01382.HK: It Has Exploded 53 Times In 8 Years And Can Finally "Lose" The UNIQLO.

In May 18, 2007, mutual textiles (01382) was listed on the market in Hongkong with the price of HK $1.938 (pre ex rights) per share. But it only enjoyed 5 months of revelry, and "disaster" quietly arrived.

In October 30, 2007, the Hang Seng Index turned to the top after the first high point in history. In the wake of the financial crisis, it fell out of a cliff shaped fall. Under the influence of the great environment, the exchange of textiles continues to fall. A year later, mutual textile shares fell to HK $0.18 per share, less than 1/10 of the opening price. However, since the low point, mutual textile has opened up a huge rise. By the beginning of 2016, its share price rose to HK $9.82, and its share price rose 53 times in 8 years.

However, after 8 years of scenery, the textile industry in the past two years has seen a sharp decline and the share price has dropped by nearly 40%. After the recent announcement of the 2019 fiscal year, the weakly mutual textile has been supplemented by "one knife". Citigroup, Xiao Mo and Da he have lowered the target price of mutual textiles. By the end of June 21st, mutual textiles fell 3.69%.

Figure: from Fu Road Securities

Second half business income due to UNIQLO Waterloo

On the whole, the performance of mutual Finance (01382) in the 2019 fiscal year is not too bad. The company's revenue increased by 0.34% to HK $6 billion 119 million compared with the same period last year. Excluding the impact of exchange losses, the profit of the company's shareholders increased by 15.86% to HK $862 million over the same period. Steady income and rapid growth in two digit profits.

But if we split the whole fiscal year, the problem is obvious. APP found that in the first half of fiscal year 2019, the profits of Vietnamese textiles increased by 13.13% over the first half of the year, and profits from foreign exchange rose by 37%.

However, in the second half of the year, revenue grew by 12.1% compared with the same period last year. The profit after excluding foreign exchange growth was only 3.1%, which was significantly weaker than that in the first half. For the second half of Waterloo, mutual textile said that due to the heating of some major markets in winter, the company's demand for chemical fiber fabrics for cold clothing is less than expected.

From the data of customer accounts, it is obvious that the largest customer is wearing down the UNIQLO library. In the first half of fiscal year 2019, the income of mutual textiles from UNIQLO was 47% (2018 in the same period in fiscal year 38%), and the revenue from second major customers was 19% (15% in the same period of 2018 fiscal year). This shows that the resumption of Vietnamese factories has increased the proportion of income from UNIQLO, and the second major customers also have a certain proportion of improvement.

But the data in 2019 fiscal year show that the annual income of mutual textiles from UNIQLO accounted for 43% (2018 in fiscal year 41%), and the annual income from second major customers accounted for 18% (2018 in fiscal year 16%). Through the first half and full year's income data, it can be found that the proportion of UNIQLO income declined from the first half of the year due to the influence of UNIQLO income. However, the dependence on the top two customers increased further from 57% in fiscal year 2018 to 61% in fiscal 2019.

Gross profit margin and net interest rate gradually improve with the resumption of production.

Although the income was greatly influenced by UNIQLO, the gross margin and net interest rate of mutual textiles in 2019 fiscal year were increased to varying degrees.

In fact, after the gross profit margin of 14.51% in the 2009 fiscal year, the gross margin level of Pacific textiles has not been below 17%, and has remained above 17% for 8 consecutive years. But in the 2018 fiscal year, the gross margin of Pacific textiles fell from 18.63% to 15.53%, down 3.1 percentage points.

The most important reason is that in April 2017, the factory buildings in Vietnam were blocked by local villagers, and Vietnamese factories had to stop production. The factory was designed to serve the biggest customers. After the closure, higher fixed cost apportionment and customer claims cost led to a decline in gross margins.

