Hi. Good evening, everyone. Thank you for joining the call. I am Stephanie from the IR team of Luk Fook. Today, we have the pleasure to have Dr. Kathy Chan, Executive Director and Chief Financial Officer, and Ms. Nancy Wong, Executive Director of the group, as speakers to talk about our financial year 2018-2019 interim results. We will start with a presentation on the figures, followed by the Q&A session. Further to the presentation, please refer to the corporate presentation PowerPoint that has been uploaded to our website. You may also find the website link in the e-invitation or the IR WeChat invitation. Now may I pass the time for Kathy to do the presentation, please.
Okay. Thank you, Stephanie. Good afternoon, ladies and gentlemen. Thank you for joining Luk Fook's FY 2018-2019 interim results conference call. I would like to start with looking at our first half FY 2019 financial highlights, followed by financial review, and then 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 phone now. Maybe we can start with slide four. Benefiting from the positive market sentiment and low gold price, revenue recorded substantial growth of 25.1% to HKD 7.9 billion, while operating profit improved by 29.8% to HKD 838 million. Profit attributable to equity holders increased by 27.9% to HKD 665 million. The basic earnings per share increased by 27% as well to HKD 1.13.
The group's e-commerce business revenue increased by almost 19% in the period under review, which was much higher than our full-year target of 30% growth. Its revenue contributed to 22% of mainland retail revenue. The group proposed an interim dividend of HKD 0.55 per share, which is the same level as last year's interim dividend per share, with dividend payout ratio of 48.5%. The group has a net increase of 94 Luk Fook shops during the period under review, out of which 90 were in mainland China, two in Hong Kong, one in Macau, and one in overseas. We have also reduced six 3D-GOLD shops in mainland. Now, let's go into the details of our financial performance. During the period under review, as overall gross margin decreased by 2.5 percentage points to 23.7%, gross profit only improved by 13.1% to HKD 1.9 billion.
With the faster growth in revenue, the operating expenses to revenue ratio decreased by 1.8 percentage points to 15.3%. Therefore, the operating profit improved substantially by 29.8% to HKD 838 million, with operating margin at 10.7%, that is 0.4 percentage points higher than previous period. Net profit recorded growth of 28.5% to HKD 670 million, with net margin increased by 0.2 percentage points to 8.5%. The effective tax rate was 20.1%, which was a bit higher than last year, mainly because of increased deferred tax expenses due to the higher inventory level. The group's financial position remained healthy. Inventory level increased by HKD 847 million during the period under review to around HKD 8.8 billion because of increase in wholesale inventory, in spite of much increased number of licensed shops. With improved sales growth, the inventory turnover days reduced by 26 days to 261 days when compared to same period last year.
The group changed from a net cash position to a net borrowing position of HKD 122 million, mainly because of the purchase of Hong Kong new headquarters and Shenzhen offices, amounting to HKD 10 billion in total, and the increase in inventory level as well. ROE was 13.4%, which was 2.1 percentage points higher than last year. The group's NAV per share as at end of September 2018 was HKD 16.94, representing a year-on-year growth of 6.6%. The operating margin and net margin in the past two years remained at a quite stable level, though gross margin fluctuated a bit. Benefiting from improved overall economic environment, increased visitors' arrivals in Hong Kong and Macau, we recorded growth in sales, operating profit, and net profit in the period under review. They are actually the fourth highest in our record.
However, with the recent U.S.-China trade war, as well as the depreciation of renminbi that adversely affected the market sentiment, the group remains prudent about the business development in the second half of the year. The Hong Kong, Macau market remained a key source of revenue for the group. With the improved retail sentiment, increased visitor arrivals, and successful product strategy, Hong Kong, Macau overseas revenue recorded an increase of 19.3% to HKD 4.9 billion, which accounted for around 63% of the total revenue. With stable segmental profit margin of 8.3%, the respective segmental profit increased by 20.5% to HKD 410 million, accounting for 48.2% of the group's total.
