In the first quarter, revenue increased 10%, net profit increased 112%, and the profitability of the seamless apparel business improved markedly.
The company is a leading manufacturer of cotton socks and expanded the seamless clothing contract business in 2017. Revenue in the first quarter of 2024 increased 10.4% to 550 million yuan, and net profit to mother increased 112% to 82 million yuan. Revenue was lower than expected, mainly due to the fact that the seamless apparel business's revenue was still declining on a high order base, and net profit was significantly higher than expected. Mainly due to the seamless apparel business, which improved profits significantly through cost reduction and efficiency. The gross margin for the first quarter increased 7 percentage points year-on-year to 29.3%, and the gross margin of the two major businesses, cotton socks and seamless apparel, increased markedly. Expense control results were good. Sales and management expenses fell 2.1 percentage points, and the financial expenses ratio decreased by 2.1 percentage points, which is expected to be mainly due to exchange earnings. Net profit margin increased 7.2 percentage points year over year to 15.0%.
Operating indicators are healthy, and free cash flow is abundant. The number of inventory turnover days decreased by 25 to 123 days year on year, inventory value decreased by 13.6% year on year, and the number of receivable and payable turnover days remained healthy. The company's capital expenditure in the first quarter was 0.3 billion yuan, continuing to be low. Net cash flow from operating activities was 150 million yuan, net current ratio was 1.8 million yuan, and free cash flow was 120 million yuan, a significant increase over the previous year. The balance ratio fell 4.8 percent to 28 percent. All business indicators are healthy.
Outlook: There is a clear upward trend in fundamentals in 2024, and the company is actively deploying new production capacity. 1) Financial reports disclosed by overseas brands show that the brand inventory ratio has returned to normal levels one after another, and there is a clear upward trend in corporate orders in 2024. 2) In March, the company announced plans to expand production in Vietnam. It plans to fund 550 million yuan to build 65 million pairs of cotton socks, 2,000 tons of spandex elastic thread, and 18,000 tons of yarn dyeing production capacity. It is expected to be built for 3 years. The project is expected to achieve annual revenue of 1.07 billion yuan and net profit of 150 million yuan after delivery.
Risk warning: weak overseas demand, repeated epidemics, falling short of expectations in developing new customers, systemic risks.
Investment advice: Good results in the first quarter, optimistic about the steady growth of cotton socks and the continued recovery of seamless apparel profits.
The company's cost reduction measures achieved remarkable results in the first quarter. The cotton socks and seamless apparel business both achieved significant profit growth. Currently, orders for cotton socks are full, and production capacity expansion will drive steady growth. As orders for seamless apparel rise, there is still room for repair in the profit level. Due to better-than-expected results for the first quarter of 2024, the profit forecast was slightly raised. Net profit for 2024-2026 is expected to be $3.3/38/4.3 billion (previously $31/36/410 million yuan), up 23.4%/15.0%/11.8% year over year. Due to an increase in profit forecasts and a clear improvement in the gross margin of the seamless apparel business, the target price was raised to 12.7-13.6 yuan (originally 11.9-12.8 yuan), corresponding to 14-15x PE in 2024, maintaining the “buy” rating.