CITIC SEC: ZHOU LIU FU (06168) seizes industry development opportunities with light equipment and fast running "buy" rating target price of 44 Hong Kong dollars.

CITIC SEC released a research report, analyzing the investment value of ZHOU LIU FU (06168). The team believes that ZHOU LIU FU, with its light-asset model focused on integrating research and development and designated supplier supply, as well as more attractive franchise policies compared to its peers, has rapidly developed. The current mass jewelry market is trending towards lightweight and fashionable products, and the company's light-asset model provides good efficiency guarantees. At the same time, the company focuses on innovation and plans to enhance its brand power in the future, tapping into the gold and jewelry consumption markets both domestically and internationally. The company is given a target price of HK$44 for 2025, with a 22xPE, and a "buy" rating for the first time. The following is a summary of the research report: Established in 2004, the company has rapidly developed through its light-asset model focused on integrating research and development and designated supplier supply, as well as more attractive franchise policies compared to its peers. In the past 7 years, the number of stores has consistently ranked in the Top 6 in the Chinese jewelry market. The current mass jewelry market is trending towards lightweight and fashionable products, and the company's light-asset model provides good efficiency guarantees. At the same time, the company focuses on innovation and plans to enhance its brand power in the future, tapping into the gold and jewelry consumption markets both domestically and internationally. The company is given a target price of HK$44 for 2025, with a 22xPE, and a "buy" rating for the first time. Leading in gold and jewelry retail. ZHOU LIU FU was established in 2004 and has ranked in the Top 6 of the Chinese jewelry market for seven consecutive years (2018-2024). From 2021 to 2024, the company's revenue increased from RMB 2.78 billion to RMB 5.72 billion, with a CAGR of +27.1%; net profit attributable to shareholders increased by 18.4%. The growth in performance during this period was mainly due to the implementation of the "channel priority" strategy offline and the rapid development of e-commerce business. As of December 31, 2024, the average age of the company's directors, supervisors, and senior management was approximately 42.0 years old, making it the youngest management team among national gold and jewelry companies. The founder and chairman, Li Weizhu, and his brother Li Weipeng are the actual controlling shareholders of the company, holding a total of 83.39% of the shares after the IPO. Industry analysis: consumer stratification, aesthetic upgrade, consumption "downgrading"; brand merchants, heavy store sales, light total store numbers. 1. According to Frost Sullivan (quoted from the company's prospectus), the size of the Chinese jewelry market in 2024 was RMB 728 billion, with a CAGR of 3.6% from 2019 to 2024, and an estimated CAGR of 5.2% from 2024 to 2029. 2. Mass jewelry market trending towards lightweight and fashionable products: with gold prices continuing to reach new highs and limited consumer spending power, consumers have limited budgets and preferences for jewelry have significantly changed, tending towards small weight, lightweight products to meet jewelry consumption needs even under economic pressure. However, consumer aesthetics have not downgraded, with high demands for fashion in jewelry design. 3. Online channel growth is steady, with untapped potential. According to Frost Sullivan (quoted from the company's prospectus), in 2024, in the China National Gold Group Gold Jewellery market, the market size of the e-commerce channel was RMB 42.4 billion, up by +13.7% year-on-year, accounting for 7.5%; with a CAGR of 16.9% from 2019 to 2024 and an estimated CAGR of 9.6% from 2024 to 2029. Based on different metrics for market share, ZHOU LIU FU ranks among the top ten gold and jewelry retailers of China National Gold Group Gold Jewellery in 2024 (according to total gold and jewelry trading value/ gold and jewelry revenue/ number of offline stores in 2024, ZHOU LIU FU ranks 6th/10th/5th respectively). One of the competitive advantages: lightweight model, young customer base, lightweight products. According to the company's investor communication, ZHOU LIU FU's brand positioning is mainly mass-market oriented, with 80% online and 75% offline customers being female, with an age range of 18-30 years; the company's average offline transaction price is approximately RMB 3,000-4,000, significantly lower than its peers (FY2026Q1, CHOW TAI FOOK's average selling price for gold products in the mainland is RMB 6,348). Targeting the desired customer base and product demand, ZHOU LIU FU focuses on integrating research and development and mainly relies on designated suppliers to wholesale goods to franchisees (according to company announcements and performance communication, 90% of ZHOU LIU FU's products are purchased from designated suppliers through franchisees, while Chow Tai Seng Jewellery is about 70%). The light-asset model is advantageous for the company to capture the rapidly changing demands of a young customer base, iterate products quickly, and seize the developmental opportunities in the industry. One of the competitive advantages: regional/level mismatched competition, building a deep channel network. As of the end of 2024, the company had a total of 4,129 stores nationwide, ranking 6th among national gold and jewelry brands; in the southern region, the company had a total of 2,633 stores, ranking 3rd among national gold and jewelry brands. 