Matters:

The company issued an annual report and quarterly report announcement: 2023 revenue of 20.01 billion yuan, -2.2% year-on-year, attributable to mother/non-return of 32.0/3.18 billion yuan, -0.9%/+0.5% year-on-year. 24Q1 revenue was 4.76 billion, +30.2% year over year, and 79/780 million due to mother/withheld from mother, +63.7%/+64.3% year over year, 24Q1 performance exceeded expectations.

Commentary:

Performance was pressured by 23 years of turbulent demand, and the trend of improvement was evident from quarter to quarter. In 23 years, the company's performance was under phased pressure due to inventory removal from downstream brand customers. The top 5 customer sales were -4%/+3%/-31%/-37%/-10%, accounting for a total of -9pct to 82%. In terms of volume price, sales volume in '23 was -13.9% to 190 million pairs, of which Q1/Q2/Q3/Q4 were -25%/-19%/-17%/+5.2%, respectively, showing a quarterly improvement trend; the RMB unit price was about +13.6% year-on-year in '23. The 24Q1 sales volume was 46 million pairs, +18.4% year-on-year, and basically recovered to 90% in the same period in '22. The continuation of demand recovery has been verified, and the upward trend is expected to continue throughout the year.

Looking ahead to 24, the company's core customers, Deckers, etc. will basically resume the growth trend; in 23, customers other than the top five customers achieved revenue of 3.55 billion yuan, +97% year-on-year, and new brand customers are expected to continue to contribute to performance in the future.

The company's operating side is resilient, and the net interest rate is rising steadily. Against the backdrop of pressure from external demand in '23, the company showed strong cost control and management capabilities. The gross margin was only slightly reduced by 0.3 pcts to 25.6%, and the sales/management/finance ratio was -0.03/-0.3 pcts/ -0.1 pcts to 0.3%/3.4%/-0.4% year-on-year. The combined impact was that the net interest rate bucked the trend and increased 0.2 pcts to 15.9%. However, the 24Q1 company's gross margin was +5.0 pcts year on year to 28.4%, mainly due to an increase in capacity utilization combined with a decrease in the number of employees, and a significant improvement in the company's profitability; the sales/management/financial expenses ratio for the period was 0.5%/5.2%/0.1%, respectively, -0.02/+1.8/-0.7 pcts year on year. Among them, the increase in the 24Q1 management expenses ratio was mainly due to an increase in performance compensation due to increased performance; taken together, the company achieved a net profit margin of 16.5% to mother, +3.4 pcts year on year. In the first half of '24, the company expects to add a total of 3 new factories in Vietnam and Indonesia. Due to rising production capacity, the annual gross margin may be under some pressure. However, considering the recovery in downstream order demand combined with the company's excellent management capabilities, the annual net interest rate is still expected to remain high.

Inventory continues to be optimized, and cash flow performance is healthy. By the end of the first quarter, the company's inventory was 3.26 billion yuan, +2.6% year on year. The number of inventory turnover days was -11 to 79 days year on year, or mainly due to the company's excellent internal operation and management capabilities, and the inventory structure continued to improve; the number of accounts receivable days remained steady, 2 days to 63 days year on year. In terms of cash flow, the company achieved net operating cash flow of 1.07 billion yuan in 24Q1, +45.1% year over year; sales revenue of 5.35 billion yuan, +8.8% year over year, and healthy cash flow.

Investment advice: The company actively reserves production capacity to match future order demand. We continue to be optimistic about the increase in the company's share in the brand customer supply system and the increase in performance brought about by the growth of new customers; we are confident that the company will maintain a high level of profit margin in the future. Considering the impact of the decline in production capacity, we expect the company's net profit to be 38.54/44.82/5.114 billion yuan for 24-26. Corresponding to the current stock price PE is 20/17/15 times. Using the DCF valuation method, the company is given a target price of 80 yuan/share. The corresponding 2024-26 PE is 24/21/18 times, maintaining a “strong” rating.

Risk warning: Domestic and foreign demand recovery falls short of expectations; risk of production being put into operation later than expected; risk of exchange rate fluctuations.