In 2023, due to inventory removal from overseas brands, revenue fell 22%, and net profit to mother fell 72%. The company is an integrated textile group for spinning, weaving, dyeing and garment making. In 2023, due to the removal of inventory by overseas brands and trade conflicts between China and the US, orders declined markedly, revenue fell 22% to 4.65 billion yuan, net profit to mother fell 72% to 100 million yuan, and net profit after deducting non-net profit fell 92% to 0.3 billion yuan. Among them, revenue from yarns/fabrics/garments changed +9%/-1%/-30% year-on-year to 3.03 billion yuan, respectively. Due to insufficient operating rates and rising raw materials, gross margin decreased by 2.2 percentage points to 16.2% year on year. Among them, gross margin of yarn/fabric/garment changed by -5.9/-4.6/-1.4 percentage points year on year, respectively. At the same time, the cost rate increased by 3.6 percentage points, mainly due to the increase in the fixed cost ratio after the decline in revenue, additional expenses arising from the integration of domestic and overseas production bases, and overseas interest rate hikes, which led to a sharp increase in interest costs. Despite an increase of 110 million yuan in asset disposal income, the net interest rate due to the above adverse factors fell 4.1 percentage points to 2.2%.
The company's net cash flow from operating activities in 2023 was 690 million yuan, and capital expenditure during the year was 1.06 billion yuan.
Order demand continued to be weak in the first quarter of 2024, but the decline in revenue narrowed month-on-month. The first quarter continued to be affected by order cuts from major customers, and operating pressure was strong, but there was a slight improvement compared to the fourth quarter. 2024Q1's revenue fell 23% year over year to 1 billion yuan, which is narrower than the 35% decline in the fourth quarter of 2023. Net profit attributable to mother decreased 88% year over year to $0.7 billion, turning a loss into a profit from the fourth quarter. The gross margin for the first quarter decreased 2.5 percentage points year over year to 14.1%, and the cost ratio for the period fell 0.8 percentage points year on year. At the same time, other earnings declined and asset impairment losses increased, so net interest rate to mother decreased 3.6 percentage points to 0.7% year over year.
Focus on order inflection points in the short term, and actively expand and improve quality and efficiency in the medium to long term. In the short term, the company's orders are affected by both brand inventory removal and trade frictions. In 2023, the company actively integrated production bases at home and abroad, completed the acquisition of Australian farms, carried out in-depth development and expansion of the upstream industrial chain, reducing raw material risks, and investing heavily in the early stages. Future benefits are expected to gradually show, and continue to pay attention to order inflection points in the short term. In the medium to long term, the company has established good cooperation with high-quality brand customers at home and abroad, with excellent product competitiveness and plenty of room for share growth. At the same time, the launch of the intelligent system will reduce factory costs and increase efficiency, and increase profit margins.
Risk warning: Overseas brands are out of inventory; repeated epidemics; trade frictions; raw material prices fluctuate greatly.
Investment advice: Focus on the medium- to long-term growth potential of the entire industry chain group. The company has a full industry chain model from spinning to garment making, and has entered the supply chain of middle and high-end brands through better R&D, quality, efficiency and delivery.
Cooperate with high-quality brands, actively invest in capacity expansion and intelligent upgrading, and have sufficient potential for medium- to long-term growth. Due to multiple adverse factors such as customer inventory removal, poor demand, and trade frictions, the company's performance fell short of expectations. We lowered our profit forecast. Net profit due to 2024-2026 was 1.3/1.9/240 million yuan (originally 2024-2025 was 2.9/370 million yuan), an increase of 21%/52%/27% year-on-year. Due to the reduction in profit forecasts, the target price was lowered to 6.2-6.6 yuan (originally 8.3-8.8 yuan), corresponding to 18-19x PE in 2025, maintaining the “increase” rating.