23-year results fell short of expectations; 24-year order and capacity recovery can be expected
Shenzhou 2H23's net profit also increased 10.7% to 2.43 billion. Excluding exchange earnings, the core net profit was 2% lower than Huatai's forecast. The main reason was that the quarterly recovery pace of orders in the second half of the year was weaker than expected, partly offset by better-than-expected gross margin. The company declared a final dividend of HK$1.08 with a full year dividend payout ratio of 60.3% (2022:
56.2%) With the company's major brand customer inventory bottoming out and the global consumer market gradually recovering, the current capacity utilization rate of Shenzhou's domestic and overseas factories has recovered to 100%. Management is confident that orders will resume and will restart employee recruitment, which is expected to drive improvements in revenue and net interest rates in 24 years. We lowered the basic EPS of 24E/25E by 1.8/ 3.8% to $3.81/4.47, introduced a 26-year forecast of $5.19; increased the DCF target price by 2% to HK$96 (WACC 11.0%; sustainable growth rate 3.0%). “Buy”.
Revenue in '23 was driven by inventory losses from European and American sportswear and Japanese casual wear customers. Revenue fell 10.1% year on year to 25 billion, mainly due to poor sales of sportswear in the European and American markets and casual wear in the Japanese market, which led to a 14-15% year-on-year decline in sales; while the unit price of RMB/USD was +5/1% year over year, mainly due to high pricing, rapid increase in orders and positive exchange rates to help offset the decline in raw material costs. By brand, revenue from Nike/Uniqlo/Puma/Adidas was -11/+3/-28/ -24% year over year; Lululemon contributed 80 million US dollars in revenue. Domestic brands increased their share of revenue to 11% (2022:9.8%). Management said that 4Q23 revenue had resumed positive growth, and 1Q24 orders continued to improve month-on-month as customer inventories recovered; in '24, the company will focus on product and customer diversification, continue to deepen product R&D interaction with customers, and implement green production and intelligent production.
Restart employee recruitment after 24 years to cope with the recovery in order demand
2H23 benefited from improved order and capacity utilization, and gross margin was +4.3pp to 25.8% year over year. According to management, 4Q23 orders have clearly recovered, and the capacity utilization rate of domestic and overseas factories has recovered to 90-95%/100% (1H23:80%/95%), and has all recovered to 100% up to now. 2H23 overseas factories took the lead in recovering capacity utilization. At the end of 23, overseas/domestic garment production capacity accounted for 53/ 47% (22:46/ 54%); the total number of employees was -2% to 92,030, and the overseas/domestic share reached 57/ 43% (22 years: 52/48%). Combined with the reduction in epidemic subsidies, wage expenses fell 11% during the year. Based on confidence in order recovery in '24, Shenzhou added about 3,000 new employees in Ningbo at the beginning of the year, and plans to add another 2,000; Vietnam's Seito plant will add about 2,000 new employees. In '24, the company will also promote production capacity layout in new markets such as Indonesia.
Forecast 24E-26E net profit CAGR of 20%
Considering that the recovery in orders in 23 fell short of expectations, we lowered our 24/25 revenue by 7/7% to $295/34 billion; however, we believe that the trend of order recovery starting in '24 is clear, and we expect revenue growth in 24 to be driven by 10-20% mid-range sales growth and lower unit price increases. We expect gross margin to improve to 27.5/28.0/ 28.5% in 24/25/26. In summary, we lowered our 24/25 net profit forecast by 1.8/3.8% to $57.3/6.72 billion, and introduced a 26-year forecast of 7.81 billion, corresponding CAGR of 20%.
Risk warning: 1) Global demand recovery is slow; 2) capacity expansion is slow; 3) RMB appreciates against the US dollar.