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Edited Transcript of 590.HK earnings conference call or presentation 26-Jun-20 9:30am GMT

Full Year 2020 Luk Fook Holdings International Ltd Earnings Call

Kowloon Jun 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Luk Fook Holdings International Ltd earnings conference call or presentation Friday, June 26, 2020 at 9:30:00am 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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* Boon Han Ong

* Charmaine Yap

Redburn (Europe) Limited, Research Division - Analyst

* Chun Shing Suen

Kingsway Financial Services Group Limited, Research Division - Analyst

* Hau-Yee Yan

HSBC, Research Division - Hong Kong and China Consumer Analyst

* Mavis Hui

DBS Vickers Research - Analyst

* Tiffany Feng

Citigroup Inc, Research Division - Director and Analyst

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Presentation

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [1]

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(technical difficulty)

On the other hand, total operating expenses decreased by 15%. Its ratio to revenue therefore increased by 3.7 percentage points to net -- up to 18.9%. And then in addition to the decline in diamond sales leading to bigger reduction in diamond purchases, which resulted to a significant decrease of VAT refund in relation to diamond import in Mainland of about HKD 182 million, together with gold hedging turn from a profit of HKD 8 million same period last year to loss of HKD 131 million this year contributed by the high gold price, operating profits therefore substantially decreased by 37.6% to HKD 1.2 billion. Our operating margin's maintained at a double-digit level of 10.3% while net margin decreased by 1.8 percentage points to 7.7%.

Now let's turn to Slide 7. Targeting at reducing our inventory level to below HKD 8 billion, we have successfully decreased our inventory balance by 19.2% to HKD 7.5 billion by end of March 2020. However, with the faster degree of revenue, average inventory turnover days grew by 128 days to 401 days. While if calculated by closing inventory instead of the average inventory, average turnover days would increase by 65 days instead of that to 309 (sic) [359] days. With this satisfactory drop in inventory levels, the group went back to a net cash position with a balance of HKD 1.2 billion.

ROE was 8.3%, which was 5.9 percentage points lower than that of the last year's level. For your information, since our IPO in 1997, there were only 2 years, including the year under review, with ROE below double digit. The other year was this last year in Q3. The group's NAV per share at the end of March 2020 was HKD 17.73, which was 1.4% lower than last year.

Now let's look at Slide 9. During the year-end review, despite the substantial drop in revenue benefited from the steadily increased gold price, the overall gross margin increased to 29.6%. Meanwhile, the operating margin in the past few years remains at quite a stable, low double-digit level.

Let's look at Slide 10 now. With the continuing impact of high gold price and the substantial decline in the number of businesses in Hong Kong due to these ongoing social activities and pandemic, Hong Kong/Macau revenue recorded significant decline of 36.4% to HKD 6.3 billion, which accounted for around 55.8% of the group's revenue. Segment profit decreased by 59.9% to HKD 387 million, which accounted for 29.8% of the group's total. The segment profit margin was 6.2%, a drop of 3.6 percentage points.

In the Mainland market, the revenues declined by 17.4% to HKD 5 billion. The segment profit declined at a relatively milder manner at 2.6% only to HKD 913 million. Because of a much lower drop of revenue in the Hong Kong/Macau market, a reversal of last year's provision of around HKD 26.8 million for impairment loss on trade receivables during the year under review for Mainland retail business and focus on Mainland licensing income as things set and therefore, Mainland's profit contribution substantially enlarged from last year's 49.3% to 70.2% this year.

Retail business was our primary revenue source. Due to the poor macroeconomic condition, the group's retail revenue decreased significantly by 35.1% to HKD 7.8 billion, representing 69.8% of the group's revenue. The segment profit decreased by 54.7% to HKD 426 million. It's accounting for about 1/3 of the group's total.

Despite the increase in number of licensed shops with the drop in the wholesaling of diamond throughout Mainland, the group's wholesale business revenue fell by 12.9% of the corresponding period last year to HKD 2.6 billion, accounting for 23.1% of the group's revenue. The segment profit decreased by 23.7% to HKD 310 million, accounting for 23.8% of the total. The segment profit margin was 11.9%.