In the mainland China market, the revenue increased much more by 36.1%, mainly because of the high increase in the number of self-operate shops in the second and third quarters of FY 2018, plus the high increase in number of licensed shops during the period under review as well. The revenue in mainland China reached HKD 2.9 billion. Its segmental profit improved by 19.3% to HKD 440 million, contributing to more than half of the group's total. Retail business was our primary revenue source. With increase of visitors' arrival in Hong Kong and Macau, and increased number of self-operate shops in later part of last financial year in mainland China, together with improving market sentiment, retail revenue increased by 27.3% to HKD 6 billion, representing around 76% of the total. Its segmental profits increased by 19.2% to HKD 396 million, which contributed to 46.6% of the group's total.
On the other hand, due to increased number of licensed shops, the group's wholesale revenue rose by 13.8% to HKD 1.5 billion, representing 18.7% of the group's total. Yet, its wholesale segmental profit decreased by 10.3% to HKD 181 million and accounted for 21.2% of the group's total. This was because of the decrease in gross margin of gem-set jewelry because of decline in its wholesale gross margin, in view of changes in product mix and pricing strategy started in the second half of last financial year. The group is in the process of revising upward such gross margin through the fine-tuning of pricing strategy, and positive impact of that will be reflected in the second half of this financial year. Meanwhile, with the increased number of licensed shops, the licensing income rose substantially by 40.2% to HKD 381 million, which was 4.9% of the group's total.
As there was higher fixed cost content in its cost structure, the segmental profit margin of licensing business further improved to 71.7%. Therefore, the segmental profit of licensing increased significantly by 55.7% to HKD 273 million, contributing to almost one third of the group's total. Gold products remains the most favorite item. The low gold price led to strong sales of gold products. Therefore, together with platinum, the gold sales increased by 18.8% to HKD 4 billion, representing 53.1% of the group sales. Its gross margin dropped by 2.8 percentage points to 13.3%. Due to the drop in gold price, the gross profits decreased by 2.4% to HKD 527 million, representing one third of the group's total. Continued to benefit from our strategy in launching good value for money products, our gem-set jewelry sales improved by 31.5% to HKD 3.5 billion, representing 46.9% of the group's total.
Gross margin of gem-set jewelry products dropped by 4.6 percentage points to 30.2% due to drop in gross margin of wholesale business. Its gross profit, therefore, only increased by 14.2% to HKD 1.1 billion, representing 66.8% of the group's overall gross profits. With increasing number of tourism improved spending power, plus positive market sentiment and successful product strategy, the retail revenue in Hong Kong, Macau, and Southeast markets recorded growth of 27.9%. With a gross margin of 6.9%, its segmental profits recorded a growth of 29.5%. Its wholesale revenue substantially decreased by 85.4% to HKD 47 million because of the change of scrap gold received from customers from a wholesale mode to a processing mode into raw materials instead. However, its segmental profit margin increased substantially to 121.4% because of significant increase of centralized purchases. As the wholesaling segmental profits actually included the profit in the inter-segmental sales to the self-operate shops.
If we added the inter-segmental sales of HKD 1.2 billion into the denominator, the segmental profit margin of Hong Kong wholesale business will be a much more stable level of 4.8%. Continued to benefit from the consultancy services income from certain authorized suppliers, Hong Kong's licensing income was HKD 17 million, which is segmental profit of the same level. Because of other incomes recorded, its segmental profit was actually a bit higher than its revenue, with segmental profit margin reaching 101.9%. In mainland China, because of the increase in the number of self-operate shops in the last financial year, retail revenue increased by 24.8% to HKD 1.2 billion. The segmental profit decreased by 17% to HKD 61 million because of decline of gross margin due to gold price drop. Its segmental profit margin, therefore, decreased by 2.6 percentage points to 5.3%.
Due to the increased number of licensed shops, the wholesaling revenue in mainland China increased significantly by 47.5% to HKD 1.4 billion. Because of the decline in gross margin of gem-set jewelry arising from the changes in product mix and pricing strategy, its segmental profit margin went down by 3.8 percentage points to 8.6%. Thus, the segmental profit only recorded 2.4% growth to HKD 123 million. As the segmental profit included wholesale profit and sales to self-operated shops, when adding the intersegmental sales of HKD 384 million to self-operated shops into the denominator, the adjusted wholesale segmental profit margin will be 6.8%. Licensing income increased significantly by 34% to HKD 364 million, due to increased number of licensed shops as well. With the high fixed cost proportion in the cost structure, the segmental profit margin increased to 70.3%.
