(Report Producer/Analyst: Kaiyuan Securities, Lu Ming, Zhou Jiale)
1 Jiansheng Group: Cotton socks & seamless clothing manufacturing leader, production capacity layout at home and abroad
Founded in 1994, the company is deeply engaged in the OEM of cotton socks products, and completed the acquisition of Qiao Ertingting in 2017, extending to the seamless sector, the company is currently one of the world's largest and most complete hosiery companies, and is also a world-class seamless underwear manufacturer, with an annual output of 401 million pairs of cotton socks and 44 million pieces of seamless clothing in 2022, and has established long-term cooperative relations with many world brands, such as UNIQLO, PUMA, DECATHLON, BOMBAS, GAP, ADIDAS, etc.
1.1 Historical review: cotton socks and seamless synergistic development, production capacity layout at home and abroad
The company's cotton socks and seamless coordinated development, production capacity layout at home and abroad.
Over the past 30 years, the Kinsen Group has gone through three phases:
The first is to deeply cultivate the domestic cotton socks stage (1994-2012): the company was established in 1994 and gradually laid out the production capacity in Hangzhou and Jiangshan.
The second is the layout of overseas production capacity stage (2013-2016): the company began to lay out overseas production capacity in 2013, planning and building Vietnam Haiphong factory and Vietnam Hung Yen printing and dyeing factory, at the same time, planning and construction of Jiangshan Industrial Park in China, the entire Jiangshan production capacity, and successfully listed in 2015.
The third is the global synergy stage of seamless & cotton socks (2017-present): in 2017, the company completed the acquisition of Qiao Ertingting, extending to seamless business, further carrying out production capacity layout, domestic Jiangshan Industrial Park was completed and put into operation, and established Guizhou Jiansheng, Vietnam Hung Yen, Haiphong, The total annual production capacity of cotton socks has increased from 262 million pairs in 2017 to 401 million pairs in 2022, including 181 million pairs in China and 220 million pairs in Vietnam, and the total annual production capacity has increased from 8.29 million pieces in 2017 to 44 million pieces in 2022, including 24 million pieces in China and 20 million pieces in Vietnam.
The company has developed seamlessly with the cotton socks business, and the domestic and Vietnamese production capacity has matched the needs of different customers, and the business has grown steadily, further strengthening its leading position.
1.2 Equity structure: The shareholding structure is stable, and the actual controller's repeated increases and repurchases fully demonstrate confidence
The shareholding structure is stable, with Zhang Maoyi and his wife holding a total of 38.48%. As of the end of 2023Q3, Zhang Maoyi and his wife Guo Xianghong hold a total of 38.48% of the shares, and the equity is relatively stable. Mr. Zhang Maoyi, the actual controller, has increased his holdings and repurchased the company's shares many times, demonstrating his confidence in sustainable development. From May 25 to September 19, 2023, Mr. Zhang Maoyi's concerted actor Yideng Trading increased its holdings by a total of 4.8 million shares, accounting for 1.30% of the company's total share capital, with a cumulative amount of 40 million yuan.
In addition, from May 11 to July 24, 2017, Mr. Zhang Maoyi increased his holdings by 4.92 million shares, accounting for 1.33% of the company's total share capital, with a cumulative amount of 79.62 million yuan. In order to enhance investor confidence, the company has carried out 4 share repurchases from 2018 to 2022, accounting for 3.57%/5.62%/2.97%/3.20% of the company's total share capital, with a total of 62 million shares repurchased.
1.3 Financial performance: The performance has grown steadily in the past five years, and the short-term performance is under pressure due to the cautious overseas orders
The performance has grown steadily in the past five years, and the weak overseas demand in 2023Q1-3 is superimposed on the destocking of downstream customers, and the performance is under pressure in the short term. The company's operating income increased from 1.138 billion yuan in 2017 to 2.354 billion yuan in 2022, with a CAGR of 15.64% from 2017 to 2022, and the net profit attributable to the parent company increased from 132 million yuan in 2017 to 262 million yuan in 2022, with a CAGR of 14.76% from 2017 to 2022, and the revenue/net profit attributable to the parent company in 2023Q1-3 was 1.659/201 million yuan, down 8.7%/25.3% respectively , weak overseas demand and downstream customers destocking, short-term performance under pressure.
