2020 performance is in line with our expectations

The company announced its 2020 results: revenue was 19.6 billion yuan, down 11% from the same period last year; net profit returned to its mother was 520 million yuan, corresponding to 0.57 yuan per share, down 41.5% from the same period last year, in line with expectations.

The company intends to pay a final dividend of HK $0.2 per share, corresponding to a dividend yield of 30%.

Full-year revenue fell 11 per cent year-on-year, below the China Daily guidance (- 20 per cent), mainly due to the recovery of the textile industry, especially the Chinese market, in 4Q20, as companies took the opportunity to sell inventory and improve their product mix. The company's 2H20 revenue fell only slightly by 4 per cent from a year earlier. In terms of business, 1) the annual revenue of the yarn business decreased by 9% compared with the same period last year, accounting for 78% of the total revenue. By the end of 2020, the total yarn production capacity increased by 180000 to 4.1 million spindles (2.25 million domestic spindles and 159 million overseas spindles); 2) the revenue from the middle and lower reaches business was-17% to 4.4 billion yuan compared with the same period last year, but the profitability improved. Among them, the income of woven fabric affected by the overseas epidemic fell 13.5% from the same period last year, but the gross profit margin remained at 16.5%; knitted fabric was the first to recover after the epidemic, with annual sales slightly down 4% from the same period last year. With the success of business restructuring, the gross profit margin of knitted fabric increased by 5ppt to 17.7%; and the gross profit margin of denim clothing increased significantly to 12.2% after the closure of factories in Cambodia.

Year-on-year gross profit margin increased 0.2ppt, management expense rate increased due to business consolidation.

Cotton prices fluctuated sharply in 2020, affecting the yarn gross profit margin slightly reduced to 13.4% compared with the same period last year, but on the one hand, the market recovery superimposed the cotton price rise in the second half of the year to facilitate the recovery of yarn gross profit margin, on the other hand, the profitability of downstream businesses improved. 2H20 Group's overall gross profit margin increased from 11.4% of 1H20 to 15.6%, increasing 1.9ppt over the same period last year. The sales expense rate was flat in 2020, while the management expense rate increased year-on-year due to the year-round consolidation of the Winnitex business (only three quarters in 2019).

Under the background of the epidemic, the company has strengthened its capital management, and its inventory, cash flow and debt ratio have reached a better level in recent years. By the end of 2020, the company's paper cash and cash equivalents reached 2.9 billion yuan, year-end inventory decreased 26% year-on-year to 3.8 billion yuan, cash flow of operating activities increased 36% year-on-year to 3.3 billion yuan, debt / equity ratio decreased to 0.9.

Trend of development

The company's sales target in 2021, excluding trade sales, is: 840000 tons of yarn, 60 million meters of grey cloth, 140 million meters of woven fabric, 30, 000 tons of knitted fabrics and 11 million pieces of denim. The rapid capacity expansion of the past few years is coming to an end, and the company expects a gradual reduction in capital expenditure in the future, focusing on improving internal operating capacity, thereby further reducing the borrowing ratio.

Profit forecast and valuation

We have raised our 2021 EPS forecast for 22% to 1.35 yuan / 1.68 yuan, mainly considering the recovery of yarn gross margin and the volume of woven fabric sales. The current share price corresponds to a price-to-earnings ratio of 7.1 to 5.7 times the price-to-earnings ratio of 2021. Maintain the outperform industry rating, taking into account the cotton price rise is basically reflected in the stock price, slightly raise the target price by 5% to HK $14.39, corresponding to 9.5 times 2021 price-to-earnings ratio, with 28% upside space compared to the current stock price.

Risk.

The epidemic has lasted for a long time, the price of raw materials fluctuated sharply, and the downstream business development was not as expected.