Laopu Gold Co., Ltd. (hereinafter referred to as "Laopu Gold") once attempted to go public on the A-share market in August 2021 but was rejected, with its gross margin of around 40% being questioned. This time, after updating the information, it turned to the Hong Kong Stock Exchange to submit listing documents, with CITIC Construction Investment International as the sole sponsor.

In April and May, gold continued to hit historical highs, but Chow Tai Fook (01929.HK), one of the main competitors of Laopu Gold, released sales data that did not meet market expectations, followed by a sharp drop in stock prices. Industry insiders believe that the consumer concept of "buying on the rise but not on the fall" does not hold true, and the statements in Laopu Gold's prospectus are not accurate; on the other hand, the low stock prices in the same industry will also affect the valuation of Laopu Gold's listing.

From the "buy on the rise" concept to a greater focus on cost-effectiveness?

On June 12, Laopu Gold successfully passed the listing hearing of the Hong Kong Stock Exchange, but then received the news of a sharp decline in sales of its peers.

Laopu Gold was established in December 2016, and the company focuses on making ancient gold jewelry. The so-called ancient gold jewelry is pure gold jewelry that combines modern design with Chinese classical culture and is processed using special traditional Chinese techniques. The craft design mainly includes lost wax, molding, hatching, hammering, engraving, hollowing out, filigree, inlay, and enameling, etc.

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Laopu Gold's prospectus states, "For gold jewelry companies, the rise in gold prices indicates that the inventory of gold jewelry companies correspondingly appreciates. In addition, the continuous rise in gold prices will stimulate consumers' investment enthusiasm and increase the demand for gold jewelry products. Driven by the concept of 'buying on the rise' for gold, the demand for gold jewelry is likely to increase with the rise in gold prices."

Furthermore, "Due to the domestic market supply shortage and the consequent import of a large amount of gold, the price of gold in China is higher than the international gold price, adding costs such as spot price physical delivery, storage, local taxes, and local currency exchange to US dollars. The increase in the selling price of Laopu Gold's products is roughly consistent with the upward trend of China's gold prices." Laopu Gold stated.

"Gold is the main raw material used in our production of products, accounting for 94.4%, 93.6%, and 92.5% of raw material costs in 2021, 2022, and 2023, respectively." Laopu Gold stated that it carefully considers several key factors to determine product prices, including material and production costs, the difficulty of craftsmanship, and the brand's market positioning. "Should the current gold market price rise significantly, we will adjust the product prices according to the current market price and pass on the costs to our customers."

However, in April and May, gold prices continued to rise sharply, with gold priced in yuan approaching the 580 yuan/gram mark, but the data released by industry leader Chow Tai Fook was not what Laopu Gold said. Can the cost of rising gold prices really be passed on to customers?

On June 13, Chow Tai Fook released its annual performance announcement for the year ending March 31, 2024, with a 14.8% increase in turnover to 108.713 billion Hong Kong dollars, and a 28.9% increase in operating net profit to 12.163 billion Hong Kong dollars. The impressive double increase did not boost the company's stock price. The next day, after the market opened, Chow Tai Fook's stock fell more than 10%, and then closed at 8.62 Hong Kong dollars, down 8.88%. Another set of data announced along with the annual report may have caused market concerns. Chow Tai Fook's unaudited main operating data from April 1, 2024, to May 31, 2024, showed that the retail value decreased by 20.2% compared to the same period last year.Gold jewelry industry insiders have analyzed to First Financial Daily reporters that previously, consumers who needed to buy gold jewelry did so, and then in April and May, when gold prices soared, consumers would "rationally" consider the cost-performance ratio, leading to a period of low transactions and a market that would not be as prosperous as before with the "buy high, not low" mentality. The gross margin of time-honored gold shops is also much higher than that of their peers, and their prices are relatively expensive. Currently, the overall sales volume of luxury goods is relatively low, so it is not surprising that gold jewelry with higher prices would "cool off."

Increased gold volatility may erode profits.

