Matters:
Revenue in 2023 was 24.97 billion yuan, -10.1% YoY, and net profit attributable to mother was 4.56 billion yuan, -0.1% YoY. Excluding exchange earnings, interest income and government subsidies, net profit was 3.71 billion yuan, +11.3% YoY.
Among them, 23H2's revenue was 13.41 billion yuan, -5.5% YoY; net profit to mother was 2.43 billion yuan, +10.7% YoY.
Commentary:
The pressure to remove inventory dragged down performance, and new brands increased their share of revenue. 1) By category; revenue from sports products was 18.03 billion yuan (-13.6% year-on-year), mainly due to weak demand in the European and American markets combined with inventory pressure, falling 7% year-on-year in the second half of the year, and the decline (20%) from the first half of the year was significantly narrower; revenue from casual, underwear, and other knitted products was 56.7/1.20 billion yuan, -1.4%/+30.2%/-41.6% (excluding masks +0.4%). 2) By region: Domestic/Europe/America/Japan/Other market revenue was 71.2/50.3/38.8/36.8/5.26 billion yuan, +0.7%/-19.1%/-20.4%/-6.4%/-7.6% year-on-year. 3) By brand: Nike/Uniqlo/Adidas/Puma achieved total revenue of 19.89 billion yuan, -12.8% year-on-year; domestic brands Anta, XTEP and Li Ning accounted for more than 11% of total revenue, an increase of more than 2pcts over the previous year; new customer Lululemon also maintained rapid growth.
The gross margin increased month-on-month, and the income tax rate greatly improved the company's gross margin of +2.2 pcts to 24.3% year on year in 2023, mainly due to the recovery in capacity utilization rate+the release of production capacity from overseas factories+ expenses related to the epidemic in the same period last year. Looking at the whole year, the company's sales/management expenses ratio was -0.1/+0.5pcts to 0.7%/7.5%, respectively, and the exchange profit and loss was 150 million yuan (a decrease of 850 million yuan over the same period). The effective tax rate was affected by the increase in the share of overseas profits -4.5 pcts to 8.8% year-on-year. As a result, the company achieved a net return to mother rate of 18.3% (+1.8pcts) in 2023.
Operating capacity continues to improve, and cash flow performance is good. The company's inventory/accounts receivable turnover in 2023 was +11/+17 days to 118/72 days, mainly due to an increase in demand for Q4 orders. The company increased its reserves of materials and products, and inventory and accounts receivable increased accordingly, but it is still within a reasonable range; it is expected that with the recovery of order demand in 2024, various indicators will return to normal. In terms of cash flow, the company's net operating cash inflow in 2023 was 5.23 billion yuan, +12.9% year-on-year; by the end of 2023, the company's cash and cash equivalents were 11.60 billion yuan, an increase of 4.23 billion yuan over the same period, and the cash flow performance was good.
Overseas factories' contributions have increased, and profitability has been gradually optimized. The efficiency, scale and output of overseas factories have been further improved, with garment production accounting for about 53% (+7pcts year on year), of which Cambodian garment production accounts for about 26% (+4pcts year on year). We believe that with the integrated support of the company's overseas factories in production processes such as accessories, printing, and embroidery, the short-term delivery capacity of overseas factories will be strengthened, and profitability is expected to rise steadily.
Investment advice: vertically integrated garment faucet with strong profit recovery flexibility. With the gradual recovery of the company's downstream orders, the capacity utilization rate is expected to increase further, and we are optimistic about the company's flexible performance in 2024. Looking at the medium to long term, the company is speeding up overseas production capacity. The advantages of vertical integration are obvious, and it is expected that it will continue to enjoy the dividends of share expansion. Considering the uncertainty of downstream customer demand recovery, we slightly adjusted the company's profit forecast. Net profit due to mother is estimated to be 53.4/61.4/7.05 billion yuan respectively (the original 24-25 forecast value was 59.8/7.61 billion yuan), corresponding to the current stock price PE 21/18/16 times, respectively. A target price of HK$97 was given based on the DCF Act valuation, maintaining the “Strong Push” rating.
Risk warning: risk of fluctuations in customer orders; risk of exchange rate fluctuations; production capacity release falling short of expectations, etc.