Kingold Jewelry Valued at Just 0.1 Times Price/Sales

Founded in 2002, Kingold Jewelry (NASDAQ: KGJI  ) is a leading producer of 24-karat jewelry in China, and currently supplies large wholesalers and dozens of retailers nationwide. Kingold has a low P/E multiple and has grown sales from $29 million in 2006 to $915 million in 2012, a six year compound annual growth rate of over 70%. While the next six years will not be nearly as robust, steady growth and consistent margins make Kingold an interesting investment opportunity.

To be clear, an investment in a small-cap company like this one entails ample risk. Serious due diligence, including a review of the annual 10-K & quarterly 10-Q's, as well as earnings call transcripts, is highly recommended. Investors should also consult an investment advisor.  

Recent articles and news on Kingold Jewelry
This informative and well done article from just a few days ago featured Kingold. In the piece the author said the following,  

"A couple of years after the China fraud fears, stocks such as Kingold Jewelry continue to trade below book value. The producer of 24-carat gold jewelry continues to grow via market share gains, but until recently the stock traded as if it was going out of business...Kingold continues to evolve into a major jewelry manufacturer with sales expected to exceed $1 billion this year."

The above quote is telling. It suggests that investors are still penalizing many Chinese companies because of the bad actions of a few. This theme was also the heart of another good article which featured Kingold from Forbes Online. Both of these articles offer balanced, detailed analysis on Kingold Jewelry and the lingering fears regarding Chinese Reverse Takeovers. Last week noted short interest firm Muddy Waters came out with a new short idea. Still, the vast majority of Chinese companies are, of course, perfectly legitimate. Finding the ones that trade cheaply can be rewarding.  

In the most recently announced quarter, net sales increased 37% to $367 million, largely as a result of increased production because of higher demand for gold. Company guidance is for sales of about $1.1 billion this year, which would be up a solid 20% from 2012. Gross margins over the long term appear to be trending toward 5%.

Many Chinese companies listed in the U.S. have regained investor confidence. For example, here's a stock that has tripled. A recent article mentioned SouFun Holdings (NYSE: SFUN  ) .

"SouFun operates a real estate Internet portal. The stock collapsed below $10 back at the end of 2011 and has now soared to over $50 and reached a valuation of $4.4 billion. The stock now sits at all-time highs. SouFun is a prime example of the excessive fear that existed back in 2011. Investors have become so comfortable with the financials that it now trades at roughly 20x current year earnings."

Other Chinese stocks that have rebounded sharply include Baidu, (NASDAQ: BIDU  ) the Google of China. This stock had doubled. Although not a small cap like Kingold, Baidu represents the sentiment that it might be safe to prudently get exposure to Chinese stocks with U.S. listings. Another name that has soared is E-Commerce China Dangdang (NYSE: DANG  ) . E-commerce is a sector that was shunned two years ago, but is now in favor again. To be clear, I'm not recommending buying Baidu or E-Commerce China Dangdang, just pointing them out as recent winners. 

Hot off the presses-- commercial real estate deal
Before I delve a bit deeper into the company's retail business, it's important to note the following news from October 29th. Here's a quote from the press release, 

"WUHAN CITY, China, Oct. 29, 2013 /PRNewswire/ -- Kingold Jewelry,, one of China's leading manufacturers and designers of high quality 24-karat gold jewelry, ornaments and investment-oriented products, today announced an acquisition agreement to acquire the operating rights for 717,587 sq. feet of industrial land for use in the development of a Wuhan Kingold Jewelry International Industry Park. The cost is expected to be approximately 1.0 billion RMB (US$164 million).

This is big news that will need to be digested. The proposed foray into commercial real estate is risky for a company with a $110 million market cap. If Kingold can pull it off, margins will be higher and earnings power augmented and diversified. At first blush, the amount of debt required to fund this real estate venture seems daunting. However, the debt for the project will probably be secured by the project itself, with no recourse to the existing assets and retail operations.  

This prospective venture boosts the risk, but also the return opportunity. Importantly, management will be in the U.S. in mid-November to tell their story. I think the timing of the real estate announcement and upcoming quarterly earnings, leading into a corporate road show in the U.S., implies that the company continues to do well. Management would not go on the road on the back of weak earnings or a half-baked real estate deal. Another quote from the press release states, 

"The construction of the project is anticipated to be an integral part of the Company's long-term growth strategy by creating a major hub for the jewelry industry in the central region of China. Wuhan Kingold Jewelry International Industry Park is expected to be a major commercial complex that provides a place where businesses and activities in the jewelry industry come together, including manufacturing, wholesale, and retail shopping."

Many U.S. listed Chinese stocks have taken off this year
As the articles I've referenced herein point out, many Chinese stocks with U.S. listings have soared this year. Valuations on some are quite high, with Price/Sales multiples of two to 10 times. By comparison, Kingold's Price/Sales ratio is closer to 0.1. At an intraday stock price of $1.72 on Oct. 30, the market cap is ~$110 million. Again, sales guidance for 2013 is about $1.1 billion. Kingold's relative cheapness compared with peer high-flying Chinese companies could enable it to outperform.

With the S&P 500 at all-time highs, it might be difficult to get big returns in blue-chip stocks going forward. Kingold is a much riskier bet for sure, but potentially one with low correlation to the major stock indices. For investors who play small-cap stocks, Kingold is a company that should be looked into. Management will be in the U.S. the week of November 18th, so additional news on the company's move into commercial real estate will be forthcoming.


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