New Stock Analysis | LaoPu Gold: Playing the "ancient method" concept well is not as good as the rise in gold prices

Driven by the dual forces of gold consumption value and investment value, the first stock of ancient gold, Lao Pu Gold Limited Company (referred to as "Lao Pu Gold"), with strong growth performance, is set to debut on the Hong Kong stock market. The Hong Kong Stock Exchange disclosed on June 12 that Lao Pu Gold has conducted a listing hearing on the main board of the Hong Kong Stock Exchange, with CICC International acting as its exclusive sponsor.

Zhito Finance APP noted that as the first brand in China to promote the concept of "ancient gold," Lao Pu Gold has elevated its performance to unprecedented heights before listing. The prospectus shows that the company achieved a revenue of RMB 3.18 billion in 2023, a year-on-year increase of 145.7%; and a net profit of RMB 416 million, a year-on-year increase of 340.5%.

It is worth noting that the driving force behind the growth of Lao Pu Gold's performance does not only come from the "ancient gold" itself, but to a large extent, it is influenced by external factors. Therefore, the sustainability of the company's high growth performance needs time to be verified. On the other hand, while achieving high growth in performance, there are signs of insufficient net profit cash content, which inevitably raises concerns about its profit quality.

Rising Gold Prices Boost Performance in the Short Term

According to Zhito Finance APP, although the word "Lao" (old) comes first, Lao Pu Gold is actually a company founded in 2009. As a new player in the jewelry market, Lao Pu Gold chose to take a different path by pioneering the promotion of the concept of "ancient gold." By 2023, based on revenue, Lao Pu Gold ranks seventh in the Chinese ancient gold jewelry market, with a market share of 2%.

Ancient gold jewelry refers to a type that combines modern design with Chinese classical culture, featuring warm colors, exquisite appearance, or other characteristics of ancient palace gold ornaments, and applies pure gold jewelry manufacturing techniques specified in at least two or more group standards released by the China Gold Association. These techniques mainly include hammering, engraving, hollowing, filigree, inlaying, and blue firing.

According to a Frost & Sullivan report, from 2018 to 2023, the market size of the Chinese ancient gold jewelry market segmented by sales revenue increased from RMB 13 billion to RMB 157.3 billion, with a compound annual growth rate of 64.6%. Lao Pu Gold pointed out in the prospectus that one of the main driving factors for the company's performance growth is that as consumption concepts upgrade, consumers prefer high-quality ancient gold jewelry products more

In addition, the reasons for the company's performance growth include: expansion of store network; increase in brand influence; rise in gold prices, and so on. Lao Pu Gold believes that the above reasons not only drive up the selling prices of the company's products, but also increase consumers' willingness to purchase traditional gold products, leading to an increase in sales. This is mainly because gold jewelry products are not only of consumer value, but are also seen by many consumers as having certain investment value. Gold is a safe-haven asset, especially when facing uncertainties in domestic and global political and economic environments.

In 2023, the sales volume of Lao Pu Gold's solid gold products reached 2199 kilograms, a year-on-year increase of 94.1%; the sales volume of gold-inlaid products reached 1982 kilograms, a year-on-year increase of 145.6%. In terms of average selling price, in 2023, the average selling price of solid gold products was 729 yuan/gram, a year-on-year increase of 7.8%; the average selling price of gold-inlaid products reached 1043 yuan/gram, a year-on-year increase of 14.1%.

Insufficient Cash Content in Net Profit

In 2023, the "rise in quantity and price" of product sales brought rapid growth in revenue and profits for Lao Pu Gold. However, the net profit cash content of the company is insufficient. According to the prospectus, in 2023, the net cash flow from operating activities of Lao Pu Gold was 29.196 million yuan, which is significantly different from the net inflows in 2021 and 2022.

