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Executives

Zhi Hong Jia - Chairman & Chief Executive Officer

Bin Liu - Chief Financial Officer

Katherine Yao - Senior Executive

Analysts

Jim Po (ph) - Private Investor

Justin Scott - Renegar Research (ph)

Kingold Jewelry, Inc. (KGJI) Q4 2012 Earnings Conference Call March 28, 2013 8:30 AM ET

Operator

Greetings and welcome to the Kingold Jewelry, fourth quarter and year end conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host Katherine Yao, Senior Executive. Okay Ms. Yao, you may begin.

Katherine Yao

Thank you and good morning everyone. Thank you for joining us. Copies of the press release announcing the fiscal year 2012 fourth quarter and year end results are available on Kingold Jewelry’s website at www.kingoldjewelry.com. As part of this conference call, the company has an accompanying slide presentation available in PDF format on the company’s website. You’re also welcome to contact our office at 212-866-1600 and they will be happy to send you a copy.

Before we get started, I would like to remind everyone that this conference call and any accompanying information contains certain forward-looking statement within the meaning of the Safe Harbor provision of the Private Securities Litigations Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect Kingold’s Jewelry business and prospects and the results of operation.

This is our 46th (Inaudible) Kingold Jewelry signed within the security and exchange commission. The company filed its quarterly report and the Form 10-K. Regarding the disclaimer language, I will also like to refer you to slide number two of the webcast presentation for the following information.

I would now like to take a moment of mine to formally open today’s call. The company’s Chairman and CEO, Zhi Hong Jia will brief us the opening statements in mandarin, which I will then read in English. I will then turn this conference call to Mr. Bin Liu, Kingold Jewelry’s CFO, who will continue with the presentation and then I will turn the call over to the Chairman for an outlook for the future.

With that, I will turn the call over to Kingold Jewelry’s Chairman and CEO, Mr. Zhi Hong Jia.

Zhi Hong Jia (Interpreted)

Thank you Katherine and good morning everyone. First I would like to briefly talk about financial marketing 2012.

As we all know China’s economic growth slowed down in 2012 and its slow down impacted China’s consumers in that. However, the financial gold product was still quite stable for the Chinese consumers.

According to the statistics of the World Gold Council, China’s gold consumption in 2012 was 776.1 metric tons, relatively flat to 780 metric tons in 2011. Also in year 2012, the demand for gold jewelry was 510.6 tons, the demand for investment products was 265.5 tons.

In the next 10 years, China’s gold jewelry is expect to maintain stable growth due to continued growth of resident income, speed up of our organization nationwide and the impact of increasing population reaching marriageable age.

As overall gold demand is basically stable, Kingold maintains strong growth in the year 2012 and has expanded our market in to 25 provinces and the municipalities throughout China from 17 last year at this time. The geological expansion impacts our overall performance and probability.

In 2012 the company reported sold operating results, which included strong top line and bottom line improvement across all lines, including margin. We remain dedicated to extending our capabilities in 24-Karat gold jeweler design and technology, increasing or manufacturing capacity, including our self branded products to enhance the market recognition and are moving aggressively in our investment gold business.

I would now like to the turn to call over to Mr. Bin Liu, the company’s Chief Financial Officer. Please go ahead Mr. Liu.

Bin Liu

Thanks Katherine and thank you to Jim and Jack. Good morning and welcome again. Let me start with our results and the market. I’d like to discuss our operational involvement at each of our segments.

Kingold Jewelry produced roughly 37.8 metric tons of 24-karat gold products in 2012, and increased to 25.6% compared to the 30 metric tons in 2011. This in total also exceeded our previously announced guidance range or 35 metric tons.

In the fourth quarter of 2012 Kingold Jewelry produced roughly 7.6 metric tons of 24-Karat gold products, an increase of 33.3% over the 5.7 metric tons in the fourth quarter of 2011. We remain dedicated to advancing to our capabilities in 25-Karat gold jewelry and most importantly improving our geographical reach.

Kingold is now selling and producing product in 25 provinces and in municipalities throughout China, up from 17 in 2011. We achieved this by securing and deepening our sales relationships with leading wholesalers and the retailers in the China, a number which are noted in our slide presentation.