On the other hand, despite the increase in licensing income in the first 3 quarters due to increase in number of licensed shops with the impact of the pandemic on business in the fourth quarter, licensing income of the year stayed flat at about HKD 801 million, which was 7.1% of the group's revenue. The segment profit increased by 1.8% to HKD 564 million, contributing to the larger share at 43.4% of the group's total. With the decrease in demand due to the strong gold price and the impact of poor macroeconomic conditions on consumer sentiment, gold and platinum products sales reported a significant decline of 37 -- 35.7% to HKD 5 billion, representing 48% of the overall sales.

With a record high gross margin of 21.3%, a 5.7 percentage point increase in the year and every year, this gold -- gross profit therefore only declined by 12.2% to HKD 1 billion for gold and platinum and then represent -- and then representing 38.8% of the group's total.

Sales in gem-set jewelry products fell by 25.3% to HKD 5.4 billion, accounting for 52% of overall sales. Gross margin of gem-set jewelery products stayed flat at 31%, though its gross profit as a result increased by 25.2% to HKD 1.4 billion, accounting for 61% of the overall gross profit.

Now let's turn to Slide 12. Consumption expenditure per capita in Hong Kong/Macau markets has been weakening. As a result of the high gold price and the substantial decline in the number of visitors, Mainland visitors due to the ongoing social activities and pandemic, retail revenue from the Hong Kong/Macau market decreased by 36.9% to HKD 6.1 billion, accounting for 97% of the market's total.

Because of the high fixed -- because a high fixed cost proportion in its cost structure, its segment profit fell substantially by 67.3% to HKD 254 million. Its segment profit margin was 4.2%. Its wholesale business revenue fell by 26% to HKD 100 million. The segment profit decreased by 52% to HKD 63 million, accounting for 16% of the total while its segment profit margin decreased by -- decrease to 63%.

The segment profit of wholesale business included the profits of intersegment sales of self-operated shops. Including intersegment sales in the denominator, the segment profit margin was 3.6%, a 1.6 percentage point drop as compared to the 5.2% in last year. Apart from that, benefiting from the increase in designated supplier consultancy services revenue as a result of the increase in number of licensed shops, Hong Kong licensing income increased by 24% to HKD 70 million. The segment profit rose by 24% to almost HKD 70 million with segment profit margin of 99.6%.

The Mainland market with the high gold price as well as the continuing impact of the U.S.-China trade war and COVID-19 pandemic under macroeconomic conditions, retail revenue from the Mainland market declined by 27.9% to HKD 1.7 billion. However, as contributed by the results of last year's provision of around HKD 26.8 million for impairment loss on trade receivables, during the year under review, the segment profit increased by 4.8% to HKD 172 million. The segment profit margin was 9.9%. As the increase in the number of licensed shops in Mainland offset the impact of other negative factors, licensing income in the Mainland market fell by 2.6% only to HKD 731 million. The segment profit fell by 0.7% to HKD 495 million. The segment profit margin was 67.6%.

Let's go to Slide 14 now. During the year under review in terms of retailing business, the Hong Kong/Macau -- Hong Kong market recorded the most significant drop of 42.6% in revenue to HKD 4.27 billion due to the reasons explained earlier. With high gold price, the sales of gold and platinum products recorded a drop of 18.7% and 27.9% in Hong Kong, Macau and Mainland markets, respectively, while gem-set products sales decreased by 34.2% and 25.7% in Hong Macau and Mainland markets, respectively.

Let's go to Slide 16 now. With strong gold price, the continuing impact of social incidents in Hong Kong, U.S.-China trade war and COVID-19 pandemic, our overall SSSG was negative 32% with Hong Kong and Macau markets recording negative 33% and Mainland recording negative 20%. Due to the strong gold price, gold and platinum sales recorded a decline in revenue and quantity with an increase in ASP in all markets. On the other hand, ASP of all the gem-set products in both Hong Kong/Macau and Mainland markets decreased mainly because most gem-set sales have been shifted from diamond product sales to lower-value items such as 18-karat gold and fixed-price gold product sets.

Slide 17 shows the same-store sales growth figures of self-operated and licensed shops in different cities, tiers and 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 less -- better gem-set sales mix in Mainland. During the year under review, the same-store sales growth of licensed shops was negative 12% while that of self-operated shops was negative 20%. The same-store sales growth of gold and platinum products was negative 22% and negative 16% for self-operated shops and licensed shops, respectively, while the gem-set same-store sales of licensed shops recorded a single-digit drop of 5% and self-operated shops was a 17% drop.

