2023 and 1Q24 results are in line with market expectations
The company announced its 2023 and 1Q24 results. In 2023/1Q24, it achieved revenue of 1.34/38 billion yuan, respectively, -11.8%/+35.2% year on year, and net profit to mother reached 1/40 billion yuan, respectively, with a year-on-year reversal of -31.4%/loss. The results were in line with market expectations. On a quarterly basis, 1Q/2Q/3Q/4Q revenue decreased by 19.5%/9%/12.6%/6.5%, respectively, and net profit to mother turned losses/ +0.5%/-31%/-33.2% year over year, respectively.
The company announced that if profit is achieved in mid-24 and the cumulative undistributed profit is positive, it plans to pay a mid-year dividend. The company also announced a shareholder return plan for the next three years (2023-2025). When the plan is met, the cash dividend will not be less than 10% of the current year's distributable profit, and the cumulative amount of the company's cash dividends within any three consecutive fiscal years will not be less than 30% of the dividable profit for the three consecutive fiscal years, and the shareholder return plan will increase.
Development trends
1. Overseas customers have left the warehouse, and Q1 revenue has increased rapidly under a low base. Abundant orders in hand are expected to drive continuous improvement in operations. The company's revenue in 1Q24 achieved +35.2% YoY/+9.2%, respectively. The rapid increase in revenue was mainly driven by a decline in overseas channel inventories, which led to order recovery. 1) By category, the revenue of pet pads/pet diapers/non-woven fabrics was -13.2%/-14.1%/+18.9%, respectively. We believe that abundant orders in hand are expected to drive relatively rapid growth in all categories in Q1; 2) By region, the company's domestic/overseas revenue was +27.8%/-13.9%, respectively. Its own brands in China continued to develop, and export revenue accounted for 32% of the total export products in customs statistics. The company continues to lead the global pet health care products sector.
2. The low operation of raw materials drives a positive gross margin, and exchange earnings increase net profit. On the gross profit side, the company achieved 17%/18.2% gross margin in 2023/1Q24, respectively. Compared with +3.3ppt/+11.2ppt, Q1 gross margin greatly improved mainly due to low prices of raw materials such as fluff pulp. On the expense side, the 1Q24 sales/management/finance expense ratios were 1.8%/2.6%/-0.8%, respectively. The year-on-year decline was mainly due to the depreciation of the RMB and the increase in exchange earnings. Under the combined influence, the company's net profit margin for 2023/1Q24 reached 7.7%/11%, -2.2pp/ +11.8ppt, year-on-year, respectively.
3. Adequate on-hand orders and rising production capacity are expected to drive the company's steady growth over 24 years, and I am optimistic about the company's medium- to long-term growth space as a leading pet health care manufacturer. In the short term, according to customs data, China's export value of pulp, paper, and other hygiene products (the company's export customs declaration category) increased by 22.1% in 1Q24. We expect that the current overseas channel removal has basically ended, and overseas demand for pet hygiene products is rigid at high frequencies. Strong terminal demand is expected to drive the company's operations back to steady growth in 24 years. Looking at the medium to long term, we believe that the company has leading production advantages. The delivery period for overseas orders has been reduced to about 2 weeks. Cooperation with customers such as Amazon, PetSmart, and Walmart is improving. Domestic companies are also developing their own brands at the same time. Increased penetration of hygiene products is expected to drive brand business growth.
Profit forecasting and valuation
The 24-year profit forecast remains unchanged. For the first time, a 25-year net profit forecast of 200 million yuan was introduced. The current stock price corresponds to 14/12 times P/E for 24/25. Maintain the outperforming industry rating and target price of 20 yuan unchanged, corresponding to 21/18 times P/E in 24/25, with 50% room for growth.
risks
Prices of raw materials fluctuate greatly; exchange rates fluctuate greatly; loss of core customers.