Event: Haoyue Nursing released its 2023 annual report. In 2023, the company achieved operating income of 2,757 billion yuan, a year-on-year decrease of 1.62%; net profit to mother was 439 million yuan, an increase of 3.72%; net profit after deducting net income of 423 million yuan, an increase of 7.37% over the previous year. Among them, in the 2023Q4 quarter, the company achieved operating income of 682 million yuan, a year-on-year decrease of 16.51%; net profit to mother was 128 million yuan, a year-on-year decrease of 19.97%; and net profit after deduction of 133 million yuan, a year-on-year decrease of 11.84%.

Sales of baby hygiene products increased steadily, and product prices affected the short-term revenue by category. In 2023, the company's baby hygiene products, adult hygiene products, and other products achieved revenue of 19.76/55/ 148 million yuan respectively, an increase of -2.79%/-10.61%/69.66% over the previous year.

In terms of volume and price breakdown, sales of infant hygiene products and adult hygiene products were 2,780 million tablets in 23, respectively, up 3.48% and -7.58% year on year; the average price of a single tablet was 0.73 and 0.82 yuan/piece, respectively, up -6.00% and -3.23% year on year. Among them, the average price drop for baby hygiene products and adult hygiene products was mainly due to falling raw material prices, and the company took the initiative to adjust the unit sales price. The updated concept of childcare has led to an upgrade in maternal and child consumption, and based on factors such as China's huge infant base and the “three child” policy, there is still some room for improvement in the domestic market penetration rate.

By region, domestic sales achieved revenue of 2,371 billion yuan in 2023, a year-on-year decrease of 4.35%; export sales achieved revenue of 307 million yuan, an increase of 17.56% over the previous year, of which 23H2 export revenue was 157 million yuan, an increase of 11.35% year-on-year. The company's Sunny Baby brand has entered major supermarkets in Thailand. Through marketing and promotion activities, it strengthens the construction of traditional local channels and further develops the sinking market.

At the same time, the Thai company sells its products to neighboring countries such as Laos and Myanmar through cooperation with local traditional channel distributors.

Strengthen private brand building, and domestic and foreign production capacity is expected to gradually be released

The company's own brand “Hope Baby” uses online platform channels to focus on developing Douyin channels to promote sales growth through various forms such as marketing, talent cooperation, etc., and uses channels such as Douyin, Tmall, and Xiaohongshu to carry out a “big single product strategy”, from user reach, interest, and trust building to final transaction transformation, to the final transaction transformation. In terms of production capacity, the company actively lays out domestic production capacity, lays out production bases throughout the country, and makes rational use of local regional advantages to improve efficiency. Production bases in Hangzhou, Jiangsu, Thailand, and Hubei have been built, and a new factory in Hefei will be added. The company's production capacity of products such as baby diapers, adult diapers, and women's menstrual pants ranks among the highest in China, and has the advantage of large-scale production. The company announced an investment of 30 million US dollars to establish Haoyue Mexico. The Mexican production base is expected to enhance comprehensive and in-depth cooperation with world-renowned multinational companies in North America and South America. In 2023, the company successfully passed factory inspections and product verification for major multinational customers and major domestic customers, laying a solid foundation for business development. In the future, the company will make full use of geographical advantages to gradually release production capacity, help customers reduce logistics costs, and further increase customer stickiness.

Raw material prices have declined, and gross margin has increased significantly

In terms of profitability, the company's comprehensive gross margin was 26.94% in '23, an increase of 3.79pct over the previous year. The main reason was the reduction in procurement costs for raw materials such as polymers, non-woven fabrics, rubber, etc. At the same time, the company further increased its own production of non-woven fabrics to replace external procurement of nonwovens, thereby comprehensively reducing material costs. By product, in '23, the company's infant hygiene products and adult hygiene products achieved gross profit margins of 23.13% and 27.58%, respectively, with year-on-year increases of 1.82 pct and 2.52 pct. Q4 gross profit margin was 29.04%, up 4.29pct year over year.

In terms of period expenses, the company's expenses rate for the 23-year period was 9.23%, up 1.55pct year on year, and the sales/management/R&D/finance expenses rates were 4.97%/2.37%/3.80%/-1.91%, respectively, and +1.50/+0.30/-0.44pct, respectively. The increase in sales expenses ratio was mainly due to the increase in employee remuneration and depreciation and amortization. Under the combined influence, the company's net interest rate in '23 was 15.91%, down 0.82pct year on year. Q4 net profit margin was 18.83%, down 0.81 pct year over year.

Investment advice: As the leading ODM in the nursing industry, the company has leading product R&D innovation capabilities, steady expansion of production capacity, and continuous promotion of its own brands, which is expected to support long-term performance growth.

We expect Haoyue Nursing's 2024-2026 revenue to be 31.58, 35.83, 4,057 billion yuan, up 14.55%, 13.46%, and 13.23% year on year; net profit to mother will be 5.08, 5.77, 689 million yuan, up 15.85%, 13.64%, 19.38%, corresponding PE 13.6, 12.0x, 10.0x, and a target price of 58.20 yuan for 24, maintaining the investment rating of Buy-A.

Risk warning: risk that categories and channels are not as developed as expected; risk of fluctuating raw material prices; risk of increased industry competition, etc.