The 2023 results exceeded expectations. We are optimistic that performance inflection point & Vietnam's production capacity optimization will achieve revenue of 2,281 billion yuan (-3.1% year over year), net profit to mother of 270 million yuan (+3.3% year over year), net profit from non-return to mother of 262 million yuan (+0.2% year over year). Core customers in the cotton socks business are stable in 2024 and are expected to continue to grow steadily. Orders from new customers in the seamless apparel business are expected to continue to land, driving improvements in capacity utilization and profitability, and performance flexibility. In the long run, with the implementation of the new project in Nam Dinh, Vietnam, performance is expected to continue to grow. We raised 2024-2025 and added 2026 net profit to the mother of 3.20/3.426 billion yuan (pre-2024-2025 value: 3.18/352 million yuan), corresponding EPS of 0.87/ 0.99/1.16 yuan. The current stock price corresponds to PE 12.3/10.8/9.2 times, maintaining a “buy” rating.
Cotton socks grew steadily in 2023, and seamless clothing was under pressure in the short term
(1) Cotton socks (including accessories): In 2023, we achieved revenue of 1,655 billion yuan, +2.7%; gross margin increased 0.2 pct to 29.42% year over year, and the average unit price increased to 5.0 yuan/pair; achieved net profit of 248 million yuan, +19% year over year, net margin increased 2.1 pct to 15.0% year over year; cotton socks have immediate demand attributes, stable orders from overseas customers, increased the share of high unit price products, and the proportion of domestic customers such as Jiaonai and Li Ning progressed steadily, achieving 52.4% growth.
(2) Seamless clothing: Achieving revenue of 626 million yuan in 2023, -15.3% year over year; gross margin fell 2.7 pct to 12.66% year on year, average unit price dropped to 23.5 yuan/piece, realized net profit of 0.2 billion yuan, -58% year on year, net interest rate fell 3.6 pct year on year to 3.6% year on year. Insufficient capacity utilization rate in 2023 put pressure on performance. I am optimistic that the continued execution of new customer orders in 2024 will drive continuous improvement in capacity utilization and profitability.
The company announced plans to expand production in Nam Dinh, Vietnam, to optimize Vietnam's production capacity layout. The company plans to invest 550 million yuan to build 65 million pairs of cotton socks, 2,000 tons of spandex elastic cord, and 18,000 tons of yarn dyeing production capacity in Vietnam's Nam Dinh Province. The construction period is 3 years. This project will help the company optimize the production capacity layout in Vietnam, integrate the production of accessories such as yarn and spandex, and further expand the supply of raw materials.
The company maintains high dividends and continues to carry out repurchases, and set up incentive funds to motivate employees to maintain high dividend returns to shareholders for a long time. The 2023Q3 and 2023 annual reports each plan to pay a cash dividend of 0.25 yuan/share. The 2023 cash dividend ratio will reach 68%, and it is approved that 2024H1 will pay dividends on the premise that the net profit does not exceed 60%. In addition, it is planned to use $1-2 billion for repurchases in 2024. The company has set up incentive funds to cover a wide range of middle and senior management groups to motivate employees and build a talent pool for a long time.
Risk warning: the risk of exchange rate fluctuations, overseas customer demand recovery falls short of expectations, and production capacity falls short of expectations.