Welcome. Thank you for standing by. At this time, all participants are on the listen-only mode. Questions will be taken after the presentation, and to ask for questions, you may press star followed by the number one. Now I will hand it over to the host, Mr. Adrian Chan. Please go ahead.
Hi, everyone. Thanks for joining the call. I am Adrian, a Daiwa Consumer Analyst. Here we have today is the Luk Fook's FY 2018 Results Conference Call. On the call today with us, management team, Dr. Kathy Chan, Executive Director and CFO of Luk Fook, as well as Nancy Wong, the Executive Director of Luk Fook. I will pass the call over to the presenters. Thank you.
Hi. Good afternoon, everybody. Thank you for joining Luk Fook's annual result conference call for the year ended 31st March 2018. I would like to start with looking at our FY 2018 financial highlights, followed by financial review and our future plans and strategies. The details are recorded in the corporate presentation, which has been uploaded to our website. I will go through that with you on the call. Benefiting from the overall economic recovery, successful product strategy, and positive retail sentiment. Revenue regained to growth after three consecutive years of decline and recorded an increase of 13.8% to HKD 14.6 billion, while operating profit increased by 25.7% to HKD 1.6 billion. Profit attributable to equity holders increased by 34.7% to HKD 1.4 billion, which was higher than expected.
The basic earnings per share increased by 34.7% as well to HKD 2.33. The Group e-commerce business revenue increased by 88.7%, contributing 15.5% to mainland China's retail revenue. The Ggroup proposed a final dividend of HKD 0.55 per share. Together with HKD 0.55 interim dividend, the annual dividend was HKD 1.1, which is the same as last year, with annual dividend payout ratio of 47.2%. The Group had a net increase of 135 Lukfook shops during the year under review, out of which 132 were in mainland China. We have also added two 3D-Gold shops in mainland China. Now, let's go into the details of our financial performance.
During the year under review, with a stable overall gross margin of 25.7%, Group profit grew by 14.2% to HKD 3.7 billion. With operating leverage, our total operating expenses to revenue ratio decreased to 15.9%. Operating profit improved by 25.7% to HKD 1.6 billion, with operating margin at 11.1%, which was 1 percentage point higher than prior year. Net margin increased by 1.4 percentage points to 9.4%. Profit attributable to equity holders increased by 34.7%, which was higher than expected. The lower effective tax rate of 15.1% was mostly because of reversal of some overprovisions in previous years. The Group's financial position remains healthy.
The inventory level rose 14.6% to around HKD 8 billion as there were 28 new self-operated shops opened during the year. Inventory turnover days reduced by four days to 257 days when compared to last year. Our net cash of HKD 1.4 billion was similar to previous years' level. Our ROE was 13.6%, which was 2.1 percentage points higher than last year. The Group's NAV per share as at March 31st, 2018 was HKD 17.17, representing a year-on-year growth of 12.2%. With successful product strategy and thanks to the positive retail sentiment, in FY 2018, the Group's revenue regained growth after three consecutive years of decline and reached the third record high in our history.
Despite a higher base in the second half of the financial year than the first half, with improved overall economic environment and increased visitor arrivals in Hong Kong and Macau, the business performance of the second half of the year was even better than expected. Therefore, we achieved a much higher net profit than expected for the full year, which was also the third record high in our history. The Hong Kong-Macau market remains the key source of revenue for the Group. With the recovery of retail markets and positive market sentiment, Hong Kong-Macau overseas revenue recorded an increase of around 9.7% to HKD 9.5 billion, which accounted for around 55% of the total revenue.
As a result of increased sales mix of gem-set jewelry products and benefiting from operating leverage, the respective segmental profits increased by 38.1% to around HKD 895 million, accounting for around 53% of the Group's total. In the mainland China market, the revenue increased much more, by 22.5%, mainly because of the improvement in the retail environment and the increase in the number of shops there. Its revenue reached HKD 5.1 billion. Its segmental profit increased by 1.9% to HKD 786 million, contributing around 47% of the Group's total. Retail business was our primary revenue source with improving consumer sentiment and increased number of self-operated shops, retail revenue increased by 14.3% to HKD 11 billion, representing around 75% of the total.
