(Report authors: Guotai Junan analyst Liu Yuenan, Su Ying)
The gold jewelry industry will usher in the triple catalytic resonance of gold price upward + recovery replenishment + new product cycle, and the main wave of data of same-store expansion can be expected. At the same time, the industry has gradually moved from a manual fee model to a brand model, and the valuation center is expected to move upward.
1. The last decade: Channel expansion is king
1.1. The triple attribute of gold demand: self-pleasing is the mainstream trend, and it is just necessary to make up and invest flexibly
China prefers gold more than the West, and gold consumption has a long history. In terms of material categories, agricultural civilizations represented by China, India and other typical representatives prefer gold jewelry, mainly because gold is a rare precious metal from the earth, which has strong value-preserving properties. In terms of styling design, Chinese jewelry patterns emphasize meaning, such as dragon and phoenix chengxiang, fulu sushi, flowers blooming and wealthy, etc., mostly meaning auspicious and wealthy. Taking listed companies in the global jewelry industry as an example, foreign brands such as Europe and the United States mostly take inlay as the main advantageous category; Domestic gold and jewelry enterprises mostly take gold as an advantageous category.
Gold jewelry demand has three attributes: rigid demand, investment and optional consumption: low frequency, high customer list, wedding just demand + precious metal investment product attributes to support the mainstream demand for gold and diamonds, and optional demand for self-pleasing support for inlay, jewelry and other categories The proportion of categories is increasing year by year.
Investment attributes: The uncertainty brought about by the epidemic has increased consumers' attention to the preservation of jewelry value. The epidemic has brought changes to the mentality of some consumers, and in the face of economic and life uncertainty, some consumers have begun to pay more attention to the preservation of the value of gold jewelry in jewelry of different materials.
Consumption attributes: The rise of the young consumer market and the higher demand for fashion. According to the World Gold Council, young Chinese consumers love gold jewelry, with about 39.02% under the age of 30 and 39.81% aged 30-50. While paying attention to product quality, young consumer groups pay more attention to the design fashion of gold jewelry, "national tide style" products, ancient gold products, IP series products have gradually become a new outlet in the domestic gold jewelry market, and gold stores mainly promoting ancient crafts and hard gold products account for 87.79% and 87.32% respectively.
Diversified consumption scenarios are on the rise, and accessories are in the ascendant. According to the World Gold Council, self-wearing has become the largest demand for buying gold jewelry, accounting for 32.10%, of which the proportion of self-wearing demand in fourth-tier cities and below is higher than that in first-tier cities. At the same time, marriage is still a rigid demand that cannot be ignored, second only to self-wear demand, accounting for 28.10%, of which the motivation for marriage purchase in first-tier cities is lower than that in other cities.
The demand for short-term wedding compensation is relatively rigid and flexible. In the short term, it will benefit from the recovery of offline passenger flow after the epidemic and some wedding celebrations just need to be replenished, releasing great flexibility. Gold jewelry recovered at a faster-than-expected pace.
According to data from the National Bureau of Statistics, the social retail sales of gold and silver jewelry goods in mainland China increased by 37.4% year-on-year in March 2023, showing a rapid recovery trend.
Medium and long-term: gold jewelry is a nearly trillion-level market, and there is still much room for improvement in per capita jewelry consumption. According to Euromonitor data, China's gold and jewelry market in 2021 is vast, with a scale of 764.1 billion yuan, which is a large market of nearly one trillion yuan. Among them, gold accounted for more than half of the market share, accounting for about 56%, and its proportion has increased steadily in recent years. With the increase in the disposable income of mainland residents and the further optimization of consumption structure, according to Euromonitor data, the average jewelry consumption in Chinese in 2022 will be $87.2, compared with $253.5 in the United States, there is still much room for improvement, supporting the continuous release of demand, and the scale of the gold jewelry market is expected to maintain steady growth.
1.2. Channel expansion supports industry growth, and concentration continues to increase
In the past decade, the concentration of the mainland jewelry industry has increased rapidly, and expanding channels and rapidly expanding large-scale is the best option.
