Laopu Gold: How Long Can Its 'Hermès of Gold' Reign Last?

Lao Pu Gold (Part 2): How Long Can the 'Hermès of Gold' Remain Luxurious?

$LAOPU GOLD(06181.HK) In the previous analysis by Dolphin Research on Lao Pu Gold, the focus was on analyzing the company's fixed-price business model and its differences from luxury goods in terms of pricing and operational model.

Next, we will focus on analyzing Lao Pu's approach under the fixed-price strategy for gold jewelry:

a) How did Lao Pu emerge as a unique player?

b) As a high-volume consumer product, why does it become poorer the more it earns? How does this affect value judgment?

c) After a tenfold increase in a year, what is the future growth potential of Lao Pu?

We will further analyze these aspects in this article.

I. Differentiated Strategy: Ancient Craftsmanship - A Blue Ocean in a Red Ocean Market

Before Lao Pu's emergence, traditional gold jewelry primarily targeted the wedding market and value preservation needs, facing a highly homogeneous and fiercely competitive mass market.

In the jewelry industry, luxury brands like Cartier, Tiffany, and Bulgari predominantly use materials such as diamonds, pearls, and K gold.

Traditional pure gold (gold content >99%) has long been labeled as a "low-end material" due to its high purity and low hardness, making it difficult to set diamonds and other complex shapes. It is rarely included in high-end product lines, let alone luxury goods. In other words, pure gold is actually absent in the high-end jewelry market.

Therefore, Lao Pu's smart move was to abandon the traditional gold jewelry mass market from the start, focusing on ancient gold craftsmanship to enter a differentiated high-end gold market, with a simple and clear slogan - "Chinese Ancient Handmade Gold."

Similar to how Lululemon entered the sportswear market through the niche of yoga pants, solving the issues of insufficient stretch and poor moisture-wicking in traditional leggings through fabric innovation, Lao Pu's success largely stems from combining ancient gold craftsmanship with traditional cultural elements to address the high homogeneity and lack of design in traditional gold jewelry.

The so-called ancient craftsmanship is not an original creation of Lao Pu. Simply put, it is a method of processing that inherits traditional Chinese imperial gold-making techniques, including a series of complex processes such as filigree, engraving, gilding, and enameling. Due to the need for skilled craftsmen to manually perform some processing steps, ancient craftsmanship is usually more time-consuming than mass-produced traditional gold jewelry but offers greater uniqueness.

From a product perspective, gold jewelry made with ancient craftsmanship has strong design elements, traditional Chinese cultural attributes, and a fashionable tone, making it visually appealing. Compared to materials like diamonds and pearls, it also retains value better. In short, Lao Pu aims to tell the story that "gold has a price, but beauty is priceless."

Of course, ancient craftsmanship itself does not constitute a core barrier, nor is it an original creation of Lao Pu. However, as the "first mover," Lao Pu has a first-mover advantage. To truly build a long-term moat, it still requires time to change consumer perceptions and gradually establish the mindset that "Lao Pu = luxury."

II. Controlling Production Capacity, Channels, and Cultivating Loyal Fans

With a differentiated positioning and products that combine design and cultural attributes as a foundation, the key step to establishing a high-end or even luxury brand mindset is to create a sense of scarcity. Lao Pu is well aware of this and has mastered the luxury strategy.

a) Production Capacity Control

Unlike traditional gold jewelry companies that typically use OEM outsourcing models, focusing only on product design and brand promotion, Lao Pu established its own factory in Yueyang, Hunan, in 2018 (prior to 2018, all production was outsourced), with a current self-production ratio of nearly 60%, which is relatively high in the industry.

According to the prospectus, Lao Pu's self-produced categories are high-margin core products and new products, ensuring core craftsmanship (filigree inlay, ancient casting) and product autonomy. Only out-of-season styles and products with lower craftsmanship complexity are outsourced to alleviate production capacity pressure during peak seasons.

However, despite this, Dolphin Research, based on some research information, found that Shenzhen's OEM factories can provide the same craftsmanship for brands like Chow Tai Fook and Chow Sang Sang. For example, in the case of pure gold gemstone inlays, the craftsmanship challenge lies in the softness of pure gold, which can easily cause gemstones to fall off. Lao Pu solved this technical challenge through craftsmanship innovation, but within 2-3 months, competitors launched similar products, indicating that Lao Pu only has a time advantage in terms of craftsmanship, without a long-term barrier.

In Dolphin Research's view, Lao Pu's real advantage in back-end production lies in the highly self-controlled design-research-production process, enabling rapid production response and supply-demand control.