If we include the sales mix of gem-set jewelry products, its amounted profit increased by 24.2% to HKD 857 million, which contributed to more than half of the Group's total. On the other hand, due to increased number of licensed shops, the wholesale revenue rose by 9.6% to HKD 2.9 billion, representing 20% of the Group's total. As the Group reduced the wholesale price of gem-set jewelry products in order to enhance our market competitiveness, together with the realized profit of inter-segmental wholesale transactions of gem-set jewelry products going back to more normal levels, the wholesale gross margin dropped and led to decrease of wholesale's amounted profit by 12.8% to HKD 383 million, and accounted for 22.8% of the Group's total.
Meanwhile, with increased number of licensed shops, licensing income rose by 26.6% to HKD 653 million, which was 4.5% of the Group's total. As labor was the highest fixed cost proportion in its cost structure that helped to offset the impact of reduction of wholesale gross margin of gem-set jewelry products. Its amounted profit of licensing increased significantly by 51.8% to HKD 441 million, contributing to 26.2% of the Group's total. Gold products remained the most favorite item. Together with platinum, sales of gold and platinum products increased by 10.2% to HKD 7.7 billion, representing 55.5% of the Group's total. Its gross profit increased by 8.8% to HKD 1.2 billion, representing 36% of the Group's total because of stable gross margin of gold products at 15%.
With our successful strategy in launching good value money products, our gem-set jewelry sales improved by 17.4% to HKD 6.2 billion, representing 45% of the Group's total. Gross margin of gem-set jewelry products dropped by 1.7 percentage points to 33.8% due to wholesale gross margin drop. Its gross profit therefore only increased by 11.9% to HKD 2.1 billion, representing 63.8% of the Group's overall gross profit. As explained earlier, with increasing number of tourists and improved spending power plus positive market sentiment, the retail revenue in Hong Kong, Macau, and the overseas markets recorded a growth of 10.3%. With increased sales mix of gem-set jewelry products, its amounted profits recorded significant growth of 36.2%. Its amounted profit margin increased by one point.
... down by 26%, while the volume grew by 57% in that category. Thus, the Hong Kong and Macau same-store sales growth improved from - 20% to + 9%, with gold platinum at + 6% and gem-set at + 14%. The same-store sales growth in mainland China was + 5%, with gold platinum at + 7% and gem-set at - 1%. With stabilizing ASP through volume growth on both gold and gold platinum and gem-set products were at 25% and 22% respectively. Slide 17 shows the same-store sales growth figures in different tiers and regions in mainland China. All tiers of cities recorded overall positive same-store sales growth. In terms of regions, all regions recorded positive overall growth as well, except certain parts of China, as there was only one shop in that region.
Overall speaking, gold platinum products performed better than gem-set products in mainland China because of lower base, resulting from lower demand due to high gold price in first half of FY 2017. During the year under review, despite a higher base in the second half of the financial year than the first half, we are glad to see that the business performance of the second half of the year was even better than expectation. Stepping into the new financial year since April 2018, the market sentiment remained positive, especially for the Hong Kong and Macau markets. With same-store sales growth of a more than + 20%, same-store sales growth with gem-set jewelry products in mainland China also restored to a growth track, although with uncertainties in the macro economy environment such as trade war and geopolitics.
The Group remains prudently optimistic about the business development in FY 2019, expecting a continuing growth in business. In Macau and mainland China, the average ticket size recorded slight growth of 3.9% and 5% respectively to MOP 7,900 and CNY 3,400 respectively. As explained earlier, with significant increase of sales in the newly launched value-for-money products in the Hong Kong market, which were mostly fixed price gem-set category, the overall gem-set ASP in Hong Kong went down 28.6% to HKD 3,000 during the year under review. Therefore, average ticket size in Hong Kong declined by 12.5% to HKD 5,600 . For diamond, jadeite, gemstones, and pearl products, which in general have higher ASP, we are glad to see their ASP remained flat in Hong Kong and regaining gentle growth in the Macau market.
