Citi: Expects LAOPU GOLD (06181) to increase discounts, putting gross margin under pressure; gives target price of HK$507 and "Buy" rating.

Citi issued a research report stating that LAOPU GOLD (06181) increased shopping mall promotional discounts in the third quarter of this year, which helped drive sales up quarter-on-quarter, but gross margin will also decline quarter-on-quarter; the bank currently gives a target price of HK$507 and a "Buy" rating. The bank estimates that third-quarter revenue needs to grow 18% quarter-on-quarter to RMB 3.9 billion in order to maintain the same net profit level as the second quarter. The report mentioned that during third-quarter shopping mall promotional activities, LAOPU GOLD offered price discounts of 15% to 20%, higher than the previous 10%. As older products account for most sales, the bank expects an additional 9% discount in the third quarter. Assuming cost of goods sold remains unchanged, gross margin is expected to fall from 47% in the second quarter to 41.8% in the third quarter. The bank estimates that if the company's third-quarter revenue grows 18% quarter-on-quarter to RMB 3.9 billion, net profit will be flat quarter-on-quarter at RMB 667 million, with a net profit margin of 17.1%. Considering seasonal factors, fourth-quarter revenue is expected to grow 50% quarter-on-quarter, ranging from RMB 4.5 billion to RMB 6.3 billion, with net profit between RMB 818 million and RMB 1.27 billion, and a net profit margin of 18.2% to 20.1%. Summarizing the second half of the year, LAOPU GOLD's revenue is expected to range from RMB 7.5 billion to RMB 10.5 billion, down 15% to 39% year-on-year, with net profit between RMB 1.26 billion and RMB 2.01 billion, and a net profit margin of 16.8% to 19.2%.