Kingold Jewelry's (KGJI) CEO Zhihong Jia on Q4 2015 Results - Earnings Call Transcript

| About: KINGOLD JEWELRY (KGJI)

Kingold Jewelry, Inc. (NASDAQ:KGJI)

Q4 2015 Earnings Conference Call

March 28, 2016 6:00 p.m. ET

Executives

Katherine Yao - IR, The Equity Group

Zhihong Jia - Chairman and CEO

Bin Liu - CFO

Analysts

Ivan Su - Trinity College

Jonathan Yu - Private Investor

Justin Scott - Lammergeier

Operator

Greetings, and welcome to the Kingold Jewelry Inc. 2015 Fourth Quarter and Year End Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Katherine Yao. Thank you. You may begin.

Katherine Yao

Thank you, operator, and good morning everyone. Thank you for joining us. Copies of the press release announcing the 2015 fourth quarter and year-end financial results are available on Kingold Jewelry's Web site at www.kingoldjewelry.com.

As part of this conference call, the company has a slide presentation available in PDF format on the company's Web site. And you are welcome to contact our office at 212-836-9600 and 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 meanings of the Safe Harbor provision of the Private Securities Litigation 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 results of operations.

Such risks are fully detailed in Kingold Jewelry's filings within the Securities and Exchange Commission. Regarding the disclaimer language, I would also like to refer you to Slide number two of the webcast presentation for further information.

I would now like to take a moment to outline the format of today's call. The company's Chairman and CEO, Mr. Zhihong 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.

When the company is finished with the presentation, we will open the floor for questions. For the question-and-answer session, please allow us to take a moment to translate the questions into Mandarin and then we will respond to everyone on the call in English.

With that, I will turn the call over to Kingold Jewelry's Chairman and CEO, Mr. Zhihong Jia. Please go ahead, Mr. Jia.

[Foreign Language]

Zhihong Jia

[Foreign Language]

Thanks for joining our 2015 fourth quarter and year end conference call.

[Foreign Language]

We are pleased with our operating results in fiscal year 2015, as we continue to improve our 24-karat gold manufacturing and designing capability and distribution networks throughout China.

[Foreign Language]

According to the World Gold Council, even though China's total [ph] quarterly consumer demand for gold increased 29.1% to 1050.8 ounce in 2015, but the average market price of gold for the year 2015 was 1160.1 [ph] per ounce, decreased 8.4% as compared to the average market price of 1266.4 per ounce in 2014.

[Foreign Language]

Despite our challenging environment for the price of gold, Kingold processed 56.5 tons of gold products during the year, and the same to our jewelry products to 300 major [ph] customers [indiscernible] of major wholesalers and distributors from 25 provinces.

[Foreign Language]

Our CFO, Mr. Bin Liu will offer [ph] more details in the financial results later in the call, and now I would like to provide updates on our 2015 development and operation.

[Foreign Language]

Kingold faced a wide range of challenges during the first quarter of 2015, but we have kept our strength and focus on our controllable factors, and our core business to remain innovative and competitive.

[Foreign Language]

We continue to expanding our production capacity, and we are tactically [ph] importance to the continued improvement of our technology. Also, gold processing systems just dramatically reduced risks during the manufacturing process to approximately [indiscernible] per kilogram of gold.

For December 31, 2015, Kingold has been awarded 26 patents granted by the State Intellectual Property Office of the PRC, and has 17 registered trademarks in China. Kingold also has been named as the Famous Brand in Hubei Province, Famous Brand in China, and Famous Jewelry Brand by the General Administration of Quality Supervision and China Top Brand Strategy Promotion Committee. We have implemented enhanced intellectual property management procedures in an effort to protect our intellectual property rights and to enhance and further enhance our competitiveness in the jewelry industry.

[Foreign Language]

In May, 2015, [indiscernible] of our continuous R&D efforts, we established a new subsidiary Wuhan Jewelry Design Company Limited, comprising [indiscernible] jewelry products and to meet customers' demand and expectations. Our design team develops and generates more ideas from a variety of source [ph], including direct customer feedback, [indiscernible], and in industry conferences. We generally have the market potential and customer [indiscernible] of our new products, as services through a wider outreach program in a specific region prior our full commercial launch.

