Since March, a sneaker foundry giant has quietly shown impressive gains. In less than 2 months, Yuyuan Group (00551) has risen from around HK$8 to over HK$14, an increase of nearly 200%, which has attracted a lot of attention from market capital.
According to the news, Yuyuan Group recently announced that profit attributable to company owners will increase by about 95% to 100% year-on-year in the first quarter of 2024, compared to 50.8 million US dollars for the same period last year. The company pointed out that the increase in performance was mainly due to the gradual recovery of the global footwear industry and the normalization of orders, which led to improvements in capacity utilization and production efficiency, as well as support from the low base period effect. In addition, the one-time income from the sale of part of an associated company's equity during the period was approximately USD 12.6 million.
Up to now, Yuyuan Group's stock price is close to the historical level in November 2021, reaching a high of two and a half years. Behind the rise in stock prices, has the fundamentals of Yuyuan Group ushered in an inflection point in recovery?
Both revenue and net profit declined for the whole year
According to the Zhitong Finance App, Yuyuan Group is a company responsible for the footwear industry under Baocheng Group. The main business of Baocheng Group is to manufacture and wholesale casual sneakers, clothing and accessories, providing design, manufacturing and production services for more than 50 internationally renowned brands such as Nike (Nike), Adidas (Adidas), Reebok (Reebok), New Balance, and Asics (Asics).
Prior to the pre-increase in Q1 results, Yuyuan Group's financial performance actually declined. In 2023, the company's revenue was 7.890 billion US dollars, down 12% year on year; net profit was 275 million US dollars, down 7.3% year on year. In addition, the company paid a final dividend of HK$0.7, and the annual dividend payment was reduced by 18.2%. However, in stark contrast to financial performance, Yuyuan Group's stock price opened sharply higher after the financial report was released, reaching a new high.
By business, the annual revenue of the company's footwear manufacturing business fell 18.4%, but the decline abated in the second half of the year. The annual gross manufacturing margin improved 0.8 percentage points year-on-year to 19.2%; Baosheng's retail business grew 7.7% throughout the year, reaching 20.06 billion yuan.
By category, the annual revenue of sports/outdoor footwear was US$4,041 million, a year-on-year decrease of 17.4%, accounting for 87%; the annual revenue of casual shoes and outdoor sandals was US$616 million, a year-on-year decrease of 24.5%, accounting for 13%; and revenue from soles, accessories and other goods was US$402 million, a decrease of 19% year on year.
By channel, omnichannel revenue accounts for 27%, franchise stores account for 21%, Pan-WeChat stores account for 13% of revenue; direct-run stores and others account for 52%.
Yuyuan Group said that the global footwear industry was in an inventory removal cycle last year, leading to a conservative ordering trend, affecting the Group's manufacturing business; while mainland consumer retail sales recovered moderately and customer traffic stabilized in physical stores, combined with the low base period effect, driving Baosheng's overall sales growth.
The company's capacity utilization rate for the full year of 2023 was 79%, a year-on-year decrease of 8 percentage points. The capacity utilization rate improved markedly in the fourth quarter, increasing 6 percentage points to 85% over the previous month. The annual footwear shipment volume was 218 million pairs, a year-on-year decrease of 20%. Among them, mainland China accounted for 12% of shipments, Vietnam accounted for 34%, Indonesia accounted for 49%, and other regions accounted for 5%.
In terms of financial conditions, the debt ratio improved for the year, with total loans falling 32% year over year to US$970 million, and ending cash increasing 12% year over year to US$1.14 billion.
When the industry is cold, the performance of sports footwear giants is under pressure
Looking back at the 2023 performance, from a macro perspective, consumption recovered moderately throughout the year, and the scale of consumption reached a record high. In 2023, China's total retail sales of social consumer goods reached 47149.5 billion yuan, an increase of 7.2% over the previous year, and the contribution rate of consumption to economic growth reached 82.5%; from an industrial perspective, the performance of most listed footwear and apparel companies that have published financial reports has increased, while Yuyuan Group is an OEM for famous brands such as Nike and Adidas, and its performance is also closely related to upstream sports brands.
