1Q24 net profit to mother was lower than our expectations. Net profit after deducting non-recurring profit was in line with our expectations. The company announced 1Q24 results: revenue of 1.38 billion yuan, +0.3% year over year; net profit to mother of 68.24 million yuan, -28.7% year on year; net profit to mother after deducting non-recurring profit and loss of 120 million yuan, +138.7% year on year.
The company's net profit after deduction for 1Q24 was in line with our expectations, and net profit to mother was lower than our expectations, mainly due to changes in fair value of 72.94 million yuan.
Revenue has recovered steadily, and fabric products have recovered relatively well. On a quarterly basis, the company's revenue was corrected for the first time in 1Q24 after four consecutive quarters of year-on-year decline. By region, we estimate that domestic sales revenue increased year on year in 1Q24, revenue from Europe and the US still declined year on year, and revenue from Southeast Asia, Japan, and South Korea remained basically the same year on year. By product, fabric is the company's highly competitive core product. We estimate that the 1Q24 fabric revenue will increase, with a significant increase in volume, a slight year-on-year decline in price, and a year-on-year decline in clothing product revenue.
Gross margin increased significantly, and changes in fair value affected profits. The gross margin of 1Q24 was +2.8ppt to 23.5% year over year. We think it was mainly due to lower raw material costs and increased capacity utilization. We estimate that the capacity utilization rate of 1Q24 fabrics and clothing increased year over year, driving a significant increase in their respective gross margins.
1Q24 expenses were well controlled, with sales/management/R&D expense ratios of -0.2pp/ -0.03pp/ -0.4ppt to 2.2%/6.0%/4.0% year on year, respectively; 1Q24 financial expense ratios were -2.4ppt to 0.2% year over year, mainly due to the devaluation of RMB during the period, resulting in exchange gains. In addition, due to changes in the trading price of the holding company Rongchang Biotech, profit and loss of 1Q24 fair value changes were -91.79 million yuan year-on-year to -72.94 million yuan. Overall, 1q24's net profit margin was -2.0ppt to 4.9% year over year, and net profit margin after deducting non-return to mother was +5.1ppt to 8.9% year over year. In terms of cash flow, the 1Q24 company's net cash flow from operating activities was +353.9% year-on-year to 90 million yuan, which is relatively healthy.
Development trends
As overseas brands replenish stocks, we expect the company's revenue to recover in 2024. Currently, the capacity utilization rate of all products will recover month-on-month. Among them, we expect the overseas capacity utilization rate recovery of fabrics to be better, which is expected to drive an increase in gross margin and achieve profit elasticity. Furthermore, the company's Vientiane yarn-dyed fabric project in Vietnam has entered the trial production stage, and we expect to release production capacity in 2024.
Profit forecasting and valuation
Considering that the company is still in the process of recovery, we lowered the company's 2024 profit forecast by 27% to 600 million yuan, and introduced a profit forecast of 680 million yuan for 2025. The current stock price corresponds to the company's 2024/25 8.6x/7.6x P/E, respectively, to maintain the outperforming industry rating. Considering the upward shift in the industry's valuation center, the target price was lowered by only 14% to 7.34 yuan, corresponding to the company's 2024/25 10.0x/9.5x P/E, with 16.4% upside compared to the current stock price.
risks
Overseas demand falls short of expectations, capacity expansion falls short of expectations, risk of exchange rate fluctuations, and risk of rising raw material prices.