Demand side: brand mentality has not yet formed, low-frequency and high-order customers are homogeneous consumer goods, consumers lack loyalty, trust channels more, will choose to buy nearby or go to high-end shopping malls and shopping centers, commercial credit relationships and profit distribution are conducive to channels;
Supply side: high-end top luxury brands rely on brand premium and spiritual attribute bonus, medium and high-end gold jewelry enterprises have no brand advantages, serious product homogenization, low imitation costs, and low industry entry barriers;
Market structure: China's vast market structure has obvious regional differences, and the key is to rapidly expand channels to enhance consumer reach, expand sales scale, and establish a stable supply chain management system.
Since 2015, the market concentration of the mainland jewelry industry has been increasing, mainly due to the sinking of channels of Hong Kong and domestic high-end brands, accelerating the expansion of stores, and increasing the chain rate of gold jewelry. The current round of the epidemic is expected to accelerate the clearance of small and medium-sized jewelry brands on the supply side, and leading companies have brand and capital advantages, empower and improve the anti-risk ability of franchisee entities, accelerate the sinking and expansion of stores, and establish competitive advantages.
Gold jewelry brands join in the form of offline channels, which is conducive to rapid expansion and market share. The self-operated model is conducive to brand building and quality control, but it has strong requirements for financial strength and channel management capabilities; The franchise model is more in line with the characteristics of the mainland's population and consumption being widely distributed between urban and rural areas. It plays a crucial role in the expansion of third- and fourth-tier cities, which is conducive to the rapid expansion of brands and the acquisition of market share. In the process of the overall sinking of the jewelry industry to third- and fourth-tier cities, the risks and costs of downstream sales terminals can be reduced.
New forms and channels such as live streaming e-commerce drive online gold product sales. Since 2018, live broadcasts, short videos, etc. have taken up the time that people spend using the Internet has increased significantly, bringing emerging channels to gold jewelry sales. With the further popularity of live streaming platforms such as Douyin, Kuaishou and Taobao, live streaming has become an important way for brands to attract traffic. In the live broadcast room, the anchor can display the wearing effect of jewelry in an all-round way, and arouse consumers' impulse to buy at low prices, driving the rapid growth of online sales of gold jewelry.
The sinking channel is at the cusp of development. With the growth of demand for young people in small towns, the channels of third- and fourth-tier cities will become a new development outlet for gold jewelry. Jewelry enterprises have made joint efforts from both channels and products, and while accelerating the layout of sinking channels, they have launched new products that integrate fashion elements to compete for the right to speak in the sinking market.
2. The next decade: brand as the core, design, technology, channel driven
2.1. The national trend is promoting the branding of gold jewelry
The rise of the national tide and cultural self-confidence have promoted the recognition of mainland gold jewelry brands. With the rise of the economy and the improvement of cultural self-confidence, the Chinese people's understanding of traditional culture will deepen, Chinese traditional crafts and aesthetic ideas will continue to be inherited and carried forward, the rise of mainland domestic brands will enter the third stage, the connotation of the national tide will expand again, the national tide is not limited to physical objects, but also includes national culture; Not limited to functional consumer goods, cultural attribute consumer goods such as jewelry will achieve a leap in the national tide 3.0 stage.
The soil of a large consumer country has given birth to the rise of national jewelry brands. Looking back at the rise of jewelry brands in the United States and Japan, we find that national jewelry brands often rise in the fourth stage of "population country - labor force country - GDP country - consumer country", mainly because jewelry has a strong optional nature in consumer goods, with the rapid growth of population and economy, the huge domestic consumer market has gradually cultivated and formed, supporting the rise of national jewelry brands. China is moving from a GDP country to a consumer power, and the rise of national jewelry brands is in the dividend period.
Domestic gold and jewelry terminal retail brands can be divided into three categories: (1) Hong Kong-funded old brands represented by Chow Tai Fook and Chow Sang Sang Sang are comprehensive, including gold and inlay products, with high brand premium; (2) The categories represented by Lao Fengxiang and China Gold focus on gold categories, with low gross profit, high turnover and low expense rate; (3) The K gold inlay represented by Chao Hongji, Zhou Taisheng and Dia shares has a high proportion, high gross profit, relatively low turnover and high expense ratio.
