Investment suggestion

Raise FY16/17 's fiscal year EPS forecast by 12 per cent to HK $0.84 / HK $0.91, respectively, and raise the target price to HK $13.65, corresponding to 17 per cent upside space and 15 times the target price-to-earnings ratio for fiscal year 2017 (20 per cent discount to Shenzhou International Group). Upgrade the rating from evasive to neutral. The reason why Mutai Textile released 1HFY16 results: revenue increased by 3% and net profit increased by 18.3%, which exceeded expectations, mainly due to the rise in average price and the one-time gain from the transfer of some shares in the associated company.

Sales have basically remained stable. Excluding an one-time gain of HK $58.76 million, net profit rose by about 10 per cent. Gross profit margin rose 2.1 percentage points to 18.9 per cent, mainly due to relatively low prices of raw materials and energy. Affected by Vietnam project, sales expense rate and management

The rate of operating expenses increased by 0.1 percentage points and 0.8 percentage points respectively.

The interim dividend is HK $0.4 per share, with a dividend yield of 3.4%.

Profit forecast and valuation

Raise FY16/17 's annual earnings per share forecast by 12% to HK $0.84 / HK $0.91 respectively.

Given that cotton prices are still falling, average price growth will not be sustainable; the TPP agreement has a negative impact on the company. Taking into account the better-than-expected performance of 1HFY16, we raised our target price to HK $13.65, with 17 per cent upside, corresponding to 15 times the 2017 target price-to-earnings ratio (20 per cent discount to Shenzhou International Group). Upgrade the rating to neutral.

Risk

Cotton prices fluctuate.