1Q24 results were higher than our expectations

The company announced 1Q24 results: revenue of 4.765 billion yuan, up 30.2% year on year; net profit to mother of 787 million yuan, up 63.7% year on year; deducted non-net profit of 777 million yuan, up 64.3% year on year. The company's first-quarter results were higher than our expectations, mainly because the increase in average price and gross margin exceeded expectations.

Revenue has recovered at an accelerated pace, and both volume and price have achieved good growth. 1Q24's revenue was +15.5% compared to 1Q22, reaching the best level in the same period in history. Looking at price by volume, as the product inventory level of overseas sports brands became normal, the company's orders began to gradually resume growth in the fourth quarter of 2023. 1Q24 sales volume increased +18.4% year-on-year to 46 million pairs, and the growth rate increased significantly from 4.7% in 4Q23. The average price of RMB in 1Q24 was +10.3% to 103 yuan/pair. Among them, we expect the average price of the US dollar to be +6.5% year-on-year due to an increase in the revenue share of high-priced brands.

Driven by improved production efficiency, gross margin reached a record high. 1Q24's gross margin was +5ppt to 28.4% year-on-year. On the one hand, due to an increase in revenue scale, and on the other hand, it benefited from an increase in capacity utilization efficiency and a decrease in the number of employees. In terms of expenses, the 1Q24 company's management expenses ratio was +1.8ppt to 5.2% year-on-year, mainly due to the increase in performance compensation due to increased performance. The sales expense ratio remained flat, and the financial expense ratio was -0.7ppt to 0.1% year-on-year. Furthermore, as 1Q24 results returned to normal, the income tax rate was +3.7ppt to 21.1% year over year. Overall, the 1Q24 company's net profit margin was +3.4ppt to 16.5% year-on-year.

Inventory operation efficiency is improved, and cash flow is healthy. 1Q24's inventory was only +2.6% year-on-year to 3.265 billion yuan with a sharp increase in revenue. The number of inventory turnover days was 11 to 79 days year-on-year, mainly due to the company's more detailed management of the inventory structure. The turnaround days for accounts receivable and payable remained steady, from -2/-0 days to 63/2 days, respectively. Furthermore, the net cash flow from 1Q24's operating activities was $1,073 billion, and the net present ratio continued to be greater than 1.

Development trends

The company's management said that orders from major core customers such as Nike and Deckers have basically achieved good growth this year compared to 23, and orders from new customers such as Reebok and On Running have continued to drop, and they are confident that orders will resume throughout the year. At the same time, we remain optimistic that the company will introduce more high-quality new customers in the future.

Profit forecasting and valuation

We maintain confidence in the recovery of the company's order volume and the increase in unit prices brought about by the optimization of the customer structure, and are optimistic about the healthy growth of the company's revenue. Furthermore, due to the recovery of the company's capacity utilization rate, we are also optimistic that the company's profit margin will remain at a high level. We raised our 2024/2025 profit forecast by 5.1%/5% to 39.19/4.541 billion yuan, respectively. The current stock price corresponds to 19x/16x P/E for 2024/25, respectively, to maintain an outperforming industry rating. At the same time, we raised our target price by 4.4% to 80.00 yuan, corresponding to the company's 2024/25 24x/21x P/E, with 26.2% upside compared to the current stock price.

risks

Orders from overseas brands fell short of expectations, production capacity fell short of expectations, and rising production capacity in new factories affected profit margins