In terms of products, the overall revenue of cotton socks grew steadily, and the proportion of seamless clothing increased steadily. The CAGR of cotton socks/seamless clothing revenue from 2017 to 2022 is 10.8%/31.5%, and the proportion of seamless clothing has steadily increased from 16.5% in 2017 to 31.4% in 2022.
In 2023H1, cotton socks/seamless achieved revenue of 690 million/375 million yuan, down 11.2%/13.9% year-on-year.
In terms of regions, the business in Europe and the United States is under pressure in the short term, and the domestic market is developing well. In 2022, the overseas/domestic market will achieve revenue of 2.043/278 million yuan, a year-on-year increase of 14.6%/15.4%, of which the growth rate of Australia and Japan will exceed 100%, and the overseas/domestic market in 2023H1 will change by -22.1%/+281.6% year-on-year respectively, and the customer development in the Chinese market will be progressing smoothly under the low base, and good cooperative relations have been established with excellent brands such as Li Ning, Bananai, UBARS, FILA, etc., and the revenue of Australia, Japan and South Korea in the foreign market will be +85.3%/+10.3%, Americas/Europe/Asia (excluding Japan and South Korea) revenue -30.4%/-4.1%/-59.4% YoY, respectively, Europe and the United States markets are under short-term pressure, Japan and Australia are growing well.
The company continues to promote cost reduction and efficiency improvement, and profitability is expected to return to pre-epidemic levels.
(1) Gross profit margin: Since 2023, the gross profit margin has improved quarter-on-quarter, with a gross profit margin of 26.02% in 2023Q1-3, a year-on-year decrease of 1.6pct, and a quarter-on-quarter increase of 4.3/2.0pct in 2023Q2/Q3.
(2) Expense ratio: Continue to promote cost reduction and efficiency increase, the expense ratio during 2022 was 12.92%, down 3.4pct year-on-year, and the expense ratio during 2023Q1-3 was 13.14%, an increase of 1.4pct year-on-year, mainly due to the adjustment of employee bonus accrual and the high base of foreign exchange income to increase the management expense rate and financial expense rate by 1.3/1.0pct respectively.
(3) Net profit margin: The net profit margin attributable to the parent company in 2023Q1-3 was 12.09%, a year-on-year decrease of 2.7pct, and profitability is expected to recover to the pre-epidemic level.
The company's operating capacity is good, and it has gradually recovered its health after the epidemic.
(1) Inventory: The inventory scale at the end of 2023Q3 was 542 million yuan, a year-on-year decrease of 19.05%, and the inventory turnover days: The inventory turnover days in 2023Q1-3 were 131 days, a year-on-year decrease of 6 days and a month-on-month decrease of 4 days.
(2) Net operating cash flow: 2023Q1-3 net operating cash flow was 434 million yuan, an increase of 90.01% year-on-year.
2 Cotton socks business: binding high-quality key customers, overseas expansion to achieve steady growth
2.1 Cotton socks industry: the mature industry has grown steadily, and the advantages of high-end head enterprises are obvious
2.1.1 Market size: The cotton socks market has entered a mature period, and China's export scale has grown steadily
The cotton socks market has entered a mature period, and the market scale has grown steadily. As a fast-moving consumer necessity, the global market has entered a mature period.
According to Statista statistics, the global/Chinese cotton socks market size in 2022 will be 51.1/9.7 billion US dollars, and the CAGR from 2020 to 2022 will be 5.40%/6.83% respectively, and the cotton socks market is expected to maintain steady growth in the future, and the CAGR of the global/Chinese cotton socks market size is expected to be 2.5%/2.5% respectively from 2023 to 2028.
