Key points of investment:
A leader in the domestic cotton machine industry, and its main customer is the Xinjiang Construction Corps. Swan Co., Ltd. is a leading enterprise in the domestic cotton machine industry. It has strong technical strength and can provide one-stop products and services from field treatment, storage, and transportation of cotton after harvesting to automatic flower feeding, cleaning, matting, packaging, cottonseed peeling and scrap recycling. The company's business is mainly concentrated in the Xinjiang region. According to the calculation of the 2016 semi-annual report data, the revenue of the Xinjiang region accounted for about 76.16% of the main revenue. The company's main customers in China are the various regiment sites of the Xinjiang Construction Corps and provide important support for the mechanization of the entire cotton harvesting process by the Corps and improving the level of agricultural mechanization.
The cancellation of storage affected cotton cultivation across the country, but the planting area in Xinjiang remained stable. In 2011, the country initiated a temporary cotton storage policy to stabilize cotton market prices and encourage cotton cultivation; in 2014, the country abolished the cotton collection and storage policy and prices returned to market regulation, but still implemented a pilot target price subsidy policy for Xinjiang, and the subsidy standards in nine provinces including Shandong were lower than those of Xinjiang. According to the National Bureau of Statistics, the country's cotton sown area in 14, 15, and 16 was 422.23, 379.67, and 3,3761 million hectares, respectively, showing a marked decline; while the sown area in Xinjiang was 195.33, 190.43, and 1,8052 million hectares respectively, accounting for 46.26%, 50.16%, and 53.47% of the country's total, which remained stable and the proportion continued to increase. Affected by the reduction in cotton cultivation area, downstream cotton processing companies' willingness to purchase equipment has declined, putting pressure on the company to develop in recent years. The company's revenue fell by about 30% year on year in 2015, and revenue fell by about 28% year on year in the first three quarters of 2016.
Social stocks are gradually declining, and cotton cultivation is expected to stabilize in '17. The total amount of cotton stored by the country exceeded 10 million tons during the collection and storage period, while the 14-16 dumping absorbed the cotton reserves of many countries. To make up for the domestic consumption gap, cotton cultivation is expected to pick up. According to a survey of planting intentions by the National Cotton Market Monitoring System, the intended cotton planting area in China increased 2.2% year-on-year in 2017. Compared with the 12.8% year-on-year decrease in survey intentions in 2016, there was a clear steady improvement. In 2017, the country will also further increase subsidies for agricultural machinery. “Document No. 1” in '17 mentions “consolidating cotton, oil, and sugar production in major production areas... increasing subsidies for machinery and tools needed to mechanize the entire production process of grain, marshmallow, and forage.” The 2017 planting industry work highlights issued by the Ministry of Agriculture mentioned “Focus on improving cotton regions in Xinjiang and steadily developing cotton areas in the Yangtze River Basin and Yellow River Basin. Promote mechanization of production and develop mechanical tools for the entire cotton production process”. As an industry leader, the company has one-stop post-harvest products and stable customer partners, and will see a turning point as cotton planting area recovers.
Profit forecasts. The company is a leader in the domestic cotton machine industry, has strong technical strength, and has had good cooperative relationships with major customers in Xinjiang over the years. In recent years, the continuous decline in cotton cultivation area has put pressure on the industry, and with cotton harvesting returning to rationality and the increase in the level of agricultural mechanization driven by labor costs and policy incentives, the company has good prospects for development. We forecast that the company's net profit attributable to the parent in 16-18 will be 2,800, 2890, and 33.4 million yuan respectively. The fully diluted EPS will be 0.30, 0.31, and 0.36 yuan/share, respectively, and the net assets per share will be 7.62, 8.04 and 8.51 yuan/share, respectively. Currently, the company is small in size, and there is room for improvement in asset profitability. Combined with comparable company conditions, it was given a valuation of 7.0 times PB in 17 years, with a target price of 56.28 yuan, an increase in holdings.
Risk warning: cotton cultivation across the country fell short of expectations, cotton development in Xinjiang fell short of expectations, and the company's new products fell short of expectations