Income in the first half of the year fell by 10%, deducting non-net profit under pressure, and the income from asset disposal was 95.4 million yuan. The company is a spinning, weaving, dyeing and finishing, clothing integrated textile group. Affected by the destocking of domestic and foreign brands, revenue fell 10 per cent to 2.5 billion yuan in the first half, and net profit fell 36 per cent to 130 million yuan. The lack of operating probability led to a decline in gross profit margin. On the cost side, the company's overseas borrowing accounts for a relatively high proportion, and overseas interest increases lead to an increase in financial expenses; at the same time, the integration of turnover compensation from production bases at home and abroad and Australian farm service fees lead to an increase in management costs, and the decline in income further puts pressure on the expense rate. The deducted non-net interest rate dropped sharply to 1.9%, and the deducted non-net profit decreased by 73% to 50 million yuan. In addition, in the second quarter, in order to optimize the asset structure and return cash, the company sold some of the mixed structure buildings, machinery and equipment and emission rights located in the Shengzhou Economic Development Zone, contributing about 95.4 million yuan from the disposal of Q2 assets.

Revenue fell in the second quarter compared with the previous quarter, while terminating the proposed asset purchase program. There was no significant improvement in the company's operating results in the second quarter. Revenue decreased by 15%, which was larger than that in the first quarter, and the amount of revenue decreased slightly compared with the first quarter, and the gross profit margin was flat. At the same time, the company announced on August 16 that it planned to spend 700 million yuan to acquire a 42.8% stake in Tianhong Trade. The original plan was to improve the company's sewage treatment capacity, expand the scale and extend the industrial chain with the help of the experience and technology of energy saving and emission reduction. However, the announcement of the termination of the acquisition plan on August 28 did not pursue responsibility with the parties involved in the agreement, mainly because the transaction conditions were not yet ripe.

In the short term, we still need to pay attention to the progress of the removal of brand customers, and actively expand, improve quality and efficiency in the medium and long term. Short-term domestic and foreign inventory is still in the process of elimination, demand is expected to gradually recover, pay attention to the marginal improvement trend of follow-up orders and operating rates. In the medium and long term, the company has established good cooperation with Ralph Lauren, Uniqlo, Lacoste, Hugoboss, FILA, Li Ning Co. Ltd. and other high-quality brand customers, with excellent product competitiveness, active production capacity expansion and large space for share growth. At the same time, the launch of the intelligent system will reduce the cost and increase efficiency of the factory and promote the increase of gross profit margin.

Risk tips: high inflation overseas; repeated epidemic situations; sharp fluctuations in raw material prices; large fluctuations in exchange rates.

Investment suggestion: pay attention to the medium-and long-term growth potential of the whole industry chain group. The company has a scarce whole industry chain model from spinning to clothing, and cuts into the high-end brand supply chain through better research and development, quality, efficiency and delivery. Cooperate with high-quality brands, actively invest in capacity expansion and intelligent upgrading, there is sufficient potential for medium-and long-term growth, and there is much room for profit margin improvement. Due to the lower-than-expected recovery of orders from overseas brand customers, the profit forecast has been lowered, and the estimated net profit for 2023-2025 is 2.5 million yuan, 3.2 billion yuan, compared with 5.7 million yuan, with a year-on-year change of-33%, 27%, 26%. Due to the profit forecast downgrade, the target price was lowered to 8.6-9.2 yuan (originally 11.2-12.0 yuan), corresponding to 2024 15-16x PE, downgraded to "overweight" rating.