Zhou Li Fu Wu Chong IPO: What is the outlook for "private label" gold?

Gold prices are experiencing severe fluctuations.

The international gold price, which has been rising continuously since the beginning of the year, suddenly turned downward just a step away from reaching $3,000 per ounce.

Last week, the main gold futures contract on the New York Mercantile Exchange fell by a cumulative 3.55%, ending a nine-week upward trend and marking the largest single-week decline of the year.

However, since March 3, international gold prices have rebounded again, returning to above $2,900 per ounce.

Domestic brand gold prices responded with an increase. On March 5, the gold price of CHOW TAI FOOK was reported at 886 yuan per gram, an increase of 11 yuan compared to two days earlier.

While consumers are still observing the volatile gold price trends, another gold jewelry brand has announced its IPO plan.

Recently, Zhou Liu Fu submitted a listing application to the main board of the Hong Kong Stock Exchange, marking the brand's fifth attempt to enter the capital market.

As early as 2019, Zhou Liu Fu expressed its intention to list on the A-share market.

During this period, the Shenzhen Stock Exchange had issued inquiries to Zhou Liu Fu regarding various issues such as the growth rate of its main business, the proportion of franchise business, trademark disputes, and sales compliance.

In the five years since, the gold consumption market has undergone significant changes.

Gold prices have repeatedly set new historical highs, and consumers are beginning to seek more cost-effective channels for purchasing gold, putting the traditional store sales model in jeopardy.

Low-cost investments represented by "small gold beans" have instead thrived online, driven by live e-commerce.

A research report from CITIC Securities cited data from Euromonitor, indicating that the market share of online channels for gold jewelry in China increased from 4.6% in 2016 to 10.2% in 2023.

Merchants in Shuibei, who once only engaged in wholesale business, are now undergoing a business transformation from e-commerce channels to C-end retail.

Will Zhou Liu Fu, once seen as a "substitute" for CHOW TAI FOOK, become a "substitute" for Shuibei in the future?

"Private Label" Gold Sales

Fluctuating gold prices are continuously impacting the entire gold jewelry industry.

In 2024, the cumulative increase in gold futures prices exceeded 27%. While consumers chase after "investment gold," the gold consumption market is in a state of overall contraction.

This trend is reflected in Zhou Liu Fu's performance.

In 2024, Zhou Liu Fu achieved revenue of 5.718 billion yuan, with growth dropping from 66% in the same period last year to 11%, and same-store revenue from self-operated stores declining by 21.2%; net profit was 706 million yuan, a year-on-year increase of 7.1%.

Zhou Liu Fu does not participate in the production process; all products are sourced from outsourced processing or direct procurement. Franchisees are allowed to purchase goods directly from suppliers authorized by the company and settle accounts independently.

While peers suffer profit losses due to rising raw material costs, Zhou Liu Fu has successfully passed on the premium to consumers.

From 2022 to 2024, the gross profit margin for Zhou Liu Fu's sales of gold jewelry to franchisees increased from 3.2% to 6.0%.

Under the franchise model, Zhou Liu Fu charges "supply chain management fees" to supply chain enterprises and "franchise service fees" and "product network access fees" to franchisees.

The service fee charging standards are fixed and not linked to store operations, so this income has also remained unaffected.

In 2024, Zhou Liu Fu's gross profit from service fee projects reached 801 million yuan, accounting for 54% of the total gross profit Due to the fact that service fees involve almost no costs, the gross profit margin of Zhou Liufu's franchise business reaches 33.7%, higher than that of self-operated stores and e-commerce businesses.

Therefore, even by taking a mid-to-low-end route, Zhou Liufu's overall gross profit margin in 2024 still reaches 25.9%, close to leading brands such as Chow Tai Fook and Chow Sang Sang.

It can be seen that Zhou Liufu's main source of profit currently comes from the growth of service fees brought by the expansion of franchise stores.

In this model, the company's biggest core asset is the "Zhou Liufu" brand itself. If there is a lack of constraints on the stores, the franchisees' violations may lead to a depletion of brand value.

A former Zhou Liufu dealer told Xinfeng (ID: TradeWind01) that many franchisees do not operate in a standardized manner. "For example, they attract customers by displaying gold prices lower than the market price, misreport the weight, or simply mix 18K gold in the counter."

In addition, violations of self-sourcing are not uncommon. The dealer stated, "Basically, all the Zhou Liufu stores around have the phenomenon of bypassing the brand to source goods externally, and very few people handle the feedback to the region."

This inadvertently increases the risk of brand backlash.

Zhou Liufu mentioned in its prospectus that it had previously encountered intellectual property infringement disputes, product quality claims, and negative publicity due to franchisees selling unauthorized third-party products.

