Since March, a sneaker OEM giant has quietly stepped out of gratifying gains. In less than 2 months, Yue Yuen Group (00551) has risen from around HK$8 to more than HK$14, an increase of nearly 200%, which has attracted the attention of many market funds.
On the news side, Yue Yuen Group recently released a profit that expects the profit attributable to the company's owners to increase by about 95% to 100% year-on-year in the first quarter of 2024, compared with a profit of US$50.8 million in 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 fulfillment industry and the normalization of orders, which led to the improvement of capacity utilization and production efficiency, coupled with the support of the low base period effect. In addition, a one-time gain of approximately US$12.6 million was generated from the sale of a portion of an associate during the period.
So far, Yue Yuen Group's share price is close to its historical level in November 2021, reaching a two-and-a-half-year high. Behind the rise in stock prices, has Yue Yuen Group's fundamentals ushered in an inflection point of recovery?
Annual revenue and net profit both declined
According to Zhitong Financial APP, Yue Yuen Group is a subsidiary of Pou Chen Group responsible for the footwear and apparel industry, and the main business of Pou Chen Group is to manufacture and manufacture wholesale casual sports shoes, clothing and accessories, and provide design, manufacturing and production services for more than 50 internationally renowned brands such as Nike, adidas, Reebok, New Balance, and Asics.
Prior to the expected increase in Q1 results, Yue Yuen Group's financial performance actually declined. In 2023, the company's revenue will be 7.890 billion US dollars, a year-on-year decrease of 12%; Net profit was US$275 million, down 7.3% year-on-year. In addition, the company paid a final dividend of HK$0.7, a decrease of 18.2% in the annual dividend. However, in stark contrast to the financial performance, Yue Yuen Group's share price opened sharply higher after the earnings release, hitting a new high.
In terms of business, the annual revenue of the company's footwear manufacturing business decreased by 18.4%, but the decline eased in the second half of the year, and the annual manufacturing gross profit margin improved by 0.8 percentage points year-on-year to 19.2%; Baosheng's retail business grew by 7.7% for the year to RMB20.06 billion.
In terms of categories, the annual revenue of sports/outdoor shoes was US$4.041 billion, a year-on-year decrease of 17.4%, accounting for 87%; The annual revenue of casual shoes and outdoor sandals was 616 million US dollars, a year-on-year decrease of 24.5%, accounting for 13%; Soles, accessories and other revenues were $402 million, down 19% year-over-year.
In terms of channels, omni-channel revenue accounted for 27%, franchise store revenue accounted for 21%, and pan-micro store revenue accounted for 13%; Directly operated stores and others accounted for 52%.
Yue Yuen Group said that last year, the global footwear fulfillment industry was in a destocking cycle, which led to conservative orders and affected the group's manufacturing business. The moderate recovery of consumer and retail sales in the Mainland, the stabilisation of traffic in physical stores, and the low base period effect drove the overall sales growth of Baosheng.
For the full year of 2023, the company's capacity utilization rate was 79%, a decrease of 8 percentage points year-on-year, and the capacity utilization rate improved significantly in the fourth quarter, increasing by 6 percentage points quarter-on-quarter to 85%. Annual footwear shipments were 218 million pairs, down 20% year-on-year, of which Chinese mainland shipments accounted for 12%, Vietnam accounted for 34%, Indonesia accounted for 49%, and other regions accounted for 5%.
In terms of financial position, the gearing ratio improved for the full year, with total borrowings down 32% year-on-year to US$970 million and ending cash up 12% year-on-year to US$1.14 billion.
The industry is cold, and the performance of sports shoes and clothing giants is under pressure
Looking back at the performance in 2023, from a macro perspective, consumption has recovered moderately throughout the year, and the scale of consumption has reached a record high. In 2023, the total retail sales of consumer goods in mainland China will reach 471495 billion yuan, an increase of 7.2% over the previous year, and consumption will contribute 82.5% to economic growth. From the perspective of the industry, the performance of most of the listed footwear and apparel companies that have announced financial reports have increased, and Yue Yuen Group is an OEM company of well-known brands such as Nike and Adidas, and its performance is also closely related to upstream sports brands.
