Revenue and net profit to mother fell 10% and 0.1% year on year. The results for the second half of the year have now improved, and Shenzhou International announced the 2023 results. The company achieved operating income of 24.970 billion yuan, a year-on-year decrease of 10.1%; net profit to mother was 4.557 billion yuan, a year-on-year decrease of 0.1%. EPS is $3.03, and it is proposed to pay a final cash dividend of HK$1.08 per share. Combined with the interim dividend already paid out of HK$0.95 per share, the total payout rate for the full year is 60.3%. After deducting the impact of exchange gains and losses, government subsidies, and net interest income, net profit attributable to mother in '23 was 3.715 billion yuan, an increase of 11.3% over the previous year.
The decline in the company's revenue in '23 was mainly due to a decline in consumer demand for clothing in the European and American markets, and a decrease in procurement due to brand customers leaving inventory. Despite a decline in revenue, total profit remained stable. Thanks to increased gross margin, effective cost control, and income tax reduction, net profit margin increased 1.8 PCT to 18.3% year over year.
Looking at the revenue split price, sales volume fell by about 14-15% year on year in '23, and the unit price of RMB/USD increased by about 5%/1% year on year. Looking at the first half of the year, 23H1/H2 revenue was -14.9%/-5.5%, respectively, and net profit to mother was -10.1%/+10.7%, respectively. The results for the second half of the year have improved.
Sports and leisure revenue fell 14%/1% year on year. The top four customers combined accounted for 80% and revenue fell 13% year over year. Looking at categories, sports, leisure, underwear, and other knitwear each accounted for 72.2%, 22.7%, 4.3%, and 0.8% of revenue in '23. Revenue was -13.6%, -1.4%, +30.2%, and -41.6%, respectively. Among them, the decline in sports revenue was mainly due to the decline in demand for sportswear orders in Europe and the US; the decline in casual wear revenue was mainly due to a decrease in casual wear procurement demand in Japan and other markets; the increase in underwear revenue was mainly due to the increase in underwear procurement demand in Japan and other markets; the large decline in other knitwear revenue was mainly due to revenue from products including masks of about 143 million yuan in the same period last year, and the company suspended mask production and sales in '23, excluding the impact of mask products. Revenue from other knitwear increased 0.4% year on year. Looking at the first half of the year, 23H1/H2 revenue for sports was -19.9%/-7.0%, +10.1%/-7.9% for leisure, +0.4%/+117.5% for underwear, and -57.2%/-17.5% for other knitwear, respectively.
By region, domestic sales accounted for 28.5% of total revenue and revenue increased 0.7% year on year; in foreign markets, sales in Europe, the US, Japan, and other markets each accounted for 20.1%, 15.6%, 14.7%, and 21.1% of total revenue, with revenue of -19.1%, -20.4%, -6.4%, and -7.6%, respectively.
In terms of customers, the company's top four customers (Adidas/Nike/Uniqlo/PUMA) accounted for 79.6% of revenue in 23, down 2.4 PCT year on year, and total revenue fell 12.8% year on year; domestic brand customers accounted for more than 11% of revenue in 23, up 2 PCT year on year.
Gross margin increased year-on-year, the second half of the year was better than in the first half of the year, and the gross profit margin was good; the company's gross margin increased by 2.2 PCT to 24.3% year on year. The year-on-year increase in gross margin was mainly due to a gradual increase in the operating efficiency of new overseas plants, an increase in the number of newly hired employees, further freeing up production capacity in overseas factories and reducing fixed cost sharing per unit product. In addition, there were no expenses related to the epidemic in 23 years. Looking at the first half of the year, 23H1/H2 gross margin was -0.1 and +4.3PCT to 22.4% and 25.8%, respectively. The increase in 23H2 gross margin mainly contributed to the year-on-year recovery in production capacity utilization.
