Blum Oriental: a leading domestic color spinning company. The company's main business is the R&D, production and sales of color spinning, and has been involved in the color spinning industry for more than 30 years. In '21 and '22, the company's net profit rose from 300 to 500 million yuan to more than 1 billion yuan, mainly benefiting from the scarcity of overseas production capacity and rising domestic and foreign cotton prices. Affected by weak industry demand and inventory removal from overseas clothing brands in '23, the company's orders were insufficient, production capacity utilization declined, and product sales prices fell year on year. Annual revenue of 6.914 billion yuan, down 1.08% year on year, net profit to mother was 504 million yuan, down 67.75% year on year. Among them, the company's orders gradually picked up and revenue growth rate corrected in the second half of '23.

24Q1's order performance continued to improve, sales growth led to a year-on-year increase in revenue of 23.45%, and net profit to mother decreased by 4.51% year-on-year.

Business spin-off: color spinning and overseas sales dominate. The company's products are mainly colored spinning, supplemented by billet yarn. Color spinning yarn is customized for customers, with short delivery times, and higher gross margin. Billet yarn is the basic product. Color spinning and blended yarn accounted for 52% and 40% of revenue in '22, and the share of billet yarn increased as demand weakened in '23.

The company laid out production capacity earlier than overseas Vietnam. With the expansion of overseas production capacity, the company's overseas sales dominated.

The compound annual growth rate of domestic and overseas revenue in 15-23 was -5.39% and +11.18% respectively. Domestic and overseas revenue accounted for 26% and 67% respectively in '23, and the share of overseas revenue increased by 28 PCT compared to 2015.

Industry analysis: The development prospects of the industry are improving, and the middle and high-end color spinning oligopoly is monopoly. Color spinning has environmental protection, fashion and technological characteristics, and can meet the requirements of downstream short delivery times. Compared with traditional process yarn, China's color spinning industry is still small in size, and the industry is quite prosperous. According to statistics from the Huajing Industry Research Institute, the scale of China's color spinning industry was 60.55 billion yuan in '21, and the compound annual growth rate from 2010 to 2021 was 7.99%. The high-end color spinning industry has formed a competitive pattern where Blum Oriental and Huafu Fashion have a duopoly monopoly. In '22, Blum Oriental spinning products ranked first in China in terms of revenue volume, and Vietnam's relatively high production capacity favors its share.

Highlight analysis: Deeply bind high-quality customers, and the advantages of overseas production capacity are obvious. 1) The company deeply cooperates with Shenzhou International, a major high-quality customer, to bind sports brands and benefit from the high popularity of sports tracks. In recent years, all links in the sports industry chain have been focusing on supplier concentration and improving supply chain stability, and the company's share is expected to gradually increase; 2) The company's Vietnamese production capacity has a first-mover advantage, and the performance is superior to the company's overall performance. The compound annual growth rates of Vietnam's Blum revenue and net profit in 16-23 were 17.64% and 24.11%, respectively. Their operating efficiency, cost control and scale efficiency were stronger. Under weak demand in 23 years, Vietnam's Blum revenue and net profit were +11.90% and -81.66% respectively; 3) The company's cotton reserve cycle is generally used for 6 to 10 months The cotton produced can better cope with fluctuations in cotton prices in the short term, and can also help companies smooth cotton usage costs and reduce gross margin fluctuations.

Profit forecast and investment advice: The company has passed the trough of 2023 and entered 2024 with positive order performance. We are optimistic that the company's performance as a leading leader in colored spinning will continue to improve and steadily increase its market share. At the same time, the company has undervalued high dividend attributes, and is highly resilient to risks. Considering the uncertainty of demand trends, we slightly lowered the company's profit forecast for 24-26 (net profit reduced by 3%/1%/1% from the previous profit forecast, respectively). EPS for 24-26 was 0.47, 0.61, and 0.69 yuan respectively, corresponding to PE 11 times and 8 times for 24 and 25, respectively. Combining relative valuation and absolute valuation, we gave the company a target price of 6.75 yuan (corresponding to 14 times PE in 24 years), maintaining a “buy” rating.

Risk warning: Weak domestic and foreign demand, changes in the trade environment affect order acceptance, and large fluctuations in exchange rates or cotton prices.