Event: Shenzhou International announces 2023 results. The company's revenue in '23 was 24.970 billion yuan, -10.1% year-on-year, mainly due to weak global demand, especially in the European and American markets; net profit attributable to mother was 4.557 billion yuan, -0.1% YoY. Excluding the impact of government subsidies, exchange gains and losses, and bank interest income, net profit +11.3% YoY; gross margin was 24.3%, +2.2ppt; Net margin was 18.3%, YoY +1.8ppt. The company plans to pay a final dividend of HK$1.08 per share, for a total annual dividend of HK$2.03 per share, with a dividend payout ratio of 60.3%.
The underwear category grew significantly, and revenue in the mainland China market was basically the same as compared to the same period last year. 1) By product, sports/leisure/underwear revenue was 18.032 billion yuan/5.673 billion yuan/1,066 billion yuan, respectively, -13.6%/-1.4%/+30.2% year-on-year, respectively. The sharp increase in underwear revenue was mainly due to strong demand for underwear in the Japanese market. 2) By customer, Nike/ Uniqlo/ Adidas/ Puma customers had revenue of 7.697 billion yuan/6.0.02 billion yuan/3,692 billion yuan/2,491 billion yuan, respectively, -10.8%/+2.9%/-24.1%/-28.1%, respectively. 3) By region, Mainland China/Europe/US/Japan/other regions had revenue of 7.124 billion yuan/5,027 billion yuan/38.80 billion yuan/3,676 billion yuan/5.263 billion yuan, respectively, +0.7%/-19.1%/-20.4%/-6.4%/-7.6%, respectively.
23H2 gross margin improved month-on-month, and the share of overseas production capacity increased. The company's overall gross margin increased by 2.2 ppt to 24.3% in 23, mainly due to: 1) the gradual elimination of 23H2 brand customer inventory and an increase in the company's capacity utilization rate; 2) benefiting from improved operating efficiency and an increase in the number of newly hired employees, production capacity in overseas factories was further released. By the end of 2023, the company's overseas and domestic apparel production capacity accounted for 53% and 47% respectively (in '22:
46%, 54%), of which Cambodia accounts for 26% of production capacity (22 years: 22%).
Investment advice: We believe that as the pressure on brand customers to leave the warehouse is eased, the company's order and capacity utilization rate may continue to improve; at the same time, the company is actively consolidating its production and delivery capacity and optimizing the product structure, which is expected to increase order share and develop new customers. We expect the company's net profit to be 5.249 billion yuan/6.098 billion yuan/7.030 billion yuan in 2024-2026, respectively, +15.0%/+16.2%/+15.3% year-on-year, respectively, maintaining the “gain” rating.
Risk warning: risk of order growth falling short of expectations; risk of capacity expansion and production falling short of expectations; risk of rising labor costs; risk of exchange rate fluctuations; risk of international political friction.