[Foreign Language]

Also in May 2015, when we launched our retail flagship store on Tmall.com, which is a large business-to-consumer online platform owned by Alibaba Group.

[Foreign Language]

As of December 31, 2015, we have exhibited [ph] 1085 different designs of products under eight major product categories, including 3D solid gold ornaments, rings, necklaces, earrings, bracelets, bangles, pendants, and investment gold products, compared to 130 products in November, last year.

[Foreign Language]

Moving on to our investment gold business, we started the business model by pilot testing in 2011, and we have signed strategic partnership agreements with various leading commercial banks in China to sell our gold bars and coins, and other products through their network branches across China.

[Foreign Language]

Our consumers reduced their spending in gold purchase due to the decrease in the price of gold. For full year 2015, our total sales of investment gold was about 5 million, represented 0.43% of total net sales.

[Foreign Language]

Now, I would like to move on to our Jewelry Park in Wuhan.

[Foreign Language]

On page nine of the presentation, you can see the photos of the Jewelry Park taken on March 24, 2016.

[Foreign Language]

In October, 2013, we entered into agreement to acquire and offered invites for 66,667 square meters, approximately 16.5 acres of land in Wuhan to develop Kingold Jewelry Cultural Industrial Park with the intention to broaden our each business line and strengthen our processing capacity by utilizing the complete Jewelry Park as [indiscernible].

[Foreign Language]

We operate previous earnings call in November 2015, we targeted the completion time for the Jewelry Park to be in the January 2016. However, due to harsh weather along with the Chinese New Year, the construction progress of Jewelry Park was delayed. We anticipate that Jewelry Park now expects they will be finishing April, 2016.

[Foreign Language]

In August 2015, we started the pre-sale of certain real estate property in the Jewelry Park, and we received approximately RMB 144 million, approximately $22.2 million from the buyers' pre-sold deposit as of December 31, 2015. We believe this Jewelry Park will help us form relationship and work closely with other leading jewelry and the jewelry manufacturers in China. To whom we plan to lease space to, in our Jewelry Park, it will create opportunities for Kingold to cross-sell and up-sell. We expect that our Jewelry Park will become a guiding force for ourselves and the marketing efforts in China. We will keep our investors closely appraised with our development.

[Foreign Language]

With that, I would now like to turn the call over to Mr. Bin Liu, Chief Financial Officer of Kinggold Jewelry for a review of the financial. Please go ahead, Mr. Liu.

Bin Liu

Thank you, Katherine. Welcome everyone. Today I will discuss Kingold Jewelry's 2015 fourth quarter and year end financial results.

During the fourth quarter of 2015, we sold 16.2 metric tons of 24-karat gold products, compared to 13.2 metric tons for the same period last year. For the full year 2015, we sold 56.5 metric tons of 24-karat gold products, compared to 60.1 metric tons in the prior year.

Kingold sales are primarily composed of the sales of brand products and customized products. Kingold sales its products to customers at a price that reflects the market price of the best material plus a markup of design and processing fees.

The branded production we purchase the gold directly from Shanghai Gold Exchange once our customer has placed an order and we book as revenue, our sales of branded products, when the goods are delivered, that the cost of gold is recorded as part of our revenue.

During the year, ended December 31, 2014 approximately 27.4% of our net sales were generated from our five largest customers.

During the year ended December 31, 2015, approximately 18.8% of net sales were generated from our top five large customers. None of our customers accounted for more than 10% our net sales year 2014 over 2015.

For the 16 metric tons we sold during the fourth quarter branded production accounted for 53.1% or [indiscernible] metric tons and customized production accounted for 46.9% or 7.6% metric tons. Among the 56.5 metric tons we sold for the year 2015. Branded production accounted for 28.9 metric tons representing 51.2% and the customized production accounted for 27.6 metric tons representing 48.8%.

