China is a major exporter of blankets, and the company is a leader in the industry. According to OEC data, the global blanket trade volume was US$5.85 billion in 2022, and the 5-year CAGR was 4.3%. The market is relatively stable. China is the main exporter of blankets, accounting for more than 75% of the world's share. China's blanket industry shows a fragmented competitive pattern. The company is a leading enterprise. In terms of export value, the company's market share has remained between 3.4% and 4% in the past three years, and its market share in the Middle East exceeded 12% in 2019.

In the short term, look at the launch of the company's smart factory to improve product profit margins. The company's new intelligent factory was put into operation in 2024Q2. The new smart factory will significantly reduce manpower, raw material processing costs, water resources, energy and electricity costs through technological upgrades. According to our estimates, under ideal conditions, the cost of a single ton of blanket is expected to drop by 2,634 yuan, the gross margin of the blanket will increase from 21.5% in 2023 to 36.6%, depreciation expenses per ton will increase by 1,486 yuan, and the commissioning of the new plant is expected to drive up the company's profit margin.

Looking at the medium to long term, the company will expand the carpet category and start a second growth curve. The company currently has a production capacity of 49,700 tons. After the first phase is put into operation, the total production capacity will reach 65,700 tons, and the second phase also reserves room for 25,000 tons of capacity increase. The company's capacity utilization rate and production and sales rate have remained at a high level in the past, due to insufficient production capacity. We expect that the needs of old customers will not be fully met, and orders from old customers are expected to absorb part of the production capacity after the new plant is put into operation. Furthermore, considering that the export value of China's carpets to the Middle East market continues to rise (CAGR reached 19.8% in 2018-2023), and that the channels and technology of carpets and the company's dominant product, blankets, can be reused, it is expected that the carpet business is expected to expand at an accelerated pace and become the company's second growth curve.

Investment advice: The company is a leading blanket export company. The new smart factory will be put into operation in 2024Q2. It is expected that intelligent transformation will drive a significant increase in gross margin, while opening up room for growth in new categories. In 2024-2026, the company's net profit to mother is estimated to be 147/233/258 million yuan, corresponding to PE 13.2/8.4/7.5X. The first coverage gives an “gain” rating.

Risk warning: risk of falling demand in overseas markets; risk of large fluctuations in raw material prices; exchange rate risk; risk of lifting the ban on restricted shares; equity pledge risk; geopolitical risk.