Interface News Reporter | Guo Jingjing
Mengjinyuan Gold & Jewellery Group Co., Ltd. (hereinafter referred to as "Mengjinyuan") has updated its prospectus and plans to list on the main board of the Hong Kong Stock Exchange.
The founder, executive director and chairman of Mengjinyuan is 60-year-old Wang Zhongshan. Wang Zhongshan and his spouse Zhang Xiuqin, son Wang Guoxin, daughter Wang Na, Tianjin Yuan Jinmeng, and three employee shareholding platforms, Jinmeng Partnership, Jinyuan Partnership, and Jinlong Partnership, together constitute the controlling shareholder group of the company. Among them, Tianjin Garden Golden Dream is owned by Wang Guoxin and Wang Na 50% each. According to this, Wang Zhongshan's family directly controls nearly 72% of Mengjinyuan's shares.
It is worth noting that in 2018, the well-known actress Haiqing (real name Huang Yi) invested 5 million yuan in Mengjinyuan, and the shareholding ratio at that time was 2.22%. In March 2022, Haiqing transferred her 0.67% stake to Zhang Yizhen due to personal financial problems, and her shareholding ratio was reduced to 1.56% at that time. As of the listing, Haiqing's shareholding in Mengjinyuan was 1.53%.
In retrospect, in August 2018, the company launched its IPO on the main board of the Shenzhen Stock Exchange, hiring GF Securities, which had successfully sponsored the IPO of another Chinese gold and jewelry company, on the Shenzhen Stock Exchange. However, until 2020, there was no new progress in the company's IPO listing, and in May of that year, Mengjinyuan rehired Zhongtai Securities as a sponsor and submitted a listing application. Unfortunately, after two consecutive rounds of consultation by the CSRC, Mengjinyuan's IPO application entered the hearing stage on November 25, 2021, and was finally rejected on December 20, 2021.
In December 2022, Mengjinyuan signed a mentoring agreement with CITIC Securities, but did not submit a second A-share IPO application. Subsequently, Mengjinyuan moved to the Hong Kong Stock Exchange and submitted a prospectus to the Hong Kong Stock Exchange for the first time in September 2023. "In order to better reach diversified global investors and gain more international recognition, we have not submitted a second A-share application," the company said.
There are concerns about the franchise distribution model
According to the prospectus, Mengjinyuan introduced itself as "China's original brand manufacturer of gold jewelry (OBM) and one of the very few enterprises that has achieved full value chain operation". The company's growth depends on its ability to deliver gold jewellery that resonates emotionally with its target consumers. For the year ended 31 December 2022, the Company ranked fifth among gold jewellery brands in China's gold jewellery market with a market share of 3.8% in terms of gold jewellery revenue, and ranked third among Chinese gold jewellery brands in terms of gold jewellery revenue (excluding gold bars) in Tier 3 and below.
Mengjinyuan said that the company has a solid market position in third-tier cities and below in China. As of December 31, 2023, Mengjinyuan has established a comprehensive franchise network, covering 2,817 franchise stores operated by 1,687 franchisees, seven self-operated service centers and 17 provincial agents. Other sales channels include 35 self-operated stores, sales to online platforms, and the presence of mainstream e-commerce platforms in consumer networks. From 2021 to 2023, the average revenue of the company's franchised stores will be 5.5 million yuan, 5.4 million yuan and 6.7 million yuan respectively.
It needs to be seen that the franchise distribution model is not without risk. A few days ago, a number of franchise stores of "China Gold" and "Shandong Gold" in Beijing ran away, and the news that "hundreds of millions of gold worth of customer custody cannot be withdrawn" has attracted widespread attention. On April 1, China Gold (600916. SH) said that the actual controller of the franchisee Sanding has been criminally detained by the public security organs, and the company decided to advance the relevant consumers in advance to fully protect the legitimate rights and interests of consumers. According to the announcement, the Beijing R&F Plaza store operated by Beijing Sandingyuan Gold Jewelry Co., Ltd., a Chinese gold franchise franchisee, violated the "Store Franchise Agreement" signed with the company, carried out the so-called "gold bar worry-free reservation" business in violation of regulations, and stopped business activities on December 27, 2023, unable to redeem the products that consumers had purchased, causing a bad impact and causing widespread concern in the society.
