1Q24 results slightly exceeded our expectations

The company announced 1Q24 results: revenue of 549 million yuan, up 10.4% year on year; net profit to mother of 82 million yuan, up 112.1% year on year. The performance slightly exceeded our expectations, mainly due to the recovery in gross margin exceeding expectations.

Cotton socks continued their strong growth trend and were seamlessly affected by the pace of order placement. By category, the company's leading advantage in the cotton socks business is obvious. 1Q24 cotton socks sold +31% YoY to 409 million yuan, and the growth rate continued the 4Q23 (+30% YoY) recovery trend. Due to the scale effect, the gross margin and net margin of cotton socks both improved year over year, and we expect the net profit margin to exceed 16%. Seamless Business's 1Q24 sales ratio was -24% to 139 million yuan. Mainly due to the influence of 1H23's major customers placing orders and a high base, 1H23's seamless revenue share reached 60%. As orders continue to grow, seamless revenue is expected to improve quarterly. At the same time, the profitability of the seamless business improved significantly year-on-year, mainly due to the reduction in labor costs brought about by the company's cost reduction and efficiency, as well as increased emphasis on profit assessment.

The improvement in gross margin exceeded expectations, and net profit returned to the best level in history during the same period. The company's gross margin in 1Q24 was +7ppt to 29.3% year-on-year, and the gross margin of the cotton socks and seamless businesses both improved markedly. In terms of expenses, under the 1Q24 scale recovery, sales/management/R&D expense ratios were -1.6/-0.5/-0.5ppt to 3.3%/7.7%/2%, respectively. The financial expense ratio was -2.1ppt to -0.6% year over year, thanks to foreign exchange contributions. Overall, the company's net profit margin was +7.2ppt to 15% year-on-year.

Steady operations and significant improvements in cash flow. The 1Q24 company's inventory turnover days were -25 days to 123 days year on year, and the number of accounts receivable and payable turnover days was +2/-0 to 75/24 days year on year, respectively. Overall operation was steady.

At the same time, 1Q24's operating cash flow improved significantly, +69.9% year over year to 150 million yuan, and year-end cash and cash equivalents +33.1% year over year to 317 million yuan.

Development trends

Looking ahead to the second quarter, we expect the company's cotton socks orders to be full, and revenue is expected to maintain good growth; seamless orders continue to improve, and as Vietnam's capacity utilization rate climbs, the revenue side is expected to improve month-on-month.

Profit forecasting and valuation

We keep our 2024/25 profit forecast of 316 and 364 million yuan unchanged. The current stock price corresponds to 2024/2025 13.1/11.4x P/E, maintaining an outperforming industry rating. Considering the positive trend in the industry, we raised our target price by 7.1% to 12.84 yuan, corresponding to the company's 2024/2025 15/13x P/E, and there is room for an increase of 14.3% compared to the current stock price.

risks

Order recovery falls short of expectations, exchange rate fluctuations, changes in raw material prices, and the risk of rising labor costs.