Key points of investment
The company released its quarterly report for '24: profit margins have been drastically restored
24Q1 achieved revenue of 549 million yuan (+10.4% YoY), a record high in Q1, net profit of 82.22 million yuan (YoY +112%), net profit of 8.07 million yuan (YoY +165%), 24Q1 gross profit margin 29.3% (+7.0pp), net profit margin 15.0% (YoY +7.2pp), a significant year-on-year improvement, close to the best state in history in 2019.
Product trends: Cotton socks are the first to recover, seamless orders are waiting to be climbed by product review in 23 years: cotton socks 23H1/23H2 revenue was -10%/+16%, respectively, customers went to inventory earlier, and cooperation with major customers (Uniqlo, PUMA, Decathlon, BOMBAS, etc.) continued to deepen, and incremental orders from new customers (Li Ning, Jiaonai, UBARS, FILA, etc.) contributed significantly; seamless clothing 23H1/23H2 revenue was -15%/-16%, respectively. Customer orders Dosage has not yet started. 24Q1 revenue was +10% year over year, and we expect cotton socks/seamless to continue the 23H2 differentiation trend.
Gross margin has increased dramatically, and the results of reducing costs and increasing efficiency are remarkable
24Q1's gross profit margin was 29.3% (YoY +7.0pp), net profit margin 15.0% (YoY +7.2pp), sales/management/R&D/finance expense ratios were 3.3%/7.7%/2.0%/-0.6%, respectively, and -1.6/-0.5/-2.1pp. We expect a significant recovery in profitability: on the one hand, with the recovery in demand, the company's capacity utilization rate increased year-on-year, while the customer structure was gradually optimized, and the proportion of customers with high unit prices and high gross margin increased; on the other hand, the company has vigorously promoted “cost reduction and efficiency” work over the past 23 years, including improving factory site management, optimizing production processes, controlling costs and expenses, and personnel optimization, etc., which have raised the level of production automation, intelligence, and informatization.
Vietnam will seamlessly enter a period of performance release, which is expected to exceed expectations
The company's cotton socks customer structure is stable, production capacity reserves are sufficient, and growth certainty is strong. Therefore, the market is mainly concerned that Seamless's performance fluctuates greatly, and we believe that Seamless is expected to contribute significantly to profit growth, based on:
1) The company built seamless production capacity in Vietnam in 2020. Currently, Vietnam has a complete yarn, dyeing, and accessories industry chain. In particular, the printing and dyeing sewage discharge index is a scarce resource. The company is expected to continue to receive favorable orders from European and American customers. At the same time, after 2-3 years of early development, seamless new customers are expected to begin to increase orders in 24 years.
2) As Vietnam's capacity utilization rate increases and the order structure improves, and Vietnam's various costs are lower than domestic costs, seamless profitability will enter a rapid upward period. Before the 2020 customer adjustment period, the seamless gross margin/net margin could reach 30% +/ 17% +, while the seamless gross margin/net margin in '23 was only 12.7%/3.6%, so there is huge room for improvement.
Profit forecasts and investment suggestions:
The company attaches importance to shareholder returns, with a cash dividend ratio of 68% in 23. In addition, the company plans to use 1-2 billion yuan of its own capital to repurchase and cancel in '24, and shareholder returns are expected to be impressive.
We expect the company to achieve revenue of 25.9/30.0/3.43 billion yuan in 24-26, +13%/16%/15% year over year, and achieve net profit of 3.1/3.7/4.4 billion yuan, +16%/+19%/17% year over year, corresponding to PE 13/11/10 times, cotton socks basic market growth is steady, seamless profit elasticity is remarkable, high dividend attributes are outstanding, and maintain a “buy” rating.
Risk warning: terminal recovery falls short of expectations; new customer volume falls short of expectations; exchange rates or raw material prices fluctuate