Key points of investment

Q2 profit also exceeded expectations by 16.8%. In the first half of the year, it steadily delivered 24H1 revenue +14.2% and net profit to mother +10.0% under pressure. Revenue and profit increased at a high base. 1) 24H1: Revenue of 3.43 billion yuan (YoY +14.2%, same below), net profit to mother of 0.23 billion yuan (+10.0%), net non-return net profit of 0.23 billion yuan (+10.1%); net operating cash flow of 0.339 billion yuan. 2) 24Q2:

Revenue 1.64 billion yuan (+10.3%), net profit attributable to mother 0.1 billion yuan (+16.8%), net non-return net profit of 0.1 billion yuan (+17.0%); net operating cash flow of 0.215 billion yuan.

In the medium term, a cash dividend of 1 yuan was distributed for every 10 shares, and the dividend performance was impressive. In mid-2024, the company plans to pay a cash dividend of 1 yuan for every 10 shares, a cash dividend of 0.089 billion yuan, and a total cash dividend of 0.31 billion yuan (0.35 yuan per share) for 2023 and 2024 semi-annual cash dividends.

Revenue structure: 24H1 gold category growth and franchise channel expansion continue to drive steady revenue growth. By product, 24H1 fashion jewelry/traditional gold/leather goods achieved revenue of 1.65/1.48/0.15 billion yuan, respectively, +6%/+31%/-26%, accounting for 48%/43%/4%; the share of traditional gold increased 5.6 pp year on year, and the growth rate of one-price gold products in fashion jewelry was close to the growth rate of traditional gold.

By channel, 24H1 self-operated/franchise channels achieved revenue of 1.72/1.65 billion yuan respectively, -4%/+44% over the same period, accounting for 50%/48%. 24H1 has a net increase of 52 stores, including a net closure of 17 direct-run stores, a net increase of 69 franchisees, and an increase in the number of stores to 1,451. The franchisee's recognition of brands and products and steady return on opening stores are the main reasons for the rapid growth in the number of franchisees.

Profitability: Gross margin declined year-on-year but stabilized month-on-month. The cost control effect was significant. 24H1 gross margin was -2.8pp year-on-year, and net margin -0.2pp. 1) 24H1: gross profit margin 24.1% (-2.8pp), net profit margin 6.7% (-0.2pp), sales expense ratio 11.4% (-2.7pp); 2) 24Q2: gross profit margin 23.3% (-2.4pp), net profit margin 6.0% (+0.3pp), sales expense ratio 11.3% (-3.3pp). The year-on-year decline in gross margin was mainly affected by the decline in inlay products and changes in channel structure. The rapid growth of one-price gold products in fashion jewelry has hedged the negative impact of the increase in traditional gold share on gross margin. The company's comprehensive gross margin has been relatively stable for the past three quarters; continuous optimization of direct-run stores has led to a decline in sales expenses, and net interest rates have remained stable.

The company's one-price products bucked the trend, highlighting strong product strength and overall pressure on sales in the aesthetic industry. The company's one-price gold products bucked the trend. The company's fashion jewelry mainly includes one-price gold products, 18K gold products, and inlay products. The growth rate of 24H1 fashion jewelry is slower than traditional gold, but in terms of segmentation, K-gold inlay has declined a lot. The main category of fashion jewelry, one-price gold, is growing at a rate close to traditional gold, and the gross margin is also close to K-gold products.

Since March of this year, gold prices have continued to reach new highs and fluctuate widely at high levels, stimulating demand for gold investment but dampening consumer sentiment. According to the World Gold Council, demand for gold jewelry in the Chinese market fell 35% year on year in the second quarter of this year, and demand for gold bars and coins increased 62% year on year. In the context of investing in gold to squeeze gold jewelry, the company's one-price gold products are growing rapidly against the trend, highlighting strong product strength and aesthetic power, and will fully benefit from the “aesthetic awakening” consumer trend.

Average store revenue grew by double digits in the first half of the year. Excellent same-store performance and steady returns supported channel expansion and multiple measures to improve single store performance, and average store revenue maintained rapid growth. From January to June 2024, the Gold and Silver Jewelry Association grew 0.2% year over year, of which -0.1%/-11%/-3.7% year on year in April to April, respectively. Since the second quarter, high gold prices have curtailed gold and jewelry terminal sales. The company improved the performance of individual stores through measures such as increasing investment in the development of branded products, promoting store image transformation and upgrading, and hiring new brand ambassadors. The average store revenue of the company's jewelry stores continued to grow by more than double digits in the first half of the year.

The profitability of the store is good, the return on opening a store is steady, and it supports the continuous expansion of the channel. The company's fashion jewelry products accounted for 48% of revenue in the first half of the year. A high proportion of high-margin one-price products effectively guaranteed the profitability of the store, and franchisees had good returns on opening stores. The company currently has 1,451 jewelry stores, and plans to hit 2,000 stores in 2025. Considering that the company's current channel layout still has many gaps and potential areas, the company's channel expansion potential will continue to be unleashed with the support of excellent store profitability.

Profit forecasting and valuation

The company has differentiated advantages in product strength and brand tone, has strong certainty in channel expansion, and will maintain a relatively rapid growth rate in the future. Considering the pressure on the women's bag business and lowering the profit forecast, we expect the company to continue to maintain 24/25/26 revenue of 6.9/8.2/9.6 billion yuan, up 16.99%/19.51%/16.90% year on year; net profit to mother of 0.369/0.439/0.509 billion yuan, up 10.82%/18.73%/16.09% year on year, corresponding to PE 10.51/8.85/7.63X. The higher dividend ratio, combined with the certainty of growth, continues to give the company a “buy” rating.

Risk warning: Gold prices fluctuate; store expansion falls short of expectations; industry competition intensifies, etc.