Gold jewellery sector is expected to gradually warm up in the second half of the year

Goldman Sachs Gao Hua Securities today released a report on the retail industry. It is optimistic about the gold and jewellery sector in the retail industry and is expected to gradually recover in the second half of the year. As for individual stocks, the bank is particularly optimistic about Lao Fengxiang, adding it to the Conviction List.

Goldman Sachs Gao Hua stated that the structural challenges faced by the gold jewellery sector in China's retail industry relative to other categories are currently limited. Based on the following four factors, the gold jewellery sector in the retail industry is optimistic: 1. Gold jewellery is one of the most repressible categories for e-commerce companies. Its consumers value the authenticity of brands and commodities rather than pure functions/designs.

2. Due to different positioning and target customers, the gold jewelry industry has relatively little competition from global brands.

3. Compared with popular consumer goods such as apparel, footwear and consumer electronics, the barriers to entry are higher.

4. There is still a lot of room for leading companies to expand their business and increase market share (as of 2013, the market share of the top three retailers was only 15%).

The three major population factors peak support long-term growth in the second half of the recovery in sight

The market view generally believes that the rapid growth of the gold and jewelry industry in 2013 may lead to excessive consumption, which will have an impact on demand in 2014. However, Goldman Sachs Gao Hua believes that the peak of China's three major demographic factors (that is, the peak of the wedding market, birth peaks, and the peak of female consumption between the ages of 35 and 50) provide support for the growth of the gold and jewelry industry in the long term.

In addition, with the gradual relaxation of China's family planning policy, the bank believes that the number of newborn babies in third- and fourth-tier cities may grow faster (because the cost of supporting future generations in these cities is lower than those in first-tier cities and second-tier cities), thus creating new market opportunities. Taking into account the normality of the second half of 2013, the bank expects the industry to recover in the second half of 2014.

Gold price has limited impact on retailer leading profit

After the gold price peaked in 2011, the correlation between gold jewellery retailer's share price and gold price was not high. Goldman Sachs Gao Hua found that the falling price of gold does not necessarily lead to a decline in the profitability of these companies. For leading companies, the falling price of gold may bring about continuous increase in sales and market share, and stimulate the acceleration of turnover, thereby slowing down the negative impact on gross margins. In addition, an effective hedging strategy can also hedge the impact of falling gold prices.

Lao Fengxiang: The beneficiaries of consumer upgrades join the Conviction List

Goldman Sachs Gao Hua believes that Lao Fengxiang’s stock price has already reflected the market’s concerns about the demand outlook in 2014. The drop in market demand will mainly affect smaller retailers. The bank believes that this brings good opportunities for Lao Fengxiang to consolidate its market position and expects the retail sales of the whole industry to recover in the second half of this year.

In the long run, the bank believes that Lao Fengxiang's store network will help the company to better benefit from the growth of consumption in third and fourth-tier cities. Goldman Sachs Gao Hua expects that the CAGR of 2016 sales and earnings will be 15% and 19.4% respectively. The bank set its 12-month target price at 32.4 yuan, implying 28% upside. As Lao Fengxiang’s risk return is attractive, he added the stock to the Conviction Buy List.