The interim profit is in the upper range of the forecast

The company achieved revenue of 3.23 billion yuan in the first half of the year, +20% year-on-year, and net profit of 0.417 billion yuan, or +54% year-on-year, in the upper range of 3.8 to 0.433 billion in the previous performance forecast. Among them, Q2 achieved revenue of 1.61 billion yuan in a single quarter, +29% YoY, -1% month-on-month, and net profit to mother 0.229 billion yuan, +44% YoY and +22% month-on-month. Considering the unexpected growth in the company's cutting and other businesses, the profit forecast was slightly raised. The company's net profit for 2024-26 is estimated to be 7.7, 11.6, and 1.29 billion (previous values: 7.6, 11.5, and 1.28 billion), respectively, corresponding to PE 17, 11, and 10 times. Comparatively, the company's 24-year Wind unanimously anticipated an average PE value of 20 times. Considering the company's high profit flexibility, the company was given 24 times PE in 24 years, with a target price of 38.2 yuan (previous value of 37.9 yuan), maintaining a “buy” rating.

All businesses achieved rapid growth in the first half of the year. Benchmark customers for intelligent equipment such as cutting beds achieved breakthroughs. The company's revenue of industrial sewing machines, cutting machines, and automatic sewing units in the first half of the year was +19%/+25%/38%, respectively, and domestic/overseas revenue was +42%/+1% year-on-year, respectively. The company's domestic sewing machine explosion strategy continued to reap success, successfully explored and promoted the “small order quick reverse” clothing production model, and revenue grew rapidly. In terms of export business, according to data from the General Administration of Customs, China's industrial sewing machine export value in the first half of the year was +5%, slightly higher than the company's overseas revenue growth. The main reason may be that domestic demand markets such as India, which have a higher market share of the company, grew slower than export-oriented markets such as Vietnam. The cutting bed and automatic sewing unit sector grew rapidly, opening up overseas markets, breaking through 5 international benchmark customers, and growing at an impressive rate.

Product upgrades and SKU streamlining helped the company's gross margin and net margin reach new highs in the first half of the year since listing. In the first half of the year, the company achieved a gross profit margin of 31.8% and a net profit margin of 13.0%, +3.4 and +2.8 pct, respectively.

By business, the gross margin of sewing machines/cutters/automatic sewing units in the first half of the year was +3.4, +3.8, and -1.3 pct, respectively. The increase was mainly due to cost reductions and exchange rate changes due to product structure upgrades and SKU streamlining. The decline in the gross margin of automatic sewing equipment was mainly due to changes in the sales regional structure of China and Italy. Q2 Sales/management/R&D/finance expense ratios were -0.27/-0.28/-0.52/+2.42pct, respectively. The scale effect was evident. The increase in financial expense ratios was mainly due to a decrease in exchange earnings.

Cash flow performance is good, and it is proposed that an interim dividend be given to shareholders

In the first half of the year, the company achieved a net cash flow inflow of 0.635 billion yuan from operating activities, higher than the total profit of 0.417 billion yuan. Inventory decreased by about 0.3 billion yuan from the beginning of the year, and accounts receivable increased compared to the beginning of the year, mainly due to sales policies under the company's distribution model (credit collection at the beginning of the year) and increased sales of major terminal customers in the first half of the year.

The company announced a mid-term dividend plan at the same time. It plans to distribute 0.3 yuan for 10 shares and 0.139 billion yuan in cash dividends, accounting for 33% of the first half of the year's profit. At the same time, 0.235 billion yuan was repurchased through centralized bidding in the first half of the year, totaling 0.374 billion yuan, accounting for 90% of the profit for the first half of the year. Looking ahead, the company's balance of projects under construction is only 0.12 billion yuan. The capital requirements for investment are small, and it is expected to maintain sufficient free cash flow.

Risk warning: 1) The recovery progress of the clothing industry falls short of expectations; 2) the progress of increasing the penetration rate of the smart hanging industry falls short of expectations; 3) the risk of exchange rate fluctuations.