According to the prospectus, Lao Pu's founder, Xu Gaoming, personally leads a 12-member R&D team to participate in systematic product development. Designer salaries are more than three times the industry average, and substantial equity incentives deeply bind the design team. Under a high-incentive system, Lao Pu launches over 200 new and iterative products annually, far exceeding industry peers in terms of innovation frequency.

On the other hand, Lao Pu's own factory can quickly respond to design needs, ensuring a high degree of consistency between design concepts and craftsmanship realization, avoiding common issues in the OEM model such as product implementation deviations and delayed deliveries.

In a highly self-controlled vertically integrated closed-loop production system, whether it's new products launched annually or classic old models, Lao Pu typically produces in small batches. Some popular models, such as the "Filigree Gourd" and "Apple Bead Bracelet," often experience 2-3 months of temporary shortages, which Lao Pu attributes to the complexity of the craftsmanship.

In reality, according to the prospectus, Lao Pu's core production capacity relies on skilled craftsmen who guide ordinary technicians in producing most products and personally handle technically challenging processing steps.

As shown in the chart below, the number of skilled craftsmen began to increase significantly in 2023, corresponding to the surge in demand for Lao Pu, while production capacity utilization was controlled at around 100%.

Therefore, in Dolphin Research's view, the essence of Lao Pu's product scarcity lies in the dual-chain self-control of production and channels, creating a luxury "limited supply" scarcity atmosphere through self-matching of supply and demand and production capacity control.

b) Marketing: In today's highly developed social media and e-commerce platforms, Lao Pu never engages in live streaming or follows the classic "celebrity/KOL matrix + brand placement" strategy of the consumer goods industry.

From the breakdown of Lao Pu's marketing expenses, over 90% is allocated to offline store rent, mall entry fees, and sales staff salaries, while traditional advertising spending accounts for only about 3%.

It is evident that Lao Pu heavily relies on offline stores and sales staff in the marketing phase, aiming to emulate luxury brands, create a sense of scarcity, and conduct precise niche marketing.

Additionally, although Lao Pu does not actively promote online, its popularity on social media platforms is not low. According to CBNData, Lao Pu Gold has over 300 million views on Douyin topics and nearly 500 million views on Xiaohongshu topics, with most being user-generated shopping experiences and recommendations, far surpassing industry peers in terms of interaction and engagement.

Why does this phenomenon occur? In fact, Lao Pu's breakthrough is closely tied to a key group of people—buyers. Lao Pu cleverly turns buyers into its stakeholders through luxury brand operations, converting them into potential sales agents.

Buyers are essentially resellers. According to Lao Pu's membership system, spending over 300,000 yuan entitles one to a lifetime 5% discount. Additionally, Lao Pu's products experience 2-3 price increases per year, and the secondary market is active due to their high value retention.

Unlike traditional gold jewelry brands, Lao Pu's buyers, who appreciate the exquisite craftsmanship, are forming a secondary market similar to luxury goods, where old gold jewelry is melted down to create new pieces (focusing on the value of gold as a raw material).

Therefore, Lao Pu's strategy of "supply scarcity + regular price increases creating price expectations + active secondary market" naturally attracts buyers, comparable to the scalper community for Moutai.

Buyers actively promote Lao Pu on Xiaohongshu and Douyin, generating topic heat and attracting potential consumers in cities not covered by Lao Pu's offline stores. They also help consumers purchase popular and limited-edition Lao Pu products at discounted prices.

Due to the high aesthetic appeal and personalization of Lao Pu's products, consumers who acquire them are often willing to share their purchases on social platforms, showcasing their taste.

As Lao Pu gains its own traffic, more content creators are willing to share Lao Pu to gain more exposure, leading to social media virality and ultimately breaking through.

c) Channels: As analyzed earlier, Lao Pu strictly controls store expansion. Over the past five years, Lao Pu's store count has only increased from 18 to 37, entirely concentrated in high-end luxury malls. This highly restrained store-opening strategy, while raising the offline consumption threshold, actually accelerates Lao Pu's breakthrough.

Consumers who are influenced by buyers and content creators online discover that they can only purchase from a few select stores, further amplifying Lao Pu's brand scarcity through social discourse.

