Introduction to this report:

A good track+good customers+good production capacity enabled the company's profitability to rise dramatically from 2008 to 2011, and stabilized at a high level in 2012-2020, ranking first in the industry. We look forward to ROE returning to a high level after leaving the warehouse.

Key investment points:

Investment advice: Considering that Nike expects FY2025H2 revenue to continue to be under pressure, we adjusted the 2024-2026 net profit forecast to 5.83/6.56/7.36 billion yuan (5.95/6.62/7.4 billion yuan respectively before the adjustment), and the corresponding PE is 14/13/11X, respectively, to maintain the “increase” rating.

ROE has gone through four major stages, with a reasonable center of about 20%. The primary influencing factor is profitability.

The company's ROE change process since listing can be divided into four stages: 2005-2007, dragged down by net interest rates and equity multipliers from 23.6% to 18.0%; 2008-2011 benefited from increased profitability, and ROE increased from 26.2% to 31.3%; the increase in net interest rates in 2012-2020 offset the decline in asset turnover to ensure that ROE is basically stable at a high level of around 20%; negative external factors affected net interest rate and asset turnover performance in 2021-2023, leading to a short-term decline in ROE; expected With the end of downstream warehousing and the resumption of orders, ROE is expected to gradually return to normal starting in 2024.

Looking at the company's core competitiveness from the ROE perspective: good track+good customers+good production capacity to create stable and high profitability. The company experienced a significant increase in ROE in 2008-2011, and stabilized at a high level in 2012-2020. The key was the increase in profit margin center, mainly due to: 1) Track expansion: in 2005, the company accounted for 80% + of the company's casual wear revenue. After listing, with deep industry insight from management, the company forwardly laid out sports tracks with high growth and high added value. 2) Production capacity advantage: Adopt a vertical integration model to cover high-margin fabric production processes and include profits from all links within the enterprise; forward-looking layout of Southeast Asian production capacity, leading industry changes, and fully enjoying low cost and tax advantages. 3) Quality customers: High-quality brand customers such as Nike and Adidas lead the company's innovation and efficient transformation into sales, forming a virtuous cycle of “increasing R&D investment → efficient sales transformation → accelerating revenue/profit growth → further increasing R&D investment”.

Industry comparison: The financial characteristics of each link in the industrial chain are differentiated, and the company's profitability is absolutely outstanding, supporting high ROE. The yarn process has low profit and low turnover; the fabric process has high profitability and low turnover; the garment process has low profit and high turnover. Although the company's integrated model has low turnover and low leverage due to strong profit and repayment capabilities, the company's ROE level still ranks first in the industry. The core reason is that profitability is clearly leading.

Risk warning: terminal consumption falls short of expectations, production capacity expansion falls short of expectations, etc.