The mainland is a major exporter of cotton socks, and the export scale has maintained steady growth.
In 2022, the export value of the mainland will be 6.19 billion US dollars, a year-on-year increase of 9.50%, and the CAGR from 2017 to 2022 will be 4.91%, and the export volume will be 16.85 billion pairs, with a CAGR of 3.7% from 2017 to 2022, and the average export price will increase steadily, from 0.346 US dollars / pair in 2017 to 0.367 US dollars / pair in 2022.
As a major exporter of cotton socks, China ranks first in the world's total cotton socks exports, according to UN Comtrade data, the top three cotton socks exports in the world in 2022 are China, Turkey and the Netherlands, accounting for 42%/12%/7% respectively.
2.1.2 Competitive landscape: China's production capacity is concentrated in low-end homogeneous competition, and a small number of mid-to-high-end enterprises have obvious advantages
From the perspective of the global market, although the average export price of China is at the middle and low level of the top exporters, it shows a steady growth trend. China's average export price in the past three years is 12.0 US dollars/kg, while the average export price of Turkey, the Netherlands, Germany and Italy is 13.9/15.0/23.9/32.7 US dollars/kg respectively. Italy and other European countries have relatively advanced equipment and strong competitiveness in the high-end cotton socks market; Turkey has a superior geographical location, which is conducive to undertaking a large number of mid-end production capacity in Europe, while China's labor costs are relatively low, the industrial chain is perfect, with the upgrading of technology and equipment, the strength of high-end manufacturers in the mainland has gradually improved, and the average export price has also increased from 0.346 US dollars / pair in 2017 to 0.367 US dollars / pair in 2022.
From the perspective of the domestic market, cotton socks manufacturers are highly dispersed and mostly have low-end production capacity, and mid-to-high-end enterprises have advantages in scale and production research and development.
According to the statistics of Qichamao, as of December 4, 2023, there are 4,990 socks manufacturers in mainland China, mainly distributed in Zhejiang, Jiangsu, Jilin, Shandong and other places, most of these enterprises are small and micro enterprises, the competition pattern is highly dispersed and most of them are low-end production capacity, and the proportion of registered capital below 1 million yuan is 93%; The average sales price of cotton socks of Jiansheng Group is 1.8 times the average export price of cotton socks in China, and the export share has increased from 2.8% in 2017 to 4.9% in 2022.
2.1.3 Development trend: The supply chain of international brands is streamlining & transferring, and the top suppliers in the global layout are dominant
Leading international brands tend to concentrate and reduce suppliers and shift their supply chains to low-cost regions. In order to ensure product quality and supply chain stability, brands concentrate and reduce suppliers, and tend to choose top suppliers to reduce risks.
The number of NIKE apparel suppliers decreased by 23% from 363 in FY2017 to 279 in FY2022, and the number of ADIDAS suppliers decreased by 46% from 782 in 2017 to 424 in 2022. At the same time, in order to improve profitability, brands have shifted their supply chains to low-cost regions, especially in Southeast Asia, with NIKE's apparel production share in Vietnam and Thailand increasing from 26% in FY2017 to 36% in FY2022.
Under the trend of streamlining & shifting the supply chain of international brands, high-quality head suppliers with global production capacity are expected to continue to seize market share, and industrial transfer will further accelerate industry concentration.
2.2 Core competitiveness: continuous R&D investment & global production capacity layout, binding high-quality key customers
The company has a large number of high-quality international customer resources, and strengthens the development of domestic brands. At present, the main customers of cotton socks include international brands such as Uniqlo, PUMA, UA, Decathlon, ADIDAS, as well as domestic brands such as Li Ning, FILA, Bananai, UBRAS, etc., and the sales revenue of domestic brand OEM in 2022 will be 69 million yuan, a year-on-year increase of 84.16%.