In the Hong Kong, Macau, and overseas markets, with the low gold price in the period under review, the gold and platinum products recorded a strong sales growth by 36.1% to HKD 3 billion. While gem-set products recorded an increase of 16.3% growth. That led to increased sales mix of 62% for gold and platinum products, while gem-set mix decreased to 38%. On the other hand, mainland China recorded 34% sales growth in gem-set and 21% growth for gold and platinum products. Therefore, gem-set mix improved to 31%. With the drop of gold price and change of sales modes of the scrap gold received from customers in Hong Kong through a processing mode into raw materials, the scrap gold and platinum sales in Hong Kong and Macau markets recorded a huge drop of 94.3% to HKD 17 million.
Our overall same store sales growth recorded +18%, with Hong Kong and Macau markets achieving +21%, while mainland China recorded +1%. In Hong Kong and Macau, with lower gold price, the same store sales growth of gold products recorded 34% growth, and gem-set products recorded +16% growth with stable ASP. In mainland China, gem-set recorded a +14% same store sales growth, while gold and platinum went down at -5% same store sales growth. ASP of gold and platinum products in both Hong Kong, Macau, and mainland China increased by double digits. Mainly because most low-weight items have been shifted to be sold at fixed price under gem-set category, together with good sales growth of wedding pieces, which were at higher ASP normally.
The ASP of gem-set in mainland China decreased by 20%, mainly because the sales for items below RMB 1,000 increased at a much faster rate than the other price categories. Slide 17 shows the same store sales growth figures in different tiers and regions in mainland China. Overall speaking, gem-set products performed better than gold and platinum products in mainland China in all tiers and regions. That may be because of lower base effects in the gem-set category from same period last year. For our licensed shops in mainland China, the overall same store sales recorded single-digit growth, and therefore, gold and gem-set products recorded single-digit and double-digit growth respectively, which performed better than our self-operated shops. During the period under review, the group recorded an overall double-digit growth in same store sales growth.
However, with the recent U.S.-China trade war and the depreciation of renminbi, that affected the market sentiment. Since October this year to the first three weeks of November, the same store sales growth in Hong Kong and Macau markets saw a single-digit drop, while that in mainland China was a double-digit drop. However, with the anticipated growth of middle class in mainland China, the group remains optimistic about the mid to long-term prospects. Mainland visitors' transactions in Hong Kong and Macau markets when counting UnionPay card, renminbi cash, plus WeChat Pay and Alipay transactions, accounting for 55% nowadays as compared to the 57.7% before. We believe mainland visitors use other mediums of payments as well, but this figure could only represent half of the sales from tourists in Hong Kong and Macau markets only.
The average ticket size of UnionPay card increased by 12%, mainly because some smaller value tickets were shifted to be paid by WeChat Pay and Alipay. With the 25% increase in revenue, we had total operating expenses at HKD 1.2 billion, which was an increase of 12.5% only. Therefore, the total operating expenses to revenue ratio decreased to 15.3% during the period under review. Rental and payroll accounted for around 70% of our total operating expenses. Overall, rental was almost static, while the variable part increased by 23.1% due to increased sales. There are 25 shops in Hong Kong and Macau subjecting to rental review in this financial year, accounting for 43% of the total number of shops we have. Up to now, the rental reductions was an average of around 24%. Therefore, the rental recorded a decrease of 5.9%.
Overall, staff costs increased by 17.1%, and with improving sales, the variable portion increased substantially by 54.3%, while the fixed portion increased by 5.2% only. The other expenses increased by 32.1% because of the bad debt provision of HKD 22 million. With additional self-operated shops, our inventory level went up by 21.3% to around HKD 8.8 billion when compared to end of September 2017. Inventory for gold and platinum increased by 6.8% to HKD 3 billion, while that for gem-set jewelry increased by 30.7% to HKD 5.8 billion, which was because of increase in wholesale inventory due to increased in number of licensed shops. With faster revenue growth, the inventory turnover days for all products and all markets reduced when compared to the same period in prior year.
