Pressure from domestic and external demand compounded the decline in cotton prices, annual revenue fell 10%, and gross margin was drastically reduced. The company is the world's largest cored cotton yarn leader. In 2022, the company achieved revenue of 23.8 billion yuan, down 10.2% year on year, and net profit fell 94% year on year to 160 million yuan. The annual gross margin fell 10.5 pct to 11.6%, mainly due to the sharp decline in cotton prices starting in the second half of 2022 and weak domestic and external demand (70-80% of the company's yarn was sold domestically). The widening domestic and external cotton price spread also affected the company's profit from yarn produced and sold from Vietnam to China. By business, yarn/woven fabrics/knitted fabrics accounted for 74%/11%/4% of revenue respectively, revenue was -14%/+3%/-17%, and gross margin was 10.6%/24.6%/5.3%. Woven fabrics performed relatively well. The total annual fee rate increased by 1.7 pct. Among them, the financial fee rate increased by 1.5 pct to 2.1% due to US interest rate hikes and exchange losses. Net interest rates fell 9.5 pct to 0.7% for the full year. The capital expenditure was 2.39 billion yuan, which was basically the same as during the same period. It was mainly related to the expansion of yarn and fabric production capacity and the technical improvement of equipment. Subsequent forecasts were expected to decrease, and the balance ratio increased by 4.8 pct to 61.4% year-on-year.
Performance was lost in the second half of the year due to weak demand, a sharp drop in cotton prices, and internal and external cotton reversals. In 2022 2H, the company's revenue fell 23% to $10.8 billion. Global demand in the textile industry weakened in the second half of the year, and the sharp drop in cotton prices led to a sharp drop in gross margin to 1.7%, and net profit loss of 840 million yuan (2021/2H profit of 1.40 billion yuan).
Looking ahead: 2023 will guide prudence and promote the integration of localized supply chains to the leading advantage. 1) 2023 outlook: The company targets sales of 750,000 tons of yarn this year (82/660,000 tons in 2021/2022, respectively), 110 million meters of woven fabric and 24,000 tons of knitted fabric (excluding the trade portion); at the same time, Vietnam and Nicaragua's production capacity of 230,000 spindles of new yarn is nearing completion and will soon be put into operation (accounting for about 6% of the Group's yarn production capacity). 2) Looking at the medium to long term, in an environment where the global trade situation is changing, the local supply chain is the general trend. The company has already laid out upstream and downstream production capacity in Vietnam, Nicaragua, Turkey, and Mexico, and is considering seeking industrial chain partners to invest together. The scale effect of leading companies, leading globalization, and vertical integration are important competitiveness of the company. Looking at growth, the company will continue to invest in new construction and technical improvement on the yarn side to maintain steady growth, while the fabric side will maintain a relatively rapid pace of expansion.
Risk warning: fluctuating raw material prices; high inflation in Europe and the US; trade war risk; systemic risk.
Investment advice: The short-term situation is expected to gradually improve, and we are optimistic about the global advantages of yarn leaders in the medium to long term. The local supply chain has become a major trend. The company's layout was global in the early years, the regional supply chain has begun to take shape, and rapid response has certain advantages. Looking at the medium to long term, the poor market environment favors increased concentration of leaders, and the company's cash flow is plentiful. It will lay out new production capacity at the right time and seek industrial chain partners to find overseas investment opportunities. Due to continued poor overseas demand, and the fall in cotton prices exceeding expectations, the company's yarn revenue and gross margin were lowered. The company's net profit for 2023-2025 is estimated to be $74/99/1.06 billion respectively (originally 2023/2024 was $1,99/2.11 billion respectively), +375%/+21%/+18% year-on-year. Due to lower profit forecasts, the target price was lowered to HK$7.4-8.0 (originally HK$9.6-10.9), corresponding to PE 6-6.5 x in 2024 due to operating pressure in the first half of this year It is still large, and it was downgraded to the “increase in holdings” rating.