Incidents:

Revenue for the first half of '24 and net profit to mother were +4.2% year-on-year, reversing losses to Yingtianhong International Group to announce 2024 interim results. The company achieved operating income of 11.24 billion yuan in the first half of 2024, a year-on-year increase of 4.2%. Net profit to mother was 0.27 billion yuan, turning a year-on-year loss into profit. EPS was $0.29. It plans to distribute a cash dividend of HK$0.1 per share and a dividend payout ratio of 31.1%.

The company's domestic sales and export revenue accounted for 66% and 34% respectively in the first half of the year. In terms of profit margins, the company's operating profit margin/net interest rate to mother in the first half of the year was 5.4%/2.4%, respectively, and both were positive year over year.

Comment:

The main product, yarn revenue in the first half of the year, was +8.9%, and volume and price increased. Other businesses except non-woven fabrics declined by product: the company's main product was yarn, accounting for 78.4% of revenue in the first half of the year, up 3.4PCT year on year. Revenue increased 8.9% year on year, mainly due to increased demand for functional sportswear. The company seized this market opportunity and contributed to the growth of related products; among other products, woven/trading/knitting/blank/nonwovens accounted for 8.8%/5.6%/2.7%/1.7%/0.3% year-on-year revenue/-35.7% /- 25.5%/-22.8%/+3.3%. The decline in knitted fabric revenue was mainly due to the company's sale of a knitted fabric factory in Vietnam in November 23.

In terms of volume price: The volume and price of the main product, yarn, is rising sharply. Sales volume increased 6.6% year on year to 0.372 million tons, and unit price increased 2.2% year on year. Among other products, sales of woven/knitted/blank/non-woven fabrics all declined year-on-year, -1.6%/-25.2%/-14.8%/-10.0%, and unit price -1.7%/-0.4%/-9.5%/+14.8% YoY.

In terms of production capacity, as of the end of June, the company's main production facilities were about 4.15 million yarn spindles, down 0.7% from the beginning of '24. Among them, China and overseas (mainly located in Vietnam) had about 2.41 million/1.74 million yarn spindles, a decrease of 0.8%/0.6% compared to the beginning of '24; in addition, the company had about 1,650 woven and knitting machines and corresponding dyeing and finishing equipment, a decrease of 2.9% from the beginning of '24. Due to technological transformation and rearrangement of production capacity, the company disposed of some of the old equipment.

Increased gross margin, lower cost ratio, reduced inventory

Gross profit margin: The gross margin increased 10.8 PCT to 13.2% year on year in the first half of the year, mainly due to a sharp increase in capacity utilization in the first half of the year, especially in overseas factories, and relatively high-cost inventories contributed close to being cleared in 2023. Looking back, 23H1/23H2/24H1 semi-annual gross margin was 2.4%/10.1%/13.2%, respectively, and gross margin continued to recover upward. By product, the gross margin of the main product yarn increased by 11.8PCT to 12.5% in the first half of the year; among other products, the gross margin of woven/knitted/blanket/non-woven fabric increased by +6.7/+2.2/+1.6/+20.5PCT to 18.8%/11.4%/6.0%/-40.2% year-on-year, respectively.

Expense rate: During the first half of the year, the expense ratio decreased by 2.5PCT to 10.1%. Among them, sales/management/finance expenses were 2.7%/5.3%/2.0%, respectively, -0.7/-0.8/-0.9PCT, respectively.

Other financial indicators: 1) Inventory decreased by 3.3% to 5.07 billion yuan at the end of June '24 compared to the beginning of '24, a year-on-year decrease of 20.9%; the number of inventory turnover days was 95 days, a decrease of 25 days year-on-year. 2) Accounts receivable increased by 9.0% to 1.71 billion yuan at the end of June '24 compared to the beginning of '24, an increase of 29.4% over the previous year; the number of accounts receivable turnover days was 31 days, an increase of 2 days over the previous year.

Demand is picking up, performance is improving, and further repairs are expected throughout the year

In the first half of 2024, downstream brands and fabric manufacturers moved from inventory removal to inventory replenishment cycle, and market demand picked up. The company focuses on differentiated markets and actively adjusts product structures. Yarn products related to functional sportswear drive overall business growth. At the same time, profitability indicators such as gross margin have also improved markedly under the upward trend in capacity utilization. The company's business target for the second half of 2024 is to sell about 0.4 million tons of yarn, 48 million meters of woven fabric, and 6000 tons of knitted fabric (the year-on-year sales growth rates for 24 are estimated to be +4.2%, +2.1%, and -23.6%, respectively). We maintain the company's profit forecast for 24-26, corresponding EPS of 0.83/1.18/1.60 yuan for 24/25/26, and 4/3/2 times PE, respectively, maintaining the “gain” rating.

Risk warning: Domestic and foreign demand is weak, orders fall short of expectations; cotton prices fluctuate greatly; the integration of midstream and downstream businesses falls short of expectations.