Blum Oriental is one of the middle and high-end color spinning oligarchs, and Vietnam's production capacity advantage is outstanding. We believe that in the short term, demand for colored spinning improves and orders resume, and the company's performance is expected to improve; in the medium to long term, the company's overseas production capacity continues to expand and cooperate closely with core customers, which is expected to take on the overseas production capacity gap and continue to increase market share. We expect the company's net profit to be 0.542 billion yuan/0.616 billion/ 0.692 billion yuan in 2024-2026, respectively, +7.6%/+13.7%/+12.2% year-on-year, respectively. Covered for the first time, a “gain” rating was given.

Blum Oriental: A leading domestic color spinning company with a high dividend rate. The company's main products are color spinning and blended yarn. Color spinning uses the method of “dyeing first, spinning later”. It is made by dyeing fibers of different colors or properties and then blended. It has high added value and is more environmentally friendly. In 2023, the company achieved revenue of 3.141 billion yuan/3.315 billion yuan respectively, accounting for 45.4%/48.0% respectively. The company actively gave back to investors. Since its listing in 2012, the company has accumulated 13 dividends, with a cumulative dividend of 3.572 billion yuan. In 2023, the company further increased its dividend rate, with a cash dividend of 0.447 billion yuan, and a dividend rate of 88.7%.

The penetration rate of color spinning is expected to increase, and the middle and high-end markets are in a duopoly pattern. Compared with colored yarn and printed cloth, colored spinning has many advantages in environmental protection, fashion, technology, etc., and can meet the brand's ESG development needs and meet consumers' requirements for clothing comfort and fashion. The penetration rate is expected to continue to increase in the future, driving the scale of the industry. At the same time, color spinning manufacturing places high demands on the technical research and development, management capacity and cash flow of enterprises, and the entry barriers are high. The industry pattern is superior to the colored yarn industry and the printed and dyed cloth industry. The middle and high-end color spinning market forms an oligopoly pattern between Huafu Fashion and Blum Oriental (CR2 is about 70%).

Significant production capacity and location advantages, deep cooperation with high-quality customers. 1) Production capacity is concentrated in Vietnam. In the future, it is expected to further handle the overseas color spinning production capacity gap and increase the company's market share. At the same time, as Vietnam's production capacity expands, its scale effect and cost advantage will also drive the company's overall profit level to increase. 2) The company's largest customer is Shenzhou International. As a midstream manufacturing leader, Shenzhou International can guarantee the quality of the company's orders. We judge that the company is expected to enhance its position in the Shenzhou international supply chain in the future.

Risk warning: risk of weak terminal consumer demand, risk of cotton price fluctuation, risk of exchange rate fluctuation