Tianhong Textile Net Profit Fell 25% Last Year? What Happened To China'S Largest Cotton Giant?

Tianhong Textile Group Co., Ltd. (hereinafter referred to as "Tianhong textile") announced today (February 19th) that the profit attributable to shareholders for the year ended December 31, 2019 will be about 25% less than that in 2018.

Tianhong textile explained that the decline in performance during the reporting period was mainly due to macroeconomic uncertainties arising from Sino US trade disputes, which led to the adverse and unstable market environment of the textile industry in 2019.

The company will pay close attention to market conditions, optimize existing product mix, develop new products that cater to market trends and needs, continue to implement enterprise strategy, and improve the financial performance of the group. However, Tianhong textile also expresses that the performance of the company may be affected by market environment, including cotton prices, Sino US trade disputes and China's recent coronary disease. The spread of drugs and the RMB exchange rate and other factors.

As of the financial year ended December 31, 2018, Tianhong textile realized 19 billion 160 million yuan of revenue, up 17.5% from the same period last year, gross profit of 3 billion 146 million yuan, an increase of 28.93% over the same period last year, and the profit attributable to shareholders was 1 billion 163 million 100 thousand yuan, up 1% over the same period last year.

The results of the first half of 2019 released by Tianhong textile show that the company's operating income increased 15.7% to 10 billion 200 million yuan over the same period last year, but net profit fell 21.8% to 471 million yuan, and earnings per share were 0.51 yuan. The performance was in line with the interim results mentioned in the company's earnings warning or the adverse impact of gross profit margin squeezing.

　　 Public information shows that Tianhong textile was founded in 1997, and was listed in Hongkong, China in 2004. It is currently one of China's largest cotton textile manufacturers and a global leader in elastic core spun yarn. The main business of the company is to manufacture and sell high quality yarns, grey fabrics, fabrics and garments, especially focusing on producing high added value cotton core yarn. At present, the company has production bases in China (Jiangsu, Shandong, Xinjiang, Zhejiang, Guangdong, etc.) and overseas (Vietnam, Kampuchea and Nicaragua), has 3 million 300 thousand spindles and 1400 air-jet looms, and has more than 3000 domestic and foreign customers, of which China is the main market, accounting for 79.9%.

　　 Wang Yusi, a researcher at Zhongtai securities, believes that the epidemic has spread throughout the country and has delayed the resumption of work after the national holiday. The main textile industry gathering places, Zhejiang, Guangdong, Jiangsu, Shandong and Fujian, announced that the resumption of work should not be earlier than 24 hours in February 9th. The resumption of work in Hubei should not be earlier than 24 in February 13th. The adjustment will affect short-term orders delivery, but it is expected to make up for overtime work after resuming work. Orders, in the short term panic, some overseas customers have the possibility of order transfer, but after the outbreak, demand is still expected to return to normal competition. Therefore, the impact of the epidemic on the textile industry is a one-off effect, such as the start and purchase of the first quarter and the two quarter delivery, which has little impact in the medium to long term. From the perspective of listed companies, some textile manufacturers have already laid down their overseas production capacity, which can reduce the negative impact of the epidemic on order production to a certain extent.

Mi Hanjie, an analyst with GF Securities, also said that because cotton spinning companies are mostly cost plus pricing, the performance of cotton spinning companies is positively related to cotton prices. Although cotton is the raw material for downstream cotton spinning companies, for cotton spinning companies, especially for larger companies, the cotton used for production is usually cotton purchased in the past. When cotton prices continue to rise, product prices will be raised by cost plus pricing, but the cost of products will remain unchanged, so gross margins will grow correspondingly and profits will also rise. On the contrary, if the market price of cotton is kept low with the production of cotton in stock, the price basis may be lower than the cost price. In addition to the profit of the price increase, the company also faces the loss of the price basis, which is lower than the cost price.

From the perspective of demand, taking into account the agreement reached in the first stage trade agreement between China and the United States in December 13, 2019, the US tariff rate of US $120 billion has been reduced from 15% to 7.5% in September. At the same time, we did not impose a 15% tariff on US $156 billion worth of goods exported to China in December 15th. Textile clothing exports are expected to improve, textile industry outlook is expected to rebound, cotton demand is expected to continue to improve.

Combined with the main factors of domestic cotton supply and demand in the 2019/2020 year, Mr Mi decided that cotton production declined and the difference between cotton prices and domestic and foreign prices narrowed so that cotton imports fell sharply in the last few months compared with the previous year. Cotton prices are optimistic.