Key points of investment

Tianhong Textile disclosed 2021H1 results: total turnover was 12.526 billion yuan (RMB, same below), an increase of 52.5% over the previous year. Gross profit was 2,853 billion yuan, an increase of 204.4% over the previous year. The profit attributable to the company's owners was $1,288 million, an increase of 121 times over the previous year. EPS rose to $1.41, with a dividend of 50 Hong Kong cents per share (about RMB 0.42).

Our review is as follows:

Demand recovered, yarn prices rose, and yarn business revenue increased 58% to 9.9 billion yuan, accounting for 79%. Gross margin increased sharply by 13.2 ppt to 23.8%, and performance exploded.

Volume: The sales volume of H1 yarn was 417,000 tons, an increase of 37.8% over the previous year. The domestic market returned to normal at the beginning of the year, customer orders increased rapidly, and production capacity was fully released.

Price: The price of H1 stretch-cored yarn was 24,497 yuan/ton, an increase of 13.1% over the previous year; the price of other yarns was 23,005 yuan/ton, an increase of 15.5% over the previous year.

Cost: Using low-cost stock raw materials, yarn costs are low.

As demand recovered and last year's base was lower, downstream revenue increased 34% year on year, 8% over the same period in 2019, and gross margin increased 9.3ppt to 17.7%. In particular, driven by the Group's own yarn, the gross margin of the distribution increased by 22.6ppt to 31.4%.

Our point of view:

As a leading enterprise in the yarn field, Tianhong Textile has bucked the trend and expanded since 2018, and has continuously promoted the integrated layout of the industrial chain. Profitability and profit stability are expected to continue to grow. Overseas epidemics have been repeated, some orders have been transferred domestically, yarn prices continued to rise in July/August, and gross profit can be maintained at a high level.

Risk warning: fluctuating raw material prices, repeated epidemics, risk of industrial transfer