1HFY24 (April-September) achieved revenue of HK$3,545 million, -23.3%/+8.5% yoy, net profit of HK$110 million, year-over-year net profit of HK$110 million, -65.9%/+52% yoy. Operating performance improved month-on-month, and there was still room for continued recovery compared to the peak of orders over 1HFY23. Looking at the short term, the company operated steadily in the first half of the fiscal year in the first half of the fiscal year. With the gradual completion of downstream inventory removal, the results of the company's operating efficiency reforms are expected to gradually show. We expect that the company's current performance has gradually bottomed out. Performance performance is expected to gradually stabilize and pick up in the next half year (October to March of the following year), and gradually resume relatively rapid growth in FY2025. In the long run, the company is expected to benefit from ① the continuous expansion of Vimi's business in China, ② the rapid growth of the new seamless clothing business, and ③ the release of production capacity and efficiency improvements brought about by the completion of the relocation of the new factory in Zhaoqing, returning to the path of steady business growth. We gave the company 8 times PE in fiscal year 2025, corresponding to the target price of HK$3.1, to maintain the “buy” rating.

1HFY24 business orders improved month-on-month, and profit levels were disrupted by factors such as interest rates and factory relocations. According to the company announcement and interim performance exchange meeting, 1) Revenue: 1HFY24 (April-September), the company achieved revenue of HK$3,545 million, -23.3%/+8.5% yoy. Compared with 2HFY23, the negative impact of orders from downstream brand customers removing inventory is gradually weakening. 2) Costs and expenses: The gross margin of 1HFY24 company is 23.8%, y-o-/-1.5pcts/+1.3pcts; excluding the impact of discounts, the gross margin of 1HFY24 is 29.8%, y-o-/-0.2pct/+0.9pct, mainly through optimization measures for the company's production efficiency (staff reduction, automation efficiency improvement, etc.) to offset the negative impact of low capacity utilization caused by downstream inventory removal; sales/management/ R&D/ financial expense ratio is 2.3%/7.6%/ 4.4%, year-on-year +0/-0.9/+0.9/+1.2pcts Among them, management expenses benefited from the optimization of Vietnamese factory personnel, and financial expenses increased year-on-year due to rising debt interest rates under the global interest rate hike trend. 3) Profit: Net profit of HK$110 million, -65.9%/+52%, corresponding to the net profit margin of 3.0%, year-over-year and -3.5pcts/+0.2pct, mainly due to ① the decline in capacity utilization caused by downstream brand inventory removal, which drags down gross margin performance; ② higher financial expenses due to global interest rate hike trends; ③ one-time expenses for Shenzhen plant relocation (If you exclude additional expenses of about HK$90 million due to one-time employee length compensation and fixed asset settlement due to Shenzhen plant relocation, 1HFY24 10.7%, y/y -1.7pcts/+4.1pcts).

Business analysis: The underwear business is under steady pressure, and the sports category complements growth. According to the company announcement and the interim report performance exchange meeting, by product, the revenue of 1HFY24 company's personal wear/sports products/consumer electronics accessories/bras and other molded products/footwear was HK$22.1/9.9/1.6/1.4/1.4/HK$0.45 million, -10%/-33%/-38%/-37%/-77%, +13% /4%/+42%/+23%/-65.7%, gross margin was 24.6%/22.9%/20.0%/22.6%/18.0%, YoY 1.9/-1.2/-5.0/-0.8/-4.3pcts, +1.4/+1.0/+5.0/+2.2/-5.2 pcts month-on-month. Performance analysis: Among them, the Innerwear Business ① Group is deeply linked to major brand partners, and overall orders have begun to enter a positive track. ② Weimi China's performance growth is driving demand for this business; growing revenue for sports products was affected by the removal of downstream sports brand inventories. By product, sports bras and sports leggings improved moderately month-on-month, and seamless clothing grew rapidly; consumer electronics revenue improved month-on-month, mainly benefiting from iterative product updates from downstream brands. Breast cup molding products are consistent with the performance of the underwear business; the decline in footwear product performance is mainly due to the company's active contraction of business (orders from a single footwear customer fluctuated too much). The business was shut down in October, shifting production capacity to seamless underwear production.