Apart from that, the mainland visitors transactions in Hong Kong and Macau markets, accounting UnionPay cards, RMB cash, plus WeChat Pay and Alipay transactions accounted for 58% nowadays as compared to the 55% before. With the increase of 17.8% in revenue, we had a moderate increase of total operating expenses by 7.8% only to HKD 2.3 billion. Because of the faster increase in revenue, the total operating expenses to revenue ratio decreased to 15.9% during the year under review. Rental and payroll accounted for more than 70% of our total operating expenses. Overall rental increased by 3.6% because of increased number of staff operates shops. In fact, the variable part of rental increased by 32.3% due to increased number of shops in mainland China, where most contracts were turnover rentals. There are 17 shops in Hong Kong and Macau subject to the rental review in FY 2018.
The rental reduction was an average of 30%. Therefore, fixed rental in Hong Kong and Macau markets decreased. There will be 25 renewals in Hong Kong and Macau in FY 2019, accounting to 43% of total number of shops we have there. After two consecutive years of renewal reductions, we expect to see further reduction in FY 2019 on renewals as they are normally three years with terms. But renewal reduction should be lower than the 14% or 30% in the past two years. Overall staff cost increased by 17.3%, which excluding sales, the variable portion increased substantially by 35.6%. With increased number of staff operates shops in mainland China, the fixed portion therefore increased by 10.6%. With the additional staff operates shops, our inventory level went up by almost 15% to around Hong Kong dollar experienced. Inventory for gold platinum increased by 11% to HKD 3.1 billion.
While that for gem-set jewelry increased by 17.6% to HKD 4.9 billion. Inventory turnover days for gold products increased slightly to 156 days because of high inventory growth in mainland China. The gem-set jewelry inventory quarter dropped by around one month to 405 days due to increasing gem-set jewelry product sales. During the year under review, the Group incurred capital expenditures of HKD 215 million, in which HKD 131 million were used for the prepayment of purchase of our Hong Kong new headquarters. The remaining HKD 82 million were used for shop and manufacturing plant renovation. The performance of 3D-Gold business continued to improve, and the loss further narrowed from HKD 36 million to HKD 16 million for the investment and operating activities in HKRHQ.
Let's look at the Group's future plans and strategies now. With the anticipated considerable growth of middle class population in mainland China, we remain optimistic in the mid to long run. We shall continue to uphold our business development through the three key focuses: Product, China, and branding. Through various productivity enhancement measures, the Group is dedicated to intensify the execution of these three key strategies. With the three focuses in mind, we will keep on enriching our product portfolio with stylish jewelry designs at affordable price to target at middle class, and continue to capture the kids market. We will also continue to seize the market opportunity in Mainland China by enlarging the market coverage. We'll improve market sentiment and coverage through at net at least 120 shops in Mainland China for FY 2019.
Expansion will remain in lower -tier cities of northern and southern parts of Mainland, with 55% in shopping malls, 1/3 in department stores, and the rest at street level. We will also continue to optimize our e-commerce business network. Lastly, for branding focus, the Group will continue to adopt market-oriented strategies to further penetrate the middle class wedding and kids market, as well as boosting local consumption. The Group will also strive to enhance productivity and reduce expansion in different operational assets, including improving service quality control and enhancing support to licensees, as well as promoting continuous improvement culture and full optimization of operational processes. Currently, we have altogether 1,661 shops worldwide, covering nine countries and regions, namely Hong Kong, Macau, Mainland China, Singapore, Malaysia, Cambodia, U.S., Canada, and Australia. In Mainland China, during the year under review, we had a net increase of 132 Lukfook shops.
With the improved overall economic environment and market sentiment, there were around 80 licensed shop openings in the second half of FY 2018, summing up to 108 licensed shops in net addition for the full year and 24 self-operate shops net addition in FY 2018. The Group opened one self-operate shop in both Hong Kong and San Francisco and opened our first licensed shop in Cambodia. On top of Lukfook shops, we have net added two 3D-Gold self-operate shops operated by the 51% owned joint venture with the licensee, summing up to 11 3D-Gold self-operate shops in Mainland China. As at 31st March, 2018, we had 1,631 shops worldwide, with 1,551 shops in Mainland China, covering all 27 provinces and municipalities in more than 350 cities, with the shops mostly concentrated in northern and southern China.
