Q3 Rapid growth in performance, raising 24-year profit forecast

The company released a performance forecast. It is expected to achieve net profit of 6.0 to 0.63 billion yuan, +45% to 53% year over year, net profit without return to mother of 5.49 to 0.579 billion, +48% to 56% year over year, corresponding to net profit of 1.83 to 0.213 billion yuan in a single quarter of 24Q3, +29% to 50% year over year, median of 0.198 billion, and +39% year over year. The company's performance was impressive, and the profit forecast for the full year was slightly raised. The estimated net profit for 2024-26 is 8.0\ 11.6\ 1.28 billion yuan (adjusted 4%, 0%, and -1% from the previous value), respectively, corresponding to PE 16\ 11\ 10 times. Comparatively, the company's consistent forecast for 2024 was 22 times. Considering the company's high profit flexibility, the company was given 24 times PE in 24 years, with a target price of 39.8 yuan (previous value of 38.2 yuan), maintaining a “buy” rating.

In Q3, domestic clothing consumption and exports all weakened. The company's performance bucked the trend and the offshore RMB appreciated by about 4% from July to September. The company reported holding 0.48 billion US dollars in the US dollar currency, or generated exchange losses of about 20 million. The median net profit returned to mother after being discounted was 0.22 billion yuan, +55% over the same period last year.

From January to June '24, the cumulative retail sales volume of clothing products of enterprises above the domestic limit was +0.8%, compared with -5.6% and -1.9% in July and August, respectively. Domestic clothing exports remained flat year on year from January to June, and -4.4% and -2.7% respectively in July and August, all weakened, leading to pressure on domestic sales of sewing machines. The company's overall performance has increased, and it is estimated that its market share has increased, while maintaining strong profitability under product upgrades and SKU streamlining strategies.

Product upgrades and SKU streamlining helped the company maintain strong profitability. 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%, compared with +3.4 and +2.8 pct, respectively. The increase in profitability was mainly due to cost reduction due to product structure upgrades and SKU streamlining. Assuming that the company's 24Q3 revenue was +15% year-on-year, and the median profit was 0.198 billion yuan, corresponding to a net interest rate of 12.2% for a single quarter, 13.5% after recovering exchange losses, which is comparable to 14% in a single quarter in Q2. Considering the adverse impact of RMB appreciation in Q3 on the gross margin of the company's export business, the company may have maintained strong profitability, and the product upgrade and SKU reduction strategies have been very effective.

Q4 sewing machine exports may continue the recovery trend. The company's “trade-in” is expected to boost domestic demand for renewal by +4.7%, +22.6%, and -0.7%, respectively. Overall, Q3 is +9.2% year-on-year, up from +3.1%, up from Q2, and is still in the recovery channel. According to the Sewing Machinery Association, in July '24, China's industrial sewing machine exports were 0.133 billion yuan, +19% year-on-year. We expect a continuous recovery trend in August and September. In 23Q4, China's sewing exports were 0.288 billion US dollars, -11% month-on-month, the lowest quarterly level since 2020. The downstream recovery is compounded by the low base effect, and Q4 companies' exports can be expected to grow rapidly. On the domestic side, according to the company's WeChat account, from September 10 to November 30, Jack responded to the national equipment renewal policy and launched a “trade-in” campaign. The Jack brand can be credited 1,000 yuan for a new flat stitch machine, which is expected to drive domestic product renewal demand.

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.