Event: Company announces Q3 2024 results. The 24Q3 company achieved revenue of 2.06 billion US dollars/year over year, with manufacturing/retail business +23%/-9% year over year, respectively. 24Q3 achieved net profit of $0.15 billion to mother, +89% year over year, of which manufacturing business +171% year over year.

The growth rate of the manufacturing business improved markedly in Q3, continuing the trend of volume increase and price reduction: 24Q3 manufacturing business revenue was 1.5 billion US dollars/year over year +23%, and the growth rate improved significantly. Among them, in July, August, and September, respectively, the year-on-year growth rate was +22%, +21%, and +27%. In terms of volume and price breakdown, the average ASP and shipment volume in 24Q3 were -4.9% and +29.5%, respectively. The average price decline narrowed and shipments improved markedly; by region, shipments from Indonesia, Vietnam, and China in 24Q3 were +43%, +15%, and -1%, respectively. Looking at sales by region, the revenue of the US, Europe, and China in 24Q3 was +20%, +25%, and +24%, respectively.

Increased capacity utilization under order improvement drives improvement in gross margin, and cost control drives OPM increase: under 24Q3 order improvement, capacity utilization rate further improved to 95%, +16 points/+3 points YoY, driving gross margin improvement to 20.6%, +1.3 points/+2.6 points YoY. At the same time, against the backdrop of cost control measures and no cost optimization for the same period last year, the company's manufacturing business OPM increased 3.3 points to 9.1% year over year.

The performance of the manufacturing business exceeded expectations, and management once again raised the annual manufacturing order guidelines: Currently, as overseas sports brand inventories generally tend to be healthy, the visibility of orders from brand customers has improved markedly, and the forecast order fulfillment rate is positive. The outlook for Q4 orders is still optimistic. At the same time, monthly manufacturing revenue in October was +21% year-on-year, maintaining a rapid growth trend. Management once again raised the annual shipment volume guideline to 16% (previously low double digits), maintaining the annual ASP unit decline guide. The manufacturing business revenue side is expected to achieve double-digit growth throughout the year; it is expected that GPM will maintain a steady level throughout the year, and OPM will increase year-on-year.

Baosheng's business continued to grow negatively due to weak customer flow, but the operating quality was steady: against the backdrop of a weak consumption environment and passenger flow, Baosheng 24Q3 revenue was 4 billion yuan, -11%. Among them, in July, August, and September, they were -11%, -6%, and -15%, respectively, continuing the weak trend in the first half of the year. However, the company maintained healthy inventory and discounts. Inventory levels increased 12% year over year to support 11th Golden Week and Double Eleven sales, and 24Q3 discounts remained steady year over year. In 24Q3, the company's gross margin was +1.5 points year over year to 33.5%.

Investment rating and valuation: The manufacturing business is expected to improve with overseas sports brand inventories in 24 years, there is strong certainty about order improvement throughout the year, and profits under positive operating leverage are expected to achieve highly elastic recovery growth; retail business performance improved marginally in October. In the medium to long term, as a leading manufacturer of established sports brands, the company's strong ODM is still the core barrier, and the share of major brands is expected to gradually stabilize; the sports retail business improvement trend is expected to continue and operational efficiency will continue to increase. We raised the company's net profit from 24-25 to $0.42 and 0.46 billion dollars, corresponding to 24PE by about 8x. The current valuation of the company is cost-effective and safe. We used a segmented valuation method to look at the company's market capitalization space, and gave Yuyuan's manufacturing/retail business 11x/7x, with a target share price of about HK$21.7 per share, and gave the company a “highly recommended” rating.

Risk warning: risk of downstream customer orders falling short of expectations; labor costs rising too fast; profitability recovery falling short of expectations; capacity expansion progress falling short of expectations