Incident Overview

The company's 2023 revenue/net profit attributable to mothers/net profit after deducting non-attributable net profit/operating cash flow were 31.05/1.16/1.39/440 million yuan, up 13.28%/146.49%/587.29%/312.49% year-on-year, with non-financial asset fair value losses of $29 million ($12 million in '22, mainly losses on forward foreign exchange transactions); excluding other earnings ($5/0.09 million in 22/23) and investment losses (0.4/0.9 billion in 22/23) Net profit due to one-time effects of 100 million yuan), profit and loss from changes in fair value (-0.1/012 million yuan in 22/23) and asset impairment losses ($0.28/013 million in 22/23) was $194 million, an increase of 145.3% over the previous year. Operating cash flow is higher than net profit due mainly to a decrease in inventory and an increase in operating payables. 23Q4 The company's revenue/net profit attributable to mothers/ net profit deducted from non-mother was $821/-0.06/0.008 billion, up 41.35%/76.01%/103.01% year-on-year, and Q4 gross margin increased sharply. However, investment losses, credit impairment losses and income tax increases led to negative net profit attributable to mother, mainly foreign exchange losses.

In 2023, the company plans to pay a cash dividend of 0.94 yuan for every 10 shares, with a dividend rate of 19.4% and a dividend rate of 0.5%.

2024Q1 revenue/net profit/deducted non-net profit were 9.10/0.71/78 billion yuan respectively, up 22.92%/102.95%/121.43% year-on-year. The non-financial losses were mainly forward foreign exchange transaction losses. Revenue was in line with market expectations. Net profit and net profit deducted non-net profit exceeded market expectations. The apparent result was a contribution from declining expense ratios. Our analysis mainly came from improvements in 2B and Xiaomi business profitability.

Analytical judgment:

In '23, the 2B luggage business was affected by downstream inventory removal, and the clothing business grew by more than 70%. In 2023, the company's 2B revenue was 2,479 billion yuan, up 11.27% year on year: 1) Looking at the second half of the year, 2B business growth slowed in the second half of the year (2B revenue in the first half of the year was 12.69/1.21 billion yuan, up 17.41%/5.50% year on year); 2) In terms of production capacity, the company's total production capacity in 2023 was 376.956 million units, a year-on-year decrease of 5.11%, and the capacity utilization rate decreased by 1.98 PCT to 86.10% year on year (domestic and overseas production capacity accounted for 34.87%, respectively) 65.13%, capacity utilization rate was 97.73%/79.87% respectively); 3) By product, bag/garment foundry revenue was 19.7/471 billion yuan, up 2.59%/70.97% year on year. The high increase in garment foundry revenue was mainly due to the company deepening partnerships with apparel customers such as Adidas, Puma, Muji, etc., and continuously expanding revenue growth in the textile, garment and fabric sector.

The 2C business growth in '23 was mainly due to high growth in Xiaomi, which turned positive in the second half of 90 minutes. 2C business revenue was 626 million yuan, up 21.97% year on year; of these, online (90 point brand) /distribution (Xiaomi channel) revenue was 214/412 million yuan, up -5.94%/44.18% year on year. Looking at the first half of the year, the Xiaomi channel maintained high growth throughout the year. Revenue for the first and second half of the year was 220 million yuan, up 45.11%/43.14% year on year; revenue for the second half of 90 percent turned positive. Revenue for the first and second half of the year was 0.67/ 146 million yuan, year-on-year increase- 20.98%/3.32%.