Expense ratio: The company's expense ratio decreased by 1.1 PCT to 6.4% year on year. Among them, sales, management, and finance expenses were 0.7% (-0.1 PCT), 7.5% (+0.5 PCT), and -1.8% (-1.6 PCT, net interest income as a share of total revenue), respectively. By type of expenses, employee costs, depreciation, and amortization accounted for 28.0% and 5.9% of revenue in '23, respectively, increasing 0.3 PCT and 0.9 PCT year-on-year respectively.
Other financial indicators: 1) Inventory decreased 2.2% year on year to 6.125 billion yuan at the end of the year 23. The number of inventory turnover days was 120 days, an increase of 11 days year on year. 2) Accounts receivable increased 0.4% year on year to 5,024 billion yuan at the end of 23. The number of accounts receivable turnover days was 73 days, an increase of 17 days year on year. 3) Exchange revenue was 152 million yuan in 23 years, a year-on-year decrease of 84.8%. 4) The income tax rate in '23 was 8.8%, a year-on-year decrease of 4.5 PCT. It was mainly due to an increase in foreign profit contributions and an increase in share, while the foreign tax rate was lower than domestic. 5) Net operating cash flow increased 12.9% year-on-year in '23 to $5.227 billion.
Revenue declined in 23 years due to weak demand. The company continued to practice internal skills and enhance core competitiveness. In 23, the company's revenue declined due to weakening demand and downstream customer inventory removal. However, the company continued to consolidate its core competitiveness, enhance product diversification and innovation capabilities, expand production bases, optimize production capacity, and enrich the customer structure. In terms of production capacity, the efficiency, scale, quality, etc. of the company's overseas factories were further improved. In '23, overseas garment output accounted for about 53% of the company's overall garment output, up 7 PCT year on year. Among them, Cambodia's garment output accounted for about 26% of the company's overall garment output, increasing by 4 PCT year on year; the company continued to promote overseas production capacity construction, and the proportion of overseas workers increased to 57% (+5PCT). At the same time, the per capita efficiency of overseas workers increased significantly, reaching 85-90% of domestic labor efficiency output. At the same time, the company has further improved the supporting construction of overseas factories in production processes such as accessories, printing, and embroidery to enhance short delivery capabilities.
At the customer level, on the one hand, the company deeply cultivates old customers and increases its share among old customers. On the other hand, the company actively expands new customers, making the customer structure more diverse. For example, in '23, Lululemon's revenue grew rapidly, reaching 80 million US dollars. At the same time, in order to meet the diverse needs of customers and increase its share among customers, the company is gradually expanding its categories and focusing on developing new fabrics and tailoring products for customers. For example, the company and Adidas mainly focused on traditional suits and sweatshirts. In '23, the company expanded its categories to soccer wear, golf wear, basketball wear, etc., to help it improve the quality of various categories and reduce procurement costs.
Furthermore, at the end of '23, the company's net cash assets after deducting loans reached 11.438 billion yuan, with strong financial strength and strong resilience to risks.
Maintaining profit forecasts and “buy” ratings, we expect orders to improve and profitability to recover in 24Q1. The company's domestic and foreign capacity utilization rates will return to full production. As downstream customers move to warehouses and terminal demand gradually recovers, the company's order acceptance situation is expected to gradually improve. In terms of production capacity, the company will further expand its recruitment this year. The Ningbo and Vietnam Seito plants are both expected to increase the number of workers by about 2,000. At the same time, in addition to Vietnam and Cambodia, the company will also expand its layout in other regions.
We continue to be optimistic about being the leading manufacturer of sportswear tracks. The company's orders have gradually improved, production capacity has been steadily expanded, efficiency has been released, and both revenue scale and profit levels have been restored in 24 years. We maintained the company's net profit from 24 to 25, and added 26 years of net profit. The EPS for 24-26 was 3.71, 4.29, and 4.90 yuan, respectively, and PE was 18 times and 15 times for 24 and 25, respectively, maintaining a “buy” rating.
Risk warning: Domestic and foreign demand continues to weaken, affecting the company's capacity utilization rate and gross profit margin; production capacity expansion falls short of expectations; cotton prices or exchange rates fluctuate greatly.