The Zhitong Finance App learned that Guoxin Securities released a research report stating that maintaining Tianhong International Group (02678)'s “increase in holdings” rating, the net profit due to mother is expected to be 5.9/7.6/920 million yuan in 2024-2026, with a growth rate of 29%/22% from 2025 to 2026, and a target price of HK$4.7-5. In the second half of 2023, the company's product prices and gross margin have improved drastically from month to month. Currently, it seems that overseas brand inventory removal has come to an end. Cotton prices have recently risen, and order volume and price are expected to continue to recover in 2024. At the same time, the company's cash flow has improved, and debt optimization is expected to ease the pressure on interest expenses. Looking at the medium to long term, the local supply chain is the general trend. The company's early layout was global. It has a local supply chain, a first-mover advantage of rapid response, and a leading scale advantage, and is expected to continue to gain market share.

The main views of Guoxin Securities are as follows:

Inventory removal from overseas brands affected order demand. Revenue fell 5% in 2023, and net loss was 380 million yuan.

The company is a leading global producer of cotton yarn. Revenue fell 4.5% to $22.7 billion in 2023. Among them, revenue from yarn/woven fabrics/knitted fabrics changed -0.3%/-22.3%/-8.0% year-on-year to 175/21/8 billion yuan, respectively. Yarn revenue remained flat, but due to the influence of overseas brand customers removing inventory, industry demand decreased, competition intensified, and prices fell 12%. At the same time, the company digested early inventory of high-priced raw cotton in the first half of 2023, so the gross margin of the company and the yarn business fell 5 percentage points in 2023. The company's financial expenses increased a lot in 2023, mainly due to the increase in debt ratios due to large capital expenses in the previous two years, as well as the impact of overseas interest rate hikes. The company lost 380 million yuan in 2023 (profit of 160 million yuan in 2022). Net operating cash flow in 2023 was $1.99 billion, an increase of 23% due to improved inventories.

The industry environment picked up in the second half of 2023, order demand picked up, and gross margin improved sharply to 10%.

In the second half of 2023, the company's revenue increased 11% year on year on a low basis, and the main yarn revenue increased 13.2% year on year. As Vietnam's yarn capacity utilization rate rebounded to full production in July-August, yarn prices increased 4% month-on-month, and inventory digestion of high-priced raw materials was completed, group/yarn gross margin rebounded sharply to 10.0% in the second half of the year (gross profit margin of about 2% from the second half of 2022 to the first half of 2023). At the same time, gross margin for fabrics, fabrics, clothing, and trade improved. In the second half of the year, the Group sold the Vietnamese knitted fabric business, and at the same time, domestic woven factories cooperated with the government's demolition, contributing about 600 million yuan in revenue. As a result, net profit returned to mother for the second half of the year.

Outlook: Demand is expected to pick up and grow steadily, while capital expenditure will slow down and debt pressure will ease.

1) 2024 target: In 2024, the company plans to sell 760,000 tons of yarn, 92 million meters of woven fabrics, and 120 million meters of knitted fabrics. 2) The company's capital expenditure in 2023 was 900 million yuan, a marked decrease compared to the previous two years. In 2024, the plan is to continue to control capital expenditure and gradually reduce the share of foreign currency loans to reduce debt pressure.

Risk warning: raw material price fluctuations; global economic weakness; trade war risk; systemic risk.