In the first half of FY 2019, the group incurred capital expenditures of HKD 840 million, which HKD 803 million was used for purchase of premises, including Hong Kong new headquarters and prepayment of purchases of Shenzhen's offices. The remaining HKD 37 million were used for shop and manufacturing plant renovation. During the period under review, the performance of 3D-GOLD business improved to breakeven. That's a good news. Now let's look at the group's future plans and strategies. We shall continue to uphold our business development through the three key focus, product, China, and branding, and 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 can continue to capture the KIS markets.
We will also continue to seize the market opportunity in mainland China by enlarging the market coverage. With target to add net at least 120 shops in mainland China for FY 2019. The expansion will be mainly in lower tier cities of northern and southern parts of mainland China, with 55% in shopping malls, 20% in department store, 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 into middle class, wedding, and KIS markets, as well as boosting local consumption. The group will also strive to enhance productivity and reduce expenditure in different operational aspects, including improving service quality controls and enhancing support to licensees, as well as promoting continuous improvement culture and full automation of operational processes.
Currently, we have altogether 1,747 shops worldwide, covering 10 countries and regions, namely Hong Kong, Macau, mainland China, Singapore, Malaysia, Cambodia, the Philippines, U.S., Canada, and Australia. In mainland China, during the period under review, we have a net increase of 90 Luk Fook shops. There was net increase of 96 licensed shops and net reduction of six self-operated shops. The group opened two self-operated shops in Hong Kong and one in Macau and one in Malaysia as well. We have also opened one licensed shop in the Philippines and closed one licensed shop in Korea. On the other hand, we had net decrease of six 3D-GOLD self-operated shops during the period under review, summing up to 10 3D-GOLD self-operated shops in mainland China by end of September 2018.
As at end of September 2018, we had 1,725 Luk Fook shops worldwide, with 1,651 shops in mainland China, covering all 27 provinces and municipalities in more than 360 cities, with shops mostly concentrated in northern and southern China. In the second half of financial year, we will continue to explore opportunities to further expand our overseas market. While in mainland China, we maintain our full year target of opening at least 120 shops. The CapEx budget for FY 2019 should be around HKD 1 billion, in which HKD 878 million will be for the completion of acquisition of our headquarters in Hong Kong and 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 87.2% to HKD 254 million during the period under review, which was much higher than our full year target of 30% growth.
The revenue accounted for 22% of the group's retail revenue in mainland China. We currently have 11 platforms, including Tmall.com, JD.com, and Vip.com. We will continue to promote sales of affordable luxury jewelry products to expand our footprint in the younger customer markets. We have recently launched a new logo for Lukfook Jewellery. With the red bean color tone, we believe it reflects an elegant, feminine, and yet younger image to the brand. The details of the design, such as the number six within the Chinese character "Fook," also represents our effort in pursuing innovation and perfection in our products and services. Together with the interior design, display, packaging, PVC, and corporate materials, we wish to bring our target audience a younger and more stylish look and feel. The group also captured the rapid growth of online marketing by various creative manners.
We once again was appointed as the official partner for Tencent's online mobile game, King Pro League Spring Season Champion Ring, that successfully increased our brand exposure. We also launched Art of Kings series to capture the potential market. We have also approached online fashion magazines and invited celebrities to style our products in order to expand our footprint among young customers. As for the anniversary promotions this year, we opened Hong Kong themed pop-up stores and invited spokesperson to the kickoff party. We also launched the Share Love and Fun challenge on the popular short-form videos platform, Douyin, and cooperated with KOLs to promote the brand. All of our shops in mainland China took part, and it was well supported by KOLs. The challenge recorded a total of over two billion views that successfully raised brand exposure to the millennials.
The entire campaign also created huge noise across different platforms and brands. We joined partners with 26 brands to offer promotion, and our hashtag recorded over 100 million views, and our official Weibo recorded maximum viewership of 4.7 million. To conclude, as the macroeconomic sentiment is adversely impacted by the recent U.S.-China trade war, as well as the depreciation of renminbi, the group remains prudent about our business development in the second half of FY 2019, and we hope to see an improved environment with the easing of tension after further negotiation between the political heads of U.S. and China, so that we may maintain our targets of double digits same-store sales growth for Hong Kong/Macau markets and single digits same-store sales growth for mainland China markets for some financial year 2019 full year. This is the end of my presentation, and thank you for listening.
