1H19 results beat our expectations

Lao Feng Xiang’s （LFX） 1H19 revenue rose 11.3% YoY to Rmb28.1bnand net profit increased 13.7% YoY to Rmb739mn （or Rmb1.41 pershare）。 Recurring net profit increased 15.1% YoY. Results beat ourexpectation （high-single-digit revenue growth and 10% net profitgrowth） thanks to significant QoQ growth acceleration in 2Q19（revenue increased 17.8% YoY and attributable net profit gained15.6% YoY） on rising gold prices.

Jewelry revenue rose 10% YoY and proportion in total revenuereached 95%. Channel expansion continued with 68 net stores addedHoH to 3,589 （up 9.5% YoY）， including 179 self-operated stores （lessthree stores in 1H19） and 3,410 franchises （up 71 in 1H19）。 Goldaccounts for the majority of jewelry sales and sale volume rose 1.65%YoY in 1H19, implying that 1H19 revenue was mainly driven by goldprices.

Gross margin rose 0.5ppt YoY to 7.9%, with 9.7% for the Chinesemainland （mainly franchises）， 25.9% for HK （self-operations） and28.6% for overseas （self-operations）。 SG&A expense ratio fell 0.1pptYoY. Operating cash flow rose 102.3% YoY to Rmb2.36bn.

Trends to watch

Given gold-price driven revenue growth in 1H19, we expect LFX’searnings upside to materialize along with rising gold prices. Weexpect the firm to beat the company’s full-year revenue target ofRmb46bn （up 5.1% YoY） and net profit target of Rmb1.292bn （up7.3% YoY）。

Financials and valuation

Our 2019-2020 EPS forecast remains at Rmb2.62 （+13.9% YoY） andRmb2.91 （+11% YoY）。 B-shares are trading at 9.1x 2019 and 8.2x 2020P/E; A-shares are trading at 20.1x 2019 and 18.1x 2020 P/E. Givenmore stable earnings compared with HK jewelry brands and marketexpectations for rebounding gold prices, we maintain anOUTPERFORM rating both for LFX A-shares and B-shares. We raiseour TP for A-shares 25.0% to Rmb65.55 （25.0x and 22.5x 2019-2020eP/E with 24.3% upside）， and keep TP for B-shares unchanged atUS$4.34 （11.5x and 10.4x 2019-2020e P/E with 27.6% upside）。

Risks

Gold price fluctuating; consumption weak.