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Edited Transcript of KGJI earnings conference call or presentation 3-Apr-19 12:30pm GMT

Q4 2018 Kingold Jewelry Inc Earnings Call

WUHAN May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Kingold Jewelry Inc earnings conference call or presentation Wednesday, April 3, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bin Liu

Kingold Jewelry, Inc. - CFO & Secretary

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Conference Call Participants

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* Allen Barbarich

* Katherine Yao

The Equity Group, Inc. - Senior Associate

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Presentation

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Operator [1]

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Greetings. Welcome to Kingold Jewelry's 2018 Fourth Quarter and Year-end Results Conference Call. (Operator Instructions) Please note this conference is being recorded.

I would now like to turn the conference over to your host, Katherine Yao of The Equity Group. You may begin.

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Katherine Yao, The Equity Group, Inc. - Senior Associate [2]

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Thank you, Sherry, and good morning, everyone. Thank you for joining us.

A copy of the press release announcing 2018 fourth quarter and year-end financial results is available on Kingold Jewelry's website, www.kingoldjewelry.com. As part of this conference call, the company has a slide presentation available in PDF format on the company's website. It is an accompaniment that you are welcome to contact our office at (212) 836-9600 and we'll 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 contain certain forward-looking statements within the meaning of 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, its prospects and results of operation. Such risks are fully detailed in Kingold Jewelry's filings with the Securities and Exchange Commission. Regarding the disclaimer language, I would also like refer you to Slide #2 of the webcast presentation for further information.

Management presenting on the call today are Kingold Jewelry's CFO, Mr. Bin Liu; and Kingold Jewelry's Treasurer, [Mr. Xiao Hu]. I would now like to take a moment to outline the format for today's call. First, I will read the opening statement prepared by the company's Chairman and CEO, Mr. Zhihong Jia. And 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 finish the presentation, we'll open the floor for questions.

With that, I will start to read the opening statement from Kingold Jewelry's Chairman and CEO, Mr. Zhihong Jia.

"Good morning, everyone. Thank you for joining our 2018 fourth quarter and year-end conference call. We are proud to have achieved all aspects of financial and operational growth for the year 2018, and we surpassed our previously provided processing volume while gaining double-digit percentage growth in all indexes. Our CFO will provide financial details later in our presentation.

According to the World Gold Council, in 2018, the annual jewelry demand in China increased by 3% as the retail industry continued to expand and innovate and certain sectors of the gold jewelry market were robust and ultrahigh purity products performed well in some regions and 3D hard gold growing -- continued to grow. I have reported to everyone in the past earnings conference calls that we have made tremendous efforts in the development and designing of 3D hard gold jewelry products. At this stage, we process about more than 3,000 of our own 3D hard gold jewelry product designs and were well received by our customers.

Also, based on our management's analysis of the gold market trend, we intend to continue to expand market coverage by diversifying our sales channels for gold jewelry and investment products and continue to explore gold investment to further implement our strategic expansion. Looking ahead, we're dedicated in building Kingold's brand as an increasingly important participant of gold industry in China by continuing to expand our production capacity, designing capabilities and sales channels while we expect to explore both upstream and downstream markets to optimally utilize resources within China's gold industry, thus to advance our company's position as a leader in furtherance of the gold industry development along with our peers.

To conclude, based on our existing resources and capacity, along with strong demand for 24-karat gold products in China, we believe that our gold sales are expected to be between 110 metric tons and 120 metric tons during fiscal year 2019. On behalf of Kingold, I look forward to speaking to all of you in person, and you're welcome to visit our facilities in Wuhan and take a tour. Thank you."

With that, I would now like to turn the call over to Mr. Bin Liu, Kingold Jewelry's Chief Financial Officer. Please go ahead, Mr. Liu.

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [3]

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Thank you, Katherine, and welcome again. Today, I will focus on Kingold's fourth quarter and year-end operating and financial results for 2018.