1. In the early stages of development, the company understood the demand in the lower-tier markets and provided franchisees with more attractive terms than its peers (lower franchise service fees, bundled product entry fees), offering lightweight and affordable jewelry products to consumers. 2. In recent years, leading gold and jewelry brands have accelerated their expansion in lower-tier markets, and the company has engaged in mismatched competition, accelerating the exploration of still potential tier 2 cities while consolidating brand influence. By the end of 2024, approximately 45% of the company's stores were in tier 1 and tier 2 cities. One of the competitive advantages: seizing the opportunity for e-commerce development, strengthening brand awareness. The company's online revenue has been growing rapidly, accounting for nearly 40%. In 2024, the company's revenue from online sales channels was RMB 22.9 billion, up by +31.0% year-on-year, accounting for 40.0% of the company's total revenue. 1. Forward-looking deployment in e-commerce, actively entering various emerging e-commerce channels. Since 2017, the company has focused on expanding its e-commerce business, and currently has a comprehensive coverage of all channels including social, live-streaming, niche, and cross-border e-commerce platforms, with a diversified and extensive channel matrix. 2. Online product offerings cater to consumer habits. The vast majority of the company's online products are different from those offline, with lower online transaction prices (approximately RMB 1,000-2,000), enabling the company to attract a wider range of customers. Future development: Deeply tap into the domestic market with a multi-brand matrix, and promote Chinese-style image into Southeast Asia. 1) Enhance brand power with a multi-brand matrix. On May 2, 2025, ZHOU LIU FU Jewelry globally debuted its "ZHOU LIU FUJI" cultural theme store at the Beijing World Trade Center. According to the company's investor communication, the average transaction price of the first cultural theme store in Beijing is approximately RMB 15,000, with plans to add no more than 5 new cultural theme stores in 2025. 2) Expand into Southeast Asia, tapping into blue ocean markets. The company opened its first overseas store in Bangkok, Thailand on September 14, 2024, and as of July 23, 2025, the company had a total of 6 stores in Southeast Asia. The Southeast Asian market, with its high cultural affinity, preference for gold products, and rapid economic growth, has become the first stop for Chinese gold and jewelry brands to go overseas, with several leading gold and jewelry brands actively expanding and upgrading their existing businesses in the Southeast Asian market. Investment advice: With gold prices fluctuating and consolidating, the mass jewelry market is expected to rebound, and there is still room for the company to expand its store network; additionally, as the company focuses on developing and promoting unique products, franchisees are expected to increase their proportion of direct purchasing from the company. Online business maintains high growth rates, and based on this, we expect the company's revenue for 2025-27E to be RMB 6.48 billion/7.32 billion/8.22 billion, with a year-on-year growth rate of +13.3%/+12.9%/+12.3%. Assuming industry recovery, enhanced brand power, and effective cost control, various cost rates are expected to decrease, and we predict the company's net profit attributable to shareholders for 2025-27E to be RMB 800 million/880 million/960 million, with a year-on-year growth rate of +13.4%/+10.3%/+8.8%. EV/EBITDA valuation method: The average EV/EBITDA for comparable companies CHOW TAI FOOK, Beijing Caishikou Department Store Co., Ltd., Guangdong CHJ Industry, and Mclon Jewellery for 2025 is 20.62 times (according to CITIC SEC research), while the company's current price corresponds to an expected EV/EBITDA of 15.17 times, lower than the average level of comparable companies. Based on this, we give the company a target price of HK$44 for 2025, with a 20.62 times EV/EBITDA, and maintain a "buy" rating. PE valuation method: Referring to the jewelry and watch industry (CITIC SEC industry classification) components' current prices corresponding to a 2025 Wind consensus expected 22xPE, we give the company a 22xPE for 2025, with a target price of HK$44, and maintain a "buy" rating. By combining both the PE and EV/EBITDA valuation methods, we give a target price of HK$44 based on a 22xPE for 2025. This is the first coverage of the company, with a "buy" rating.