texhong [2678.hk] textile sector...margin expansion based on widened cotton price gap. raw materials...

1

Sep 5, 2013

TEXHONG [2678.HK]

Texhong Textile Group is one of the largest yarn manufacturers in China, with a

30% share of the core-spun yarn sub-market. Taking advantage of the gap between

the domestic and international cotton price, the company has been able to source

cheaper cotton and to manufacture at lower cost through its Vietnam production

facility. Assuming a stable cost environment, we believe Texhong will continue to

deliver solid growth in the next few years on the back of its capacity expansion plan

and its cost advantage over competitors in the domestic Chinese market.

BUY

Close: HK$13.66 (Sep 4, 2012)

Target Price: HK$16.70 (+22%)

GENERATING LUCRATIVE RETURN IN YARN PRODUCTION

Price Performance

Market Cap US$1549.3m

Shares Outstanding 884.7m

Auditor PWC

Free Float 27.0%

52W Range HK$2.31-16.36

3M Avg Daily T/O US$1.5m

Major Shareholding Chairman Hong 60.9%

Vicky Lai—Analyst

(852) 3698-6515

[email protected]

John Mulcahy—Head of Research

(852) 3698-6889

[email protected]

Source: Company and CGIHK Research

Textile Sector

We expect net profit to jump by 96% YoY in 2H13. We forecast sales to in-

crease by 49.7% in 2H, driven mainly by new capacity (+55% by our estimate). As the domestic vs international cotton price gap remained substantial, we ex-pect gross profit margin (GPM) in 2H to reach 19.6%, +2.7ppt year-on-year (YoY), but slightly down compared to 1H as the international price has risen by over 10% YTD. Net profit is estimated to reach RMB669.4m, equivalent to a net profit margin (NPM) of 11.1%, +2.6ppt YoY.

Texhong earns higher margins than other domestic yarn producers: 1)

focus on high value-added products – core spun yarns; 2) leverage on the cotton price gap between domestic and international markets through overseas produc-tion; 3) enjoy lower production cost in its Vietnam operation; 4) full utilization for further cost savings.

Significant volume growth suggests Texhong is gaining market share from peers, due to: 1) stable supply that appeals to downstream customers; 2) stronger bargaining power over suppliers, enabling Texhong to enjoy beneficial treatment; 3) low funding cost that is unavailable to many peers.

Texhong is likely to register healthy growth, driven by capacity expan-

sion—by 77.5% and 22.5% at the end of FY13 and FY14 respectively. Product mix will skew towards synthetic products as a means of product diversification. This development will help stabilize margins for the group in the future due to the reduced reliance on cotton.

Valuation. We initiate coverage on the stock with a BUY rating as the valuation

appears undemanding at 8.7x and 7.8x PER in FY13 and FY14, given its strong growth prospects with its future capacity expansion plans. Our target price of HK$16.70 implies 9.5x PER FY14, on par with average valuations for textile peers.

Investment Highlights

RMB 2010 2011 2012 2013E 2014E

Turnover (m) 5,472 6,873 7,341 9,620 12,655

Net profit (m) 841 61 487 1,116 1,244

Net margin (%) 15.4 0.9 6.6 11.6 9.8

EPS (HKD) 1.09 0.08 0.68 1.58 1.76

P/E(x) 12.8 163.8 20.2 8.7 7.8

Yield (%) 2.0 0.7 2.0 3.5 3.9

2

We are optimistic on 2H result...

We forecast sales to increase by 49.7% in 2H13. We expect growth momentum to accelerate in 2H from 1H, and we expect sales to increase by 49.7% to RMB6,010.9m based on:

Estimated realizable capacity will grow 55% YoY in 2H compared to 2H12 as

new capacity in Vietnam (235,000 spindles) commenced operation in July this year and new production lines in China (540,000 spindles) will come on line in Q4.

Sales-to-production ratio is likely to remain high (2012: 100%). The story of

market share gain is likely to continue in 2H as no substantial change in the cotton price gap situation is likely to take place during the rest of this year.

We estimate GPM in 2H13 to be 19.6%, +2.7ppt YoY. 70% of the group’s overall cotton usage was sourced from overseas. Based on its view that the international price would rise in the future, management accumulated five months of cotton by the end of June 2013 as a preparation for production in 2H. Tracking the Cotlook A index of cotton prices in 1H, international cotton has seen a price increase of over 10%. Based on the assumption of a steady average selling price (ASP) outlook for the group’s yarn products in 2H, we believe the narrowing price gap will impact GPM mildly and reach 19.6%, slightly lower than 21.4% in 1H, but still a higher-than-normal level (2H12: 16.9%) as the price gap remains significant compared to re-cent years.

We expect net profit to jump by 96% YoY in 2H13. Net profit is expected to reach RMB669.4m in 2H, implying a net margin of 11.1% according to our estimate, slightly lower than 1H13 (12.4%) but higher than 2H12 (8.5%). The slight decline in GPM in 2H13 compared to 1H13 is likely to be partially offset by more leverage on fixed costs owing to the big increase in revenue. An example would be the adminis-trative cost which accounted for 3.9% of total sales in 1H13 as the company has recruited more employees for its capacity expansion plan in 2H. When the new ca-pacity comes on line in 2H and contributes to top-line sales, admin cost as a per-centage of sales should see a clear decline. Overall, we expect net profit to in-crease by 96% in 2H and 129.5% for the full-year earnings estimate to RMB1,116.0m, 10% above Bloomberg consensus.