"If we are unable to maintain or further develop our cooperation with our franchisees, or if the franchisees have any illegal acts, misconduct or failure to provide satisfactory services, our business, financial condition and results of operations may be adversely affected," Mengjinyuan said. ”
Although the company does not have direct management control over provincial agents or franchisees, it monitors and indirectly manages their performance through the adoption and implementation of their operational policies, pricing guidelines and training sessions for their products. To monitor the performance of the franchise network, the Company's internal management policies include requiring sales representatives to conduct ad hoc site visits and monitoring sales performance, pricing and the quality of marketing activities. The company has also held meetings with underperforming provincial agents and franchisees to help with the recovery.
Gross margin continues to be low
Financial data show that from 2021 to 2023, Mengjinyuan's revenue will be 16.871 billion yuan, 15.724 billion yuan and 20.209 billion yuan respectively, and the company's profit for the year will be 225 million yuan, 181 million yuan and 233 million yuan respectively in the same period. During the Reporting Period, the Company's distribution and sales expenses were $177 million, $195 million and $257 million respectively.
From 2021 to 2023, the company achieved net profit margins of 1.3%, 1.1% and 1.2%, respectively. Mengjinyuan said that its lower net profit margin was mainly due to the company's adoption of a franchise distribution model, which keeps the company's fixed labor fees low when selling products to provincial agents and franchisees, and correspondingly, the pricing model can benefit its franchisees due to its ability to subsequently sell to consumers with higher profit margins.
From 2021 to 2023, the gross profit margin of sales from the franchise network of Mengjinyuan was 2.8%, 4.3% and 4.7%, respectively, while the gross profit margin of its self-operated stores was 14.7%, 16.9% and 22.4% respectively during the same period.
From 2021 to 2023, the main components of Mengjinyuan's sales were gold jewellery and other gold products, accounting for approximately 97.5%, 97.9% and 98.4% of the total revenue. Compared to other jewellery products, the profit margins of gold jewellery are generally lower. During the same period, the Company's gross profit margins were 3.2%, 4.8% and 5.3%, respectively, of which the gross margins of gold jewellery and other gold products were 2.2%, 3.9% and 4.6% respectively. According to the company, the gross profit margin of gold products continued to rise due to the combined impact of increased sales volume, fluctuations in gold prices and the time difference between gold purchase and sales.
Recently, the price of gold has continued to rise. The data shows that the price of gold has risen by about 18% since 2024. From 2021 to 2023, the cost paid by Mengjinyuan to Shanghai Gold Exchange, the largest supplier, for the procurement of gold bars was RMB7.585 billion, RMB8.05 billion and RMB11.163 billion respectively, accounting for 90.9%, 93.2% and 87.6% of the total procurement in the relevant years. In 2021, the overall downward trend in the gold price resulted in the Company purchasing gold at a relatively high price level while charging customers the prevailing market gold price, which is usually lower than the previous purchase cost, and the time lag between the Company's purchase and sales transactions, coupled with the downward trend in the gold price during the year, led to a decline in its gross profit and negatively affected its gross profit margin for the year.
Mengjinyuan pointed out that in order to mitigate the impact of the rapid change in gold prices, the company has implemented a gold price risk management strategy, that is, to sell and purchase. This approach allows the company to purchase gold materials based on daily sales volume to maintain inventory levels, with inventory turnover days of 42.7 days, 45.6 days and 36.8 days respectively from 2021 to 2023, thereby mitigating the potential adverse impact of a mismatch between the purchase price and the selling price.