The company maintains long-term and stable cooperation with many high-quality customers, mainly by virtue of its continuous investment in R&D capabilities, industrial chain integration layout and global production capacity layout.
(1) Continue to improve the level of R&D and intelligent manufacturing, and promote the transformation of OEMs to ODM. The company continued to invest in R&D, and its R&D expenses increased from 50 million yuan in 2019 to 65 million yuan in 2022, with a CAGR of 8.97% from 2019 to 2022, and the R&D expense ratio remained stable at about 2.8%. As of 2023H1, the company has 30 national invention patents and 103 application model patents, and the number of patents is increasing year by year, providing customers with strong technical support.
(2) Integration of industrial chain: ensure the stability of delivery and control costs. The company's industrial chain has production processes such as grey yarn, yarn covering, yarn dyeing, weaving, sewing, hanging dyeing, spot molding, embroidery, quality inspection and packaging. With a complete industrial chain and production process, the company has a strong grasp and rich experience in each link, which effectively ensures the stability of delivery, and at the same time, the coordination of each link will also effectively control the cost.
(3) Global production capacity layout: Southeast Asia's cost advantage, improve profitability and global competitiveness. As of the end of 2022, Vietnam's production capacity in Vietnam has reached 220 million pairs, accounting for 55% of the company's overall cotton socks production capacity. In terms of labor costs, the average monthly wage in Vietnam in 2023Q1 is 2,031 yuan, while the average monthly wage of Chinese manufacturing workers in 2022 is 5,613 yuan.
Therefore, the net profit margin of the Vietnamese subsidiary is higher than that of the domestic factory, and the net profit margin of the cotton socks factory in Vietnam and China in 2022 will be 11.2%/6.2% respectively, and the net profit margin of Vietnam in 2023H1 is lower than that of the domestic company, mainly due to the ramp-up of production capacity in Thanh Hoa, Vietnam. With the continuous layout of overseas production capacity, the company's profitability has continued to improve, and its global competitiveness has also been further enhanced.
2.3 Future highlights: Orders from high-quality customers continued to recover, and the cotton socks business grew steadily
Orders from high-quality customers continued to recover, and the development of new customers made good progress.
With the company's continuous R&D investment and global production capacity layout, the binding with high-quality customers such as Uniqlo, PUMA, Decathlon, UA, and GAP has gradually deepened, and customer orders have grown steadily, and the CAGR of sales revenue of Uniqlo/PUMA accessories/UA accessories/ADIDAS accessories/GAP from 2017 to 2022 is +6%/+12%/-1%/+7%/+1% respectively On the other hand, under the background of the endorsement of high-quality large customers and the improvement of the company's competitiveness, the development of new customers has made good progress, and it has established good cooperative relations with excellent brands such as Li Ning, Bananai, UBARS, FILA and so on.
The production capacity at home and abroad continues to be deployed, and the cotton socks business is expected to grow steadily. In 2021, Guizhou Jiansheng plans to add 1,000 hosiery machines, with 440 socks machines in the first phase, and in 2022, Thanh Hoa, Vietnam will build a new No. 5 plant, which is planned to accommodate 659 hosiery machines, with an estimated new production capacity of about 35 million pairs. We expect that the production capacity is expected to increase to 470 million pairs in 2025, the capacity utilization rate will increase to more than 90%, and the cotton socks business is expected to grow steadily.
3 Seamless apparel business: Vietnam's production capacity expansion & new customer development, with resilient performance
3.1 Seamless apparel industry: the industry is growing rapidly in the growth period, and the competition pattern is unstable
After the adjustment and differentiation, the domestic seamless clothing industry has grown rapidly.
The development of China's seamless apparel industry has gone through five periods, namely the embryonic period in 1992, the initial period of export sales in 1995, the rapid development of domestic sales in 2000 and the rapid expansion period of export OEM in 2005, and 2008 is a watershed in the seamless apparel industry, entering the stage of adjustment and differentiation.
