Kingold Jewelry's (KGJI) CEO Zhihong Jia on Q1 2016 Results - Earnings Call Transcript

| About: KINGOLD JEWELRY (KGJI)

Kingold Jewelry, Inc. (NASDAQ:KGJI)

Q1 2016 Earnings Conference Call

May 16, 2016 17:30 ET

Executives

Katherine Yao - IR, The Equity Group

Zhihong Jia - Chairman & CEO

Bin Liu - CFO

Analysts

Peter Halesworth - Heng Ren Investments

Justin Scott - Lammergeier Capital

Operator

Greetings, and welcome to the Kingold Jewelry Inc. 2016 First Quarter 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, of the Equity group. Thank you Ms. Yao. You may begin.

Katherine Yao

Thank you, Chris, and good afternoon everyone. Thank you for joining us. Copies of the press release announcing the 2016 first quarter 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 broadcast 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 first quarter results conference call.

[Foreign Language]

We are pleased that the first quarter of 2016 delivered solid financial and operating results.

[Foreign Language]

In the first quarter of 2016 we continue to improve our manufacturing capacity and distribution network. During the first quarter our management team made adjustments on ourselves to go to market strategy and successfully achieve a 37% increase in the net sales. A 20.3% increase in the cold process volume plus 131% growth in net income.

[Foreign Language]

Our CFO, Mr. Bin Liu will also be detailing the financial results later in the call and now I will like to provide updates on our recent developments and operations.

[Foreign Language]

For instance, in May 2015, we launched our online retail flagship store on kingold.com which is a large business to consumer online retail platform owned by Alibaba group.

[Foreign Language]

As of May 13, 2015, we have exhibited 1332 designs of products under a major product under a major product category including 3D ornaments, rings, necklaces, earrings, bracelets, bangles, pendants and the investment gold products compared to 130 different designs of the products in the November last year.

[Foreign Language]

Presently, we have launched our self-promotion or online retail flagship store including free shipping and gifts to celebrate our one year anniversary. I would like to advise everyone to visit our online store.

[Foreign Language]

Now I would like to talk about our investment gold business.

[Foreign Language]

According to the World Gold Council, the Chinese demand for investment gold products in the first quarter 2016 was 61.9 pounds increased from 59.1 pounds in the first quarter of 2016. In the fourth quarter of 2016, our sales from the investment gold business was $0.7 million representing 0.3% of our total net sales.

[Foreign Language]

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

[Foreign Language]

On Page 7 of the presentation you can see the photos of the Jewelry Park taken on May 13, 2016.

[Foreign Language]

Previously we signed several supplement agreements with the construction company Yeng Shun [ph] agreed to complete the construction and deliver the complete real estate property to us in April 2016. However, due to the cold weather conditions in January and February 2016 and the construction worker did think pain rest of the holiday season, the final construction work of the Jewelry Park resumed in the middle of February 2016. And the landscaping, building decoration and the construction will be complete as of March 31, 2016.

Due to the construction work delay the inspection application with local government was also delayed until mid-April 2016 where the construction work was totally completed. Therefore, in April 2016 both parties signed an additional supplement agreement to extend the final property deliver time to May 30, 2016 when the certificate of occupancy is expected to be obtained from the local government.

[Foreign Language]

Thus, we are pleased to announce Kingold finishing construction of the Kingold Jewelry Cultural Industrial Park at the end of May 2016. However, we are unable to predict the actual timing of the delivery because the government inspection process is not under the company's control and may be longer than expected.

[Foreign Language]

With that, I would now like to turn the call over to Mr. Bin Liu, Chief Financial Officer of Kingold Jewelry for review of our financials. Please go ahead sir.

Bin Liu

Thank you, Katherine. Welcome everybody again. Today I will go through Kingold's 2016 first quarter financial results. During the first quarter of 2016 we processed 14.8 metric tons of 24-karat gold products. An increase of 20.1 compared to 12.3 metric tons for the same period last year.

Kingold sales are primarily composed of the sales of branded products and customized products. Kingold sales product's to customers at a price which reflects the market price of base material which is gold thus a markup of design and processing fees. In branded production, we purchased gold directly from Shanghai Gold Exchange once a customer has placed an order.

And we recognize revenue n sales of branded products when the goods are delivered. Thus the cost of a gold is recorded as a part of revenue. In customized production our customers supply us the raw materials and we create products per the customer's instructions and the cost of gold is not recorded as part of our revenue.

Among the 14.3 metric tons that we have processed during the first quarter branded production accounts for 8.2 metric tons and customized production accounted for 6.6 metric tons. Now I would like to move to the financials. In the first three quarters, three months ended March 31, 2016, the company reported net sales $282.2 million increased by 37% from $206.2 million from the same period in 2015.

