1H24 results are in line with our expectations

The company announced 1H24 results: revenue increased 1.5% year on year to 8.2 billion yuan, and net profit to mother fell 19% year on year to 0.6 billion yuan. 2Q24 revenue fell 21% year over year, and net profit to mother fell 31% year over year, in line with our expectations. The company plans to pay a cash dividend of 0.3 yuan per share, corresponding to a dividend rate of 54%.

The rapid rise in gold prices is putting pressure on the industry and affecting the enthusiasm of franchisees to pick up goods. Since March 2024, the price of gold has risen rapidly, affecting terminal demand and the willingness of franchisees to pick up goods. By channel, 2Q24 online/offline ownership/offline franchise revenue was -2.5%/-1.7%/-28%, respectively, compared with the same period, and franchise channels declined a lot. By product, plain gold/inlay/brand usage fees (related to gold products) were -24%/-20%/-29%, respectively, compared to the same period in 2Q24.

In an unfavorable business environment, the company is still actively developing new channels. In 2Q24, 7 and 94 stores were opened sequentially for direct offline management and franchise, respectively. As of June 2024, the number of the company's offline stores reached 5,230.

Gross margin benefited from higher gold prices, but higher expense ratios and lower non-operating income affected net interest rates. Against the backdrop of a rapid rise in gold prices and an increase in the share of direct revenue with high gross margins, 2Q24 gross margin increased sharply by 3.7ppt to 21.8% year over year; however, due to the structural increase in direct management share and the company's increase in brand promotion and personnel related expenses, the total 2Q24 sales management expenses increased by 3.9 ppt year on year. At the same time, non-operating income such as profit and loss from changes in fair value and other income decreased, causing the company's operating profit margin to decrease by 1.6 ppt year on year and net profit to mother decreased by 31% year on year (corresponding net interest rate of 8.3%, -1.2ppt year on year).

Inventory growth was relatively steady, and accounts receivable declined sharply, leading to an improvement in operating cash flow. As of 1H24's book inventory increased 17% year on year. After considering the impact of the rise in gold prices, we expect the inventory volume to be stable; accounts receivable decreased 68% year over year, which helped the company reduce risk in an unfavorable market environment and drive 1H24's operating cash flow to a sharp increase of 80% to 1.3 billion yuan year over year.

Development trends

The company plans to pay more attention to the coordinated development of multiple categories in the future, with gold as the main focus, while incorporating jadeite, jade, pearls and fashion jewelry into the product system to increase store profit margins. In terms of channels, the company guides the next few years to balance the speed of opening stores and the quality of existing stores to optimize and adjust the structure of franchisees and stores.

Profit forecasting and valuation

Considering the pressure on terminal sales, we lowered the company's 2024/25 EPS forecast by 16%/13% to 1.14/1.33 yuan. The current stock price corresponds to 9/8 times the 2024/25 price-earnings ratio, considering that the company, as a leading jewelry brand, has leading channel expansion capabilities and maintains an industry performance rating. Considering the decline in the overall valuation of the gold and jewelry industry, the target price was lowered by 33% to 13.64 yuan, corresponding to 12/10 times the 2024/25 price-earnings ratio, and there is 30% room for growth.

risks

Gold prices fluctuated greatly, store expansion fell short of expectations, and market competition was fierce.