Tianhong Textile (02678): Increase Profits Do Not Increase Profits, Still "Hoarding" 1 Billion 800 Million Capital Production Capacity

"Business is good to make profits, and business is difficult to expand share". As the head of textile industry, Tianhong textile seems to be well versed in this way.

One

New revenue growth, profitability declined significantly

Tianhong textile (02678) released its performance report for the year ended December 31, 2019 in March 16th. According to the financial report, the company's revenue grew 14.9% to 22 billion yuan (the same below), a record high.

However, as sales cost increased by 18.74% to 19 billion 10 million yuan, sales and distribution expenses increased by 23.66% to 847 million yuan, and general and administrative expenses increased by 40.14% to 1 billion 10 million yuan, leading to a decline of 4.84% to 2 billion 993 million yuan in gross profit and a decrease of 2.8 percentage points to 13.6% in gross profit margin.

It is understood that from the business plate, Tianhong textile revenue increased substantially in 2019, mainly driven by sales of yarn and dyed fabrics. The company's sales revenue covers the whole industry chain, including yarn, grey cloth, dyed fabrics and clothing sales. Yarn sales revenue rose to a record high of 7.5% to 16 billion 700 million yuan, up 7.5% from last year. The middle and downstream businesses achieved a total sales revenue of 5 billion 300 million yuan, up nearly 50% over the same period last year.

According to the sales market, in 2019, the income of yarn, fabric and clothing and grey fabric business in mainland China and Hongkong, China (from external customers) reached 18 billion 56 million yuan, an increase of 14.78% over the same period last year. Other market revenues (from external customers) reached 3 billion 944 million yuan, up 15.12% from the same period last year, of which Vietnam's revenue (from external customers) reached about 710 million yuan, up 52.6% over the same period last year.

According to the statistics of China's National Bureau of statistics, in 2019, the scale of textile industry achieved a total operating income of 2 trillion and 400 billion yuan, a decrease of 1.8% compared with the same period last year, and the sales volume of textile and apparel enterprises reached 1 trillion and 600 billion yuan, a decrease of 3.4% compared with the same period last year. In terms of output, in 2019, the output of yarn was 28 million 920 thousand tons, the output of cloth was 45 billion 700 million meters, and the output of chemical fiber was 59 million 530 thousand tons. According to the data released by the General Administration of Customs of China, total exports of textiles in China amounted to $120 billion 200 million in 2019, an increase of 0.9% over the same period last year, while clothing exports were 151 billion 400 million US dollars, down 4% from the same period last year.

According to Vietnam customs data, exports of yarn and staple products increased by 16% to 1 million 715 thousand tons in Vietnam in 2019, and revenue increased by 3.8% to 4 billion 177 million dollars compared with 2018. Clothing exports increased by 7.8% to 32 billion 850 million dollars.

In contrast, the sales volume of Tianhong textile in 2019 has outperformed the average level of China and Vietnam, and the market share of the company has increased significantly in the corresponding market.

Unfortunately, the high income growth has not been able to bring about the same level of profit growth. According to Tianhong textile financial report, the market situation was uncertain in 2019, but the company still gave priority to ensuring the utilization rate of capacity. The total sales volume of yarn in 2019 increased to nearly 750 thousand tons, exceeding the original target of 720 thousand tons. This led to a decline in gross margin of yarn from 17.9% in 2018 to 13.5%, thus leading to a decline in overall gross margin.

Details of Tianhong textile sales cost

In addition, the sales cost of the company increased by 18.7% to 19 billion yuan compared with 2018 due to the increase in sales, and sales and distribution expenses, general and administrative expenses rose sharply due to the increase in transport costs and sales salaries, the increase in R & D expenditure and the increase in new acquisition costs.

Two

"Hoarding" cash, a big move in 2020?

Surprisingly, despite the fact that "Hong Kong textile did not increase profits" in 2019, the cash position of the company has improved significantly.

According to the results, as of the end of 2019, Tianhong textile cash and cash equivalents reached 1 billion 831 million yuan, an increase of 73.72% over the same period last year.

There are two main reasons for the increase in cash: first, the net cash income of the company's business activities has increased by 215.25%. Financial reports said the increase in cash flow from operating activities was mainly due to the fact that in 2018, more cash flows were generated for raw materials for new capacity reserves.

Second, the company significantly increased bank lending in 2019. The results showed that at the end of 2019, the company failed to repay the borrowings of mobile banks at 3 billion 360 million yuan, an increase of 49.2% over the 2 billion 252 million yuan in 2018. Financial reports said the increase in mobile bank lending was mainly to provide working capital for the new capacity of the group.

Tianhong textile said in its earnings report that since 2019, multiple uncertainties will inevitably impact the global economy and consumer market, and the business environment is still arduous. To cope with the changes in the external environment, the company will adhere to the direction of vertical integration of internationalization and industry chain, build yarn production bases outside China, directly face overseas markets, and continue to build textile and dyeing three in one production base in Vietnam and Nicaragua. On the one hand, it will effectively mitigate or avoid the impact of uncertainties, and on the other hand, it will be able to use vertical one. The production of fabrics and even clothing can drive the overall profit margin to rise and enhance the stability of profits, thereby reducing the impact of price fluctuations of raw materials.

In addition, the company has completed the reformed knitted fabric management team in 2019 and has begun to apply for the construction of a large scale knitted dyed fabric production base in Vietnam. The denim garment business has completed its restructuring in 2019, focusing on Vietnam's profitable production base, thereby improving the profitability of the jeans business.

The company said that after 2018 and 2019 years of rapid expansion, the scale of the company's capacity has reached another level. In 2020, the company's capital expenditure is expected to be substantially reduced, and the existing capacity will be used to enhance profitability.

However, according to the understanding, due to the substantial growth of short-term loans, the balance sheet ratio of Tianhong textile was 61.75% and the liquidity ratio dropped from 1.39 times in 2018 to 1.29 times by the end of 2019.

The string of financial leverage of Tianhong textile has been tight. It is unknowable whether the company can successfully meet the goal of improving profitability in 2020 when public health events develop into global events. Perhaps, the rapid growth capacity of Tianhong textile in the past two years has evolved into a "big gamble".