Key points of investment
From the top down, I am optimistic that the 2024 Huali Group order will continue to be repaired. As the inflection point of downstream customers gradually emerged, the 23Q4 textile manufacturing sector's revenue improved smoothly over the same period last year. The repair trend continued for 24 years, and we continue to be optimistic that textile companies' orders will continue to warm up during the year. As a leading sneaker OEM, Huali Group has high customer resources, concentrated customer structure, and high cooperative stickiness, and is expected to directly benefit from order recovery after downstream customers have gone to the warehouse. 23Q1/Q2/Q3/Q4 Huali Group's revenue was -11.23%/-3.87%/-6.92%/+11.74%, respectively. Q4 returned to a double-digit growth level as scheduled; 24Q1 revenue was +30.15% year-on-year, and the recovery trend was quite clear.
From the bottom up, Huali Group maintained a stable and high profit margin in a volatile environment. Looking from the bottom up, in the past few years, Huali Group has shown outstanding stable and high-profit financial characteristics. The average net profit margin of Huali Group in 17-23 was 13.8%, 6.9 percentage points higher than the average of its peers (Yuyuan/Fengtai/Yuqi/Zhiqiang) of 6.9%, and Huali Group's net profit margin level remained steady and upward during this period, while the profit margins of other peers fluctuated greatly due to factors such as fluctuating orders. We believe that it reflects several of the company's core competencies (cost advantage, management advantage, customer advantage), which is the main reason why we continue to focus on recommending Huali Group.
Decommissioned profit: The gross profit margin, period expense ratio, and net profit margin are all clearly superior to peers. Through detailed breakdown of profit indicators and peer comparison, it can be seen that Huali Group is clearly superior to its peers in terms of gross profit margin, expense ratio, and net profit margin index: the average gross profit margin of Huali Group in 17-23 was 24.9%, higher than the average of peers (Yuyuan, Fengtai, Yuqi, Zhiqiang) by 2.8pct; 2) Period expense ratio: The average sales, management/financial expense ratio for 17-23 was 0.98%/5.96%/0.09%, respectively, lower than the peer average by 4.23/1.40/0.34pct, respectively., the cost rate indicators for the three periods are Lower than peers; 3) Income tax rate:
It is at a moderate level among peers, relatively stable, and a source of non-profit advantage. 4) Net profit margin: The average net profit margin of Huali Group in 17-23 was 13.8%, 6.9pct higher than the peer average of 6.9%.
The three major advantages of cost, management, and customer drive high profits. Through detailed comparison of profit indicators, we summarize that Huali Group's high profit mainly comes from the following three advantages: 1) Cost advantage: product structure+factory layout brings natural cost advantages, while variable costs account for a relatively high proportion of the cost structure, making cost control more flexible and gross margin stable; cost advantage further brings customer pricing advantages and effectively saves sales expenses. 2) Management advantages: The company's founder team has highly concentrated shareholding and rich experience, strict dynamic management fees+continuous R&D investment to improve production efficiency, and the company's management fee ratio is continuously optimized and lower than peers; 3) Customer advantage: Huali Group adopts a strategy of consolidating old customers and expanding new customers, and the amount of new customer cooperation effectively smoothes the order pressure of old customers during the storage cycle, thus making the profit level relatively stable. At the same time, the company continues to release new production capacity under the expansion of orders from new and old customers, which is also very helpful in improving overall production efficiency and reducing costs and fees.
Profit forecast and investment advice: From the top down, since the end of '23, order recovery has led to improvements in upstream fundamentals. The 24Q1 textile manufacturing sector's revenue and net profit have all resumed positive growth. Currently, overseas brands are still in the inventory replenishment cycle, and European and American consumption is showing a weak improvement trend. We expect the upstream order repair trend to continue within 24 years. Looking from the bottom up, in the past few years, Huali Group's profit level has bucked the trend in a volatile external environment, reflecting the company's three core advantages in cost, management, and customers. This has created a high competitive barrier for textile manufacturing companies, and we believe it will continue to support the company's medium- to long-term investment value. The company's net profit is expected to be +22.5%/+19.2%/+16.8% year-on-year in 24-26, respectively. The corresponding PE is 17/14/12X, respectively, maintaining a “buy” rating.
Risk warning: Overseas economic downturn, risk of customer loss, etc.