Liufu Fu breaks through the IPO for the third time: diamond prices fall, inventory is high

On March 20, Liufu, a jewelry brand with nearly 4,000 franchise stores, launched its third IPO attack. From the perspective of protecting investors, the Shenzhen Stock Exchange quickly issued the first round of inquiry letters in less than a week. But after a delay of four full months, on Saturday, July 26, Fu finally issued a reply letter.

Prior to this, Saturday Fu had knocked on the IPO twice. In May 2019, Liufufu applied for listing for the first time, and the selected sponsors, GF Securities and Zhongzhong Zhujiang, were involved in the “Kangmei fraud case” at the same time, and the IPO review was suspended by the China Securities Regulatory Commission. In 2020, Saturday Fu submitted materials again, but the meeting was rejected. At that time, the Issuance Examination Committee of the China Securities Regulatory Commission raised many questions: relying on the distribution model; involving multiple trademark infringement disputes; high brand usage fees and franchise fees; substantial growth in inventory and a high proportion, etc.

There is a famous saying in “Zuo Zhuan·Cao GUI Controversy”: one vigorous effort, then decline, and three exhaustion. Saturday Blessing is well aware of the importance of the third breakthrough, whether it is to alleviate the current plight of the sudden drop in operating cash flow through listing and financing, or to boost the confidence of the company and many franchisees.

The reporter flipped through the 184-page reply letter, which was deeply participated by the sponsor agency China Securities Investment Securities, and found that there were many doubts in it. Among them, nearly 600 million yuan of diamond raw materials and diamond inventory has been repeatedly questioned by the Shenzhen Stock Exchange. However, it is difficult to dispel doubts about Saturday’s blessing reply.

　Starting from selling jewelry, the revenue and gross profit margin of diamond products have continued to decline

Shuibei Village in Luohu District, Shenzhen has the largest jewelry OEM and wholesale market in China, and is known as “Huaqiangbei in the jewelry industry”. Well-known brands including Chow Tai Fook and Chow Sang Sang are also purchased from Shuibei. At the same time, there are a group of jewelry companies with the surname “Zhou” in Shuibei, whose names are mixed with “Fu”, “Sheng” and “Fa”, trying to establish relatives with Zhou Dafu and Zhou Shengsheng.

The actual controller of Saturday Fortune is naturally not named “Zhou”, but brothers Li Weizhu and Li Weipeng from Chaoshan, Guangdong. In 2004, Li Weizhu established the Liufu brand in Shuibei, Shenzhen. At present, the two together hold 94.13% of the shares of Saturday Fu.

As of December 31, 2022, the company has 3,974 franchised stores and 78 self-operated stores. The brands with more than 3,000 offline channels in the domestic gold and jewelry industry mainly include Chow Tai Fook, Laofengxiang, Chow Tai Sang, Laomiao Gold, China Gold, etc. The above companies have been listed on the A-share or Hong Kong stock market.

From the perspective of product categories, although gold products belong to the category with a large consumption in my country’s terminal consumer market, the display distribution and production turnover of gold need to occupy a lot of funds, and the fluctuation of gold price will bring certain market risks. Therefore, Saturday Fortune uses diamond products with relatively small capital occupation and relatively high gross profit margin as the starting point for the franchise sector to make profits.

According to the prospectus, Liuliufu launched a fast franchise model in 2016. The main sales products are diamond products, and gold products are supplied to franchisees through the network access mode of authorized suppliers. Core areas of third- and fourth-tier cities.

Jewelry is a mid-to-high-end optional consumer product. In the past, the rapid development of China’s national economy and the increase of residents’ disposable income have effectively stimulated domestic jewelry consumption and promoted the rapid growth of the industry. However, with the slowdown of the growth rate of my country’s macro economy and per capita disposable income, the growth of the domestic jewelry market capacity is also slowing down, and the significant increase in gold demand has impacted diamond-set products.

According to the prospectus, the proportion of diamond-inlaid products in Saturday Fortune’s revenue will drop from half of 49.73% in 2020 to 16.64% in 2022. Sales in 2020 will be 995 million yuan, which will be cut to 510 million yuan in 2022.

The higher gross profit margin of diamond inlaid products has declined rapidly in recent years. According to the previous two prospectuses, the gross profit margin of Liufu’s diamond inlaid products remained at around 26% in 2017, 2018 and 2019, and fell to 16.69% in 2021. %, in 2022 it will continue the decline and drop to 15.67%.

　　The profit of the same industry plummeted, and 600 million diamond raw materials and inventories faced the risk of falling prices

Uncertainty in the external environment has made gold, an important hedging tool, hot, while optional consumption growth has been sluggish, and the diamond market has suffered a cold winter. This is a true portrayal of the current domestic jewelry market, as is the market for related raw materials.

