Main points of investment
Domestic cotton textile production leader. Tianhong Textile, founded in 1997, is a leading manufacturer of high value-added core-spun textile products in China, mainly engaged in the manufacture and sales of yarn, grey cloth, fabrics and clothing. By the end of 2021, the company has a total capacity of 3.87 million spindles (2.15 million domestic spindles + 1.72 million overseas spindles (148K in Vietnam + 13.6 in Nicaragua + 82m in Turkey), 1,900 sets of weaving and knitting machines and supporting dyeing and finishing equipment.
The company has more than 5000 downstream customers, and its products are sold to China, Vietnam, Cambodia, the United States and other markets at home and abroad.
Revenue and profits in 2021 have exceeded the pre-epidemic level. Affected by the epidemic in 2020, the company's revenue / return net profit was-11% gamma 41% respectively compared with the same period last year. The revenue in 2021 is 265.2 billion yuan / yoy+35.5%/ compared with 2019 + 20.6%, and the return net profit is 2.69 billion / yoy+419.3%/ compared with 2019 + 203.8%. The substantial increase in performance is mainly due to: 1) the rise in cotton prices (domestic / international cotton prices rose by 48% and 50% respectively in 2021), and yarn sales prices rose as a result of the transfer of orders. 2) the rise in cotton prices led to an increase in the overall gross profit margin (8.2pct) compared with the same period last year, in which the gross profit margin of yarn / grey cloth / woven fabric / denim increased 8.8/16.8/3.8/3.9pct respectively. 3) the decline of homing net profit in 2020 includes the one-time effect of unrealized loss of 380 million yuan in related transactions.
The depth of yarn sales of the main products benefits from the rise in cotton prices. 1) in terms of products, yarn sales are the main source of income. In 2021, the revenue from yarn / grey cloth / woven fabric / knitted fabric / denim / nonwovens / trade business increased by 34.2% 18.5% 57.5% and 38.8%, respectively, by 11.9% 100.1% 35.0%, and the proportion of income was 76.9% 2.2% 9.7% 3.9%, 2.5% and 4.2%, respectively. 2) from the point of view of weight price, yarn price makes a great contribution to income growth. In 2021, yarn sales and unit prices increased by 8.9% and 23.2% respectively compared with the same period last year; revenue accounted for 55.6% and 1.2% respectively; knitted fabric sales and unit prices increased by + 11.4% and + 24.6% respectively over the same period last year; grey fabric sales and unit prices increased by-18.7% and + 45.7% respectively compared with the same period last year. 3) in terms of sales region, the proportion of exports will increase in 2021. With the global epidemic alleviating, the company's domestic sales / exports accounted for 66% / 34% respectively in 2021, and the proportion of exports increased by 10pct compared with 2020.
A significant increase in net interest rate and a slight improvement in asset turnover contributed to a sharp rise in ROE. Thanks to the rise in cotton prices in 2021, the gross profit margin rose year-on-year to 22.1%. The net interest rate in 2021 rose 7.6pct to 10.3% year-on-year, the highest level since 2014; inventory turnover days were 99.4 days, down 0.4 days from 2020, and total asset turnover was 1.19, slightly improved from 0.95 in 2020. The company's ROE reached 26.7% in 2021, up from 6.7% in 2020 and also the highest level since 2014.
Capacity expansion will resume in 2022. The yarn production capacity of the company will be 4 million spindles in 2020 and a domestic spinning mill will be sold in 2021. The production capacity will be reduced to 3.87 million spindles. Considering the strong demand in the global textile market and the tight supply side, the company plans to invest about 2 billion yuan in fixed assets in 2022 to expand spinning capacity to 4.5 million spindles (mainly distributed in Xuzhou, Jiangsu and Vietnam). Combined with the market situation, the company expects to sell 880000 tons of yarn, 180 million meters of woven fabric and 28000 tons of knitted fabric in 2022, and the sales of corresponding yarn, woven fabric and knitted fabric will increase by 7.5%, 31.2% and 57.8% respectively compared with the same period last year.
Profit forecast and investment rating: the company is the leader of domestic cotton textile production, overseas capacity layout and vertical integration of the industrial chain make it have a better scale and cost advantages. Taking into account the downward pressure on cotton prices in 2022 and the sale of most of the interests in the Vietnamese clothing factory to the clothing company's joint venture partner Hualida Group in 2021, and with reference to the company's 2022 sales target, we estimate that the company's homing net profit in 2022-2024 is-23.2%, respectively, compared with the same period last year, corresponding to PE 3.8x3.6x3.3X. The company's dividend ratio has been relatively stable over the years, with a dividend yield of 10.4% in 2021 and a low valuation. For the first time, the company has been given an "overweight" rating.
Risk tips: repeated epidemic, capacity expansion is not as expected, cotton prices fluctuate sharply, and so on.