In the three months ended December 31, 2015, the company reported net sales of $280.8 million compared to $209.3 million for the same period in 2014. The increase in sales is largely due to increased sales volume from 14.3 metric tons in the three months ended December 31, 2014 to 16.2 metric tons for the three months ended December 31, 2015, and the increase in market price of gold in late 2015 which positively impacted consumer's perception of gold investment and they increased the gold purchase during the holiday seasons.

Net sales for the year ended December 31, 2015 was 1.0 billion -- 1 billion exactly, a decrease of 9.7% from the $1.1 billion reported in the year of 2014. The decrease in net sales was primarily driven by the decrease in total sales volume, decrease in the company's average unit selling price and loss in currency exchange rate.

For the fourth quarter 2015, gross profit was $9.6 million compared to $13.9 million for the same period in 2014. For the year of 2015 the company reported a gross profit of $38.3 million compared to $76.3 million for the year 2014.

The decrease in gross profit was due to the decrease in total sales volume, the decrease in unit selling price of the products, and the decrease in sales volume for customized production and the decrease in the unit

selling price in customized products.

Kingold sales its products to customers at a price that reflects the market price of the base material plus a markup for design and processing fees. This markup is typically in the range of 3% to 6% of the price of the base material.

For the fourth quarter 2015, the gross margin was 3.4% compared to 6.7% in the prior year period. The substantial decrease was because, we purchased a large quantities of gold inventory at the year end of 2015 and the beginning of 2014 at a favorable market price at that time which resulted to some [indiscernible] causing much lower than normal.

Gross margin for the year of 2015 was 3.8% compared to 6.9% in the prior year period. The decrease in gross margin was due to the following factors. First the company purchased a large quantity of gold inventory at the year end of 2013, beginning of 2014 at a price [indiscernible] which were much lower than in 2015, making 2014 production costs much lower than normal.

Mentioned secondly, our average unit selling price decreased by 3.8% compared to 2014, third our sales orders from customers product segment reduced due to a decline in market price of gold in 2015. According to the World Gold Council, the average market price of gold for the year ended December 31, 2015 was $1160 per announce decreasing 8.4% compared to the average market price of $1266 per announce in 2014.

The company's average unit price of $17.7 million per metric ton in 2015 decreased 3.8% from the average unit price of $18.4 million per metric tons in 2014. Kingold reported net income for the fourth quarter of 2015 of $5.6 million or $0.09 per diluted share compared to net income of $8.1 million or $0.15 per diluted share in the prior year period.

For fiscal year 2015, Kingold reported net income of $21.6 million or $0.33 per diluted share compared to $47.3 million or $0.72 per diluted share outstanding in 2014.

On the balance sheet, at December 31, 2015, Kingold cash and cash equivalent was 3.1 million inventory, which is gold in our case was 298.3 million and the stock holders equity was 265.7 million. The company book value per diluted share was $4.03 at December 31, 2015 compared to $2.92 at December 31, 2014. We want to [indiscernible] include detailed information our business in our Form-10K we would like to welcome each of you to review closely.

With that I would like to turn the call over to our Chairman again to provide details on our outlook for the full year 2016. Please go ahead, Chairman.

Zhihong Jia

[Foreign Language]

Thank you, Bin. Based on the company existing resources and the capacity, we expect to -- we expect to sale between 50 and 60 metric tons in 2016.

[Foreign Language]

Kingold Jewelry market will continue to grow as China's economy continues to develop. Since gold has long been a symbol of growth and prosperity in China, demand for gold jewelry particularly in 24-karat gold jewelry is firmly embedded in the country's culture. The gold jewelry market is currently benefiting from rising consumer spending and rapid urbanization of the Chinese population. We believe that jewelry companies like us with develop distribution network attractive design and reliable product quality and the well positioned to build up our brand and capture an increasing share of China's growing jewelry market.

[Foreign Language]

We will continue to focus on increasing our production capacity and organization production line [indiscernible] or design team and capabilities, increasing our marketing abilities and further improving our brand recognition.

[Foreign Language]

Finally we anticipate the jewelry park will serve us the platform to further accelerate Kingold towards the goal of becoming a leading 24-karat gold product designer, manufacturer and a sizeable supplier in greater China, thank you.

