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Kingold Jewelry, Inc. (NASDAQ:KGJI)

Q1 2013 Earnings Conference Call

May 16, 2013; 08:30 a.m. ET


Zhi Hong Jia - Chairman & Chief Executive Officer

Bin Liu - Chief Financial Officer

Katherine Yao - Equity Group


Paul Cooney - Maxim Group

Jim Po (ph) - Private Investor


Greetings and welcome to the Kingold Jewelry, first quarter 2013 earnings 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 of the Equity Group. Thank you Ms. Katherine Yao, you may begin.

Katherine Yao

Thank you operator and a good morning everyone. Thank you for joining us. Copies of the press release announcing the fiscal year 2013 first quarter financial results are available on Kingold Jewelry’s website at

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 212-836-1600 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 discussed herein contains certain forward-looking statements 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 Jewelry’s business and prospects and the results of operation. Such risks are found in Kingold Jewelry’s filings with the Securities and Exchange Commission.

The company filed its quarterly report and Form 10-Q 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 to outline the format for today’s call. The company’s Chairman and CEO, Mr. Zhi Hong Jia, will read a prepared opening statement in mandarin, which I will then read in English. I will then turn the conference call over 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 our 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 and good morning everyone and for those with me in China, good evening. As we all know, the past several months have been very challenging to our industry as gold price changes.

Kingold has been suffering from some delayed orders, some write downs of our inventory and the margin pressure. It gives us a number of challenges throughout the first quarter of the year. We continue to remain confident in Kingold’s potential for 2013 based on our recent turnaround.

As we noted in our press release, our financial results for the first quarter were affected by delaying orders from our consumer into as a slow steady decline in the (inaudible). Those customers – so we noticed that the consumer demand was still strong beneath the core purchase product at the lower price in the near future.

However, despite these delays Kingold continued to leverage its strong financial position and it believes that it is now benefiting from a recent up turn in demand. In mid-April, as many of you have seen, gold dropped considerably over a two day period. From this point our customer’s began placing considerable orders in advance of China’s May Day holiday.

Our recent export data released by Hong Kong Census and the Statistic Department on May 7 indicated China’s gold import since March exploded to an all time record high of 223.5 metric tons. This follows 372 metric tons throughout the (inaudible) quarter.

While fluctuation in gold prices certainly affected our top line, we believe the gross margin and profit will remain stable as a result of this increased demand in 2013, second quarter.

We continue to leverage in the company’s production capacity and are working with our distribution network to fill and process orders as efficiently as possible. We are confident in the company’s long-term growth from China’s strong purchasing power and demand in gold products.

I would now like to turn the call over to our CFO, Mr. Bin Liu, to introduce Kingold’s 2013 first quarter operations results.

Bin Liu

Thanks Katherine and thank you Chairman Jia. Good morning and welcome again. Today I will like to discuss Kingold’s 2013, the first quarter operational and financial results, beginning with slide four on the presentation.

Let me first start with overall gold market. Our sales were impacted actually by delayed orders as the Chairman mentioned, during this decline in gold price. In many instances we have been approached by investors and individuals will naturally whish to understand this commodity impact on Kingold.

The company typically will pass through the raw material cost directly in the cost of its product, plus its design manufacturing fees. However, I would like to go through these three scenarios to give a better sense of how it changed and the market pricing of gold affects Kingold’s results.

Scenario one; there’s a steady increase or decrease in gold market price. This type of steady increase or decrease in gold prices typically causes little fluctuation for Kingold Jewelry’s from supplier or customers. We typically can price the current cost of these materials onto our customers regularly.

Scenario two; a rapid rise in gold price. Depending on the timing of Kingold gold purchase a rapid rise, typically a very positive, generally positive for the company. This is out of higher sales and demand stays high. If demand stays high, volume stays high.

And then scenario three; a record or continuous decline in gold price. Depending on the timing of gold purchases, Kingold will continue to pass on current market costs competitively to customers. But depending on timing, customers may essentially wait for a bottom. This is what our company has just experienced in the 2013 first quarter.

However, when bottom is perceived, there is a general order, an increase in borrowing with surges also. Gold has dropped, sub-dropped on April 14 and 15, roughly a 30.35% drop in two days, with the retail sales in China tripled on April 14, 15 and 16.

Moving to the next slide where you will see a summary of the company’s results for the first quarter of 2013, Kingold Jewelry processed an 8.6 metric tons of 24-Karat gold products compared to 8.8 metric tons in the prior year period.