2.2. The old brand continued to make efforts, and the new brand came later
Brand premium builds a long-term moat. The low-frequency, optional, and high-order consumption attributes of jewelry determine that brand value is the highest barrier, and the essence of the brand is the occupation of consumers' minds, behind which is culture, values and emotional identity. High-end luxury goods occupy the commanding heights of consumers' minds, and the walls are high and deep. Mid-to-high-end jewelry brands that are positioned for mass consumption eventually also need to rely on operating brands and monetize their value. We will continue to build and accumulate brand value through continuous management (direct management/franchise) in the early stage.
Brands are the key to competition at the top of the gold and jewelry industry. The brand represents the comprehensive competitive strength of gold jewelry enterprises, one is to rely on the brand premium to support the increase in net profit margin, and the other is based on the strong trust bond of consumers The brand contains the possibility of further innovative business models, such as the launch of jewelry sales customization model and the expansion of multiple categories, thus bringing about the continuous optimization of turnover rate.
Lao Fengxiang and Chow Tai Fook have a long history and have strong brand power, and the consumer recognition of later brands has also been continuously improved. Review the development of foreign jewelry brands, Tiffany, Bulgari and other brands through celebrity endorsement, publicity and promotion, etc., brand added value is high. Brand building is conducive to enhancing customer stickiness and can also make products have higher added value. Among Chinese gold jewelry brands, Lao Fengxiang is a Chinese national gold jewelry brand founded in 1848 with a long history, ranking 28th in the list of "2022 Global Top 50 High-end and Luxury Brands by Value" released by British assessment agency Brand Finance. Founded in Guangzhou in 1929, Chow Tai Fook not only has a history of 94 years but also strives for innovation and high brand awareness with the concept of "sincerity and eternity". Through the design and products of fashion trends, Chao Hongji and DR have also quickly bound with specific consumer groups, and their brand influence has been continuously improved.
The rise of brands requires differentiated, iterative and innovative products to seize the minds of consumers. In order to meet the diverse needs of young consumers for gold jewelry design, the products of various brands are constantly upgraded and iterated. Marked by Chow Tai Fook's launch of the inheritance series of ancient gold in September 2017, domestic brands have gradually launched ancient gold series products; In 2018, relying on his 170 years of cultural precipitation and skill continuation, Lao Fengxiang launched ancient gold, which restored the natural color of gold jewelry matte and yellow, simple and fashionable; At the end of 2018, Yuyuan Co., Ltd. launched the Old Temple Ancient Rhyme Gold Series, enriching the design connotation of jewelry with oriental aesthetics; In 2019, the China Gold Chengfujin series was launched, which means to undertake good luck and inherit blessings, and use ancient forging techniques to give products cultural attributes; In October 2021, Chow Tai Sang launched the Extraordinary Collection, revealing the thousand-year-old craftsmanship and leading the new fashion of ancient gold.
Gold-set diamonds test the water feedback exceeded expectations, and the new product cycle opened up profit elasticity. In July 2022, Chow Tai Fook officially launched the "Four Beauty of Life" series of products combining ancient gold craftsmanship and T MARK natural diamond nanotechnology. Chow Tai Fook, Chao Hongji and other multi-brand gold-set diamond category of the first batch of stores Test the water feedback and franchisee orders will feedback the heat beyond expectations. It is expected to replicate the rhythm of the ancient gold release of the inheritance series and start a new round of product cycle. We expect that with the iteration of the process and the increase in the stocking volume of gold-set diamond categories of various brands, the proportion of non-yellow categories in the industry is expected to usher in an upward turning point, considering that the profit margin of gold-set diamond categories and inlay categories converge, the category volume is expected to drive the pricing model of gold products from the bottom to change, enhance the brand and product design premium, drive the profit growth rate to release better than the revenue growth rate, and the profit elasticity space is large.
