As the gold price remains high and demand is under pressure, can LAOPU GOLD rely on the concept of "ancient method gold" to withstand the lifting of the ban in 3 months?

In less than three months since its listing, LAOPU GOLD (06181) has experienced another significant surge in its stock price: on September 13th, the highest price reached HKD 115 during trading, representing an astonishing increase of 184% compared to the IPO price of HKD 40.5.

Recently, on the news front, the company released its interim financial report showing rapid growth in both revenue and profit, with net profit increasing by nearly 200% year-on-year. On September 10th, the adjustments to the list of stocks eligible for the Stock Connect program officially took effect, with LAOPU GOLD being included in the list. The improvement in the company's liquidity is expected to further drive up the stock price in the future.

Data indicates that LAOPU GOLD will face a wave of lock-up share release on December 27, 2024, with a total of 10.8016 million shares being unlocked, accounting for 48.28% of the global issuance. As disclosed by the company earlier, as concerted parties, Xu Gaoming and his son Xu Dongbo collectively hold 78.27% of LAOPU GOLD's shares, while Hong Qiao Jinji (Xu Gaoming holds 70%, Xu Dongbo holds 30%) holds 45.84%, and Hong Qiao Jinji's Tianjin Jincheng, as a common partner, holds 6.51%. Additionally, among the board members, the General Manager of the Operations Department Xu Rui and the Director of the Quality Inspection Department Jiang Xia are Xu Gaoming's nephew and niece, respectively.

It can be seen that the company is actually a family-owned enterprise with concentrated ownership structure. Considering the current high valuation of the company, there is a certain risk of a downward price correction as the lock-up period approaches.

Interim Profit Surges by 200% to Reach a New High

It is understood that LAOPU GOLD, founded in 2009, officially registered the "LAOPU GOLD" trademark in 2014, becoming the first brand in China to promote the concept of ancient gold. Positioned as the number one brand in the professional field of ancient handmade gold products in China, the company's core target customers are high-net-worth individuals, with all products using ancient gold techniques.

In the first half of 2024, the company achieved rapid growth in both revenue and profit, recording a revenue of RMB 3.52 billion, an increase of 148.34% year-on-year; the attributable profit to the company's owners reached RMB 588 million, an increase of 198.75% year-on-year. The company stated that the increase in revenue and gross profit during the reporting period was mainly due to the expansion of the group's brand influence, leading to growth in store revenue including overall revenue from online and offline channels.

In the first half of the year, the company's gross profit margin slightly declined to 41.3%, a decrease of 0.32 percentage points year-on-year. Both the sales expense ratio and the management expense ratio showed significant improvements, with the sales expense ratio at 15.1%, a decrease of 2.5 percentage points year-on-year, and the management expense ratio at 3.5%, a decrease of 1.25 percentage points year-on-year, resulting in a sales net profit margin of 16.7%, an increase of 2.8 percentage points year-on-year.

It is known that all LAOPU GOLD stores are self-operated, with store revenue per unit and average customer spending far exceeding those of peers. The company's current channels are mainly located in high-end shopping centers in first-tier and new first-tier cities. As of the end of June 2024, the company had a total of 33 stores, a net increase of 6 stores year-on-year, covering 14 cities, including 4 stores in the SKP series and 10 stores in the Wanda Plaza series In terms of distribution channels, in the first half of the year, the company's offline revenue was approximately 3.13 billion yuan, a year-on-year increase of 150%, while online revenue was 390 million yuan, a year-on-year growth of 139%, both recording rapid growth. In terms of regions, in the first half of the year, the mainland China and Hong Kong-Macao-Taiwan regions achieved revenues of 3.233 billion yuan and 288 million yuan respectively, with year-on-year growth of 138% and 376% respectively. According to Frost & Sullivan data, as of June 30, 2024, LAOPU GOLD ranked first among all gold and jewelry brands in terms of coverage in the top ten high-end department stores nationwide.

Looking ahead, LAOPU GOLD's internationalization strategy is accelerating, with the Southeast Asian market becoming an important direction for the company's future development. According to the previous prospectus disclosure, within two years after the completion of the IPO, the company will expand with 5 new stores in the Southeast Asian market, creating a Chinese high-end gold and jewelry brand with international competitiveness.

Gold Prices Continuously Rising, Significant Performance Differentiation in the Industry Chain

In the first half of 2024, gold prices rose rapidly, repeatedly hitting new highs. Data from the China Gold Association shows that as of the end of June, the London spot gold fixing price was $2,330.90 per ounce, up 12.34% from $2,074.90 per ounce at the beginning of the year. At the end of June, the Shanghai Gold Exchange Au9999 gold closing price was 549.88 yuan/gram, up 14.37% from the opening price of 480.80 yuan/gram at the beginning of the year.

Taking the SHFE gold closing price in Shanghai as an observation indicator, the gold price reached a phase high of 494.80 yuan/gram on March 4, and continued to rise, reaching 581.56 yuan/gram on July 17.

Since 2022, the amount of gold purchased by central banks worldwide has increased significantly, reaching a record high of 1,135.69 tons for the first time. According to Minsheng Securities statistics, in the first three quarters of 2023, global central bank gold reserves increased by a net of 799.57 tons, a 14% increase compared to the first three quarters of 2022. By December 2023, China's gold reserves had increased to 2,214.55 tons.

