in this financial year.

Let's look at Slide 20 now. We had total operating expenses of HKD 1.1 billion, representing a decrease of 8.2%. With revenue declining faster, the total operating expenses to revenue ratio increased to 17.2% during the period under review. With the adoption of the new accounting standard, parts of the rental expenses was classified into HKD 14 million financing costs from lease liabilities and HKD 230 million depreciation of right-of-use assets, which was included in depreciation and amortization. If we include both key expenses into the total rental expenses for year-on-year comparison, it would be HKD 370 million, representing a 7% drop year-on-year and a 5.9% expense-to-revenue ratio. The TOE-to-revenue ratio in this case will increase to 17.5%.

There are 20 shops -- 22 shops in Hong Kong/Macau subjecting to rental renewal in financial year 2020, accounting for around 1/3 of the total number of shops we have. Given the current situation in Hong Kong, we are actively negotiating for rental reductions for our renewals and short-term rental discounts. And we expect the rental renewals in the current financial year to have a single-digit decrease and we see a double-digit drop in the next financial year.

With our keen target in reducing inventory, the inventory balance reduced by 8.2% to [HKD 8.1 billion] when compared to same period last year. Inventory of gold and platinum decreased by 9% to HKD 5.3 billion while the gem-set jewelry decreased by 6.7% to HKD 2.8 billion. With an expected downturn in sales since June 2019, the average inventory turnover day level grew to 371 days. Gold inventory turnover days grew by around 100 days, up to 258 days due to slow gold sales resulting from high gold price.

In the first half FY 2020, the group incurred capital expenditures of HKD 271 million, in which HKD 52 million was used for shop renovations and improvements and HKD 210 million as prepayment for acquisitions, offices and showrooms in Xi'an and Shenzhen, respectively.

During the year under review, the deterioration in macroeconomic conditions and impairment provision of HKD 57 million as a result of Hong Kong -- of HKRH's failure to redeem the CB on the maturity date, the losses of CGS operations-related and HKRH investment activity widened. The group has filed winding-up petitions against HKRH for the recovery of the debt and relevant interest.

Let's look at the group's future plans and strategies now. In lieu of the up-to-date business performance, the group will reduce number of shops in the areas which are considerably impacted by the social incidents in Hong Kong and search for opportunities to open new shops in the Macau market and expect to have 3 net shop additions in Hong Kong/Macau market for the full year. The group will also actively seek expansion opportunities in overseas, targeting to achieve a net additional 3 shops in the overseas market.

Further to the Mainland market, as we have net added 126 Lukfook shops in the period under review, we have raised our full year store expansion targets to a net addition of not less than 200 shops, including 30 Goldstyle and Dear Q shops. Despite uncertainty on macro economy regarding the U.S.-China trade war and the social incidents in Hong Kong with the anticipated considerable growth of the middle-class population in Mainland, the group remains optimistic about the mid- to long-term business prospects. With the 3 main focus, mainly supply chain management, Mainland market expansion and strategic growth in mind, we look forward to bringing our business to new heights in the near future.

In order to further enhance the group's competitive edge, the group will focus on strengthening supply chain management through various means. We will try our best endeavors to identify right products, set right price and allocate products to market at the right time by implementing high level of automation and big data management, which will lead to factory productivity; shortening inventory turnover period; establishing strategic partnerships with suppliers; streamlining logistics on distribution; and intensifying support to licensees, hoping all this would help to promote our business development and strengthen our operational efficiency.

We have started our multi-brand strategy since May 2019. With a different product portfolio and brand image, we wish to cater different customers' needs and expand our customer portfolio. During the period under review, we opened 3 Dear Q and 6 Goldstyle independent shops in Mainland. And we have raised our target to open 10 Dear Q and 28 Goldstyle shops in the full year. Meanwhile, we will continue to build the brand awareness through various means, especially social media platforms, such as Xiaohongshu, Douyin and WeChat as well as hosting interactive roadshows. But today, including the independent shops -- brands, Dear Q and Goldstyle, we have reached a milestone of having 2,000 shops worldwide. With the focus of Mainland market expansion in mind, we will continue to seize opportunities to enlarge market coverage in Mainland and target to add net-net at least 200 shops in full year. Expansion will be mainly in lower-tier cities via licensing model. We will also continue to further develop our e-commerce business and target to increase its revenue by 20%.

