Since this year, the price of gold has skyrocketed. The spot gold price hit a record high of 2330.06 US dollars, and the domestic basic gold price broke through 700 yuan/gram. At one point, the gold track became a popular race track today.

Driven by the continued rise in gold prices, investors are clearly also enthusiastic about gold concept stocks. Therefore, as far as the current industry environment and capital sentiment are concerned, this is a very favorable time for relevant high-quality companies to successfully complete their IPOs and further raise their valuations.

Meanwhile, the gold and jewelry brand Mengjinyuan Gold & Jewelry Group Co., Ltd. (“Dream Gold Garden” for short) has once again accelerated the listing process in Hong Kong — on April 3, the Hong Kong Stock Exchange's official website revealed that Mengjinyuan submitted a listing application to the main board of the Hong Kong Stock Exchange, with CITIC Securities as its sole sponsor. This is another application after submitting the form on September 28, 2023.

The industry is trending. From an investor's perspective, what kind of strength will Mengjinyuan use in the industry to sprint into Hong Kong stocks? What is the potential for growth in the industry and track?

With the support of two major highlights, profitability continues to improve

As I said, numbers are the best litmus test. The quality of a company's fundamentals is undoubtedly a key factor for investors to measure investment value, so you might as well start from Mengjinyuan's fundamentals and explore the company's growth potential in depth.

The Zhitong Finance App learned that Mengjinyuan is an original brand manufacturer of gold jewelry. It was founded in 2000. Its products mainly focus on high-purity gold jewelry, as well as jewelry such as diamond jewellery, and jade inlays, K gold, and platinum. According to Frost & Sullivan data, in 2022, based on gold processing volume and gold jewelry revenue, Dream Gold Garden ranked fourth and fifth among Chinese gold and jewelry brands, respectively. Based on gold and jewellery earnings in third-tier cities, the company ranks third among Chinese gold and jewellery brands.

The founder of the company is Wang Zhongshan, an inheritor of intangible cultural heritage at the provincial level. As a non-genetic inheritor, Wang Zhongshan pays more attention to the combination of techniques and materials. In 2023, taking advantage of the “Guochao Culture” trend, Mengjinyuan also launched the Master Craftsman series in collaboration with the National Intangible Heritage Yanjing Eight Decades and the “Three Holes Culture” IP.

Simply put, Mengjinyuan's body can be described as having the dual highlights of a “non-genetic successor” and a “whole industry chain”. This is obviously a great bonus point on the golden circuit where many brands gather. On the one hand, it has built the company's brand moat, and on the other hand, it has added weight to the company's performance.

Supported by the above highlights, Mengjinyuan's overall business performance has shown a continuous upward trend.

In terms of revenue, from 2021 to 2023, Dream Gold Park achieved revenue of 16.871 billion yuan, 15.724 billion yuan, and 20.209 billion yuan respectively, showing the characteristics of upward fluctuation and continuous expansion. The increase in revenue scale is obviously also reflected in the net profit scale of Mengjinyuan. According to the prospectus data, from 2021 to 2023, the company's net profit attributable to mother was 0.221 billion yuan, 0.181 billion yuan, and 230 million yuan, respectively.

The two core financial indicators of revenue and net profit to mother have all improved markedly, so what about the company's profitability?

From 2021 to 2023, Dream Gold Park achieved gross profit of 0.536 billion yuan, 0.759 billion yuan, and 1,077 billion yuan respectively, increasing year by year. Gross margins for the same period were 3.2%, 4.8%, and 5.3%, respectively, and net margins were 1.3%, 1.1%, and 1.2%, respectively. Although the overall profit level was not high, it showed a steady upward trend.

Of course, Mengjinyuan's level of profit is not high, but on the Golden Track, where profitability is generally not strong, Mengjinyuan's performance is certainly a normal phenomenon.