Behind the improvement of product richness and the opening of a new cycle, it relies on the continuous innovation and improvement of process and product design. Looking back at the development of gold craftsmanship, gold jewellery manufacturing processes have continued to innovate: (1) in 1956, Chow Tai Fook pioneered the "Four Nines" (i.e. gold quality of 999.9‰) full gold; (2) The 3D hard gold products created by improving the gold electroforming process are famous for their three-dimensionality, which pioneers the limitations of gold jewelry manufacturing; (3) 5G gold combined with traditional gold and karat gold production technology, the use of hard gold powder to make the molecular structure of yellow gold more stable, so that the product can meet the five dimensions of high wear resistance, strong toughness, easy repair and other five dimensions; (4) Ancient gold adopts traditional craftsmanship techniques such as tire, hammering, engraving, inlay, and gold repair, creatively combining traditional skills and modern technology, fully combining national tide elements with traditional culture, improving fashion, and meeting consumers' diverse needs for gold product design.
Process and product design are the cornerstones of brand value building and build strong barriers. In recent years, R&D expenses for gold jewellery brands have shown an upward trend. Chao Hongji, Lao Fengxiang, Yuyuan Co., Ltd. and other brand R & D personnel and R & D expenses have invested a lot. Lao Fengxiang has the ability to produce gold and inlaid products on a large scale, and masters the upstream supply. The two design and production bases invested and constructed by the company Lao Fengxiang Dongguan Jewelry Co., Ltd. and Lao Fengxiang (Dongguan) Jewelry Inlay Jewelry Co., Ltd. have advanced automation machinery and production technology, which ensure the company's product supply in the process of market expansion, effectively improve production efficiency, processing accuracy and product physical quality, form economies of scale, and reduce production costs.
3. Reshaping the valuation system: From channels to brands, leaders enjoy a valuation premium
3.1. The valuation of the channel depends on the growth rate, and the store opening needs to match the same-store data
The life cycle of chain formats is different, and the core factors affecting valuation are different. The life cycle of chain formats is mainly divided into three stages: (1) the start-up period, and the valuation level depends on the business model (the operation of the single-store model), the core management team and the market size space; (2) In the rapid growth period, the core focus is on the growth elasticity and growth ceiling of enterprises, and the rapid release of business formats can support strong and sustainable growth rates and often enjoy higher valuations; (3) In the mature period, the revenue and profit enter a period of stable development, the core focus is on the improvement of operating efficiency, and the leading companies that rely on brand advantages to drive profit margin improvement and obtain better returns can enjoy a certain valuation premium.
Short-term same-store, store expansion and other business data fluctuations as the basis for investment, has become the core impact factor of short-term stock price and valuation fluctuations in the jewelry sector, and the performance and valuation in the upward process are double-rise, which is easy to form a Davis double-click, and vice versa.
From 2016 to 2018, Zhou Taisheng added 185/286/625 net stores respectively, relying on the franchise model to rapidly expand channels and expand scale, ranking among the first echelon of the industry, and the net profit growth rate from 2017 to 2019 was stable at more than 20%, and the valuation was generally more than 20 times; In recent years, the pace of store expansion has slowed down slightly, and the valuation level has declined. In the early days, Chow Tai Fook was mainly directly operated, and in 2018, he implemented the "New Town Plan" to open up the third and fourth line franchises, and quickly expanded stores and superimposed the amount of ancient gold in the inheritance series, driving the performance growth rate to be significantly released, and the valuation increased from 15x to about 30x.
Under normal circumstances, the PEG level of major gold jewelry brands is in the range of 0.5~1.5. Historically, the PEG of leading jewelry companies before the epidemic was basically stable at a level of about 1, and Zhou Taisheng's PEG was relatively lower due to the second shareholder. In 2023, it is expected that under the triple catalysis of gold price + recovery + new product cycle, the current PEG is at a historical low.
At present, investors mostly look at the cyclical attributes of the gold and jewelry industry from the perspective of channel valuation, take short-term same-store, expanded stores and other operating data fluctuations as the basis for investment, and pay attention to the inflection point of growth, so valuation fluctuations are often ahead of operating data.
Valuation began to repair: same-store is still downward, but the decline rate has begun to narrow, indicating that there is a marginal improvement on the demand side after the production capacity is cleared, driving the marginal repair of the growth rate of the expansion store, and the continuous narrowing of the same-store decline often indicates that the demand side continues to improve, but the same store is still declining, at which point the valuation begins to repair;
Valuation accelerated: the decline rate of the same store continued to narrow until it turned from negative to positive, the re-growth of the same store will drive the expansion of the store to boost, the growth rate of the expansion store turned from negative to positive, the volume and price of the same store and the expansion store rose together, and the performance flexibility was the largest.
