Tianhong Textile: Wei Qiao Textile Issued Profit Warning; Tianhong Textile Is More Defensive.

CICC released its Research Report on Tianhong textile in December 30th.

Recent situation of company

Wei bridge textile issued a profit warning. It is expected that net profit declines will accelerate in the second half of 2019. Wei Qiao textile believes that the main reason is that the decline in cotton prices leads to pressure on textile prices, the pessimism of downstream sentiment and the weak market demand.

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In the first half of 2019, Wei Qiao's textile and textile business sales fell 10.4%, and the plate lost 161 million yuan. In the first half of the year, Tianhong textile and textile business was also under pressure (revenue grew by 15.7%, but net profit fell by 21.8% over the same period last year), but we expect unfavorable external environmental factors to have less impact on the profitability of Tianhong textile.

In the first half of 2019, the profit margin of Wei Qiao textile yarn business was only 1.4%, and that of Tianhong textile reached 14.1%. With the development and manufacturing advantages of elastic core yarn, Tianhong textile enjoys higher bargaining power. Against the backdrop of trade friction, the volume and average selling price of the rainbow elastic core spun yarn remained stable over the same period last year. After the acquisition of Winnitex, Tianhong textile is committed to building a vertically integrated industrial chain, which helps to reduce the impact of cotton price fluctuations.

Wei Qiao textile believes that Sino US trade friction is also one of the important reasons for the decline of the company's performance, because all the factories are located in mainland China. On the contrary, Tianhong textile industry has a leading position in overseas capacity layout. As of June 2019, the capacity of Tianhong textile was about 380 thousand spindles, of which 40% were located in Vietnam, Turkey, Mexico and Nicaragua.

Valuation proposals

Considering short-term pressure and long-term competitive advantage, we lowered the forecast of earnings per share in 2019 to 11% to 1.05 yuan, and maintained a profit forecast of 1.25 yuan in 2020, corresponding to a decrease of 17.6% and an increase of 19.5% over the same period last year. At present, Tianhong textile trades at 7.5 times and 6.3 times 2019-2020 years price earnings ratio. Maintain the industry rating. Considering the valuation switch, the target price will be raised from 30% to HK $11.06, corresponding to 8 times the 2020 price earnings ratio, 28% higher than the current stock price. After the performance of Tianhong textile company in 2018, stock prices began to slide, but there has been a rebound in recent years. We believe that investors have begun to pay close attention to the structural advantages of Tianhong textile, because the stock price has already reflected the unfavorable external environment.

risk

Cotton prices and geopolitical uncertainties; vertical integration progress is less than expected.