According to Zhitong Financial APP, among the 32 listed companies in the A-share footwear and apparel industry that have been announced, 17 companies are expected to increase their performance, accounting for about 53%. Among them, the performance of men's and women's clothing and home underwear companies has increased, while children's clothing and luggage and footwear companies have shown an overall downward trend.
As for the sports footwear and apparel industry in which Yue Yuen Group is located, affected by multiple unfavorable factors such as the decline in global consumer purchasing power and the industry's entry into the inventory clearance cycle, the revenue growth rate of most sports brands will slow down in 2023, and leading companies such as Nike and Adidas have repeatedly reported layoffs and production cuts. Among them, Adidas' revenue in the 2023 fiscal year will be 21.427 billion euros, a year-on-year decrease of 5%; Nike's revenue in the second quarter of fiscal 2024 increased by only 1% year-on-year, and in the third quarter, not only did the revenue growth rate drop to 0.3%, but the net profit growth rate also turned negative, with net profit decreasing by 5.48% year-on-year and 25.73% quarter-on-quarter.
The industry has not yet come out of the "cold winter", and the further intensification of competition in the Chinese market will also make international giants such as Adidas and Nike face more performance pressure. McKinsey, a global management consulting firm, pointed out in the latest "2024 Sporting Goods Report" that among the top 20 sports brands in China's sports market in 2023, local companies will occupy 60% of the market share, and the territory of global sporting goods giants is being divided by Chinese companies and emerging sports brands such as lululemon and Gymshark.
Looking ahead to 2024, despite the continued recovery of consumption, the sports footwear and apparel industry remains mixed. According to Adidas' 2024 guidance, sales are expected to grow at a mid-single-digit rate in 2024, regardless of currency factors. In the first nine months of 2023, Adidas' global inventory levels have fallen by more than 1.1 billion euros, which may indicate that the company has begun a new growth cycle.
In addition, at the macro level, there are also some positive factors that are expected to boost market demand. Catalyzed by a series of large-scale sports events such as the Paris Olympics, the European Cup, and the Copa America held this year, the sales of sports brands are expected to increase, such as Adidas has recently officially released a "Athletes' Equipment Series" containing 49 shoes, covering 41 different Olympic sports; Nike also unveiled the uniforms and related sports equipment of a number of Paris Olympic teams sponsored by Nike, and plans to launch the most innovative breaking shoes ever, the Nike Jam, to integrate fashion culture into the brand's values.
Is there a cost-effective advantage in low valuation and high dividends?
If we deeply analyze the driving force of Yue Yuen Group's stock price in the past two months, the favorable factors at the industry level are not the only influencing factors, and the low base effect and high dividend attribute of the company's performance are also the focus of investment institutions.
According to Zhitong Financial APP, Citi recently reaffirmed the "buy" rating of Yue Yuen Group, raised its net profit forecast for fiscal years 2024 to 2026 by 20% to 22%, and raised the target price from HK$12.5 to HK$16.5. The bank noted that the higher dividend yield, combined with the expected 20% CAGR of EPS from 2024 to 2026, is already attractive.
Goldman Sachs pointed out in the research report that Yue Yuen's final dividend of HK$0.7 per share and annual dividend of HK$0.9 are close to 70%, plus another US$15 million buyback (accounting for about 5% of net profit in 2023), which means that the company's dividend yield is 11%, and its stock price has been overvalued considering the company's profit margin and order improvement.
In the short term, the financial data for Q4 2023 and Q1 2024 send positive signals, 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 continued to rebound at a low level for a period of time, and there is currently uncertainty about giving back gains, and the real recovery of the sports shoes and apparel industry may wait until the second half of the year, and it is still not appropriate to ignore the risk of intensified market competition and lower than expected demand. As a leading OEM manufacturer of sports shoes, Yue Yuen Group still has long-term allocation value if there is a suitable time to enter the market.