How To Reverse The Trend Of Undervalued Textile Industry In The Once-In-60-Year Winter?

With the "Indian textile orders continue to flow back to China" news screen, Hong Kong stocks textile concept stocks finally have some movement.

Zhitong finance app observed that during the five trading days from October 14 to October 20, textile concept stocks with market value of more than 1.5 billion and relatively good liquidity had changed. Among them, deyongjia group (00321) rose by 24.51%, intertai textile (01382) increased by 21.55%, Tianhong textile (02678) rose by 14.12%, Weiqiao textile (02698) rose by 5.29%.

In fact, in the past two years, textile enterprises have had a bad time. Due to the change of trade environment, all companies have been affected to varying degrees. Moreover, after the impact of this year's epidemic, the valuation level of relevant enterprises is at a historical low. What impact will the return of overseas orders have?

The downstream conduction makes the prosperity rise periodically

According to market information, the return of Indian textile and garment orders has made the orders of many domestic garment manufacturers scheduled to May next year. Since May this year, the number of orders for fabrics and textile raw materials has increased by more than 100%; the number of orders in the clothing industry has increased by more than 200% over the same period of last year, and the number of orders in the clothing industry has increased by three times in July.

Tianfeng Securities believes that the return of orders mainly benefits from three aspects: first, it has the whole industrial chain of textile industry in China; second, it has achieved obvious results in the control of epidemic situation, and the resumption of work and production can be carried out orderly; third, the domestic cotton price is relatively low, and the cost advantage of raw materials is obvious. According to the data of Huaxi Securities, from April to mid July, the difference between domestic cotton price and import price was small, which also created certain conditions for the transfer of orders.

It is worth noting that India's transferred capacity is mainly concentrated in the field of home textiles, that is, home textiles such as towels, bed sheets, quilt covers, etc. If the overseas epidemic situation improves, there will be a risk of a decline in this part of the new orders.

After July, the price difference between the domestic cotton price and the imported cotton gradually increased, and the scissors mouth became more and more obvious, which indicated that the demand for raw materials in the domestic market increased steadily, which promoted the price rise. The key factor behind this is the continuous recovery of domestic downstream terminal brands.

According to the data of China business intelligence network, since August, China's total retail sales of textile and clothing have achieved a positive growth, and the growth rate is fast, with a year-on-year growth of 4.2% and 8.3% in August and September respectively. After entering October, the National Day Golden Week brands continued to maintain a rapid growth, data performance is bright.

At the same time, the arrival of the cold winter will also form a catalyst for the textile and clothing industry. Tianfeng Securities said that due to the influence of La Nina phenomenon, the winter of 2020-2021 in China is expected to be a cold winter. From the perspective of the golden week of the double 11, the national temperature generally drops by 4-5 degrees, and the temperature in northern regions drops more obviously, and winter clothing sales in some regions begin to advance. The fourth quarter of 2019 is a warm winter with a relatively low base. In this context, the growth rate of the clothing industry in the fourth quarter of this year is worth looking forward to, and due to the impact of the epidemic this year, the base has been lowered, and the relatively rapid growth rate may be maintained until the first half of next year.

It can be seen that the return of Indian orders is only on the one hand, and the sustained recovery of the downstream terminal of the domestic market is more critical to the upstream transmission. In the downstream market, the stock prices of Shenzhou International (02313), Anta (02020), Li Ning (02331) and karbing (02030) have entered the rising channel, which can prove the continuous recovery of the downstream market. The transmission from the downstream to the upstream needs time difference. The news of Indian orders is the trigger of the time difference, and the upstream enterprises also begin to change their stock prices.

De Yongjia with obvious flaws

After the prosperity of the industry is determined, it is necessary to screen and judge the subject matter, and the target whose stock price has changed since October 14 is the key observation object.

Deyongjia group has two business sectors, namely textile business, retail and distribution business. In fiscal year 2020 (12 months ending March 21, 2020), textile business revenue accounted for 64.5% of the company's total revenue, while retail and distribution business accounted for 35.5%.