According to reports, due to the transparency of gold procurement prices, most of the gold from jewelry brands are purchased from the Gold Exchange, but the price of gold is highly volatile. In order to calm procurement costs, gold and jewelry brands generally choose to hedge risks through gold futures. At the same time, since risk hedging is not directly reflected in the company's gross profit or gross margin, the company's gross profit and gross margin are mainly affected by fluctuations in gold prices.

According to the prospectus data, from 2021 to 2023, Mengjinyuan's net profit after excluding hedging profit and loss was 0.148 billion yuan, 0.352 billion yuan, and 0.533 billion yuan respectively, with a compound annual growth rate of 89.4% (net profit CAGR 2.1%). Whether in terms of profit size or profit growth rate, it far exceeded the net profit level for the same period.

Furthermore, the price of gold is determined by international gold prices. As a supplier of gold jewelry, brands have almost no pricing power; they only charge fixed labor costs, so for brands, the cost cannot be controlled. Companies with strong brand effects have high premium space; companies with weak brand effects have low premium space. This is one of the reasons why the profitability of the gold and jewelry industry is generally low.

In addition to this, since there is little premium space for plain gold jewelry and large premium space for inlaid jewelry, the profit level of Dream Gold Garden, which almost only sells gold, has not dragged the industry back. In 2023, the gross margin of Mengjinyuan gold jewelry and other gold products was 4.6%, and the gross margin of K gold jewelry, diamond jewelry and other products was 27.5%. Since gold revenue accounts for 98.4% of total revenue, excluding the revenue contributed by inlay and diamond brands, Mengjinyuan's gold gross margin is also obviously close to the industry average.

Finally, let's look at an important indicator — return on net assets. As one of the “stock god” Buffett's favorite metrics, return on net assets is often used to measure a company's profitability, and it is also an indicator that determines return on investment.

Take data, for example. Earlier, the prospectus revealed that from 2020 to 2022, Mengjinyuan's return on equity (return on net assets) was 14.3%, 15.7%, and 11.2%, respectively. The average return on equity for the same period was 9.0%, 10.9%, and 8.2% respectively. Although fluctuated, it has been several years higher than the industry average return, so it is not difficult to see a good return on investment from it. As of 2023, the company's return on equity continued to grow to 12.9%, further reflecting an increase in the company's profitability and return on investment.

Judging from the various core financial data mentioned above, it is easy to see that Mengjinyuan has undoubtedly handed over a qualified and predictable “report card”, which supports the company's growth potential and also highlights the company's investment value.

Surrounded by triple demand, deep mining sinks into the market

If fundamentals have established the investment value of Dream Gold Garden, then the industry space determines the growth ceiling of Dream Gold Garden.

There is no doubt that the Gold Jewel Track is a “long slope and heavy snow” track. In recent years, driven by three major demands: strong investment demand, recovery in wedding demand, and high demand for self-satisfaction, gold prices have skyrocketed, and the market size has expanded dramatically.

Specifically, since gold has the concept of preserving and adding value, under the influence of many uncertain factors in the macro environment, the gold investment effect is remarkable. Spot gold prices in London rose 70% cumulatively from the beginning of '19 to 24/3/8, and the spot gold price in Shanghai increased 78% during the same period. As of April 5, the price of spot gold had risen to 2324.15 US dollars per ounce. At the same time, the domestic basic gold price also reached a high level. On April 8, the domestic AU9999 gold price exceeded 550 yuan/g, and the price of pure gold jewelry was also approaching 730 yuan/g. Furthermore, with technological changes and the rise of aesthetics, demand for self-pleasure is also increasing, while demand for weddings is gradually shifting from “diamonds” to “gold.”

Driven by these multiple demands, the domestic gold and jewelry market has also continued to expand in recent years. In 2022, sales revenue from the gold and jewellery market was RMB 409.8 billion, accounting for 57.0% of the total jewellery market. It is expected to reach RMB 546.5 billion in 2027, with a compound annual growth rate of 5.9%, continuing to grow.

