Longfeng Group: Triple Reality Concerns Behind the High-Growth Halo

ZC Asia has learnt that Longfeng Group Holdings Limited (hereinafter referred to as ‘Longfeng Group’) has formally submitted its listing application to the Main Board of the Hong Kong Stock Exchange, aiming to become the first cosmetics and pharmaceutical retail company to list on the Hong Kong stock market. As the local enterprise with the largest market share in Hong Kong's pharmaceutical retail sector, its financial data over the past three years reveals a picture of rapid growth.

However, behind this growth fuelled by store expansion, the company's heavy reliance on a single offline channel, strained financial position, and concentrated family governance structure are casting a shadow over this IPO.

Fragile Prosperity Under a Single Channel

Long Fung Group's business model exhibits a classic ‘one-legged walk’ characteristic. As of 30 June 2025, the company operated 29 physical retail outlets in Hong Kong. According to FY2025 data, its physical stores accounted for a staggering 97.2% of revenue, while the online channel contributed a mere 1.7%.

Notably, online revenue continues to contract, falling from approximately HK$45 million in FY2023 to around HK$41 million in FY2025.

This structure runs counter to the prevailing trend in Hong Kong's retail sector. With the average online penetration rate in Hong Kong's retail industry exceeding 20%, Long Fung Group's digital transformation lags significantly behind.

Why High Margins Remain Elusive

From FY2023 to FY2025, its revenue surged from HK$1.094 billion to HK$2.460 billion, achieving a compound annual growth rate of 50%. In the first quarter of FY2026, revenue grew 42.5% year-on-year, while net profit surged by 130.7%. This expansion was primarily driven by store proliferation – the total number of outlets increased from 16 in FY2023 to 29 in FY2025. However, the quality of this external growth is deteriorating.

Same-store sales growth, reflecting organic store performance, plummeted from 64% in FY2024 to 5.6% in FY2025, indicating new stores are significantly cannibalising footfall from existing outlets.

The company's gross margin has shown a sustained improvement trend, rising from 24.9% in FY2023 to 31.9% in Q1 FY2026. This is primarily attributable to the increased contribution from high-margin beauty products, whose revenue share has grown from 28.0% in FY2023 to 33.3% in FY2025.

However, the high gross margin has not effectively translated into a substantial net profit margin. In FY2025, the company's net profit margin stood at 6.9%, not only declining from the previous fiscal year's 7.2% but also significantly below the 8%-10% range achieved by industry leader Watsons.

As of 30 June 2025, the company's net current liabilities stood at HK$331.6 million, with short-term borrowings reaching HK$625 million, while cash and cash equivalents amounted to merely HK$33.608 million, indicating a substantial liquidity gap.

The company's debt-to-asset ratio reached 68%, with approximately 44.1% of short-term borrowings comprising supplier financing arrangements. This indicates severe operational dependence on supply chain finance. Amid Hong Kong's potential interest rate hike cycle, rising financing costs may further compress already narrow profit margins.

Transparency Concerns Under Family Control

Longfeng Group exhibits highly concentrated ownership, with the founding Xie Shaohai family holding 100% equity through TTK Holding, constituting a quintessential family enterprise prior to listing. The board is dominated by family members including Xie Shaohai and his daughter Xie Cuiying.

Under this structure, the fairness of related-party transactions warrants scrutiny. During FY2025, the company leased five retail properties from its controlling shareholder, incurring HK$13.65 million in rental expenses – accounting for 9.8% of total rental outlays. The prospectus states rental pricing references market levels but fails to disclose specific third-party valuation reports.

As of 30 June 2025, receivables from related parties reached HK$2.89 billion, constituting 34.5% of total assets, indicating significant risks of capital occupation.

As an enterprise with operations highly concentrated in the Hong Kong market (generating over 97% of revenue), Lung Fung Group's performance is closely tied to local economic cycles, consumer confidence, and tourist footfall. In 2024, Hong Kong's top five pharmaceutical retailers collectively held just 14.6% of the market by retail value. While Long Fung Group led with a 5.2% share, the second-placed competitor held 4.9%, indicating a marginal lead.

The question facing the Tse Siu-hoi family is whether investors will support a regional retailer whose growth relies heavily on physical store expansion, carries high financial leverage, and features a concentrated governance structure.

Disclaimer: The content herein is for reference only and does not constitute any form of investment advice. Should any information contained herein prove inaccurate, incomplete, or potentially misleading, please refer to the company's official announcements. Market risks exist; investment requires caution.