Specifically, in 2023, Lao Pu Gold had a net outflow of cash from operating activities, mainly due to two reasons. Firstly, inventory reached 1.268 billion yuan with business growth, an increase of 462 million yuan year-on-year. Secondly, the company's trade receivables increased by 280 million yuan in 2023, reaching 376 million yuan. As of April 30, 2024, the company's trade receivables further increased to 567 million yuan.

According to the Zhitong Finance APP, during the historical period, the majority of Lao Pu Gold's customer base consisted of individual customers. The company did not enter into any long-term agreements with individual customers The company does not provide credit terms to customers. The proportion of individual customers to the total revenue of the company does not exceed 5%.

The reason why Lao Pu Gold has a large amount of trade receivables on the books is that the company tends to cooperate with high-end shopping centers to collect payments from customers through these centers. According to the prospectus, the company has entered into joint arrangements with several shopping centers, where the centers collect sales proceeds from the company's customers and settle with the company afterwards. The company generally settles with these centers on a monthly basis. Some shopping centers may default on payments to the company due to deteriorating financial conditions or liquidity issues. The company cannot guarantee that potential center defaults will always be discovered. If trade receivables cannot be collected in a timely manner, the company's liquidity, operating performance, and financial condition may be adversely affected.

As of April 2024, Lao Pu Gold covers eight of the top ten high-end shopping centers nationwide, ranking first among domestic gold and jewelry brands. The company typically provides a credit period of up to 60 days to the relevant shopping centers. As of December 21, 2023, trade receivables aged over 2 months amounted to 23.707 million yuan. It is important to monitor the collection of the company's receivables and potential risks of impairment of receivables.

Due to the capital tied up in inventory and accounts receivable, Lao Pu Gold needs to use external financing to support business growth and expansion. As of December 31, 2023, the company's current liabilities include interest-bearing bank and other borrowings of 128 million yuan. These borrowings are mainly used to fund the company's inventory and store expansion.

IPO Fundraising for Expansion

Given the tight cash flow situation of Lao Pu Gold, future business expansion will also rely on IPO fundraising to be completed. According to the prospectus, the main uses of the funds raised from the IPO include: expanding the sales network; maintaining brand positioning and increasing brand awareness; optimizing internal information technology systems and enhancing automation and informatization levels; strengthening research and development capabilities; general working capital and other general corporate purposes.

In terms of expanding the sales network, the company plans to use part of the IPO proceeds to open approximately eight new stores in mainland China, mainly targeting first-tier cities and new first-tier cities with huge market potential (including Beijing, Shanghai, Guangzhou, Shenzhen, Zhengzhou, Xi'an). In addition, some of the fundraising will also be allocated to open about five new stores outside mainland China, including Hong Kong, Macau, and Singapore, and gradually expand the company's footprint in other cities in Asian markets such as Tokyo to increase the brand's overseas visibility.

According to data disclosed by Lao Pu Gold in the prospectus, it is expected that the new stores will have good "blood-making" capabilities. The company states that based on the actual initial breakeven period and cash investment payback period of existing stores, the average initial breakeven period for stores to be opened in mainland China in 2024 is estimated to be about one month, and the average cash investment payback period is estimated to be about four months It is expected that the average initial breakeven period for stores to be opened overseas in mainland China in 2024 will be about one month, and the average cash investment payback period will be about seven months.

According to a Frost & Sullivan report, the Chinese ancient method gold jewelry market is considered an incremental market, with the market size expected to reach 421.4 billion yuan by 2028. The compound annual growth rate from 2023 to 2028 is projected to be 21.8%. While the market will continue to grow rapidly, the growth rate is expected to significantly slow down.

At the same time, industry competition is becoming increasingly fierce, with the top 5 ancient method gold jewelry brands in China holding a 46.1% market share in 2023. This means that although Lao Pu Gold was the first company in the industry to promote the concept of ancient method gold, its development is constrained by factors such as store size, making it difficult to maintain a leading position. Against the backdrop of a slowdown in industry growth, the company may find it challenging to sustain the growth rate achieved in 2023 in the long term