Now let's go to Slide 18. During the year under review, the SSSG in Hong Kong/Macau market declined significantly as a result of strong gold price, the continuing impact of social incidents in Hong Kong, U.S.-China trade war and COVID-19 pandemic. Overall, SSSG in the Mainland dropped at a milder manner. For April to May 2020, SSSG in Hong Kong/Macau markets grew up a few -- recorded a drop of around 18%, just like its performance in February and March 2020 because the Hong Kong/Macau and Mainland normal plans for the business were not yet resumed.

As for Mainland market, overall speaking, actually, the same-store sales for the overall shops altogether was talking about 42% drop in March 2020 and around 20% drop in April to May. But then actually starting from June 2020 or actually in the first 3 weeks of June, actually Mainland market reported progressive improvement at a decline of same-store sales for overall shops by less than 20%. It is quite a good improvement.

And for Hong Kong/Macau markets, retail sentiment gradually recovered as well and decline of same-store sales in the first 3 weeks of June actually narrowed to around 60% against the 80% of the previous few months.

And then let's go to Slide 20 now. We have TOE of HKD 2.1 billion, representing a decrease of 15% from last year's record. With revenue declining faster, its ratio to revenue thus increased by 3.7 percentage points to 18.9%. With the adoption of new accounting standard, parts of the rental expenses was classified into financing costs at an amount of HKD 28 million from lease liabilities and depreciation of right-of-use assets at an amount of HKD 474 million, which was included in depreciation and amortization. If we include the above 2 expenses into fixed rental for comparison, the total revenue will be HKD 685 million, representing a reduction of 12.8% and a revenue ratio at 6.1% as compared to the 5.5% in last year, and the TOE's revenue ratio will increase to 19.1%.

There were 22 shops in Hong Kong/Macau subjecting to rental renewal in FY 2020, accounting for around 1/3 of the total number of shops. The full year rental reduction on renewal was 7.5% for the year under review. Apart from the reduction on yields, we have around HKD 24 million rent contraction from landlords in relation to the social activities in Hong Kong and the pandemic. Given the current situation in Hong Kong, we have actively negotiated for rental reductions for our renewals and short-term rental discounts. There will be 17 shops subject to renew in FY 2021, accounting for about 30% of the total. We expect a double-digit drop on these renewals.

Slide 21 shows our inventory information. With our keen targets in reducing inventory levels below HKD 8 billion, we have successfully reduced the inventory level by 19% to HKD 7.5 billion. And inventory for gold and platinum decreased by 17.7% to HKD 2.7 billion while for gem-set jewelry decreased by 20% to HKD 4.8 billion. And then with faster accounting in sales for the year under review, the average inventory turnover days grew by 128 days to 401 days while closing inventory turnover days grew by 55 (sic) [65] days to 359 days.

In FY 2020, the group incurred CapEx of HKD 392 million, in which HKD 282 million was used for acquisition of offices and showrooms in Xi'an and Shenzhen, respectively.

Let's look at Slide 23 now. During the year under review, the impairment provision on amount due from -- on HKRH, Hong Kong deposit of HKD 7 million related from investments and operating activities in HKRH and its subsidiaries widens to HKD 38 million.

Now let's look at the group's future plans and strategies. Prior to the year under review, the group has set up its new 3-year corporate strategy with supply chain management, Mainland market expansion and strategic growth as its 3 main focuses. For us to foster its future business growth in order to further enhance the group's competitive edge, the group will focus on strengthening the supply chain management through various means. We will try our best endeavor to identify right products, set right price and allocate products to the market at right timing by implementing high level of automation and big data management, including factory productivity, shortening inventory turnover period, establishing strategic partnership with suppliers, streamlining logistics and distribution and intensify support to licensees, hoping all this would help to promote our business environment and strengthen our operational efficiency and effectiveness.

Let's look at Slide 27 now. The group has already adopted multi-brand strategy, and we will strive to develop more new brands in the future. During the year under review, we have opened 3 Dear Q and 32 Goldstyle independent shops in Mainland. We hope to open around 50 Goldstyle shops and aim to develop more new brands in the coming year.