In the past ten years of development, seamless has also formed three generations of clothing products, namely abdominal and hip lifting underwear, seamless underwear, sports bras/camisoles/shorts, etc.; with the diversification of products, enterprises with accurate positioning and innovative ability have come to the fore and have grown rapidly in the following ten years.
The scale of the seamless apparel market is growing rapidly, and the penetration rate continues to increase.
According to Frost & Sullivan's 2017 historical forecast, the output value of seamless underwear in China is estimated to be about 22.14 billion yuan in 2022, and the ECAGR from 2013 to 2022 is 16.0%. As seamless intimate clothing is made of highly elastic microfiber, which has the characteristics of flexibility, comfort and softness, it is becoming more and more popular with consumers and gradually replacing traditional intimate clothing, and the penetration rate of domestic seamless products in intimate clothing production is expected to increase from 6% in 2013 to 22% in 2022.
The mainland is a major exporter of seamless clothing, and the export scale has maintained steady growth.
According to UN Comtrade data, the top three seamless apparel exports in 2022 are China, Vietnam and Germany, accounting for 41.9%/10.7%/5.0% respectively.
In 2022, the export value of seamless apparel in mainland China will be 16.9 billion US dollars, a year-on-year increase of 4.1%, and the CAGR from 2018 to 2022 will be 6.5%;
The competition pattern of seamless clothing is highly fragmented, and the domestic mid-to-high-end production capacity is dominant.
From the perspective of the global market, large and medium-sized enterprises in Italy and Austria occupy the high-end luxury market, leading product design and technology; the medium-to-high-end market is mainly divided into large and medium-sized enterprises in China represented by Bangjie Co., Ltd., Jiansheng Group, and Bony Holdings, and large and medium-sized enterprises in Israel represented by Delta, which have good technical strength and product quality; while many small enterprises in China and Turkey are positioned in the low-end market, with low technology content and fierce competition.
From the perspective of China's production capacity, China's low-end production capacity is mostly concentrated in Yiwu City, Zhejiang, Yiwu production capacity accounts for 70% + / 10% of the domestic / global supply, the market competition pattern is highly fragmented, China's seamless clothing manufacturers more than 3000, in 2017 seamless clothing CR5 was 13.3%, high-end enterprises are expected to rely on good technical strength, stable product quality and long-term supply capacity, and influential and large-scale customers continue to cooperate, to further seize market share.
3.2 Core competitiveness: focus on technology research and development > have scale advantages, and perform better than mid-to-high-end peers
The company has the advantage of scale, focuses on technology research and development, and the average price is higher than that of other high-end companies in the industry.
By comparing the performance of the three mid-to-high-end seamless enterprises in the industry, we can see that the average product price and market share of Jiansheng Group are higher than those of its peers, and the average price of seamless clothing of Jiansheng Group in 2022 is 25.4 yuan/piece, which is 1.4/1.6 times of the average export price of Bangjie shares/China, respectively, excluding the impact of capacity utilization caused by the epidemic, Jiansheng Group's seamless gross profit margin is at a high level in the industry, and the market share of Jiansheng Group in 2022 is 3.3%, which is 0.7/2.6pct higher than that of Bangjie shares/Boni Holdings.
In 2022, the company has more than 700 seamless knitting equipment with an annual design capacity of 44 million pieces, which far exceeds the scale of other companies in the same industry. As of December 2023, the company has 97 seamless-related patents, including 58 invention patents and 39 application model patents, which is significantly higher than its peers.