Thank you, Kathy. Moderator, please open the floor for questions now.
Ladies and gentlemen, if you wish to queue for a question, please press zero followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press zero followed by two. Again, that is zero one on your telephone keypad now. Your first question comes from Emily, who is from Nomura. Your line is now open. Please go ahead.
Hi, Kathy.
Hi.
Thanks for the presentation. I have got a few questions.
Yeah.
First of all, just wondering what caused the substantial retreat in gem-set gross margin as it is now down to 30%. You did mention we will increase the wholesale gem-set pricing and will be reflected in second half, but what should we be looking at for the second half versus the first half? Secondly, we saw a double-digit drop in same-store sales in China in third quarter to date. Just wondering if we can share how the licensed stores are performing as well. Thirdly, we actually saw quite a big jump in the wholesale segment profit margin in Hong Kong. It is above 100%. Can we explain what caused this and whether it is sustainable as we go forward?
Lastly, on the licensing segment margins, as we mentioned how we are maintaining our target of over 120 stores addition in China for the full year, but we already saw 90 store addition in first half. So it actually implies a 30 store addition in second half. Should we be expecting a slowdown in terms of licensing profit contribution in second half? Thanks.
For the gross margin for gem-set, it is actually mainly affected in the wholesale business, not in the retail. Actually, retail margin for gem-set would be quite a stable level. The reason for the drop in the gross margins there will be because of two factors. One, because we have got more Goldstyle products selling this year. That is at a lower gross margin, I mean, in wholesale, lower gross margin than diamond. For diamond itself, in last financial year, in the second half, we talked about a change in pricing strategy so as to make it at a more competitive level, and so that we have reduced the gross margin a bit. After some time, we noticed that actually we do not really need to decrease that much.
That is why we have started to revise or fine-tune the pricing, the formula again, so that we would be able to enjoy a bit higher gross margin again. Basically, within the last six months, I mean, under review, the first three months will be at a lower level, just like maybe before, but the last three months will be at a better level. I think the full impact will be reflected in the second half, so that the overall gross margin for gem-set will be better. That is why it is at normally low level at the moment. Basically, maybe we can expect to have maybe at least 1- 2 percentage points higher in the coming period of time. For the same-store sales growth, let me see. You talk about the double-digit drop in China. Right?
For the licensing shops, they perform better. They are normally maybe single digit better than the self-operated shops, and that trend have not changed. The third question is about the licensing income on in Hong Kong, right?
Yes.
The segmental gross margin is above 100%. That is the question you asked, right?
Yes.
All right. Yeah. So, actually, we have explained that actually because that was the consultancy services income, that we do not have actually any operating cost for that. The revenue will go direct into the profit. But then, because of some other income in terms of some kind of sales of maybe operational materials that add to the profit so that we have a segmental profit margin higher than 100%, but it is only a little bit higher. Yeah. For the licensing business, actually, when we talk about the annual target of adding at least 120 shops for the full year in mainland China, and we have added 90 already. Basically, we expect that target to be achieved, and actually, we should be able to have a much higher addition than our targets. Basically, I don't think the licensing income growth would slow down in the second half.
Okay. Can I have two follow-ups? We've talked about how the same-store sales for licensing stores in China is single digit better, so should we still be expecting closer to a 10% drop for licensing business in China in this quarter so far?
Maybe.
Okay. Also just want to clarify, did I hear it correctly that the gross margin for gem-set in the second half should be 1- 3 percentage point higher comparing to first half?
Yes, I think so.
Okay. Thank you. Thank you a lot.
You're welcome.
Thank you. There are currently no questions in queue. As a reminder, if you wish to queue for a question, please press zero followed by one on your telephone keypad, and wait for your name to be announced. If you wish to cancel your request, please press zero followed by two. Again, that's zero one on your telephone keypad now. Your next question comes from Mavis, who's from DBS. Your line is now open. Please go ahead.
Hello, Kathy and Nancy. Thanks for taking my call.
Hi.