If Lao Pu's "luxury feel" online is not yet apparent, offline, as Lao Pu's core scene, it provides consumers with a 100% luxury experience:

In terms of store design, Lao Pu innovatively adopts a Chinese classical luxury style, complemented by wooden furniture, carved window lattices, screens, and palace lanterns, providing consumers with a strong cultural immersion experience, distinct from traditional gold jewelry stores. Additionally, Lao Pu displays a large number of high-weight, high-craftsmanship gold pieces for consumers to admire, this differentiated decoration and display not only aligns with Lao Pu's product craftsmanship but also directly conveys the brand's high-end positioning to consumers.

Furthermore, for sales staff, Lao Pu prioritizes recruiting employees with affinity and communication skills, such as flight attendants and tour guides, and rigorously trains them to master the design meaning and intangible cultural heritage details of each product, conveying them in a storytelling manner. In terms of salary design, to avoid excessive sales pressure, Lao Pu's store sales staff have a fixed salary ratio exceeding 80%, and assessments focus on customer satisfaction rather than sales volume.

On the other hand, like international luxury brands, Lao Pu has its own "VIP room"—a VIP lounge (accessible with a single purchase exceeding 100,000 yuan), separated from regular consumers, offering members customized services, including tea ceremonies, one-on-one exclusive shopping guides, and previews of new products, enhancing the sense of belonging among members.

With this comprehensive strategy, from location selection to decoration and service, through all-round luxury store marketing packaging, Lao Pu has further reinforced its high-end brand image, successfully establishing Lao Pu's scarcity image, which is the underlying logic for Lao Pu's 100% insistence on self-operation.

II. How to View Lao Pu's Growth Potential?

Emphasizing one point, as it has not yet achieved luxury brand premiums, the core of its valuation judgment still lies in assessing performance growth potential, which, from a store perspective, involves evaluating the potential for store expansion and single-store growth. Let's address these one by one:

1. Store Expansion: Exploring Space Alongside Luxury Brands

For a business like Lao Pu that relies on offline store openings, performance drivers primarily come from store count and single-store revenue. Let's break it down:

Firstly, store count is relatively easy to estimate. Currently, Lao Pu has a total of 37 stores, primarily distributed in major high-end luxury shopping districts in first-tier and new first-tier cities, with stringent location requirements, even at great expense, to be neighbors with luxury brands.

Therefore, in terms of store expansion potential, to maintain its high-end positioning, Lao Pu's future domestic store openings will mainly focus on high-end luxury shopping districts in new first-tier and first-tier cities where it has not yet entered.

Dolphin Research has compiled data on all high-end luxury shopping districts in first-tier and new first-tier cities, including SKP, MixC, IFC, Hang Lung, Taikoo, and K11. As shown in the chart below, Lao Pu's potential domestic store expansion space could reach 67 stores (including Hong Kong and Macau), nearly doubling the current number, comparable to the store count of international luxury brands like Cartier, Bulgari, and Hermès in China.

Overseas, Lao Pu's store-opening strategy is also clear: In 2025, it plans to open its first overseas store in Singapore, the most developed Southeast Asian country with the highest proportion of Chinese population (nearly 80%), establishing an international benchmark and serving as a testing ground for Lao Pu's overseas brand strength, laying the foundation for expansion into the East Asian cultural circle and Western markets.

According to company performance meetings, if the Singapore store performs well, Lao Pu plans to open five stores in Southeast Asia within the next 2-3 years, gradually expanding to Japan, South Korea, the Middle East, and Western markets.

However, as Lao Pu's overseas expansion is just beginning, and unlike domestically, its brand strength has not yet been validated, Dolphin Research will not make predictions about the upper limit of store openings. However, as shown in the chart, the potential space for overseas store openings is not small, based on the store count of international luxury brands in various Asian countries.

In terms of store-opening pace, to strictly control scarcity and avoid channel saturation, Dolphin Research assumes Lao Pu will maintain a small, steady pace of store openings (4-5 domestically, 1-2 overseas), as shown in the chart below.

However, it is important to note that whether domestically or overseas, the store expansion space estimated by Dolphin Research is based solely on the number of high-end luxury malls, as Lao Pu's current brand strength still relies on the empowerment of high-end luxury malls.

However, if in the future, with overseas expansion and further enhancement of brand strength both internationally and domestically, Lao Pu may consider opening standalone stores, but the visibility of this possibility is currently low, and Dolphin Research will not consider it for now.

2. Single-Store Revenue: Achieving Luxury Standards

In terms of single-store revenue, as of 2024, Lao Pu's average store revenue is 220 million yuan, already approaching the average store efficiency of Cartier, Bulgari, and Tiffany. According to channel research information, in the first quarter of 2025, some leading Hualian SKP stores achieved monthly sales close to the entire year's level in 2024, indicating that Lao Pu is still in a phase of rapid penetration of high-net-worth customers driven by brand expansion.