Slide 28 shows our new brand, Lukfook Joaillerie. This brand targets at the high-end jewelry sector and features exquisite design and craftmanships, including award-winning jewelry masterpieces. The first shop-in-shop will be opened in Macau next month, and we target to open 3 stores in the coming year.

Slide 29 shows our expansion plan in FY 2021. As at 19 June 2020, including the independent brands, Dear Q and Goldstyle, we have 2,117 shops worldwide. With the focus of Mainland market expansion in mind, we will continue to seek opportunities to enlarge our platform coverage in Mainland. Expansion will be mainly focused on adding licensed shops in fourth and firth tier cities. In order to improve our store efficiency, we will transfer around 35 self-operated shops, which are mostly doing shopping, to licensed shops in the coming year. Nevertheless, we're targeting net increase not less than 150 licensed shops and not at a less 50 shops of new brands. We will also continue to further develop on e-commerce business and target to grow revenue by 15% in FY 2021. As it is expected for some time from -- bringing ventures to come back to Hong Kong and for retail atmosphere to somewhat level, the group will reduce 5 shops in Hong Kong in the coming year and seek opportunities to -- for opening 2 new shops in Macau market. The CapEx budget for FY 2021 would be around HKD 100 million, which will be used for shop renovation in Nansha plant and office renovation and purchase of equipment.

Now let's go to Slide 30 about the e-commerce business. In FY 2020, the e-commerce revenue increased by 13.8% in Hong Kong dollar and 18% in renminbi. The revenue accounted for 36% of the group's revenue in Mainland with the gradual growth in ASP to CNY 1,300. It's also accounting for 8% of the group's retail revenue as compared to 4.6% last year. We currently have 14 platforms, including Tmall.com, JD.com and VIP.com. And we took the initiatives to offer video chats, 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.

Let's turn to Slide 31 now. The group will also continue to capture the rapid growth of online marketing by various creative manners. We may use of Chinese social media platforms, including RED, Douyin and online fashion magazines to increase our brand exposure, expand our footprint in the young consumer markets. We expanded online sales channels by live streaming by staff and KOLs and enhanced CRM via instant messaging apps to reach and engage with customers.

We are now on Slide 32. For the anniversary promotions this year, apart from establishing the 91 Golden Fantasyland pop-up store, we have advertised plays for gold-diggings games and net KOLs as a whole. We also held the On-screen Bomber Challenge on RED Xiaohongshu, which recorded a total of over 11 million click rates, which once again raised Luk Fook's brand awareness among young consumers.

Let's go to Slide 33. To celebrate the remarkable milestone of reaching 2,000 shops worldwide, we invited the renowned celebrity, Li Yi Feng, as our global brand spokesman. We held a kick-off ceremony in Beijing to unveil the Feng-style pop-up store in several major cities. A number of followers of official Weibo page increased from 600,000 to over 1 million after the announcement of the new spokesman. We also ranked #1 in the Impact of Jewelry and Watches Brand Spokesman in AIMAN China Entertainment Index.

On Slide 34, you can see that we were invited to be one of the 10 brands participating in the popular Five Fortunes Collection challenge hosted by Alipay in last Chinese New Year. We have reached over 443 million participants and achieved brand exposure of 220 million.

To conclude, with the continuing uncertainties on macroeconomic environment arising from the social incidents in Hong Kong, U.S.-China trade war and COVID-19 pandemic, it is hard to set a target for the group's performance. So we really want to see some improvement in the coming year. Although we expect to see tough market condition in short term, we are still optimistic in mid- to long-term prospects and will focus on expansion in Mainland markets, relying on the solid growth potential of the middle-class population. The group looks forward to regain growth and bring the group's business to a high -- to a new height in the near future.

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 [2]

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Thank you, Kathy. Moderator, please open the floor for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from [Joey Chang] from ICBC International.

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Unidentified Analyst, [2]

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I have two questions. First is, can you illustrate the SSG (sic) [SSSG] in April, May, June to date of Mainland self-operated stores, Mainland licensed stores and HK and Macau stores, respectively?

The second question is, can you reveal some plans of stores rental-renew schedule in Hong Kong and rental cuts schedule?