In the coming year, the Group will further expand the overseas markets. We shall open our first shop in Malaysia and first shop in the Philippines in June and July, respectively. In Mainland China, we shall open at least 120 shops, which would include five self-operate shops, while in Hong Kong Macau, we shall open no more than five shops. In FY 2019, the capital budget should be around HKD 1 billion, in which HKD 878 million will be used for completing the acquisition of our headquarters in Hong Kong, as well as the acquisition of several floors of office in Shenzhen. With the rapid development of e-commerce, we achieved remarkable growth for our e-commerce business in the past few years. The revenue increased by 88.7% to HKD 343 million during the year under review, which exceeded our first-year target of 50% sales.
The revenue accounted for 15.5% of Group's retail revenue in Mainland China now, and FY 2019 sales target for e-commerce is 30% growth. We currently have 10 platforms, including Tmall.com, JD.com, and Vip.com. The Group also captures the rapid growth of online marketing by various creative manners. We joined as partners with mobile games for promotion, invited KOL, and approached online fashion magazines to share styling tips on our products in order to expand our footprint among young customers. We also engaged in sports and entertainment apps together with our medal sponsorships in marathons. We launched promotional activities that successfully reached the middle-class population in an interactive and creative manner. In view of the growing impact of the esports, on top of sponsoring the champion rank of King Pro League for two seasons, we held King Pro League cultural roadshows in four cities to arouse attention.
With over 15 million active King of Glory players, the two finale games and the presentation of the champion ranks reached over 6.2 billion views on different platforms. Together with the Heart of King series that were tailor-made for KPL, the collaboration successfully raised brand exposure to the millennials. To conclude, with improved macroeconomic environment and consumer sentiment, we are presently optimistic about the performance of FY 2019, and we target a double-digit same-store sales growth for Hong Kong and Macau, and single digit same-store sales growth for Mainland China markets for FY 2019. This is the end of my presentation, and thank you for listening.
Thank you, Kathy. Operator, can we go to Q&A?
Thank you. We will now begin our question and answer session. To our participants on the phone, if you would like to submit your questions, you may press star followed by the number one. Please unmute your lines and record your names slowly and clearly when prompted. Your names are needed to introduce your questions. To cancel your request, please press star followed by the number two. Once again, star one to submit your questions on the phone, and star two to cancel your requests. One moment while we wait for questions. Our first question comes from the line of George Siu. Sir, your line is open.
Hi, Kathy and Nancy. Thanks for taking my questions. I actually have two questions. Firstly, it is regarding the gem-set gross margin. I recall that you mentioned that for the Hard Gold products, the margin is quite similar to the other gem-set products, but why do we see the second half GP margin of gem-set contracted by 200 basis points during the second half? I am not sure, did I miss anything for this? Secondly, I would like to ask about the China wholesale business, because we see the sales are 14% in the second half, but the OP actually down 44%. That leads to the OP margin down like 10 percentage points. Anything specific that you want to highlight to us? Thanks.
Okay. Actually, your two questions are related to the same factors. For the retail business, actually, the gross margin for gem-set jewelry actually was stable. For the wholesale part, there are actually two factors affecting the gross margin of wholesale gem-set jewelry products in mainland China, really. First of all, because we want to really improve that quality competitiveness, so that in the second half, actually try to decrease some of the selling price or the wholesale selling price of some gem-set jewelry. That accounted for half of the decline in the gross margin of the wholesale gem-set jewelry product.
The second factor is actually because, in FY 2017, actually, we have a much higher exceptional high realized gain on the inter-segmental wholesale gem-set products because the proportion of the inter-segmental sales on the retail sales of gem-set is actually at a much, much higher level than FY 2018. Therefore, the realized gain in 2018 dropped quite much against 2017. That leads to another reason for the drop in the gross margin of the wholesale part. That is why you can see that the China wholesale revenue increased so much, but the financial profit actually decreased. In Hong Kong, it is okay. Everything is okay.
Got it. Thanks.
Sure.
Thank you. Our next question is from the line of Mr. Yugo Shen. Your line is open.
Hi. Thank you for your presentation. I'd like to ask about the product mix change for this financial year. I mean, the product mix between gem-set and the gold products. What's your guidance on this? Another question is about the effective tax rate estimate. Thank you.
