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In May of this year, gold prices surged to an all-time high, approaching $2,500 per ounce. However, as market volatility gradually increases, what challenges will gold retail businesses face?

Lao Pu Gold Co., Ltd. (hereinafter referred to as "Lao Pu Gold") once attempted to go public on the A-share market in August 2021 but was rejected, with its gross margin of around 40% being questioned. This time, after updating the information, it turned to the Hong Kong Stock Exchange to submit listing documents, with CITIC Construction Investment International as the sole sponsor.

Before 2023, as gold prices rose, consumer enthusiasm for gold consumption was ignited, and Lao Pu Gold's performance was positive. As future overseas inflation data slows down, the uncertainty of gold price trends increases, what impact will this have on Lao Pu Gold? Lao Pu Gold stated that it has not used hedging tools; on the other hand, Lao Pu Gold's market share in the domestic gold jewelry market is only 0.6%, which also raises concerns about its overall competitiveness.

No measures have been taken to hedge gold price fluctuations.

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"Since we do not have any hedging tools to manage the fluctuations in gold prices, we are highly susceptible to the impact of such fluctuations," Lao Pu Gold stated in its prospectus. The company's raw material procurement costs constitute the largest share of our sales costs, and significant fluctuations in raw material (mainly gold) prices may have a significant impact on the company's business, operating performance, and financial condition.

Lao Pu Gold was established in December 2016. According to the introduction, the company focuses on making ancient gold jewelry. The so-called ancient gold jewelry is pure gold jewelry that combines modern design with Chinese classical culture and is processed using special traditional Chinese techniques. The craftsmanship mainly includes lost wax, molding, hollowing, hammering, engraving, hollowing, filigree, inlay, and enameling.

Lao Pu Gold stated that gold prices are affected by various factors, such as industrial and jewelry demand; government agencies (including central banks) and multilateral institutions that lend, sell, and purchase gold; and the recycling gold sales, gold production levels, production costs, and supply disruption situations in major gold-producing countries (such as South Africa, the United States, and Australia). In addition, gold prices are also affected by factors related to the structure of the gold market, such as the asynchronous trading hours of the gold market and the short-term rapid changes in gold supply and demand caused by speculative activities. Other factors affecting gold prices include the structure and confidence of the global monetary system, expectations of inflation rates, the relative trend and confidence of the US dollar (the general currency for gold quotations), interest rates, gold lending rates, global or regional economic, political, regulatory, judicial, and other events, as well as wars and other disturbances.

"Gold is the main raw material used in our production of products, accounting for 94.4%, 93.6%, and 92.5% of raw material costs in 2021, 2022, and 2023, respectively," Lao Pu Gold stated, carefully considering several key factors to determine product prices, including material and production costs, craftsmanship difficulty, and the brand's market positioning.

"If the current market price of gold rises significantly, we will adjust our product prices according to the current market price and pass on the costs to our customers," the company said.

As for why it does not hedge, Lao Pu Gold also provided an explanation. The company said, "We believe that such fluctuations are controllable because we often adjust our raw material procurement plans according to actual market and production needs. Specifically, our supply chain department will adjust our procurement plan every month based on the historical sales and expected sales trends provided by the sales department. After issuing the procurement order each month, our supply chain department will follow up on the procurement progress of raw materials, the use of raw materials in production, and inventory levels. Therefore, even though we do not have any hedging tools to manage the fluctuations in gold prices, we can still reduce the risk of having too much gold raw material inventory and mitigate the impact of cost fluctuations on our business operations and financial performance."For gold jewelry companies, an increase in gold prices leads to a corresponding appreciation of inventory. On the other hand, the continuous rise in gold prices will stimulate consumers' investment enthusiasm, driving up the demand for gold jewelry products. Driven by the customer's philosophy of "buying on the rise, not on the fall" for gold, the demand for gold jewelry is likely to increase with the rise in gold prices. In this regard, a retail financial professional told Yicai reporters that during the gold price rise period a few years before May 2024, due to the relatively low-priced inventory purchased early, it could be sold at a higher price after the subsequent appreciation of gold, resulting in a higher gross margin. However, if the fluctuation of gold prices increases in the future, it is not easy to predict and may erode profits.

A-share listing was rejected, and the gross margin was questioned.

In 2021, 2022, and 2023, the gross margins of Laopu Gold were 41.2%, 41.9%, and 41.9%, respectively. Laopu Gold only holds a 0.6% share in the Chinese gold jewelry market. Why is the gross margin much higher than that of peers? Laopu Gold's explanation is that the proportion of self-operated models is high, but the A-share listing was still rejected.

In August 2021, after review by the China Securities Regulatory Commission, Laopu Gold's A-share application was not approved. The main comments and reasons were: the necessity and fairness of the pricing of continuous transactions between Laopu Gold and Wenfang Culture (a company controlled by the controlling shareholder) after acquiring the business of Golden Treasure; more importantly, the CSRC questioned the rationality of Laopu Gold's gross margin, which is "significantly higher than other comparable companies in the market" (that is, the average gross margin of the nine companies disclosed in the application materials for the first A-share listing application, which ranged from 22.1% to 26.5% during the historical record period).

In response, Laopu Gold explained in the Hong Kong stock prospectus: According to the consulting firm Frost & Sullivan, the gross margin of jewelry brands using the self-operated model is usually higher than that of the franchise operation model. The main reason is that under the franchise operation model, the franchisor's pricing for selling products to franchisees will be lower than the pricing for selling products directly to end customers, so that franchisees can obtain a reasonable profit. Therefore, assuming the same sales cost, the gross margin of products sold under the self-operated model will naturally be higher than that of products sold under the franchise operation model. Due to Laopu Gold's full self-operated model, it leads to higher operating expenses, such as high rents and commissions generated by stores located in prime commercial centers to match the high-end brand image.

In terms of product mix, according to Frost & Sullivan, the gross margin of ancient gold jewelry is usually higher than that of other gold jewelry, mainly because its craftsmanship is more complex and exquisite, and its selling price is usually higher than that of other gold jewelry. Among ancient gold jewelry, the gross margin of gold-inlaid products is usually higher than that of pure gold jewelry, mainly because consumers are willing to pay a premium for gold-inlaid ancient gold jewelry that combines the nobility of gold with the charm of gemstones. Therefore, as a company specializing in providing ancient gold jewelry, gold-inlaid products account for nearly half of Laopu Gold's total sales revenue, and it is commercially reasonable to have a higher gross margin compared to other gold jewelry brands that only have a small part of ancient gold jewelry and/or gold-inlaid products in their product mix.

According to Frost & Sullivan, in 2023, the market size of the Chinese gold jewelry market was 518 billion yuan, and Laopu Gold held a 0.6% share in the Chinese gold jewelry market; in 2023, Laopu Gold held a 2.0% share in terms of sales revenue of ancient gold jewelry, and the market size of ancient gold jewelry in China was 157.3 billion yuan. The total income from ancient gold jewelry products generated by the top five gold jewelry brands was about 72.4 billion yuan, accounting for 46.1% of the entire market. In terms of revenue, Laopu Gold ranked seventh in the Chinese ancient gold jewelry market.