LAOPU GOLD (06181) plunged 7.16% yesterday and extended losses by another 4.17% today, hitting a six-month low. Other gold and jewelry retailers also suffered steep declines, with Chow Tai Fook (01929) dropping over 10% and CHJ Jewellery (002345) tumbling more than 13.6% in two sessions.

The sell-off followed new VAT regulations issued by regulators last Saturday. Previously, gold retailers could claim a 13% VAT deduction, but the revised policy slashes this to just 6%. Citigroup warns that under the "worst-case scenario," retailers’ costs could rise by approximately 7%.

Profit margins in the gold and jewelry sector are already thin. While LAOPU GOLD enjoys an 18% net margin due to its luxury positioning, competitors like Chow Tai Fook (6%), Chow Sang Sang (9%), Lao Feng Xiang (4%), and CHJ Jewellery (5%) operate with far leaner margins. If retailers fail to fully pass these cost increases to consumers, profitability will take a significant hit.

Major players have already responded with price hikes. For instance, Chow Tai Fook adjusted select product prices starting November 3, aligning increases with the new policy’s cost impact. However, it remains uncertain whether consumers will accept higher prices. If sales volumes decline due to sticker shock, the negative effects of the policy may outweigh any benefits.

This week’s sector-wide slump appears justified, but deeper questions linger. Given this year’s gold price rally and the industry’s robust performance, will higher prices truly dent demand?

Third-quarter results for gold retailers have been strong: - Chow Tai Fook’s retail sales grew 4.1% YoY, marking its fastest pace in 18 months. Despite modest top-line growth, profit surged 74% in H2 FY2025 (ending March 31). - Lao Feng Xiang posted 16% revenue growth, a two-year high. - Chow Sang Sang’s revenue decline narrowed to 17%, with net profit up 14%. - CHJ Jewellery saw revenue jump 49.5% (a two-year record) and adjusted net profit skyrocket 81.5%.

LAOPU GOLD, which doesn’t disclose quarterly results, historically thrives during gold price rallies. With gold soaring this year, the company has raised prices three times—a rare move. Analysts project H2 revenue growth of 194%, with full-year net profit potentially reaching RMB 4.8 billion, implying a forward P/E of 21x.

This valuation seems reasonable given gold’s bullish outlook. International banks forecast prices could rally another 25% to $5,000/oz amid geopolitical tensions (e.g., Russia-Ukraine, U.S.-China trade), Fed policy uncertainty, and central banks’ gold accumulation.

Notably, China’s September gold and jewelry retail sales rose 9.7% YoY, defying historical trends where higher prices dampened demand. This resilience suggests the VAT-triggered sell-off may present a compelling entry point for investors.