Chow Tai Fook's windfall profits were washed away

Golden Horn Finance

2024-04-24 16:37Published in Guangdong financial field creators

Original debut | Golden Horn Finance

Author | Zelda

In 2024, gold staged a big bull market.

Taking the domestic market as an example, after March 1, the price of gold 9999 soared from 480.96 yuan to a high of 576.99 yuan, an increase of nearly 20% in a month and a half, and an annualized yield of nearly 330% calculated by compound interest.

However, in this round of bull market, there has been a double heaven of ice and fire within the gold market.

On the one hand, offline gold stores are overcrowded, and similar topics such as "mainland tourists buy up Hong Kong gold stores and sell them to earn 7,000 a day" are frequently on the hot search, but on the other hand, gold jewelry, especially K gold, has fallen into an embarrassing situation.

Taking Chow Tai Fook as an example, in the first quarter of this year, Chow Tai Fook's same-store sales in the Mainland jewellery setting, platinum and karat gold jewellery categories fell by nearly 2 per cent, and in Hong Kong and Macau, same-store sales fell by nearly 3 per cent.

For jewelers, jewelry businesses such as K gold often sell gold while also selling more value-added (IQ tax) such as design and fashion to consumers, resulting in higher gross profit margins, and can even be said to be the main driver of profit growth.

It can be said that jewelry giants such as Chow Tai Fook did not enjoy too many dividends in this round of vigorous gold bull market.

Buy gold in troubled times

The gold bull market has detonated the heat of both physical and financial markets.

During the Ching Ming holiday, as the two major offline gold markets in the north and south, the "first store of gold in China", the Caibai General Store of Beijing Caishikou Department Store Co., Ltd. and Shenzhen Shuibei were overcrowded.

The situation is similar in financial markets, where various types of gold-linked derivatives rise along with the price of gold. The unilateral trading volume of the main gold contract on the Shanghai Futures Exchange increased from 160,000 contracts in the week of March 18 to 380,000 contracts in the week of April 8, and the price also rose from 506 yuan/gram to 555 yuan/gram.

At the same time, the scale of gold ETFs and gold stock ETFs is increasing. As of April 12, the scale of Huaan Gold ETF was 21.236 billion yuan, becoming the first 20 billion gold ETF, an increase of 7.2 billion from the beginning of the year. The scale of Bosera Gold ETF and E Fund Gold ETF rose to 11.448 billion yuan and 8.612 billion yuan respectively.

On the one hand, the gold bull market is related to the asset allocation preference of the global market.

"In the past two years, the real estate market adjustment superimposed on the continuous downward trend of the stock market, the domestic wealth effect is not good, the growth rate of residents' income has also declined to a certain extent, the 'asset shortage' is more prominent at the level of the Chinese people, and the attributes of gold preservation and appreciation have been continuously strengthened by the behavior of retail investors 'buying more and more'. Zhang Zuohao, chief analyst of Hongze Research, said.

In addition to China, gold is also a popular investment target in overseas markets. For example, investors in India, where financial instruments are limited, tend to participate in physical gold investment, while Egypt and Argentina, where currency depreciation pressure is high, are also betting on gold in the trend of "de-dollarization" and "de-fiatization".

"The global gold investor population is widely distributed, including retail investors chasing up and down, high-net-worth individuals with diversified asset allocation needs, speculative or allocation financial institutions, gold manufacturers, and central banks of various countries, all of which have the motivation to participate in gold trading. Zhang Zuohao said.

On the other hand, risk aversion in global markets remains high. Some industry insiders pointed out that in the short term, the Fed's interest rate cut expectations, the reshuffle of U.S. inflation expectations, and the geopolitical risks such as Palestine and Israel, Russia and Ukraine are in the ascendant, all of which have pushed up the trading sentiment of gold.

Gold is often combined with another important metal, copper. Compared with the safe-haven properties of gold, copper is an important industrial metal, and the price of copper is also one of the most sensitive indicators in the economic cycle.

The open non-commercial position is selected here as a measure of the pure speculative position of the two commodities in the futures market, and the market sentiment is observed by the net long position in copper (the long-short difference between the open non-commercial position) minus the net long position in gold.

Looking at the data from COMEX (New York Mercantile Exchange), the current difference in net longs between the open non-commercial positions in the two metals still shows that market sentiment has not recovered much from the pessimistic past.

The two phased lows of this data in recent years occurred in early 2020 and early 2022, respectively, corresponding to the outbreak of the epidemic and the eve of the Russia-Ukraine conflict. After two years, this indicator has not changed much from the eve of the Russia-Ukraine conflict.

