Report guide

Huafu Fashion reported that the Q2 single-quarter income decline narrowed, the loss was mainly due to gross profit margin pressure, cash flow remained smooth.

Main points of investment

Event: the company announced semi-annual results, the decline in Q2 revenue narrowed from 37% of Q1 to 13% in 2020, but the gross profit margin was under pressure due to falling cotton prices, resulting in a net loss of 160 million yuan in a single quarter. Throughout the first half of the year, revenue fell 24% year-on-year to 5.55 billion yuan, with a net loss of 190 million yuan, but operating cash flow remained at 540 million yuan, a slight increase over the same period last year.

Under the epidemic, the pressure on orders and the decline in cotton prices also affected product pricing, and the yarn industry as a whole was under pressure in the first half of the year.

In the first half of 2020, downstream orders affected by the epidemic were more cautious, while the higher decline in cotton prices compared with the same period last year affected product pricing, so enterprises in the yarn industry as a whole experienced difficult times. As for Huafu, the revenue of the main business of yarn fell 36% to 2.37 billion yuan in the first half of the year, and the volume / price of yarn decreased by 20% / 10% respectively. As more than 60% of the operating costs of the yarn business are raw materials, the gross profit margin of the yarn is under pressure in the context of high-price cost carry-over of cotton, and the gross profit margin in the first half of the year fell to 3.54% compared with the same period last year (but due to cotton futures hedging, the investment income was 120 million yuan). From the perspective of a single quarter, the decline in yarn business revenue narrowed from 43% of Q1 to 28% of Q2 in the third and fourth quarters. Due to the main production of 21 spring / summer orders, under the background that the inventory in spring / summer 20 has not been fully digested, it is expected that downstream customers will still place orders cautiously and recover rhythmically.

Net chain business Q2 gross profit margin is also under pressure from cotton prices, the new hosiery industry began to contribute income. The net chain business is mainly cotton trading business, with revenue falling 15.5% to 3.09 billion yuan in the first half of the year compared with the same period last year, and profitability is also closely related to cotton prices, so the gross profit margin also fell 5.06pp to-0.44% year-on-year. As cotton prices rebounded slightly in the second quarter, the decline in net chain business revenue narrowed from 27% of Q1 to 8% of Q2. In addition, Zhuji Boyi, which the company acquired in Xinjiang generated 77.62 million of its revenue in the first half of the 20th year, and will choose a machine to manufacture socks, gloves and other small goods in the future, in order to make full use of Xinjiang yarn production capacity.

Profit forecast and valuation: the decline in the first half of the year is basically due to the high cost carry-over of raw materials, and the overall cash flow turnover is smooth. With the rise in cotton prices and the gradual recovery of overseas orders, the base margin of orders in the second half of the year is expected to be better than that in the first half of the year, and the loss is narrowed. It is expected that the net profit of return to the mother in the fiscal year of 20-21-22 is 09.73 million yuan, which corresponds to a valuation of 42 million yuan in 22nd year. As the global leader in color spinning, the long-term competitiveness is still there, and Vietnam's future production capacity to be expanded is also very sufficient, "holding" rating.

Risk hint: the epidemic repeatedly affects consumer confidence and the expansion of new brands falls short of expectations.