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

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Okay. Actually, for April, May and June, in Hong Kong/Macau market, the -- there isn't -- no schedule. Actually, June show much progress for Hong Kong market, especially. So basically, for April and May, Hong Kong market, we're talking about 70-something percent or 60 -- something like 70-something percent drop in same-store sales. For Macau market, it's actually because the Macau market rely very much on the Mainland businesses for its business. So basically -- because the border is not yet open. So basically, for Macau market, it's always talking about 90% drop of same-store sales since March up to now. For April -- as of June, it's a bit better. It's now something like in the 80%, 80-something percent.

And for Hong Kong market, actually, since June, it's talking about a lower drop than the Macau market. So it's something like in the 60% or 70%. Now in June, the first 3 weeks, it's talking about 50%. So it's a much improvement against the previous 2 months.

And then for Mainland market, for their overall figure, we've talked about that already. But then, actually, they've been keeping that quite a stable manner of around 20% overall in the past few months. And then in June, it's a little bit less than 20%. But for -- that's mainly for the licensed shops. But for the self-operated shops, it's actually something like 80% in the March and then something like in the 60% in April and May and then in June is similar, something like that.

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Unidentified Analyst, [4]

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Very clear. And what about the rental cuts?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [5]

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Now for the rental part, actually, we mentioned that because we don't expect the Hong Kong market to soon be normal in the short term, in the short rate of time, so even after the pandemic, we expect the Hong Kong market to be weak. That's why we would -- we plan to close about 5 shops in Hong Kong, especially in those area in the coming year.

And for Macau, because actually, before the pandemic, actually the Mainland businesses transactions actually grew to 70% or more. So basically, we expect the Macau markets to do well after the borders are reopened. So basically, we expect -- the reason why we expect to open 2 more shops in Macau markets.

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Unidentified Analyst, [6]

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Okay. And...

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

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For Mainland market, we will still focus on expansion in Mainland markets because we expect middle-class population growth will be good. So basically, we would open an I guess of 150 shops in Mainland for Luk Fook brand mainly in licensed shops format. And then we would open at least 50 shops for the new brand, but it will be mostly it goes down.

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Unidentified Analyst, [8]

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So basically for Hong Kong shops, besides of 5 shops going for which are going to be closed, other -- there are no additional renewal of contracts, right?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [9]

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We've got 17 shops subject to renewal in Hong Kong, and we expect that should be something like a double-digit drop. And we're talking about 30% of the portfolio.

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Operator [10]

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There are currently no questions in the queue. (Operator Instructions) Our next question is from Mavis Hui from DBS.

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Mavis Hui, DBS Vickers Research - Analyst [11]

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First, I have to check with you in terms of the first quarter FY '21 performance, April to June. In terms of gem-set, could you tell us a little bit more on how each division has been performing? And also in terms of the average selling prices for these 2 divisions, how is the trend like? And lastly, in terms of e-commerce performance for April to June, what has maybe you've seen in terms of the growth momentum?

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

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In fact, for gold and (inaudible) included June. Actually, on gold by-product includes that throughout the year. For gold, it's still something like -- because of the high gold price, it's still very high drop. And then -- I mean basically everywhere. Actually, we talked about, let me see, 70% or 80% drop or something like that for the self-operated shops. So both of them are actually dropping at quite similar magnitude.

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Mavis Hui, DBS Vickers Research - Analyst [13]

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Right. And in terms of ASP, how has it been?

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

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Now for ASP, actually, if we talk about gold products, it's -- because the -- because of the rising gold price, it's actually increasing for gold sales. But then for gem-set jewelry, because we've got higher proportion of like 18-karat gold and fixed-price gold products instead of diamond products. So basically, it's -- we have a little bit of drop. Of course, the timing for those is actually -- it seems to be a bit better now, returning at a better manner than before. But still, the ASC is still low in recent months.

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Mavis Hui, DBS Vickers Research - Analyst [15]

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And so how much is the fixed-price gold products taking up in the latest report period versus also the April to June numbers?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [16]

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Now actually, we are going to announce our first Q details in mid-July. So basically, I guess maybe we'll talk about the details. Also, we have been -- we have announced our performance for the first quarter in mid-July.

