Key points of investment

The company released its 24-year report: cotton socks drive growth, and Q2 profits were briefly under pressure

24H1 achieved revenue of 1.169 billion yuan (YoY +5.5%), net profit of 0.166 billion yuan (YoY +33.8%), and net profit of 0.162 billion yuan after deduction (+32.1% YoY). Revenue growth was mainly due to steady growth in the cotton socks business, and the higher net profit growth rate came from a year-on-year recovery in net interest rates.

24Q2 achieved revenue of 0.62 billion yuan (+1.5% YoY), net profit to mother of 83.48 million yuan (-1.9% YoY), and net profit of 81.85 million yuan after deduction (-11.4% YoY). We expect the decline in net profit in Q2 mainly due to a high base (net profit for 23Q2 was the highest quarter in '23), as well as an increase in related expenses due to the 30th anniversary celebration of 24Q2.

Cotton socks and seamless face low/high bases respectively, and growth rates are expected to diverge in the first half of the year

We expect 24H1 revenue growth mainly from cotton socks: cotton socks 23H1/H2 revenue was 0.73/0.89 billion yuan, respectively, -10%/+16%. 23H1 is still in the inventory removal stage for European and American brands, while 23H2 continues to improve with the end of inventory removal and a significant month-on-month improvement in revenue, so 24H1 is expected to grow on a low base.

We expect 24H1 seamless revenue to be under year-on-year pressure: 23H1/H2 seamless revenue was 0.38/0.25 billion yuan respectively, accounting for 60% of the full year's revenue in the first half of the year, so 24H1 faces high base pressure. However, new seamless customers are climbing the slope, and the proportion is growing rapidly. We expect 24H2 to achieve beautiful growth at a low base.

Gross margin increased significantly, and anniversaries and exchange briefly affected the net profit of a single quarter

24H1 has a gross profit margin of 28.9% (+4.2pp), net profit margin of 14.2% (year-on-year +3.0pp), and a significant recovery in profit margins. We expect: 1) the recovery of orders will drive an increase in capacity utilization, while the customer structure will gradually be optimized and the share of ODM orders will increase; 2) The company has promoted “cost reduction and efficiency” over 23 years to continuously optimize the cost structure and improve production efficiency. All production bases have actively implemented assessment indicators such as controlling 10,000 yuan of variable costs.

The gross profit margin for 24Q2 was 28.5% (+1.9pp), the net profit margin was 13.5% (-0.5pp), and the period expense ratio was +2.0pp. Among them, the sales/management expenses ratio was +1.0/+0.7pp, respectively, mainly due to an increase in expenses and travel expenses for the 30th anniversary celebration; the financial expense ratio was +0.7pp year-on-year, mainly due to a decrease in exchange earnings compared to the same period last year.

Mid-term dividend rate of 43%, cash repurchase cancellation in progress

The company plans to pay a cash dividend of 0.2 yuan/share in mid-'24, with a dividend of 71.92 million yuan close to the upper limit (distributable profit of 78.88 million yuan as of 6/30), with a dividend rate of 43.4%. In addition, the company plans to use 0.1-0.2 billion yuan in cash to repurchase shares from February '24 to February '25 for cancellation. Up to now, it has repurchased a total of 93.44 million yuan, showing that the company attaches importance to shareholder returns.

Profit forecasts and investment suggestions:

The company's cotton socks customer structure is stable, production capacity reserves are sufficient, and growth certainty is strong; seamless customers have gone through 2-3 years of early development, and orders are expected to gradually rise in 24 years. As Vietnam's production capacity utilization rate increases and order structure improves, profit margins are expected to rise rapidly.

We expect the company to achieve revenue of 2.54/2.92/3.32 billion yuan in 24-26, +11%/15%/14% year over year, and achieve net profit of 0.32/0.38/0.44 billion yuan, +18%/20%/16% year over year, corresponding to PE 9/8/7 times. Cotton socks are growing steadily, seamless profit elasticity is remarkable, shareholder return is outstanding, and maintaining a “buy” rating.

Risk warning: terminal recovery falls short of expectations; new customer volume falls short of expectations; exchange rates or raw material prices fluctuate