In addition, in line with its gold price risk management strategy, the company has implemented measures including procurement through gold leasing and Au (T+D) contracts to mitigate the risks associated with gold price fluctuations. These measures are prudently assessed on the basis of available funds, the position of gold inventories and estimated sales demand.
Mengjinyuan said that the company's operation requires a lot of capital. The procurement of gold materials is capital intensive and is necessary for the company to expand its organic business. The Shanghai Gold Exchange only accepts the purchase of gold using cash in its specific account. The Company expects to use cash from operations and the various channels and tools available to it to meet these capital commitments.
For subsequent development, the prospectus of Mengjinyuan shows that the company will further invest in the construction of production facilities to increase production capacity and support business growth, strengthen continuous investment in R&D and technology through the establishment of R&D centers to ensure innovation and competitiveness, strengthen and expand distribution channels, expand consumer reach and renew consumer experience, accelerate the development of digital information platforms, establish a sound membership system, and continue to invest in brand building to further do a good job in product innovation and category expansion. Among them, the company plans to strengthen its gold jewellery intelligent manufacturing center located at the production base of Changle County Economic and Technological Development Zone, Weifang City, Shandong Province, China, to produce gold jewellery, karat gold products and snap buckles.
Mengjinyuan pointed out that as of the latest practicable date of this debt statement (i.e. February 29, 2024), the company's outstanding debts include bank borrowings of $880 million, gold leasing of $455 million and lease liabilities of $15.15 million. As of February 29, 2024, the company had 1.727 billion yuan of available bank financing, of which 50 million yuan has not been used.
The old material business and the "one-dollar swap" activity were questioned
During the rush to the A-share IPO, regulators expressed concerns about a number of unresolved consultations on Mengjinyuan, including the company's used materials business and the business rationale of the "one-yuan swap" activity, and the fact that the unit price of gold raw material inventory was significantly higher than that of gold jewellery products.
In response, the Mengjinyuan Hong Kong stock prospectus responded. The Company considers that the business rationale for its used materials business and the "one-dollar swap" activity is sound, and that, according to Frost & Sullivan, the used materials business is a common practice in the gold and jewellery industry, and although this activity is an industry practice, the SFC is concerned that the scale of the company's used materials business is much larger than that of other listed companies in the same industry. In addition, in terms of interbank sales volume during the Track Record Period, the proportion of used material transactions in the gold and jewellery industry with refining and manufacturing capabilities ranged from 20% to 40%, which is comparable to that of the company. In addition, according to Frost & Sullivan, the counterparties to the used materials business in the same industry are similar to the counterparties, including franchisees, provincial agents and consumers.
In addition, in addition to the daily gold business, Mengjinyuan regularly launches "one-yuan exchange" promotional activities for Wanchun series products. Participating consumers can trade their previously purchased Wan Pure Gold series products for new Wan Pure gold jewellery of the same weight or heavier, plus a notional labor fee of $1 per gram of used gold, with the consumer paying the gold market value and regular labour fees for any additional gold they purchase through trade-in.
In the previous review of the A-share application, the CSRC raised doubts about the commercial reasons for the franchisees of Mengjinyuan to participate in the "one-yuan swap" and whether the franchisees would suffer losses as a result. Although there has been no agreement with the company on the specific policies and terms of such promotions, the CSRC has also raised concerns about the reasons for franchisees' participation in the "one-yuan swap". In this regard, the prospectus of Mengjinyuan pointed out that the company's directors believe that franchisees can obtain direct and indirect economic benefits by participating in the "one-yuan exchange" promotion of Wanchun series products, and that the promotional activities stimulate customer flow and increase franchisee sales;
Mengjinyuan said that the company has strengthened the internal control of the "one-yuan exchange" promotional activities of Wanchun series products. Specifically, the agreement between the company and the franchisees clearly addresses their requirements for cooperating with promotional activities, which includes the "one-yuan exchange" of Wanchun series products. In addition, the Company strengthened its internal control by encouraging franchisees to adopt a CRM system to record their sales in relation to the "$1 for Money" promotion. In addition, the company can systematically review the sales data related to the "one-yuan exchange" of Wanchun series products in a timely manner.
