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Executives

Katherine Yao - Equity Group

Zhi Hong Jia - Chairman and CEO

Bin Liu - Chief Financial Officer

Analysts

Andrew Dorman - Meyers Associates

Kingold Jewelry, Inc. (KGJI) Q3 2013 Earnings Conference Call November 15, 2013 8:30 AM ET

Operator

Greetings and welcome to the Kingold Jewelry Third Quarter 2013 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Katherine Yao with the Equity Group. Thank you, Ms. Yao, you may begin.

Katherine Yao

Thank you Kevin and a good morning everyone. Thank you for joining us. Copies of the press release announcing the 2013 third quarter financial results are available on Kingold Jewelry’s website at www.kingoldjewelry.com.

As part of this conference call, our 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 we 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 fully detailed in Kingold Jewelry’s filings within 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 further information.

I would now like to take a moment to outline the format for today’s call. The company’s Chairman and the 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 Chairman for our outlook for the future. When he finish we will open floor for questions. For the question-and-answer session please allow us a moment to translate it to Mandarin for all the questions and then we will respond to everyone on the call in English. For those who if you are following along with the conference call presentation, we will begin on slide number three.

With that, I will turn the call over to Kingold Jewelry’s Chairman and CEO, Mr. Zhi Hong Jia. Please go ahead. [Foreign Language]

Zhi Hong Jia

[Foreign Language]

Thank you Katherine and good morning everyone. And for those, listening in China, good evening.

[Foreign Language]

We are pleased with the revenue and sales volume growth we were able to achieve during the 2013 third quarter. During the period our net sales increased to 283.9 million from 220.8 million and our sales volume increased to 30 metric tons of 24-karat gold products from 9.5 metric tons in a prior year period.

[Foreign Language]

We have discussed challenges from the pressure on global gold pricing increasing quarter and there is a reputation gold price has greatly affected Kingold business and our peers.

[Foreign Language]

We are announced a series of gold leasing transactions earlier this year. Investors need to understand the importance of that. Kingold has realized the significant benefit from additional access to gold provided by these transactions during the period which increased access to gold allows the company much greater flexibility to expand our production capacity at durable time in the market cycle during 2013 third quarter enabling Kingold to achieve higher margins, better control over inventory management and increase our cash flow from operations.

[Foreign Language]

During the period, we also signed an important acquisition agreement for a plot of industrial land with current use for the development of Wuhan Kingold Jewelry International Industry Park.

[Foreign Language]

Now I like to provide an update on our gold lease transactions.

[Foreign Language]

On October 24, 2013, we announced an increase in the credit line established under our previously disclosed gold leasing agreement with China Construction Bank's Wuhan Jiang'An branch, dated December 20, 2012, Kingold’s total credit line under this Gold Leasing Agreement with China Construction Bank is now just RMB400 million which is approximately $65.4 million versus original credit line of RMB225 million. During the first nine month of 2013 we also signed similar gold leasing agreements with the Wuhan branch of Shanghai Pudong Development Bank and with Wuhan branch of CITIC Bank Corporation Limited.

[Foreign Language]

We expect to continue with license gold leasing as a way to fuel our growth and we strongly believe this is a great advantage for us in the long-term as we work to gain market share from or less capitalized competitors.

[Foreign Language]

As I mentioned earlier we entered into acquisition agreement to acquire 66,666 square meters of industrial land for use in the development of Wuhan Kingold Jewelry International Industry Park.

[Foreign Language]

We expect this industrial park will be a major commercial complex where businesses in the jewelry industry and consumer can come together for everything jewelry related, from manufacturing and the wholesaling to retail. The company plans to move part of its production facility to this industrial park which will provide Kingold great flexibility to expand production level.

We expect construction of Wuhan Kingold Jewelry’s International Industry Park to be completed by mid 2015. And anticipate it will also hub or new headquarters. We are excited to be creating a new major hub for the jewelry industry in the central region of China. And are looking forward to updating investors or talk with.

[Foreign language]

Moving on to the investment gold business.

[Foreign language]

Our investment gold business has continued to grow rapidly primarily due to increasing demand from our partner banks in despite of dropping gold price. As of today we have partnered with Bank of Communication, CITIC Bank, and Pudong Development Bank to start our investment gold product to operations across China.

