1H20 results slightly beat our expectationsLao Feng Xiang （LFX） announced 1H20 results: Revenue dropped 5.8%YoY to Rmb26.5bn and net profit attributable to shareholders grew0.24% YoY to Rmb741mn （Rmb1.42/sh）， slightly beating ourexpectations as its wholesale model reduced the negative impactfrom COVID-19.

Gold, jewelry and crafts revenue slid 5.6% YoY to Rmb26.4bn in1H20. In 1H20, gold jewelry demand recovered thanks to risinggold prices. Coupled with the firm’s efforts to distribute theproduct, its revenue slid 8.4% YoY in 2Q20 and dealers wereactive in distributing gold jewelry during the outbreak.

Attributable net profit grew 1.1% YoY in 2Q20, thanks to theresilience of its business model that centers on gold andfranchise stores.

Expands presence in lower-tier markets and continuing toexpand outlet network. At the end of June, the firm operated3,991 stores, of which 3,972 were located in China, a netincrease of 98 stores compared with end-2019.

Rising gold prices pushed up GM; expense control effective. In1H20, GM at the firm rose 0.2ppt YoY to 8.1%. Selling and G&Aexpense ratio dropped 0.1ppt YoY, thanks to falling decorationand advertising expenses. In 1H20, operating cash inflow soared86% YoY to Rmb4.38bn.

See page 3 for details.

Trends to watch

In 1H20, LFX completed 50% of the revenue target and 52% of theprofit target set by its board of directors. We think full-year revenueand profit will exceed those targets, as: 1） impact from the COVID-19outbreak is easing; and 2） we expect pent-up gold demand from newcouples to be unleashed in 2H20.

Financials and valuation

As the firm recorded sound revenue and profit during the pandemic,we lift our 2020 and 2021 EPS forecasts 5% and 4% to Rmb2.86 andRmb3.36. A-shares are trading at 19x 2020e and 16x 2021e P/E.

B-shares are trading at 7x 2020e and 6x 2021e P/E. We maintain anOUTPERFORM rating for A-shares, but lift our target price 4% toRmb77.35 （23x 2021e P/E, 42% upside）。 We maintain anOUTPERFORM rating for B-shares, but lift our target price 4% toRmb4.50 （9x 2021e P/E, 53% upside）。 Risks: Gold prices fluctuate.