Incident: The company recently released its 2023 annual report. 2023 revenue of 6.91 billion yuan/year on year -1.08%, net profit of 504 million yuan/year on year -67.8%, net profit after deducting non-return net profit of 121 million yuan/year on year -102.7%; single Q4 revenue 1.82 billion yuan/year on year +44.4%, net profit to mother - 50 million yuan/year on year -109.3%, after deducting non-net profit - 128 million yuan/year over year. Among them, non-financial assets mainly include gains and losses on disposal of illiquid assets (RMB 0.17/439 million in 22/23) and income from financial asset investment (RMB 776/127 million in 22/23, respectively). Cash dividends accounted for 88.7% of net profit attributable to mother in '23.

Domestic/overseas revenue was -0.5%/+1.3%, and revenue from colored spinning yarn/ billet yarn was -13.5%/+19.4%, respectively. 1) By product, revenue from colored spinning and billet yarn was -13.5%/+19.4% to 31.4/3.32 billion yuan, respectively, of which color spinning accounted for 49%/-8pct year on year; in terms of volume and price breakdown, the total output and sales volume of yarn was +11.6%/+22.4% YoY to 21.216 million tons, respectively, and the production and sales rate was 102% /yearly +9pct. We estimate that ASP fell 18% year on year to 30,000 yuan/ton. 2) By region, domestic/overseas revenue was -0.5%/+1.3% YoY to 18.4.65 billion yuan respectively. Among them, Vietnam's factory achieved contrarian growth. Vietnam Blum's annual revenue was +11.9% YoY to 5.3 billion yuan, and net profit was 126 million yuan/-81.7% YoY, mainly due to insufficient orders and declining capacity utilization.

The exchange of price for volume put pressure on gross margin, and the fall in inventory prices washed back to offset some of the decline in performance. 1) Gross margin -18.2pct to 8.7% year-on-year, mainly due to ① low sales price, absorption of high-priced cotton inventory, ② increase in the share of blanks with low gross margin. 2) On the cost side, sales/management/R&D/finance expense ratios were -0.11/-0.82/-0.17/ -0.02pct to 0.59%/4.79%/1.45%/2.23%, respectively; 3) Other expenses: the share of investment income decreased by 3.5 pct, mainly by 89% to 80 million yuan (730 million yuan in '22); the share of asset impairment losses fell by 4.9 pct, mainly due to falling cotton prices in '22; 4) Net profit margin -15.1pct YoY to 7.3%.

Profit forecast and investment suggestions: As a leading global color spinning enterprise, the company has obvious competitiveness in manufacturing, capacity layout, and product quality. In the short term, brand customer inventory is nearing its end, and demand for stock replenishment combined with demand continues to recover, driving up the inflection point of orders. Furthermore, with the digestion of high-priced cotton inventory sales in the early stages and the tightening of price increases and discounts since 24Q1, the company's performance side is expected to recover significantly in 24Q2. In the medium to long term, the company is expanding production reserve capacity in an orderly manner, and is optimistic that the trend of concentrating manufacturing side shares on leading companies will not change. We expect net profit to be 5.6/7.5/890 million in 2024/25/26. The corresponding valuation of the current stock price is 15/11/9 times, giving it a “buy” rating.

Risk warning: demand recovery/capacity expansion falls short of expectations, large fluctuations in raw material prices/exchange rates, etc.