The company announced 2023 results: 2023 revenue of 2,281 million yuan/yoy -3.07%, net profit to mother 270 million yuan/yoy +3.34%, net profit after deducting non-return to mother 262 million yuan/yoy -0.14%. On a quarterly basis, 23Q1/Q2/Q3/Q4 revenue was -6.57%/-2.16%/+16.11%, respectively, and net profit to mother was -52.99%/-19.58%/-4.46%/reversed loss to profit, respectively. Results for the second half of '23 improved markedly, with 23Q4 turning losses into profits mainly: ① Cotton socks business rebounded beyond expectations, and the share of high-margin customers increased; ② bonuses were distributed to all quarters of 23; ③ reduced losses in inventory prices, etc.
The company announced that it plans to pay a cash dividend of 0.25 yuan per share, compounded by the three-quarter report dividend of 0.25 yuan/share. The cumulative dividend ratio for fiscal year 23 reached 68%, and the dividend rate as of 24/03/19 reached 4.6%.
Cotton socks business (including accessories): Domestic customers and Uniqlo are growing at a high rate, and profitability is further improving.
1) Performance: Revenue for 23 was 1,655 billion yuan, +2.7% year-on-year, accounting for 73% of total revenue, net profit of 248 million yuan/yoy +19%, and 23H1/H2 revenue was -10%/+15% year-on-year respectively. The cotton socks business recovered significantly in the second half of the year. ① Looking at volume and price, revenue growth in 23 was mainly due to price increases due to improvements in customer structure and devaluation of RMB (unit price was about +7% year over year), and sales volume was -4% year-on-year. ② Looking at the customer structure: In terms of international customers, cooperation between the company and UNIQLO deepened, UNIQLO contributed +30% of revenue, Decathlon's revenue increased by about 20%, and other major customers were basically stable; on the domestic side, customer development progressed smoothly in '23 (Li Ning, Jiaonai, Ubras, FILA) began to gradually expand, and their contribution to the company's revenue increased by 52% year on year. ③ In terms of its own brands, JSC developed steadily, with revenue of 35 million yuan in 23 years, +19% year-on-year. 2) Profitability: The gross margin for 23 years was 30% /year over year +1pct, and the net interest rate was 15% /year over year +3pct, mainly due to the increase in Uniqlo's share, the depreciation of RMB + significant cost reduction and efficiency.
Seamless business: Short-term pressure remains, and profitability improvements can be expected. 1) Performance: Revenue for the year 23 was 626 million yuan, -15.3% year-on-year, accounting for 27% of total revenue. 23H1/H2 revenue was -15% year-on-year, and is still under pressure. Looking at the split price, seamless sales volume was about -9% year-on-year due to customers leaving the warehouse in '23, and the share of some low-priced customers increased, leading to a unit price of about -6% year-on-year. In terms of customer structure, Uniqlo and Decathlon are relatively stable, declining by about a single digit, delta falling a lot, and new customers IKAR and TEFRON contributed more. 2) Profitability: The gross margin for 23 years was about 12.7% /-2.7 pct year on year, and the net profit margin was 3.6% /year over year -3.5 pct, mainly due to low capacity utilization and acceptance of low price orders. Along with the seamless expansion of new customers and the expansion of old customers in the business, it is expected that there is plenty of room for improvement in profitability.
The increase in the gross margin of the cotton socks business boosted the overall gross profit margin, and the net profit margin increased steadily. 1) Gross profit margin: 23 gross margin +0.16 pct to 25.97%, 23Q4 gross profit margin 25.83% year over year, +12.5 pct year over year, mainly driven by increased gross margin of cotton socks combined with cost reduction and efficiency. 2) Expense ratio: The cost ratio was +0.59pct to 13.51% year-on-year during the 23-year period. Among them, sales/management/ R&D/finance expenses were +0.18/+0.41/-0.54/+0.55pct year-on-year, respectively, to 3.31%/7.83%/2.21%/0.16%, with little overall change. 3) Net interest rate to mother: Net interest rate to mother in '23 was 11.85% /yoy+0.73pct, mainly due to reduced net loss on investment, combined income tax expenses, and reduced inventory prices.
Profit forecast and investment rating: The company is a leader in cotton socks+seamless underwear. In the first half of '23, there was strong pressure on short-term orders. However, in the second half of the year, along with the smooth digestion of downstream overseas customer inventories and a gradual recovery in demand from Europe and the US, the improvement in the company's cotton socks orders led to improved performance, but the seamless business was still under pressure.
In the long run, domestic customers and own brands have been developing smoothly in the cotton socks business. In addition, supply-side companies announced the construction of 65 million pairs of cotton socks and dyeing and spandex supporting projects in Nam Dinh, Vietnam, which is expected to maintain steady growth over the long term; the seamless business continues to develop new products and new customers, and is expected to contribute more to performance flexibility in the future. Considering that the 23-year cotton socks repair exceeded expectations, we raised our 24-25 net profit forecast from 289/363 million yuan to 311/364 million yuan, estimated net profit to mother of 422 million yuan in '26, EPS of 0.84/0.99/1.14 yuan/share, and PE of 13/11/9X, respectively, maintaining a “buy” rating.
Risk warning: weak external demand, exchange rate fluctuations, production expansion falling short of expectations, fluctuations in orders from major customers, etc.