Tianhong Textile (02678): Yarn Main Industry Under Pressure, But The Results Of Vertical Integration Are Remarkable.

Investment points

Event: Tianhong textile (02678) published 2019 annual report, revenue increased by 14.9% to 22 billion yuan, net profit to 24% yuan to 884 million yuan, if excluding 209 million Hongkong Qing industry's one-time acquisition gains and government subsidies, derivative income and other non recurring earnings, 19 years, the company's actual pre tax profits fell nearly 50%, the decline is mainly in the Sino US trade friction in the year 2000, cotton prices go Low, leading to a significant decline in gross profit margin of the yarn main industry.

Yarn main business: scale development continues, gross margin pressure. In 2019, the yarn production capacity of the company reached 3 million 920 thousand spindles (+12%), with domestic and Vietnamese growth of 16%/7% to 245/147 million respectively. The 19 year was affected by Sino US trade friction, while cotton prices continued to slump. In order to ensure the full capacity of the products, the company's structure was not as good as in previous years, and the average unit price of yarn products dropped by 5.3% to 22 thousand and 300 yuan / ton. In 2019, yarn income increased by 7.5% to 16 billion 700 million yuan, but the gross profit margin declined by 4.4pp to 13.5%, and gross profit fell 19% to 2 billion 260 million yuan, dragging down the overall profit performance.

Downstream vertical integration business: woven and knitted fabric business team matured, downstream revenue increased to 24%, profitability increased significantly. The company began to develop downstream vertical integration business in 2014, and the total revenue scale of downstream business has reached 5 billion 300 million yuan in 2019, an increase of 47% over the same period last year, contributing 737 million yuan in gross profit, an increase of 105% over the same period last year.

Specifically speaking: 1) grey fabric business: the proportion of self use increased, so the external sales volume dropped from 96 million meters to 79 million 200 thousand meters, and the income was 710 million yuan, benefiting from vertical integration, gross margin from 14.8% to 17.2%;

2) woven fabric business: in early 19, it completed the integration of Hongkong celebration industry, and its sales volume reached 149 million meters (about 100 million meters), which was lower than the previous 120 million meters. It was mainly due to running in at the beginning of the 4-5 month integration, and trade sales of 40 million meters or so. The income reached 2 billion 694 million yuan (+140%).

3) knitted fabric business: revenue grew by 12.6% to 900 million yuan, and sales volume was 18230 tons (+8.8%), but gross profit margin decreased by 1.8pp to 12.7%, which was mainly related to running in of factories in Zhuhai. In August 19, the gross profit margin of 19Q4 was higher than last year's average level in the reorganization of management personnel team. In 20 years, we hope to reflect the integration effect in succession.

4) jeans business: revenue 983 million yuan (+19.6%), sales volume 17 million (+10%), gross profit margin increased from 3.7% to 5.4%; considering profitability, 19Q4 company closed Kampuchea factory, leaving only profitable Vietnamese factories for further development.

Profit forecast and investment suggestion: as at the beginning of March, all the factories except Xinjiang factory were all operated normally (Xinjiang production capacity was restored to about 7%). In 2020, considering the impact of public health events, the company expects to focus on the full utilization of existing capacity and the further integration and management efficiency of downstream businesses. From the sales plan, it is estimated that the yarn will be 830 thousand tons (+10.7%) in 2020 and 60 million meters in grey cloth (-24%, the reason for the reduction is the increase of self occupied ratio), and the woven fabric is 140 million meters (refers to the self produced part, increasing 30%+; Another part of the trade is expected to be the same as 19 years, at 3000-4000 m), knitted fabric 25 thousand tons (+37%), jeans 14 million (-18%, focusing on Vietnamese capacity). Considering the small recovery of gross margin of yarn business and the improvement of profitability of downstream vertical integration business, we expect the company's profit from 2020/21/22 to increase from 20.5%/30.2%/27.8% to 10.6/13.9/17.7 billion yuan, corresponding to the valuation of 4.9/3.8/2.9X, as a leading global textile leader in the management of efficient and vertical integration strategy.

Risk warning: intensified trade frictions, unexpected fluctuations in cotton prices, dramatic changes in exchange rate prices, and less expansion of downstream businesses.