New Stock Outlook | Lao Pu Gold: "Traditional Gold" is playing with concepts, lacking cash flow.

Creating and leading a category, making the brand a representative of a certain category in the minds of potential customers, is a positioning theory pursued by many emerging consumer brands. For example, in the jewelry market in China with a market size of over 700 billion yuan, Lao Pu Huang Jin has taken a different path and become the first brand in China to promote the concept of "ancient method gold". However, being the first to enter the minds of consumers does not mean that one can rest easy. According to the Frost Sullivan report, in 2022, in the market for ancient method gold jewelry, Lao Pu Huang Jin's sales revenue accounted for only 1.3% of the market share, ranking tenth. In order to further expand its brand influence, Lao Pu Huang Jin has decided to leverage the power of the capital market. According to the Hong Kong Stock Exchange's disclosure on November 11, Lao Pu Huang Jin has submitted an application for listing on the Hong Kong Stock Exchange's main board, with China Securities Co., Ltd. International as its exclusive sponsor. "Senior player" in ancient method gold According to Lao Pu Huang Jin's prospectus, ancient method gold jewelry refers to a kind of pure gold jewelry that combines modern design with Chinese classical culture, with warm colors, exquisite appearance, or other features of ancient imperial gold jewelry, and applies at least two or more Chinese traditional handmade gold manufacturing processes specified in the group standards issued by China National Gold Group Gold Jewelry Association. These techniques mainly include hammering, engraving, hollowing, filigree, inlaying, and enameling. In 2009, Lao Pu Huang Jin became the first brand in China to promote the concept of ancient method gold jewelry, and was the first to engage in branded operation of traditional craft gold jewelry. According to the Frost Sullivan report, Lao Pu Huang Jin is the only brand among the major brands in the China National Gold Group Gold Jewelry market that focuses on designing, manufacturing, and selling ancient method gold products. It is also the first brand to introduce full gold with diamonds and full gold with enamel products. It is understood that since Lao Pu Huang Jin promoted the concept of ancient method gold, it has set off a fashion trend in the jewelry market. The Frost Sullivan report shows that in 2017, the market size of ancient method gold jewelry in China, based on sales revenue, was 3 billion yuan, and it is expected to reach 97.3 billion yuan by 2022, with a compound annual growth rate of 100.5%. Due to the shift of mainstream consumer groups to the younger generation and the upgrading of consumer preferences, the market for ancient method gold jewelry is expected to reach 20.25 billion yuan by 2027, with a compound annual growth rate of 15.8% from 2022 to 2027. In the "golden age" of rapid growth in ancient method gold, Lao Pu Huang Jin has achieved rapid development. The company operates all offline stores through the fully self-operated model and theme scene store model. As of November 3, 2023, the company has self-operated 29 theme scene stores in high-end commercial centers nationwide. According to Frost Sullivan's data, Lao Pu Huang Jin ranked first in single-store revenue among all gold jewelry brands in China in 2022. In the first half of 2023, the company's average store revenue reached 44.8 million yuan. Financially, in the six months ended June 30, 2020, 2021, 2022, and 2023, Lao Pu Huang Jin achieved revenues of approximately 896 million yuan, 1.265 billion yuan, 1.294 billion yuan, and 1.416 billion yuan, respectively; during the same period, the company achieved profits of approximately 88.025 million yuan, 114 million yuan, 94.529 million yuan, and 197 million yuan, respectively. "Sales comes first," high inventory Against the background of strong demand in the market for ancient method gold, as a brand that entered the minds of consumers in the industry, Lao Pu Huang Jin is more likely to be associated with low sales expense ratio and high inventory turnover efficiency in terms of financial data. However, according to Lao Pu Huang Jin's prospectus, there is still a significant gap between "ideals" and "reality". Taking 2022 as an example, Lao Pu Huang Jin's sales and distribution expenses were 297 million yuan, accounting for 22.95% of revenue. In comparison, the sales expenses of Lao Feng Xiang, a traditional A-share gold and silver jewelry sales company, in 2022 were 829 million yuan, with a sales expense ratio of 13.16%. In the first half of 2023, Lao Pu Huang Jin's sales and distribution expenses were 250 million yuan, a year-on-year increase of 75.8%, and the sales expense ratio was 17.6%. In contrast, the company's R&D expenses in the first half of the year were only 4.667 million yuan, with an R&D expense ratio of only 0.33%. It is worth noting that inventory is also a major challenge for Lao Pu Huang Jin. In 2022, the company's inventory amounted to 807 million yuan, accounting for 80.3% of the total current assets. In the first half of 2023, the company's inventory reached a high of 990 million yuan, accounting for 69.5% of the proportion of current assets. From 2020 to 2022, the inventory turnover days of Lao Pu Huang Jin were 461 days, 357 days, and 383 days, respectively; in the first half of 2023, the inventory turnover days were 196 days. According to the prospectus of Lao Pu Huang Jin, the company is exposed to inventory risks due to various factors beyond its control, including supplier supply delays or interruptions, changing consumer trends and preferences, and the launch of competing products. In addition, for the purpose of inventory, the company usually estimates the demand for its products before actual sales. The company cannot guarantee accurate prediction of these trends and events and maintain sufficient inventory on a regular basis. If the market demand for the company's products suddenly declines, it may lead to inventory surplus, which may have an adverse impact on its financial condition and operating performance. On the other hand, insufficient inventory may result in sales going to competitors, thereby negatively affecting the company's operating performance. Cash flow "tight," IPO fundraising to "refill" It is worth noting that due to the large amount of funds occupied by inventory, Lao Pu Huang Jin has had a tight cash flow situation. From 2020 to 2022, the company's cash and cash equivalents in its current assets were 9.719 million yuan, 25.19 million yuan, and 60.282 million yuan, respectively; in the first half of 2023, it was 83.217 million yuan, all accounting for less than 10% of current assets. Such cash flow performance is difficult to support Lao Pu Huang Jin's growth.Gold carried out large-scale business expansion in the short term, and going public became a necessary option for the company's financing.Lao Pu Gold disclosed in its prospectus that a portion of the funds raised from listing will be allocated to expanding its sales network and opening new stores in domestic and overseas markets over the next few years to promote brand internationalization. The company plans to open about 35 new stores in mainland China, primarily targeting first-tier and new first-tier cities, with the funds raised from the listing. In addition, the company plans to open approximately 12 new stores in areas outside mainland China, including Hong Kong, Macau, and Singapore, to expand its footprint in the Southeast Asian market and increase brand awareness overseas. It is still uncertain whether Lao Pu Gold can maintain high profitability after expanding its stores on a large scale. This is due to the increasingly fierce competition in the industry. According to a Frost & Sullivan report, the total revenue generated from traditional gold jewelry products by the top five gold jewelry brands reached approximately RMB 46.3 billion in 2022, accounting for 47.6% of the entire market. Therefore, although Lao Pu Gold is a veteran player in the "traditional gold" industry, the company is not "first-mover advantage" in terms of market share. Against the backdrop of slowing industry growth, the company's development prospects are still uncertain.