Core views:

Jihua Group is a leader in China’s military uniform industry, with 60% domestic market share in military gear and 10% in civilian business wear. The Company is well-positioned to fully benefit from incremental business volumes due to the changeover to the 2021 style military uniforms, or the Type 21 series. At the same time, Jihua Group continues to expand its presence in the civilian area, relying on channels and R&D advantages to build the second growth curve. Looking ahead, we expect the Company to achieve solid top-line growth with a faster rise in profitability in the short term. We initiate coverage with an “OVERWEIGHT” rating.

Abstract:

The largest light manufacturer of military gear in China. Jihua Group is mainly engaged in the R&D, production and sale of professional clothing, shoes/boots, and also textile products, with a market share of 60% in China’s military gear industry and a 10% market share in civilian business attires.

Military gear: Transition to Type 21 uniforms brings new opportunities. China’s military uniforms have experienced multiple rounds of changeovers. The last round of large-scale changeover was the 2007 style military uniform (Type 07), which mainly consisted of uniforms and dresses. As the leader in this industry, Jihua Group undertook 80% of the replacement orders back then. The revenue of the military gear business increased from Rmb3.35bn in 2007 to Rmb6.29bn in 2011, implying a CAGR of 17.1%, with a fallback in 2012. The changeover to Type 21 military uniforms consists of training uniforms and new work uniforms. We expect this to bring incremental orders of Rmb2.9bn-7.6bn for the whole industry.

Well-positioned to benefit from the phase-in of new army uniforms. The Company has successfully completed the support tasks of the PLA's transitioning to new uniforms in the past, and maintained high market share in the military supplies market. In this round of military uniform changeover, the Company stands well to fully benefit. We conservatively assume that it will undertake 50% of the replacement orders, and estimate that the military supplies revenue will increase by Rmb1.5bn-3.6bn in the next three years.

Poised to expand in the civilian business wear market. In the area of professional uniforms, the Company has a solid large-scale enterprise customer base and a good reputation, and has been actively participating in the R&D of national uniform clothing as well as industry standard formulation and refitting work. At the same time, the Company's well-established R&D innovation system and strong production organization capabilities are also likely to help it acquire more orders.

Potential risks: Changes in the national military supplies procurement policy; rising raw material costs; risks of market expansion and development; risk of technological innovation, inventory impairment risks; account receivables impairment risks.

Investment recommendation: As a leader in the military supplies industry, Jihua Group is well-positioned to fully benefit from the changeover of the Chinese army to the Type 21 military uniforms. At the same time, the development of the civilian product market is also likely to build a new growth curve. We forecast the 2022E/23E/24E EPS to be Rmb0.05/0.11/0.15. Based on the PE and PB valuation of comparable companies, we assign 22x 2024E PE to derive a target price of Rmb3.2 and initiate coverage with an “OVERWEIGHT” rating.