But by the beginning of 2018, Vietnam's workshop had been reused, and the production capacity had been restored to 40% at the end of the first half of fiscal year 2019. The company expects that at the end of 2019, the production capacity will be restored to the pre production level. After Vietnam's resumption of production, gross margin increased significantly, from 15.53% in fiscal 2018 to 17.34% in fiscal 2019.

Subdivision, the gross profit margin in the 2019 fiscal year is higher than the second half of the year, but this fluctuation is consistent with the 2018 fiscal year, and higher than the same period in the 2018 fiscal year. This shows that the gross margin of mutual textiles has not been affected, and is steadily improving along with the recovery of capacity.

At the same time, because of the proper cost control, the net interest rate (excluding the impact of the exchange rate) is also raised accordingly. In the 2019 fiscal year, the net interest rate of Pacific textiles was 14.22%, an increase of 2.36 percentage points over the same period, and the fluctuation was consistent with gross margin.

Conservative demand for market future

It can be predicted that with the continuous improvement of Vietnam's factory capacity, the gross margin and net interest rate of mutual textiles will continue to rise. After all, in the past 8 years, 17% of the gross profit margin is only the lowest level, and the factory specializes in UNIQLO, UNIQLO as a brand dealer, and it sells more products to its products, and more importantly, the scale effect can also raise the gross profit margin to a certain extent.

But it is worth noticing whether market demand can be maintained or improved. Only when demand is abundant can the scale effect become more apparent. According to the specific data, the growth of mutual textiles is relatively conservative.

Zhitong finance and economics APP found that in the 2019 fiscal year, the Vietnamese textile production capacity was restored, but the production cost of raw materials and consumables declined from 4 billion 525 million to 4 billion 497 million Hong Kong dollars in the 2018 fiscal year. This shows that the overall demand for mutual textiles in the 2019 fiscal year has not increased, and the company has only shifted its capacity.

Inventory can reflect the company's judgement of future demand to a certain extent. At the end of the fiscal year, mutual textile inventory amounted to HK $947 million, which was over 10% over the same period of 1 billion 68 million in 2018. Thus, the company's market demand for 2019 is relatively conservative.

This is also consistent with the company's description in the future. It indicates that the warming of the weather has indirectly affected the sales growth of cold resistant fabrics, and it is generally believed that the warm weather will continue. UNIQLO's birthplace is warmer in Japan. According to Japanese media, if global warming causes world temperature to rise by 1 degrees, the number of "hot summer days" in Japan's highest temperature reaching 35 degrees or more will increase to 1.8 times.

In the face of the sluggish sales of cold resistant fabrics, mutual textiles said it is exploring high quality chemical fiber fabrics for sportswear, and expects the global demand for sportswear will continue to increase. The new fabric of sportswear, or will become a breakthrough for the exchange of textiles, but the specific effect remains to be investigated.

Second, the company said it would further explore the mainland market in order to diversify business risks and balance customer base. Up to now, the largest market of Pacific textiles is in Southeast Asia, accounting for over 49% of revenue. The proportion of income in China and Hongkong is 30%, of which only 1/5 in the mainland. That is, 20% of the market share comes from other parts of the world, including India, Africa and the Americas. The current complex international situation has increased uncertainty.

However, mutual textiles still maintains a fine tradition of returning shareholders. From 2006 to fiscal year 2018, the total cash dividends of mutual textiles amounted to HK $9 billion 967 million, with a dividend rate of 92.97%. In the 2019 fiscal year, mutual textiles announced a dividend of HK $0.25 per share, a dividend payout rate of 41.96% and a dividend payout rate of 4.17%.

From the valuation point of view, mutual textile has come to the lowest level of PE in the past three years, that is, 10.24 times PE. The valuation is low, but it reflects the uncertainty of the market's demand for the largest customer of the largest textile company, UNIQLO, the conservative expectations of the company and the impact of the complex international environment on exports. Therefore, in the absence of improvement in the three major factors or in the overall market valuation, it is difficult to achieve a better performance of the textiles, while the effect of the new fabric for sportswear remains to be seen.