Key points of investment:
The company released its 23rd annual report: ① Revenue of 6.91 billion yuan (-1.1% year over year), net profit to mother of 50 million yuan (-67.7% year over year), which is the upper limit of the previous performance forecast range (4.2-50 billion yuan), after deducting net loss of 200 million yuan (year-on-year loss). Non-income items mainly contributed to the transfer and disposal of shares in domestic surplus production subsidiaries. Looking at the volume price of the main business spin-off, yarn sales in '23 were 217,000 tons (+22.4% YoY), with an average price of 29,800 tons/ton (-17.7% YoY). Against the backdrop of insufficient orders due to inventory removal from downstream international brands, 23H1 promptly adjusted and adopted a “price-for-volume” sales strategy, which enabled a rapid recovery in capacity utilization in a relatively short period of time, and ultimately achieved balance between production and marketing. ② The proposed cash dividend for fiscal year 23 is 450 million yuan, with a cash dividend rate of 89%, and a dividend of 0.3 yuan per share. The dividend rate corresponding to the latest stock price is about 5.5%.
We believe that after 24 years, when downstream international brands are out of stock and stock replenishment begins, the company will usher in a reversal of the difficult situation and is in the beginning stages of a recovery in volume, price, and profit. It's just that the profit side will lag behind the revenue side's recovery! We are optimistic for the following reasons:
1) The recovery in downstream demand was first reflected on the revenue side, and the recovery in production capacity utilization effectively reduced unit manufacturing costs.
According to quarterly earnings reports, 23Q1/Q2/Q3/Q4 revenue year-on-year was -24.8%/-12.8%/+6.2%/+44.4%, +17.7%/+16.7%/+8.0%/-2.7% month-on-month compared to the previous quarter. Downstream warehousing is nearing its end, and procurement from international brand customers is gradually resuming. Orders are showing a recovery trend, driving up the company's capacity utilization rate. Currently, Vietnam's production capacity utilization rate is high.
2) Early stocks of high-priced cotton were basically exhausted, the pressure on the cost side was relieved, and subsequent improvements in supply and demand also provided solid support for cotton prices.
In order to guarantee that the fluctuation in its raw material costs is limited, the company adopts a relatively balanced procurement rhythm of raw materials and has a large holding volume. Therefore, in the recent cotton price drop cycle, its own inventory costs need to be gradually digested by digesting high-priced inventories and purchasing new low-price inventories. According to the 23 annual report, the company prepared 46 million yuan for inventory price reduction in 23 years, a sharp decrease from 380 million yuan in '22. Of these, only a small amount of raw material inventory was prepared for price reduction of 7.15 million yuan, indicating that the current pressure on the company's raw material inventory costs has been greatly reduced. Furthermore, since domestic and foreign cotton prices were low in the current round in November 23, domestic and foreign cotton prices have rebounded to varying degrees, which also shows that improvements in supply and demand have a supporting effect on cotton prices, which is conducive to a recovery in cotton yarn prices.
3) As high-margin spinning orders pick up, order structures are optimized, and combined price discounts are narrowed, gross margin will continue to rise.
According to the 23 annual report, the company's revenue for blank/colored spinning was +19.4%/-13.5%, contributing 51%/49% of revenue, and 2.4%/12.8% of gross profit margin, which was -22.1pct/-14.3pct, respectively. This indicates that during the inventory removal cycle, the profitability of all yarn products declined sharply, resulting in a sharp decline in the gross profit margin of the main business in 23 (-18.5pct year on year), and sales of high-value-added colored spinning products declined significantly. Recently, with the normalization of downstream procurement, the share of high-unit price and high-margin color spinning orders is expected to continue to rise, driving a significant recovery in actual gross margin. At that time, it will usher in a second signal of a rebound in performance!
A major global manufacturer of color spinning, with outstanding production capacity scarcity in Southeast Asia, began reversing the situation in '24 and maintaining a “buy” rating. Considering the pace of order recovery and the time of confirmation of some investment returns, we maintain our 24-year, 25-year profit forecast, and expect net profit to mother of 6.0/7.8/1.02 billion yuan for 24-26 (previously $6.0/1.01 billion yuan for 24-25), corresponding PE is 14/10/8 times, maintaining a “buy” rating.
Risk warning: The global pandemic affects downstream demand; fluctuations in cotton prices affect profitability; industry capacity supply has increased dramatically.