I'd like to know a little bit about the latest sales trends. I understand that you will probably have some quarterly updates, but is it possible to just give us a sense into October, November, in terms of, for example, same-store sales growth by markets? My second question is on margin trends, margin outlook, as well as cost ratios into the second half, including rentals, advertising promotion. My last question is on effective tax rate for the full year of FY 2019. Thank you.
For the latest sales trend, actually, we have announced that as well for the period from October to the first three weeks of November. Basically, for Hong Kong, Macau market, it's a single-digit drop, and for mainland China, it's a double-digit drop. Actually, if you talk about the different products, actually, they have similar trends. Gold, gem-set, they have quite similar trends. For the margin trend, I think what we can say that we should expect our operating margin level to be at a stable level. Basically, the gross margin, they fluctuate, but normally, the TOE to revenue would move in the same direction. Therefore, we should have a quite stable operating margin. For the effective tax rate for the full year, we should expect that to be a similar level as last financial year. That's around 15%. That's because of an expected over-provision reversal in the second half.
Right. Thank you. To follow up on what you mentioned about the latest same-store sales growth trend, are we going to keep our full-year target or guidance in terms of double digits increase in the same-store sales growth for Hong Kong, Macau and single digits growth for China?
Unless it is a decline in the second half, otherwise I think we should be able to keep the full-year targets in both regions.
Right. Thank you.
You are welcome.
There are currently no more questions in queue. Again, if you wish to queue for a question, please press zero followed by one on your telephone keypad, and wait for your name to be announced. If you wish to cancel your request, please press zero followed by two. Your next question comes from Linda from Macquarie. Your line is now open. Please go ahead.
Hi, Kathy. I have several questions. The first one is regarding the online business, because in the first half, we see the very strong, the 87% growth. I know the company's full-year target is at 30%. I think, is there any chance that we see the full year, the revenue growth from online will be much higher than the 30%? The second one is regarding the rental revision. What do you expect for the rental revision cycle for 2019? The third question is regarding the CapEx. For FY 2019, our CapEx, we budget HKD 1 billion, and do we have any of the guidance regarding FY 2020?
This year, we maintain the same dividend per share. Based on payout, I think this number is a little bit lower. I just want to know that if this is something to do with the high CapEx this year, and how do we see FY 2020? Thank you.
Okay. First of all, about the e-commerce business, we had a very good revenue first half. For your information, in October and November, it's actually more than 30% as well, but it should be below 87%. That's why I expect that the second half, because we have a relatively higher base, that we'll still keep the target of 30% for the whole year. For the rental revision. Actually, I think for the full year, for this financial year, originally, we expect the drop in rental on renewals will be single digit, but to our surprise, it's actually a double digit, and it's a 24% drop at the moment. By end of the year, I expect that to further drop a bit, actually. If we talk about 2020, I mean, for next financial year.
Originally, we think that maybe kind of a rising trend again, but with the recent adverse market sentiment, it's hard to tell. Maybe it will still be a drop if renewal. I think we need to have a longer time to assess that. It's quite unclear at the moment, because there's a lot of uncertainties around. For CapEx of full year to next financial year, we don't have a trend yet, but normally, if we don't have any purchase of properties, our CapEx will be something like maybe HKD 100 million to HKD 120 million for mainly shop renovations.
For dividend policy, our policy is actually 40% payout ratio. But then, in the past few years, because of the declining trend of profits, we try to maintain that at absolute dollar level of HKD 1.1 per annum, and that is HKD 2.55 in half year. We are in the process of assessing whether we should set a new dividend policy with a payout ratio more than 40%, actually. I think that will be fixed in our final result announcement.
Okay, I got it. Thank you.
Thank you.
Thank you. Your next question comes from Hugo, from Sunwah Kingsway. Your line is now open. Please go ahead.
Hello, Kathy. Can you hear me?
Hi. Yes.
Yes. Just one number that would like to clarify on the holding gain or losses during first half 2019. Just this number.
It's HKD 180 million loss.
180. 180, right?
Yes.
Okay. Thank you, Kathy.
You are welcome. Hello?
Hello.
Okay, moderator, are there any more questions?
My apologies. I was on mute. Your next question comes from Anne Ling from Deutsche Bank. Your line is now open. Please go ahead.