The increase in net sales was primarily due to increase in sales volume. The average unit selling price for the company's customized production decreased RMB7.05 per gram in the three months ended March 31, 2015 to RMB4.25 per gram in three months ended March 31, 2015.

This decrease was primarily a result of Kingold strategy to encourage customers to purchase more customized production of scored products during the holiday season. This resulted in approximately $3 million decrease in customized production revenue which was partially offset by increase in branded production revenue. For the first quarter ended March 31, 2016 gross profit was $28.5 million, an increase of 165% from $10.8 million in the prior year period.

The company's gross margin was 10.1% for the three months ended March 31, 2016 compared to 5.2% in the prior year period. The substantial increase was due to the decreased unit cost and the increased unit price of branded products and sales. The unit cost of branded product sales was RMB202.6 per gram for the three months ended March 31, 2016 while the unit cost of branded products and sales was RMB216.7 per gram in the same period of 2015.

The unit cost decreased by 6.5% because most of gold sold on the branded production sales for the first quarter 2016 was purchased during the end of 2015 at a lower price. On other hand, the unit selling price of branded products was RMB222.2 per gram for the three months ended March 31, 2016 while the unit selling price of branded products was RMB220.6 per gram in the same period of 2015. The selling price for the branded product sale increased by 0.7% due to high demand for the branded products in the holiday season. As a result the unit model branded production was RMB19.66 per gram for the three months ended at March 31, 2016 compared to RMB3.95 per gram in the same period of 2015.

For the first quarter of 2016, Kingold report a net income of $15.2 million or $0.23 per diluted share compared to a net income of $6.6 million or $0.10 per diluted share in the same period of last year.

Moving to the balance sheet, at March 31, 2016, Kingold's cash and cash equivalent was $13.3 million, inventories, which is gold in our case was $503.9 million. Stockholders' equity was $282.9 million compared to $290.3 million and $265 million respectively at December 31, 2015.

With that I'd like to turn the call over to our Chairman again to provide more details on our outlook for the rest of fiscal year 2016. Please go ahead, Chairman, Zhihong Jia.

Zhihong Jia

Thank you, Bin.

[Foreign Language]

We're very pleased with our operating performance during the period and we remember for the remainder of 2016. We still feel very confident that our 2016 guidance will be between 50 metric tons and 60 metric tons of gold processed based on the company's existing resources and capacity.

[Foreign Language]

We will continue to focus on increasing our production capacity, enhancing our design team and capabilities, increasing our marketing abilities, further improving our gold manufacturing and our geographic sales coverage.

[Foreign Language]

Finally we expect increased sales upon opening of the jewelery park as well as the greater level of collaboration and negative exchanging of ideas amongst our joint industry tenant which will increase Kingold spend awareness and expansion and the diversification of our customer base. 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. Operator?

Question-and-Answer Session

Operator

Thank you, Katherine. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Paul [ph] from Joseph Capital Markets. Please proceed with your question.

Unidentified Analyst

Gentlemen, congratulations on a fantastic quarter, it was a great surprise. So couple of questions. Number one, obviously I know you kind of alluded to it already a little bit with the increasing gold inventory, that you're expecting -- I guess a significant increases in sales upon opening the jewelry park. According to what you guys did this quarter about 15 metric tons, that would suggest about 60 metric tons for the year if we just multiply it by four. But if your participating a significant ramp up in your -- basically, ticking in the inventory, so any reasons why you didn't increase your guidance for the year as far as metric tons?

[Foreign Language]

Bin Liu

Paul, this is Bin. I will take on the question.

Unidentified Analyst

Okay, thanks Bin.

Bin Liu

I agree with you. The first quarter is 15 -- our inventory went up substantially as you pointed out. So to be conservative right, if we build in the run rates 15 times four of course is roughly 60. There is a couple of reasons; a, because you know the Chinese economy still a lot of uncertainty over there, at least from the early indicators, we don't see a very robust economy for 2016. And we don't know whether the customer continue the demand, right. So that's we wanted a little more conservative that's the most important reasoning.

Second reasoning is that, we probably will have a so-called poor preserve utilization because of jewelry park will be completed and we're moving off that is around. So that might also salute down the production. Of course it's hard for us to catch up, at this moment we want to be a little bit conservative, that's why we'll put this to 60 but when we come to the second quarter, we will see what we can do and of course if chances of going where or more than we or better when than we expected, of course we will adjust that.

Unidentified Analyst

Okay. And I know you guys didn't really mention much of it in the comments but could you maybe comment on what's going on with Kuwait. We haven't still heard anything about that in a while. Is there anything going on there? Maybe you could talk a little bit more about the economics of it?