On the other hand, considering that Lao Pu's store efficiency has doubled for two consecutive years in 2023 and 2024, combined with future store openings in the same regions, the decline in scarcity will dilute some of the same-store revenue growth. Therefore, although single-store revenue growth remains a core driver of Lao Pu's revenue, Dolphin Research assumes a gradual slowdown in single-store revenue growth.

Therefore, benchmarking against the current average store revenue of top luxury brands like Hermès and Chanel (4-5 billion yuan), Dolphin Research assumes that over the next four years, as Lao Pu continues to expand its customer base and optimize store locations, its average store efficiency will double to 4.4 billion yuan.

Combining the above store-opening volume and single-store revenue forecasts, we can derive a set of key data: If we take 2025 as the baseline, without considering the incremental contribution from overseas, Lao Pu's revenue is expected to grow at a compound annual growth rate of 34% over the next three years.

In terms of expenses, as analyzed earlier, store rent, high-end luxury mall entry fees, platform fees, and sales staff salaries account for over 90% of sales expenses. Dolphin Research assumes that fixed costs such as store rent and sales staff salaries will be further diluted with continued same-store growth, while mall entry fees and platform fees will gradually decrease as Lao Pu's brand strength increases. Ultimately, with the release of operating leverage, starting from 2025, Lao Pu's profit is expected to grow at a compound annual growth rate of nearly 40% over the next four years.

III. Clarifying a Key Issue Before Discussing Investment Value: How to View Gold Inventory?

Here, it's important to note that, as mentioned in the previous article, regardless of how Lao Pu markets and defines itself as a luxury brand, it is still a business highly correlated with the price of raw material gold.

In response to user comments in the previous article, we will use a cash flow analysis to explain why Dolphin Research repeatedly emphasizes its high correlation with gold price cycles. It cannot independently control product prices like other luxury brands, and it cannot escape the price fluctuations of gold as a raw material.

As shown in the chart below, in 2024, after adjusting for stock-based compensation and depreciation, the actual cash profit is approximately 1.7 billion yuan, but operating activities actually consumed 3.4 billion yuan, resulting in a 1.7 billion yuan operational gap.

Ultimately, the company barely achieved a 200 million yuan increase in cash, primarily because it used the 900 million yuan raised from its IPO and borrowed an additional 1.3 billion yuan to cover the 1.7 billion yuan operational gap.

This raises the question: while other businesses typically use upstream and downstream funds to sustain operations, like BYD, why does Lao Pu Gold only have paper profits, and the higher its operating cash flow and profits, the poorer it becomes, with a larger operational gap?

The secret lies in its core raw material for profit creation—gold. Specifically, in 2024:

a. The company's paper profit is 1.5 billion yuan, and after excluding non-cash expenses such as SBC and depreciation, the actual cash profit is 1.7 billion yuan;

b. However, the value of inventory increased by 2.8 billion yuan in 2024, meaning the company used all its profits to buy gold. Even this was not enough, requiring funds raised from the IPO and bank loans to purchase gold raw materials.

c. Is this a gold hoarding behavior during a gold price increase period? There is some suspicion, but not much. The proportion of inventory to annual costs actually decreased as the company's revenue grew.

In other words, the company's current inventory at the end of 2024 is prepared for 2025's revenue, and with revenue expansion in 2025, the value of gold hoarded in 2024 is only 82% of 2024's costs.

Therefore, Lao Pu currently appears to be a business that becomes poorer the more it earns, as seen by everyone. Lao Pu seems to have high paper profits, but its operating cash flow is severely negative. The essence of this issue is that all the money earned is used to buy inventory.

The issue Dolphin Research mentioned about Lao Pu's unique raw material business also affects the estimation of the company's free cash flow. How to view this issue:

a. Considering gold as inventory, although fundamentally different from other companies using gold as a cash management tool, gold accounts for a high proportion of total assets, and gold price fluctuations inevitably affect the company's business. Therefore, as mentioned in the previous article, regardless of how Hermès in the gold industry influences it, at the current gross margin level, it cannot escape the gravitational pull of gold prices. The current high gold prices are also a factor contributing to the company's performance.