Valuation began to fall: The growth rate of the same store crossed the highest point, and the growth rate narrowed, but the growth rate of the expansion store is still growing due to the stickiness of the same store, at this time, the same store and the expansion store are still in positive growth, but the period of the fastest performance growth rate has passed, and the valuation at this stage first increased, reaching the highest point, and then due to the decrease in performance flexibility, the valuation began to decline;
Valuation accelerated downward revision: same-store growth fell below 0, same-store negative growth, same-store pressure dragged down the growth rate of expansion stores, and eventually expanded stores began to negative growth or the growth rate fell sharply, resulting in accelerated valuation downward revision.
The PE valuation level of domestic gold jewelry brands is in the 10-30x range, and there are two key reference ranges for the valuation of jewelry, namely: (1) the valuation level of jewelry companies before joining the company; (2) The lowest valuation level before the recovery cycle of gold jewelry. According to the average data of Chow Tai Fook, Chow Tai Sang and Lao Fengxiang, the PE (ttm) bottom is 10-15x PE (2012 and 2022); Chow Tai Fook lowest trough PE valuation 9.79x; Chow Tai Seng's PE valuation is at the bottom 9.94x; Lao Fengxiang PE valuation bottom 10.44x.
3.2. Brand valuation relies on pricing power, and the leading premium is obvious
Leading brand companies enjoy higher valuation premiums. We selected 144 targets in the U.S. consumer services sector, with an average valuation level of 27x PE and 15x EV/EBITDA since 1990; Among them, the average valuation of the leader is 35x PE, with a valuation premium rate of 36%, and the EV/EBITDA valuation is 19x, compared with the non-leader premium rate of 39%.
Leading luxury companies enjoy brand premiums and significantly higher valuations than channel-driven companies. We selected the valuation levels of LVMH, Kering, Richemont and overseas jewelry company Signet, the world's three major luxury goods groups, which enjoy higher valuations based on strong brand premiums and sustained and solid performance growth, and the overall valuation level is in the range of 20-50x; Signet is more driven by channel store opening, and the overall valuation level is in the 4-25x range.
Relying on strong brands to grasp pricing power, benefit from brand barriers and concentration increases, and enjoy valuation premiums. Leading companies have brand barriers and control pricing power. On the one hand, leading brand companies can transfer cost fluctuations through price increases, or obtain excess profits by relying on their competitive advantages in brand power, channel power and product power terminal pricing, with better profitability, better cash flow, and stronger anti-risk ability; On the other hand, with the advantage of scale, the industry concentration is increased, and it has stronger sustainable growth potential.
After 2019, Chow Tai Fook relied on strong brand power, the rapid expansion of channel sinking stores, and the release of same-store stores driven by the rapid increase in the proportion of ancient gold in the inheritance line, the market share trend was upward, enjoying stronger growth expectations and matching better brand valuation levels.
Although the gold and jewelry industry is affected by consumer demand, gold prices, economic cycles, etc. in the short term, valuation shows certain cyclical characteristics; However, in the medium term, the jewelry industry has a large growth space, the industry concentration is still expected to continue to increase, and the competitive innovation is gradually iterating from channel construction to brand building. We believe that with the improvement of brand bargaining power, the reshaping of product pricing methods is worth looking forward to, and valuations are expected to usher in a trend upward.
The head company represented by Chow Tai Fook has created a good brand reputation through design, manufacturing process, product quality and other aspects; At the same time, a high-end channel experience store will be launched to enhance the brand tonality, and the product is expected to achieve a higher brand premium.
Vertically integrated supply chain to ensure the supply of high-quality products and maintain brand reputation. At the upstream raw material end, Chow Tai Fook selects multiple suppliers to inventory to ensure the supply of high-quality products, and the source is stable and rapid response to customer needs; In the processing link, a diamond polishing factory has been set up, and the cutting technology has reached the world's leading level; In the midstream manufacturing process, maintain a high proportion of internal production through its own production base, enhance product quality control, and have an outstanding team of craftsmen to inherit traditional craftsmanship; At the downstream channel end, the franchisee is supplied uniformly to ensure the effectiveness of the product quality control system.