We feel that we are winning a greater share of business than overall jewelry market growth due to our continued designed development. Essentially we are getting better and more detail oriented jewel business. This is helping our company compete for, including the 10 complicated designs.

We make a lot of rings, but we make a lot of different types of jewelry also. We believe this helps our company with customer retention and margin expansion. We entered the investment gold business in 2011 and the segment is still a vacancy at Kingold. We believe this has the most upside as a growth driver for the company. Investment products for Kingold are now currently available in 356 bank branches across the state provinces in China.

Just to remind you of 2013, we entered into gold lease arrangements with major Chinese commercial banks that have accelerated our growth and have supplied increasing demand from our client. We believe we have the opportunity to expand this business to more than 4,000 additional retail branches, our bank branches in 2013.

Our investment growth business is becoming more and more an integral part to our business, however we feel its more cautioned. In 2012 a total revenue from our investment gold business was approximately 5% of the total sales. However we definitely believe that the growth rate will continue to be a considerable driver for the company as it continues its shift to more closely matching kind of the gold market.

On a flat side, talking briefly about the China and global go-to-market trend, which the Chairman has just touched upon, what we feel is causing it to come out is that Kingold is exceeding the overall rate on growth in the market. We feel it is because we are deepening our relationship with countrywide wholesalers and retailers, improving our brand recognition and simply executing it.

As we quickly move on to financials and our balance sheet, which we detailed in slide six to eight in our press release, we encourage you to closely review our audited financial results through our website or via the SEC filings.

Very briefly we achieved the double-digit percentage growth in net sales in the fourth quarter and the 2012 year end. We are reporting a net sales of $916 million for the year. We also improved the gross margin for the fourth quarter and the year, which is said to be between 5% to 6% throughout 2012.

The reason for growth in revenue was largely due to increase in volume as we have increased our capacity with expansion into seven more provinces in China. We also met meaningful sales or investment to grow the business as we explained on the call.

Our operational expanses remain very stable despite this growth and Kingold improved operational marketing goals for the quarter and the year. Finally we reported a net income for the quarter of $7.4 million or $0.14 per diluted share in 2012, an increase over 133% over the prior year.

The improvement in the bottom line for the quarter was largely due to investment incurred during the fourth quarter of 2011, related to the ramp up of the company’s investment gold business, as well as an increased passing of customized gold business in Q4 2012. For the year net income improved 24.7% to $32.7 million or $0.60 per diluted share.

Next let me briefly provide some color on our recent events. We are very pleased to have secured access to addition of gold in the first quarter of 2013 to advance our growth. Our agreements with Shanghai Pudong Development Bank and the China Construction Bank, in total provided Kingold with 69 million worth of gold, which wre relatively unique forms of financing.

As many of you know, Kingold’s growth is depended on inventory and the ability to invest our cash flow back into our inventory, and this gold loan has allowed our company to aggressively accelerate our growth and achieve a great balance sheet free cash flow.

We are confident that we will be able to greatly enhance the processing capability in our 24-karat jewelry manufacturers, investment gold processing business. We will continue a place to sit in the various financing options with China’s leading banking customers (inaudible), plus improve our market leading position and to create a value for our shareholders.

With that, I’d like to turn the call over to our Chairman for more inside in the outlook for 2013. Mr. Chairman.

Zhi Hong Jia (Interpreted)

We remain confident in the long-term demand in 24-karat jewelry and the investment gold offers in China. As the market is big, the population is growing and we have seen steady increases and stable pricing this year.

However, at Kingold we remain focused on what we can control. This is increasing our production capacity, leveraging new operating with purity controlling our cash flow and we continue to grow. We continue to feel that allocating all available capital to reach -- invest in our business is the best use of our asset.

Based on the company’s existing resources and capacity, we expect to profit between 50 to 60 metric tones in year 2013. This will be a sizable increase from 2012, but we feel that the company’s recent proceeds from these previously announced financing and gold lease agreement shall allow Kingold to achieve this target.

We continue to grow organically, expanding new distribution network, development of new 24-Karat gold product and extend services and the designing offerings.

Moving forward we remain confident about the long term growth prospects for the investment gold market and 24-Karat gold jewelry in China and we’ll look forward to continue to develop our new product and distribution abilities throughout the country.