"In the years leading up to the gold price rise before May 2024, due to the relatively low-priced inventory purchased early on, it was possible to sell at higher prices after the subsequent appreciation of gold, resulting in a higher gross margin. However, if future gold price volatility increases, it becomes unpredictable and may erode profits," said a senior retail financial executive to First Financial Daily reporters.

"The gross margin of jewelry brands using a self-operated model is usually higher than that of the franchised operation model." In 2021, 2022, and 2023, the gross margins of Time-Honored Gold were 41.2%, 41.9%, and 41.9%, respectively. Time-Honored Gold only holds a 0.6% share in the Chinese gold jewelry market. Why is the gross margin much higher than that of peers? Time-Honored Gold's explanation is that the proportion of self-operated models is high. Previously, Time-Honored Gold's A-share listing application was rejected. The China Securities Regulatory Commission questioned the rationality of Time-Honored Gold's gross margin being "significantly higher than other comparable companies in the market" (i.e., the average gross margin of the nine companies disclosed in the application materials for the first A-share listing application, which ranged from 22.1% to 26.5% during the relevant performance period).

According to Frost & Sullivan data, in 2022 and 2023, among all gold jewelry brands in China, Time-Honored Gold ranked first in single-store revenue. In 2023, Time-Honored Gold's average store revenue reached 93.9 million yuan, more than double the average store revenue in 2022. The company explained that ancient gold jewelry usually requires more craftsmanship, thus having a higher profit margin. The company's high-end brand positioning also allows it to have higher pricing, thereby obtaining a higher gross margin. In terms of store opening, Time-Honored Gold operates all offline stores in a fully self-operated model and a themed scenario store model. As of the last practicable date, the company has opened 32 self-operated stores in 13 cities in China (mostly first-tier or new first-tier cities).

Time-Honored Gold stated that pure gold is relatively soft, and processing pure gold, especially when embedding diamonds and gems on the surface of pure gold, requires complex craftsmanship. Unprofessional craftsmanship may cause pure gold to bend, be squeezed, or deform. According to Frost & Sullivan's data, Time-Honored Gold, founded in 2009, is the first brand in China to promote the "ancient gold" concept, the first to launch "pure gold inlaid with diamonds" products, and the first to launch "gold-clad enamel" products.

"Since we do not have any hedging tools to manage gold price fluctuations, we are highly susceptible to the impact of such fluctuations," Time-Honored Gold said in the risk factors section of its prospectus, stating that the company's raw material purchase amount constitutes the largest share of our sales costs, and significant fluctuations in raw material prices (mainly including gold) may have a significant impact on the company's business, operating performance, and financial condition.

However, Time-Honored Gold also explained why it does not hedge. The company said, "We believe that such fluctuations are controllable because we often adjust our raw material procurement plans according to actual market and production needs."

Chow Tai Fook, on the other hand, has a different approach. Its annual report states, "We use gold borrowing (gold short positions) for economic hedging purposes to mitigate the financial impact of price fluctuations in gold inventory (gold long positions). In the short term, there will be a timing difference in the confirmation of positions from a specific financial reporting period. In the long run, we expect the impact of gold long and short positions to offset each other when selling gold inventory."

Time-Honored Gold's prospectus shows that the company's revenue has grown rapidly in the past three years, from 1.265 billion yuan in 2021 to 3.18 billion yuan in 2023, with a compound annual growth rate of 58.56%; net profit increased from 113 million yuan to 416 million yuan.A Hong Kong investment banking professional told Yicai reporters that most gold retail companies will have certain short positions on gold to hedge against the risk of inventory devaluation. If an old-established gold shop does not do this, its performance will grow significantly during periods of rising gold prices, as there will be no losses from short positions; however, once the gold price enters a downward trend, the previous high growth in performance may turn to the other extreme, and it may even sell at a loss. On the other hand, considering that the stock prices of peers such as Chow Tai Fook have already corrected significantly, investors will use this as a reason to pressure investment banks and management to lower the valuation at the time of the IPO, thereby affecting the total amount of funds raised.