3.3 Future Highlights: Vietnam's production capacity expansion is superimposed on the development of new customers, and the performance is flexible
Cooperate with resources to actively develop new and old customers, and the downstream boom promotes high growth. In 2021, the company cooperated with the domestic brand Li Ning, the Israeli seamless leading manufacturer TEFRON and IKAR, and while developing new customers, the company also deepened the cooperation with old customers, such as expanding the scope of cooperation with Uniqlo and HM from cotton socks to seamless clothing. With the rapid growth of the market scale of the seamless apparel industry and the continuous improvement of the penetration rate, the growth of new and old customer orders is expected to contribute to the performance elasticity.
Vietnam's production capacity layout enhances its competitive advantage, and the development of new downstream customers supports capacity utilization.
The company has steadily promoted the seamless production capacity layout in Vietnam and adjusted the distribution of production capacity, with 223 Santoni looms in the first phase of the production base in Hung Yen, Vietnam, which have been put into operation in 2019, and 200 Santoni looms in the second phase, which are planned to be put into operation in 2023, and the number of looms in the Vietnam production base accounts for 44% of the company's total looms after it is put into operation, which has the advantage of scale.
Vietnam's production capacity is scarce, and the layout of production capacity is conducive to further developing overseas high-quality customers and enhancing competitive advantages.
After the epidemic, the company is actively exploring new overseas customers, with Vietnam's production scale and design advantages, the company is expected to obtain more orders from international customers, as orders continue to land, the capacity utilization rate is expected to gradually increase to drive profitability, we expect the capacity utilization rate to increase to more than 70% in 2025, and the seamless business is resilient
4 Earnings Forecasts and Valuations
4.1 Key Assumptions
Revenue:
(1) Cotton socks business: We expect that the production capacity will reach 4.01/4.36/466 million pairs from 2023 to 2025, the capacity utilization rate will be 86%/90%/90%, the average unit price in 2023-2025 will be 4.5/4.6/4.7 yuan, the production and sales rate will be 100%, and the revenue growth of cotton socks is expected to be 1%/16%/9% from 2023 to 2025.
(2) Seamless apparel business: We expect that the production capacity will reach 0.4/0.5/050 million pieces from 2023 to 2025, the capacity utilization rate will be 56%/64%/70% respectively, the average unit price will be maintained at 24.5 yuan from 2023 to 2025, the production and sales rate will be 100%, and the revenue growth of cotton socks is expected to be -21%/35%/10% from 2023 to 2025.
Cost side:
(1) Cotton socks business: The gross profit margin remains stable overall, and it is expected that the gross profit margin of cotton socks from 2023 to 2025 will be 28%/29%/29% respectively.
(2) Seamless apparel business: Considering the capacity utilization rate supported by the development of new downstream customers, it is expected that the gross profit margin of seamless apparel is expected to improve to 18%/23%/23% from 2023 to 2025.
Fees:
We expect the sales expense ratio to be 3.5%/3.4%/3.4%, the administrative expense ratio to be 7.8%/7.5%/7.4%, and the R&D expense ratio to be 2.55%/2.5%/2.5% to be 2.5% from 2023 to 2025.
4.2 Earnings Forecasts and Valuations
We expect the company's revenue from 2023 to 2025 to be 22.23/26.82/2.922 billion yuan, a year-on-year increase of -5.6%/20.7%/8.9%, and the net profit attributable to the parent company will be 2.40/3.18/352 million yuan respectively, a year-on-year increase of -8.3%/32.6%/10.6%, the corresponding EPS is 0.65/0.86/0.95 yuan, and the corresponding PE of the current stock price is 15.1/11.4/10.3 times.
The company's valuation level in 2023-2025 is lower than the average of comparable companies, and the CAGR of net profit attributable to the parent company in 2023-2025 is 21.1%, which is higher than the average level of comparable companies, and the valuation level still has some room for improvement.
In the short term, new customer orders for the seamless apparel business are expected to continue to land in 2024, driving capacity utilization and profitability improvement, and achieving performance flexibility.
5 Risk Warning
The risk of exchange rate fluctuations and the ramp-up of production capacity are less than expected.
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