Event

The company released its mid-2017 report. 2017H1 achieved operating income of 1.969 billion yuan, an increase of 5.47% over the same period last year; operating profit of 193 million yuan, down 5.11% from the same period last year; net profit of 141 million yuan, down 4.48% from the same period last year; and non-return net profit of 96.3573 million yuan, down 12.08% from the same period last year. Of this total, 2017Q2 realized operating income of 1.081 billion yuan, an increase of 8.77% over the same period last year, and its net profit was 81 million yuan, down 9.28% from the same period last year.

On the basis of 324 million shares, the company pays a cash dividend of 2.00 yuan (including tax) to all shareholders for every 10 shares, with a total cash dividend of 64.74 million yuan, accounting for 68.47 percent of the net profit returned to the mother.

The company expects 2017Q1-Q3 home net profit of 212 million to 260 million yuan, an increase of-10% and 10% compared with the same period last year.

Brief comment

The United States and Japan export decline, the appreciation of the RMB, coal prices drag on the overall performance, cotton yarn business performance is bright.

(1) the company's revenue increased by 5.47% compared with the same period last year, and the decline in export revenue from the United States and Japan led to a decline in yarn-dyed fabric sales, and cotton and cotton yarn sales were strong. The contribution income of 2017H1's yarn-dyed fabric business totaled 874 million yuan, down 6.47% from the same period last year, mainly due to the decline in export sales in the United States and Japan. Due to changes in customer strategy, production transfer led to a decrease in orders (overall export revenue fell 52.51% in Japan and 27.41% in the United States). Printed and dyed cloth contributed 285 million yuan, an increase of 2.78% over the same period last year. The income contributed by the new printed fabric business was 12.2911 million yuan, and that of clothing was 214 million yuan, down 1.28% from the same period last year. Revenue from electricity, steam and sewage treatment business increased by 1.65% to 31 million yuan compared with the same period last year, while cotton yarn and cotton sales grew rapidly, with cotton yarn sales of 192 million yuan, up 23.63% over the same period last year, and income from other businesses (mainly cotton trade and processing fees) was 360 million yuan, an increase of 42.92% over the same period last year.

(2) the coal price rose sharply, and the foreign exchange appreciation superimposed the expansion of the internal and external cotton price difference to reduce the 2017H1 comprehensive gross profit margin. 2017H1's comprehensive gross profit margin was 18.21%, down 1.89 pct from the same period last year, mainly due to higher costs of domestic production factors. Companies generally purchase coal one quarter in advance, while coal prices have risen since August and September last year, and 2016Q4-2017Q1 has maintained high levels (the average price of coal used by H1 is estimated to be about 599.34 yuan per ton according to the average price of thermal coal from 2016Q4 to 2017Q1 Qinhuangdao, up 58.82 percent from 2015Q4 to 2016Q1, or 221.97 yuan per ton). The company purchased some of the coal needed in the first half of the year at high prices, leading to a sharp increase in coal costs. The decline in the performance of the company's new energy subsidiary in the first half of the year was also affected by this. The spot exchange rate of 2017H1 RMB against the US dollar rose from 6.94 at the beginning of the year to 6.78 in the middle of the year, affecting the gross profit margin of export products.

(3) with the exception of cotton yarn division, the net profit of other divisions has declined. From the perspective of segment profit information, among the company's five major divisions, the 2017H1 net profits of the yarn-dyed fabric division, shirt division, printing and dyeing division and thermoelectric division all declined, to 97.9287 million, 9.1309 million, 15.8829 million and 24.1851 million yuan respectively, down 1.68%, 50.17%, 3.57% and 30.17% from the same period last year. Among them, the printing and dyeing division due to the delay in payment for individual customers in June, the impairment of its accounts receivable led to a decline in profits, this part of the accounts returned in July, the overall net profit still maintained positive growth. The shirt division is mainly due to the uneven distribution of customer orders in Europe, resulting in ups and downs. Thanks to the rapid growth of domestic cotton yarn sales, the cotton yarn division achieved a net profit of 13.0559 million yuan, a year-on-year increase of 299.58%.

(4) the loss of exchange leads to an increase in the rate of financial expenses. The sales expenses, administrative expenses and financial expenses of 2017H1 Company were 85.0625 million, 76.9865 million and 49.8501 million yuan respectively, which were-0.58%, + 3.90% and + 40.69% respectively compared with the same period last year. Overall, the expense rate during H1 period increased by 0.31 pct compared with the same period last year, while the sales expense rate and management expense rate decreased by 0.26,0.06 pct to 4.32% and 3.91% respectively. The financial expense rate increased by 0.63 pct to 2.53%. The company's financial expenses increased significantly in the first half of the year, mainly due to the exchange loss increased by about 13.19 million year-on-year due to the appreciation of the RMB.

(5) the loss of asset impairment has decreased significantly, and the investment income has increased. Affected by the significant reduction in inventory price loss, the company's 2017H1 asset impairment loss decreased significantly by 79.16% to 4.2632 million yuan. At the same time, the annual investment income brought by the company's 2017H1 due to financial management and entrusted lending activities increased by 16.25% to 56.3435 million yuan.

Yarn-dyed fabric is the main body, textile categories are diversified, the layout of upstream and downstream and supporting industries are perfect, and the synergy effect is remarkable.