In terms of textile business, deyongjia group showed obvious resilience. Although it was affected by trade friction in fiscal year 2020 and the outbreak of the epidemic in early 2020 had a certain impact on its operation, it still achieved a revenue growth of 3.4% in its textile business in fiscal year 2020, and its gross profit rate also increased by 4.9 percentage points. From the past data, its textile business income has been steadily increased since 2017, and its textile business is expected to benefit from the recovery of the industry prosperity L.

However, its defects are also obvious, that is, the development of retail and distribution business is not smooth. In fiscal year 2020, the business income decreased by 21.4% year-on-year, which is mainly due to the low market in Hong Kong, the impact of trade environment and epidemic situation. Judging from the past data, the business of de Yongjia group has also continued to decline. This trend may continue, which will drag down the textile business.

In the case of some flaws in the fundamentals, deyongjia group has still recorded a good rise since October 14, which is mainly due to two aspects: first, the market value is relatively small and easy to speculate; second, the company's valuation is extremely low. In terms of Pb valuation, the company has been at the lowest level in 10 years, only 0.37 times Pb, reduced to cigarette butts, market value is less than net assets.

Mutual textile with strong profitability

Intertai textile is mainly engaged in the production and manufacture of textile products including high-quality cotton and chemical fiber knitted fabrics. In fiscal year 2020 (for the three months ended March 31, 2020), its revenue was HK $5.476 billion, a decrease of 10.5% over the same period of last year. This was due to the temporary closure of Chinese factories for three weeks due to the impact of the epidemic.

From the regional perspective, intertai's products are mainly sold to China and Vietnam, and their income accounts for more than 50%. Although in the past three years, the revenue growth of mutual textile is relatively slow, but the improvement of the industry prosperity will form support to a certain extent. It is worth noting that the profitability of Intertek is much stronger than the other three targets. Its net interest rate in fy2020 is as high as 13.72%, while the remaining three are not more than 5%.

In terms of valuation, both PE and Pb are at the lower edge of the average valuation level in the past decade. Recently, Citigroup issued a research report saying that the stock price of Intertek was raised to HK $7, reiterating its buy rating. There is still room for the target price to rise compared with the current share price.

Tianhong's textile capacity can be released rapidly

Tianhong textile is one of the largest cotton textile manufacturers in China. Its main business is to manufacture and sell high quality yarn, grey fabric, fabric and clothing. Among them, yarn revenue accounted for the largest proportion, accounting for 75.9% in the first half of 2020. The company's export and domestic sales revenue accounted for about 3:7, mainly domestic sales.

From the perspective of its net profit growth rate of around 15% in the past, Tianhong's annual average growth rate has been almost 15%, but its performance has been very interesting since 2017. This is because the company has expanded its yarn production capacity by about 1 million spindles in the last two years. However, with the increase of production capacity, the gross profit rate has declined significantly, resulting in poor profitability. With the fourth quarter of the industry into the business cycle, Tianhong textile production capacity can be quickly released with downstream demand, and bring performance growth.

From the perspective of low valuation, Tianhong's net assets are expected to increase by only 8 times in the past 10 years.

Weiqiao textile with only 0.11 times PB

Weiqiao textile is the largest cotton textile manufacturer in China and the largest cotton textile enterprise in the world. The company has two major businesses: textile business, power and steam business. In the textile business, domestic sales accounted for 69.6% and overseas sales accounted for 30.4% in 2019.

In 2019, the textile business of Weiqiao textile industry was affected by trade friction, and its revenue decreased by 5.8% year-on-year, while that of power and steam business decreased by 11.3% due to the economic downturn. As the largest cotton textile enterprise, the cold winter will support its textile business, but it is not known whether the power consumption of enterprises can be maintained after the epidemic.

From the perspective of valuation, Weiqiao textile is the lowest among the four targets, and the Pb valuation is only 0.11 times, which is the lowest level in ten years. Of course, such a low valuation is also related to the company's power business.

On the whole, when the industry's prosperity is picking up, the deterministic target will become the first choice in terms of valuation and business. We may get some gains by focusing on mutai textile, which has strong profitability, and Tianhong textile, whose production capacity can be released quickly. However, we should also pay attention to the potential pressure on the stock price if the return of Indian orders declines and the risk brought by the periodic boom.