Incident Overview
In 2023, the company's revenue/net profit attributable to mothers/net profit after deduction of non-attributable net profit/operating cash flow were 27.00/1.86/1.80/0.25 billion yuan respectively, up 35.81%/23.74%/36.86%/122.69% year-on-year. The performance was lower than the minimum assessment target of 196 million yuan for equity incentives. Our analysis was mainly affected by asset impairment.
Excluding asset and credit impairment losses ($39/75 million in 22/23) and government subsidies ($27.012 million in 22/23, respectively), net profit to mother was $250 million, up 53% year over year; the lower operating cash flow was mainly due to inventory growth and increase in operating accounts receivable. In 23Q4, the company's revenue/net profit attributable to mothers/net profit after deduction was RMB 759/0.13/024 million yuan, respectively, up 29.3%/-31.6%/64.3% year over year.
A cash dividend of 6 yuan was distributed for every 10 shares in 23 years, with a dividend rate of 94% and a dividend rate of 4.9%.
2024Q1 Company's revenue/net profit attributable to mothers/ net profit deducted from non-mother was 597/0.35/0.33 billion yuan respectively, up 28.61%/22.03%/44.83% year-on-year, in line with market expectations.
Analytical judgment:
Revenue from the main business increased, and profits remained flat mainly due to depreciation. (1) Revenue/production/sales/unit price of leather used in shoes and bags in the main business were 1.87 billion yuan/128 million SF/124 million SF/15.1 million yuan/SF, respectively, up 19.59%/17.34%/14.30%/5% year on year, capacity utilization rate 68.23%, up 1.86PCT year on year; main business gross margin was 19.67%, up 0.19 PCT year on year; according to our estimates, the net interest rate was 6.14%, down 1.14 PCT year on year. Our analysis was mainly affected by asset impairment, but if the main business is excluded from depreciation, Profit actually increased by 24%. (2) Domestic (excluding Hongxing and Baotai) /foreign sales revenue was 17.25/145 million yuan, up 28%/-33% year over year; according to our analysis, the overseas decline was mainly affected by inventory, but in '23, the company actively expanded overseas customers and successfully entered the supply chain of brands such as VF Group (Weifu Group) and COLEHAAN (Gehan), and took a solid step in expanding overseas markets.
Increased gross margin combined with tax benefits led to an increase in net interest rates. (1) Revenue from leather for automotive interiors was 599 million yuan, an increase of 94.21% over the previous year. Our analysis was mainly due to Hongxing's merger in the second half of '22; excluding the impact of the consolidation period, Hongxing's own revenue increased by 43% in '23. (2) Hongxing Auto's net profit was 99 million yuan, up 93%/240% year on year, and contributed 59 million yuan in net profit. Hongxing's net profit margin was 16%, up 7 PCT year on year. The increase in net profit margin was mainly due to an increase in gross margin (gross margin of 29.91%, up 6.06 PCT year on year) and a reduction in income tax expenses due to preferential high-tech corporate income tax policies starting in '23. (3) On the customer side, according to the announcement, on April 12, '24, the company announced that it received a fixed notice from an OEM. It is expected to start in March '25, and the amount corresponding to the 5-year life cycle is 1 billion yuan.
Baotai began a period of high growth, but profit margins declined. Revenue from raw materials/other leather for two-layer collagen products was 134/70 million yuan, up 165.52%/133.15% year on year. Excluding the impact of the consolidation period (March '22 consolidation), the subsidiary Baotai Leather's revenue/net profit was 49/13 million yuan, up 124%/68% year on year, and contributed 0.07 billion yuan in net profit. The gross margin of raw materials/other leather for two-layer collagen products was 12.17%/18.00%, an increase of -1.9/10.9PCT over the previous year. According to our estimates, Baotai's net foreign sales margin was 6%, down 3 PCT year on year.
The net interest rate increase lower than gross margin in '23 was mainly affected by increased asset impairment losses, while net interest rate declined in 24Q1 due to increased credit impairment and increased minority shareholders' equity. (1) The company's gross margin/net profit margin in '23 was 21.41%/6.9%, up 1.90/ -0.67PCT year on year. Sales/management/R&D/finance expense ratios in '23 were 1.32%/4.22%/2.67%/0.75%, respectively, with a year-on-year increase of 0.22/0.11/-0.10/0.27PCT. Asset impairment loss ($75 million) /revenue was 2.76%, up 1.32PCT year on year, mainly as a preparation for inventory price drop; other income/income was 0.65%, down 0.69 PCT year on year; the share of net investment income decreased by 0.42 PCT year on year; the share of income tax decreased by 0.14 PCT. (2) The 24Q1 company's gross margin/net margin was 20.24%/5.80%, up 2.48/ -0.31PCT year on year; sales/management/ R&D/finance expense ratios were 1.24%/4.37%/2.23%/0.24%, respectively, with a year-on-year increase of 0.13/0.33/ -0.07/0.24PCT. The share of other earnings decreased by 0.7 PCT; the share of asset impairment losses decreased by 0.44 PCT; the share of credit impairment losses increased by 1.08 PCT; the share of income tax increased by 0.19 PCT; and the share of minority shareholders' equity increased by 0.75 PCT.
The preparation of raw materials led to a large increase in inventory, an increase in accounts receivable, depreciation, and an impact on cash flow. Inventory at the end of 23 was 1,249 billion yuan, up 22.89% year on year. Raw materials/in-stock products/shipped goods/homemade semi-finished products accounted for 23%/19%/10%/17%/31% respectively, up -1/-2.5/1/3.5/-1PCT year on year; the number of inventory turnover days was 192 days, down 5 days year on year. Accounts receivable were 444 million yuan, up 7.78% year on year, and the number of accounts receivable turnover days was 57 days, down 1 day year on year. Accounts payable was $311 million, up 5.29% year over year, and the number of accounts payable turnover days was 52 days, an increase of 1 day year over year. Inventory for 24Q1 was 1.262 billion yuan, up 5.35% year on year, and the number of turnaround days was 237 days, a decrease of 24 days year over year. Accounts receivable were $424 million, up 21% year over year, and the number of accounts receivable turnover days was 65 days, a decrease of 9 days year over year.
Investment advice
According to our analysis, the company's future drivers are: (1) Hongxing benefits from ideal rapid growth, and has maintained a relatively rapid growth trend despite the phased influence of ideal sales increases or reductions; we analyze that Hongxing has benefited from the trend of localization in the NEV supply chain for a long time and is expected to account for half of the revenue of the main business; (2) Baotai and Indonesia are expected to become new growth points; (3) if the price of raw leather rises, the company's inventory reserves will benefit and contribute to the increase in profit margins of the main business. Considering that Baotai's revenue growth exceeded expectations, the revenue forecast was raised to 30.4/3.38 billion yuan to 31.81/3.567 billion yuan, and the 26-year revenue forecast was increased by 4.039 billion yuan; considering the deductions from the main business, the 24-25 net profit forecast was adjusted to RMB 2.86/346 million yuan to 261/368 million yuan, and the net profit forecast for 26 years was increased to RMB 453 million, corresponding to the adjusted 24-25 EPS of $0.98/1.19 yuan to 0.90/1.26 yuan, new EPS forecast for '26 was 1.55 yuan, with a closing price of 12.2 yuan on April 22, 2024, corresponding to PE being 14/10/8X for 24/25/26, respectively, maintaining a “buy” rating.
Risk warning
Risk of automobile customer sales falling short of expectations, risk of fluctuating raw material prices, risk of new customer orders falling short of expectations, systemic risk.