Net sales decreased to $221.4 million for the three months ended March 31, 2013. The decrease in revenue was primarily due to the decrease in the price during the period. Of the $3.6 million decrease in net sales, approximately $2.7 million was attributable to the increased branded products, offset by roughly $7.2 million decrease due to the decrease in the price of gold and then the remaining increase was due to the translation gain from exchange rate fluctuations.

Our gross profit was $6.3 million in the first quarter, decreased 45.4% from $11.6 million compared to the same period in the prior year. Our gross margins decreased to 2.9% from 5.1% in 2012. These margins were affected by the latter demand I mentioned earlier and also a $2.8 million write down to cover inventory loss.

As the price has stabilized, we are hopeful that there is a more than sufficient coverage for any adverse development in Q2, but after working closely with our sales, this was the most conservative and prudent measure to take at this time.

Moving to slide seven, lets discuss the bottom line. The company reported net income attributable to Kingold’s shareholders for the first quarter of 2013 of $2 million or $0.05 per diluted share based on 61.2 million weighted average diluted shares outstanding, compared to net income of $7.3 million or $0.13 per diluted share, based on 54.4 million weighted average diluted shares outstanding in the prior-year period.

While our profits trailed behind the prior year period, we were all pleased to have reported this figures, considering the turbulent state of the gold market. We feel that it’s a testament to both our skill and our pro-activity in staying in front of our customers. While it was challenging in the short term, it’s defiantly helped us longer term in comparison with our lesser-capitalized and smaller competitors.

Moving to the balance sheet in the next slide, slide eight. March 31, 2013 Kingold’s cash and cash equivalents were $20.7 million inventories, which in our case was $144.4 million and our stockholders equity was $178.3 million.

As the gold price dropped significantly in Q1 and due to higher demand and volatility the company has taken a very cautious approach to avoid marketing risks and present value for the shareholder. As a result our cash totals increased during the period, and it was held off increasing our inventory.

In the first quarter of 2013 we listed more than $60 million worth of gold through agreements with Shanghai Pudong Development Bank and the China Construction Bank to enhance our ability to reinvest into our inventory. In view of the current price and the gold price fluctuation, we just hold off the production in the first three months of 2013.

With that, I’d like to turn the call over to our Chairman for more insight into the momentum of 2013. Mr. Chairman.

Zhi Hong Jia (Interpreted)

Thank you again. Despite the decrease in gold price during the first quarter of 2013, we still remain confident of growth in 2013. This is partly driven by this incredible increase in demand through the first six weeks of the second quarter. Given our current progress today, we are still confident that our volume will be approximately between 50 to 60 tons for the full year of 2013.

We have planed to make even greater effort in Asia and clarity our leading position with the Industry in China. We are in agreement with China’s major commercial banks, served as a good long-term capital resource and we expect to improve and expend upon our (inaudible) channel to reduce our reliance on other more dilutive method of financing.

Our market is changing and that we are exposed to commodity risks, as (inaudible) strategies using our resource appropriately and seeking methods to improve the company growth, Kingold must focus on what they can control to expand its amount of share and the increased shareholder value.

Again, I look forward to hear your ideas and projections and welcome our shareholders to our Annual Shareholder meeting in June 6. Thank you.

Katherine Yao

For the question-and-answer section please allow a moment for the company to translate into Mandarin each question, and as the management will respond to everyone on the call in English. With that operator, lets open up for any questions.

Question-and-Answer Session


Thank you. (Operator Instructions). And sir, there are no questions at this time I would like to turn the floor back over to management for any further comments.

Bin Liu

Thanks again to all of you for joining us. We look forward to speaking with you again in August.


I apologize sir. We do have a question coming from Paul Cooney from Maxim Group. Please proceed with your questions.

Paul Cooney - Maxim Group

Thank you. Hey guys. Just wondering, you said there was a big pickup in demand in the second quarter. Can you give us an idea of how much gold was processed in the first six weeks time wise?

Zhi Hong Jia (Interpreted)

Okay, for the first six months of Q2, the company processed approximately about 6.5 pounds.

Paul Cooney - Maxim Group

Okay. That’s excellent, thank you.

Bin Liu

Paul I just want to clarify, this is just like to estimate, not like the final, final. So it’s like a rough number okay.


Thank you. (Operator Instructions) Our next question is coming from Jim Po (ph) who is a Private Investor. Please proceed with your questions.

Jim Po (ph) - Private Investor

Yes, you mentioned that you processed 6-something tons in the first six weeks, because you saw higher demand after the price of gold went down. The price of gold has come down again. Do you still see that demand or you know people have still started waiting again for gold to go further down?

Zhi Hong Jia (Interpreted)

To answer your question, the company still sees very high demand from others and so the company, we are confident to process 50 to 60 tons for the whole year.

