The company released its quarterly report for '24. Revenue was in line with expectations, and net profit was better than expected. 24Q1 revenue was 1.83 billion yuan (+23.5% YoY), net profit attributable to mother was 80 million yuan (-4.5% YoY), and net loss of 7.5 million yuan (YoY) was deducted. Non-proceeds mainly contributed to the transfer and disposal of surplus domestic production capacity assets. Against the backdrop of insufficient orders placed due to inventory removal from downstream international brands, 23H1 promptly adjusted and adopted a “price-for-volume” sales strategy, which enabled the capacity utilization rate to recover rapidly in a short period of time, and ultimately achieved a balance of production and sales. However, it also caused 23Q3/Q4 deducted non-net loss of 0.94 billion yuan. With the gradual recovery of downstream orders, 24Q1's main business has drastically reduced losses, and is expected to turn profit from 24Q2.

We believe that when downstream international brands end their inventory and start to replenish stocks, the company will usher in a reversal of the difficult situation in 24. It's just that the profit side will lag behind the recovery of the revenue side! We are optimistic for the following reasons:

1) The recovery in downstream demand was first reflected on the revenue side, and the recovery in production capacity utilization effectively reduced unit manufacturing costs.

According to the quarterly earnings report, after achieving an average year-on-month increase in revenue since 23Q3, it has exceeded 1.8 billion yuan for 3 consecutive quarters. As downstream warehousing comes to an end, procurement from international brand customers from the supply chain is gradually resuming, and orders are showing a recovery trend, driving up the company's capacity utilization rate. Currently, Vietnam's production capacity utilization rate is high.

2) Early stocks of high-priced cotton were basically exhausted, the pressure on the cost side was relieved, and subsequent improvements in supply and demand also provided solid support for cotton prices.

In order to guarantee that the fluctuation in its raw material costs is limited, the company adopts a relatively balanced raw material procurement rhythm and has a large holding volume. Therefore, in the recent cotton price drop cycle, its own inventory costs need to be gradually digested by digesting high-priced inventories and purchasing new low-price inventory. According to the 23rd annual report, the company prepared an inventory price reduction of 46 million yuan in 23, a sharp decrease from 380 million yuan in '22. Of these, only a small amount of raw material inventory was prepared for price reduction of 7.15 million yuan, indicating that the current pressure on raw material inventory costs has been greatly reduced. We believe that the improvement in downstream supply and demand has a supporting effect on cotton prices, and there is limited room for further decline.

3) As high-margin spinning orders pick up, order structures are optimized, and combined price discounts are narrowed, gross margin will continue to rise.

According to the 23 annual report, the company's revenue for blank/colored spinning was +19.4%/-13.5%, contributing 51%/49% of revenue, and 2.4%/12.8% of gross profit margin, which was -22.1pct/-14.3pct, respectively. This indicates that during the inventory removal cycle, the profitability of all yarn products declined sharply, resulting in a sharp decline in the gross profit margin of the main business in 23 (-18.5pct year on year), and sales of high-value-added colored spinning products declined significantly. As the share of color spinning orders with high unit prices and high gross profit increases, it is expected to lead to a significant recovery in actual gross margin. The 24Q1 gross profit margin was 5.9%, showing an improvement trend of 3.6%/2.8% month-on-month compared to 23Q3/Q4 gross margin, respectively. We expect 24Q2 profitability to rise more significantly.

A major global manufacturer of color spinning, with outstanding production capacity scarcity in Southeast Asia, began reversing the situation in '24 and maintaining a “buy” rating. Orders from downstream brand customers are picking up. We are optimistic that the company's profitability will recover quarterly in 24 years and maintain profit forecasts. We expect net profit to be 6.0/7.8/1.02 billion yuan for 24-26, corresponding PE of 14/11/8 times, maintaining a “buy” rating.

Risk warning: The global pandemic affects downstream demand; fluctuations in cotton prices affect profitability; industry capacity supply has increased dramatically.