Revenue and net profit to mother fell 1% and 68% year over year in '23

Blum Oriental publishes its 2023 annual report. In 2023, the company achieved operating income of 6.914 billion yuan, a year-on-year decrease of 1.08%, net profit to mother of 504 million yuan, a year-on-year decrease of 67.75%, after deducting a loss of 21.35 million yuan in non-net profit, which turned into a year-on-year loss. EPS is $0.34, and it is proposed to distribute a cash dividend of 0.30 yuan (tax included) per share, with a dividend payment rate of 89%.

In '23, demand for terminals was weak, and the company's performance was disrupted due to inventory removal from downstream overseas clothing brands.

Among them, against the backdrop of a decline in overseas orders and a decline in production capacity utilization in the first half of the year, the company promptly adjusted its sales strategy and traded price for volume in the second half of the year. Revenue declined only slightly throughout the year, driven by sales volume. There was a large decline on the profit side, mainly due to poor demand, low sales prices and poor order structure, which led to a year-on-year decline in gross margin. The company's net profit margin in '23 was 7.29%, down 15.07PCT year on year.

In '23, the company deducted non-net profit losses, while net profit attributable to mother was positive. The difference was mainly non-recurring profit and loss totaling $525 million, of which the main ones were profit and loss of 439 million yuan from the disposal of illiquid assets (share transfer contribution of some domestic subsidiaries), profit and loss of 127 million yuan from fair value changes and disposal of financial assets and liabilities (wealth management income and cotton futures investment income contribution).

On a quarterly basis, 23Q1-Q4 companies' revenue in a single quarter was -24.78%, -12.80%, +6.17%, and +44.38%, respectively. Net profit to mother was -75.59%, -56.24%, and +6.95%, respectively. Orders gradually picked up in the second half of the year, revenue growth was positive, and the higher growth rate in 24Q4 also contributed to a low base.

Revenue from colored spinning and billet yarn was -14%/+19%, and Vietnam's Blunk/domestic production capacity revenue was +12% and -28% volume price. The sales volume of the company's main product yarn in '23 was 21,600 tons, up 22.40% year on year. It is estimated that the unit price decreased by about 18% year on year; output was 212,200 tons, up 11.57% year on year.

By category, the revenue of the company's colored spinning yarn and billet yarn products accounted for 45% and 48% of total revenue, respectively, accounting for -7PCT and +8PCT year-on-year, respectively. Revenue was -13.50% and +19.44%, respectively.

In terms of production capacity, as of the end of 23, the company's production capacity in Vietnam was 1.26 million ingots and the domestic production capacity was 360,000 ingots, accounting for 78% and 22% respectively. The subsidiary Vietnam Blum had revenue of 5.305 billion yuan, accounting for 77%, and revenue increased 11.90% year on year; net profit of 126 million yuan, down 81.66% year on year, net interest rate was 2.38%, down 12.12 PCT year on year. It is estimated that domestic production capacity revenue for 23 years was 1,608 billion yuan, a year-on-year decrease of 28.43%.

The decline in gross margin exceeded the cost rate, reduced inventory, accelerated turnover, and increased net operating cash flow. Gross profit margin decreased by 18.23 PCT to 8.65% year on year in '23, mainly due to a decrease in product sales prices and a decline in the share of colored spinning yarn categories with high gross margins. By category, the gross margins of colored spinning yarn and blended yarn were 12.82% and 2.41%, respectively, -14.33PCT and -22.09PCT; by region, domestic and overseas gross margins were 2.37% and 9.45%, respectively, -16.73PCT and -19.26PCT, respectively. On a quarterly basis, gross margins for a single quarter from 23Q1 to Q4 were 13.31%, 16.30%, 3.57%, and 2.78%, respectively. The gross margin remained low in the second half of the year, mainly due to improved demand at the end of the year, and the order structure had not improved.

Expense ratio: The cost ratio decreased by 1.12 PCT to 9.06% year on year. Among them, sales, management, R&D, and finance expenses were 0.59% (-0.12PCT), 4.79% (-0.83PCT), 1.45% (-0.17PCT), and 2.23% (-0.01PCT), respectively. Weak market companies reduced expenses such as sales commissions and management remuneration, which led to a decrease in the cost ratio. On a quarterly basis, the cost rates for a single quarter from 23Q1 to Q4 were +3.03, -3.05, -1.03, and -4.78PCT, respectively.

Other financial indicators: 1) Inventory decreased 11.93% year on year to 4.708 billion yuan at the end of the year 23. The number of inventory turnover days was 287 days, a decrease of 48 days year on year. 2) Accounts receivable increased by 35.05% year-on-year to 616 million yuan at the end of the year. The number of accounts receivable turnover days was 28 days, a decrease of 1 day year-on-year. 3) Asset impairment losses were 47.48 million yuan in 23 years, compared to 390 million yuan in '22. 4) Net operating cash flow was 809 million yuan in 23 years, an increase of 228.62% year-on-year, mainly due to a year-on-year decrease in total operating purchases.

The 23-year results declined due to weak demand. Profitability was expected to gradually recover in '24. The company's performance declined year-on-year due to weak demand. The revenue growth rate in the single quarter of 23Q3 and Q4 was positive, and orders showed a gradual improvement trend. In '24, as downstream overseas clothing brands are nearing completion, the company's orders are expected to continue to improve. At the same time, as demand recovers, the company's category structure will also be optimized, the share of color spinning is expected to increase, and superimposed prices will gradually pick up. The company's gross margin is expected to continue to improve and recover to a normal level, which in turn will drive an increase in profitability.

Up to now, the company's production capacity in Vietnam is close to full production, and the domestic production capacity operating rate is 80 to 90%. The order schedule and delivery cycle has been slightly longer than average, indicating that orders are being taken relatively well. Since February '24, the company has also increased prices in line with demand and raw material price trends. It is expected that the performance improvement in the second quarter will be even more obvious. We continue to be optimistic that as a leader in the color spinning industry, the company will benefit from the high prosperity of downstream sports tracks, promote production capacity expansion in an orderly manner, and gradually increase market share. In addition, the company has undervalued and high dividend attributes. The average dividend ratio of the company from 2021 to 2023 was 7.95% (calculated based on the closing price of April 16).

Considering that domestic and foreign demand is still recovering and there is some uncertainty, we lowered the company's profit forecast for 24-25 (net profit reduced by 35%/30% from the previous profit forecast, respectively) and added a profit forecast for 26 years, corresponding to EPS of 0.48, 0.61, and 0.69 yuan respectively, and the 24-year and 25-year PE were 11 times and 9 times, respectively. The company's fundamental trend is positive, and it has high dividend attributes, maintaining the “increase in weight” rating.

Risk warning: Weak domestic and foreign demand, changes in the trade environment affect order acceptance, and large fluctuations in exchange rates or cotton prices.