Zhitong Finance App learned that Zheshang Securities released a research report stating that it maintains the “buy” rating of Shenzhou International (02313) and expects 24-26 revenue of 287.1/324.8/36.09 billion yuan, and net profit to mother of 55.5/62.8/7.08 billion yuan. With the completion of inventory removal from European and American customers, 24 years have started well. It is expected that the company's orders will return to the growth channel, while gross margin will be further repaired as capacity utilization increases.

Incident: The company achieved revenue of 24.97 billion yuan (-10.1% YoY), operating profit of 5.33 billion yuan (YoY -3.3%), and net profit of 4.557 billion yuan (YoY -0.1%); of these, 23H2 achieved revenue of 13.41 billion yuan (-5.5% YoY), operating profit of 2.84 billion yuan (+8.3% YoY), and net profit of 2.43 billion yuan (YoY +10.7%), which is basically in line with expectations.

The report's main points are as follows:

By category: The decline was mainly due to the steady growth of sportswear, casual wear, and underwear

In 23, sports product revenue was 18.03 billion yuan (-13.6% YoY, accounting for 72%). The decline was mainly due to European and American brands continuing to inventory and reduce procurement. The decline in the second half of the year (-7% YoY) was significantly narrower than in the first half of the year (-20% YoY); revenue from casual products was 5.67 billion yuan (-1.4% YoY, accounting for 23%), and demand from casual customers represented by Japan's Uniqlo remained stable; underwear product revenue of 1.07 billion yuan (YoY +30.2%, accounting for 4.3%), mainly from the Japanese market and other underwear procurement needs Growth; Other Knitwear revenue of 200 million yuan (-42% YoY, accounting for 0.8%) was mainly due to a decrease in mask sales.

By region: Europe and the US are under the greatest pressure to remove inventories, and demand from Japan and China is stable

The European market revenue in '23 was 5.03 billion yuan (-19% YoY, accounting for 20%), and the US market revenue was 3.88 billion yuan (YoY -20%, accounting for 16%), which is expected to be related to strong pressure from European and American customers such as Nike, Adidas, and PUMA to remove inventory; the Chinese market revenue was 7.12 billion yuan (+1% YoY, accounting for 29%), and the Japanese market revenue was 3.68 billion yuan (-6% YoY, accounting for 15%), which is relatively superior to European and American customers.

The gross margin improved significantly from month to month, and the income tax rate was drastically reduced

The gross profit margin in '23 was 24.3% (+2.2pp), of which 22.4% in the first half of the year (-0.1pp) and 25.8% in the second half of the year (+4.3pp). The obvious reasons for the month-on-month improvement include: 1) the gradual recovery of overall capacity utilization as orders picked up; 2) the further release of production capacity in overseas factories, and the gradual increase in operating efficiency, diluting the fixed costs per unit product. The three-fee rate in '23 was 9.58% (+0.98pp), and the actual cost was basically the same. The increase in the cost rate was mainly due to a decline in income; the comprehensive income tax rate was 8.8% (-4.5pp), which was related to the increase in the share of profits from overseas production capacity with lower tax rates; and the net interest rate was 18.3% (+1.8pp year on year).

Overseas production capacity scale and efficiency increased, and profit contribution gradually increased

In '23, the company's overseas garment production accounted for 53% (+7pp). Among them, the Cambodian base accounted for 26% of ready-to-wear production (+4pp) as efficiency improved and employees expanded. The total number of employees in the Group in '23 was 92,000 (-2.4% YoY), of which the proportion of overseas employees rose to 57% (+5pp). With the improvement of overseas integration facilities and the increase in the number of employees, the operating efficiency of overseas factories has gradually improved, and the profit contribution has gradually increased.

Risk warning: Exchange rates or raw material prices fluctuate greatly.