Laopu Gold (Laopu Gold (06181.HK)) shares experienced a severe two-day decline following a seemingly positive profit alert, revealing weak performance in the crucial second quarter during the gold price downturn.

On July 27, the company projected sales revenue (including tax) of approximately RMB 22.7 billion to RMB 23.35 billion for the first half of 2026, a year-on-year increase of 60% to 65%. Net income was estimated between RMB 19.8 billion and RMB 20.45 billion, also up 60% to 66% year-on-year.

Despite these headline figures, the stock crashed 23.76% on July 28, followed by a further 4.83% decline the next day, hitting an 18-month low. The sell-off was triggered by data showing a dramatic slowdown in the second quarter, a period when gold prices were falling.

Calculation based on first-quarter results suggests second-quarter revenue fell to between RMB 2.3 billion and RMB 3.95 billion, a sequential plunge of 76.1% to 86.9%. Net profit for the quarter is estimated at only RMB 510 million to RMB 760 million, down 34% to 56% year-on-year and over 80% sequentially.

More critically, the brand's narrative has collapsed. Consumer attention has shifted from viral unboxings and long queues to discounts, second-hand sales, and empty stores. By July 29, Laopu Gold's market capitalization stood at approximately HK$50.8 billion, having lost over HK$130 billion from its peak in July last year. Its price-to-earnings (PE) ratio contracted from over 136 times to 9.43 times, now lower than traditional brands like Chow Tai Fook and Lao Feng Xiang.

The market's worst fears have been confirmed. This earnings season has shown that even companies with decent results are seeing their share prices fall, driven by poor expectations for future growth. The market quickly delivered a failing grade, with multiple investment banks cutting their price targets for Laopu Gold.

Citi cut its target price by 23% to HK$507 from HK$659, reducing 2026-2028 earnings forecasts by 17% to 22%. Goldman Sachs lowered its target by 14% to HK$560 from HK$650, cutting net profit forecasts by 14% to 15% for the same period. Macquarie was the most bearish, slashing its target by 39% to HK$275 from HK$450 and downgrading the stock to "Underperform".

Before the second-quarter data emerged, many, including Laopu Gold itself, pinned hopes on high-net-worth customers. The company has consistently claimed it is "stealing" customers from luxury brands, with an increasing overlap. Its "fixed-price" model and multiple price adjustments per year (some single items seeing a 30% increase) were seen as evidence of its move away from gold towards a luxury goods narrative. Through these price increases over the past two years, Laopu Gold achieved a gross margin of 40%.

In its annual report, Laopu Gold stated that according to a Frost & Sullivan survey, the consumer overlap with five major international luxury brands—Louis Vuitton, Hermès, Cartier, Bulgari, and Tiffany & Co.—rose from 77.3% in July 2025 to 82.4% in March 2026. The company believed these users are not price-sensitive and would not leave due to falling gold prices.

However, these core customers failed to sustain sales. Luxury consumers have low loyalty to new brands, and while not price-sensitive, many are trend-driven. Once a trend like "national style" fades, their spending moves to newer, more topical products. Retaining these sophisticated users requires strong product development and trend-forecasting capabilities.

Furthermore, high-end user data shows Laopu Gold's growth was far above the industry average, indicating this segment's contribution is not as high as assumed. In reality, the company has many price-sensitive customers who bought during the gold price rally believing prices would only go up. A Citi report from last month identified customers on the SKP and Tmall channels as being most prone to this behavior, and they are leaving as gold prices fall. The report estimates these two channels previously accounted for about 30% of total sales, now down to around 20%.

Aggressive Brand Investment Eats into Profits

The market had expected a weak second quarter due to falling gold prices, but the actual data was worse than anticipated. Goldman Sachs noted that its first-half revenue forecast was RMB 21 billion, while Laopu Gold's actual revenue was RMB 550 million to RMB 1.2 billion below that. Adjusted net profit of RMB 4.3 billion to RMB 4.4 billion also fell short of the RMB 4.8 billion forecast. Second-quarter net profit was 40-45% below Goldman Sachs' estimate.