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Mavis Hui, DBS Vickers Research - Analyst [17]

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Certainly. And I also have some questions about the latest employee support scheme. I just want to check what are your expectations for the government subsidies in the scheme that we could collect in next -- in the 6 months period?

And also, in terms of rental relief, probably some time the rental reliefs have been given from the landlords. So for April to June, for example, what our expectations in terms of rental relief?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [18]

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In fact, for the support scheme from the government, actually, we've got -- for those -- for the staff, actually, we have received the first part already. We're talking about HKD 30-something million. And then we expect altogether to the -- to be something like HKD 17 million for 6 months for the staff salary. Then for the rental relief, actually, we've got something like HKD 24 million unquoted in the financial year 2020. And then there would be maybe another something like a bit less than HKD 20 million for the new financial year.

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Operator [19]

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(Operator Instructions) Our next question is from Lina Yee from HSBC.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [20]

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So I just want to clarify, you mentioned you want to close 5 stores in Hong Kong. Are those 5 stores included in the 17 renewals in FY '20?

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

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Should be.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [22]

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Okay. Okay. Got it. Okay. And also, I want to like ask one near-term question. So what is -- like this year, it's -- visibility is quite low, but what would be the optimal network size in Hong Kong/Macau like in 2 to 3 years' time? And by then, what will be the normalized like OP margin or like a rental to sales cost ratio in Hong Kong and Macau?

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

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Actually, for the optimum side in Hong Kong/Macau, we have to tally. So basically, we always adjust our shops in accordance with the latest situation in the market. So in the past years, even though when there was a very -- a kind of a booming situation, we did not really open shops in a very aggressive manner. We are very conscious about the control or the control on ourselves to open shops or to expand shops in a disciplined manner. So that's why during the downturn period, we do not really need to reduce too many number of shops. But this time, it's a bit serious. In the past, we've been keeping quite stable number of shops for Hong Kong/Macau markets for quite some periods already.

Then in view of the serious impact of the pandemic, actually, we don't expect the economy to become -- to go back to normal or as good as before in the near term. That's the reason why we decided to reduce 5 shops in Hong Kong.

But at this moment, we don't have really any concrete plan to further reduce the number of shops in Hong Kong. So basically, if you -- we really want this as for -- on an optimal size, then that would be the optimal size.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [24]

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And what is like a normalized OP margin you will be like looking for in 2 to 3 years' time?

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

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In fact, when you look at the OP margin, we've been stable at kind of a low level -- low double-digit level for quite some years already. So basically, we still expect our OP margin can be maintained at double-digit level in the coming years.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [26]

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Okay. And I have a last question. So can you share with us what is the -- like inventory of your licensing shops in China compared with normal level or any other like indicator? That's all my questions.

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

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Well, in fact, because they stocked up for the Chinese New Year, I think, I mean before, in fact, January. So that's why they are still consuming the then inventory, excessive inventory because of the pandemic. So basically, they -- just like us, having a bit of excessive inventory at the moment. But we see that they are -- they have already started kind of a replenishment already. So basically, it's basically that they have -- they -- their inventory levels are going back to normal now. And then, in fact, some of -- we know that some of the licensees are doing quite well. Actually, although we've got something like maybe a 20% same-store sales growth drop off overall for the licensees, our licensed shops in the past few months. But in fact, for some of the licensees, they may go back to something like more than 90% or even have a little bit of growth. So they are doing quite well.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [28]

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Got it. Got it. Okay. But can you quantify what is the destocking factor by licensees in first half FY '21?

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

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Destocking factor?

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [30]

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Yes. For example, like your retail sell-through for the licensing shops could be like 100, right? And do you hold like a -- to you, revenue like what will be like the wholesale to the -- their retail sales? What would be the impact from the inventory destocking?

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

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Actually, because of the destocking, of course, they would replenish slower. That's happening in the past few months, I mean, because they've got excessive infantry because of the pandemic since Chinese New Year. But then it's hard to quantify that, really. But then, actually, some of them have already started the replenishment.

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Operator [32]

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Next question is from Tiffany Feng from Citi Group.

