Tianhong Textile (02678): Profit Decline Due To Trade Friction; Focus Shifted From Quantity To Quality.

CICC released its Research Report on Tianhong textile in March 17th.

2019 performance meets profit warning

Tianhong textile announced its 2019 results: revenue 22 billion yuan, an increase of 14.9% over the same period; net profit of 884 million yuan, down 24% compared with the same period last year, corresponding to earnings per share of 0.97 yuan, in line with earnings warning.

The products continued to sell in the first half of the year: yarn, grey fabric, woven fabric, knitted fabric and denim clothing sales were +7.5%, -17.1%, +140.1%, +12.5% and +19.6% respectively, accounting for 76%, 3.7%, 12.2%, 4.1% and 4.5% of the total sales respectively. The sales volume of yarn, grey fabric, woven fabric, knitted fabric and denim clothing were respectively +13.5%, -17.1%, +108.9%, +8.8% and +9.7%. Yarn shipments exceeded the company's target (749 thousand tons vs.72 million tons), but shipments of other products were slightly lower than expected, mainly due to business restructuring or self employment. The average selling price of clothing fabrics has increased (woven fabric +15%, knitted fabric +3.4%) and denim clothing (+9%), while the average selling price of yarn and grey fabric has decreased by 5.3% and 0.1% compared with the same period last year.

Gross profit margin fell 2.8 percentage points to 13.6%, mainly due to trade friction caused by product structure adjustment led to a decline of yarn gross margin 4.2 percentage points. The operating expenses rate increased by 1.1 percentage points over the same period. The net asset liability ratio dropped by 2 percentage points to 86%. The investment cash flow is about 2 billion yuan.

Developing trend

Company target: sales volume of yarn, grey cloth, woven garment fabric, knitted fabric and denim garment reached 830 thousand tons (11% year-on-year), 60 million meters, 140 million meters, 25 thousand tons and 14 million pieces in 2020. With the end of the investment peak of capacity expansion, we expect that the capital expenditure budget will drop to less than 800 million yuan this year, and the focus of the company will expand from capacity expansion to profitability. In the long run, we expect that the company will continue to promote vertical integration and globalization.

Profit forecast and valuation

We lowered the forecast of earnings per share in 2020 to 6.3% to 1.17 yuan, mainly considering the uncertainty of the shipment caused by the epidemic, and introduced the 2021 earnings per share forecast of 1.39 yuan. At present, Tianhong textile trades at 4.6 times and 3.9 times 2020-2021 years price earnings ratio. Maintain the industry rating, but based on the uncertainty of the new restructuring business, the target price will be lowered to HK $24% to HK $8.42, corresponding to 6.5 times the 2020 price earnings ratio, 33% higher than the current stock price.

risk

Cotton prices fluctuate; brand customer demand is weak.