[Foreign Language]

And also in addition of other banks, which is Bank of Agriculture and the Bank of --

[Foreign Language]

With that I would like to turn the call over to Bin Liu, Chief Financial Officer of Kingold Jewelry for the review of financials.

Bin Liu

Thanks Katherine and thank you Chairman Jia. Good morning and welcome everybody again. Next I will discuss Kingold Jewelry’s 2013 third quarter results beginning with the slide six of the presentation.

During the third quarter of 2013 we processed 30 metric tons of 24 karat gold products compared with 9.5 metric tons for the same period last year. Kingold is a as you know is a 24 Karat gold jewelry designer and manufacturer and our sales are primarily composed of the sales of branded products and customized products. Kingold sell this product to customers at a price that reflects the market price of base material plus a markup of design and processing fees.

In branded products, we purchase gold directly from Shanghai Gold Exchange once the customer has placed an order and we recognize revenue on sales of branded products when the goods are delivered that’s the cost of gold is recorded as part of our revenue, in customized production, our customers supply the raw material and we create products per customers instructions and the cost of gold is not recorded as part of our revenue.

On slide six you will for the third quarter 2013 of 13 metric tons processed, branded production accounted for 7.2 metric tons, roughly 35.2% of the total and the customized production accounted for 5.8 metric tons or 44.8%. This blend is pretty consistent over the year.

For the first nine months of 2013, we processed a total of 36.8 metric tons of gold, of which branded production accounted for 20.2 metric tons and the customized production accounted for 16.5 metric tons.

Moving to the next slide, slide seven where you will see a summary of the company’s financial results for the third quarter of 2013. We have also detailed financial and operational information for the nine months year-to-year period in our press release and in this presentation.

Net sales for the three months ended September 30, 2013 were $283.9 million, an increase of $63.1 million or 28.6% compared to net sales of $220.8 million in the same period in prior year. The increase in revenue was primarily driven by increase in production of $96.3 million which was offset by a decrease of approximately $40.3 million in the price of gold. Revenues for the period were also positively impacted by a translation gain from exchange rate fluctuations.

Third quarter 2013 gross profit increased 43% to $18.1 million from $12.7 million in the prior year period. Our gross margin increased to 6.4% from 5.7% primarily due to higher processing fees for the customized production during the quarter, which was offset the negative impact of 1.9 write-downs on the inventory in the three months ended September 30, 2013.

Moving to the next slide, slide eight. Let's discuss the bottom-line. The company reported net income attributable to Kingold’s shareholder for the third quarter of 2013 of $11 million or $0.17 per diluted share based on $64.5 million weighted average diluted shares outstanding compared to a net income of $8.4 million or $0.15 per diluted share based on $54.2 million weighted average diluted shares outstanding for the third quarter of the prior year.

Moving to the balance sheet on slide nine, at September 30, 2013, Kingold Jewelry’s cash and cash equivalents were $23.3 million, inventory, which is gold in our case, was $169.4 million and stockholders’ equity was $204.8 million.

I just want to highlight that in our book value per diluted share right now is $3.18 at September 30, 2013 compared to $2.97 at December 31, 2012.

With that, I’d like to turn the call over to our Chairman to provide some more detailed outlook for the fourth quarter 2013 and fiscal year 2013. Chairman?

Zhi Hong Jia

[Foreign language]

Thank you, Bin. I would like to provide a revised sales volume projection for 2013. Based on existing tons of gold process in the first nine months of 2013, we expect the total sales volume for the 2013 full year will be in the range of 50 to 55 tons. All royalties that Kingold was able to be [turning] to various gold leasing partnerships which were banked over the taxable amount which not only enable us to increase our production capacity, but reflected our ability or company’s reputation and the creditability.

We look forward to the upcoming busy season with holidays approaching in the fourth quarter which we expect will be a driver of revenue growth. Many of you have been following our growth over the past few years and many challenges you have looked the company have faced in more recent years.

