2019 results in line with preannouncementLao Feng Xiang’s (LFX) Revenue rose 13% YoY to Rmb49.6bn, netprofit grew 17% YoY to Rmb1.41bn (Rmb2.69/sh) in 2019. In 4Q19,revenue grew 3% and net profit increased 11.8%.

Jewelry revenue rose 9.8% YoY in 2019 driven by franchise stores.

Revenue of self-owned stores fell 8% YoY to Rmb3.2bn, and thenumber of self-owned stores rose by 2 to 184 as of end-2019.

Revenue per store fell 12.7% YoY to Rmb17.73mn as rapid rise ingold prices in 2H19 dampened demand. However, rising goldprices also boosted gross margin by 3.3ppt to 24.4%.

Wholesale revenue rose 12% YoY to Rmb33.9bn, and thenumber of franchise stores rose by 370 to 3,709. Revenue perstore rose 0.7% YoY to Rmb9.61mn. New store opening is themain driver of revenue growth. GPM stayed flat YoY at 8.9%.

Rising gold prices boosting gross margin, though offset byinvestment loss. 2019 gross margin rose 0.3ppt YoY to 8.1% thanks torising gold prices since 2H19. Sales and G&A expense ratios bothdipped 0.1ppt YoY. LFX booked Rmb230mn from its gold lendingbusiness in 2019, offsetting the positives from higher gross margin.

Net margin expanded 0.1ppt to 2.8%.

Trends to watch

LFX aims to grow revenue by 5.8% YoY to Rmb52.5bn in 2020, andattributable net profit by 1.94% YoY to Rmb1.44bn. The firm’sresilient growth in 1Q20 has shown the advantage of its focus onwholesale and the gold’s high store of value.

Financials and valuation

Given COVID-19’s impact on franchise stores opening, we cut2020-2021 EPS forecast 1% and 7% to Rmb2.73 and Rmb3.24. LFXA-share is trading at 15x and 13x 2020-2021e P/E, and B-share at 7xand 6x P/E. We maintain OUTPERFORM on A-share and B-share, butcut TP 8% and 21% to Rmb50.56 (19x and 16x 2020-2021e P/E with22% upside) and US$3.46 (9x and 7x 2020-2021e P/E with 25%upside).

Risks

Rising gold prices weighing on demand of gold jewelry.