Jewelry chain Mokingran hopes for good luck charm with IPO

The jewelry company, which targets urban Chinese consumers, has dropped plans for a mainland listing and is aiming for a higher profile on the Hong Kong market

Key Takeaways:

• Mokingran’s annual revenue exceeds 10 billion yuan but its profit margin is less than 2% because of high sales costs
• Before applying for a Hong Kong IPO, the company deviated from its zero dividend policy to pay out 78.70 million yuan to shareholders

By A Au

The publicity brochure for a well-known Chinese jewelry brand features modern designs in gleaming gold mixed with traditional symbols of wealth and good fortune.

This jewelry maker usually promotes its wares to urban Chinese shoppers, but its latest publication is designed to tempt investors to buy into its planned IPO.

The images of necklaces and bracelets with captions about “golden fortune” adorn the recently filed prospectus from Mokingran Jewellery Group Co. Ltd., which is looking to list its shares on the Hong Kong Stock Exchange.

Established in 2000, Mokingran deals in high-end gold jewelry, mainly targeting female consumers with growing disposable incomes in China’s third- and fourth-tier cities. The business started out processing and selling gold jewelry but went on to become a design brand in its own right, producing collections with titles such as “ancient prayers for good fortune” or “cute pets”.

Mokingran initially aimed for a mainland listing but has switched its focus to Hong Kong, hoping to raise its international profile while fulfilling its dream of going public.

Unusually, the firm operates across the production and retail chain, handling gold procurement, purification, product research, development and design, jewelry manufacturing and sales, as well as brand management. The company positions itself as an expert in high-purity goldwork for a young, urban market and has become one of China’s established jewelry brands.

According to a research report from Frost & Sullivan’s cited in the prospectus, the company ranked fourth last year among Chinese gold jewelry brands in terms of gold processing volume and came in fifth for revenue. In its target market of third-tier cities and below, Mokingran ranked third for gold jewelry revenue and fourth for the number of stores.

The company had set itself a goal of going public in its 20^th business year. In September 2020 it applied to list on the main board of the Shenzhen Stock Exchange under the sponsorship of Zhongtai Securities. But the attempt foundered after Chinese regulators raised concerns about the commercial viability of its used materials business and questioned some of the prices for gold inventory and gold jewelry in the IPO paperwork.

The company switched to Citic Securities in December last year to prepare for another shot at a mainland listing. But then it switched gears to target Hong Kong instead, wanting to tap a diverse base of global investors and gain international recognition. Mokingran filed its Hong Kong listing application on Sept. 28 with Citic Securities as the sponsor.

Gold has long been prized in Chinese culture, denoting social status and wealth. Benefiting from China’s enduring love for gold, Mokingran has been expanding its reach in recent years. By the middle of this year, the company’s network comprised 35 self-owned stores, 2,756 franchise stores, seven directly operated service centers and 17 provincial agents in major shopping malls across more than 250 prefectural cities and over 1,400 counties across China. It also has a presence on mainstream e-commerce platforms such as Tmall, JD.com and Pinduoduo.

The prospectus said rising spending by households in third- and fourth-tier Chinese cities and more aspirational consumption patterns had boosted gold jewelry sales. Anticipating further demand, the company has outlined plans to increase the number of franchise stores in its current locations and expand into new areas. A greater number of outlets would drive up per capita spending on gold jewelry in third- and lower-tier cities to 856.7 yuan ($117) in 2027, a 40% jump from 617.5 yuan last year, according to research in the prospectus.

However, the franchise model is not without its challenges. The brand owner requires franchisees to sign up to its operational rules and conditions, but it can struggle to keep close tabs on a far-flung network of businesses operating under its trademark.

Mokingran’s growth is reflected in its revenue figures. Despite the Covid outbreak, revenue reached 10.83 billion yuan in 2020 and jumped nearly 56% to 16.87 billion yuan a year later. Revenue fell by a modest 6.8% to 15.72 billion yuan in 2022, with limited damage from a wave of lockdowns that soured consumer sentiment.

The company’s financial performance rebounded in the first half of this year. Revenue rose 38.6% to 9.32 billion yuan, with more than 95% of the money coming from franchisees and provincial dealers.

Pre-IPO dividend payment

As a jewelry enterprise, Mokingran must manage the risks from a fluctuating gold price. Its strategies include regular monitoring of gold prices and running a lean inventory to mitigate any divergence between procurement and sales prices. The company also uses gold loans and margin trading, as well as tracking sales demand, to navigate gold price volatility.

Even so, the company has been grappling with cost of sales figures ranging from 94% to nearly 97% of its total revenue. The cost burden leaves limited scope for profits, even on turnover of more than 10 billion yuan a year. Mokingran made a net profit of 174 million in 2020, 224 million the following year and 181 million yuan in 2022, generating super slim profit margins of around 1.1% to 1.6%. In the first half of this year, its net profit rose 5% to 106 million yuan, enough to pass the listing requirements of the Hong Kong Stock Exchange.

Like some other companies, Mokingran took the opportunity to pay a pre-IPO dividend to shareholders. It paid out 78.70 million yuan last year, equating to about 43% of net profit for the year. Most of the dividends went to the founder Wang Zhongshan and his wife, their children, and the employee shareholding platform. But the payout was less generous than some companies’ dividend windfalls, accounting for 35% of the company’s cash and cash equivalents of 225 million yuan at the end of last year. No dividends have been paid this year.

Last August, Citic Securities bought about 4.17 million shares of the company at 12 yuan per share in cash, or 1.82% of total equity. Based on that, the company can be valued at about 2.75 billion yuan with a price-to-earnings (P/E) ratio of around 15 times. The ratio is close to the 16 times for Lao Feng Xiang (600612.SH), a Chinese mainland peer with more stores and bigger profits. Mokingran may need to consider discounts to burnish its appeal to investors when it finally goes public.

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