Goldman Sachs: Yuyuan Group (00551) estimates that the net profit margin for the third quarter will improve quarterly

The Zhitong Finance App learned that Goldman Sachs released a research report saying that Yuyuan Group (00551) was in line with the bank's expectations after the downgrade and estimated that the net profit margin improved quarterly. The bank maintained a “buy” rating, with a target price of HK$15.9 for 12 months.

Yuyuan Group announced a profit warning for the third quarter after closing yesterday (26th), meaning that net profit for the first nine months/third quarter (after minority shareholders' equity) fell by about 50% to 55% year on year, and fell 37% to 50% year on year, in line with the bank's expectations of 54% and 49% for the first nine months/third quarter respectively; if net profit for the first nine months fell 55% or 50% year on year, the net profit margin for the third quarter is expected to be about 2.8% or 3.5% (the bank's forecast is 2.9%). The bank believes that the overall net interest rate is generally in line with its lowered expectations, while the implied net interest rate for the third quarter was 2.8% to 3.5%, showing a quarterly improvement from 1.9% in the second quarter. It believes or reflects an increase in OEM operating leverage and efficiency improvements after order improvements.

The bank pointed out that net profit declined year-on-year in the first nine months, mainly due to weak profit margins in the OEM segment. The company indicates that the pressure on gross margin comes from: 1. Demand is uncertain, and although early orders in the third quarter had a positive effect, it was not enough to offset the operating deleveraging caused by the decline in the scale of manufacturing business; 2. Labor costs rose, and the average number of OEM employees was still high year over year. Coupled with wage inflation in various production regions, and progress in reducing overtime and other inefficiency-related expenses was slower than expected; 3. Although production efficiency was uneven in the third quarter, the load on each factory was still uneven, dragging down overall efficiency and driving up the unit cost of shoe manufacturing.

Looking ahead to the fourth quarter, although some orders have been brought forward to the third quarter, the final order level will still depend on holiday demand and product mix. The bank believes that the current price is equivalent to 9 times the projected price-earnings ratio in 2027, which is still not expensive compared to its 8% dividend rate. The company will announce its full third quarter results on November 10.