The Company believes that by clearly informing franchisees and formally documenting the franchisees' participation in and support of promotional activities, including the requirement of "one-dollar swap" for Wanchun series products, the Company believes that the inclusion of such clauses will strengthen its internal controls. By incorporating such clauses, the franchisee agrees to closely follow and participate in the Company's promotional activities, which provides a solid basis for the company to enforce its right to require franchisees to support the promotions.
During the previous review of the A-share application, the SFC also found inconsistencies in the disclosure of inventory-related financial data of Mengjinyuan. In response, Mengjinyuan stated that the karat gold jewellery was included in the inventory balance disclosure but was omitted from another inventory disclosure, the consignment processing materials were included in one gold raw material inventory balance disclosure but not the other inventory balance disclosure, and the carrying value of the K gold material was applied in one inventory balance disclosure, and the value of the K gold was converted to gold value in another inventory balance disclosure (using a 75.5% conversion formula). The discrepancies were made for different purposes of illustration but did not adequately explain the differences. In view of these differences, there are inconsistencies in the calculation of the gold raw material breakdown and the unit price of gold raw materials.
After a thorough investigation, the directors concluded that these discrepancies were mainly due to differences in interpretation that did not adequately clarify the relevant disclosures when submitting materials in the A-share application. Subsequently, the Company conducted a thorough examination of the accounting classification of the inventory, and conducted a due audit of the breakdown items that might cause discrepancies in interpretation and confirmed that there were no such discrepancies in the interpretation of the current IPO application, so this issue no longer applies to the current application.
Sued for infringement of Cartier's trademarks
It should also be noted that since 2018, Mengjinyuan has been involved in a number of lawsuits with Cartier International Limited ("Cartier").
In December 2018, Cartier filed a trademark infringement and unfair competition lawsuit against Mengjinyuan, Shandong Mengjinyuan and their franchisees for using the same or similar logos and designs as Cartier's jewelry product lines to sell products.
After the parties appealed, the Tianjin Higher People's Court rendered its final judgment in April 2022, pursuant to which the court ruled that the sale of jewelry with the same logo as Cartier's trademark series by Shandong Mengjinyuan franchisees constituted trademark infringement and unfair competition, that Cartier claimed that the infringing products sold by the franchisees were produced and sold by Mengjinyuan or Shandong Mengjinyuan was insufficient, and that since the Company and Shandong Mengjinyuan failed to perform their regulatory obligations to the franchisees, Mengjinyuan and Shandong Mengjinyuan should be jointly and severally liable for the infringement of the four franchisees, including the joint and several payment liability of a total of 180,000 yuan payable by the franchisees to Cartierand the Company and Shandong Mengjinyuan shall pay a total of 250,000 yuan to Cartier for the economic losses and reasonable expenses suffered by Cartier.
Following the franchisee's conviction by the court, the company imposed various penalties on the parties involved, including fines and early termination of the franchise contract, and the company did not seek their settlement amounts in view of the insubstantial amount involved and the potential time and resources required to seek compensation.
Mengjinyuan said that after this incident, the company has taken the following internal control measures to strengthen the prevention of similar incidents and the supervision of franchisees' business operations, the company has compiled a detailed guide, reminding and requiring all franchisees to avoid infringing on other parties' intellectual property rights, portrait rights, name rights, and expressly prohibit unauthorized printing and pasting of company logos and trademarks on products.
In addition to signing the franchise contract with the company, Mengjinyuan requires all franchisees to read, accept, sign and strictly implement the guidelines separately, and will bear legal responsibility if they violate them, instruct external legal counsel to review and update the franchise contract to include provisions on strengthening intellectual property protection, and the company's designated market inspection team has stepped up its efforts to inspect the franchisee's stores, and pay special attention to whether the franchisee infringes the intellectual property rights of third-party products during the inspection process.