Okay. Actually, for the product mix change, actually, in our FY 2018, you can see that the gem-set jewelry products performed better. That's why we have a relatively higher mix of gem-set jewelry. That's mainly in Hong Kong retail. For the effective tax rate, you can see there is a much lower percentage than before. It's mainly because we've got something like a reversal of over-provision for five years. That's talking about around maybe HKD 37 million . Basically, for next year, maybe we may have another reversal as well, but further than that, we should see the effective tax rate going back to normal levels.
Thank you.
Thank you. Our next question is from Tiffany Feng. Ma'am, your line is open.
Hi, management. Hi, Kathy. I want to ask more about the gem-set wholesale price. Do you see any sign of growth? Do you still maintain the growth versus April and May? Thank you.
For the wholesale gem-set gross margin, actually, because we try to increase or decrease the selling price periodically to align with the market price, so that in the second half of the year, it is a bit higher than expected. But then, actually, in the coming year, we should expect that to go back to a more normal level. For the rental trend in FY 2019, actually, we got 25 renewals in Hong Kong and Macau markets. It is accounting for 43% of the total there. Because we got three years lease term, and we started to see renewal reduction the year before last year, it is talking about 14% reduction. Last financial year, FY 2018, we got 30% reduction. We should expect another year of reduction in FY 2019, but most likely it would be below the level of those two years, maybe kind of a single-digit reduction only.
For the same-store sales growth since April, actually, every month was very strong, especially June. We did not see the kind of slowdown phenomenon at all. Since that, the momentum is still going on, and we have a kind of a more than 20% growth here in Hong Kong and Macau markets. So that is a very strong growth indeed. We are going to announce the first quarter same-store sales growth performance in mid-July, so you may need to wait until then to discuss about the details of every month's performance.
Yeah. Thank you.
Okay.
Thank you. Once again, for those who would like to ask their questions on the phone, you may press star followed by the number one. Once again, for those who would like to ask those questions, please press star followed by the number one. Our next question is from the line of Jason Shang. Sir, your line is open.
Hi, Kathy and Nancy. Congratulations on the results.
Thank you.
I have a few questions that I would like to ask. First one is, dividend per share, it seems a drop compared to FY last year in absolute value. The second question is, for the China wholesale business OP and the licensing OP, it seems it goes two different directions. Can you tell us more about this? The third question is related to the Hong Kong wholesale business. Can you tell us what kind of product you sell in this business unit? The last question is, the PRC profit seems to drop significantly in the wholesale unit and the retail unit. Does this relate to the gem-set decrease in the second half of the year? Thank you.
Now, actually, for dividend per share, actually it's the same absolute amount as for the full year. We have paid HKD 1.1 for annual dividend for a number of years already. So it's not really dropping. It's kind of a stable dividend per share. For China wholesale operating margin and licensing operating margin, since going into different directions, mainly because the gross margin performance. For China wholesale, because of the decrease of gem-set products gross margin, because of the decrease of selling wholesale price in order to enhance the market competitiveness, and the decrease in the realized gain from the inter-segmental hotels of such products when comparing to FY 2017, which was exceptionally high. That's why it have a decreased gross margin for wholesale business in mainland China, leading to a decline of operating profits, even with an increase in the revenue.
But for the licensing income, because we have a very good growth due to the high number of newly added licensed shops. Therefore, the gross margin and the operating margin for licensing actually improved very much. It went up to 60 point something percent. So it led to a much improved performance for licensing. But the two things to offset each other, because when we look at the wholesale licensing together, the gross margin actually is quite similar to the retail margin for the Group as a whole. For wholesale in Hong Kong, actually, we've got three categories inside there. The major part would be scrap gold sales. It's not happening in Mainland China in the past. We have also some sales of products, the finished goods to 3D-Gold and some corporate clients as well.
