WEIXING INDUSTRIAL(002003)1H23 EARNINGS REVIEW：PROMISING OUTLOOK AHEAD AS ORDERS IMPROVE

　　Weixing Industrial’s revenue increased by 0%/2.4% YoY in 1H/2Q23, respectively, demonstrating strong operational resilience and growth momentum despite a cyclical decline in industry demand. The Company’s net profit attributable to the parent fell 3.2% YoY in 1H23 and rose 0.3% in 2Q23. The uptick in gross margin partially offsets the negative impact of rising selling expenses and falling industry orders. In the short term, we expect the Company's earnings to improve every quarter in 2H23 on the back of growing orders from downstream client, which are currently at low levels. In the long term, the Company’s overseas production capacity will continue to grow, its strengths in terms of product quality and timely delivery will keep optimizing, and product positioning will continue to improve, which will help the Company achieve sustained breakthroughs in client engagement. Considering its prudent earnings growth and leading position gradually established in recent years, we assign 22x 2024E PE to derive a target price of Rmb15 and a target market cap of Rmb15.6bn. We reiterate our "BUY" rating for the Company.
　　Revenue: Up 0%/2.4% YoY in 1H/2Q23, respectively.
　　According to its 2023 interim report, Weixing Industrial achieved revenue of Rmb1,829mn in 1H23 and Rmb1,132mn in 2Q23, up ~0% (0.01%) and 2.4% YoY, respectively, demonstrating prudent earnings performance given a high base for comparison last year. Growth in the Company’s order share and market share helps offset the negative impact of a cyclical decline in industry demand in 1H23. By product, buttons/zippers/other accessories achieved revenue of Rmb730mn/1,015mn/62mn, respectively, +3.2%/-2.8%/+25.1% YoY. Its zipper and button business remained stable in the first half of 2023 despite the headwinds faced by the industry, while the other accessories segment developed rapidly on the back of expansion of new product lines. By client, domestic/overseas clients (factories) contributed Rmb1,231mn and Rmb597mn to its total revenue, respectively, down 5.6% YoY and up 13.8% YoY, showcasing rapid overseas market expansion.
　　Profitability: Gross margin increased; ANP fell 3.2% YoY in 1H23 and rose 0.3% in 2Q23.
　　The Company’s gross margin was 41.2% in 1H23, up 1.3 ppts from the prior year. 2Q alone witnessed a 2.1ppts YoY increase in gross margin to 43.4%.By product, gross margin for 1H23 was 41.8%/42.6% for buttons and zippers, up 0.1ppts/2.2ppts YoY. The increase in the zipper segment's gross margin can be attributed to intelligent manufacturing and rising capacity utilization in overseas markets. By region, gross margin stood at 39.4%/44.9%, respectively in domestic/overseas markets, up 1.0 ppt/1.3 ppts YoY. Expense ratios: Selling/administrative/R&D/financial expense ratio came in at 7.9%/13.6%/3.9%/-0.45%, respectively, +1.5ppts/+0ppt/-0.3ppts/-0.13ppts YoY. The rise in selling expenses is linked to its expanding overseas marketing team and intensifying principal business marketing efforts. Net profit: The Company's net profit attributable to the parent/net profit attributable to the parent excluding non-recurring items was Rmb302mn/300mn in 1H23, down 3.2%/up 0.36% YoY, and was Rmb247mn/248mn in 2Q23, up 0.3%/4.3% YoY. Net margin/net margin excluding non-recurring items was 16.4%/16.5% in 1H23, -0.5ppts/+0ppt YoY.This performance illustrates the Company's strong operational resilience and growth momentum despite short-term market volatility.
　　Outlook: Overall industry demand is recovering; its earnings performance will likely improve quarter by quarter going forward.
　　On the demand side, overseas apparel and sports brands are currently depleting their inventories. We project that leading brands will complete this process by mid-year or in 2H23, leading contract manufacturers will see a gradual increase in orders, and the Company's capacity utilization will continue to improve. On the supply side, we expect the Company’s earnings performance to continually improve in 2H23 on a gradually lower base for comparison in subsequent quarters (revenue and net profit increased 12%/28% YoY, respectively, in 3Q22 and fell 18%/163.6% YoY in 4Q22). In the short-term, we expect the Company's orders to continually increase from their current lows. In the longer-term, we project that the Company's market share will keep growing on its strengths in international capacity, client network and smart manufacturing and it is set to become a leading global apparel accessories provider as YKK.
　　Potential risks: Weaker-than-expected production capacity expansion; intensifying industry competition; bigger-than-expected increase in costs; weaker-than-expected consumption recovery; fluctuations in client orders; slower-than-expected expansion of new businesses; stronger-than-expected exchange rate volatility.
　　Investment recommendation: The Company’s revenue increased by 0%/2.4% YoY in 1H/2Q23, respectively, demonstrating strong operational resilience and growth momentum despite a cyclical decline in industry demand. The Company’s net profit attributable to the parent fell 3.2% YoY in 1H23 and rose 0.3% in 2Q23.The uptick in gross margin partially offsets the negative impact of rising selling expenses and falling industry orders. Given that the Company will likely see a continued increase in orders in 2H23 and considering divergent de-stocking pace among overseas apparel brands and the impact of a struggling overseas macro-economy in the medium to long term, we revise our EPS forecast for the Company to Rmb0.55/0.67/0.81 for 2023E/2024E/2025E (compared with our original projections of Rmb0.54/0.74/0.85). Considering the Company’s average valuation in recent three years (18x PE) and the 2023E/2024E average valuation of leading textile manufacturers Huali Group (300979.SZ) and Shenzhou International (02313.HK) (at 17x/14x PE based on CITICS Research forecast), given that Shenzhou International maintained a PE of 15x-30x during the period when it maintained continued revenue growth of least 10%-15% after 2014, and given the Company's impressive order growth in 1H23 despite falling industry demand and leading market position established in recent years, we assign 22x 2024E PE to derive a target price of Rmb15 and a target market cap of Rmb15.6bn. We reiterate our "BUY" rating for the Company.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。