Why did the third quarter change the bank’s assessment?

  • JPMorgan had viewed the sharp second-quarter slowdown as a warning sign. It believed deferred demand would gradually recover as gold prices stabilized and promotions became more flexible, once the effects of the gold price pullback and purchases made ahead of first-quarter price increases had passed.
  • But the third-quarter recovery was uneven: August improved from July, while sales weakened again as gold prices fell in September. By then, promotions had been broadened and discounts could be combined, with effective discounts on some products reaching approximately 20%.
  • The bank therefore believes consumer purchases are more sensitive to gold price expectations than it had assumed. Laopu’s gross margin of approximately 40% and store productivity in high-end malls still support a brand premium, but its business sits between traditional gold jewelry and luxury goods.

How much are near-term sales and profits expected to fall?

  • JPMorgan expects offline same-store sales to decline approximately 20%–25% year on year in each of the third and fourth quarters of 2026, with net profit of approximately 650 million yuan and 1.3 billion yuan, respectively. It expects second-half revenue and net profit to decline 26% and 23% year on year, respectively.
  • By comparison, the company’s revenue grew 60.3% year on year in the first half of 2026, while net profit rose 88.2%. Strong first-half growth and the second-half pullback make the full-year year-on-year figures a poor reflection of recent operating conditions.
  • The company decided not to provide its previously expected third-quarter operating update, reducing visibility into recent operations.

Why was the 2027 earnings forecast cut sharply?

  • The bank uses the second half of 2026 as a reference for post-boom store productivity. It assumes productivity per store will improve approximately 5% from that baseline in 2027, with gross margin holding at approximately 40% and net margin at 17.4%.
  • On that basis, JPMorgan forecasts 2027 revenue of 24.825 billion yuan and net profit of 4.323 billion yuan, down approximately 20% and 31% year on year, respectively. Those figures are 27% and 39% below its previous forecasts.
  • The bank believes the full-year declines mainly reflect the exceptionally high base from 2025 through the first quarter of 2026 falling out of the comparison, rather than an assumption of another precipitous decline in current demand. It expects revenue and net profit to grow approximately 8% and 9%, respectively, from that base in 2028.
  • Store upgrades, key-customer management and overseas expansion could support long-term growth, but spending on promotion, store upgrades and overseas operations will come earlier, while the earnings contribution will come later. Competition and promotions in high-end ancient-method gold jewelry are also intensifying.

Why was the rating cut to neutral after the valuation reset?

  • JPMorgan downgraded the stock to neutral from overweight and cut its price target to HK$296 from HK$891. It also changed its valuation benchmark from 18 times forecast 2027 earnings to 9.5 times forecast 2028 earnings; the latter is slightly above the Chinese traditional jewelry industry average of approximately 9 times.
  • The bank retains a small premium to the industry because of Laopu’s favorable brand economics. However, lower earnings visibility and demand’s continued sensitivity to gold prices mean it no longer assigns the near-luxury valuation it previously used.
  • JPMorgan believes the share price has fallen substantially and valuation based on its earnings forecasts is close to industry levels, making the risk-reward balance more even. Downside pressure remains if sales fall below its assumptions or the gross margin of approximately 40% cannot be maintained; if same-store sales consistently exceed expectations without deeper discounts, the bank may reconsider an overweight rating.