Key points of investment:

Leading enterprises in the garment industry, steadily improving the quality of operations

In the first quarter of this year, the company's revenue and net profit to mother were 3.139 billion yuan (+4.58% YoY) and 346 million yuan (YoY +11.40%), respectively, of which the profit scale was close to pre-pandemic levels. Inventory management was optimized. Inventory fell 28.61% year on year in 2023, and the turnover rate increased to 2.32 times. The cash flow situation is healthy. Net cash flow from operating activities increased +65.08% year over year to $1,941 billion in 2023. The company's total cash dividends in 2023 increased by 50.00% to 808 million yuan, with a dividend ratio of 5.20%, exceeding the industry average.

Clothing e-commerce still has potential, and spending money drives the children's clothing circuit

The scale growth of the domestic apparel industry is slowing down, but e-commerce channels have significant potential for growth. Last year, clothing e-commerce retail sales were 2.3 trillion yuan, and the 2024-2029 CAGR is expected to be 11.55%. The outlook for the children's clothing market is optimistic. Last year, the market size was about 250 billion yuan, and the 2015-2023 CAGR was higher than that of women's clothing and men's clothing. Post-90s parents became the main consumers of children's clothing, focused on fashion and brands, and preferred online shopping. The children's clothing market is driven by the amount of money spent, showing a steady foundation of development. In 2023, children's clothing consumption per capita exceeded 1,000 yuan, +9.88% over the same period last year. It is estimated that by 2028, the domestic children's clothing market will exceed 320 billion yuan.

Accumulate global retail power in multiple dimensions and create a new model of growth

The company continues to carry out brand upgrades and product innovation. In 2023, sales expenses were 3.294 billion yuan, +0.98% year-on-year. The total advertising expenses in the past three years were 2.118 billion yuan, which is significantly higher than the pre-pandemic level. Focus on mental products, strengthen design and fabric development, and establish a BALA-FIT fabric technology system to meet the needs of multiple scenarios. Online and offline development is balanced. Last year, e-commerce revenue was 6.228 billion yuan, -3.51% year over year, but gross margin was +4.17pct year over year. , which reached 42.97%. The company accelerated the live e-commerce business. In 2022, live streaming revenue exceeded 3 billion yuan, and built a live streaming matrix for diversified platforms. After three supply chain iterations, flexible supply chain management was achieved, and digital intelligence upgrades were initiated. The company invested 2,567 billion yuan to build five major logistics parks and cooperated with JD Logistics to improve logistics efficiency and achieve positive and reverse logistics solutions.

Valuation and Ratings

The company continues to improve global retail capabilities and product distribution efficiency, strengthen terminal channel capabilities, and expand overseas business layout. Under a neutral scenario, EPS is expected to be 0.49 yuan, 0.56 yuan, and 0.64 yuan respectively in 2024-2026, corresponding to the 2024 PE valuation of 13.05 times, and for the first time coverage, a “gain” rating.

Risk warning

Macroeconomic fluctuation risk, brand operation risk, raw material price change risk, inventory management and price drop risk, import and export trade risk.