Among these, in particular, the per capita consumption of gold and jewellery in third-tier and lower-tier cities is growing more rapidly. From 460.7 yuan in 2017 to 617.5 yuan in 2022, the compound annual growth rate is 6.0%. The per capita consumption of gold and jewelry in third-tier and low-tier cities is expected to increase to 856.7 yuan in 2027, with a compound annual growth rate of 6.8%. The growth rate of third-tier cities outperforms the overall industry growth rate.

In view of the above development potential, Mengjinyuan also strategically regards third-tier cities and below as market entry points to dig deeper into the market.

As of 2023, Mengjinyuan has established a sales network of more than 2,817 franchise stores, 35 self-operated stores, 7 direct service centers, and 17 provincial agents and online stores on mainstream e-commerce platforms. Among them, the company's third-tier city franchisees accounted for 41% of revenue; first-tier cities 0.6%; and second-tier cities 19.2%. Judging from industry trends, this move is clearly somewhat forward-looking. After all, at present, third- and fourth-tier cities are gradually becoming new growth engines for the gold retail market.

Of course, although consumer demand for gold has soared, insufficient supply also seems to have added some “trouble” to the industry.

According to the “China Gold Yearbook 2023”, at the end of 2022, China's gold resources were 15798.01 tons, accounting for about 16% of the world's gold resources. Although China has a large amount of gold resources, it is mainly small and medium-sized mines, mostly medium and low grade deposits, so it has been highly dependent on the outside world for a long time. At the same time, due to the “shortage of supply” factor — in 2023, China's gold consumption was 1089.69 tons (up 8.78% year on year), but the country produced a total of 519.289 tons of gold (up 4.31% year on year), so domestic gold and jewelry brands are not lacking in the risk of “raw materials being in a hurry”.

In this context of development, the domestic gold and jewelry industry has spawned three ways to purchase gold, namely direct procurement, gold leasing, and acceptance of used materials.

From 2021 to 2023, the amount of gold directly purchased by Mengjinyuan accounted for 46.5%, 55.9%, and 62% of the total amount of gold obtained, respectively, while the used materials business accounted for 49.9%, 40.8% and 34.8% of the total amount of gold obtained, respectively. However, it should be noted that the reason and rationality of Mengjinyuan's relatively high share of the trade-in business has previously been questioned by the outside world, probably because the share of used materials business is high enough.

In fact, judging from the characteristics of the industry, Mengjinyuan's obvious used materials business is also clearly a common phenomenon in line with the rules.

According to the “China Gold Yearbook 2021,” “China Gold Yearbook 2022,” and “China Gold Yearbook 2023” published by the China Gold Association, the proportion of gold jewelry made from old Chinese jewelry in 2020, 2021, and 2022 was 57.1%, 24.6%, and 30.4%, respectively. During the same period, Mengjinyuan's old gold accounted for between 33.7% and 48.5% of total revenue. Although this range is slightly higher than the data in the “China Gold Yearbook”, it remained roughly at the same level.

In addition, Mengjinyuan's strong ability to purify gold also motivates the company to have an unrivaled advantage with other gold and jewelry brands. According to Frost & Sullivan, Dream Gold's gold purification capabilities have enabled the company to develop into a major player in the 999.9 high-purity gold and jewelry market. In terms of gold and jewelry earnings, the company topped the 999.9 high-purity gold and jewelry market in 2022, and was one of the first gold and jewelry manufacturers to achieve large-scale and automated production of 999.9 high-purity gold jewelry.

In summary, although it has been questioned by the outside world due to the “trade-in business,” the overall development prospects of Dream Gold Park are still full of potential.

epilogue

Buffett has a classic quote: “Life is like a snowball; the important thing is to find wet snow and a long slope.”

Judging from the various industry trends mentioned above, the Gold and Jewelry Track is clearly a typical long slope and heavy snow track, and Dream Gold Park's growth potential is also impressive. In the future, as demand for gold is fully released in the market, Mengjinyuan's performance is also expected to further enhance through technical advantages and brand effects, and the investment value will naturally increase accordingly.