We have always deeply believed that the key gaining and keeping investor confidence to be transparent and to proactively communicated with the investment community. So I will also like to remind everyone that myself and the management team will be holding investor meeting and conduct media appearances next week in the US to share Kingold’s story including discussions on strategies and recent activities, we welcome all of you.

Thanks again all of you for joining us. As always we welcome any visitors to our facilities in Wuhan China. Thank you.

Katherine Yao

Before the question-and-answer session, please allow a moment for the company to translate each question into mandarin and then management will respond everyone on the call in English. With that operator, let’s open up for any questions.

Question-And-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question today is coming from Andrew Dorman from Meyers Associates. Please proceed with your question.

Andrew Dorman - Meyers Associates

Okay. First of all I want to congratulate you on a wonderful, wonderful quarter. And I believe that your company will continue to progress as it has been progressing. My question at this point, and I may have one later is, is it possible to do more custom work because it seems that your profit margin is better in the custom work. At one point you were doing more custom than your regular production and seems to have gone down somewhat although your margin has increased?

Katherine Yao

Please allow me to translate.

Zhi Hong Jia

[Foreign Language]

Well, the discussion in fact for customized production, the comp store, the customized production is much lower under the company. It will prefer to more customized production over the prepaid branded production. However due to fluctuation in the gold price that demand from our customer varies also due to the fluctuation of the gold price.

Andrew Dorman - Meyers Associates

All right thanks.

Operator

Thank you. (Operator Instructions) Our next question is coming from (inaudible) from Garden City Securities. Please proceed with your question.

Unidentified Analyst

Yes, good morning and thank you. I just had two questions. First question is the manufacture gold bullion, I was wondering has there been an increase beside the manufacturing the high-end jewelry the gold bullion are people buying the gold bullion and because I read that in Taiwan and Singapore they’ve built big storage facilities. And I was wondering, are you seeing the people participating to save the gold?

Zhi Hong Jia

[Foreign Language]

So your question to the management is that, you see whether people will use the gold as a currency?

Unidentified Analyst

Not, as a currency. I was just trying to put it in the proper context. Are you seeing people buying the gold as an investment from the company at all?

Katherine Yao

Okay. Would you please allow me to translate first?

Unidentified Analyst

Yes, I'm sorry.

Zhi Hong Jia

[Foreign Language]

To answer your question sir, yes there are customers buying the investment gold products directly from the company. However, the company is focusing on manufacturers of those investments gold products to partner with the banks at this time. And also the company sees increase in demand from the Chinese population for the investment gold products. Does that answer your question?

Unidentified Analyst

Yeah, thank you ma'am, appreciated. Have a good day and good luck.

Operator

(Operator Instructions). Our next question is coming from [Andy Dinato], a private investor. Please proceed.

Unidentified Analyst

Yes. I just wanted to know the total amount of the inventory valuation allowance at September 2013 and then how that has changed since the end of June of 2013? Thank you.

Bin Liu

[Foreign Language]

Yes. For third quarter Q3, we have allowance of $1.9 million actually. For the first six months we have 5.2 million allowance. So gradually because of the gold price stabilized so the inventory allowance has become a kind of stabilized as well, so you can see that generally it’s going down right now. But hopefully the gold price will be stabilized again that will enable us have (inaudible) operations going forward.

Unidentified Analyst

Okay. Thank you.

Operator

(Operator Instructions). Our next question is coming from [Justin Scott], a private investor. Please proceed with your question.

Unidentified Analyst

Hi. This is [Justin Scott] from (inaudible). I have question about the real estate development and my question is what part of Wuhan is the development and can you give us an idea of what the market rate or the market value per square meter is for retail and industrial parks say in that part of Wuhan?

Zhi Hong Jia

[Foreign Language]

The industrial park is actually located in the most [populated] part of Wuhan Jiang'An (inaudible) and the market prices for this part of land is at least 100% cheaper than compared to the market price.

Operator

(Operator Instructions). There are 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 to all of you for joining us today and we look forward to speaking with you again in March after we report our fourth quarter and year-end financial results and look forward to meeting some of you during our visit to the U.S. next week. As always, we welcome any investors to our facility in Wuhan, China. Thank you everybody.

Operator

Thank you. That 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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