Kingold sales are primarily composed of the sales of branded products and customized products. Kingold sells its products to customers at a price that reflects the market price of base material plus a markup of design and processing fees. In branded production, we purchase gold directly from Shanghai Gold Exchange once a customer has placed an order, and we recognize revenue on sales on branded products when the goods are delivered. Thus, the cost of gold is recorded as part of our revenue. In customized production, our customers supply us the raw materials, and we create products per the customers' instructions. And the cost of gold is not recorded as part of our revenue.

During the fourth quarter 2018, we processed approximately 33.7 metric tons of 24-karat gold, increased 8% compared to 31.2 metric tons for the same period last year. Among the 33.7 metric tons we processed during the fourth quarter of 2018, of which branded production accounted for 16.4 metric tons or 48.7% of the total volume and the customized production accounted for 17.3 metric tons or 51.3% of the total volume.

For the year ended December 31, 2018, we processed approximately 114.2 metric tons of 24-karat gold products, an increase of 10.4% compared to 103.4 metric tons for the same period last year. Among the 114.2 metric tons we processed during 2018, of which branded production accounted for 62.9 metric tons or 55.1% of the total volume and customized production accounted for 51.3 metric tons or 44.9% of the total volume.

In the 3 months ended December 31, 2018, the company reported net sales of approximately $633.1 million, an increase (sic) [$631.2 million, a decrease] of 3.9% from USD 657.1 million for the same period in the prior year. For the year ended December 31, 2018, the company's net sales was approximately $2.48 billion, an increase of 41% (sic) [23%] from approximately USD 2.01 billion for the same period in 2017. The overall increase in our revenue in 2018 as compared to 2017 was due to the following combined factors:

A, our total sales volume in terms of quantity sold of branded products increased from 51.5 metric tons in 2017 to 62.9 metric tons in 2018, a 11.4 metric tons or 22.1% increase. However, the average unit selling price for the branded production remained stable in 2018, which was RMB 254.8 per gram in 2018 comparing to RMB 257.2 per gram in 2018 (sic) [2017], resulting a slightly decrease of 0.9%.

The total sales volume in terms of quality sold -- quantity sold for customized production remained stable in 2018, which was 51.3 metric tons in 2018 comparing to 51.8 metric tons in 2017. However, the average unit selling price for customized production increased from RMB 6.38 per gram in 2017 to RMB 6.89 per gram in 2018, causing 8.1% increase.

For the fourth quarter ended December 31, 2018, gross profit was approximately USD 75 million, increased by 33% from USD 56.4 million in the prior year period. Gross margin was 11.9% compared to 8.6% for the same period in 2017. For the year ended December 31, 2018, our gross profit was approximately USD 264.3 million, increased from approximately USD 199.9 million in the year -- prior year period of 2017. Our gross margin was 10.6% compared to 9.9% for the same period in 2017. The slight increase in gross margin was due to above reasons.

For the fourth quarter ended December 31, 2018, net income was approximately $9.5 million or $0.14 per diluted share compared to net income of approximately USD 10.5 million or $0.15 per diluted share in the prior year period. For the year ended December 31, 2018, our net income was approximately USD 49.5 million or $0.75 per diluted -- basic and diluted share compared to net income of approximately $26.2 million or $0.39 per basic and diluted share in the same period of 2017.

Moving to the balance sheet. At December 31, 2018, Kingold's cash and cash equivalents were USD 0.23 million; inventories, which is gold in our case, was $127 million; stockholders' equity was USD 638.3 million compared to the cash and cash equivalent of USD 5 million and inventories of USD 135 million and stockholders' equity of USD 390.2 million at December 31, 2017.

With that, operator, please open it up for any questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Allen Barbarich with Spartan Trading Group.

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Allen Barbarich, [2]

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It looks like you guys had a great year. I have one first housekeeping question. Your yearly revenue you said was up 41% from $2.01 billion to $2.47 billion, which I calculate that as 23%. Am I missing something there? Or is that a mistake in your...

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [3]

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Yes, yes. I misread it, yes. Sorry, you are right, yes, from 2.1, 2.2 billion (sic) [$2.01 billion] to $2.47 billion, yes, you're right. Yes, I apologize, my fault.

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Allen Barbarich, [4]

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Okay. Another question is do you have any planned changes in your levels of gold investments going forward. Or do you expect it to stay similar to what it is right now?