Hi, management team.
Hi.
The question is more on the same sales that you just announced regarding October and also the first three weeks of November. May I know, for Hong Kong, the single-digit decline, did you mention that for both market it's actually similar in terms of gem-set and also for gold product? Do you see, for example, the domestic consumer being a little bit weaker relative to tourist spending, or it's actually more or less similar? I remember that the first couple of quarters we have a bit of a gold rush, right? Does it mean that with the gold price start to pick up a little bit in October, the kind of gold rush is gone? Yeah.
Actually, it's hard to tell the difference between local and tourists because we can only judge from the payment media. We try to segregate them. We have accounted the UnionPay card transactions as related to cash, WeChat Pay, Alipay to be tourist spending, then it's 55% now. Actually, we have tried to assess the trend between the two types. I mean, those four payment types and on those four payment types. Actually, the trend would be quite similar. So it's hard to tell the difference between local and tourists. Maybe they have similar trend. For the gold price fluctuation, in fact, mainly in August and September, the gold price dropped when we talk about year-on-year, it's mainly in August and September. Actually the gold sales was quite good actually in those few months before that as well.
I do not think we have a gold rush really. But then, I think the consumption is actually affected by the macro environment at the moment, not really the gold price.
Okay. Fair enough. Is the gold and the gem-set segment having similar same store decline? Did you just mention that both in Hong Kong and China?
Yes.
Okay. Regarding the ticket price, are you seeing the ticket price for gem-set coming down more? What I am trying to ask is the November number weaker than the October number?
I guess we normally have our quarterly announcement for this current quarter is actually to be announced in January. For such detail level, I think we better discuss that in January after we have announced.
Okay. Got it. Thank you.
Sorry.
Thank you.
Thank you. Your next question is a follow-up question from Mavis from DBS. Your line is now open, please go-
Right. Thank you. Hi, Kathy and Nancy. Can I just check with you in terms of the sales of daigous? Because I understand that there is a certain portion of sales that come from daigous. So, what's the contribution for the first half of this financial year and has there been any changes in the trend for October, November? Another question is on e-commerce. Can you share with us the margin, the profitability of e-commerce lately? Thank you.
Sorry, what is daigou?
The parallel traders.
Parallel traders.
Parallel traders. Oh.
Oh.
In fact, I think in the past, actually the parallel trader sales actually accounted for a very minimal portion of our sales in Hong Kong. I think because of the change in the policy, the tightening of the import policy by mainland China, actually, it would decrease a bit, but it won't really affect our total revenue too much.
Right. I see. Because I noticed that in your shops actually there are some mainlanders actually they buy for some of their clients back in China and are using their phone to show the clients in China the products that they buy for them. So those probably could be, in terms of sales volume, could be in the VIP categories to some extent. So I'm just wondering that kind of clients, have you been seeing some differences in terms of the trends in latest weeks?
Lastly, in November, there were a lot of daigou customers in Hong Kong because it's the Double Eleven. So that is partly impacted by the Double Eleven campaign so that these daigou, they actually don't work very hard in November. But it was still okay in October. Because actually we had a campaign with Alibaba, with Taobao. They have a platform for these kind of daigou traders on a global basis. They've actually organized a tour to Hong Kong to a lot of their shops, and then they have all these daigou in their shop, live broadcasting the whole process. They advertise the whole campaign on their section as well on Taobao. So actually it was still okay in October.
We actually have some daigou from other Asian countries as well, like Malaysia and Japan, and this is actually growing as well. But of course, as Kathy said, this kind of daigou sector is only a very small portion of the whole business. But then they are actually helping us in promoting the brand as well.
Right.
Yeah. Okay. Regarding the second question about the e-commerce, actually the margin is still higher than the operating margin of offline business in China. The gross margin would be very much the same compared with the offline market, because we have the same market strategy, pricing strategy. But for the operating margin, it is still higher than the offline.
Right. Is it possible to quantify a little bit in terms of this e-commerce operating margin? By how much would it be higher than the offline business in China?
It is double digits, a bit higher than the overall.
Right. Thank you.
You are welcome.
Thank you. Your next question is also a follow-up question from Emily, from Nomura. Your line is now open. Please go.
