Net profit remained flat in 2023, and revenue and gross margin increased significantly in the second half of the year. In 2023, the company's revenue fell 10% to 24.97 billion yuan, the RMB unit price increased by about 5%, and the US dollar unit price increased by about 1%, reflecting the impact of brand inventory removal. Net profit attributable to mother remained flat at 4.56 billion yuan year on year, and main net profit, excluding net income from government subsidies, exchange, and interest, increased 11% year over year, mainly due to a 2.2 percentage point increase in gross margin to 24.3% and an increase in the share of profits of overseas subsidiaries with lower tax rates, which led to a decrease in income tax rates.
Net operating cash flow for the year was 5.2 billion yuan, up 13%, with a net current ratio of 1.15 billion yuan; the company's net cash was 11.4 billion yuan, an increase of 3.2 billion yuan over the previous year. The annual dividend payout ratio increased slightly to 60%.
The company's revenue in the second half of 2023 fell 5.5% year on year, which was narrower than the decline in the first half of the year, and revenue in the second half of the year increased 16% month-on-month. Net profit to mother increased 11% to 2.43 billion yuan in the second half of the year, and net profit margin increased 2.7 percentage points to 18.1% year on year, mainly due to a 4.3 percentage point increase in gross margin year over year.
The share of sales in Japan and China has increased, and sports categories in Europe and the US are under high pressure. 1) By category, the underwear category increased by 30%, the leisure category decreased by 1%, and the sports category decreased by 14%; 2) By customer, revenue from customer A decreased by 11%, customer C and D fell by more than 20%, customer B increased by 3%, and other customers increased by 2%; 3) By region, China and Japan both increased their sales share, with an average drop of about 20% in the EU and the US. Changes in the growth structure reflect high order pressure for European and American sports brands in 2023, and the Japanese and Chinese markets are relatively good.
The upward trend in orders is clear, and the recovery in capacity utilization is driving the restoration of gross margin. 1) Looking at the industry situation, Nike, Adi, Uniqlo, Puma, and Lulu's inventory sales ratio in the fourth quarter of 2023 has fallen back to a healthy level close to the same period in 2019. **** garment foundry Ruhong and Juyang achieved NTD revenue growth rates of 17% and 9% respectively in January-January, respectively, and the outlook for the future market is optimistic. 2) Judging from the situation in Shenzhou, the utilization rate of domestic and foreign production capacity has now reached a reasonable level. The expansion of new customers and new fabric types is progressing well, overseas factories are expanding and efficiency is improving, and there are plans to recruit and expand capital expenditure in 2024. The upward trend in orders and gross margin is clear.
Risk warning: raw material price fluctuations; exchange rate fluctuations; trade policy risks; systemic risks.
Investment advice: Optimistic about profit recovery and elasticity, expanding demand and expanding overseas production capacity to open up room for growth. The inflection point of the company's orders has arrived. The recovery in capacity utilization in the second half of the year led to a marked improvement in gross margin. The recovery in capacity utilization in 2024 will further bring greater profit elasticity. In the medium to long term, continued expansion of overseas production capacity, new customers and new categories will lead to increased performance. Since the impact of brand customer withdrawals in 2023 on the company's orders was greater than previously assumed, and the profit forecast was slightly lowered. The net profit forecast for 2024-2026 is expected to be 53.9/63.7/7.36 billion yuan (originally 2024-2025 was 55.2/6.58 billion yuan), an increase of 18.2%/18.2%/15.5% over the previous year. We are optimistic that short-term capacity utilization will drive profits to recover elasticity and that active overseas expansion in the medium to long term will bring room for growth. The target price will be maintained at HK$91-99, corresponding to PE 23-25x in 2024, and maintain a “buy” rating.