Investment logic:

Review: The company has sharpened and grown into a leading global industrial sewing machine in 30 years. The sewing machine industry originated in the United States. After the industrial transfer to Japan, China relayed to become a major global production and sales country. China's sewing machine industry experienced a period of rapid growth from 1994 to 2008 and a period of cyclical turbulence and reshuffle after 2009. In these two stages of development, the company stood out with outstanding characteristics such as management reform, fine dealer/supply chain management, and clear market positioning, and continued to break through market share. The revenue scale in 2020 surpassed the revenue of the sewing machine & systems division of leading overseas Japanese heavy machinery. In 2023, the company's industrial sewing machine sales accounted for about 32% of total domestic sales, leading the way, building a leading global industrial sewing machine leader in 30 years.

Outlook: The company is expected to benefit from the recovery cycle, lay out intelligent packages to explore the second growth curve. Cycle outlook: the industry is expected to enter an upward cycle, and domestic and foreign sales will continue to recover. The industrial sewing machine industry cycles every 2-3 years. We believe that the driving factor is active equipment replacement demand driven by high downstream prosperity. The unit price of industrial sewing machines is far lower than labor costs, and the efficiency improvements brought about by equipment upgrades can effectively improve the economy of garment factories. The industry was at its bottom in '23. 1H24 industrial sewing machine production and sales data improved, and downstream fixed asset investment also began to pick up. Domestic sales of industrial sewing equipment for key machinery companies of the 1H24 Association achieved a year-on-year increase of about 20%; the pace of export recovery was slower than domestic sales, but the data also showed an improving trend. 1H24 industrial sewing machines exported 2.28 million units, up 1.49% year over year, an increase of 5.28 pcts compared to January to May. We believe that the industry low has passed, and the company is expected to fully benefit as a domestic leader.

Growth outlook: Lay out intelligent packages to explore the second growth curve. In recent years, on the one hand, the company has continued to promote the intelligent upgrading of stand-alone machines. On the other hand, it has improved the overall layout before, during, and after sewing through increased R&D investment and epitaxial mergers and acquisitions. It has the ability to provide intelligent clothing packaging solutions integrating digital layout, fabric accessories storage, intelligent cutting, AI scheduling and hanging, intelligent sewing, post-processing, finished product storage, and software and hardware such as APS, MES, WMS, and PDM. At present, the smart suite has achieved breakthroughs in many customers, and is expected to become the core point for the company to break through medium and large customers in the future, creating a new growth curve spanning the cycle.

Profit forecasts, valuations, and ratings

The company's net profit from 24 to 26 is expected to be 0.789, 0.997, and 1.219 billion yuan respectively, corresponding to the current PE of 15X, 12X, and 10X respectively. Considering the company's leading position in the industry, the industry sentiment is expected to recover. The company is valued at 20X in 24, corresponding to a target price of 32.59 yuan/share, covering the “buy” rating for the first time.

Risk warning

The recovery in the sewing machinery boom fell short of expectations, breakthroughs in complete smart customers fell short of expectations, and shareholders' holdings were at risk.