Jim Po (ph) - Private Investor

Sorry, even the amount, if I many follow with another questions; if the price of gold falls further down in the international markets, you still expect that you can meet the 50 to 60 tons? Is that from what you see in the China market?

Zhi Hong Jia (Interpreted)

The company is very confident to process 50 to 60 tons, through the observation of the market.

Jim Po (ph) - Private Investor

All right, very good. One final question; I believe you said the book value of your stock is $2.7 or something like that. What is the reason your stock price is so low and it seems like it stays around 127, 130. Is it because its Chinese stock and people don’t trust or is there anything the company can do to restore confidence, and I mean this is very low price for the revenue you have and the net book value and all is changing. It looks as though it doesn’t make sense. Do you have any input in that?

Zhi Hong Jia (Interpreted)

The company has been public for perhaps a few years and we realize that or without an operation, there is nothing to effect our stock price. This is a phenomena of undervalue China’s stock and its very common among all Chinese listed companies, and it’s very hard to give the actual position and there is nothing we could do to effect the whole market.

Jim Po (ph) - Private Investor

All right. Thank you very much.


Thank you. (Operator Instructions). Our next question is a follow up from Paul Cooney from Maxim Group. Please proceed with your questions.

Paul Cooney - Maxim Group

Hey guys, just a quick comment and then question. One think I’d like to maybe point out about the story here is obviously like the previous question, the stock price really doesn’t make sense based on book value earnings and the revenue, okay. Part of that I believe is people worried about it being a Chinese stock. I think part of it is also people worried about credibility and all those things that go along with that.

But a few things that happen this quarter and last quarter I think are very, very bullish for the prospects of the company. Number one, having those investors come in at $1.80 when the stock was much cheaper than that. I think it was the nature, a bullish indicator. And number two, the gold piece agreement that you guys have gotten. I can say its over a year now that we should be trying to get some type of credit line with the bank to increase growth and I think that’s a major boost of confidence from those banks to give that to you and also accelerate growth.

But a question, I personally think that a driver of the stock going forward would be for investors to really see a way that money comes back to them, okay. One of the biggest complains about China as I said in previous calls is people feel like the money goes in and never comes out.

I don’t know if there is way to pay a dividend. We have talked a buyback, which you guys put in place, but you didn’t do anything. Just wondering, people are looking to get money back for their investment and like do you guys talk about that at all, without paying a dividend or a way to get money back to shareholders.

Zhi Hong Jia (Interpreted)

This is a very good question and we have the exchange comments regarding to the dividend and we will just discuss this to the – when its in the time of any shareholder meeting, on June 6.

Bin Liu

I just wanted to add few comments on the Chairman’s comments. Basically we all agree on what you just said and it’s a great advice, right. But dividend is kind of, I wouldn’t say tricky issue, but there’s two sides of coin right.

On one side you have being asked, like you said, many people want to see the return to the U.S. investors right, you give money and it never comes back like you said. So it’s a credibility issues. Also it’s kind of a do you care about the shareholders right. So that’s why I just want to repeat what the Chairman just said. Yes, this has been like a proposal on the general shareholder meeting to be held early next month. So we will see how the general acceptance will be and from the many shareholders who will present at the meeting and we will get back and report to you, that’s first of all.

Second of all, on the other side right, we have been able to solve some of the capital constraints right. Initially we knew capital will grow and that’s why we hold up the dividend policy and the buyback plan, because the company is still growing revenues right.

But it changed a little bit this year, right, as you mentioned that we signed a lease agreement with Pudong Bank and China Construction Bank. So these two will help to relive our potential constrain, because we can feel the growth with this channel, like the Chairman said before.

So in those case it will give us a new window to talk about the dividend policy, and that’s why the company is very open to this idea right now. But again, the board and the company and maybe also a shareholders decision as well. So that’s why we’ll get this point over to talk as one of the big topics on the shareholder meeting.

Paul Cooney - Maxim Group

Just one more comment, it would help a lot I think, I remember a couple of years ago there was some insider buying, but at this price you guys got to buy some stock, the insiders should be buying stock and its probably…

Zhi Hong Jia (Interpreted)

All your questions and comments will be discussed during our shareholder meetings next month in June.

Paul Cooney - Maxim Group

Okay. Thank you.


Thank you. There are no further questions at this time and I’d like to turn the floor back over to management for any further or closing comments.

Bin Liu

Thanks again to all of you for joining us and thanks for your attention and time. We look forward to speaking with you again after we report our second quarter financial report results and also you are all welcome to join or attend our Annual Shareholder meetings to be held on June 6, 2013 in Wuhan, China and we always welcome you to visit our facility in Chain again. Thank you.


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

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