1H16 performance is in line with expectations
Lao Fengxiang announced 1H16 results: operating income of 20.02 billion yuan, down 3.69% year on year; net profit attributable to parent company was 523 million yuan, down 2.38% year on year, corresponding to profit of 1.00 yuan per share. Non-net profit after deducting non-net profit increased by 0.63% year on year (investment income from non-recurring profit and loss declined sharply). The performance was in line with expectations. In 2Q16, revenue fell by 1%, and the decline narrowed; net profit increased by 14.9%, mainly due to an increase in government subsidies (income from support funds for cultural and brand building development).
The rise in gold prices has yet to bring about an improvement in terminal demand. In the first half of 2016, retail sales of gold, silver and jewelry from 100 major retail enterprises in the country fell 15.4% year-on-year, an increase of 9.3 pct over the same period last year. Revenue split: (1) Jewellery revenue fell 6.19%, lower than the industry, mainly due to the company's franchise model; gold trading revenue increased 56% and pen revenue fell 27.2%; (2) the number of Yinlou outlets reached 2,986 in the first half of the year, a net increase of 134 (+4.5%) over the previous year. Among them, there are 178 self-operated silver stores/counters (+2.3%), 1,239 retail stores (+6.1%), and 1,561 distribution outlets (+3.4%). In addition, the company has opened 8 new overseas bank stores. (3) In the first half of the year, the price of gold increased by 12.8% year on year, and the launch sales volume fell 16.8%.
The rise in gold prices has led to a loss in the fair value of the hedging business. The gross margin increased by 0.4ppt to 7.8% year on year, and the cost ratio for the period increased by 0.4ppt to 3.1% year on year. The fair value of the hedging business lost 28.88 million yuan due to the rise in gold prices.
Development trends
(1) The economy is sluggish, and the rise in gold prices based on safe-haven demand is expected to continue, but it will take time to drive sales of gold and jewellery terminals; (2) The company plans to add no less than 100 franchise stores in 2016, and has already opened 22 in the first half of the year; the company will also establish 1 to 2 joint ventures.
Profit prediction
We maintain our full-year earnings per share forecast for 2016/2017 unchanged. The EPS forecast is 2.09 yuan/2.32 yuan respectively, corresponding to a growth rate of -2.1%/10.8%.
Valuation and recommendations
Currently, the company's stock price corresponds to 19.7x/17.8x 2016/17e P/E. We maintained a neutral rating, but raised our target price by 10.83% to RMB 46.34, which is 12.26% upward from the current stock price. The target price was adjusted due to valuation switching, based on 20x 2017-e P/E; maintaining the recommended rating for the company's B-shares; lowering the target price by 3.88% to $4.46 (13x2017-E P/E) implied an upward space of 23.89%. Demand for terminals in the jewelry industry is unspeakably improving, but I am optimistic that Lao Fengxiang's share will continue to increase and channels will sink.
risks
Gold prices are at risk of fluctuating, and terminal consumption continues to be sluggish.