So that's basically the wholesale business in Hong Kong. For PRC, profit decreased very much. It's mainly because of the wholesale and the retail drop in our profit, even though with an increase in revenue. So for wholesale, we explained already, it's mainly because of gem-set product gross margin drop. But for retail, it's mainly because of the gold margin drop. Because remember, in last financial year FY 2017, we've got very high gold price in the first half, and it led to a very high gross margin for our first half of gold products. But this year, in FY 2018, the gold price go back to a more normal level. That's why the gross margin is going back to a more normal level as well. That means there is a drop. So altogether, it led to the retail profit drop as well, even though revenue was a growth.
Okay. Thank you so much.
You are welcome.
Thank you. Our next one is from Miss Emily Lee, manual lines open.
Hi, Kathy. Hi, Nancy. Thank you for taking my call. A few questions here. First, I just want to spend a little bit more time talking about the gross margin for gem-set. Because if we were to look at the first half gross margin, it was still at 34.8%. So implying that the second half was only at 22%-23% level. I was just wondering if we have already increased back the wholesale prices for gem-set for FY 2019, because earlier on, Kathy mentioned that we should be expecting it to go back to a normalized level for this year. So I'm just wondering about when we should be expecting the gem-set gross margin to stabilize or increase back to the previous year's level. Secondly, going to the ASP questions for gem-set. Obviously, we are still seeing a decline because we've been launching hard gold products, so on and so forth.
But I'm just wondering how should we be looking at it going forward, because in the MD&A, we did talk about how we want to launch some more products targeting the mass market or even kids. So possible to see further downtrend in ASP? And thirdly is on same-store sales. I'm sorry to drill on this, but we did mention how Hong Kong is doing really well, over 20%. But can we just get a sense of how China's doing? I see in the MD&A that at least the gem-set is going back to the positive trend, but any further color would be great. And lastly, I just want to ask about online. How profitable are we now for the online business? Possible to share with us the operating margin. Thank you.
Okay. For gross margin gem-set actually, we would change that periodically. So that actually, we have started to increase some of the category to a high level already. So basically, we should expect a higher gross margin in FY 2019 against the 2018. And then for ASP drop, because it's been dropping for more than a year already. Actually, the hard gold product started to see very good sales since the Chinese New Year in 2017. So I think it's already a year over.
So basically, we should expect that to go to kind of a more stable level in future. And then the same-store sales growth for Hong Kong Macau market is very good since April. And then for China, it's a double digit. It's more than 20%. For China, we see the same-store sales growth for gem-set actually going back to a growth track. For gold, it's not yet. Basically, that's why we just mentioned about the gem-set. For online business, maybe Nancy can talk about that. How profitable.
Well, on the online business, that will be operating cost for the online business is getting higher and higher. As you said before, the online operating margins naturally is higher than the offline. If you just look at the FY 2018, that will be low single digit higher than the retail business in China for the staff operated stores.
Can I just have one follow-up? Is it right to assume that FY 2019 gem-set gross margin could go back to FY 2017 level or first half FY 2018 level?
Actually, our normal gross margin for gem-set should be something like 35%-36%. Maybe we should expect something like 34%-35% range in FY 2019.
Thank you.
Welcome.
Thank you. Next question is from Mavis Hui. Your line is open.
Hi, Kathy and Nancy. Thanks for taking my question. I have to check with you on the payout ratio, which was 47% for FY 2018. It seems that is normalizing. Do we expect somewhere around that level for the coming years? Secondly, I noted on Page 17 of your presentation that the self-operated stores in China, in particularly Tier one cities in Northern China, has been seeing better performance. In coming future, are we going to add more stores in these areas? How would be the performance of your licensed stores in China so far compared to the self-operated stores? Lastly, could I have a breakdown on the online sales in terms of your e-platforms? Thank you.
Actually, for the payout ratio, we have used to be payout ratio of 40%, but because of the decline of profit in the past few years, try to maintain the same absolute amount of annual dividend of HKD 1.1. This year, in the final, we haven't split that into special and basic because we are planning to change to increase the payout ratio, the policy from 40% to something higher. It's not yet decided. We will fix that in the coming board meeting when we announce our interim results for FY 2019. Basically, we should expect that to be above the 40% anyway. For the additional shops in mainland China, we should expect that to be more focused on the northern parts and southern parts of China and kind of lower tier cities.