Brands win aesthetic pricing power. From the perspective of channel pricing: (1) Under the pricing model, the unit labor cost of Chow Tai Fook is higher, which has a premium space compared to other brands. For example, the unit cost price of Chow Tai Fook is about 48 yuan/gram, which is obviously higher than that of Chow Tai Sang (40 yuan/g), Chow Tai Sang (35 yuan/g) and Chao Hongji (40 yuan/g); (2) Under the pricing model, Chow Tai Fook, Chow Sang Sang and Chow Tai Sang priced gold products with higher unit prices and belonged to the first echelon. For example, the Pixiu series of various brands are priced with gold products, the unit grammage price of Chow Tai Fook, Chow Sang Sang and Chow Tai Sang is the highest, about 1150~1250 yuan / gram, the average price Chow Tai Fook> Chow Sang Sang > Chow Tai Sang, Luk Fook Jewelry and Chao Hongji unit price is about 900 ~ 1000 yuan / gram.
Launched a high-end experience store, and the average unit price of customers increased significantly. Chow Tai Fook has launched its collection of high-end personalised jewellery brands, Chow Tai Fook Clubhouse, which sells products including the Forbidden City, Heritage Collection, as well as many high-end, unique and connotative international jewellery brands such as Mémoire, Gemmmagioia, Sino-French "Court", Annoushka and Kagayoi. In FY2020-2021, the number of Chow Tai Fook Club stores increased from 59 to 123, and the average selling price of Chow Tai Fook Club's jewellery setting jewellery in FY2021 was approximately HK$10,000, which was approximately 40% higher than the overall same-store average selling price of jewellery set jewellery in Chinese mainland.
With the further increase of industry concentration, the leading brand power is expected to continue to strengthen, and the product side may enjoy a higher brand premium. At the same time, relying on strong brand power, stores can promote the sales conversion of other categories such as diamonds through the drainage of gold products, and the product structure and profitability are expected to continue to improve, and are expected to enjoy a higher valuation premium.
3.3. Business format comparison: gold jewelry has high ROE and strong risk resistance
3.3.1. ROE comparison: Jewelry formats have higher ROE
Mass jewelry brands positioned at the mid-to-high end mainly rely on high profit margins or high turnover rates to earn higher rates of return. The turnover rate is related to the category, and the turnover of gold category is faster than that of inlaid jewelry, resulting in a higher turnover rate of brands dominated by gold category; Some gold and jewelry brands, such as Chow Tai Sang, adopt an asset-light model, focusing on high-margin design and brand links, mainly relying on net sales profit margin to support ROE of more than 20%.
The jewelry industry has high turnover, high net profit, and light assets, and its model is better than other formats such as catering, tea, hotels, supermarkets, etc. From the perspective of ROE, the ROE of jewelry formats is significantly higher than that of other formats, among which Dia shares, Zhou Taisheng, Lao Fengxiang, and Chow Tai Fook are particularly prominent. From the perspective of net profit margin, the overall net profit performance of jewelry, marinade and breakfast restaurant formats is better, and the net profit margin of franchise-based companies is higher than that of directly-operated companies, mainly due to the more asset-light franchise model. From the perspective of asset turnover, the turnover rate of jewelry formats is also significantly better than that of other formats, and the turnover rate of jewelry brands China Gold, Lao Fengxiang and Caibai shares with a high proportion of gold has performed well.
The improvement of net profit margin and turnover ratio is the key to the success of jewelry retail enterprises to improve ROE.
Brands are the key to competition at the top of the gold and jewelry industry. The brand represents the comprehensive competitiveness of gold jewelry enterprises, one is to rely on the brand premium to support the increase in net profit margin, and the other is based on the strong trust bond of consumers, the brand contains the possibility of further innovative business models, such as the launch of jewelry sales customization model and the expansion of multiple categories, thereby bringing continuous optimization of turnover rate.
