The world's leading manufacturer of sneakers. Established in 1988, Yuyuan Group is a global leader in the manufacture of sports/outdoor shoes/casual shoes, serving international brands such as Nike and Adidas, and has production bases in China, Indonesia, Vietnam, etc. In 2001, the retail business began in China. After 2022, it continued to focus on the manufacturing sector, and the business was adjusted and improved. In 2013-2019, the Group's revenue increased from US$7.583 billion to US$10.105 billion, with a CAGR of 4.9%. In 2023, due to the impact of inventory removal from brand customers, revenue was 7.890 billion US dollars, a decrease of 12.0%. Among them, the manufacturing business achieved revenue of 5.059 billion US dollars, a decrease of 18.4%, accounting for 64.1% of revenue; retail revenue of US$2,831 billion, an increase of 2.30%, accounting for 35.9% of revenue.

Returning to the main manufacturing industry, the core advantage is still there. It has strong ability to accept orders from high-quality customers, and its core customers are stable. It is responsible for OEM manufacturing/OEM design and manufacturing for international brands such as Nike, Adidas, Asics, New Balance, Salomon and Timberland, and has a leading position in the field of sports shoes and casual shoes manufacturing. 1) Footwear management has been passed down for three generations, and the core management is experienced. The core management team is stable. Most of them come from Baocheng International and work for Yuyuan Group, and the relationship with the group is stable. Currently, the Group has returned its overall strategy to focusing on OEM and ODM development and foundry, and is focusing on seizing core brand shares, refurbishing foundries, and increasing order volume. 2) Vertical integration, horizontal division of labor, and stable supply chain. “Vertical integration and horizontal division of labor” is an important development strategy for the Group. By controlling the supply of upstream and downstream materials and key components, stabilizing supply sources, forming a complete supply chain, and establishing close partnerships with international brands. 3) Perfect production capacity layout, efficient layout to seize the dividend period of low labor costs. Under the capacity transfer strategy, from China to Vietnam and Indonesia to other countries with lower labor costs, plant construction continues to advance, and production continues to focus on countries with low labor costs. 4) Digital transformation to meet the flexible and varied needs of customers. When assisting brand customers in development, the company incorporates new elements of innovative science and introduces digital transformation technology to improve development, yield and delivery quality.

The dark time for the industry has passed+marginal improvements in the company's main business have brought about greater profit flexibility. At the industry level: Brand sales have stabilized+brand inventory removal is coming to an end, and the recovery of the industry is certain. International brands such as Nike, Adidas, Puma, Columbia, Deckers, and VF entered the inventory removal stage since 22Q4, and the inventory growth rate declined. However, by the end of '23, the year-on-year inventory growth rate of several brands had narrowed, and the current inventory score was at or below 70% of history, indicating that inventory levels have recovered to health; in addition, judging from the year-on-year growth rate of sales and the year-on-year increase in inventory value, the brand sales situation has improved compared to 23 years, and the foundry industry continues to maintain an upward trend with high certainty. Adjust the switch in a timely manner and focus on the main manufacturing industry. 1) The past period of slowing manufacturing business growth was mainly affected by industry trends and the company's strategic layout. The manufacturing business performance in the past was not as good as that of peers, mainly due to the combined effects of factors such as order volume, gross margin, and rates. In terms of order volume, past resource inclination affected the share of leading brands; in terms of rates, the loss of brand demand orders led to a decline in the company's orders; in terms of unit price, Yuyuan Group focused on high-end shoe models, and the unit price of shoes rose steadily; in terms of gross margin, the past focused on the development of retail business, and diversified production capacity distribution combined with brand service strategy issues, making the manufacturing business capacity utilization rate lower than its peers; in terms of rates, because there were too many past service brands and many business lines of its own, the rate rate was higher. 2) At present, the company has made timely strategic adjustments to focus on the main manufacturing industry and focus on key customers. The subsequent recovery in demand for footwear manufacturing in the industry combined with marginal improvements in the company's focus on manufacturing, which is expected to increase capacity utilization and transfer to gross profit margin. At the same time, the management focus is expected to drive efficiency improvements to reduce rates and promote the continued release of the company's profits. At present, marginal improvements have been seen: in 24Q1, the gross margin of the manufacturing business was +3.5 pct to 20.3% year on year, and the net margin of the manufacturing business was 6.76%, +4.31 pct year on year, which is a significant increase. Reviewing the historical profit level, it is expected to return to a high single-digit ~ 10% net interest rate level in the future, and profit flexibility is high.

Investment advice: The company's strategic layout has been adjusted and improved, and orders in the textile and garment manufacturing industry are gradually being repaired. It is expected to benefit from a recovery in industry sentiment and an increase in the growth rate of its own manufacturing business, gain a steady share of large customers, and expand new brand customers to drive order growth. We expect to achieve revenue of 82.62, 87.20, and 9.169 billion US dollars in 2024-2026, +4.7%, +5.5%, +5.2% year-on-year, and achieve net profit of 3.75, 4.10, and 443 million US dollars, +36.6%, +9.2%, and +8.0% year-on-year. The closing price on May 29 corresponds to the 2024-2026 PE of 8, 8, 7 times. Furthermore, if this dividend ratio continues, the dividend rate is expected to be above 8% for the first time in 24 coverage, giving a “recommended” rating.

Risk warning: International trade risks, rising labor costs, risk of terminal demand falling short of expectations.