The CapEx budget for FY 2020 has been raised to HKD 400 million, in which HKD 300 million will be used for acquisition of office and showrooms in the Mainland. With a relatively high base in terms of FY 2020, the revenue increased by -- our e-commerce revenue increased by 16.1%. But actually, it's more than 20% in renminbi. The revenue accounted for 31% -- 31.3% of the group's retail revenue in Mainland with the gradual growth in ASP to CNY 1,300 while we see a gradual increase in the gem-set sales mix. We currently have 13 platforms, including Tmall.com, JD.com and VIP.com. And we took the initiatives to offer video chat broadcast, customer support and quality assurance certificates with platforms to enhance the customer experience and consumer confidence.

We will continue to promote sales of affordable luxury jewelry products to expand our footprint in the younger consumer markets. The group always continue to capture the rapid growth of online marketing by various creative manners. Apart from being an official partner for Tencent's online mobile game King Pro League or the Champion Ring, we created the champion medal for the first-ever Honour of Kings 2019 World Champion Cup during the period under review.

We may use of Chinese social media platforms, including RED, Douyin and online [advertising] services to increase our brand exposure and expand our footprint in the young consumer markets.

As for the anniversary promotions this year, apart from establishing the 91 Golden Fantasyland pop-up store with advertised-based gold-diggings game and (inaudible) e-sports, we also held the On-screen Bomber Challenge on [RED], which recorded total of over 11 million click rates, which once again raise Lukfook's brand awareness among young consumers.

To conclude. With the continuing uncertainties on the macroeconomic environment arising from the U.S.-China trade war and the negative impact from social incidents in Hong Kong, the group therefore expects a double-digit drop in terms of annual revenue and profit in this financial year. However, we are still optimistic in the mid- to long-term prospects of luxury market in Mainland, where we're relying on for the growth potential for the middle-class population.

This is the end of my presentation, and thank you for listening.

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Stephanie Chan, Luk Fook Holdings (International) Limited - IR & Corporate Communications Officer [3]

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Thank you, Kathy. Moderator, can you please open the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from [Julie, who's from BI].

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Unidentified Analyst, [2]

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Kathy, can I ask 3 questions? The first is, in this first half, we noticed that the SSSG in Mainland is a record double-digit decrease. Meanwhile, for Hong Kong stores, for example, Chow Tai Fook, actually recorded a mild increase in SSSG. So did it mean -- meaning that we are losing market share to other competitors? This is first question.

And the second question is for the situation in Hong Kong. Are we planning in the following, like, 12 months to close some doors down in Hong Kong? Or is the rental negotiation going on? If it is, help us with how the future decrease in overall rental in Hong Kong would be. This is the second question.

The third question is what is our hedge ratio on our gold inventory and -- for now. And what is the fair value gain and loss on that gold loan?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [3]

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No. Yes, I'll talk about the Hong Kong shops situation first. Actually, we actually plan to close some shops in the areas that would be seriously affected by the social incidents. But of course, it would mainly depend on whether the landlords would be willing to reduce the rental in a substantial manner so that we would not need to close on those shops. So basically, we expect there may be a few shop closure in those areas, but at the same time, we are actively seeking for new opportunities in Macau markets to open 2 -- maybe a few shops more. Then all together, we still expect the Hong Kong market to have a net-net addition of 3 shops for the full year.

And then for the hedging ratio, actually, we have maintained the 20 -- around 20% hedging ratio for the base inventory for many years already. And now we did not actually change that policy frequently. Actually, it's been there for many years.

And then for operations, actually, because we've got the daily replenishment system, so that is actually naturally hedged in the operations side so that no hedging is necessary for the operation. So that's why we just hedge the base inventory, and the ratio was there. And then for this year, actually, the holding loss -- holding gain, we're talking about 76 million altogether.