[Foreign Language]

Bin Liu

Paul, if you don't mind, because probably the Chairman is tied up. The Kuwait thing, we have been working with one of the leading distributor, actually the wholesaler as well as in the Middle East. He has a focus in both Kuwait and Egypt so the benefit of working there is because the initial plans of the sale then the conversation to a factory over there is kind of joint venture because if the gold was locally made within the gulf area then you don't have to pay 10% tax, import tax which is a very good competitive advantage.

The roughly 85% of the gold in the Middle East was supplied from India and the remainder 15% is roughly from Swiss gold so the major product of there is either 20-karat or 22-karat so not too much of karat so part on the news time until basically to promote the concept of 24-karat gold over there that takes a little bit of time and then because you know the Indian government has also a new policy recently in the past couple of months that the export of gold from India will pay the export tax which is also 10%.

So if we manufacture in the gulf area and to be made competitive with Indian gold they pay 10% of exporting tariff and they have to pay 10% importing tariff so the 10% difference will give us a huge advantage. That's why the conversation ended from a buy and sale to a joint venture partner manufacturing over there so but that requires to ship the machineries from China over there and also the technicians.

So the initial idea is that Kingold will supply the designing team and technicians and they will help to buy equipment's and the partner will take care of the marketing, sales, distribution and some of the local skilled labors. So the new idea is to be the factory like probably 20 to 40 people and that is what is being discussed and hopefully we will see some results over there.

Unidentified Analyst

And, what's the timing on that?

Bin Liu

The last time the partner travelled to China he changed the idea from sale by sale to joint venture so the initial idea is to probably send to three to five technicians from China to do onsite training for us because otherwise you cannot get that. That's the idea.

Unidentified Analyst

Okay, but we don't know that could be a year out or two years out or is it three months out?

Bin Liu

That will be in the second half of this year.

Unidentified Analyst

Okay. Now just to clarify a little bit. The competitive advantage is that you are going to manufacture the jewelry there in Kuwait, you won't be paying the 10% import or 10% export so you will have like a 20% competitive advantage?

Bin Liu

Yes, that is one side and the other is because we are competing with the Indian government, we believe the quality of our stuff has some advantage over theirs.

Unidentified Analyst

Okay. Now would there be a problem getting gold from China to there?

Bin Liu

That's a great question actually. That's one of the, we have to reserve this. That's why we want to have a joint venture there so we can source the gold locally and the raw material from China because we have tested it right last year that we shipped some gold, raw material from China here to the Gulf area which requires a lengthy approval. That's another reasoning for getting a joint venture because you can't just buy the raw material over there from the market and then transform it into the jewelry products.

Unidentified Analyst

Okay one other thing. I know we talked about it in our past conference calls but obviously great quarter. I won't take anything away from it whatsoever and the stock has been obviously performing much better recently. But even at the current levels we are still trading at a significant, roughly one-third of our stated book value and has there been any more talk about a potential buy-back of shares by the company since any buy-back at current levels or higher levels will return a significant increase in book value. Any more talk about that?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Not in the near future about the shares buy-back.

Unidentified Analyst

Alright, listen guys thanks again and congratulations one more time.

Operator

Thank you. Our next question comes from the line of Peter Halesworth from Heng Ren Investments. Please proceed with your question.

Peter Halesworth

Yes, thanks just on the opening day of the Jewelry Park, is that 100% guaranteed? And would it be for all 7 buildings to be opened simultaneously or would it be partial permit is my first question.

[Foreign Language]

Zhihong Jia

[Foreign Language]

We anticipate the grand opening of the Jewelry Park by the end of August however, we have to be more observant of the weather conditions at the time. Regarding to the work title, the buildings that will be opening will be the commercial properties only.

Peter Halesworth

Okay when I recently visited I saw the parking facilities were not, were kind of lagging the other construction and I am wondering do you need to, is the permit contingent on the parking facilities also be available and ready?

[Foreign Language]

Zhihong Jia

[Foreign Language]

To be honest, we did not foresee the problem of the parking in the beginning of the construction however, all the exterior walls has been taken down and we are working with the construction company to solve this problem but please be note we do have 1,000 parking space in the basement as parking facility. So it should not be a problem.

Peter Halesworth

Okay. And just on the hotels is there any interest in a strategic partner coming in or purchase of the hotel?

[Foreign Language]

Zhihong Jia

[Foreign Language]

We are negotiating with some buyers. We hope to settle this as soon as possible within this month.

Peter Halesworth

Okay. And just lastly, is there a plan for a U.S. road show? I think it's been a few years since the Chairman has visited investors in the U.S. I think it's an opportune time considering the very strong first quarter, the recover in gold prices, and the stock now being well over $1. It's probably a good time to put the many firms that are supporting you in the U.S., not only equity group but others to work to put together a great schedule and attract few investors. So is there any plan for that?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Yes, of course we have this plant other way we're like to as harbored with the U.S. after the grand opening of our jewelry park and we are targeting middle September or early October to visit all the institutional investors and other investors in the U.S. to communicate with or most recent developments.

