LAO FENG XIANG(600612)：REVENUE GROWTH BEATS DESPITE COVID-19 RESURGENCE IN EASTERN CHINA IN 2Q22

　　1H22 results beat our expectations
　　Lao Feng Xiang announced its 1H22 results: Revenue grew 6.8% YoY to Rmb33.74bn, attributable net profit fell 14.5% YoY to Rmb890mn, and recurring net profit increased 10.1% YoY to Rmb895mn. In 2Q22, revenue grew 6.3% YoY to Rmb15.3bn and attributable net profit increased 23.0% YoY to Rmb484mn. Its results beat our expectations due to rapidly increasingly revenue driven by high income from nationwide franchise stores.
　　Jewelry business presents resilient growth despite COVID-19 resurgence in eastern China in 2Q22. In 1H22, revenue grew 6.8% YoY to Rmb33.7bn. Specifically, revenue from jewelry business increased 9.2% YoY to Rmb29.2bn, but revenue from gold business dropped 4.3% YoY to Rmb4.3bn. Most direct-sales stores of Lao Feng Xiang are located in Shanghai and surrounding provinces. As a result, revenue from direct-sales stores plunged in 2Q22 due to the resurgence of COVID-19 in eastern China. However, the firm’s franchise stores generated revenue growth of 6% YoY, outperforming the industry.
　　Channel expansion continues amid COVID-19 resurgence; net growth of stores in line with guidance in early 2022. In 1H22, the number of stores increased by 110 on a net base to 5,055. Specifically, self-operated stores increased by two to 188 and franchise stores grew by 108 to 4,867 (on a net base), in line with management’s guidance in early 2022 (management expects the net increase of stores to exceed 300 in 2022).
　　GM dropped structurally in 1H22; expense control sound; recurring attributable net profit up 10% YoY. In 1H22, GM fell 0.2ppt YoY to 7.3%, which we attribute to declining revenue from high-GM direct-sales business. As the firm strictly controlled expenses, its selling and G&A expense ratio edged down 0.3ppt YoY in 1H22. Its recurring attributable net profit grew 10% YoY to Rmb895mn in 1H22.
　　Trends to watch
　　In 1H22, the firm completed 53.5% and 52.1% of its full-year revenue and attributable net profit targets. We expect it to reach the targets in 2022, given its sound revenue and net profit amid headwind and the potential recovery of end-market retails in 2H22.
　　Financials and valuation
　　We keep our 2022 and 2023 EPS forecasts at Rmb3.43 and Rmb4.06. Lao Feng Xiang-A is trading at 11x 2022e and 9x 2023e P/E, and Lao Feng Xiang-B is trading at 6x 2022e and 5x 2023e P/E. We maintain OUTPERFORM and maintain our TP at Rmb51.49 for A-shares, implying 13x 2023e P/E with 39.7% upside. We maintain OUTPERFORM for B-shares. Considering the company announced the conversion of B-shares into H-shares and the liquidity increased, we raise our TP 7% to US$3.83 for B-shares, implying 6x 2023e P/E with 27.4% upside.
　　Risks
　　Sharp fluctuations in gold prices; COVID-19 resurgence; intensifying market competition.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。