And then when you talk about the same-store sales performance against our competitors, so sometimes we perform better, sometimes they perform better. So basically, we are working very hard on this change of, I mean, product strategy by shifting to selling more low-value, fixed-price gold products recently and 18-karat gold products. So basically, I think we had been very successful in the launching of [Dear Q] category. So that's certainly performed very well in the gold area. So we are -- but we try to do more on the gem-set side with the offering of fixed-price gold products and the 18-karat gold products.

And then in the recent year, actually, the diamond market has been quite flat. So the diamonds sales decreased quite a lot. And then even though we've got very good sales performance for the fixed-price gold products and the 18-karat gold products, but it's not enough to fully offset the impact of the drop in the diamond sales. So that's the difference in the kind of products and strategy, I think.

But in the long run, because -- since you know that for -- because we focus in the middle-class customers, so we try to offer more good value for money type of products such as stylish design to attract our customers with -- for kind of watches for daily-wear level. And we try -- and we have adopted multi-brand strategy this year so that, hopefully, these new brands would help to contribute to the growth in future.

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Operator [4]

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There are currently no more questions in queue. (Operator Instructions) Your next question is from Mavis from DBS.

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Mavis Hui, DBS Vickers Research - Analyst [5]

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I have 3 questions for you.

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Operator [6]

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Pardon the interruption. There's a lot of feedback coming through.

(technical difficulty)

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [7]

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I think it's okay now. Hello?

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Mavis Hui, DBS Vickers Research - Analyst [8]

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Yes. I just have to check with you in terms of the same-store sales performance and the operating margin trends for Hong Kong alone.

(technical difficulty)

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Operator [9]

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Pardon the interruption. This is the operator. May I just double-check, your speakers have 2 lines dialed in, in 1 room?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [10]

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Okay. We can continue. Sorry.

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Mavis Hui, DBS Vickers Research - Analyst [11]

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All right. Great. Yes, I was just checking on same-store sales growth and operating margin trends for Hong Kong alone and also for Macau alone. Could we split that up for us? And then secondly, how's performance in terms of the latest months, October, November, and in terms of regions and products? And thirdly, what about the overall outlook for the next financial year, FY '21, in terms of, like, the top line and also margins?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [12]

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For Hong Kong, Macau market, actually, of course, with the recent development, Hong Kong's margins must be worse than Macau's in quite a big extent. But the positive news is that, actually, even though we talk about very bad performance in August, actually, the retail -- Hong Kong retail market is still profitable altogether, as a whole. So basically, we are just earning less profits than before.

And then for 2 -- for next financial -- actually, for this financial year, originally, we expect kind of a flattish performance. But then with the drop in the first half, the substantial drop in first half, and then even though when we talk about October and the last 3 months -- last 3 weeks of November -- with the first 3 weeks of November, so basically, October is -- we saw actually kind of improvement, progressive improvement in this period of time bit by bit. And so basically, apart from the Hong Kong market, actually, both Mainland and Macau market has improved. And for Macau market, we actually saw double-digit growth in the first 3 weeks of October -- of November mainly because of the good sales performance of gold products because of the lower gold price, actually.

And then for Mainland market, it's kind of flattish situation in November. And actually, for licensed shops, we -- for the full -- for year-to-date, actually, August was the only month that they have negative same-store sales growth for gem-set jewelry. For other -- all other months, it's kind of a positive figure.

So that's why, basically, for this financial year, we are expecting kind of a double-digit drop for revenue and profit for this year. But then for next financial year, it's hard to tell at the moment because we don't really know how the U.S.-China trade war and the social incidents in Hong Kong would -- will look like in the next year.

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Mavis Hui, DBS Vickers Research - Analyst [13]

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Can you talk a little bit more about the same-store sales growth for Hong Kong? Is it possible to quantify a little bit for Hong Kong alone?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [14]

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Actually, for Hong Kong, I think we talk about really in August -- since August, we're talking about something like 40-something or 40 -- 50-something. And in the recent -- like October is maybe 40-something. And up to now, it's still 40-something kind of a drop.

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Operator [15]

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There are currently no more questions in queue. (Operator Instructions) Your next question is from Shirley, who's from Value Partners.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [16]

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Yes. Actually, I would like to understand more about the GP margin side. From -- we -- the GP margin has increased by 6% -- around 6%, like, from last -- on a Y-o-Y basis. And actually, is it all then coming from the rising of gold price? Is there any help from the product mix or -- yes.