The reason is also very simple, after the conflict between Russia and Ukraine in 2022, global geopolitical tensions have not cooled down, and the future of Russia and Ukraine is not clear, and now there are more geopolitical events in Israel, Palestine, Iran and other places that further trigger tensions.

Kannu Kono, chairman of the Japanese commodity analysis firm Edge of the Market, said: "The value of gold as a safe asset is rising. Commenting on the situation in the Middle East, Kan said: "Although the details are not yet known, if Iran retaliates in the future, geopolitical risks will be pushed further higher, and gold prices may continue to rise." ”

This makes "buying gold in troubled times" still the biggest support for gold prices.

K gold, despising the bottom end of the chain

Although the gold bull market has attracted market attention, after leaving aside the hedging investment logic of "buying gold in troubled times", gold consumption has not enjoyed this wave of bull market dividends. In particular, karat gold (an alloy formed by fusing gold with other metals) has not only not gained popularity, but has dragged down the performance of jewelry companies.

Chow Tai Fook, for example, saw a 19.5% drop in same-store sales in the Mainland's inlay, platinum and karat gold jewellery categories, and a whopping 27.2% in Hong Kong and Macau, according to operating data.

At the same time, the amount of money spent by customers on Chow Tai Fook has also decreased. In the first quarter, the average same-store selling price of Chow Tai Fook's mainland jewellery inlays fell to HK$8,200 from HK$8,400 in the same period last year, and the average same-store selling price in Hong Kong and Macau fell to HK$15,800 from HK$17,900.

Chow Tai Fook's operating data

Embarrassingly, K gold jewelry is an important profit growth point for major jewelry brands. Jewelry products such as K gold often sell gold while also selling more value-added such as design and fashion to consumers, resulting in higher gross profit margins.

Taking Chow Tai Sang as an example, its 2022 financial report disclosed that the company's gross profit margin of K gold inlay was as high as 31.4%, compared with 8.1% for plain gold.

The cold of K gold has also led to the fact that the stock price of the jewelry giant represented by Chow Tai Fook has not received much boost in this round of gold bull market.

At the beginning of 2024, Chow Tai Fook's share price was HK$11.62, and on April 22, its share price closed at HK$10.72, which is lower than at the beginning of the year. Even after the start of the gold market in March this year, Chow Tai Fook's latest closing price is still down from HK$11.72 in early March, reflecting the embarrassing situation faced by jewelers in the gold bull market after the profiteering products such as K gold could not be sold.

In fact, in a normal year, karat gold has a considerable advantage from an ornamental point of view. It is hard and can be used for setting, while plain gold is too soft to hold gemstones. At the same time, K gold has a variety of colors such as gold, light gold, rose gold, silver white, etc., which can design richer products. In contrast, pure gold products that give people the impression of "old-fashioned" are not fashionable enough.

But at the node of "buying gold in troubled times", pure gold has a huge advantage - strong value preservation.

Compared with K gold, the price of pure gold is calculated transparently, generally multiplied by the gram weight, plus labor costs. At present, the Shanghai gold price released by the Shanghai Gold Exchange is around 560 yuan/gram, which can be regarded as the gold price of raw material cost. Major retail brands release the gold price of jewelry every day, around 700 yuan/gram.

Taking April 15 as an example, the gold prices of Chow Tai Fook, Chow Sang Sang and Xie Ruilin in the mainland were all around 726 yuan/gram, and the gold of Lao Fengxiang and Lao Miao exceeded 730 yuan/gram. There are two mainstream brands with a unit price of less than 700 yuan, Caibai jewelry is 699 yuan/gram, and China gold is 679 yuan/gram.

In addition, if the retail brand stocks early, the cost is lower than the current raw material gold price, and the terminal sales will have a certain discount space. For example, in the official flagship store of Chow Tai Fook Tmall, a pure gold chain of 3.15 grams was priced at 2,269 yuan after discount, and the labor cost was 180 yuan, which was only 663 yuan per gram of gold.

In contrast, K gold and inlaid jewelry are generally fixed prices. For example, in recent years, Chow Tai Fook has launched 22K gold (91.6% gold content) products, many consumers complain that they are too expensive on Xiaohongshu, 1.9 grams of 22K gold necklaces sell for more than 3,000 yuan, 2.3 grams of 22K gold bracelets sell for more than 5,000 yuan, and the gram price is more than 1,000 yuan.

In terms of cashing out, second-hand pure gold jewelry is also easier to circulate, there are many recycling channels, and the price fluctuates with the price of gold, which is a strong support for its hedging attributes.

