Chaohong is based on the three-quarter report published on October 30:3Q24 revenue of 1.43 billion yuan, -4.4% YoY, -12.7%; net profit to mother of 86.43 million yuan, -17.2% YoY, -12.4%; 1-3Q24 revenue 4.86 billion yuan, +8% YoY; and net profit to mother of 0.316 billion yuan, +1% YoY. The company's revenue declined slightly year on year in the third quarter. We think it was mainly due to the high rise in gold prices, which suppressed sales; gross margin declined year on year due to changes in sales structure, but the company actively promoted channel optimization, and expenses improved. We believe that the company's cost-effective positioning makes same-store sales more resilient and maintains a “buy” rating.

The high rise in gold prices led to weak terminal consumer demand. Chao Hongji's business resilience was strong, and the price of gold rose to a high level in the third quarter. The price of AU9999 on the Shanghai Gold Exchange rose from 550 yuan at the end of June to 595 yuan at the end of September, an increase of about 8%, leading to a strong wait-and-see attitude among consumers to buy gold jewelry. Looking at industry terminal sales, according to the National Bureau of Statistics, total retail sales of gold and silver jewelry above the limit in July-September were -10.4%/-12.0%/-7.8% year-on-year, respectively. We believe that against the backdrop of weak overall consumption in the industry, Chao Hongji bucked the trend and expanded its stores. The 3Q24 revenue dropped slightly by 4.4% year-on-year, which is better than the overall level of the industry.

Changes in the revenue structure affected the year-on-year decline in gross margin. The gross margin for the period improved. 3Q24 gross margin was 24.2%, -2.3 pct year over year. We expect the main reason for the increase in revenue share of traditional gold products and franchise channels with relatively low gross margin; the sales expense ratio decreased 0.3 pct to 12.2% year over year. We expect the main reason for the company to actively promote the optimization and improvement of self-operated channels, and the rapid expansion of franchisees to reduce sales expenses. Management Expense Rate/R&D Expense Rate/Financial Expense Ratio were -0.2/-0.1/-0.2pct to 2.2%/1.0%/0.4%, respectively. Under the combined impact, the 3Q24 net profit margin decreased by 0.9 pct to 6.1% year on year.

Profit forecasting and valuation

Considering the high fluctuation in gold prices and weak terminal consumer demand in the industry, we lowered net profit from 2024-2026 to 0.37 billion yuan, 0.44 billion yuan, and 5.0 billion yuan, corresponding to EPS of 0.41, 0.49, and 0.56 yuan (previous value of 0.47/0.59/0.67 yuan). Comparatively, the company's 25-year Wind unanimously expected an average PE value of 14 times, giving the company 14 times PE in 25 years, corresponding to a target price of 6.9 yuan (previous value 7.05 yuan).

Risk warning: Showrooms do not meet expectations, gold prices fluctuate, and market competition intensifies.