For performance of licensed shops against self-operated shops, it is normally better than self-operated shops because we started the licensing model in 1994, and the self-operating model actually was started 10 years later. That is why the licensed shops occupy most of the prestigious locations. For the self-operated shops, we mainly open for strategic purpose, like if the licensees did not want to develop, they go to a newly developed region, then we go first and attract them to come. It is just like the central part of China, we try to go there first. That is why it is quite natural to see the licensed shops to perform better than self-operated shops. Normally it is kind of a single digit better.
For e-commerce, we are selling on 10 online platforms now. Tmall, JD, and Vipshop are the three important platforms. Actually, Vipshop and JD.com add together would be approximately the sales of Tmall.
Right.
Thank you.
Right. Thank you.
Thank you. Next question is from Tiffany Feng. Ma'am, your line is open.
Hi, Kathy, Nancy. A follow-up question on the GP margin. In FY 2018, the GP margin seems to reach the historical high level. Going forward, how do we expect for the GP margin? Can we continue to maintain this high level, or do we expect a further upside, or there will be some correction on it? Another small question is on the licensing cost of goods sold. I saw it continued to decline last year, but the licensing revenue actually recovered the growth. Can you explain why the cost of goods sold continued to decline? Thank you.
Licensing cost of goods sold to decline? Where can you see the licensing cost of goods sold?
On Page 15 of your announcements, there is a breakdown of cost of sales into cost of inventory sold and cost of licensing business.
Oh, I see. Because there is a higher fixed cost content, that may be because of some improvement in efficiency. It's about a million, something lower than before. This part, I don't think it's really very material. It's only about 4% lower.
Yes, but the revenues from the licensing business grow quite well last year. That means the margin of this part improved significantly.
Yes, that's true. Because we've got higher fixed cost proportion in the cost structure, that's why we enjoy a much higher gross margin and operating margin of more than 60 something percent in this business. Actually, we used to have 60 something a few years ago. It's only because of the macroeconomic conditions that we have a not as good performance in the past few years that led to a drop in the margin of the licensing business to something like 50 something percent. Basically, it's going back to a more normal level nowadays. For the gross margin, it's a little high this year. Actually, it's quite similar to last year's level. Of course, we really want to see a more-
Yes. How about the proportion April to June, and what's your expectation for FY 2019?
For April to June, actually, we are going to announce that in mid-July. Basically, what we can tell you will be about the same sales growth of double digit of more than 20% since April for Hong Kong and Macau markets, and single-digit positive growth for gem-set jewelry in Mainland China. That's all we can talk about April to June. For further than that, we have to talk about that in mid-July, after we announce the first quarter. That's April to June same store sales performance. Basically, in Hong Kong and Macau markets, gold performs better than gem-set, and in Mainland China, the opposite.
Okay. Thank you.
You are welcome.
Thank you. Next question is from Mr. Yugo Fun. Your line is open.
Hello, Kathy. Can you hear me?
Yes.
Just a quick question on the holding gain or loss on gold in FY 2018. The number for full year 2017 should be HKD 121 million. For your reference, may I have the full year 2018 number? Thanks.
It's only HKD 40 million something or HKD 50 million loss.
Okay.
HKD 52 million. Sorry. It's HKD 52 million.
HKD -52 million, right? Thank you. HKD 52 million loss, right.
Thank you. Once again, for those who would like to submit their questions on the phone, you may press star followed by the number one. Once again, for any questions that you would like to submit on the phone to our hosts, please press star followed by the number one. We have a couple of questions that just came in. Our next question is from Jessica Deng. Your line is open.
Good evening, Kathy. A quick question on gold versus gem-set performance. You mentioned earlier that gold is doing better than gem-set in Hong Kong, but in China, it is the opposite. Do you mind elaborating on why we have been seeing this kind of trend?
Maybe gold. Sometimes if the gold price drops, it would lead to high demand. But in China, it is quite interesting to see that actually, gold performance in Hong Kong is much better than China. Actually, in China, we guess mainly because of the fierce competition. The competitors try to offer very steep discount for gold products. Because we want to protect our gross margin, we do not follow. That is why our performance of gold sales in China was not that good. But we try to offer more fixed price gold products in China, and it is included in the gem-set category. That is why the gem-set products were performing better than the gold in Mainland China.