Peter Halesworth

Okay, that's good news. Thank you, Mr. Chairman, thank you Ben, thank you Katherine.

Operator

And our next question comes from the line of Justin Scott from Lammergeier Capital. Please proceed with your question.

Justin Scott

My first area of questions is about the very, very strong quarter of which the volume number was up about 20%. And having had a very strong fourth quarter as well, so two quarters in a row of about 20%. This is against the background where many of the jewelry retailers have seen the volumes that are down reflecting not sure we're spending in China. So clearly, you've gained market share against competitors and I'm wondering if you could describe which competitors you've been hurting in terms of taking market share from them and how you've been doing that?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Well, as all of you know China possess a vast peers markets and it's hard to say what competitor we have hurt but I have to say that Kingold possess best quality of jewelry and very good team of management team and a sales team and all of these elements actually gather weekend long-term customers and orders to be sustained gross in the jewelry sector in China.

Justin Scott

I have a couple of questions on the jewelry park development. The first question is, the grand opening is going to be in August. Which quarter -- is it going to be the third or fourth quarter? Can we expect to hear announcements of the first new sales and leases, the actually sales and leases beyond pre-sales?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Well, to answer your question, we are talking to few buyers that are interested to take over the -- our entire jewelry park. And we're in the negotiating process. Second of all, that -- the exterior decoration has been already completed and we're expecting the explanation from the local government to give -- to provide permit to -- issue us a permit. But after we receive the permits from the local government, then we will entry into the next most exhausting stage which is the internal decoration. So we are confident to the grand opening of August -- by the end of August but still as I said, due to weather condition and other factors, we might prolong the grand opening.

Justin Scott

The second question in the jewelry park development, about the pre-sales, you've taken to positive of pre-sales, what conditions have to be satisfied for you to get the final payments on those pre-sales? When are they delivered to the customer? Do the inside rules have to be finished or when do the pre-sales turn into sales?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Well, I said I introduced in earlier of this Q&A session that we are negotiating with buyers who are interested to take the whole Jewelry Park so there is a possibility that we will sell all internal state property.

Justin Scott

I think I know the answer to this question but I have to ask it, when this Jewelry Park development is sold, do you anticipate doing another real estate development in the future?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Well we are having good conversation with the potential buyers and we hope that they are still interested in taking the whole project and the buyer away from us and no matter what we will not anticipating into other real estate project after Jewelry Park.

Justin Scott

Okay. I want to follow up on a question that an earlier caller asked about you know, I agree with their product, great quarter but the core operating business of Kingold is doing very well. The share price does not reflect the value of the operating business. Last year or earlier this year you announced the shareholder value initiative with the shareholder value committee, I wonder if you could share with us what your plans are to create shareholder value?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Well, as you can see that in the past few months our stock price has been revised and better than we were performing in the late 2015 so I am sure that we must did some work in creating shareholder value but at the same time I have to agree with you that we are definitely undervalued. I think the trying with that our management is aggressively talking to some parties and trying to be very creative in employing different approaches to work on creating additional shareholder value. Meanwhile we have also to concentrate and to work hard on the core business and to make adjustments to make more sales even in the difficult times and the better times. Well, I believe that after the grand opening of the Jewelry Park and/or if we sell off this residual Park project to any buyer that / or we return to the core business of jewelry manufacturing and as -- or why it will be reflected to that price.

Justin Scott

Thank you. One final question. A lot of Chinese companies “in the US” have been affected by a few Chinese companies who have hurt the reputation of other Chinese companies. There has been concern about Corporate Governance in Chinese companies. One of those concerns is about the VIE structure and I wonder if you could say anything to reassure US investors about Kingold's and whether in the future this VIE structure might change?

[Foreign Language]

Zhihong Jia

[Foreign Language]

Well, US listed companies I am still confident of the US Capital Markets. Regarding to the structure then not only China US listed companies houses these structures, so there are others as well. So it's really hard for me to answer your question but I believe the problem is not because of the VIE structure.

Justin Scott

Thank you very much. Just reminds me to congratulate the Chairman and the Management team on a very strong quarter. We look forward to seeing you in September when you come to the USA.

Operator

Ladies and gentlemen, this does conclude our question-and-answer session for today. I turn it back over to any closing remarks from management.

Bin Liu

Thanks again, to all of you for joining us. We look forward to speaking to you again in August after we report our second quarter financial results. Also, just a reminder the company will host an annual shareholder meeting also if any of you have interest contact us and we will come to hand. As always thanks again.

Operator

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your time and participation today. You may disconnect your lines at this time and have a wonderful rest of the day.

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