Revenue increased 23% in the first quarter of 2024, and gross margin improved to 5.9% month-on-month. The company is the second leading producer of color spinning in the world. In the first quarter of 2024, the company's revenue increased by 23.5% to 1.83 billion yuan, and net profit to mother fell 4.5% to 80 million yuan, after deducting a loss of 7.5 million yuan in non-net profit (76.8 million yuan in the first quarter of 2023). The gross profit margin for the first quarter was 5.9%, a year-on-year decrease of 7.4 percentage points, mainly due to the high order price level in the first quarter of 2023, and subsequent order prices were affected by increased competition in the industry. Excluding the impact of resale after inventory impairment, the second quarter of 2023 was negative gross profit. The gross margin for the third quarter and fourth quarter was low in units. In the first quarter of 2024, gross margin improved to 5.9% month-on-month with a slight improvement in price levels. The company strengthened cost control, and the fee rate decreased by 2 percentage points year on year, mainly the management fee rate. The company's asset disposal revenue for the first quarter was 110 million yuan, accounting for 6.1% of revenue. As a result, net profit margin fell 1.3 percentage points to 4.4% year over year.
The company's operating conditions are healthy, inventory is improved, and cash flow is sufficient. In the first quarter, the company achieved net cash flow from operating activities of 280 million yuan and free cash flow of 280 million yuan. Inventory in the statement decreased 16% year over year, and the number of inventory turnover days fell 135 days to 244 days year over year.
Outlook: Recently, industry sentiment has rebounded, and sales prices are expected to gradually increase. I am optimistic about the restoration of profit levels. As overseas brand inventory removal comes to an end and industry sentiment picks up, the company gradually raised product prices after the Spring Festival this year. It is expected that gross margin will improve significantly starting in the second quarter, and profit levels will improve further in the second half of the year.
Risk warning: brands continue to remove inventory, large fluctuations in raw material prices, repeated epidemics, systemic risks.
Investment advice: Overseas yarn production capacity has a clear competitive advantage, and focus on profit recovery trends in the short term. The company initially laid out yarn production capacity in Vietnam, forming the advantages of low cost and low trade barriers. It will continue to expand in Vietnam in the future to consolidate its competitiveness. In the short term, the month-on-month increase in the company's gross margin in the first quarter is in line with expectations. As industry sentiment improves and price levels pick up, the period of poor performance is gradually passing, and the performance is expected to recover quite significantly starting in the second quarter of this year. Maintaining the profit forecast, net profit due to mother for 2024-2026 is estimated to be $51/76/ 8.4 billion yuan, an increase of 1%/49%/10% year-on-year, and net assets of 6.6, 6.7, and 6.9 yuan per share.
Maintain the target price of 6.2-6.8 yuan, corresponding to 0.95-1.0x PB in 2024, and maintain the “buy” rating.