In the first half of this year, the price of gold performed outstandingly, hitting the historical record in 2020, reaching a record high of US$2,081.82 per ounce. Despite slight fluctuations recently, the price of gold is still hovering around $1,950 per ounce.

The decline in diamond retail performance has dragged down the price of upstream rough diamonds. The latest price index on the official website of the International Diamond Exchange (IDEX) shows that the INDEX diamond index was reported at 116.11 on August 2, a drop of about 26.66% from the peak of 158.39 on March 7, 2022, and has been declining for 15 consecutive months. Dong Haiyang, a nationally registered jewelry quality inspector and member of the British Gemological Association, pointed out that in terms of diamond weight, the most obvious declines are diamonds with a large stock in the market and a high circulation rate, such as diamonds with a score of 20-30.

Recently, Di’er, a company listed on the Growth Enterprise Market whose main product is diamond rings, released a semi-annual performance forecast. As of June 30, the company expects operating income of approximately 1.226 billion to 1.244 billion yuan, a decrease of 40.37% to 41.22% from the same period last year; The net profit is expected to be 43.263 million yuan to 54.4701 million yuan, a year-on-year decrease of 90.58% to 92.52%.

In the last year, the performance of Dia’s shares has been hit hard. In 2022, the company’s operating income will decline by 20% year-on-year to 3.68 billion yuan; net profit will drop sharply by 43.98% to approximately 730 million yuan.

In reply to the Shenzhen Stock Exchange’s inquiry letter, Dia’s shares stated that the influence of uncertain factors has deepened, and the “retaliatory” diamond consumption in China has not come as expected after the full recovery of normal operation. The global demand for polished diamonds has shrunk, and the price of polished diamonds remains unchanged In the down channel, there is a cyclical adjustment.

There is another important factor that DIA is unwilling to mention, that is, China, as an important producer of lab-grown diamonds, is rapidly eroding the market share of natural diamonds in the lab-grown diamonds produced by industrial methods.

Lab-grown diamonds are chemically identical to natural diamonds, with virtually no difference to the naked eye. According to a brokerage research report, the sales of lab-grown diamonds will only be equivalent to 2.4% of natural diamonds in 2020, but the current ratio has risen to 9.3%. The three domestic listed companies, Zhongbing Hongjian, Huanghe Xuanfeng and Lili Diamond, occupy the vast majority of the international cultivated diamond market. It is predicted that from 2023 to 2025, the scale of China’s cultivated diamond rough diamond market will increase from 2.55 million carats to 4 million carats, with a compound annual growth rate of 25.24%.

In the face of internal and external troubles, as of December 31, 2022, Liuzhou Fu registered 112 million yuan of raw diamonds and 472 million yuan of diamond-inlaid products in stock. Inventories of diamond commodities have risen for two consecutive years. The company’s long-life products are mainly concentrated in loose diamonds with GH color, VS and SI clarity, and weights of 20 points and 25 points, which are the “hardest hit areas” of price drops.

The reporter visited many pawnshops in Beijing. The staff said that due to the market downturn, pawnshops generally do not evaluate the value of diamonds for diamond products with a score of less than 30, but only the metal value of the products. This means that the recovery price of low-weight loose diamonds has fallen to the bottom.

In the face of huge commercial risks, the Shenzhen Stock Exchange repeatedly asked: In the case of declining terminal sales of diamond-encrusted products, is the provision for price reduction of related raw materials and inventory products sufficient? Are there any significant differences from companies in the same industry?

Liu Fu answered this calmly. In 2022, the price reduction provision for diamond inlaid inventory products is 8.1925 million yuan, which is only equivalent to 1.7% of the original value, while the INDEX diamond index fell by 17% from its high level that year.

Pan Helin, co-director and researcher of the Digital Economy and Financial Innovation Research Center of Zhejiang University International Joint Business School, said in an interview with the media that industrialized mass production has completely disintegrated the scarcity that diamonds were firmly bound to before. Once the scarcity no longer exists, Then diamonds may become a common material. “Diamond prices are still diving, and it is expected that they will continue to fall in the future until it subverts everyone’s perception of diamond value preservation.”

Article 55 of the “Enterprise Accounting System” stipulates that when there is a “continuous decline in market prices and no hope of recovery in the foreseeable future”, an inventory depreciation reserve should be accrued.

But obviously, whether it is the actual price of the current period or the market expectation of the future. Saturday Fu’s preparations for the price drop of raw materials and inventory commodities are far from adequate, and it is difficult to dispel the doubts of regulators and investors. The reporter will continue to follow up and report on issues such as trademark legal disputes and over-reliance on franchising.

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