Huafu Color Spinning: Policy Subsidies, Icing On The Cake, Thickening Company Performance

Events: the company announced 5 days, cotton textile production cotton financial subsidy policy started, when Xinjiang cotton price is higher than the import price of cotton at the same time (CIF +1% tariff) 1500 yuan / ton, give textile enterprises to use Xinjiang Cotton Subsidy.

The cotton price difference is determined according to the difference between the average price of Xinjiang's real estate cotton and the average price of imported cotton in the same year.

The subsidy funds are produced and sold according to the enterprise.

The products were calculated using the quantity of Xinjiang real estate cotton and viscose fiber.

The cotton and viscose fiber subsidy standard is 800 yuan per ton.

The layout of the company's capacity in Xinjiang is expected to use 65 thousand tons of Xinjiang real estate cotton in 2014. It is expected that in 2014, the subsidy fund for real estate cotton in Xinjiang will be 52 million yuan, of which 1-9 yuan should be supplemented by 33 million yuan in subsidy income.

We are expected to benefit from the support policy of the state for Xinjiang cotton textile industry. The company's capacity in Xinjiang will directly benefit over 100 million yuan.

The above announcement can be referred to ten preferential policies: in July 18th, the people's Government of the Xinjiang autonomous region held a press conference in Beijing, releasing the ten preferential policies formulated by the state and autonomous region in developing the textile and garment industry to promote employment in Xinjiang, and for the first time released the development plan of the textile and garment industry in Xinjiang.

The ten preferential policies include 20 billion special funds, tax preferences and subsidies: (1) set up a special fund for textile and garment industry development of around 20 billion yuan for the construction of infrastructure, technological pformation and standard workshop construction of the park; (2)

稅收特殊優(yōu)惠政策，將紡織服裝企業(yè)繳納的增值稅，全部用于支持紡織服裝產(chǎn)業(yè)發(fā)展;(3)實(shí)施低電價(jià)優(yōu)惠政策，支持具備條件的紡織工業(yè)園區(qū)建設(shè)配套電廠，切實(shí)降低企業(yè)用電價(jià)格;(4)實(shí)施紡織品服裝運(yùn)費(fèi)補(bǔ)貼政策，擴(kuò)大補(bǔ)貼范圍，提高補(bǔ)貼標(biāo)準(zhǔn)，實(shí)施南北疆差別化的補(bǔ)貼政策;(5)實(shí)施使用新疆棉花補(bǔ)貼政策，對(duì)疆內(nèi)棉紡企業(yè)使用新疆棉花按實(shí)際用量給予適當(dāng)補(bǔ)貼;(6)實(shí)施企業(yè)員工培訓(xùn)補(bǔ)貼政策，對(duì)企業(yè)招錄新員工開(kāi)展的崗前培訓(xùn)按培訓(xùn)后實(shí)際就業(yè)人數(shù)給予培訓(xùn)費(fèi)用補(bǔ)貼;(7)實(shí)施企業(yè)社保補(bǔ)貼政策，對(duì)紡織服裝企業(yè)新招用的新疆籍員工和南疆四地州享受低保的就業(yè)人員，均制定特殊補(bǔ)貼政策;(8)支持高標(biāo)準(zhǔn)印染污水處理設(shè)備建設(shè)，在一定時(shí)期內(nèi)對(duì)運(yùn)營(yíng)費(fèi)用給予補(bǔ)貼;(9)加大對(duì)南疆地區(qū)支持力度，實(shí)施更加優(yōu)惠的政策，在資金安排、項(xiàng)目布局上向南疆地區(qū)傾斜;(10)加大金融支持

Efforts have been made to formulate a series of financial measures to support the development of Xinjiang's textile and garment industry.

　　上述公告主要涉及十大優(yōu)惠政策中的第5條，即用棉補(bǔ)貼;在此之前，10月27日公司發(fā)布公告，新疆維吾爾自治區(qū)決定對(duì)以新疆地產(chǎn)棉花(含粘膠纖維)為原料生產(chǎn)并運(yùn)往內(nèi)地銷(xiāo)區(qū)的棉紗類(lèi)產(chǎn)品(包括棉紗、棉/粘混紡紗、粘膠紗)和棉布類(lèi)產(chǎn)品(包括機(jī)織本色坯布、色織布和印染布，針織本色、染色坯布)，在現(xiàn)有國(guó)家和自治區(qū)出疆運(yùn)輸費(fèi)用補(bǔ)貼標(biāo)準(zhǔn)的基礎(chǔ)上，進(jìn)一步提高補(bǔ)貼標(biāo)準(zhǔn)(北疆和東疆地區(qū)生產(chǎn)的棉紗類(lèi)產(chǎn)品，每噸增加補(bǔ)貼100元，即:32支以上棉紗類(lèi)產(chǎn)品中央和自治區(qū)每噸共補(bǔ)貼800元，32支以下每噸共補(bǔ)貼700元;南疆地區(qū)生產(chǎn)的棉紗類(lèi)產(chǎn)品，每噸增加補(bǔ)貼300元，即32支以上每噸共補(bǔ)貼1000元，32支以下每噸共補(bǔ)貼900元)，此項(xiàng)公告對(duì)應(yīng)十大優(yōu)惠政策中的第4條，即紡織品服裝運(yùn)費(fèi)補(bǔ)貼。