I personally look forward to meet many of you in person and as always, welcome each of you to visit our facility in Wuhan and take a tour. Thank you.

With that operator, lets open up for questions. Please remind that all questions will be translated to the management and then I will translate back in English. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Please hold while we poll for questions.

(Operator Instructions). Our first question is coming today from Jim Po (ph), who is a Private Investor. Please proceed with your question.

Jim Po (ph) - Private Investor

My question is if the earnings for 2012, the share was $0.60, given your estimate of processing 50 to 60 tones of gold, what is your estimate for earnings per share for 2013; should it be like $0.90 or a $1?

Bin Liu

Jim, I’ll take this question. First of all I want to explain to you very briefly, normally we’re not, because we focus on the capacity growth and the control of the capacity. So roughly right now we are like 38 metric tons, right, so we project it to be 50 to 60.

Normally when the capacity grows, our total sales fall down to the bottom line and net income normally grows proportionally. So if we project like 30% to 40% growth, then the net income normally, assuming we don’t like issue any more shares, that’s a big assumption. So hold everything constant for the number of years, the answer is that the growth will be – the earnings EPS will be like $0.70 to $0.85 around this.

Jim Po (ph) - Private Investor

Okay and a follow-up question, if the company looks like its doing so well, why the price for earnings is so low and does the Kingold plan to do any dividend or anything else worth profiting investors and keeping?

Zhi Hong Jia (Interpreted)

We have currently no sense of issuing our extension and further expansion in the capital markets and what we will like to do now is focusing our operation. We will also hold our annual shareholders meeting in coming up June and as in for the dividend, we’ll probably discuss it by that time. We will have the meeting.

Jim Po (ph) - Private Investor

All right. Thank you.

Operator

Thank you. Our next question is coming from Justin Scott from Renegar Research (ph). Please proceed with your question.

Justin Scott - Renegar Research (ph)

Congratulations Mr. Chairman and the rest of the management on a successful quarter and for executing the financing transaction for future capital. My first question is an accounting question for the CFO. I’ll pause for translation.

How will the lease gold be accounted for in the balance sheet and the P&L, and by that I mean will the lease gold appear as inventory and there be a financing liability matching that or will it just sort of be an off balance sheet operating lease. And will the cost of goods sold reflect the cost of the lease gold, the actual gold or just the leasing charge.

Zhi Hong Jia (Interpreted)

The lease gold will be on the P&L as inventory and also shown as short-term loss.

Bin Liu

Justin, again this is Bin. I just want to clarify this with you. Because this is kind of a creative financing, so this is a full time I’ve ever done this. At the current stage we just booked it like the increase of the inventory, I think which is because they give us gold, that’s the top of the inventory and also as you clearly explained right, we have to pay 6% of interest rate on top of it.

So obviously the short-term interest at par will be increased as well. This will be reflect in our Q1 results and we are consulting on working today with our auditing firm Freeman to clearly lay out what should be booked, because again this is the first time and we have to check with what that will specify.

Justin Scott - Renegar Research (ph)

Okay, that’s the answer I would like, that it will be fully disclosed in the balance sheet, that’s great. My next question is and I quite respect whatever disclosure you feel comfortable with. Can you tell us anything about the three significant shareholders that have invested at the dollar rate in share recently and what their relationship with the company is and how close they were to the company as they did their due diligence, etcetera.

Zhi Hong Jia (Interpreted)

These three significant individuals have been long term followed the company and they are – we have prior professional individuals to look into the company for their DTE (ph) process and also the prospects for the future development of the company.

Justin Scott - Renegar Research (ph)

Is there any commercial relationship between any of the three shareholders and Kingold?

Zhi Hong Jia (Interpreted)

No, the company does not have any commercial relationship with any of these individual shareholders.

Justin Scott - Renegar Research (ph)

Thank you very much. I’m going to stop there, but again, thank you for the meeting and congratulations on the quarter.

Operator

Thank you. (Operator Instructions). Thank you. With no further questions at this time, I would like to turn the floor back over to management for any further or closing comments.

Bin Liu

Thanks again for all of you for joining us and we look forward to speaking with you again in May after we report our first quarter financial results. As always we welcome any investors to our facility Wuhan in China and also if you would like to join our new shareholder meeting which is to be held in June, please let us know. We welcome all of you. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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