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Tiffany Feng, Citigroup Inc, Research Division - Director and Analyst [33]

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I have two questions. The first one is regarding your self-operated stores. I'm wondering why the performance is so weak. I understood the performance is normally weaker than licensing stores, but the -- is there any particular reason for the even bigger decline in Hong Kong stores? And do you plan to close them?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [34]

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Now in fact, most of our self-operated shops -- we've got a lot of self-operated shops in central parts of China and then especially Wuhan. So that would tell why it's performing so weak against the licensed shops.

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Tiffany Feng, Citigroup Inc, Research Division - Director and Analyst [35]

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Okay. So for the 200 -- around 200 stores, most of them are in Wuhan, right?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [36]

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Yes. Quite many of them are in Wuhan, in central parts of China and some licensing too.

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Tiffany Feng, Citigroup Inc, Research Division - Director and Analyst [37]

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Okay. Got it. And my second question is regarding the Goldstyle. I want to know the current revenue contribution and the GP margin level.

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

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Well, in fact, most of them are actually licensed shops. So it's not impacting our revenue.

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Tiffany Feng, Citigroup Inc, Research Division - Director and Analyst [39]

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Okay. So that's -- the store net addition target of 150 include the 50 Goldstyle stores?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [40]

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No. It's mainly for local shops.

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Tiffany Feng, Citigroup Inc, Research Division - Director and Analyst [41]

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Okay. So they -- these are separate, 150 for local shop and 50 for Goldstyle?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [42]

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Yes.

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Operator [43]

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Moving on we have [Haley] from Maple-Brown Abbott.

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Unidentified Analyst, [44]

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I've got two questions here. So the first one is very quickly just want to confirm the royalty pay from the licensed shops, is it charged per annum or per product?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [45]

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Well, it's actually charged on the cost of purchase every time when they replenish.

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Unidentified Analyst, [46]

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On the cost of purchase. Yes. Okay. And then the second question is, do you have any comments on the competition that's coming from Chow Tai Fook as they have been very aggressive in opening franchise stores in the low-tier cities? I think they opened about 400 to 450 a year. Can you comment on the competition?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [47]

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So I think we have opened a lot of new shops in the last financial year. So that's why we are actually speeding up the shop opening in China as well. So like last year, we opened a lot. And then in coming years, we are also trying to open more shops in the lower-tier cities. And then so we have a new program to attract the -- some licensees to open more shops in these lower-tier cities.

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Unidentified Analyst, [48]

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So has that been a great conversation to Luk Fook?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [49]

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Like in the past several months, it has been very distorted in a lot of ways. But then so far, you see that our numbers are not that bad compared really to other competitors in the market. So I think we are still doing okay so that in the coming months in the financial year, we're actually going to put more effort in expanding more aggressively in the China market, especially in the lower-tier cities.

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Unidentified Analyst, [50]

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Yes. So I guess going forward, if they open around 400 a year and you only opened 150, there's going to be a lot of a challenge for Luk Fook, I guess. Yes. Do you have any plans to compete with them already? Or -- yes.

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [51]

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No. Not really. Because you know what, like we have a full (inaudible) from the licensees in the past for quite a long time. And so we now have 5 -- more than 500. We have like 506 licensees right now. And then we added 83 licensees in the last financial year. So that we have been more aggressive in terms of the shop opening and creating licensees.

And then like these licensees actually, we are on a very different model. So even though like they are using license model as well, but we are quite -- in terms of the -- for example, resolving income ourselves that we schedule and also the mindset. Because like for our licensees, they have been more like avid entrepreneurs, which they have managed the shop and then run the operations and then so as far -- as long as they are putting more efforts, they will earn more. But then for a lot of the licensees in the past for enterprise, they have been more like a passive in -- passive investors. So that's why for the last 6 months, we think that we have, they are more like an entrepreneur. So that we are kind of attracting different type of licensees.

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Operator [52]

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Next question, we have Boon Han Ong from Tokio Marine Asset Management.

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Boon Han Ong, [53]

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I'm just curious about your 200 stores in China right now. I'm just curious because the macro is too weak. I mean that still create more (inaudible) What gives the confidence for the licensee to open 200 stores? Because I mean, historically, that was still -- that is your run rate in around 200 stores. So what gives them the confidence to continue to grow at this pace, yes?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [54]

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Well, in fact, actually, I just mentioned. Actually, the licensed shops are recovering quite well. And then some of them are even having kind of a growth or some of them maybe have any kind of a similar level of last year's performance even under the pandemic. So basically, for the -- because we target that opening licensed shops in the fourth -- in 50 cities and they -- and then they are not as crowded as the large cities. So basically, all this high-tier cities. So maybe there's a pandemic situation and those decision are not as bad as those high-tier cities. And then that's why we can still see many licensees having interest in expanding in the fast manner in the lower-tier cities in the coming years.

