Incidents:
On March 26, 2024, Shenzhou International announced 2023 results: In 2023, the company achieved operating income of 24.970 billion yuan, -10.12%, net profit to mother of 4.557 billion yuan, -0.12% year-on-year, net sales margin 18.25%, +1.82pct compared to 2022, gross profit margin 24.27%, +2.22pct compared to 2022, and a dividend of HK$2.03 per share in 2023, +6.3% year over year.
Investment highlights:
European and American brand customers leaving the warehouse affected revenue growth, and the revenue performance of sports products was poor. In 2023, the company achieved operating income of 24.97 billion yuan, -10.12% year on year, net profit to mother of 4.557 billion yuan, +0.12% year on year, net sales margin 18.25%, +1.82pct compared to 2022, gross profit margin 24.27%, and +2.22pct compared to 2022. Looking at business segmentation, 1) Revenue by category:
Sports category was 18.032 billion yuan, -13.6% year on year, accounting for 72.2%; leisure category was 5.673 billion yuan, -1.4% year on year, accounting for 22.7%; underwear category was 1,067 billion yuan, +30.2% year on year, accounting for 4.3%; other knitwear was 199 million yuan, or -41.6% year on year, accounting for 0.8%. 2) Revenue by region: Europe 5,027 billion yuan, -19.1% YoY, accounting for 20.1%; US 3.888 billion yuan, -20.4% YoY, accounting for 15.6%; Japan 3.676 billion yuan, -6.4% YoY, accounting for 14.7%; Other countries 5.263 billion yuan, -7.6% YoY, accounting for 21.1%; Domestic market 7.124 billion yuan, +0.7% YoY, accounting for 28.5%. Demand in the global market was weak in 2023. In particular, demand in the European and US markets dropped significantly, the company's revenue declined, and domestic market demand increased, especially casual clothing. At the same time, the company did not sell mask products in 2023, causing sales revenue from other knitwear to drop sharply. If the impact of mask products is excluded, sales of other knitwear increased by 0.4% compared to last year.
Gross margin improved due to increased capacity utilization and new plant efficiency, and the Group's cash flow was still abundant.
The company's gross profit margin in 2023 was 24.3%, +2.2pct compared to last year, net margin 18.25%, and +1.82pct compared to last year. The main reasons for the increase in gross margin were: 1) the Group's overall capacity utilization rate increased in the second half of 2023 compared to the same period last year; 2) the operating efficiency of new overseas plants increased, the number of new employees hired increased, and profit contributions increased; 3) the impact of pandemic-related expenses on performance during the period was eliminated. In terms of expenses, the company's sales/management/financial expenses in 2023 accounted for 0.7%/7.5%/1.4%, respectively, compared with -0.1/+0.5/+0.6pct in 2022. In terms of cash flow, in 2023, the Group's net operating cash was 5.227 billion yuan, compared with 4.628 billion yuan in 2022, +13% year over year. As of the end of 2023, cash and cash equivalents were $11.596 billion, and in 2022 it was 7.369 billion yuan, an increase of 4.227 billion yuan over the previous year, with abundant cash flow.
The transformation to a green and low-carbon production model has been strengthened, and the operating performance of overseas factories has been further improved. In 2023, the company achieved greening of about 50% of its electricity through measures such as photovoltaic power generation on its own roof, outsourced green power transactions, and electricity green license transactions. By the end of 2023, the total installed capacity of the Group's photovoltaic power generation had reached 75MW, +65%; annual biomass consumption +167%; and treated sewage recycling +47% year-on-year. In terms of operating performance of overseas factories, garment output from overseas factories accounted for 53% of the Group's total garment output in 2023, +7pct compared to 2022; of these, the Cambodian base was 26%, +4pct compared to 2022. We are optimistic about Shenzhou International's green and low-carbon development model in the future and the continuous improvement of the operating performance of overseas factories in terms of efficiency, scale, and quality.
Profit forecast and investment rating: Taking into account the uncertainty of the external environment, we adjusted the profit forecast. The company is expected to achieve revenue of RMB 288.3/327.2/36.78 billion, +15%/13%/12% year over year; net profit to mother of RMB 53.4/62.1/7.09 billion yuan, +17%/+14%; closing price of HK$74.1 on March 28, 2024, corresponding to the 2024-2026 PE valuation of 19/16/14X. I am optimistic about the company's subsequent expansion of brand customers and the integrated layout of production capacity at home and abroad, as well as the increase in ready-to-wear unit prices due to the company's fabric innovation and enhanced bargaining power. Maintain a “buy” rating.
Risk warning: supply chain risk; core customer order fluctuation risk; exchange rate fluctuation risk; valuation risk: changes in market style, risk of falling valuation center; risk of rising raw material costs; other risks.