High margins have been a key part of Laopu Gold's luxury narrative: fixed prices, no hedging, and over 40% gross profit. However, high gross profit does not equal high net profit. When revenue or gold prices suddenly drop, profits suffer.

Gold jewelry companies typically hedge against inventory devaluation by borrowing gold or selling futures. Laopu Gold does not hedge. Consequently, the raw material cost for goods sold in Q2 likely included high-cost inventory. Additionally, to support its brand image, the company invests heavily in store rent, services, and branding. When revenue declines, these costs weigh heavily on net profit. Goldman Sachs warned that operating deleveraging from store upgrades and brand investments would increase staff and marketing expense ratios, negatively impacting the stock post-earnings.

In April 2025, Laopu Gold disclosed that a single store's renovation and inventory investment was about RMB 50 million, several times the investment for a traditional jewelry store. For example, its Beijing SKP store features a study, private tea room, and on-site engraving demonstrations, matching top luxury standards. Job postings for store managers required six years of flight attendant experience with an annual salary of RMB 325,000 to RMB 455,000. Brand investments, like the "Classic Heritage" exhibition at the Shanghai IFC mall, aim to reinforce its luxury image. When revenue growth can't support these costs, they erode profits.

From 136x PE to 9x: What's Next for Laopu Gold?

The PE ratio collapse from 136x to 9.4x since its peak in 2025 starkly illustrates a loss of faith by the capital market. The market has "disproven" two key assumptions.

First, it has not yet become a true luxury brand. An Hermès bag's value is in its design and scarcity, with leather costs representing a small fraction of the price. Many hoped Laopu Gold would become "China's Hermès," with pricing power independent of gold prices. However, its products sell for RMB 2,100 to RMB 2,200 per gram, double the price of ordinary gold jewelry, but its pricing remains tightly tied to gold. At 9x PE, it is now valued similarly to traditional jewelers like Chow Tai Fook and Lao Feng Xiang, confirming its status as a cyclical consumer good, not a luxury.

Second, the "no hedging" strategy risk has been exposed. Traditional jewelers typically hedge 60-80% of their gold inventory. Laopu Gold's "full exposure" approach worked when gold prices rose, but when they fall, it faces pressure from both costs and sales. Profitability is already suffering. According to Guotai Haitong, the Q2 net profit margin was 20.3%, down from 21.8% in Q1. As of end-2025, the company held RMB 16 billion in high-cost inventory, which management said corresponds to about RMB 35 billion in sales. This high-cost inventory has not yet been fully cleared.

It is clear that Laopu Gold will not return to a 136x PE. That was a temporary phenomenon driven by Chinese aesthetic trends, a gold investment bubble, and a scarcity of attractive assets. Ultimately, the company's fate remains tied to gold prices.

Analyst views are sharply divided. An optimistic scenario sees gold prices stabilizing and recovering, boosted by seasonal demand from Qixi Festival and National Day, combined with store optimization and new product launches, potentially leading to a Q3-Q4 revenue recovery. Goldman Sachs assumes if gold returns to $4,900/oz by year-end (from around $4,100), the worst sales environment may have passed.

A pessimistic scenario sees continued low gold prices suppressing consumer demand for Laopu Gold's high-premium "fixed price" model, with the unhedged inventory risk worsening. China Merchants Securities International forecasts a 29% year-on-year decline in second-half sales. Macquarie provides a bearish target of HK$275, citing that the company's focus on new product launches and high-value customer management could increase operating expenses and drag on operating profit.

If gold prices remain low or fall further, the current 9x PE may not be the bottom. One thing is certain: the capital market no longer believes Laopu Gold can decouple from gold prices. Its future trajectory is essentially a bet on the direction of gold.