In 2014 1-6, according to the old freight subsidy standard, 16 million 120 thousand yuan was exported to Xinjiang yarn freight subsidy income, benefiting from this, supplementary provision for the 1-6 month Xinjiang yarn freight subsidy 6 million 920 thousand yuan, and it is estimated that in 2014 7-12 months, the proposed tariff subsidy income for Xinjiang yarn is 23 million yuan, that is, the annual subsidy for the export yarn is about 46 million 40 thousand yuan.

According to the company's announcement, in 2014, the company subsidized cotton and exported yarn to a total of about 100 million yuan (98 million 40 thousand yuan). Taking into account the preferential tax policies, tariff preferences, training subsidies and operating expenses subsidies in the ten preferential policies, we judged that the actual subsidies in 2014 would exceed 100 million yuan. However, considering the implementation details of the ten preferential policies have not yet been fully promulgated, it is expected that there are some uncertainties in the way of financial treatment.

We recommend the logic of Huafu color spinning, mainly based on the recovery of the cotton textile industry chain in 2015, and the benefit subsidy of Xinjiang's production capacity is icing on the cake.

The colored spinning industry is a typical "small industry and large company". In the field of medium and high grade color spinning, Huafu color spinning and Baron East are duopoly with monopoly status. The company's capacity of 1 million 300 thousand spindles (1/3 in Xinjiang) is about 50% in the middle and high grade colored spinning industry, and the business structure of the company is mainly colored spun yarn, and the regional market is mainly domestic.

Under the direct subsidy policy, domestic cotton prices fell as scheduled. According to Haitong reckoning, the difference between domestic and foreign cotton prices has narrowed to about 2000 yuan / ton, and domestic cotton prices are expected to fluctuate at a low level in 2015.

According to our judgement, the impact of the direct subsidy policy on cotton textile enterprises in April 2014 will be "short and long". In the short term, the whole industry chain is expected to have a downward trend in cotton prices. The downstream customers of the 13 sectors of the textile industry are cautious about placing orders, and tend to digest inventory and substitute products. Some of the order volume in 2014 will be moved to 2015 in essence. (expected 2015 cotton prices will be running at a low level, there will be replenishment needs). Because of the cautious orders of customers, the gross margin of cotton textile enterprises will encounter some resistance. The pressure of orders and gross margins will bring certain suppression to the performance of cotton textile enterprises in the 3 and 4 quarters of 2014.

Unlike in 2013, the investment logic of the current cotton textile enterprises is the recovery of the industrial chain.

In 2013, the performance reversal of cotton textile leading products was mainly affected by the low base effect. The core logical point is still the fluctuation of cotton prices. We expect that cotton prices will fluctuate in a low position in 2015, and the rebound of the performance of leading enterprises of cotton textile industry will mainly benefit from the resumption of industrial chain growth.

We recommend the company.

It is judged that the performance elasticity of the leading enterprises of cotton textile industry in 2015 is due to the increase of order volume and the increase of gross margin. Huafu color spinning is one of the leading enterprises, and we judged its performance elasticity to be the largest.

First of all, colored spun yarn is essentially an optional consumer product (a series of products that can be used in the brand, which can be used without any flexibility), which is more elastic than that of A. Secondly, the company's gross margin is lower than that of Baron East, and the small fluctuation of gross margin will significantly increase the fluctuation of net profit growth. Thirdly, the downward price of cotton will lower the price of colored spinning products in 2015, and as an alternative consumer goods, the substitution effect of colored yarn on ordinary yarns is expected to be more obvious.

Finally, benefiting from Xinjiang's support policy, Xinjiang's capacity subsidies will add to the icing on the cake and will further enhance the company's profitability.

In the end of September and the end of October, two companies' in-depth reports have taken into account the benefits of the company's Xinjiang production subsidies, maintaining the original profit forecast unchanged, that is, the company's net profit attributable to the parent company in 2014-16 years is 2.35, 3.60 and 468 million yuan respectively, with the increase of 17.11%, 53.29% and 30.21%, corresponding to EPS 0.28, 0.43, 0.56 yuan respectively.

Give the company slightly higher than the average valuation level, 2015 15xPE, corresponding to the target price of 6.47 yuan, buy rating.

The main uncertainties are: Overseas recovery is not up to expectations, domestic demand continues to deteriorate, and cotton prices fluctuate too much after the Spring Festival.