The company announced its 2024 quarterly report: 24Q1 revenue of 550 million yuan/yoy +10.4%, net profit to mother of 80 million yuan/yoy +112%. Revenue growth mainly comes from the cotton socks business order volume continuing to recover. Profit side growth surpassed revenue side mainly due to overall capacity utilization recovery plus cost reduction and efficiency measures to increase gross margin and net interest rates.
The 24Q1 cotton socks business continues to grow, and the seamless business is still under pressure in the short term. 1) Cotton socks business: We expect 24Q1 to continue the 23H2 growth trend (23H2 cotton socks revenue increased by double digits year on year), while gross margin was about +3.3 pct to 30% year over year, driven by cost reduction and efficiency and year-on-year improvement in capacity utilization; in terms of volume price, the unit price of 24Q1 cotton socks remained flat and declined slightly, and revenue growth was mainly due to a recovery in order volume from various brands; 2) Seamless business: We expect to continue the 23H2 downward trend, mainly due to deviations in customer order rhythm and the same period last year, UNIQLO shipments increased by +70 million The number of pieces dropped to 2000+ million Units. Q2 orders are expected to improve month-on-month; the gross margin of the seamless business improved by 11pct to 27% year-on-year under the cost reduction and efficiency measures of labor cost optimization.
24Q1 gross margin increased, expense ratio decreased, and net profit margin to mother increased significantly. 1) Gross profit margin:
24Q1 was +7.0 pct to 29.3% year over year, with gross margin of cotton socks and seamless business improved under cost reduction and efficiency measures; 2) Expense ratio: 24Q1 sales/management/R&D/finance cost ratio was -1.6/-0.6/-2.1pct to 3.3%/7.7%/2.0%/-0.6%, respectively, mainly benefiting from order recovery and cost reduction and efficiency measures. Among them, the decline in financial expenses was mostly due to the impact of exchange. 3) Net profit margin to mother: Comprehensive gross margin and expense ratio changes, 24Q1 net margin +7.2pct to 15% year over year.
Profit forecast and investment rating: The company is a leader in cotton socks+seamless underwear. The first three quarters of 23 were affected by weak external demand and overseas warehousing, but since 23Q4, the company's performance has recovered positively due to the resumption of orders due to the end of downstream warehousing. In the long run, domestic customers and private brands have been developing smoothly in the cotton socks business. In addition, supply-side companies announced the construction of 65 million pairs of cotton socks production capacity and dyeing and spandex supporting projects in Nam Dinh, Vietnam, which are expected to maintain steady growth; orders for the seamless business are expected to resume in the second half of the year, which is expected to contribute more flexibility to performance in the future. Considering the current demand for cotton socks and seamless orders, we raised net profit from RMB 3.11/364/422 million yuan to RMB 328/3.79/424 million yuan for 24-26. The corresponding PE was 12/11/9X, maintaining a “buy” rating.
Risk warning: weak external demand, exchange rate fluctuations, production expansion falling short of expectations, fluctuations in orders from major customers, etc.