The net interest rate increase in '23 was lower than gross margin mainly due to reduced government subsidies and exchange losses. (1) The gross margin in 2023 was 24.35%, up 2.73 PCT year on year; of these, 2B/2C gross margin was 23.80%/26.55%, respectively, up 2.00/5.67PCT year on year. Among them, 2B's contract processing/other gross margins were 23.88%/18.02% respectively, up 1.90/9.79PCT year on year, and 2C's 90 points/Xiaomi gross margin was 33.88%/22.74% respectively, up 12.29/2.43PCT year on year. (2) The company's net interest rate for the year 23 was 3.7%, an increase of 2.01 PCT over the same period last year. Sales/management/R&D/finance expenses in '23 were 6.44%/6.43%/2.20%/0.89%, respectively, with a year-on-year increase of -0.48/ -0.82/0.13/0.14PCT. Among them, the increase in financial expenses was mainly due to a decline in exchange earnings, and the increase in R&D expenses was mainly due to an increase in R&D activities. Other income/revenue in '23 was 0.29%, down 1.54 PCT year on year, mainly due to reduced government subsidies; investment loss/income was 2.78%, up 1.16 PCT year on year, mainly due to forward foreign exchange business losses and long-term equity investment losses; fair value change gain/loss was 0.38%, up 0.75PCT year on year, mainly due to changes in the fair value of transactional financial liabilities; asset impairment loss/revenue was -0.43%, up 0.60 PCT year on year; credit impairment loss/revenue decreased by -0.29% year on year 0.20PCT; income tax/revenue was 1.25%, up 0.37PCT year over year. (3) 24Q1 gross profit margin 24.16%, up 2.41PCT year on year; 24Q1 net profit margin was 7.8%, up 3.1 PCT year on year; 24Q1 sales/management/R&D/finance expense ratios were 4.90%/5.30%/2.06%/0.75%, respectively, and 1.53/0.95/- 0.30/0.82PCT year on year. The decline in financial expense ratio was mainly due to increased exchange income and interest income. The share of profit and loss from changes in fair value decreased by 0.8 PCT year on year; the share of asset impairment losses increased by 0.6 PCT year on year; the share of income tax increased by 0.9 PCT year on year.

The participating company Shanghai Jiale had revenue of 23 billion yuan, up 26.87% year on year; loss of 75 million yuan, up 12.14% year on year. Considering the company's shareholding ratio of 35.94%, the net profit impact to mother was -0.27 billion yuan; net profit margin was -5.9%, up 0.8 PCT year on year.

Inventory risk is reduced. The company's inventory in '23 was 493 million yuan, down 17.8% year on year; inventory turnover days were 84 days, down 12 days year on year; accounts receivable were 592 million yuan, up 23.5% year on year. The company's inventory in 24Q1 was 425 million yuan, a year-on-year decrease of 12.37%; the number of inventory turnover days was 60 days, a year-on-year decrease of 25 days.

Investment advice

Our analysis: (1) According to our estimates, the 2B business is expected to achieve high double-digit growth in 24. The core advantage comes from the Indonesian layout due to the decline in labor costs, tariffs, and tax rate cost advantages in Vietnam and Cambodia. We estimate the high order growth of old customers NIKE, Decathlon, and VF, combined with the contributions of new customers Uniqlo and PUMA. (2) According to our estimates, the 2C business is expected to achieve 30% high growth in 24 years, driving the expansion of offline KA channels by +90 percent from Xiaomi's supply chain profit relaxation. (3) The 24/25 revenue forecast was lowered to $38.84/4.588 billion yuan to $3,707/4.339 billion, and an additional 26-year revenue forecast of $4.964 billion; considering the gradual increase in the profitability of 2B and Xiaomi's businesses, the net profit forecast for 24/25 was raised to $244/327 million to $303/346 million, and an additional 26-year net profit forecast of $461 million; corresponding adjustments to the 24/25 EPS of $1.02/1.36 to $1.26/1.44 billion, an increase of 26 years EPS 1.92 yuan. The closing price on April 28, 2024 was 19.89 yuan, corresponding to the 24/25/26 PE was 16/14/10X, maintaining a “buy” rating.

Risk warning

Fluctuations in raw material prices and rising labor costs; exchange rate fluctuations; capacity expansion falls short of expectations; systemic risks.