Description of the event

In 2023, the company achieved operating income of 71.4 billion yuan, an increase of 13.4% over the previous year, and net profit to mother of 2.21 billion yuan, an increase of 30.2% over the previous year.

2024Q1 achieved operating income of 25.6 billion yuan, an increase of 4.4% year on year, and net profit to mother of 80 million yuan, an increase of 12.0% year on year.

Incident comments

Stores expanded steadily throughout the year, and the jewelry business grew rapidly. There were 385 net stores opened throughout the year, including 7 self-operated stores and 392 net franchised stores. The total number of stores reached 5,994, consolidating the “five in one” marketing model for self-operated banks, joint ventures, general distribution, dealers, and specialty stores. The company's annual gold sales volume was 148 tons, a slight decrease of 1.8% year-on-year.

Jewelry and gold trading revenue was 581 billion yuan and 12.8 billion yuan respectively, up 15% and 6% year on year. The main jewelry industry achieved faster growth. At the same time, the company's products continued to be iteratively updated in 2023, and sales of new products reached 15.2 billion yuan, accounting for more than 20% of total revenue. Benefiting from the rise in gold prices throughout the year and the narrowing of discounts, the gross margin of the jewelry business increased by 0.7 pct to 9.8% year on year, achieving gross profit of 5.7 billion yuan, an increase of 24% year on year. Sales and management expenses increased 27% and 22% year over year, respectively. The growth rate is relatively fast compared to historical levels. It is expected that the company has increased its salary investment for sales and management personnel. At the same time, the company is actively promoting the appointment system of the four “designers, technicians, production craftsmen, and salesmen” and a hierarchical progression system of 1, 2, and 3 levels to improve the incentive mechanism and promote a steady increase in human efficiency. Taken together, operating profit (gross profit - tax - three fees+investment income+fair value change) reached 3.9 billion yuan, an increase of 31% over the previous year. The net profit margin increased by 0.4 pct to 3.1% year on year, and profitability was resilient.

2024Q1 revenue is growing steadily, and profitability continues to be optimized. The company's revenue increased 4.4% year-on-year in the first quarter. The gold trading business is expected to be stable, and the gold jewelry revenue growth rate may be relatively faster. Gold prices soared in late March and continued until early April. The company's shipping pace is expected to be disrupted in the short term, but the price of gold fell in late April, and the peak season in May is expected to drive demand recovery. Subsequent franchisee replenishment is worth paying attention to. Gross margin continued to rise year-on-year in the first quarter, increasing 0.35pct to 8.37%, and gross profit of 2.1 billion yuan, up 9% year on year. Sales/management expenses were reduced by 8% and 15%, respectively, or a higher base was mainly due to higher investment in employee remuneration expenses in the same period last year. Operating profit for the first quarter reached 1.5 billion yuan, a year-on-year increase of 16%. Credit impairment losses of more than 60 million yuan have caused a certain drag on net profit. It is expected that the company has carefully prepared for impairment of accounts receivable. Net profit margin increased 0.21pct year-on-year to 3.13% in the first quarter, and profitability continued to be optimized.

Investment advice: As a leading gold and jewelry company, in addition to benefiting from the improvement of the industry pattern and the continuous rise in gold prices driving demand and profitability, Lao Fengxiang's internal quality and efficiency measures have also performed well. The company has actively implemented the “Double Hundred Action” reform in recent years. It has fully launched the third round of “Double Hundred Action” and formulated the “Three-Year Action Plan”, which clarifies 20 specific key tasks, fully stimulates operators' motivation to innovate, and is expected to further strengthen the drive for growth. We expect the company's EPS to reach 4.9, 5.6, and 6.3 yuan in 2024-2026, with corresponding PE valuations of 15.6, 13.7, and 12.2 times, respectively, maintaining a “buy” rating.

Risk warning

1. Increased competition in the industry;

2. The price of gold fluctuates sharply in the short term, causing disturbance to consumers and franchisees.