Turnover rate is the core indicator to measure the operational capability of gold and jewelry retail enterprises. Enterprises mainly improve turnover rate through two dimensions: products and channels: on products, actively control the gross margin level at the pricing level to benefit consumers to achieve better turnover efficiency; In terms of channels, relying on the franchise distribution and wholesale mode to rapidly expand the market, simplify circulation links, and improve turnover efficiency.
Mass jewelry brands positioned in the middle and high end mainly rely on the balance of high profit margin and high turnover rate to earn a high rate of return. The asset-light model of Dia Shares, Chow Tai Sang, Lao Fengxiang and Chow Tai Fook focuses on high-margin design and brand links, with high net sales profit margin of inlaid categories and high turnover of gold categories, supporting ROE to maintain a level of more than 20% for many years.
3.3.2. Single-store model: Gold and jewelry formats have strong risk resistance
The gold category has strong value-preserving attributes, and jewelry stores have strong regional risk capabilities. The single-store model of different formats is different, and the most important indicators are ping efficiency, net profit margin, first investment amount and payback period. From the perspective of floor efficiency, the overall floor efficiency of gold jewelry format is better than that of other formats such as catering, tea, supermarkets, and hotels. From the perspective of net profit margin, the net profit margin of brands, breakfast restaurants, marinades, coffee, pubs, and catering formats with a higher proportion of gold jewelry is higher.
From the perspective of the first investment amount, the first investment amount of the jewelry industry is second only to the hotel, and the industry has a high entry threshold. From the perspective of return on investment, individual asset-light customized model companies (Dia shares), supermarkets, pubs, breakfast shops, coffee, tea, and catering individual leaders (Haidilao/Taier, etc.) have a shorter return on investment period, and a longer return on investment period for gold jewelry, meals, and hotels. However, since the initial investment amount of the jewelry format is mainly composed of the cost of distribution, gold products have strong value-preserving attributes, and the jewelry format has strong regional risk capabilities.
The overall closure rate of gold jewelry is roughly the same as that of chain formats such as restaurants and hotels, and it has a strong ability to resist risks under fluctuations in the external environment. The overall level of the closure rate of gold jewelry formats is relatively stable, the closing rate is basically in the range of 5-15%, and the average closure rate in the past five years is roughly the same as that of restaurants, hotels and other connected formats; During the disturbance of the external environment, jewelry brands with a higher proportion of gold have stronger operational resilience and ability to resist risks, and the annual fluctuation of the closure rate is basically the same as that of hotels, and the stability is significantly better than that of the catering industry.
4. Gold price + recovery + new product cycle, gold jewelry welcomes triple catalysis
The growth rate of the gold and jewelry industry is expected to return, mainly benefiting from the triple catalysis of gold price + recovery + new product cycle.
23Q1 jewelry consumption recovery is better than expected, Q2 entered the same period of low base, coupled with the wedding season replenishment release, the industry is expected to usher in gold price upward + recovery supplement + new product cycle triple catalysis, the same store expansion data main wave can be expected; At present, the gold and jewelry sector has low valuation and high certainty of cash, which is expected to usher in industry opportunities.
Gold prices are expected to rise, and the gold category continues to be prosperous. The recent decline in the US dollar and US bond yields has stimulated gold prices to rise in shocks, and the international gold price once again broke through 2,000 US dollars / ounce; In the medium and long term, interest rate hikes are reversed under overseas recession expectations, gold prices are expected to rise steadily after building a platform, inventory appreciation boosts gross margins, and C-end consumers' gold investment preservation needs and franchisee replenishment needs are expected to be released. According to the first quarter 2023 reports of companies in the gold and jewelry sector, the gold category continued to be prosperous, and the pace of recovery was better than expected.
Q2Q3 recovery + wedding replenishment, the same store expansion is expected to match the release, and the data main wave can be expected. Terminal consumption scenarios recovered rapidly, and franchisees' willingness to replenish stocks and open stores picked up significantly. According to the channel terminal survey, the proportion of wedding gold in March was lower than the normalization level in the same period, mainly due to the sharp rise in the short-term gold price of large grams of heavy dragon phoenix bracelet products in mid-to-late March, the demand release has been suppressed to a certain extent, the current 22-year epidemic disturbance postponed wedding demand has not yet opened a large-scale replenishment release, it is expected that with the gradual entry of the wedding season in May, the flexibility of the replenishment release space is worth looking forward to, Q2 same-store expansion store matching release is expected to further boost valuation, the data main wave is worth looking forward to.
