1H24 results are in line with our expectations

The company announced 1H24 results. Revenue reached 0.81 billion yuan, an increase of 29.3%, and net profit to mother reached 0.1 billion yuan, an increase of 111.7%. The performance was in line with our expectations. On a quarterly basis, 1Q/2Q24 revenue increased by 35.2%/24.5%, respectively, and net profit to mother reversed year-on-year losses/ +12.1%, respectively. At the same time, the company issued a semi-annual profit distribution plan to distribute a cash dividend of 2.7 yuan (tax included) to all shareholders for every 10 shares, with a dividend rate of 51.9%.

Development trends

1. Overseas customer order recovery and new customer expansion helped 1H24's revenue grow rapidly. 1) By category: Revenue from 1H24 pet disposable hygiene products increased by 29.1% to 0.76 billion yuan, with revenue from pet diapers/pet diapers increased by 30.5%/13.3% respectively. Revenue growth was mainly due to overseas channel inventory adjustments, original customer order recovery and new customer expansion; revenue from non-woven fabrics and personal disposable hygiene products also increased 33%/38.6%; 2) By region: 1H24 overseas/domestic revenue reached 0.76/0.05 billion yuan, respectively, up 29.4% /28.7 billion yuan %.

2. Increased scale effects drive improvements on the gross profit side, and net interest rates are under pressure in the short term due to exchange and the like. On the gross profit side, the company's 1H24 gross margin increased by 5.5ppt to 18.9%, of which Q1/Q2 gross margin was 18.2%/19.5% respectively. Continued improvement of the main cause channel order pace recovery led to an increase in the company's shipment volume, the scale effect on the production side continued to show, and raw material procurement prices were running smoothly; on the cost side, the Q2 company's sales/management/finance expense ratios were -0.2ppt/0.1pp/ +6.3ppt, respectively. Under the combined influence, the company's Q2 net profit margin reached 12.3%, -1.4ppt year over year.

3. The equity incentive plan has clear goals and is expected to fully motivate core cadres. On August 16, the company issued the “2024 Employee Stock Ownership Plan (Draft)”. It plans to grant 1.908 million shares (1.03% of the total share capital) to the incentive target, covering a total of 65 employees, including directors, deputy general managers, and core business executives. The initial grant price is 6.42 yuan/share. According to the assessment method, the current equity incentive is based on operating income. The target revenue values for 2024-26 are 1.671/1.88/2.06 billion yuan, respectively, corresponding to the same increase of 25%/12.5%/9.6%. We believe that the company's current equity incentives cover a wide range and are strong, and that the assessment goals are relatively steady, which is expected to fully motivate employees and support the company's continued growth in the future.

4. Focus on the company's 24-year revenue growth trend under channel order resumption and new customer development. According to the General Administration of Customs, China's export value of pulp, paper and other hygiene products (the company's export customs declaration category) also increased by 17.8% in 1H24.

We believe that the current order pace for overseas channel customers has basically recovered. With the advent of the peak consumption season in Europe and the US and the development of new customers, the company is expected to continue to have sufficient orders this year; in the medium to long term, the company's domestic brands and overseas OEM are expected to develop simultaneously, opening up the growth ceiling.

Profit forecasting and valuation

Keeping the profit forecast unchanged, the current stock price corresponds to 13/11 times P/E for 2024/25. Maintaining an outperforming industry rating, the target price was lowered by 18% to 16.5 yuan based on market risk appetite adjustments, corresponding to 18/15 times P/E in 2024/25, with 35% room for growth.

risks

Prices of raw materials fluctuate greatly; exchange rates fluctuate greatly; loss of core customers.