Guozheng International released a research report stating that it has initiated coverage on Lao Pu Gold (06181), giving a target price of 235 Hong Kong dollars and a "buy" rating. The firm believes that Lao Pu Gold has created a unique competitive advantage, has good development potential in the domestic high-end gold jewelry sector, and its current scale is still small, with promising future development. The firm forecasts net incomes for 2024, 2025, and 2026 to be 1.12, 1.45, and 1.78 billion yuan respectively, corresponding to EPS earnings of 7.1, 9.3, and 11.3 Hong Kong dollars. For the full year of 2023 and the first half of 2024, the company's revenues were 3.28 billion yuan and 3.52 billion yuan respectively, with net incomes of 0.416 billion yuan and 0.587 billion yuan, reflecting a very strong growth trend.

The main points of Guojing International are as follows:

Product positioning is high-end.

Lao Pu Gold was founded in 2009 and is the first brand in China to promote the concept of "ancient method gold." The characteristics of ancient method gold involve using complex craftsmanship to create intricate gold jewelry from pure gold. The company continuously launches high-quality products, making Lao Pu Gold a brand widely recognized and highly regarded among high-net-worth individuals. According to the "2023 Hurun Best Luxury Products - Brand Preference Report of China's High-Net-Worth Individuals," Lao Pu Gold is listed among the top ten jewelry brands favored by high-net-worth individuals, being one of only two Chinese jewelry brands on the list. The firm believes Lao Pu Gold has the potential to become a luxury goods brand. If it can become a luxury brand, there is significant potential for both market space and pricing power.

Pursuing a high-end pricing strategy.

The company’s sales of products priced above 10,000 yuan account for about 90% of overall revenue, whereas among other comparable brands, the proportion of products above 100 million does not exceed 20%. Lao Pu Gold has clearly defined its high-end market positioning in its pricing strategy. Its store layout focuses on high-end malls. Unlike competitors that expand extensively through franchising and aim to enter lower-tier markets, the company has always been relatively restrained in store expansion pace and location selection, and it only expands stores through self-operated models. Currently, the company has 33 stores, most of which are located in the luxury goods districts of first-tier and new first-tier cities in China, such as SKP and Wanda Plaza, which have high entry barriers. Among the top ten high-end shopping centers in the country, the company has entered eight of them, ranking first among domestic gold and jewelry brands in terms of coverage. There is huge development space. Lao Pu Gold currently has a limited number of stores, only 33, while many domestic peers have over 3,000 stores. Even when referencing leading luxury brands in China, which have between 30 and 70 stores, there is still room for expansion. In addition, there are also development opportunities in overseas markets in Asia, such as Japan, South Korea, and Singapore.

The continuous rise in gold prices supports the demand for gold.

Since the beginning of this year, gold prices have risen rapidly. Taking the above gold SEG 9999 as an example, it has now reached 623 yuan per gram, which is a 28.9% increase since the beginning of the year. Gold has an annualized return of 5.68% over the past decade, so it is currently in a phase of relatively rapid growth. In the long term, the trend of gold prices as an anti-inflation asset will not change. This is also the underlying logic supporting gold consumption. Additionally, customs for weddings and gift-giving in China create continuous demand for gold consumption. The firm also believes the company’s high-end positioning makes its performance less impacted by short-term fluctuations in gold prices.

The industry is experiencing healthy growth, and the traditional gold market is growing rapidly.

The size of the jewelry market in china has steadily increased from 58.0 billion yuan in 2018 to 82.0 billion yuan in 2023, with a compound annual growth rate of 7.2%. In 2023, gold products accounted for the largest share at 63.2%. The traditional gold market experienced rapid growth with a compound annual growth rate of 64.6% from 2018 to 2023, reaching 157.3 billion yuan. The traditional gold jewelry market is relatively concentrated among leading companies, with the top five brands collectively holding a market share of 46.1%. They rank in order as chow tai fook, lao feng xiang, china gold, shanghai yuyuan tourist mart, and mengjinyuan. Laopu gold ranks seventh in the industry, with a 2.0% market share, but is the only jewelry brand focused exclusively on traditional gold.

Risk warning: fluctuations in gold prices, intensifying industry competition, consumer demand falling short of expectations, and the unlocking of shareholder holdings.