With that operator, let's open it up for any questions. Please note that for the question-and-answer session, please allow us to take a moment to translate question into Mandarin and then we will respond to everyone on the call in English.

Question-and-Answer Session

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instruction] Our first question comes from Ivan Su with Trinity College. Please state your question.

Ivan Su

Hello. Congratulations on the recent earnings. I noticed that the company has announced the formation of a stockholder value committee not too long ago, and I'm wondering what type of action has the committee taken to ensure the stock value for KGJI's stockholders. Thank you.

[Foreign Language]

Zhihong Jia

[Foreign Language]

Bin Liu

Maybe I will [indiscernible], if I understand correctly, okay, you are asking for the shareholder value company-wise. It's not necessarily -- I understand your question correctly, if that's correct?

First of all, the company has [indiscernible], because we pay very close attention to the shareholder's value, and unfortunately, right, we saw that over the past six months the stocks fell below $1, and we got a notice from NASDAQ, right. So the company has been working very diligently to, (a), reform a shareholder value committee to produce -- these are one of our top priorities, and then we work with third-party consulting firm [indiscernible] to handout some strategies. And then we take a much more proactive to talk to each one of our existing major shareholders, and trying to give them better understanding of the company's strategy, and we invited a couple of [ph] investment firms and funds [ph] to visit Wuhan, China. And also doing the annual shareholder meeting in December last year, the company had a very open dialog with a couple of major shareholders, mainly from Mainland China and one from Denmark, Europe actually.

So we took the notice of all the major advances. For example, some shareholders like share corporate buybacks, some like more popular [ph] dividend policy, and some probably prefer the company has more transparency, which we all think is the right direction to move. However, in these limited resources, right, we have to focus on what we have to do.

And our number one priority is basically to probably improve the communication with the existing shareholders to help them have a better understanding. We still have a lot of room to improve, but we're proud that we have gained a lot of perspective. Some of them are probably listening in today, but I want to thank you all of you for helping us, and we will continue to [indiscernible] gain advice from you.

Second away [ph] is, roughly, we tried to [indiscernible] in Hong Kong, because the Asian investor has probably more or better understanding of the gold business, right. So we feel we have successfully generated some interest over there in Asia. And the next step is talking with IFM [ph], the equity group, and also Chairman Jia to deliver [ph] the U.S. and to have better communication with the U.S. investors here. And then our consulting firm will probably have [indiscernible] to more institutional investors. So that's what we have added there [ph], and fortunately that the delta [ph] comes back to about $1 an ounce [ph], but still we have a long way to go, but we'll try our best and we hope that we can still continue to give us some help and probably advice. Thank you.

Ivan Su

Thank you. Just a quick follow-up, you mentioned that the company is considering share buybacks, right?

Bin Liu

That's one of the suggestions that proposed by two shareholders during the annual shareholder meeting, yes.

Ivan Su

Okay. What about dividends, is that something that's on the company's agenda?

Bin Liu

The company, if you recall, we did payout the $5 million dividend, right, a while ago, and we probably don't have a better understanding of the impact of it, but the reality check is that this actually does -- the market does not respond very well. So that's why between the dividend policy versus the buyback, more shareholders probably lean towards buybacks, but again, this is something we can talk [ph] on the table.

Ivan Su

Thank you.

Operator

Our next question comes from Jonathan Yu, a Private Investor. Please state your question.

Jonathan Yu

Hi, guys. Can you guys hear me okay? This is Jonathan.

Bin Liu

Yes.

Jonathan Yu

I believe, Bin, you can [indiscernible] through this. So, listening to the previous caller, the information that I'm hearing, one of the reasons -- one of the suggestions that I would have [technical difficulty] is to, if possible establish a quarterly dividend [technical difficulty] there was, one time, a special dividend. So if you guys are going to consider [indiscernible] consider a quarterly dividend possible [technical difficulty] I know there's complications with bringing [technical difficulty] again, I would suggest a buyback versus a dividend, but it's good to hear that these conversations are going on, because this is an unbelievably, ridiculously, undervalued company. You guys even have close to 300 million of gold inventories on your book. So it's good to hear that these conversations are going.

