Wool-worsted yarn leader, expanding production and expanding categories for the first time, giving the “Buy” rating company that has been deeply involved in the wool spinning industry for more than 30 years and has become the global leader in wool spinning industry. In 2022, the company ranked 2nd and 3rd in the global market share for worsted wool yarn and woolly worsted cashmere yarn production, and ranked first in the world in sales in the wool-worsted knitted yarn segment in 2023. In the context of wool (cashmere) demand expansion and competitive pattern optimization, the company uses its competitiveness to develop new categories and customers under the leadership of the broadband strategy, expand its product line and enter the field of cashmere yarn. In line with the active pace of global production capacity expansion, the company has broad room for growth. We expect net profit from 2024-2026 to be 4.5/53/61 billion yuan, corresponding EPS of 0.6/0.7/0.8 yuan, and the current stock price corresponding PE is 11.9/10.1/8.8 times, respectively, for the first time, covering the “buy” rating.

Build competitive barriers: Middle and high-end customer resources, innovative processes and products, foundry quality and service companies serve more than 5,000 customers, including 500 high-end brands and clothing OEM factories. With strong development and design capabilities and quick response one-stop service, and in line with active category and production capacity expansion, it has become a designated yarn supplier for brands such as Hermes, Lululemon, and Allbirds, and co-created with brands. (1) Leading process technology and equipment: Using advanced processes in compact spinning, silo spinning, and core spinning, and relying on the KDC platform to continuously optimize the process. Empowering cutting-edge quality with high-tech equipment, the company's equipment import rate reached more than 80% in 2014. It has become the largest customer in Qingze, Germany, the world's top spinning machine manufacturer. Furthermore, it is actively laying out the path of digital transformation, leading the industry in terms of manpower efficiency and yield. (2) Integrated production and one-stop service: The company's wool spinning verticalization model, which integrates washing, stripping, treatment, spinning, dyeing and quality inspection, is conducive to ensuring quality and providing one-stop service. In terms of service, it forms a competitive advantage of customization, full process, and quick response, deeply participates in downstream processes, and leads the industry in terms of delivery with flexible adaptation services in small batches, multiple varieties, and quick refurbishment.

Future growth: Broadband strategy opens up new markets and accelerates the release of global production capacity (1) Multiple varieties and serialization of wool yarn: Under the guidance of the 2020 broadband development strategy, woven/semi-worsted wool was added to worsted wool, various types of yarns such as woven/fancy yarn were added to the knitting base, and extended from apparel to high value-added application scenarios such as sports outdoor/home textiles/industrial/new materials. (2) Cashmere yarn became a new engine: the establishment of Ningxia Xin'ao Cashmere and the acquisition of Duncan from the UK into the cashmere yarn business to increase the global market share of the cashmere business by integrating the superior resources of the two. The utilization rate of cashmere production capacity in New Australia is expected to increase with product structure/business transformation/optimization of worsted cashmere (about 70% in 2023), and Duncan in the UK is expected to improve profitability with the advantages of luxury customers and color research and development capabilities. (3) Accelerated release of global production capacity: Wool-worsted yarn faces production capacity bottlenecks. The company follows the textile supply chain migration trend. Vietnam's production capacity has an advantage on the cost side and enhances overseas delivery capacity to meet overseas order demand. In 2023, the production capacity of wool-worsted yarn was 135,000 spindles, and the “Vietnam 50,000 spindles high-grade worsted eco-yarn textile dyeing and finishing project” and the “Ningxia 20,000 high-quality worsted wool (velvet) yarn project” are progressing steadily. The production capacity is expected to reach 260,000 spindles at a compound growth rate of 10%-15% by 2028.

Risk warning: Fluctuating raw material prices, capacity expansion and new market expansion falling short of expectations, exchange rate fluctuations.