Regarding this, Kaiyuan Securities pointed out that the unexpected decline in the U.S. CPI data announced in July has to some extent boosted expectations of interest rate cuts, frequent geopolitical factors in Russia, Ukraine, the Middle East, and the continuous gold reserves held by central banks around the world, all of which will provide strong support for gold prices.

Despite the high gold prices, listed companies in the gold industry chain have shown a significant differentiation in performance. While upstream gold mining companies have collectively benefited from the rise in gold prices and achieved significant performance growth, downstream gold jewelry enterprises have encountered significant declines in performance Data shows that in the first half of 2024, the national gold consumption was 523.753 tons, a year-on-year decrease of 5.61%. The consumption of high-premium gold jewelry was 270.021 tons, a year-on-year decrease of 26.68%; while the consumption of gold bars and coins with relatively lower premiums was 213.635 tons, a year-on-year increase of 46.02%.

Specifically, Chow Sang Sang (00116) saw a 13% year-on-year decrease in revenue to HKD 11.313 billion in the first half of the year, with net profit plummeting by 36% to HKD 526 million; Chow Tai Fook (01929) reported a 20% decrease in overall retail sales in the second quarter, with same-store sales in Mainland China dropping by 26.4%, and in Hong Kong and Macau by 30.8%, indicating a similarly bleak performance.

In contrast, LAOPU GOLD managed to achieve "contrarian" growth, perhaps due to its unique positioning in "ancient gold".

Can the Leading Ancient Gold Achieve Sustainable High Growth?

It is understood that LAOPU GOLD is the first brand in China to promote the concept of "ancient gold", which refers to pure gold jewelry products that combine modern design with Chinese classical culture, applying traditional Chinese handmade gold manufacturing techniques. With fine craftsmanship, a sense of weighty product quality, and deep cultural heritage, the concept of ancient gold has been sought after by many consumers in recent years, with comprehensive jewelry brands like Chow Tai Fook launching their own ancient gold series products.

LAOPU GOLD's brand positioning mainly targets high-net-worth individuals. According to the Hurun Report, in 2023, LAOPU GOLD entered the top ten most favored jewelry brands among high-net-worth individuals in China for the first time, following Chow Tai Fook as the second Chinese gold jewelry brand to make the list. Setting itself apart from mainstream gold jewelry brands that price by weight, all of LAOPU GOLD's products are priced per piece, with a pricing logic more similar to luxury jewelry.

It is disclosed that all of LAOPU GOLD's products are independently designed and developed, with over 1800 original designs created since 2021, holding 243 domestic patents, 1207 copyrighted works, and 164 foreign patents by the end of the reporting period.

In terms of products, the company's pure gold and gold-inlaid products achieved revenues of RMB 1.372 billion and RMB 2.147 billion respectively in the first half of the year, with year-on-year growth of 110% and 182%. The proportion of gold-inlaid products targeting young consumers accounted for 61% of total revenue, up 7 percentage points year-on-year.

In recent years, with the increasing popularity of "national trend" among young people, ancient gold with rich traditional cultural connotations and auspicious meanings has also attracted more young consumers. LAOPU GOLD offers a wide range of products, from daily wear accessories to cultural and practical gold items, catering to consumers of different ages and needs. By the end of the reporting period, the company had 275,000 loyal members, with the consumer base continuously expanding According to the data from the China Business Industry Research Institute, the market size of the ancient Chinese gold jewelry market has rapidly increased from 13 billion yuan in 2018 to 157.3 billion yuan in 2023 based on sales revenue, with a high compound annual growth rate of 64.6%. It is expected that the market size will reach 219.3 billion yuan in 2024 and 421.4 billion yuan in 2028.

It can be seen that LAOPU GOLD's brand positioning is more like a luxury brand, blurring the distinction between gold jewelry and luxury goods. It mainly focuses on high-net-worth customers who are relatively insensitive to prices. The pricing per piece also mitigates the negative impact of high gold prices, earning more brand premium in the gold jewelry market.

However, LAOPU GOLD is not without challenges. Data shows that LAOPU GOLD currently has a relatively low market share. In terms of revenue in 2023, LAOPU GOLD ranks seventh in the ancient Chinese gold jewelry market with a market share of 2%, while the top 5 ancient Chinese gold jewelry brands occupy 46.1% of the market. Looking at the entire gold jewelry market, LAOPU GOLD's market share is only 0.6%.

As of the end of June 2024, LAOPU GOLD had a total of 33 stores. In comparison, Chow Tai Fook and Chow Sang Sang had over 4,000 stores, Chow Tai Fook Jewellery Group had nearly 8,000 stores, and Lao Feng Xiang had around 6,000 stores during the same period.

Although the company currently has a first-mover advantage in the ancient Chinese gold segment, with other gold brands launching ancient Chinese gold products, the increasingly fierce competition may lead the market into a vortex of homogenization, low profit margins, and price wars. At that time, LAOPU GOLD's design, processing, and brand marketing capabilities will face more challenges