Quick question regarding the capital expenditures, could you shed some light on what the 2016 capital expenditures are going to look like, and any cash flow projections you can give for the Jewelry Park going forward [technical difficulty] completion?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Thank you for your suggestion and your question. I have to apologize that the company's conference line is not accurate, and I couldn't hear the [indiscernible] all well. So I have to ask [indiscernible] repeatedly.

Regarding to your suggestions on the cash buyback, and the Chairman's answer is that it's a very good suggestion, and the Board has been considering this thoroughly, and it's [indiscernible] for a better opportunity. And regarding to the timing for the Jewelry Park, he mentions that the company expects the completion of the park most next month, which is in April. However, the government has to examine the whole project, and that will take some time, but meanwhile during this time the paving and the landscaping could be still implemented during this time, after actually the completion. So, our bottom line is that the company plans the grand opening in July to August. It might be a little bit rushed, but we are working on their best.

Jonathan Yu

Okay, I appreciate it.

Operator

Our next question comes from Justin Scott with Lammergeier. Please state your question.

Justin Scott

Hello, thank you very much in deed. I'd like to dive in with a couple of detailed questions on the Jewelry Park development. First of all, you have pre-sold 40,000 square meters, about 20% of the project, and the presale price is about 6,000 RMB per square meter according to your 10-Q. We don't have the 10-K yet. And that and the average cost per square meter of the entire project is about 5,200 per square meter pre-financing. So two questions on that; first of all, when you launch the post-completion sales, roughly what price per square meter are you anticipating for that, presumably better than the presale discount. And my second question is, do you still hold the project at cost or have you revalued it from the 5,200 to the 6,000 for the 20% you sold, or is that still at cost? So first question, how much do you think the post-completion price per square meter? Second question, is the whole project still held at cost or has there been any markup to the 6,000 for the stuff you sold?

[Foreign Language]

Zhihong Jia

[Foreign Language]

To answer your first question, the post-completion sales price, we are -- all projections under -- are from the real estate market in Wuhan, is about RMB 7,000 to 8,000, in this range, per square meter.

Bin Liu

Just [indiscernible] Ivan, may I want to cover the [indiscernible] adjustment, the channel sale and probably highlight some of the details that might be of interest to you. You are obviously right, the deposit [indiscernible] per square meter to be exact. The total is 198,000 square meters, if you recall, and 20% of it, RMB 6,000 per square meter which generate 1.4 -- RMB 144 million, right. So of course we are so far away from [indiscernible].

So, now given this 10-K, we still assume the market is actually pretty normal, which means not really [indiscernible], so that's a scenario we're using, which is also reflected, actually a little behind the fact, the factor now the market is hot in China because of the government pumping some -- having big budget into the [indiscernible]. So the marketing is actually not that bad, I would say it's normal or even slightly better than before.

So what Chairman said, I will repeat what he said is that in the future we are projecting to sell at roughly 7000 to 8000 and which is very conservatively right. So we have the building numbers, number four, number some of number five and number six. So number seven, number two will be using as a rental property that we mentioned before.

Number seven, the last building half of them will be lend out, half of them will be used a [indiscernible]. So with that, we have like roughly 90,000 square meter to accelerate once it's completed [indiscernible] just like project like selling 8,000, and with that we have a project of roughly RMB 676 million. So if you go back to the 144 like, this give us $1 billion, right, the total investment bank.

So on top of that, I wouldn't say roughly right, but essentially we get the benefit of the rental property as a cash fee, right. So that is the conservative view and also in terms of the rental property number one and number two buildings, we assume, the rental price is RMB 100 per square meter which is very, very conservative because the monthly is roughly anywhere between 150 to 300 per square meter in Wuhan. So we have been very conservative, right, so RMB 100 per square meter the rental rate, so we have a number one building, number two and half of number seven with a total of 43,000 to be rented out. So we can generate roughly RMB 22 million from net income with very, very conservative, and also we occupancy rate is also conservative 80 to 85% occupancy rate which is very conservative in Wuhan. So I just wanted to give a broader view to make you feel a little more comfortable about this project.