It is reported that the recycling price of Chow Tai Fook is 535 yuan/gram, and the recycling price of big brands is generally low, and some recycling channels can give 550 yuan/gram under the casual search of Taobao and Xiaohongshu, but it generally does not exceed the current Shanghai gold price. In the recycling market, all brands of gold jewellery are treated equally, and there is no premium for brand and design, only the condition.

And when K gold is cashed out, it is cut much more ruthlessly. According to industry insiders, the recycling price of 18K gold is generally 7% off the pure gold recovery price, although the gold content is 75%, but the manufacturer will lose when purifying. For example, the recycling price of pure gold is 550 yuan/gram, and the recycling price of 18K gold is 385 yuan/gram.

Chow Tai Fook said in its earnings report that jewellery inlays are consumer discretionary and therefore relatively weak in a challenging macro environment, as they are more affected by the economic cycle. This is actually consistent with the logic of "buying gold in troubled times", when the market is pessimistic, it will "invest" in gold to hedge and reduce "consumption" of gold.

The "IQ tax" of karat gold is heavier, eventually making it the bottom of the chain of contempt in the great bull market of gold.

When will gold peak?

The price of no commodity will rise all the time, and gold is no exception.

For K gold, as well as jewelers who use K gold as an important means of making profits, when the gold price will peak is the most concerned issue at the moment, after all, if they can't share the dividends in the bull market, when the gold price pulls back and the bull market is over, their situation may only be more embarrassing.

According to relevant media reports, at present, in the physical market, gold consumption has appeared an obvious wait-and-see mood.

The sales of a gold store in Chengdu told the media: "Recently, the price of gold has indeed risen too high, many consumers are waiting, I have served a couple who are about to get married, bought a ring before the Chinese New Year, and recently wanted to buy earrings, bracelets and other jewelry, just because the recent gold price has risen too high, has been hesitating." ”

"The peak period of gold consumption is generally around the Chinese New Year, and now after entering March and April, consumers' enthusiasm for buying has decreased, and the flow of customers and transactions will be less. A gold jewelry store clerk told reporters that the price of gold has continued to rise recently, and some "non-rigid needs" consumers have begun to choose to wait and see.

At the same time, the volume of trading in the financial markets has also begun to decline. COMEX data shows that although the spot price of gold futures is firm, the open interest of the main gold contract first rose from about 400,000 contracts at the end of February to a maximum of 537,000 contracts on March 21, and then fell to 505,000 contracts on April 9.

From the perspective of the internal market, although the trading volume of the main gold contract increased in the week after the Qingming Festival, the open interest also decreased from 224,000 unilateral positions in the week of March 18 to 218,000 contracts in the week of April 8.

Some analysts say that gold is actually a highly volatile and high-risk asset. "Gold's safe-haven characteristics are mainly reflected in hedging geopolitical risks, but it does not avoid the risk of price fluctuations. The realisation of gold also ultimately depends on whether there is a buyer in the secondary market, which will be the determining factor in the price of gold, regardless of whether the person entering the market is for production or investment. ”

"In the final analysis, the 'anchor' of asset prices is nothing more than a belief pursued by investors, but the short-term trend of gold prices is not dominated by the behavior of a single market participant and a single event-driven, and the long-short game of multiple expectations will intensify. A gold expert said.

In Goldman Sachs' view, there are several factors that will contribute to the pullback in gold prices, including easing the unease caused by the US use of the dollar to impose sanctions, central banks meeting their gold purchase targets, fading fears of a slowdown in some large countries, and the Federal Reserve raising interest rates.

From the evening of April 18 to the early morning of the 19th, Beijing time, a number of senior Federal Reserve officials spoke intensively, releasing heavy signals, and even rarely mentioned the possibility of raising interest rates. New York Fed President Williams warned that the Fed will raise interest rates if the data shows that the Fed needs to raise interest rates to achieve its goals.

In fact, in addition to being known for its safe-haven status, gold is also an inflation-resistant zero-coupon asset, with inflation-adjusted real interest rates generally seen as the opportunity cost of holding gold. If U.S. interest rate hikes push real interest rates higher, gold will become less attractive and the price of gold will fall accordingly.

Public data shows that the current US 10-year Treasury bond yield targeting inflation is at a high level in recent years.

When the price of gold really starts to pull back, the situation of karat gold jewelry, which is already at the bottom of the chain of contempt, will be even more awkward. The profitability of jewelers will also be put to the test.

Resources:

Caixin "Why Gold Soars"

Caixin "Gold prices soar, why can't big brands of K gold jewelry sell?"

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