Hi, management. I am sorry for another question. Just wondering, because it seems as though that the same store sales is deteriorating really fast in the past month or two or so. Could it be possible that we may have to downward adjust our pricing or margins further if the overall market weakness persists? Also, whether we have observed any relatively more conservative order placement by our wholesale customers as well because of the overall market weakness.
Well, I guess it is not really nothing to do with the margin because I think we do not really use the kind of huge discounting strategy because it would hurt our brand. I do not expect the margin to really deteriorate in the coming period of time. For the wholesale margin, actually, we expect the gem-set jewelry margin to improve a bit, comparing to the first half. It should be better actually in the second half.
All right. What about the wholesale customers' order placement in the past month or so? Have they been more cautious?
I think it's usual, just like usual.
Okay. Thank you.
You are welcome.
Thank you. There are currently no more questions in queue. If you would like to ask a question, please press zero followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press zero followed by two. Your next question is a follow-up question from Linda, from Macquarie. Your line is now open, please.
Hi, Kathy. I have one follow-up question. Regarding our full year same-store sales guidance. You just mentioned that you probably will not change the full year guidance unless the later quarter, the same-store sales growth turn into negative. That implies that the Q4 FY 2019, the same-store sales growth will be better off compared to the third quarter FY 2019. I just want to know that, where is the company's management, your confidence coming from, that you think that the Q4 FY 2019 will be better off compared to the Q3? Thank you.
Actually, we don't know. Actually, when you look at the second quarter, like this year, the second quarter, we got a + 14% growth overall, even though we got a high base of 17%+ in FY 2018 Q2. It is hard to tell at the moment. I guess we have to wait until we have announced the third quarter, then we may know better whether we can achieve the full-year targets. But at the moment, when we talk about the calculation, the first half of our same-store sales growth figures we have at the moment actually is good. I mean, the calculation for the decline in same-store sales growth, to make us unable to achieve the full year target is actually just like mathematics. Basically, you can calculate that yourself as well. You will come to the same conclusion.
If there will be no decline in the second half altogether, then our full year target will be achievable. Actually, we don't know really. We have to wait and see.
Okay, got it. Thank you.
Yeah. Welcome.
Thank you. Your next question comes from Albert, from CMBI Securities. Your line is now open. Please go-
Yeah. Hi, management. I have one question about the latest same-store sales trend. Regarding the decline of the same-store sales in the first quarter to date, can you comment if the decline is mainly driven by volume or ASP? Thank you.
Actually, I think we have just announced that it's a double-digit or single-digit drop. But for details, we better discuss that in mid-January after we have the announcement out.
Okay. Thank you.
You're welcome.
Thank you. Your next question comes from Chris from Templeton. Your line is now open. Please go.
Hello, Nancy and Kathy.
Hi.
I just have a question on the gem-set margin, because you mentioned that the second half gem-set margin will be higher. Can you repeat again, say again why you expect the gem-set margin will be higher?
In fact, in the first half, the low margin was because of the change in product mix and the pricing strategy. For the product mix, it is mainly, we have Goldstyle inside the gem-set wholesale business. That is enjoying a lower gross margin than the diamond products in the wholesale area. Then in the second half of last financial year, we have tried to change the pricing formula for the diamond to make the pricing more competitive, so that the gross margin dropped quite a bit. But after reviewing the whole thing, we found that we may not need to reduce that much. Therefore, we are in the process of adjusting that upward again, so that it will not be that low. Actually, it was started in the second quarter so that you will not see the full impact yet.
We will adjust the Goldstyle margin upward as well for the wholesale business. Therefore, we should expect that the gem-set wholesale margin to grow better in the second half.
No, I see. Okay. That's good. Okay, thanks.
Thank you.
Thank you. There are currently no more questions in queue. If you would like to ask a question, please press zero one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press zero followed by two. As there are no more questions in queue, I'd like to hand back the call over to your speakers today. Please continue.
Thank you, moderator. I think this is the end of the presentation and the call. Thank you, Kathy and Nancy, for joining the call tonight, and thank you everyone for joining the call. Have a nice evening.
Thank you. Bye-bye.
Bye-bye.
Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.