It is proposed to acquire 15.9% of Shanghai Jiale's shares, expand integrated clothing, and maintain a “buy” rating

The company plans to acquire 15.9% of Shanghai Jiale Co., Ltd. (hereinafter referred to as “Shanghai Jiale”). After the transaction, the company directly held 51.8480% of Shanghai Jiale's shares (previously 35.9440%). After the transaction is completed, Shanghai Jiale will be included in the scope of the company's consolidated statements. Since Ningbo Purun, a wholly-owned subsidiary of the company, owns 39.9% of Huai'an Jia'an Venture Capital Partnership, one of Shanghai Jiale's shareholders, it is estimated that the company's penetrating share is 69.4% (previously 59.53%). We maintain our profit forecast. We expect net profit due to mother for 2024-2026 to be 30/41/5.2 billion yuan, corresponding EPS is 1.3/1.7/2.2 yuan, and the current stock price corresponds to PE16.8/12.3/9.7 times PE. It is expected that after the acquisition and implementation, Shanghai Jiale will increase profits by 2024H2. With Shanghai Jiale, the company's OEM category will expand from bags to the clothing field with more space. It has high-quality customer resources, fabric accessories research and development, and global operation management advantages, and will facilitate resource sharing between the two parties. Deep collaboration on luggage production experience & customer & capacity layout is expected. It is expected that Shanghai Jiale will increase its profitability. The rapid growth of Shanghai Jiale will contribute more and maintain the “buy” rating.

Shanghai Jiale's total equity is valued at 1.26 billion yuan. It is proposed to use convertible bonds to raise capital and 200 million yuan of its own capital to acquire all of Shanghai Jiale's shares. The company plans to use convertible bonds to raise funds and 200 million yuan of its own capital for the acquisition. Of these, the convertible bond funds will receive 160 million yuan to change the use of capital raised. The original fund-raising project was a fashion women's bag factory project. The deal is divided into two parts: (1) the acquisition of 10.9040% of Shanghai Jiale's shares held by Anhui Taihe Smart Mobility Equity Investment Partnership using convertible bonds; (2) the proposed acquisition of 5% of Shanghai Jiale's shares held by Huai'an Jia'an Venture Capital Partnership using its own and raised capital of 63 million yuan.

Shanghai Jiale: Vertical integrated knitwear OEM has excellent growth, significant barriers and synergy effects. Shanghai Jiale has been established for more than 30 years. It has vertical integrated production capacity from fabric research and development, weaving, dyeing and finishing, printing (embroidery) flowers to finished garments. It mainly manufactures high-end casual fashion and sports series products, and a global production capacity layout mainly in Indonesia (vertically integrated in Shanghai and Indonesia, finished clothing in Anhui), serving world-renowned customers Uniqlo (Uniqlo), Adidas, Puma, MUJI, etc., which is the core textile clothing store of Uniqlo (Uniqlo), Adidas, Puma, MUJI, etc. One of the suppliers, has Significant customer resource advantages. The synergy effect is remarkable, as reflected in customers, production capacity, and production experience: the company's luggage customers and Shanghai Jiale customers are world-renowned brands, and most have luggage and clothing category layouts; the luggage OEM layout factory layout is highly consistent with Shanghai Jiale production capacity bases; the luggage foundry business core team has worked in large textile, garment and textile accessories manufacturing companies, and is similar in terms of luggage and apparel and textile accessories manufacturing process, supply chain and factory management, R&D and design. In 2023, we benefited from the expansion of new customers and the expansion of categories from old customers, with revenue of 1,285 billion yuan (+26.9%), and there is plenty of room for scale improvement. Net profit in 2020-2023 lost 0.72/0.28/0.67/0.75 billion yuan respectively. It is expected that future profitability will improve significantly as the proportion of large-scale orders and the proportion of fabric self-supply increases.

Risk warning: The pace of acquisition implementation falls short of expectations, the recovery in travel demand falls short of expectations, and orders fall short of expectations.