First Rise To Respect, Can The Tianhong Textile Surplus Police Take It Seriously?

Tianhong textile (02678), one of the largest suppliers of core cotton textiles in the world, is mainly engaged in the manufacture and sale of yarn, germ cloth, fabrics and garments. In the first half of 2019, yarn accounted for 75.8% of its total revenue.

After the closing of February 19, 2020, Tianhong textile issued a profit warning. Due to trade problems and macroeconomic uncertainties, the textile market in 2019 was in an unfavorable and unstable market environment. The profit attributable to shareholders in 2019 is expected to decline by 25% annually.

What's odd is that before the announcement of earnings warning, the price of Tianhong textile rose 4.19%, closing at HK $8.95, while the Hang Seng Index rose only 0.46% on that day. Will this benefit news reduce the stock price of Tianhong textile?

Profit attributable to shareholders fell 25%

In 2018, the total revenue of Tianhong textile increased 17.47% to 19 billion 156 million yuan (unit RMB). The gross profit margin increased by 1.46 percentage points to 16.42%, and the profit of shareholders increased 0.97% to 1 billion 163 million yuan compared with that of the main business.

The earnings warning just released means that shareholders should make a profit of 872 million yuan or 0.9533 yuan per share in 2019.

Can the police be able to take the first warning?

In fact, Tianhong textile is not the best textile product on this day, and the surplus (02111) has also risen 6.25%. The whole textile share board has shown a good performance. Wei Qiao textile (02698) has dropped 0.48%. Therefore, the first rise in earnings is probably just by chance, and the trading volume of Tianhong textile is not too large. Compared with the market value of about 8000000000, the turnover is only HK $3 million 398 thousand.

Past stock price performance

According to the table below, after the closing of July 29, 2019, Tianhong textile issued a profit warning. It is expected that the demand will decline due to trade problems in the first half of 2019, and the profit attributable to shareholders will drop by 20%-25%.

Dragged down by this news, stock prices continued to fall, from HK $8.06 in July 29th to HK $6.60 in the interim results released in August 23rd, or 22.12%.

Then the stock price bottomed out, and gradually recovered from the end of 8, reaching the level of HK $9.60 in late January this year, then fell. From this trend, the stock price fluctuate around the fundamentals. So this time, after the release of the profit police, the stock price pullback is quite likely.

Peer valuation comparison

02698-HK, also engaged in the production and sale of cotton yarn, grey cloth and denim, and also engaged in the production and sale of electricity and steam, also issued a surplus police at the end of 2019, which means that the net profit in the second half of 2019 will be further expanded compared with the first half of the year.

In the first half of 2019, the income of Wei Qiao textile decreased 7.4% to 7 billion 784 million yuan, and the net profit of shareholders decreased 32% to 206 million yuan.

This means that the net profit of the whole year's shareholders should be reduced by more than 32%, and the net profit of the company in 2018 will be 644 million yuan, and the net profit of the shareholders in 2019 should be less than 438 million yuan (equivalent to 0.367 yuan per share).

The current price of Wei Qiao textile is HK $2.09, or the expected price earnings ratio is more than 5.12 times in 2019. The current price of Tianhong textile is HK $8.95, or 8.44 times the expected price earnings ratio in 2019. Although Wei Qiao textile is not favored by the market because of its low gross profit margin, its valuation has lagged behind Tianhong textile for a long time, but this valuation is still somewhat different. Moreover, the textile share plate is likely to be further weakened by the negative effects of the epidemic. Therefore, investors should not take lightly the surplus police.