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [17]

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Actually, gold price -- high gold price would be the major contributor to that. And then because of the high gold price, sales of gold dropped a lot by more than 30%. That's why the gem-set sales mix improved as well because gem-set has a higher gross margin than gold. That's why altogether, it would contribute to the overall increase in gross margin, too.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [18]

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Okay. But the high gold price actually contribute most of the rise of the GP margin.

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [19]

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Yes. Yes.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [20]

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So we put up for -- because you have mentioned about in August, with the 40% drop in same-store sales, actually, we are still making money. But if we think about the -- if we eventually use up the lower gold price, so if the -- and also the same-store sales remained the same, would it -- what would then be the margin look like in Hong Kong?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [21]

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In fact, we talk about -- when we talk about the operations side, we always use the daily replenishment system. So that is -- even though if you see kind of volatility in the gross margin with gold sales in the first half, normally, if we go extend that to a full year, we would go back to kind of a normal gross margin of gold no matter how the gold price fluctuates. So basically, for the full year, you may go -- you may see kind of a 15% gross margin with the gold sales again.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [22]

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Okay. I mean, yes, I understand. But actually, my question is more about like the August number that you mentioned, actually, does it include the benefit from the GP margin expansion?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [23]

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For the GP, we don't -- because with the hedging, the P&L is actually below the GP. So the high gold price will benefit the profit in the gold sales -- I mean in the GP.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [24]

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I guess. And also, because of the higher GP margin in August, so the -- in Hong Kong, with 40% of same-store sales drop, actually, it's making money. But what I mentioned is about if this -- if we exclude the effects of the high gold price, if we -- does it mean that, actually, we'll be losing money?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [25]

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In fact, for August, actually, when we effect the breakeven position for Hong Kong market, actually, if we have kind of a sales drop by around maybe 50%, we will reach the breakeven point. So basically, the kind of sales drop in August is actually something like this situation. So basically, if there's no gold price benefits for that, maybe we will talk about the breakeven -- really breakeven position for August.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [26]

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Okay. Okay. I see. Okay. And also for the going forward, like for -- any cost-cutting plan? And also on -- are there from the rental reduction in Hong Kong side?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [27]

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So we talk about rental -- yes, rental reduction, the short-term discount on that. And then we got some -- froze staff number, kind of frozen the head count and let it be reduced naturally. Well, if they resign, we don't really replace. And then we are asking staff to take their annual -- the leave -- annual leave. But we don't have any plan of redundancy yet, and we don't have any plans to ask people to take no-pay leave yet. And then we most likely would freeze our salary increments, the [N-1]. So basically -- and then we may look for kind of reducing marketing expenditure in future, not now because some are committed already, to keep it around the same percent to revenue as usual. So basically, we are doing all these kind of things.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [28]

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Okay. So -- and for the closure of Hong Kong store, when you talk about, like, the impact from the protests, you're talking about like most of the tourist area like Tsim Sha Tsui or...

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [29]

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Yes.

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Shirley Ng, Value Partners Group Limited - Senior Analyst [30]

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Okay. Or Causeway Bay?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [31]

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The most affected area would be like Causeway Bay, Tsim Sha Tsui and Mong Kok. These 3 will be the most serious areas.

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Operator [32]

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There are clearly no questions in queue. (Operator Instructions)

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Stephanie Chan, Luk Fook Holdings (International) Limited - IR & Corporate Communications Officer [33]

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Moderator, I guess there's no questions lining up. I think we can move probably at the end of the call.

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Operator [34]

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Sure. As there are no more questions in queue, our speaker for today, would you like to -- do you have any closing remarks that you'd like to do before we close the call?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [35]

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No. No more.

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Stephanie Chan, Luk Fook Holdings (International) Limited - IR & Corporate Communications Officer [36]

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Not really. Not really.

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Operator [37]

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Great. Thank you. So ladies and gentlemen, this concludes our conference call for today. Thank you all for your participation. You may all now disconnect.

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [38]

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Thank you. Bye.

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Stephanie Chan, Luk Fook Holdings (International) Limited - IR & Corporate Communications Officer [39]

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Thanks. Bye.