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [5]

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The plan is to gradually probably lower the level. We -- the company has already kind of tried because most of the gold investment was funded by the loans, right, from the banks in China. And the 2 reasons: a, the gold prices like remain at this level for a while and there's more uncertainty over there, right? And b, the Chinese economy is still like in the end of the process of restructuring, right? And to maintain that high level of loan wouldn't be an optimal choice for the company, so the company is moving to other direction of lowering this kind of investment in gold.

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Allen Barbarich, [6]

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Okay. Great. As a shareholder, I agree with that approach. And you obviously have some significant unrealized gains in gold for the fourth quarter as the gold price increased, so those should flow through to your gross margin as the gold shifts from inventory into cost of sales. Is that -- at a lower cost basis. Is that -- am I getting the accounting correct there?

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [7]

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Yes, you're absolutely right. Yes, that exactly is happening because that's a [sequential] of gold the company acquired, right, at different price level. And as we try to move out of this -- not move out, reduce this level, yes, these things -- the gains will change a little bit, yes.

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Allen Barbarich, [8]

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Is there any particular reason for the slight decrease in fourth quarter sales year-over-year despite the increase in production? Is that just a timing issue? Or was there a reason?

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [9]

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Yes, this is more like a timing issue. For 2018, as you might know, there's a huge kind of tank in the Chinese, in general, the stock market, if you recall. Right now, there's a huge rebound, right, in the entire market of China in Q1 versus Q4 last year. So Q4, this year -- last year, the consumer demand for jewelry is not like a kind of must-have day-to-day stuff people have to, right? So this year, for Q4, there's more the pressure for this demand. So that's one of the reasons, yes.

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Allen Barbarich, [10]

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Okay. That makes sense. And last question, if there are any positive changes in the trade agreements between China and the United States, which allow for loosening of capital controls regarding conversion of renminbi into dollars and allow, potentially, distributions to shareholders either through dividends or share buybacks, is that something that you will consider going forward? And do you anticipate that there might be any loosening of capital controls with the trade agreement? Is that something that you're monitoring?

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [11]

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Yes. That's a great question actually. This has been raised multiple times, if I recall correctly, during the December 7 Annual Shareholder Meeting. And the shareholders from both the U.S.A. and China raised some questions. At that meeting, people talking about these options because it looks like the company has a stable business and if the consumer demand comes back, right, for jewelry, and our business should be stable as well looking into 2019 and even in 2020. So if the gold price does well, so the company should be in good shape. And as you recall, the company paid a onetime dividend before. And the company does have cash, right? So the constraint mainly really lies on those government constraints not only for Kingold but in general, across many Chinese companies, right? Yes.

So you mentioned about the trade agreement. It seems like it's -- or it looks like it's kind of moving toward the very positive direction because in both sides, on the U.S. side, President Trump led this conversation, and also, the (inaudible) official is visiting -- or exchange visits are quite often, right, between the U.S. and China now. It's the ninth round the Chinese vice premier will come here actually next week as well. So it sounds like they are moving to close a deal. And hopefully, that's loosening up the controls of this currency because this will allow the company: A, to have a chance to reward the shareholders; B and also, the company have some -- also have some time to grow, right, even in the international world, we don't have this kind of liability. So hopefully, that's going to happen.

But back to your question, the company is thinking about -- we have did it before, and there's a lot of requests from shareholders, including yourself, but many others requesting the same thing. So definitely, the Board has discussed this, and we're waiting for, if any, kind of, from the government control point of view, change. So definitely, this is one of the things that the company is [considering] and is planning to do if we're allowed to do so.

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Allen Barbarich, [12]

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Okay, great. Congratulations on a great year.

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Operator [13]

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(Operator Instructions) There are no more questions at this time. I would like to turn the call back over to management for closing remarks.

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Bin Liu, Kingold Jewelry, Inc. - CFO & Secretary [14]

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Well, thanks again to all of you for joining us today. We look forward to speaking with you again in May after 2019 first quarter financial results. As always, we welcome investors and visitors to our facilities in Wuhan, China. Thanks a lot.

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Operator [15]

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