Key points of investment:

The company released its 2024 mid-year report, and revenue and net profit to mother were in line with expectations. 1) 24H1's revenue was 3.99 billion yuan (YoY +23.9%), net profit due to mother was 0.233 billion yuan (YoY -14.8%), net profit after deducting non-attributable net profit of 0.107 billion yuan (YoY -46.7%). Non-recurring profit and loss are mainly about 0.12 billion yuan in non-current asset disposal gains and losses, and we expect to contribute about 0.08 billion yuan to net profit after tax. 2) 24Q2's quarterly revenue of 2.15 billion yuan (+24.3% YoY), net profit to mother was 0.152 billion yuan (YoY -19.35%), net profit not attributable to mother was 0.115 billion yuan (-7.7% YoY), a significant improvement over 24Q1 after deducting non-net loss, but due to the loss of 56.16 million yuan in the first half of the year, an investment subsidiary of Shanghai Xinyu, was included in equity accounting, causing a drag on net profit deducted from non-mother net profit.

Vietnam's production capacity has the advantage of scarce location. Improved downstream demand has boosted the recovery of orders, and the recovery of production capacity has narrowed with combined price discounts, driving the restoration of marginal gross margin. According to the interim report, 24H1 revenue was +23.9% YoY, spin-off sales +23.8% YoY, and unit price was flat YoY. We expect the 24Q1 unit price to fall year on year, and after the price discount narrows, the 24Q2 unit price has risen slightly year over year, confirming the month-on-month improvement trend and reflecting the 24Q2 gross profit margin of 13.5%, 24q1+7.6pct month-on-month. On the cost side, the 24H1 period cost ratio was 7.5% (-0.7 pct year on year). Looking at the main changes, the 24H1 management expense ratio was 4.0% (year-on-year -1.8 pct) and the financial expense ratio was 1.5% (+1.1 pct year over year), mainly due to exchange losses of 1.99 million yuan. The difference between net exchange earnings of 57.18 million yuan in the same period last year was as high as 59.17 million yuan.

Pay attention to the trend of improving business quality, inventory turnover has accelerated, and cash flow has increased dramatically. According to the interim report, inventory at the end of the 24H1 period was 4.24 billion yuan (-22.3% YoY), a further decrease of 4.64 billion yuan at the end of 24Q1. The 24H1 inventory turnover days were 224 days (down 131/31 days from 23H1/22H1, respectively), and turnover accelerated after orders picked up. 24H1's net operating cash flow was 0.89 billion yuan, a significant increase from 0.155 billion yuan in the same period in '23. The improvement in cash flow was greater than the profit side. Considering that the company's undistributed profit at the end of 24H1 reached 5.05 billion yuan, we believe that only by cooperating with current cash flow improvements, its stable high dividend can be guaranteed. We are optimistic that the company is a potential high-quality high-dividend investment target.

We judge that cotton prices are currently at a cyclical low level. From the beginning of '24 to 8/23, Zheng Mian/ICE2 cotton fell by 14.2%/12.6% respectively. This was mainly due to the weak recovery in downstream demand and the high forecast for global cotton production for the current year, which led to pessimistic expectations on both the supply and demand sides. However, according to the latest forecast in the US Department of Agriculture (USDA) August report, the 2024/25 global cotton production forecast was reduced by 0.556 million tons month-on-month to 25.61 million tons, of which the expected annual US cotton production value was reduced by 0.412 million tons to 3.289 million tons month-on-month, which is expected to correct the market's pessimistic expectations about cotton prices and support the decline in cotton prices to stop and stabilize.

A major global manufacturer of color spinning, with outstanding production capacity scarcity in Southeast Asia, began reversing the situation in '24 and maintaining a “buy” rating. According to the interim report, about 77% of the company's production capacity is located in Vietnam. The location advantage has established long-term competitiveness, and orders from downstream brand customers are picking up. We are optimistic that the company has entered a quarterly repair stage and maintained profit forecasts. Net profit to mother is expected to be 0.6/0.78/1.02 billion yuan for 24-26, corresponding to 11/8/6 times PE, maintaining a “buy” rating.

Risk warning: The global pandemic affects downstream demand; fluctuations in cotton prices affect profitability; industry capacity supply has increased dramatically.