Gold-set diamonds test the water feedback exceeded expectations, and the new product cycle opened up profit elasticity. Benefiting from the innovation of gold technology, various jewelry brands actively layout gold-set diamond categories, and the channel test accelerated. In December 2019, Lao Pu Gold took the lead in launching the "Lao Pao Dian Diamond" series; In March 2022, Chao Hongji launched the "Zhenjin Diamond" series; In July 2022, Chow Tai Fook launched the "Four Beauty of Life" series. Chow Tai Fook, Chao Hongji and other multi-brand gold-set diamond categories, the first batch of stores to test the water feedback, franchisee orders will be more than expected.
Empowering the gold and diamond process to reinvent the way gold is priced and start a new product cycle. Due to the strong homogenization of traditional gold products, they mostly rely on the basic gold price to price by grammage, and the gross profit margin level is relatively low: (1) the gross profit margin of investment gold products is in the range of 1%-6%; (2) The gross profit margin of ordinary traditional gold is in the range of 5%-10%; (3) The gross profit margin of ancient gold denominated by gram is in the range of 10%-23%; (4) Due to IP and process empowerment, the gross profit margin level of pure gold piecework products is relatively high, in the range of 20%-40%, but in recent years, the industry has shown a trend of turning from one price to grammage, and the proportion of gold products at one price has decreased significantly. Benefiting from ancient gold and other process innovations to improve the hardness of gold, providing more space for the design of gold-set diamonds, gold-inlaid jade and other categories, relying on the differentiated positioning of technology and materials, reshaping the gold pricing method, the gross profit margin level is relatively high, in the range of 40-60%, which is basically the same as the gross profit margin of diamond inlaid products.
The gold-set diamond process still has technical barriers, the product advantages of leading companies occupy a certain window period, and the brand enjoys a valuation premium. Gold-set diamond categories rely on supply chain handiwork, etc., and the existing outsourcing foundries of domestic jewelry brands still have certain bottlenecks in process technology that have not yet been broken, and the process still has certain technical threshold barriers. Companies represented by Chow Tai Fook, Chao Hongji and Lao Pu Gold pay attention to supply chain control and product design and development, take the lead in launching new categories of gold and diamonds to lead the industry trend, and rely on channel advantages to quickly card positions, which is expected to benefit from the rapid increase in the industry window period.
In our previous in-depth report "The Dragon Aura is Full Open, Gold-set Diamonds Are Expected to Lead Again", we calculated in detail the profit elasticity of the volume contribution of the gold-set diamond category (Life Four Beauty Series), FY2024 conservatively assumes sales of HK$1.810 billion, corresponding to a profit of HK$507-688 million, optimistic assumption sales of HK$2.469 billion, corresponding to a contribution of HK$691-938 million profit; The conservative assumption of sales of HK$10 billion in the mature period corresponds to a contribution of HK$2.8-3.8 billion in profit, optimistically assuming sales of HK$20 billion, corresponding to a contribution of HK$5.6-7.6 billion in profit, with huge space flexibility.
We expect that with the iteration of the process and the increase in the stocking volume of gold-set diamond categories of various brands, the proportion of non-yellow categories in the industry is expected to usher in an upward turning point, considering that the profit margin of gold-set diamond categories and inlaid categories converge, the category volume is expected to change from the bottom to drive the pricing model of gold products, enhance the brand and product design premium, drive the profit growth rate to release better than the revenue growth rate, and have a large profit elasticity space; At the same time, brand premiums are expected to build a long-term moat and further boost brand valuation.
Due to the consumption characteristics of low-frequency and high-order categories, the gold and jewelry industry mostly relies on the transformation of offline scenarios, and the impact of the epidemic disruption in 2022 is greater, showing a low base; Considering the demand for wedding compensation postponed by the epidemic and the investment preservation demand of gold categories under the expectation of rising gold prices, offline consumption recovery flexibility is large, and the certainty of performance is high.
The above content is for learning and communication only and does not constitute investment advice. Please refer to the original report for details.