As gold prices continue to rise, the impact on consumer demand for gold jewelry is complex, potentially suppressing demand for decorative pieces while boosting interest in pure gold coins and bars. Despite the macroeconomic downturn and geopolitical conflicts, gold consumption in 2023 has so far mirrored its 2022 performance.

This trend, coupled with the ongoing decline in diamond prices leading to weaker demand for diamond-set jewelry, has positioned gold jewelry as one of the best-performing categories in the domestic market this year.

Many gold jewelry brands have benefited from this trend, showing strong performance. However, this doesn't necessarily mean their profit models are seen as sustainable in the long term by the capital market. In fact, gold jewelry companies have faced challenges in their recent attempts to go public.

Shortly after Lao Feng Xiang Gold turned to the Hong Kong Stock Exchange and submitted its prospectus, news emerged of Chow Tai Fook Jewelry's failed second attempt to list on the main board.

According to the Shenzhen Stock Exchange's official website, Chow Tai Fook Jewelry's listing process was officially terminated on November 17. The termination followed the withdrawal of the listing application by its sponsor, CITIC Construction Investment Securities Co., Ltd., on November 8.

Chow Tai Fook's latest attempt to go public, submitted to the Shenzhen Stock Exchange on February 28, 2023, underwent a round of review inquiries and responses, as well as two updates to its prospectus, before the company ultimately decided to withdraw its application. Its first attempt to go public was in May 2019, but the application was rejected by the review committee in October 2020.

Other gold jewelry companies that have faced similar rejections include Lao Feng Xiang Gold Co., Ltd. and Mengjin Garden Gold Jewelry Group Co., Ltd. However, both Lao Feng Xiang and Mengjin Garden have since turned to the Hong Kong stock market, submitting their prospectuses in September and November 2023, respectively.

Chow Tai Fook's business model centers on a "private label" strategy, earning high profits through franchise fees and brand usage fees from large-scale dealers.

According to the latest prospectus data, Chow Tai Fook's gross margin in the first half of 2022 was 44.57%, significantly higher than other gold jewelry brands like Lao Feng Xiang, Chow Tai Fook, and Zhou Dafu, whose gross margins were approximately 9.1%, 22.6%, and 20.33%, respectively, in 2022.

However, a closer look at Chow Tai Fook's product structure reveals that the gross margins for its main products, diamond-set and plain gold items, are much lower at 14.02% and 6%, respectively, compared to the company's overall gross margin.

On the other hand, the proportion of Chow Tai Fook's service income increased significantly from 17.28% in 2019 to 57.76% in 2022. According to its prospectus, the gross margin for this service income is nearly 100%, significantly boosting the company's overall gross margin.

Chow Tai Fook's private label model allows franchisees and authorized suppliers to transact directly, significantly reducing the company's capital usage. This model heavily relies on the growth in the number of franchisees. According to the prospectus, franchise stores accounted for 98% to 99% of all stores for three consecutive years, with the number of stores increasing annually.

However, from 2019 to the first half of 2022, the average revenue per Chow Tai Fook franchise store declined from 575,000 to 164,500. This decline in revenue could lead to franchisees reducing inventory or exiting the franchise, as evidenced by the increasing number of franchise closures over the three years.

In other words, even though gold consumption has been high in recent years, the gross profit from product sales is far less than the comprehensive gross profit created by Chow Tai Fook's unique private label model. If the growth in the number of franchisees slows, the source of Chow Tai Fook's service income could be impacted, affecting its growth performance. In fact, from 2019 to the first half of 2022, the proportion of income from the franchise model has already decreased from 82% to 46%.

Under the private label model, Chow Tai Fook's most valuable asset is its trademark. However, ongoing trademark disputes have been another major obstacle in its path to going public.

According to the Tianyancha APP, among the judicial cases related to Chow Tai Fook Jewelry, the most common cause is "trademark right infringement disputes," with as many as 511 cases. The second and third most common causes are "intellectual property rights ownership and infringement disputes" and "trademark rights ownership and infringement disputes," with 19 and 17 cases, respectively.

As of February 27, 2023, 10 trademarks of Chow Tai Fook and its subsidiaries, including "Chow Tai Fook," have been challenged for invalidation, and the State Intellectual Property Office has yet to make a ruling. Additionally, 9 trademarks have been revoked, with the company having filed for review.

During the first round of inquiries for this round of listing applications, the Shenzhen Stock Exchange asked Chow Tai Fook Jewelry to explain the progress of the invalidation or revocation proceedings of the "Chow Tai Fook" trademark, the background and reasons for the disputes, the related income and proportion of products involved in the revoked trademarks during the reporting period, and the risks of the trademarks being declared invalid or revoked and their potential impact on the issuer's production and operations, and whether these risks have been disclosed.

It's worth noting that Lao Feng Xiang Gold also has a gross margin significantly higher than its peers. However, its high gross margin is not created by a private label strategy but is the result of its product mix, high-end brand positioning, and direct sales model.

From 2020 to the first half of 2023, Lao Feng Xiang Gold's gross margins were 43.1%, 41.2%, 41.9%, and 41.7%, respectively. When Lao Feng Xiang Gold's A-share IPO was not approved in 2021, the China Securities Regulatory Commission specifically requested the company to provide a reasonable explanation for its gross margin being significantly higher than comparable companies in the market.

In the latest prospectus submitted to the Hong Kong Stock Exchange, it can be seen that Lao Feng Xiang Gold focuses on traditional pure gold products and diamond-set pure gold products, ensuring high gross margins.

At the same time, Lao Feng Xiang Gold's small but refined all-self-operated store network (currently only 29 stores) generated RMB 44.8 million in revenue per store in the first half of 2023, nearly matching the average performance for the entire year of 2022. According to Frost & Sullivan data, in 2022, Lao Feng Xiang Gold ranked first among all gold jewelry brands in China in terms of revenue per store.

However, a higher reliance on direct-operated store models also means a higher risk of inventory. For Chow Tai Fook, Lao Feng Xiang Gold, and Mengjin Garden, the inventory balances have shown a year-over-year increasing trend in recent years. Factors such as self-operated store stocking, increased inventory due to rising gold prices, potential inventory value decreases if gold prices fall, and declining sales of diamond-set products due to falling diamond prices have all contributed to this increase in inventory.

In summary, the fluctuating gold prices present a complex scenario for jewelry brands. While they benefit from certain aspects like increased interest in pure gold items, challenges such as inventory risks, reliance on specific business models, and trademark disputes add layers of complexity to their market performance and growth prospects.