Joint ventures: IDM's main business develops collaboratively, and Vimi China continues to be profitable. 1HFY24 Vimi China's revenue was HK$883 million yoy/y +51%/+16%, accounting for net profit of HK$2201.8 million (1HFY23/2HFY23 was a loss of $906.2 million and a profit of HK$116 million). Reasons for continued profit: ① The company relies on its main IDM business to develop differentiated pillar products (popular products such as jelly strip vests, anti-gravity bras, etc.). The two have synergized, and some of the locally developed Chinese market products have been purchased from the international market; ② With the support of popular funds, e-commerce channels have grown rapidly (“Double Eleven” e-commerce channels +57%, including Tmall channel +61%, Douyin channel +49%).

Outlook: The demand side gradually ushered in an upward inflection point, and the supply side continued to optimize profit levels. According to the company announcement and the interim performance exchange meeting, the company expects 2HFY24 to achieve a double month-on-year increase in revenue, and FY 2025 orders are expected to improve markedly. 1) The demand side is gradually recovering: The underwear and chest cup compression business has benefited from ① stable orders from international brands and ② improved business in Vimi China. The company expects a steady increase in the second half of the fiscal year. In terms of the sports products business, we expect that the sportswear category will benefit from ① the company's leading industry's seamless fit processing technology, ② major brands promoting women's sports series products, and ③ the gradual completion of downstream brand inventory removal. 2) Increased supply-side profit: On the one hand, automated production improves efficiency, ① the company has optimized the Vietnamese factory. The company expects that once sales return to 1HFY23 and maintain the same production scale, the company can save 20% of human resources; ② the company expects the Zhaoqing base to be relocated within two years, further improving the level of production automation and digitalization. On the other hand, the capacity utilization rate has rebounded. The company expects that by FY2025, the capacity utilization rate will gradually approach the level of 1HFY23, and gross margin is expected to continue to rise.

Risk factors: The progress of moving into the Zhaoqing production base falls short of expectations, the progress of downstream brand inventory removal falls short of expectations, product range expansion falls short of expectations, raw material prices have risen sharply, foreign currency exchange rates have fluctuated, raw material prices have fluctuated, manufacturing policies have changed beyond expectations, and the decline in sales volume from major customers has led to a decline in company orders.

Profit forecast, valuation and ratings: 1HFY24 achieved revenue of HK$3,545 million yoy /y -23.3%/+8.5%, net profit of HK$110 million, and net profit of HK$110 million, -65.9%/+52% yoy. In the short term, the pressure on performance in the first half of the fiscal year was mainly due to ① the decline in capacity utilization due to the removal of inventory by downstream brands, which dragged down revenue and gross margin performance; ② higher financial expenses due to global interest rate hikes; and ③ one-time expenses for plant relocation in Shenzhen. We expect that the company's current performance has gradually bottomed out. Performance performance is expected to gradually stabilize and pick up in the next half year (October to March of the following year), and achieve continued growth in orders in FY2025. In the long run, the company is expected to benefit from ① the reversal of the difficult situation of Vimi's business in China, ② the rapid growth of the new seamless clothing business, and ③ the release of production capacity and efficiency improvements brought about by the completion of the relocation of the new factory in Zhaoqing, returning to the path of steady business growth. Considering the high interest level in the short term and the higher labor compensation expenses due to factory relocation within the next three years, we lowered the company's EPS forecast for the 2024-26 fiscal year to HK$0.27/0.39/0.48 (the original forecast was HK$0.38/0.45/0.55). Referring to the 2024 valuation level of comparable companies in the industry (Wind unanimously expects the current price to correspond to 12 times PE of Jiansheng Group, and the CITIC Securities Research Department predicts 20 times PE of Shenzhou International), considering the company's leading position in the underwear manufacturing industry and advantages in technology and production scale, the company was given 8 times PE in fiscal year 2025, corresponding to the target price of HK$3.1, maintaining a “buy” rating.