1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 3.989 billion yuan, +23.89% year on year; net profit to mother 0.233 billion yuan, -14.78% year on year; net profit of 0.107 billion yuan after deducting net income to mother, -46.70% year on year. Among them, 2Q24 revenue was 2.155 billion yuan, +24.27% year over year; net profit to mother was 0.152 billion yuan, -19.35% year over year; net profit after deduction was 0.115 billion yuan, or -7.73% year over year. The 1H24 results were in line with our expectations.

Revenue growth was driven by volume growth, and 2Q24 prices recovered year over year. As overseas brands begin the inventory replenishment process, in terms of volume price, we estimate that 1H24 revenue growth is mainly driven by volume growth, and prices are basically flat year over year; of these, 2Q24 prices have achieved year-on-year growth in units. By product, we estimate that 1H24 spinning accounts for a larger share of revenue, and the share of color spinning revenue is increasing quarterly. By region, 1H24 domestic/overseas revenue was +27.8%/+34.4% to 1/2.99 billion yuan, respectively, and both achieved a good recovery.

Comparable gross margin increased significantly, and cost control was good. 1H24 gross margin was 4.9ppt to 10.0% year over year, of which 2Q24 gross margin was -2.8ppt to 13.5% year over year. Considering one-time factors such as 2Q23 inventory falling prices and preparation for resale, gross margin has clearly rebounded under comparable standards. In terms of expenses, the company strictly controls expenses. The 1H24 sales/management expenses ratio was -0.04pp/ -1.8ppt to 0.6%/4.0%, respectively; the 1H24 financial expense ratio was +1.1ppt to 1.5% year over year, mainly due to exchange losses. Furthermore, 1H24 investment income was -42.01 million yuan to 62.5 million yuan year over year, mainly due to the year-on-year decline in long-term equity investment income from Shanghai Xinyu and futures investment. Overall, 1H24 net profit margin was -2.6ppt to 5.8% yoy, minus non-net profit margin -3.6ppt to 2.7% yoy.

Steady operations and abundant cash flow. As of the end of 1H24, the company's inventory was -22.3% to 4.24 billion yuan, corresponding turnover days -130.7 days to 224.4 days; accounts receivable were +24.9% year-on-year to 0.64 billion yuan, corresponding turnover days were +1.3 to 28.3 days year-on-year. 1H24's operating cash flow was +470.9% year-on-year to 0.89 billion yuan, and the net cash ratio was greater than 1.

Development trends

Driven by capacity utilization restoration and product structure optimization, we expect 2H24's gross margin to continue to recover, which in turn will bring high performance flexibility. On the production capacity side, 77% of the company's production capacity is currently located in Vietnam, and we are still optimistic about the scarcity of production capacity and order certainty for the company's Vietnamese subsidiary in the long-term dimension.

Profit forecasting and valuation

We basically maintain the company's 2024/25 profit forecast of 0.56/0.64 billion yuan. The current stock price corresponds to 2024/25 11.9x/10.4xp/E, respectively. Maintaining an outperforming industry rating and maintaining the company's target price of 5.57 yuan, corresponding to 14.9x/13.0x P/E in 2024/25, there is room for 25% increase compared to the current stock price.

risks

Orders fall short of expectations, risk of changes in raw material prices, trade policy risks.