I see. So you are saying basically the competition for gold products in China, it is a lot more severe compared to in Hong Kong.
Yes.
Yeah.
The competitors just try to over a very deep count. We think it is really quite irrational to us, actually.
Mm-hmm. Kathy, if I understand correctly, I thought gem-set is quite competitive in China as well. Is overall gem-set demand, it just industry-wise is better than gold? Right? Gem-set is as competitive as well.
In fact, when you look at our past performance, past few years performance every quarter, mostly you can see a double-digit gem-set same-store sales growth in Mainland China for us. Sometimes it is crazy in single digits. There were a few single digits same-store sales growth as well, but mostly double digits. Basically, it is still that kind of a trend in the recent period of time. We experienced a single-digit drop in the last financial year for gem-set in Mainland China. Right now, we are experiencing something like a single-digit growth in Mainland China for this product in the first quarter. I mean, in April to June quarter.
Hmm. Right. Yeah, Kathy, I am just wondering, I guess gem-set, do we have better design? Our products are better, or why is our gem-set doing much? I am just curious. I guess it is as competitive as gold as well in China.
In fact, we try because the big trends that people were really buying gem-set jewelry for daily wear purpose, and to try to buy a more affordable or kind of a good value for money product. That is why we try to offer lots of new design, stylish design for this purpose, to attract the mass market consumers. So we spend a lot in improving the product offering in gem-set category in the past few years. Hello?
All right, our next one is from Jason Shang. Your line is open.
Hi, Kathy. I have a few following questions. For the watch business, I see in the report it is mentioned that it dropped 14% to FY 2018, HKD 180 million. Can you tell us more about the watch business? The second question is, we see that for the Hong Kong licensing segment, the revenue is around HKD 37 million. Can you tell us what is the new store open for the Hong Kong, and is it from overseas? Thank you.
In fact, for the watch business, it is not our focus, really. So that is kind of offering more choices for customers in the shops. We just allow it something like a kind of a natural growth or drop. For the Hong Kong licensing segment, actually it is a new business, new kind of an income for us. It is actually from the kind of the consultancy fees we gain from several of our suppliers, like the contractors for renovation, for the one for those kind of the stations, the boxes for the packing materials for the jewelry and shops.
All these, because we try to help them to get business from mostly the licensed shops. That is why we group such kind of income in our licensing business. This is happening in Hong Kong company, so it is grouped under Hong Kong segment. It's a new source of income actually for us in FY 2018.
Is this going to continue, and is this mainly for 3D-Gold or any other competitor jewelry business?
It's actually for the licensed shops, and they're mostly in Mainland China, really. Then, of course, for the licensed shops in overseas, it cover that as well. But it's basically in Mainland China. It's a kind of a recurring income for us in future. A new source of income, new source of recurring income. I guess it would grow bigger and bigger in future.
How much will this grow bigger in the coming year or the future?
It's hard to tell because we have to negotiate one by one, see whether we can successfully get that kind of income. It depends. We don't know yet how much we can grow as a maximum.
Okay. Thank you so much, Kathy.
You're welcome.
Thank you. Our last question is from HanLee . Your line is open. You may proceed.
Hi. Hello?
Hi.
Hi. Thank you. Thank you for taking my call.
Yeah.
Just a quick question. We noticed that there is an IFRS accounting changes regarding revenue recognition and operating lease. Just wondering whether the company has started to evaluate the impact, and if so, what may the impact be?
In fact, for revenue, our auditors have done something for us in these two aspects already. For revenue recognition, we do not think there is any material impact for us. For operating lease, it is not yet started. Basically, we do not really expect that to have too much influence on our P&L. It would increase our total liability and total assets to a certain extent.
Okay, got you.
It should not be too material too.
Got it. Got it. Thank you.
Okay.
Thank you. We do not have any further questions on queue. I would like to hand the floor back to our speakers.
Okay. Thank you everyone for joining the call, and thanks Kathy and Nancy for your time. Congratulations again on the very good results. Thank you.
Thank you. Okay, bye-bye.
Goodbye. Thank you.
Thank you. That concludes today's conference call. Thank you all for joining. You may now disconnect.