According to the Zhitong Finance App, out of the 32 listed companies in the A-share footwear industry that have been announced, 17 companies have a predicted increase in performance, accounting for about 53%. Among them, the performance of men's and women's clothing and home underwear companies mostly increased, while children's clothing and luggage and footwear companies showed an overall downward trend.
Specifically, the sports footwear industry where the Yuyuan Group is located was affected by multiple adverse factors such as a decline in global consumer purchasing power and the industry entering an inventory clearance cycle. The revenue growth rate of most sports brands slowed in 2023, and leading companies such as Nike and Adidas repeatedly reported news of layoffs and production cuts. Among them, Adidas's revenue for fiscal year 2023 was 21.427 billion euros, down 5% year on year; Nike's revenue for the second fiscal quarter of fiscal year 2024 increased by only 1% year on year. In the third quarter, not only did the revenue growth rate drop to 0.3%, but the net profit growth rate also turned negative. Net profit decreased 5.48% year on year and 25.73% month on month.
The industry has not yet emerged from the “cold winter,” and further intensification of competition in the Chinese market will also cause international giants such as Adidas and Nike to face more pressure on their performance. Global management consulting firm McKinsey pointed out in the newly released “2024 Sporting Goods Report” that among the top 20 sports brands in the Chinese sports market in 2023, local companies account for 60% of the market share, and the market of global sporting goods giants is being divided by Chinese companies and emerging sports brands such as Lululemon and Gymshark.
Looking ahead to 2024, the sneaker and apparel industry is still mixed despite the continued recovery in consumption. According to the 2024 performance guidelines issued by Adidas, sales are expected to grow at a medium single-digit rate in 2024, regardless of currency factors. In the first nine months of 2023, Adidas's global inventory level has dropped by more than 1.1 billion euros, which may indicate that the company has begun a new growth cycle.
Furthermore, at the macro level, there are also some positive factors that are expected to boost market demand. Under the catalyst of a series of major sporting events such as the Paris Olympics, European Cup, and America's Cup, sports brand sales are expected to increase. For example, Adidas recently officially released the “Athlete Equipment Series” with 49 shoes, covering 41 different Olympic events; Nike also released competition uniforms and related sports equipment for many Paris Olympic teams sponsored by it, and plans to launch the Nike Jam, the most innovative breakdancing shoe in history, incorporating trendy culture into brand value.
Are undervaluation and high dividends cost-effective?
If we analyze in depth the upward momentum of Yuyuan Group's stock price in the past two months, the benefits at the industry level are not the only influencing factors; the low base effect and high dividend attributes of the company's performance are also the focus of investment institutions' attention.
According to the Zhitong Finance App, Citi recently reaffirmed Yuyuan Group's “buy” rating, raised its net profit forecast for the 2024-2026 fiscal year by 20% to 22%, and raised the target price from HK$12.5 to HK$16.5. The bank pointed out that the higher dividend rate and its compound annual growth rate of earnings per share from 2024 to 2026 is expected to reach 20%, which is already quite attractive.
Goldman Sachs, on the other hand, pointed out in the research report that Yuyuan's final interest rate was HK$0.7 per share, and the annual dividend payout ratio was close to 70%. Plus a repurchase of 15 million US dollars (accounting for about 5% of net profit in 2023) meant that the company's dividend ratio was 11%. Considering the company's profit margin and order improvements, its stock price has been undervalued.
In the short term, the financial data for Q4 2023 and Q1 2024 sent a positive signal, and the upcoming Paris Olympics have also become an important factor in catalyzing market sentiment; however, from a longer-term perspective, the company's stock price has been rebounding at a low level for some time, and there is uncertainty about returning to the increase, and the real recovery of the sneaker and apparel industry may wait until the second half of the year. It is still not appropriate to ignore the risk that the market competition environment will intensify and demand falls short of expectations. As a leading sneaker OEM, if there is an appropriate time to enter the market, Yuyuan Group still has long-term allocation value.