2021 attributable net profit preannounced to rise 18.3% YoY

Lao Feng Xiang (LFX) preannounced 2021 results: Revenue could rise 13.5% YoY to Rmb58.7bn, attributable net profit may increase 18.3% YoY to Rmb1.88bn, and recurring attributable net profit may grow 5.0% YoY to Rmb1.59bn. The preannouncement beat our expectation, mainly driven by upside surprise in net addition of stores.

Trends to watch

4Q21 revenue and profit rapidly growing. We estimate that 4Q21 revenue rose 13.4% YoY to Rmb8.9bn (+19% vs. 4Q19), attributable net profit grew 7% YoY to Rmb378mn (+56% vs. 4Q19) and recurring attributable net profit climbed 16% YoY to Rmb324mn.

Retail and wholesale business rapidly growing; net store openings beat expectation. The firm further advanced its comprehensive reforms in 2021. It strengthened market expansion and further penetrated into lower-tier markets and various segments, contributing to rising market coverage and share as well as sustained growth of retail and wholesale business. The firm added a net 495 stores in 2021, increasing the total to 4,945 (including 16 overseas stores). The net addition significantly exceeded the firm’s guidance (per its 2020 financial report) of a minimum 200 store openings, driving full-year revenue and net profit growth to beat annual targets.

Strong gold sales during Chinese New Year (CNY) holiday; watch boost to consumption from rising gold prices. According to China Gold Association, national gold consumption grew 13% YoY during the CNY holiday in 2022, implying an uptrend in the gold jewelry sector. International gold price has rapidly surged since end-January due to political tensions and rising inflation in the US. Gold jewelry boasts certain intrinsic investment value, and we believe its sales value tends to move in sync with gold prices. Hence, we expect gold price rallies to boost consumption of gold jewelry. In the short term, we think companies with high exposure to the gold jewelry business and direct sales may report stronger earnings, mainly considering: 1) rising demand may bolster revenue growth; and 2) the increased difference between gold cost and actual selling price may drive up gross margin. In the long term, we believe top brands will expedite penetration into lower-tier markets, and drive an industry-wide shift from fixed pricing to pricing by weight. This should accelerate the exit of smaller brands and market consolidation by large brands, in our view. We expect top brands to benefit in the long term as leaders account for rising market share.

Valuation and recommendation

Considering upside surprise in store expansion, we raise our 2021-2022 EPS forecast 7.1% and 5.5% to Rmb3.59 and Rmb3.85. We introduce our 2023 EPS forecast of Rmb4.34. LFX A-shares are trading at 12x and 11x 2022-2023e P/E, and B-shares at 6.0x and 5.3x P/E. We maintain an OUTPERFORM rating for the A-shares and B-shares. We roll over valuation to 2022, and maintain TPs for the A-shares at Rmb58.61 (15x 2022e P/E with 24% upside) and for the B-shares at US$4.00 (7x 2022e P/E with 17% upside).

Risks

Sharp fluctuations in gold prices; COVID-19 resurgence; intensifying competition.