Description of the event

In 2024H1, the company achieved revenue, net profit attributable to mother, and net profit without return to mother of 1.17, 0.17, and 0.16 billion yuan, an increase of 5.5%, 33.8%, and 32.1% year-on-year. Single Q2 achieved revenue, net profit attributable to mother, and net profit excluding non-return to mother of 0.62, 0.08, and 0.08 billion yuan, with year-on-year changes of +1.5%, -1.8%, and -11.4%. In addition, the company announced the 2024 semi-annual profit distribution plan, with a cash dividend of 0.20 yuan (tax included) per share, with a dividend ratio of 43.4%, and a dividend rate of 2.2% corresponding to 2024/8/08.

Incident comments

Revenue performance was stable under a high base, and the month-on-month improvement continued seamlessly. Cotton socks: Revenue growth is steady, mainly due to a high base and differences in monthly production schedules. Improved capacity utilization combined with increased production efficiency in cleaning plants drives improved profitability. 2024H2 is expected to pick up growth rate driven by high-quality customer orders. Seamless: It is expected that the high base due to Uniqlo's centralized orders in 2023Q2 will weigh on revenue, but the recovery continues from month to month, driven by continuous restoration from old customers and gradual orders from new customers. 2024H2 is expected to usher in a high increase due to the low base and customer volume represented by Uniqlo.

Performance was weaker than revenue due to one-time expenses, and operating efficiency continued to improve. The gross margin of 2024Q2 was +1.9 pct to 28.5% year over year, and the net profit margin to mother was 0.5 pct year over year, mainly due to the marketing and management fee ratio +1.7 pct year over year (charges for the 30th anniversary of 2024Q2) and the financial expenses ratio +0.7 pct year over year (high exchange base due to the depreciation of the RMB 2023Q2). Without considering the impact of anniversary expenses, it is expected that the company's operating efficiency will continue to improve, and profits will continue to improve under lean production.

Looking ahead, in the short term, along with the release of the interim report, the negative impact of profit fluctuations due to 2024Q2 expenses has been fully unleashed. 2024Q3 was accompanied by a seamless decline in base, both businesses welcomed order volume from major customers, and revenue and performance flexibility was remarkable. Under undervaluation, we are now facing a good layout opportunity. In the long term, with a focus on customers, strong R&D, increased production, and increased efficiency, cotton socks are becoming more competitive, production capacity planning is optimistic, profit elasticity is seamlessly released, and revenue is slowly recovering. In the future, cotton socks are expected to maintain a high level of steady growth, and with seamless strengthening, they are expected to relay into an elastic growth curve. The company's net profit for 2024-2026 is expected to be 0.33, 0.39, 0.44 billion yuan, +22%, +19%, and +13% year-on-year, and corresponding PE of 10.1, 8.5, and 7.5X. Moreover, the peak of capital expenditure has passed, and excellent cash flow is expected to guarantee continued high dividends and maintain a “buy” rating.

Risk warning

1. Overseas macroeconomic fluctuations;

2. Brand inventory removal falls short of expectations;

3. The progress of production capacity investment fell short of expectations.