High Gold Prices May Take The Shine Off Hipine As It Seeks Hong Kong IPO

The maker of gold watches is grappling with high production costs and weak sales growth following a big jump in prices of the precious metal

Key Takeaways:

• Hipine has filed for a Hong Kong IPO, reporting falling profits and a sharp slowdown in its revenue growth last year
• High gold prices are raising the watch maker's raw material costs and could dampen demand for its products, especially in China's current weak economy

Time may be its core business, but gold watch maker Shenzhen Hipine Precision Technology Co. Ltd. seems to have lost its sense of timing by filing for a Hong Kong IPO last week.

Gold prices have been soaring lately as central banks and investors globally stock up on the metal as a hedge against economic uncertainty. That's creating headaches for companies that make gold accessories, including watches, like Hipine. They can try to charge higher prices to offset their rising material costs, but that can scare away consumers. That dilemma becomes doubly poignant in a weak economy like China's right now, where consumers are reining in their spending, especially for expensive, discretionary items like gold accessories.

Despite those factors working against it, the maker of Hipine brand gold watches went ahead and filed for a Hong Kong listing. The road to market is sure to be bumpy, as the company looks set to face plenty of investor skepticism about its ability to grow.

For starters, Hipine's revenue increased just 2.5% to 457 million yuan ($64 million) last year from 2023 as gold prices marched higher, hitting records, according to its listing document. That's a significantly slower pace than its 38% revenue growth for 2023, when gold prices were lower and China was still enjoying a post-pandemic rebound and wave of "revenge spending."

But its ability to grow sales at all last year was no mean feat, considering that gold consumption in China decreased nearly 10% in 2024. In particular, purchases of gold jewelry, which accounts for half of total consumption of the metal in the country, dropped by more than a quarter last year. By contrast, buying of gold bars and coins jumped at a similar rate.

The disparity between the two categories of products reflects different attitudes between consumers and investors towards gold in a difficult economy. Consumer sentiment in China is generally quite lackluster, and particularly weak for luxury items like gold-covered products that typically sell for big mark-ups above their material costs. Key products for Hipine — which says it is the largest maker of gold watches in China — retailed for as much as nearly 30,000 yuan apiece at the end of last year, according to its listing document.

But interest in the precious metal among investors may be stronger than ever as they seek safe-haven assets to hedge against heightened economic uncertainty. Such demand fueled a 28% rally in the price of the most active gold contract on the Shanghai Futures Exchange last year, which helped drive demand for products like gold bars, whose prices are basically the same as the content of the gold they contain. But rising gold prices only further suppress demand for consumer-related products like watches and jewelry.   

The sharp increase in gold prices has left Hipine grappling with higher raw material costs and weak sales growth. A 20% increase in raw material prices last year would have sent the company into the red, according to an estimate in its prospectus.

Wriggle room

Yet the company has some wriggle room to keep its costs down. It doesn't recognize the cost of the gold it buys until it actually sells products using that material. That means if it holds a significant amount of gold that it procured earlier at lower prices, and sells products containing that gold later, the company can keep its raw material costs from growing rapidly. Hipine can also use this discrepancy to curb its price increases, helping it to retain buyer interest.

This method of cost recognition apparently helped Hipine improve its gross profit margin last year. Its raw material costs actually decreased a bit, and it also slashed spending on direct labor and overhead expenses. As a result, the company's gross profit grew 15% last year, much faster than its 2.5% revenue growth.

To protect itself from rising gold prices, Hipine also borrows gold from banks. Such schemes allow the company to secure gold at lower prices if its value increases later, though it pays the lenders interest in cash. It can then use the borrowed gold to make watches and use part of revenue from the sales of the products to buy the same amounts of gold and return it to the banks when the borrowing periods expire.

This strategy works if gold rises in value, allowing Hipine to mark up the prices of its products significantly enough to cover all costs for gold loans and still make some profits. The downside is that if gold prices go up, the company needs to record a valuation loss on its gold loans.

That was one reason Hipine's net profit slipped 5.3% to 49.3 million yuan last year, despite the improvement in its gross profit margin. It booked an 8.2 million yuan valuation loss on its gold loans for the year, more than four times the amount for 2023. The company's operating expenses also increased, and impairment losses related to trade receivables further ate into its earnings.

The bottom line is that Hipine's performance last year probably won't awe anyone. And its future prospects don't look much shinier. Beijing is trying hard to stimulate domestic consumption, which, if successful, could reignite Hipine's revenue growth. But highly discretionary and low value-added items like gold jewelry and watches don't seem to be high on the government's list of what it wants consumers to buy, with other products like home appliances and cars getting higher priority.

What's more, high gold prices are probably here to stay, at least for the foreseeable future, as trade tensions and other geopolitical factors keep investors and central banks around the world jittery. Gold consumption in China fell nearly 6% year-on-year in the first quarter of this year.

Shares of listed jewelry makers can give investors some idea about how Hipine's stock might be valued. Among them, Chow Tai Fook's (1929.HK) shares trade at a price-to-earnings (P/E) ratio of 26, while Chow Sang Sang (0116.HK) is far lower at about 7. A P/E ratio somewhere in the middle of the two, say 17, would give Hipine a market capitalization of more than $100 million, based on its 2024 net profit.

But the two gold jewelry companies are much larger and more established than Hipine, which was founded in 2013. And their product prices are far more based on the cost of the gold they contain, meaning their products can hold their value better than watches that aren't from top-tier brands like Rolex.

So we wouldn't be surprised if Hipine ends up with a lower valuation, especially as its growth prospects look dull in the near term, unlike its glittery products.