Key points of investment
(1) Leading manufacturer of wool spinning, with steady growth in revenue performance. The company dates back to 1991. It specializes in R&D, production and sales of worsted yarn, cashmere yarn and wool wool strips. It has been deeply involved in the wool spinning industry for more than 30 years, and has production bases in Zhejiang, Ningxia, the United Kingdom and Vietnam. The production capacity of the company in '23 was 0.015 million tons (calculated by discounting 48 sticks) /0.013 million tons/3130 tons for wool/cashmere dyeing, respectively, with 0.015 million tons/2,500 tons for wool/cashmere dyeing. The actual controller of the company is Mr. Shen Jianhua. As of 2024Q1, he directly held 14.22% of the company's shares and 30.49% through Xinao Industrial Holdings. Since the company went public, it has promoted 2 equity incentives to bind core employees. The team is stable, and the core employees have obtained shares. The company's revenue/net profit for 2023 was 4.438 billion yuan/0.404 billion yuan, and the corresponding compound growth rate for 11-23 was 9.67%/12.52%, and revenue performance increased steadily; 24Q1's revenue/net profit to mother was 1.1 billion yuan/0.096 billion yuan respectively, with year-on-year growth rates of 12.50%/6.59%, respectively, due to the steady increase in revenue due to the steady increase in revenue due to the impact of short-term raw material prices.
(2) 100 billion wool market, improving export sales and optimizing the industry pattern. The wool spinning market is large: 1) The wool spinning and printing and dyeing processing market was over 150 billion yuan in '21, and has remained stable in recent years; 2) China's wool yarn production in '22 was 0.18 million tons. If calculated at a price of 0.165 million yuan/ton, the corresponding output value scale was 29.7 billion yuan, and the cashmere production in '23 was 1.76 tons. If calculated at a yarn price of 0.61 million yuan/ton, the corresponding output value is 11 billion yuan.
The export sales of the industry are improving, and there is plenty of room for domestic sales: 1) The export value of wool raw materials and products was -3.6% year-on-year in January-May '24, and the decline narrowed to 2% in May, steady, moderate and positive; 2) Domestic online cashmere/wool clothing is growing rapidly, and the category penetration rate is expected to increase. After 17 to 21 years of reshuffle, the average income of enterprises above scale increased, profits recovered, and the industry pattern improved. In the field of wool yarn, Germany's Nanmao Group and Xinao Co., Ltd. are the world's leading companies, with domestic volume shares of 9.4%/8.3% respectively, and the gap continues to narrow; the cashmere yarn industry concentration is high. Consinee and Xinao are the top two domestic manufacturers, with domestic volume shares reaching 30%/13% respectively; the overall leading advantage continues to strengthen.
(3) The revenue performance of the cashmere business is double, capacity expansion helps increase share, and low gross prices are expected to improve profits. On the revenue side, the company's broadband strategy has broadened the ceiling in recent years: 1) Relying on R&D and innovation, sports and outdoor yarn accounted for 25% of worsted yarn in '22, expanding to fields such as woven yarn, home textiles and industrial yarn; 2) Accelerating the expansion of mid-tier customers such as e-commerce, and domestic brand customers have achieved rapid growth; 3) The cashmere business has developed rapidly, with revenue of about 1.2 billion yuan in 23 years. By tapping into customer needs and enriching product structures, etc.
The company is actively expanding production. It is expected to add 0.055 million spindles of worsted yarn in 24-25, with sufficient production capacity to help increase its share. From the profit side: 1) Australian gross prices are at a historically low level. Since Q2, they have fluctuated around 1150 Australian cents/kg, and the downward trend is limited. If they remain relatively stable or rising, they are expected to improve gross margin; 2) The net interest rate of the cashmere business in '23 was only 6.7%, which is lower than the company average. In the future, increased capacity utilization, technical management improvements, and product structure optimization will all lead to an increase in net interest rates.
Investment advice
We expect the company's revenue from 2024 to 2026 to be 5.036 billion yuan, 5.707 billion yuan, and 6.439 billion yuan, respectively, with year-on-year growth rates of 13.5%, 13.3%, and 12.8%, respectively. Net profit to mother is 0.46 billion yuan, 0.52 billion yuan, and 0.59 billion yuan, respectively. As of the latest closing date (July 11, 2024), the corresponding PE will be 12.3 times, 10.9 times, and 9.5 times We are optimistic about the company's future growth, covered for the first time, and gave it a “buy” rating.
Risk warning:
1) The downturn in downstream prosperity such as wool and cashmere will drive the risk that customer order demand will slow down; 2) The cost reduction and efficiency of the cashmere business falls short of expectations;
3) Decrease in raw material prices, etc.