The integrated layout of the upstream and downstream of the company's textile industry chain is complete, covering upstream cotton planting and ginning, including spinning, dyeing, weaving, finishing, knitting, printing and dyeing, downstream home textile, clothing processing, brand operation, etc., with strong comprehensive strength. At present, the company has an annual production capacity of 160 million meters of yarn-dyed fabrics, 210000 spindles of upstream cotton yarn (100,000 spindles of Haian and 110,000 spindles of Xinjiang), 70 million meters of printed and dyed fabrics (60 million meters at the end of 2016), 30 million meters of home textile fabrics, 6000 tons of knitted yarn and knitted fabrics, and 11 million pieces of clothing (shirts) (8 million pieces of Haian, 3 million pieces of Cambodia, OEM processing). Provide to Uniqlo, Himm, Sema and other brands). At the same time, the company also has its own power plant, sewage treatment plant supporting, strong cost control advantages, enhance profit space. In addition, all the production links from spinning to clothing are in the same factory area, which can effectively reduce the logistics cost.

With the continuous development of brand management and the adjustment of clothing operation mode, spot fabrics have great potential. The company attaches importance to the construction of its own characteristic brand, and continues to make great efforts to build a brand system composed of "JAMES FABRIC" spot fabrics and "JAMES" series clothing in the first half of 2017.

(1) in terms of clothing brands, the company adjusts the operation of the JAMES brand to join all of them to reduce the occupation of funds. The company adjusts the operation mode of clothing brand JAMES. In the past, the store was opened by a joint venture between the company's wholly-owned or holding subsidiary and the franchisee, but now all the stores have been changed to join the agent, and the cost of opening the store is borne by the franchisee. The company adopts the consignment mode to bear the inventory risk of unsalable products and reduce the occupation of liquidity. At present, there are more than 80 franchise stores.

At the same time, the JAMES brand will increase online sales efforts in the future.

(2) in terms of fabric brands, "JAMES FABRIC" spot fabrics are developing rapidly, boosting the gross margin of the company's products. 2017H1 increased the promotion of spot fabrics, achieved more than 20% growth in spot fabric revenue and profits, and achieved relatively large sales growth in domestic and foreign markets, especially in Southeast Asia and Japan. Spot sales of fabrics cater to the flexible and fast demand of low-volume, multi-batch and fast delivery, and its gross profit margin is about 10 pct higher than that of order-based sales. At present, spot sales of fabrics account for only 10% of the company's total production capacity of yarn-dyed fabrics, and the company aims to increase its share to 20%, 30%. The future has a good prospect and is expected to maintain a high growth rate, boosting the company's gross profit margin.

We will promote investment in new production capacity in Africa and seize the foreign market for medium-and low-grade fabrics.

In order to continue to promote the global layout of the company's production base, the company signed an agreement with the Ethiopian government in December 2016 to build a textile industrial park in the country that integrates spinning, printing and dyeing, yarn-dyed fabrics and ready-made clothes. if it goes smoothly, construction is expected to start at the end of this year or early next year and reach production in 2019. After it is put into production, it is expected to have a monthly production capacity of 200,000 spindles, 2.5 million meters of printing and dyeing fabrics, 2.5 million meters of yarn-dyed fabrics and 3 million pieces of garments. The company can take advantage of low labor costs and transportation facilities in Africa, and Ethiopia has a cost advantage because of its large number of hydropower, stable power supply and relatively cheap electricity prices. At the same time, it can enjoy the duty-free dividend of exports to Europe and the United States, which will help the company to seize the foreign medium-and low-grade fabric market.

The two subsidiaries continue to accelerate the pace of turnaround and boost profits.

In terms of subsidiaries, Tianxiang home textile and collar weaving and dyeing subsidiaries have accelerated the pace of turnaround in the past two years. The company's 67% stake in Tianxiang Home Textile lost about 20 million in 2015, but the loss was sharply reduced after the change of management team in 2016, with a loss of only 4.28 million, which is likely to be reversed in 2017. MediaTek leader is in charge of the company's knitting yarn and knitted fabric dyeing business. Similarly, the management team was greatly adjusted in 2016, and the loss was greatly reduced. In the first half of 2017, the talent lost 4.4 million yuan, and the loss decreased by about 2 million yuan compared with the same period last year. At present, the production capacity of the two companies has not been brought into full play, and the company will strengthen the acceptance of orders, fully release production capacity, speed up the turnaround, and boost the company's performance.

Investment suggestion: after the transfer of American and Japanese customers in the company's yarn-dyed fabrics, we will actively open up new customers in Europe and other regions in the second half of the year, and orders are expected to resume. Printing and dyeing fabric with the improvement of departmental management, product quality is expected to improve in the second half of the year, performance is expected to continue to grow. Overseas production capacity in Cambodia, Africa and other places has expanded smoothly, and the international market still has broad prospects. Downstream brand building efforts, spot sales of fabrics highlight new growth points. The new energy subsidiary meets the company's own needs and makes a stable profit. Tianxiang home textile, collar weaving and dyeing and other subsidiaries are about to reverse losses and contribute to the company's future performance. We estimate that the net profit from 2017 to 2018 will be 379 million yuan and 445 million yuan respectively, an increase of-3.9% and 17.5% over the same period last year, corresponding to 1.17,1.38 yuan per share of EPS and 12 and 10 times of PE, respectively, maintaining the "buy" rating. If the company makes smooth progress in customer development in the second half of the year, the annual results are also likely to achieve positive growth, which is worth paying attention to.

Risk factors: exchange rate fluctuations affect export and exchange gains and losses; cotton and coal price fluctuations affect the cost side; downstream consumption recovery is not as expected.