The implication for valuation is that, due to the linear nature of performance growth models, it is difficult to predict gold cycles. Therefore, at the peak of gold prices, it is easy to optimistically extrapolate the company's performance growth linearly, and the actual calculated valuation should be discounted for the cyclical nature of gold prices. Currently, gold is in such an upward cycle.

b. The unique nature of gold as inventory is that it is highly liquid. If BYD's cash flow breaks, factory funds are to some extent just scrap metal, but gold remains a relatively high-liquidity, high-value asset. Therefore, Dolphin Research's DCF valuation for this company is based on after-tax operating profit (NOPAT) rather than free cash flow. In terms of free cash flow, because the company is in a performance uptrend, all profits are converted into gold inventory, resulting in negative free cash flow, making DCF valuation impossible.

IV. Does Lao Pu Still Have Value?

From a relative valuation perspective, because the company is a growth stock, its 2025 PE is 51 times, which seems very high; however, even if the company still has good growth potential, using the profit multiple for valuation is not very appropriate.

Therefore, when estimating PE, Dolphin Research uses the company's after-tax operating profit when it enters stable growth, referencing the current mature peer valuation for PE estimation.

Specifically, in Dolphin Research's judgment, based on approximately 10 billion yuan in after-tax profit in 2029, with a profit growth rate of 20%, a 20X PE is given for 2029 profits (compared to the current mature peer average of around 15X PE), and using Dolphin Research's DCF valuation WACC of 10.5% to discount back to 2025, the corresponding 2025 PE valuation is 140 billion HKD, which is about 8% lower than the current price.

From an absolute valuation perspective, assuming a WACC of 10.5% and a perpetual growth rate of 3%, the DCF valuation of Lao Pu Gold's stock price is 958 HKD, representing an 8% premium.

In other words, combining both valuation methods, at the current price level, Lao Pu's investment value is not high.

Summary: It is a High-ASP Consumer Product, Not a Luxury Brand

Of course, the premise of this estimation is that giving it a 20X PE in a stable state means Dolphin Research has not given it any luxury brand valuation premium.

In the article "Tenfold in a Year! Is Lao Pu Really the 'Hermès of Gold'?", Dolphin Research mentioned that the core reason luxury brands can have high valuation premiums is that, regardless of economic cycles, labor, materials, or any other factors, luxury brands can always firmly control pricing power and regularly increase prices.

The underlying reason for price increases is that luxury brands, through creating scarcity and regular price increases, have filtered out the wealthiest class least affected by economic fluctuations. This class of consumers has long recognized the value of these century-old brands, making them symbols of status.

Dolphin Research believes that Lao Pu's biggest issue is that this round of performance explosion, in addition to its own alpha, is inseparable from the rapid rise in gold prices in 2024. In other words, although Lao Pu currently adopts a luxury-style fixed-price + regular price increase model, in reality, Lao Pu's product price increases are still anchored to the rise in gold prices, which is the biggest difference between Lao Pu and true luxury brands.

If we step out of this short cycle of violent gold price increases and view it from a long-term perspective, Dolphin Research believes that the long-term valuation improvement of Lao Pu depends more on the acceptance of Lao Pu's luxury brand mindset by consumers. Once consumers focus more on Lao Pu's brand logo itself and downplay the design and underlying gold prices, making it a recognized luxury brand internationally, then, regardless of Lao Pu's performance, there will be room for valuation improvement.

However, as Lao Pu has not yet experienced a complete cycle of gold price increases and decreases, Dolphin Research will not give it a valuation premium for now.

Overall, Dolphin Research's biggest impression is that Lao Pu is a company that has taken differentiation to the extreme. Unlike traditional channel-driven, red-ocean competitive traditional gold jewelry companies, Lao Pu has innovated its business model, entering the high-end gold market through ancient gold craftsmanship and using luxury brand operations to differentiate itself.

As the first player to open up the high-end gold market, facing a blue ocean, and with Lao Pu's listing coinciding with the main upward wave of gold, Lao Pu's performance has soared, and the continuous acceleration of performance has led to continuous upward revisions in valuation, making it a typical "Davis Double Play" company.

However, from the current standpoint, while Dolphin Research does not deny that there is still room for further improvement in store space and store efficiency, from an overall performance growth perspective, marginal diminishing returns are highly likely. The "tenfold in a year" Lao Pu stock price has largely reflected future growth potential. Dolphin Research is more concerned about whether Lao Pu's brand strength can support it through stress tests when gold stagnates or enters a downward phase.

At least for now, compared to century-old luxury brands like Hermès and LV, Lao Pu still has a significant gap in brand accumulation, and whether it can truly become a recognized luxury brand in the international market still requires time for validation.

Related Historical Articles from Longbridge Dolphin:

June 13, 2025, "Tenfold in a Year! Is Lao Pu Really the 'Hermès of Gold'?"