Against the backdrop of increasing global economic uncertainty, gold, as a traditional safe-haven asset, has been closely watched for its price. According to Wind data, as of August 9, 2024, COMEX gold has risen 18.92% cumulatively this year, constantly challenging historical highs, and is quoted at $2463.7 an ounce. With the rise of futures gold prices, the domestic spot gold price has reached 559.28 yuan/g, and the quote for branded gold jewelry is close to 730 yuan.

Although the prices of branded jewelry stores have risen with the spot prices, life is not easy for gold jewelry merchants.

Performance losses, the jewelry business is not easy, not just for Chow Sang Sang.

According to the WiseNews financial news app, recently, gold jewelry merchant Chow Sang Sang (00116) issued a profit warning. The announcement showed that the company is expected to have a profit of between HKD500 million and HKD550 million in the first half of the year, a decrease from HKD827 million in the same period last year. The main reason for the decrease in profit is due to the historical high gold price and the challenges of macroeconomic conditions, which have led to weak consumption and a decline in jewelry and watch retail revenue.

In addition to Chow Sang Sang, Chow Tai Fook and Luk Fook Holdings are also struggling.

Recently, Chow Tai Fook released unaudited Q1 financial data for fiscal year 2025 ending June 30, 2024. The data showed that Chow Tai Fook's retail value decreased by 20% YoY during the reporting period. Among them, the mainland China retail value decreased by 18.6% YoY, and the retail value in Hong Kong, Macao, and other markets decreased by 28.8% YoY. Same-store sales in mainland China decreased 26.4%, and same-store sales volume decreased 36.5% YoY, while same-store sales in Hong Kong and Macao decreased 30.8%, and same-store sales volume decreased 36.1% YoY.

In addition to the decline in performance, the number of Chow Tai Fook stores is also decreasing. During the reporting period, Chow Tai Fook opened 85 new jewelry stores in the mainland China market, but closed 176, a net decrease of 91. As of the end of June 2024, Chow Tai Fook had a total of 7429 jewelry stores globally, including 7284 in mainland China, 87 in Hong Kong and Macao, and 58 in other markets. In the previous quarter (January-March this year), Chow Tai Fook had a net decrease of 89 jewelry stores in the mainland China market. This means that in just half a year, Chow Tai Fook has reduced its jewelry stores in the mainland China market by 180.

Luk Fook Holdings also reported disappointing operating data. According to its retail data for Q1 fiscal year 2025 released by Luk Fook, its overall retail value decreased by 18% YoY during the reporting period, while its retail revenue decreased by 23% YoY and same-store sales decreased by 34%. As of June 30, 2024, Luk Fook had a total of 3484 stores worldwide, with a net decrease of 99 stores in the first quarter.

Regarding the phenomenon of declining performance among various gold jewelry merchants, Chow Tai Fook stated in the announcement: in the first quarter, due to the continued impact of the macro environment on consumption, same-store sales in mainland China, Hong Kong and Macao have all declined. In addition to gold prices hovering at high levels, the demand for gold jewelry during the quarter was affected, which is an industry-wide phenomenon.

As gold prices rise rapidly, gold jewelry merchants are caught in a "price hike trap".

In fact, despite the rise in gold prices, consumption of gold products in China has not decreased. From the perspective of consumption (weight), in recent years, China's consumption of gold products and gold prices have shown an upward trend. To visually reflect the correlation between gold consumption and price changes, we can see that since gold prices broke free from low-level oscillations in 2019 and entered an accelerated upward trend since 2022, China's gold consumption and price have gradually shown an upward resonance trend.

From the perspective of consumption (amount), the steady growth of the scale of the gold and jewelry industry in China is due to the simultaneous increase in the quantity and price of gold products. According to data from the China Gold Association, the scale of China's gold and jewelry industry has maintained a steady upward trend for many years, and the trend of changes in industry size and annual average gold prices has been closer since 2021.

Looking at the internal classification structure of the gold and jewelry industry, the proportion of diamond products has continued to shrink in recent years, while the proportion of gold products has continued to increase, reaching a historically high level of 63% in 2023. Overall, the consumption trend of the industry is dominated by gold products, not only filling the gap caused by the decline in diamond products but also creating incremental space. As for the gold product category alone, its market size growth is the result of simultaneous increase in quantity and price, with price factors possibly contributing more.

