The company announced its 2023 results, achieving operating income of 24.97 billion yuan, a year-on-year decrease of 10.1%, and a net profit of 4.56 billion yuan, a year-on-year decrease of 0.1%. Among them, 23H2 revenue and net profit to mother fell 5.8% and increased 10.7%, respectively. The profit for the whole year was better than market expectations. The 2023 dividend payout ratio is 60.3%.
Orders for sports products in Europe and the US dragged down the company's revenue performance, and the domestic market performance was better than that of the international market. Specifically, 1) By category, sports/leisure/underwear/other knitwear revenue fell 13.6%, fell 1.4%, increased 30.2%, and 41.6% respectively in 2023. Among them, the decline in sports products was mainly due to falling demand for sportswear orders in the European and US markets and brand inventory removal. The sharp increase in underwear was mainly due to increased demand for underwear procurement in Japan and other markets. The sharp decline in other knitwear was mainly due to mask product sales in 2022, and none in 2023. If mask products were excluded, the year-on-year increase was due to the year-on-year increase. 0.4% 2) In terms of subregions, Europe/US/Japan's revenue declined by 19.1%, 20.4%, and 6.4%, respectively, in 2023, while China's domestic revenue increased by 0.7% year on year, which is better than other regions.
The gross margin performance was better than market expectations. Gross margin increased by 2.2 pct to 24.3% year over year in 2023, with 23H2 up 4.3 pc year over year and 3.4 pc month over month. The main reasons for the increase include: 1) the 23H2 capacity utilization rate increased month-on-month; 2) the gradual increase in the operating efficiency of overseas factories, the increase in the number of new employees hired, and the increase in the profit contribution of overseas factories; 3) the impact of pandemic-related expenses was basically eliminated. In terms of other categories, net interest income in 2023 was 400 million yuan, compared to 50 million yuan in the same period last year. The effective tax rate fell 4.5 pct to 8.8% year on year, mainly due to increased overseas profit contributions. Exchange income was 150 million yuan, compared to 1.1 billion yuan in the same period last year.
We remain optimistic about our 2024 results. Although some overseas leaders are cautious about future expectations (Nike, Lulu Lemon, etc.), we predict that sales growth in 2024 will be around double digits, and gross margins are expected to gradually recover. The core drivers include: 1) a recovery in demand from overseas brands; 2) an increase in the market share of existing customers and the expansion of new customers. We believe that the company's excellent quick reaction ability, category expansion ability, and high production efficiency brought about by vertical integration can achieve continuous performance surpassing peers. Furthermore, the company is actively considering further enriching overseas production capacity layout to further optimize global resources while meeting customer needs.
According to the 2023 results announcement, we have adjusted our profit forecast. We expect the company's 2023-2025 earnings per share to be $3.03, 3.69, and 4.32 (previously $3.00, 3.38, and $4.11), respectively, and the DCF target valuation is HK$97.65 (1 RMB = HK$1.0829), maintaining a “buy” rating.
Risk warning: Economic recovery falls short of expectations, RMB exchange rate fluctuations, downstream brand inventory replenishment demand falls short of expectations, etc.