THE steep fall in gold prices have negatively impacted local gold players like Poh Kong Holdings Bhd.
The price of gold has been nosediving since last year and was trading at US$1,246.91 per troy ounce last Monday. This is in sharp contrast to its all-time high of US$1,900.20 on Sept 5, 2011. It hit a five-year low of US$1,188.68 on Dec 19, 2013.
In Poh Kong’s recent results, its net profit for the fourth quarter ended July 31, 2014, fell 61.6% to RM13 million — an all-time low since it was listed.
The decline was mainly due to weak market sentiment and the volatility of gold prices.
The company’s gross profit margin fell to 22.4% for its FY2013, compared with 28.5%, 29.6% and 30.7% in FY2012, FY2011 and FY2010 respectively.
In an email reply, Poh Kong acknowledges that the slump in gold prices has eroded its gross profit margin, as the group’s inventory was procured at a higher cost while the retail price was lower.
However, it expects its margins to normalise soon. “As soon as the inventory experiences a complete stock turn cycle, our margins will be normalised. The normal stock turnaround for gold jewellery is three to four months, where the old stock is sold and the new ones replenished at current prices,” it says.
But Poh Kong is not taking chances. Given the volatility of gold prices, it has put in place a system to effectively manage its inventory and is confident that it will ride out the current low performance soon.
The effects of its inventory control management are already starting to show. “With an effective inventory control management, coupled with less volatile gold prices in FY2014, the group’s gross profit margin is improving.We are controlling the inventory to make sure that we do not overstock as well as improve our inventory turnaround,” says the group.
Indeed, its gross profit margin for FY2014 improved to 24.9%.
Apart from reducing its inventory levels, Poh Kong plans to reduce its gearing. “We want to reduce our procurement and gearing. Now, our gearing is about 60%. Our comfortable level is about 50%,” it says.
On the gold prices, Poh Kong says current views are mixed. “Some believe it will reach US$1,500, and the lowest will be US$1,000. For this year, we don’t expect to see a lot of improvement in prices. It has been hovering around the US$1,200 mark. We foresee it maintaining at this level. Moving forward, after the Goods and Services Tax (GST) kicks in, gold prices may trend upwards again,” it says.
It adds that currently, it does not have plans to venture outside Malaysia, but may consider doing so once the Asean Economic Community is implemented. “It could then be feasible for us to look abroad. The Customs duties now are hefty in other Asean countries, and should we go in, our products will not be competitive. But, if a free trade zone opens, then there is a possibility for us to look offshore,” Poh Kong says.
Poh Kong started operations in 1976 from a single shoplot with inventory totalling RM200,000. Today, it has 106 outlets nationwide and as at July 31, had inventory worth RM608 million.
The GST factor
Poh Kong and another local jeweller, DeGem Bhd, are already bracing themselves for the introduction of GST, which is expected to hit many retailers’ bottom lines.
Poh Kong says its strategies include the introduction of a range of lower-priced products. It wants to make jewellery affordable, although consumers expect prices of goods and services to go up post-GST.
“Malaysians in general will continue to be cautious in their spending, thus demand for value-for-money goods and services will rise. We intend to implement product portfolios to ensure better alignment with consumers’ changing needs,” it says.
“Retailers like us will be engaging in more price-aggressive promotions to stimulate spending.”
Meanwhile, DeGem says it anticipates that in the initial months of GST implementation, sales of all items subject to GST will be affected.
“As an interim measure, we may consider absorbing part of the GST to maintain our market share,” it says in an email reply.
According to its latest results, DeGem’s net profit for the six months ended June 30, 2014, rose 53% to RM9.5 million from a year ago. This is an improvement from the 28.8% year-on-year drop in net profit for its 2QFY2013. For FY2013, earnings fell 28% to RM16.5 million.
DeGem says it managed to reverse the drop in its earnings by streamlining its operations to improve efficiency and taking measures to control expenses. It adds that unlike traditional goldsmiths, DeGem’s core products are not gold jewellery and, therefore, fluctuations in gold prices do not have a material impact on its performance.
“In the last 10 years, we have seen a dramatic shift from traditional gold jewellery to more contemporary designs using white gold and platinum. And from just diamonds, the acceptance of other precious stones has grown rapidly. We expect this trend to continue, with an appreciation for products by reputable, established brands,” it says.
“With increasing regional and overseas travel, consumers’ tastes and demands are also shifting rapidly, with greater appreciation for finely crafted and unique or personalised jewellery, as opposed to putting the value of their purchases merely on the weight of gold and the quality of diamonds.”
DeGem has 21 stores nationwide and a store each in Brunei and Singapore. Its inventory stood at RM206.8 million as at June 30.
Poh Kong is also placing more emphasis on complementary products, diversifying into diamond jewellery, jade items and gemstone jewellery. In 2006, the group ventured into diamond cutting and polishing as well as the sale, import and export of precious stones.
This article first appeared in The Edge Malaysia Weekly, on October 27 - November 2, 2014.