Key points of investment:
Leading shoe manufacturer, steady improvement in performance
The company is engaged in the development, design, production and sales of sports shoes. It is the world's leading manufacturer of sports shoes. It mainly provides development, design and manufacturing services for world-renowned sports brands such as Nike, Converse, Vans, Puma, UGG, Columbia, Under Armour, and Hoka One One. From 2017 to 2023, the company's total revenue increased from 10.01 billion yuan to 201.1 billion yuan, doubling in 6 years, with a compound annual growth rate of 12.3%. By order type, leisure sports contributed mainly to revenue. In 2023, its revenue reached 17.81 billion yuan, accounting for 88.7% of total revenue; followed by outdoor shoes/slippers and sandals, which accounted for 6.7%/4.6% of revenue. From 2017 to 2023, the company's net profit to mother increased from 1.11 billion yuan to 3.20 billion yuan, with a compound annual growth rate of 19.4%, which is faster than scale growth.
Core customer cooperation deepens, and Xintuo customers drive high-quality growth
Through good product quality, outstanding development and design capabilities, quick response and delivery capabilities, the company has accumulated valuable resources for world-renowned sports footwear customers. Core customers include Nike, VF, Puma, Columbia, UA, etc. In recent years, the company's top 5 customer orders have accounted for between 82% and 92%, which is relatively stable, and its dependence on single-brand customers is limited. In addition to this, the company is also focusing on expanding new customer resources, and new partner customers such as Reebok, Lululemon, and Allbirds began mass production and shipment in 23Q1.
Southeast Asia production capacity layout, higher labor efficiency than peers
The company's overall production capacity has maintained steady growth since 2017, increasing from 140 million pairs in 2017 to 220 million pairs in 2023; and the capacity utilization rate has basically remained above 90% (with the exception of 2023, when production declined due to overseas brand customers leaving the warehouse). In addition, the company's per capita output remains at a high level in the industry. Huali's per capita output in 2023 was 1,276 pairs/year, higher than Yuyuan's 900 pairs/year. Judging from the production capacity layout, as of the 2023 annual report, the company has a total of 30 subsidiaries related to footwear processing, including 25 in Vietnam and 4 in Indonesia. Judging from the location of the company's factories, most of them are located in northern Vietnam. The labor force is relatively abundant, labor costs are low, tariffs are low, and the cost advantage is remarkable.
Profit forecasting and investment advice
We expect the company to achieve net profit of 3,861 billion yuan, 4.462 billion yuan, and 5,072 billion yuan respectively from 2024 to 26, with year-on-year increases of 21%, 16%, and 14%, respectively. Considering that Huali Group is a leading shoe foundry company, is deeply tied to customers of high-quality international brands such as Nike and Puma, and has a total production capacity layout in Southeast Asia, the cost advantage is prominent, and for the first time, it was covered with a “buy” rating.
Risk warning
Prices of raw materials rose, demand from overseas sports brands recovered below expectations, exchange rate fluctuations