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We think Laofengxiang is a leading domestic jewelry firm with astrong brand, a well-established sales network, and competitiveadvantages in production technique and quality. In addition, itsearnings are more stable than peers thanks to its focus on goldproducts, wholesales, and domestic sales.

Comments

Brand is core asset. Gold jewelry products do not differentiate much,and brand is an important consideration for consumers. The LFXbrand was founded in 1848 with a strong cultural heritage and highconsumer recognition.

Wide sales network coverage; franchise model boosting turnoverrate. LFX’s marketing system comprises self-owned stores,joint-ventures, general distributors, specialty stores anddistributor-operated stores. As of end-2019, LFX had 3,893 POS with95% of them being franchise stores. Gold jewelry contributes to over80% of LFX’s revenue. Traditional gold jewelry features low salesgross margin and fast product turnover, and we think it is crucial toimprove turnover rate via a franchise model to enhance returns.

Advantages in human resources, design, and production ensure highquality. LFX has a full value chain covering procurement, design,production and downstream sales. It boasts numerous experts indesign, and its production bases lead the sector in automation andtechnology. We believe this improves production efficiency andaccuracy, as well as ensuring product quality.

Earnings more stable than peers. LFX’s earnings are more stablethanks to its high exposure to gold products and wholesales.

Fluctuating macroeconomic conditions in Hong Kong SAR and MacaoSAR weighed on earnings of Hong Kong brands in these areas.

However, sales in the Chinese mainland account for 99% of LFX’s totalsales, so its earnings are more stable than Hong Kong brands.

Valuation and recommendation

Maintain 2020 and 2021 EPS forecasts at Rmb2.73 and Rmb3.24. LFXA-share is trading at 21.1x and 17.8x 2020e and 2021e P/E, andB-share at 8x and 7x P/E. Maintain OUTPERFORM on A-shares andB-shares. As rising gold prices may boost valuations, we raise ourA-share TP 19% to Rmb74.61 (23x 2021e P/E with 29% upside), andlift our B-share TP 7% to US$4.34 (9x 2021e P/E with 35% upside).

Risks: COVID-19 lingers; sharp rise in gold prices weighs on demandfor gold jewelry.