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Boon Han Ong, [55]

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Right. So that means in terms of the store expansion would be -- are to the even lower at 4 to 5-tier cities for this year?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [56]

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Yes.

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Boon Han Ong, [57]

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Right. And Kathy, I'm just curious, out of your 500 licensees, any of them went under distress? I mean they have cash flow problem, they have to close down any stores? Any cash problems just in case on that point?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [58]

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In fact, actually, when you look at the latest shop number, we've got a little bit less, about 3 shops less than before -- I mean than March-end condition mainly because some of the license shops have been closed because of some problems. So basically, there are some, but only a few. And then most of them -- because for the gold price, right, in the past periods of time continuing like 20 years, yearly rising. So basically, even if they really have cash flow problems, some of them they sell their gold on hand to -- actually, to cash the gold to help their cash flow problem. That's why, in fact, it's not really that serious for our industry in the pandemic reason -- periods of time because our -- the inventory we hold on hand is really valuable at a rising price, and that's why the cash flow problem is easier to solve than the other industry.

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Operator [59]

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Next we have Charmaine Yap from Redburn.

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Charmaine Yap, Redburn (Europe) Limited, Research Division - Analyst [60]

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I have two quick questions, please. The first one on price for the gem-set jewelry. Have you done any increases recently? Or are there any plans to do so, so not the gold one, but the gem-set jewelry part? And also, the second question is on demographics of the Mainland Chinese consumer. Are you -- have you seen any changes in recent months in terms of maybe the age group or anything that you can share on who is driving most of the recovery at the moment?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [61]

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So the summer price has been quite stable. I don't think we have like changes in that a lot. And then -- and yet some times, the people, of course, the gold sales have been lower because of the high gold price so that people actually shift to like 18-karat gold items and then also like lower -- lighter gold items. And they (inaudible). So like, for example, on e-commerce, they're selling very well on the pro-item swap at very low-value item. So then I guess that is because the people, they like just say in the past several months, the economic environment hasn't been that well, but then they have a lot of time to shop online or they have like a lot of time to shop, maybe 70%. We have been very aggressive on like WeChat and then like how to talk to the customers, show them we've got our results. So they are willing to buy lower-value items for their wear.

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Charmaine Yap, Redburn (Europe) Limited, Research Division - Analyst [62]

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That's interesting context. And in terms of age group, have you seen any changes in there?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [63]

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Well, to be honest, I don't have any specifics on the age group. But then if you can -- you can like see that these people, they purchase online and also like the live streaming, (inaudible) has been very popular. So these people are actually (inaudible) lower. But I'm not saying that it's lower like in the teens or at there, but that they are actually, let's say, below 40. But these people, they always go online and then check out like what's -- what new options there are. And also like the tech culture and salespeople over WeChat, and then we send them photos. And then even like our salespeople, they do a lot of live streaming section as well. And the manner is on our own or with a partner with the department stores. So we have been very aggressive on these kind of social media platforms.

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Operator [64]

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Next we have Hugo from Kingsway Group.

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Chun Shing Suen, Kingsway Financial Services Group Limited, Research Division - Analyst [65]

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Just a quick question on the holding gain on gold absolute value. The same number for FY '19 was HKD 177 million loss. Can I have the same number for FY '20?

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [66]

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It's HKD 115 million gain.

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Operator [67]

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As there are no further questions, I will hand the session over to you, [Chloe]. Please go ahead.

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Unidentified Company Representative, [68]

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Thank you, Kathy and Nancy, and thank you very much for joining the call. Everyone, have a nice evening. Bye.

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So Kuen Chan, Luk Fook Holdings (International) Limited - CFO, Company Secretary & Executive Director [69]

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Bye-bye.

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Unidentified Company Representative, [70]

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Thank you. Bye-bye.

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Operator [71]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.