Incident: The company disclosed its 2023 and 24Q1 results, which were in line with expectations. The company achieved operating income of 2.7 billion yuan, +35.81% year over year; realized net profit of 186 million yuan, +23.74% year over year (total equity incentive expenses of 11.51 million yuan in 23 years, net profit of 198 million yuan after share incentive expenses, +31.4% year on year); net profit without deduction of 180 million yuan to mother, +36.86% year over year. 24Q1 achieved operating income of 597 million yuan, +28.61% year over year; realized net profit of 35 million yuan, +22.03% year over year; net profit after deduction of 0.3 million yuan, +44.83% year over year.
Leather used for traditional shoe and bag straps has grown beautifully at a low base, and the amount of raw materials for automotive interior leather and two-layer leather has increased.
Looking at the main business by product, 1) Leather for shoes and bags: Achieved operating revenue of 1,867 billion yuan in 23 years, +19.59% over the same period last year. The restoration was beautiful at a low base. 2) Leather for automotive interiors: Achieved operating revenue of 599 million yuan, +94.21% year-on-year, continuing the trend of volume growth. 3) Raw materials for two-layer skin collagen: Achieved operating revenue of 134 million yuan, +165.52% over the same period last year.
The subsidiary Baotai Leather is engaged in two-layer leather processing and two-layer collagen raw material business, and is in the phase of rapid release of production capacity.
In '23, Baotai Leather achieved revenue of 489 million yuan (including 355 million yuan for two-layer leather and 134 million yuan for collagen raw materials).
The scale effect and structural optimization have led to a significant increase in the company's profitability. Among them, the gross margin of automotive leather has increased significantly. The company's gross margin in 2023 was +1.9pp to 21.41% year over year. By product, 1) The fur margin for shoe and bag straps was +0.19pp to 19.67% year-on-year, mainly benefiting from cost improvements. 2) The gross margin of automotive interior leather was +6.06pp to 29.91% year-on-year, mainly benefiting from cost reduction and efficiency results brought about by scale effects and internal management improvements; the subsidiary Hongxing Auto Leather achieved a net profit of 98.79 million yuan in 23, with a net profit margin of 16.3%. 3) The gross margin of two-layer collagen raw materials was -1.90pp to 12.17% year-on-year. The cost ratio was +0.5pp to 8.96% year-on-year for the 23-year period; of these, the sales expense ratio was +0.
22pp to 1.32%; management expense ratio (including R&D expenditure rate 2.67%) +0.01pp to 6.89% year over year; financial expense ratio +0.27pp to 0.75% year over year. The increase in the fee rate during the period was mainly affected by equity incentive costs. Overall profitability increased steadily, with net sales margin +0.14pp to 8.57% year-on-year in '23. 24Q1 gross margin +2.48pp to 20.24% year over year; net margin +0.43pp to 7.46% year over year; period expense ratio +0.62pp to 8.07% yoy.
Cash flow has improved compared to '22, and the efficiency of inventory and accounts receivable turnover has improved. Operating cash flow of RMB 25 million was achieved in '23, +122.69%; on a quarterly basis, Q1/Q2/Q3/Q4 operating cash flow was -2.28/+1.64/+0.69/+20 billion yuan, respectively; operating cash flow of RMB 45 million was achieved in 24Q1. The 23-year net business cycle was 197.75 days, down 5.73 days; among them, inventory turnover days were 192.22 days, down 4.34 days year on year; accounts receivable turnover days were 57.04 days, down 1.01 days year on year.
Investment proposal: The company is deeply involved in the traditional leather industry, successfully expanded the two-layer leather processing and NEV leather circuit through acquisitions, and further developed the collagen raw material business using its own resources and technical advantages. It is expected to gain more market share in emerging fields in the future. Considering that the company's automotive leather business continues to receive new customers, we slightly raised our profit forecast for 2025. We expect the company to achieve revenue of 33.43, 40.48, and 4.831 billion yuan in 2024-2026 (33.33 billion yuan and 3,954 billion yuan, adjusted according to 24Q1 results), +24%, +21%, and +19% year-on-year respectively; net profit to mother of 2.63, 3.39, and 414 million yuan (24-25 years ago, adjusted for 24Q1 results) ), +41%, +29%, and +22% year-on-year respectively, corresponding to PE 14, 11, and 9 times, maintaining the “buy” rating.
Risk warning: risk of large fluctuations in raw material prices, increased risk of market competition, risk of channel expansion falling short of expectations