For many years, Zhou Liufu has been unable to erase the existing impression of being "low-end and counterfeit" in the public eye.

When Zhou Liufu opened its first store in Hong Kong years ago, it invited Carina Lau to attend. Later, when responding to the media about this matter, Carina Lau stated that she was confused by the brand name and thought it was "Chow Tai Fook" or "Liu Fu."

From 2017 to 2018, Zhou Liufu was sued by Chanel and Cartier for selling products that infringed on their trademark rights in some franchise stores.

Actors Guan Xiaotong, Ge You, and Cai Shaofen have also filed lawsuits against Zhou Liufu, claiming that it allegedly used their portrait images for commercial promotion without authorization.

Online Competition Difficulties

Gold consumption is becoming differentiated.

According to Lv Chao, general manager and gold analyst at Guangzhou Tongxin Investment Consulting Co., Ltd., consumers pursuing experience and craftsmanship are flocking to old gold shops, while cost-effective consumption has driven the popularity of "Shuibai Direct Purchase."

Currently popular among young people, "small gold beans" and "gold patches" have simple craftsmanship, low processing costs, and low decision-making costs, allowing purchases to be completed without trying on in stores, becoming a traffic-driving product for Shuibai merchants.

Recently, the Luohu District of Shenzhen announced the "Shuibai Jewelry Live Streaming Star Cultivation Plan," aimed at training talents such as anchors and operators.

Lv Chao believes that if the sales norms of Shuibai live streaming are recognized by consumers, not only Zhou Liufu but the entire industry's "middlemen" will be in jeopardy.

In 2024, the offline channels of the gold and jewelry industry are generally shrinking. Chow Tai Fook closed nearly 600 stores throughout the year; Zhou Dasheng and Lao Fengxiang closed 173 and 35 stores respectively in the first half of the year.

The sinking market where Zhou Liufu operates also seems to be facing the same situation.

In 2024, Zhou Liufu's franchise stores net closed 250 stores, reducing the total number of franchise stores from 4,288 to 4,038.

The industry has shifted to increase its online layout efforts In the performance structure, the proportion of self-operated e-commerce revenue has reached 40%.

Zhou Li Fu claims that this ratio is higher than its peers and ranks first among national jewelry companies.

However, in terms of absolute value and growth rate, it still lags behind first-tier brands such as Chow Tai Fook and Chow Sang Sang.

The e-commerce business continues to maintain a mid-to-low-end brand positioning.

According to data from Chan Mama, the sales of gold and jewelry on the Douyin platform from November 2023 to October 2024 show that among the top 10 brands, Zhou Li Fu's average selling price is 393 yuan, the lowest among the top ten brands.

In contrast, Chow Tai Fook's average price reaches 3,378 yuan.

On March 5, TradeWind (ID: TradeWind01) observed in Zhou Li Fu's Douyin flagship store that the brand mainly sells gold pendants weighing 0.3g-0.7g priced under 1,000 yuan, and has listed 925 gold-plated silver jewelry priced under 100 yuan.

However, in terms of price per gram, the brand seems to lack competitiveness.

The 0.7g plain ring sold in Zhou Li Fu's Douyin flagship store is priced at 739 yuan, equivalent to about 1,056 yuan per gram.

On the same day, a 1g small gold bean sold in Chow Tai Fook's Douyin flagship store is priced at 773 yuan, significantly lower than the brand's gold price of 886 yuan.

In some live streaming rooms of Shui Bei and white-label merchants, a 1g small gold bean is only sold for 685 yuan, in line with the day's market gold price.

Merchants with supply chain advantages are squeezing profit margins to single digits, leaving brand merchants with only the option of upgrading craftsmanship.

Currently, established Hong Kong-funded stores like Chow Tai Fook, Chow Sang Sang, and Liu Fu are all laying out high-end sub-brands. Old shops focusing on high-net-worth individuals have further enhanced their brand presence with "traditional craftsmanship."

Zhou Li Fu, which has long relied on external procurement, seems to have no obvious advantages in craftsmanship research and development.

In 2022 and 2023, Zhou Li Fu's R&D expenditure was below 10 million yuan. In 2024, R&D expenditure rose to 12.55 million yuan, but accounted for only 0.2% of total revenue.

As the proportion of self-operated business increases, the company is beginning to face more practical challenges in production and operations.

In 2024, Zhou Li Fu's capital expenditure increased by 293% year-on-year to 91 million yuan, mainly for purchasing properties, warehouses, and equipment; inventory rose by 21.2% year-on-year to 2.318 billion yuan, with inventory turnover days increasing by 13 days to 182 days.

Time is running out for Zhou Li Fu