Moreover, during the rise in gold prices, gold jewelry traders are expected to benefit from inventory appreciation (raw materials, products) and fee increases. Combining with the financial data of some listed companies, it can be seen that the quarterly gross profit margin performance of Lao Feng Xiang, China Gold and other companies is highly correlated with the gold price growth rate of that quarter, preliminarily verifying the increase in gold price on the profitability of the brand. However, it should be noted that if the brand's main raw material acquisition method is gold leasing, the increase in its sales gross profit margin will be offset to a certain extent by changes in investment income, fair value changes and other items, so the degree of benefiting from the rise in gold prices will be weakened.

Furthermore, since 2023, most of the target stocks in the gold and jewelry industry have shown a certain degree of synchronization with the trend of gold prices. Kaiyuan Securities has compiled the cumulative rise and fall data of some target stocks in the gold and jewelry industry and gold prices since 2023. It can be seen that most of the target stock prices have shown an upward trend and have a certain degree of synchronization with the trend of gold prices, which also reflects the increase in market attention and allocation proportion to the gold and jewelry industry as a whole.

The rise in gold prices is bullish, but a sharp increase in gold prices may lead to a 'price increase trap'. That is, a short-term sharp rise in gold prices may cause consumers to adopt a wait-and-see attitude, which in turn may suppress terminal sales.

From the historical review, the year-on-year growth rate of gold jewelry consumption from 2015 to 2019 was basically negatively correlated with the month-on-month changes in gold prices (data interval explanation: the terminal consumption power was overdrawn during the 2013 gold rush, resulting in large data deviations in 2013 and 2014; there were disturbances after 2020). This is mainly because most consumers are not professional investors. When purchasing gold products, especially gold jewelry, consumption attributes occupy the dominant position. Even if there is a judgment on the long-term trend of gold prices, short-term thinking on cost performance is still easily affected. In the face of a sharp rise in gold prices, they will temporarily shelve their purchase plans and wait for the price to rebound or stabilize before making a decision.

In the short term, when the price of gold rises sharply and the price is too high, it may suppress consumers' willingness to purchase, especially in the period of low demand, and negative effects may continue to spread from the terminal to upstream brand parties along the industrial chain.

The low willingness of consumers to buy has led to a situation where the same-store sales and sales volume of gold and jewelry traders have declined. Taking Chow Tai Fook as an example, during the period of weighted gold price increase in 2020/2023 fiscal year, the same-store sales volume decreased significantly by 24%/18%, and the same-store sales decreased by 15%/13%.

The sales chain and model of gold are complex, and there are obvious differences in the impact of gold price fluctuations and impacts under different management models.

Upstream link: Jewelry brands mainly obtain raw materials through gold price purchase or bank leasing. Among them, the self-procured part is the brand's own inventory, and its procurement price and inventory value are affected by gold price fluctuations; the leased part is generally hedged through T+D contracts to smooth gold price fluctuation risks, among which some unhedged gold and own inventory jointly constitute a gold exposure, and there are certain investment gains and losses.

Channel link: The direct sales channel of the brand mainly sells self-owned inventory gold, and the inventory appreciation after the increase in gold price will be reflected in the gross profit margin increase. In the franchised stores, the platform-type wholesale model allows dealers to purchase their own gold from upstream factories and pay brand royalties, so they are not affected by gold price fluctuations, but the distribution-type wholesale model sells gold to franchised distributors, which can obtain additional benefits from the rise in gold prices.

Product link: One-priced product is a fixed pricing and is not affected by gold price fluctuations, while investment gold bars and weight products are sold in a processing fee + real-time gold price mode, and the rise in gold prices will increase the sales gross profit margin.

It is worth noting that the rapid rise in gold prices has led to increased store opening thresholds and inventory pressure for franchised distributors, and the return on investment of single stores has decreased. Taking Chow Tai Fook and Guangdong CHJ Industry as examples, during the steady growth phase of gold prices from 2019 to 2023, the expansion rate of direct-operated stores has slowed down, and the core considerations for franchised distributors are the return on investment ratio, brand influence, and channel density space.

It is not difficult to see that during the mild rise in gold prices, gold and jewelry traders benefit from it. However, in the context of a sharp rise in gold prices and the continued creation of new highs, consumer demand is suppressed, and gold and jewelry traders are caught in the 'price hike trap'. And the continuous rise in gold prices has different effects on stores under different management models, which is bullish for gold and jewelry traders with a high self-supporting ratio.

At present, most domestic gold and jewelry traders adopt a franchise model. Taking Chow Sang Sang as an example, the data shows that as of December 31, 2023, Chow Sang Sang has a total of 5,106 stores, including 331 self-operated stores and 4,775 franchise stores, with a high proportion of franchise stores accounting for 93.52%. From the above analysis, it is not difficult to see that a rapid rise in gold prices is not conducive to Chow Sang Sang.