1H24 Results Exceed Our Expectations

Jack Co., Ltd. released its 2024 semi-annual report: 1H24 revenue of 3.23 billion yuan (YoY +20.2%), net profit of 0.42 billion yuan (YoY +54.0%), and the profit side surpassed the July forecast center (0.38 billion yuan - 0.433 billion yuan), mainly due to the company's structural optimization and remarkable supply chain management results in the first half of the year, which led to a significant increase in gross margin and profitability better than our expectations. Looking at a single quarter, 1Q24/2Q24 revenue was 1.63/1.61 billion yuan, breaking the previous rule where the absolute value of 2Q revenue declined significantly from month to month, reflecting the upward trend in the 2024 textile manufacturing cycle. Our review is as follows:

The gross margin of equipment before and during sewing increased significantly. 1) The revenue of 2024H1's industrial sewing machine/cutting & layer/shirt & denim automatic sewing equipment increased 19%/25%/33% year over year, and gross margin was +3.4/+3.7/-1.3pp year on year. The company led the increase in gross margin with structural optimization. 2) Looking at the subregions, there is a clear differentiation between domestic equipment sales and direct exports. The 2024H1 domestic sales revenue growth rate is over 40%, and direct exports are only basically the same.

The rate of expenses for the period was well controlled. Driven by scale effects, 2Q24's sales/management/R&D expense ratios were -0.3/-0.3/-0.5ppt, respectively, and the net profit margin for the single quarter increased 1.5ppt to 14.2% year-on-year. The company introduced an interim dividend for the first time. The announcement announced a cash dividend of 0.30 yuan (tax included) per share, accounting for 33.4% of net profit for the first half of the year. In the first half of the year, the company repurchased 0.24 billion yuan of shares through centralized bidding transactions. The total amount of cash dividends and repurchases was 0.37 billion yuan, accounting for nearly 90% of net profit.

Development trends

Exports of 2024M6 industrial sewing machines are speeding up, and we look forward to overseas elasticity in the second half of the year. According to statistics from the China Sewing Machinery Association, 2024M1-6 China's overall export value of sewing machinery increased by 10% to 1.6 billion US dollars; industrial sewing machine exports rebounded monthly, and industrial sewing machine export sales increased 23.8% in June, and the amount increased by 30%, reversing the 2024M1-5 export slump trend. We look forward to improved export demand in the second half of the year, resulting in profitable resilience.

Profit forecasting and valuation

Taking into account the increased elasticity of the company's profitability in the first half of the year, we significantly increased our 2024/2025 net profit by 19%/15% to 0.78/0.86 billion yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 16.5x/14.9x. Considering the decline in the valuation of the A-share textile machinery sector in the past two months, we only raised our target price by 8% to 35 yuan, corresponding to the 2024 price-earnings ratio (PEG=0.5), which has 32% room to rise compared to the current stock price.

risks

The progress of the new business fell short of expectations; improvements in operational efficiency were slow, and mergers and acquisitions fell short of expectations.