Justin Scott

Thank you, Bin. That level of detail is really useful, I appreciate it and just to be clear, Bin, I have only got the 10-Q in front of me, but in September, it was still at book cost, as far as I can see. Now in the balance sheet, its actual costs, you haven't started amortizing any profit into the balance sheet, that will happen as you actually sell or lease I presume.

Bin Liu

Yes, yes. That will be -- yes, you are right, that will be like reflecting in the next one, yes.

Justin Scott

Bin, can I take a bit of time and post just a couple of questions on the gold inventory which other people have touched on, again, I don't have the 10-K; can you tell me that 298 million of inventory at year end, how many grams of gold inventory, normally you disclose that, I don't know whether you are going to disclose that to the 10-K and what price per gram are you using for your price there and what is the price per gram in the market now; if that makes sense.

Bin Liu

The…

Justin Scott

Again, I am trying to figure out what is the market value of the inventory over and above your [indiscernible].

Bin Liu

Yes, the costs that we have roughly 200; let me [indiscernible].

Zhihong Jia

[Foreign Language]

Bin Liu

Yes. So I just confirm from Chairman, especially roughly every decline you have on the inventory, you know, average is roughly RMB 220 to 222 per gram, okay, so I will use, and I apologize for using RMB rather than USD. And the market price is roughly, you know, anywhere between 240 to 250 in the past couple of weeks. So we have been reviewing this with our auditor and to the impairment test. So roughly we feel comfortable right now, but you know the market can change any time soon because of the [indiscernible] critical changes, right. For example, anywhere the event in North Korea, this gold price should have, and also because of the expectation for RMB is very, very slow; have a strong momentum in China nevertheless. So people still have appetite for gold. So for the near future, we are probably okay, but [indiscernible] still like we need to manage well, I appreciate the advice. So that's why we need to pay very close attention to it.

Justin Scott

No. That's great. Thank you very much indeed. Now, debt levels, obviously before you can do share buybacks, we would anticipate some of the debt coming down and assume the debt can come down from two things. One is obviously from the real estate development and secondly from some of the inventory coming down at these higher prices, but I guess my first question is, what sort of time of the year or is it going to be end of second quarter, end of third quarter or towards the year end, do you anticipate some of that debt coming down in value.

Zhihong Jia

[Foreign Language]

Bin Liu

So, essentially China is having -- yes, we have some challenges, okay. The challenge is that [indiscernible] one year along, and then we have a project, which is taking more than one year, which is the Jewelry Park, right. That's why it put us a lot of stress on us.

Now we realize this is a challenge and we have to be corrected, and that's why if you [indiscernible] probably the more recent borrowings are more longer time, like serious long, right, less than ten year. So now we have a longer term borrowing to cover the certain needs. So that's why we're out of the water line now. So basically we are much better than before. We don't have this kind of stress. However, the debt is a debt; still have to be paid back, and the two main surfaces to cover it. So the first one is basically to -- using the [indiscernible] something like that, and also as we mentioned before we're planning to sell the Jewelry Park, because we are in a jewelry business [indiscernible] business. So we would sell the property to get some cash, to cover the certain debt.

Justin Scott

Thank you very much. I guess I'd just conclude by echoing some of the comments of the two previous investors. First of all, we would definitely appreciate the Chairman in addition to the road show that he did in Hong Kong, with the road show in the USA. We're looking forward very much to meeting you in person. And then with the one caveat that I think would like to see the balance sheet stay strong, so debt paid down before share buybacks, [indiscernible] take on share buyback as compared to dividends is mouthwatering, I mean back of the envelope, $20 million taken out of gold inventory and buying all shares back at $80 per share, say, increases the NAV per share for reigning shareholders by 40 million. So there is a very, very attractive return on capital by taking some of your gold inventory and investing it in a share buyback, but understanding you have to reduce your debt on the real estate first, so the balance sheet doesn't get too levered. Thank you very much. I will pass on to the next caller.

Operator

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Bin Liu

Thank you everybody, thanks for joining this call. We look forward to speaking with you again in May, after we report our first quarter financial results. As always, we welcome investors and visitors to our facilities in Wuhan, China. Thank you. Thank you everybody.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

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