Core views
In '22, due to weak downstream demand and falling cotton prices, the company's colored yarn business experienced a slowdown in revenue growth and pressure on performance under multiple pressures of lower product prices and higher inventory costs of cotton yarn in the early stages. Looking ahead to 23:1) Driven by the recovery of the consumer environment and the company's expansion of new categories such as dyed fabrics and sweaters, production and sales of dyed yarn products are expected to recover significantly in '23; 2) The gross margin of the company's yarn business is expected to gradually recover under the clear inventory of high-priced raw materials and the stabilization of cotton prices, which is optimistic about a recovery in net interest rate in '23; 2) Part of the company's production capacity under construction will be concentrated in '23, and production capacity growth is impressive. The company's target production of tube dyeing in 2023 exceeded 112,000 tons per year, and the annual production of mercerized cotton exceeded 3,000 tons (production in '22 was 68,500 tons, an increase of 64% over the previous year). Furthermore, the company announced plans to expand production, and the colored yarn business plans to add 110,000 tons of production capacity.
occurrences
The company released its 2022 annual report: 22-year revenue of 2,208 million yuan/ +1.5%, net profit of 163 million yuan/ -30.0%, net profit of the non-return mother 119 million yuan/ -47.3%, net cash flow from operating activities was 163 million yuan/+151.0%, EPS (basic) was 1.31 yuan/share/ -37.0%, and ROE (weighting) was 10.2% /-9.23pct.
Corresponding to 22Q4 revenue was 590 million yuan/ -11.1%, net profit of 23 million yuan/ -67.4%, net profit of non-return mother was 18 million yuan/ -73.6%, net cash flow from operating activities was 128 million yuan/ +295%, and EPS (basic) was 0.18 yuan/ -67.4%.
The company plans to pay a dividend of 2.70 yuan (tax included) for every 10 shares and transfer 2 more shares. The dividend amount is 33.696 million yuan, with a dividend ratio of 20.7%.
Brief review
In 2022, the cotton yarn business declined, and profits were under pressure due to price reductions and removal of inventory and high costs. By product, the revenue of colored yarn, trade yarn, and processing businesses in '22 was 1,972 million yuan/ +1.03%, 164 million yuan/ +0.69%, and 61 million yuan/ +19.38% respectively. Looking at the volume and price split, the sales volume of colored yarn was 67,300 tons, +3.86% year on year, and the average sales price was 29,000 yuan/ton, -2.73% year on year. The slowdown in sales growth was mainly due to the impact of the epidemic on weak downstream demand. The price reduction was mainly due to the impact of the epidemic on yarn pricing as a cost bonus model. Cotton/cotton yarn prices declined in '22, and dyeing fees were lowered to benefit customers. Affected by price reductions and high inventory prices of cotton yarn in the early stages, the gross margin of the colored yarn business was 11.98% /-6.74PCT. The gross margins of the trade yarn and processing business were 4.14% /-3.52PCT and 17.62% /-17.37PCT respectively.
Company expenses have remained stable, and net interest rates declined less than gross profit margins, driven by increased government subsidies. The company's overall gross margin in 2022 was 11.79%/-6.75%, in sync with the decline in gross margin of the yarn business. In terms of cost rates, sales, management, and R&D expenses rates in '22 were 0.53% /+0.03PCT, 1.96% /-0.19PCT, and 3.23% /+0.01PCT respectively, all of which remained stable. Under the influence of declining gross margin, the company deducted non-net interest rate in 22 was 5.4% /-5.0 PCT. Driven by a sharp increase in one-time government subsidies (55.88 million yuan in '22 and 4.3 million yuan in '21), the net interest rate decline was less than deducting the non-net interest rate, which fell 3.3PCT to 7.4%.
Looking ahead to 2023:1) Driven by the recovery of the consumer environment and the company's expansion of new categories such as yarn-dyed fabrics and sweaters, the demand side of dyed yarn products is expected to recover significantly in '23; 2) The gross margin of the company's yarn business is expected to gradually recover when inventories of high-priced raw materials are cleared and cotton prices are stabilized. Optimistic about a recovery in net interest rates in '23, domestic cotton and cotton yarn prices have declined sharply since May 22, and China's cotton price index (328) fell from a high of 22900 in the first half of '22 to 12,500 at the end of October 22, a decline of 1245%, reaching 1245% at the end of October 22. Cotton prices start in November There was a gradual steady recovery. As of March 15, it had rebounded to 15445, a low point of about 25%; 3) The production capacity of the 60,000-ton high-quality tube yarn dyeing project under construction at the company's Jingzhou base in '23 was gradually released, and production capacity growth was impressive. The company's target tube dyeing volume in 2023 exceeded 112,000 tons per year, and the annual production of mercerized cotton exceeded 3,000 tons (production in '22 was 68,500 tons, an increase of 64% over the previous year). In addition, the company is actively laying out the industrial chain and building the upstream Anhui Fuchun Textile Intelligent Precision Spinning Project and the Anhui Fuchun Color Spinning Fiber Dyeing Project to achieve diversified product development.
Production expansion plans have been added, and the colored yarn business plans to add 110,000 tons of production capacity. The company announced on March 14 that Hubei Fuchun, a wholly-owned subsidiary, plans to invest 700 million yuan to build a high-quality tube yarn dyeing project with an annual output of 110,000 tons. The construction period of the project is 3 years. The company plans to seize opportunities during the industry consolidation period where small and medium-sized printing and dyeing enterprises are continuously shut down under the continuous elimination of backward production capacity in the industry and the strengthening of environmental protection regulations in the printing and dyeing industry, and continue to seize market share by further increasing production expansion plans.
Profit forecast: The company's revenue for 2023-2025 is estimated to be 31.4, 40.2, and 4.83 billion yuan, respectively 42.4%, 27.8% and 20.1%, respectively; the net profit of the mother is 250, 320, and 39 billion yuan respectively, 55.0%, 28.5%, and 20.3%, corresponding to the latest P/E, 13.0x, 10.1x, 8.4x, respectively, with initial coverage, giving a “buy” rating.