Investment points:
Incident: The company achieved operating income of 1,647 million yuan (YoY -12.18%) in the first three quarters of 2020, net profit of 171 million yuan (YoY -21.04%), net profit of 165 million yuan (YoY -21.58%) after deducting net profit from non-return income of 165 million yuan (YoY -21.58%). Q3 Achieved operating income of 593 million yuan (YoY +2.03%); net profit attributable to shareholders of listed companies was 67 million yuan (YoY +167.52%); net profit attributable to shareholders of listed companies after deduction was 62 million yuan (YoY +176.94%).
There was a marked recovery in performance in the third quarter. The company's Q3 revenue was 593 million yuan, an increase of 2.03% over the previous year. It was corrected for the first time in the year, and the performance showed a clear trend of improvement.
Q3 Net profit increased 116.78% year on year. Under the condition that operating income did not fall, operating costs fell somewhat, indicating that the company had achieved results in cost control, including eliminating poor quality direct-run terminals, adjusting the pace of opening stores, negotiating with partners to reduce fees, and implementing savings when resuming work and resuming production after the pandemic. We believe that downstream demand in the third quarter is only the initial stage of the recovery in textile and garment consumption. Online and offline retail demand for clothing may increase further in the fourth quarter, and demand in the first half of the year will be delayed until the second half of the year, creating a trend where the peak season is even stronger, supporting the company's performance growth.
Gross margin declined slightly in the first three quarters, and is expected to recover in the second half of the year. The company's Q1-Q3 gross profit margin was 65.67% (-1.47pct), and the net interest rate was 11.34% (-1.65pct). We think it was mainly because of the sharp drop in retail demand due to the epidemic in the first half of the year, which caused gross margin to decline rapidly in the first half of the year, dragging down the whole year. Downstream demand for textiles and clothing began to pick up markedly in the third quarter, and gross margin is expected to continue to improve.
Profit forecast: We predict that the company's net profit attributable to the parent company in 2020-2022 will be 211 million yuan, 284 million yuan, and 317 million yuan respectively. The corresponding EPS will be 0.51 yuan, 0.69 yuan, and 0.77 yuan respectively. The current stock price corresponding to PE is 15.1/11.2/10.0 times, respectively. The company's 2020H2 performance has gradually recovered, and the annual growth rate is expected to exceed expectations. For the first time, it has been covered by a “recommended” rating.
Risk warning: the risk of a further decline in performance due to repeated epidemics; the risk of a decline in industry sentiment; the risk of rising raw material prices; systemic risks in the capital market, etc.