Overview

Laopu Gold (6181.HK) is the top heritage gold jewelry brand in China. Based on data of Frost & Sullivan, Laopu Gold was the first brand in the industry to introduce diamond-inlaid pure gold jewelry, leading trends for the industry. As of June 30, 2024, it ranked first in terms of coverage rate of the top ten high-end shopping malls among all gold jewelry brands in the PRC and ranked first in terms of single-store sales among all gold jewelry brands in the PRC.

2024H1 Performance review

In the first half of 2024, the company's revenue was 3.52 billion yuan (RMB, the same below) with a year-on-year increase of 148.3%, of which store revenue was 3.13 billion yuan and online platform revenue was 391 million yuan, proving that the company's product sales were still mainly through store channels. The company's gross profit was 1.46 billion yuan with a year-on-year increase of 146.4%, and the gross profit margin was 41.3%. The company's gross profit margin is relatively stable, and it was above 40% in the past three years. The substantial growth in revenue and gross profit benefited from a variety of factors, including the continued expansion of the company's brand influence, which brought about the growth of existing stores revenue, including the overall revenue growth of online and offline stores, the continuous optimization, promotion and iteration of the company's brand products, and the upgrading of consumer concepts, consumers started to prefer high-quality heritage gold products with classic cultural connotations and product value and the company actively expanded stores to generate incremental revenue contributions. As of June 30, 2024, the company had opened 33 self-operated stores in 14 cities with six new stores compared with last year. The company's net profit was 589 million yuan with a year-on-year increase of 198.8%. EPS was 4.11 yuan with a year-on-year increase of 185.4%.

Industry Analysis

Data from the China Gold Association showed that in the first three quarters of 2024, the national gold consumption was 741.732 tons with a year-on-year decrease of 11.18%, including 400.038 tons of gold jewelry with a year-on-year decrease of 27.53%, mainly because the price of gold had been rising for a long time which caused people to reduce their consumption on gold jewelry, but e-commerce such as live commerce and instant retail continued to be popular. The rapid development of the trend had driven the growth of consumption of small-weight gold jewelry. China's gold consumption in 2024 was 985.31 tons with a year-on-year decrease of 9.58%. Among them, gold jewelry consumption was 532.02 tons with a year-on-year decrease of 24.69%.

Data from the China Jewelry and Jadeite Association showed that the scale of China's heritage gold market increased from 13 billion yuan in 2018 to 157.3 billion yuan in 2023, with a five-year CAGR of 64.6%. According to Frost & Sullivan, the market size is expected to reach approximately RMB 421.4 billion by 2028, with a compound annual growth rate of 21.8%, proving that the heritage gold market has great development potential.

Analysis of company's competitive advantages

Gem-set jewelry had great profit margin

The proportion of the company's gem-set jewelry in operating income had increased year by year, from 47.7% in 2021 to 56% in 2023, and 61% in the first half of 2024; the gross profit margin in 2023 was 45.8%, which was higher than that of pure gold jewelry mainly because the gem-set jewelry were fixed products with high brand premium. The design and craftsmanship of these products were generally more complicated and complex, and they have higher pricing space. The average selling price of the company's gem-set jewelry in 2023 was 1,043 yuan/gram with a year-on-year increase of 14.1%. In the future, the proportion of the company's revenue from gem-set jewelry is expected to increase further.

Operating stores in a self-operated mode can achieve higher profit margin

The company operates its stores in a self-operated mode, and address of the stores are generally concentrated in high-end business districts in first-tier and new first-tier cities. Compared with the ordinary franchise mode, self-operated mode allows the company to retain the ownership of the product selling in the retail counters, as well as recruit and manage the employees by themselves. In addition, the self-operated mode usually leads to higher profit margin, which helps the company achieve higher profit income.

A production mode that mainly relies on self-production and processing, supplemented by outsourced processing

The company began internal production and processing of gold jewelry in 2018. In 2023, the company's self-production ratio was 59%. Compared with other companies, the company's self-production ratio was higher, which helped to ensure the quality of the company's products.

Investment Thesis

In recent years, with the escalation of geopolitical conflicts and the uncertain global economic outlook, the price of gold has been rising, gold is becoming the first choice for safe-haven assets. Central banks of various countries have been increasing their gold reserves. In recent years, China's gold reserves have been increasing, the latest data from the People's Bank of China showed that in December 2024, China increased its gold holdings by 10.26 tons. As of the end of December 2024, China's gold reserves were 2,279.57 tons. Due to the uncertainty about how Trump will govern after taking office, coupled with the risk of rising inflation, we expect gold to remain strong in the short term.

According to the World Gold Council's 񓠈 China Gold Jewelry Retail Market Insights", gold jewelry remains the main part of China's jewelry retail, with young consumers aged from 18 to 34 contributing more than one-third of sales. Gold's value-preserving properties have become more prominent, and it has become a common investment practice among all generations. Young people have also begun to invest in gold, but the difference is that young people are more concerned about the style and craftsmanship of gold jewelry. As a leading enterprise in heritage gold, Laopu Gold is positioned as a high-end brand. Its products have certain differentiated characteristics. Its profitability had increased significantly in the past two years and it had entered a period of performance growth. We are optimistic about the company's future development in the field of heritage gold. The company continues to expand circle of the core business districts in the mainland and seize the opportunities in Hong Kong, Macao and overseas markets, the numbers of stores are expected to continue to increase and contribute to revenue growth.

We predict that the company's revenue will be 7.24 billion yuan, 9.72 billion yuan and 12.60 billion yuan respectively in 2024-2026. EPS will be 7.12/8.97/10.57 yuan, corresponding to the P/E of 53.3x/42.4x/36.0x. The company is given a P/E of 60 times in 2024, with a short-term target price of HK$458.32, and our investment rating is " Accumulate ". (Current price as of Jan 27)

Risk factors

Gold price fluctuations, intensified industry competition, macroeconomic recovery is weaker than expected, and store expansion is weaker than expected.

Financial

Click Here for PDF format...