Estimate for 2H13 Results

Income statement (RMB million) 2H12 2H13 YoY Common Size% 2H12 2H13

Revenues

Revenues 4,016.3 6,010.9 50% 100.0% 100.0%

Cost of Goods Sold (3,338.2) (4,832.3) 45% -83.1% -80.4%

Gross profit 678.1 1,178.6 74% 16.9% 19.6%

Expenses

Selling & Distribution Expenses (113.3) (169.5) 49% -2.8% -2.8%

General and Administrative Expenses (116.4) (180.4) 55% -2.9% -3.0%

Other Revenues & Gain (9.2) 13.5 -247% -0.2% 0.2%

Share of Profit/loss of an Associate 2.4 2.0 -16% 0.1% 0.0%

Finance Costs (57.2) (87.5) 53% -1.4% -1.5%

Finance Income 8.2 4.0 -51% 0.2% 0.1%

Earnings before Taxes 392.7 760.7 94% 9.8% 12.7%

Taxes and Other Expenses

Provision for Income Tax (51.3) (91.4) 78% -1.3% -1.5%

Minority Interest (After Tax) 0.1 0.1 96% 0.0% 0.0%

Net Income (Loss) 341.5 669.4 96% 8.5% 11.1%

Source: Company & CGHIK Research

3

Texhong Textile Group [2678.HK] is one of the largest yarn manufacturers in China, with a diversified product portfolio, offering over 1,500 types of yarn and 2,700 types of fabric. The company derives 90% of its sales domestically, from 1,400 cus-tomers in China, and the rest from around 200 customers in overseas markets, such as Brazil, Turkey, Bangladesh, Japan and Korea.

Comparing the historical returns of Texhong and Weiqiao Textile [2698.HK], it is not difficult to notice that Texhong has earned consistently higher margins in rela-tive terms – so we looked for the origin of this premium [see figures 1a & 1b].

The story behind higher margins…

Focusing on high value-added products – core spun yarns. Accounting for 60% of the group’s total revenue, core spun yarn is a product that offers better strength, greater stretch and longer durability [see figure 2]. Due to higher complex-ity in the production process compared with normal yarns, such niche products usu-ally command higher selling prices and correspondingly high gross margins [see figure 3]. The company estimates its market share at around 30% in the core spun yarn market in China.

Figure 1a: Gross margin comparison between Texhong and Weiqiao Figure 1b: Net margin comparison between Texhong and Weiqiao

Source: Company & CGIHK Research

8.7% 8.7%

16.1%

1.8%

6.8%

12.3%

14.7%

23.9%

8.1%

15.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY08 FY09 FY10 FY11 FY12

Weiqiao GPM Texhong GPM

2.7%

5.7%

7.8%

-1.0%

2.7%

5.7%7.0%

15.4%

0.9%

6.6%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


Weiqiao NPM Texhong NPM

Figure 2: Product mix for Texhong Figure 3: Core-spun yarn products demand higher ASP and GPM


59.8%23.9%

11.3%

2.8% 2.3%

Core-spun yarns

Other yarns

Stretchable grey fabrics

Other grey fabrics

Garment Fabric

16.3% 23.6%

7.4%

13.4%16.2%

28.6%

8.8%

17.7%

0%

5%

10%

15%

20%

25%

30%

35%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY09 FY10 FY11 FY12

(RMB/ton)

Other yarns ASP core-spun yarn ASP (RMB/ton)

Other Yarns GPM Core-spun yarn GPM

4

Significant cost advantage through overseas production. Texhong’s total yarn production capacity reached one million spindles in 2012, of which 60% comes from the 11 manufacturing plants located in China (Yangze River Delta) and the rest from Vietnam [see figure 4]. Production capacity from outside China generates significant cost advantages to the group through cheaper sourcing (mainly of cot-ton) and lower production cost.

The story behind higher margins (2)…

Margin expansion based on widened cotton price gap. Raw materials account for over 80% of total production cost for yarn producers in general [see figure 5]. More than 80% of Texhong’s overall sales are generated from cotton products, whose selling price / gross margin is highly correlated to the cotton price [see fig-ure 6]. The company can source cheaper cotton from the international market (60% of group’s total cotton sourcing) through its Vietnam production arm, while selling the finished goods at a higher price in China (>20%). Combined with the import quota of cotton assigned to the group’s domestic production, about 70% of Texhong’s total cotton procurement cost is 30-40% lower than the domestic spot price [see figure 7]. The price gap between the two markets resulting from the cot-ton reserve policy implemented by the Chinese government is actually a positive factor contributing to Texhong’s higher than average return.

Figure 4: Production capacity mix between domestic and Vietnam plants Figure 5: Cost of goods sold breakdown


83.3%

5.6%

5.7%

2.9% 2.5%

Raw Materials

Direct Labor

Utilities

Depreciation

Other Overhead530 530 600 600 600

140 210

210

400 400

-

200

400

600

800

1,000

1,200


China Vietnam

Figure 6: Correlation between GPM and cotton price Figure 7: Domestic and international cotton spot price


-5%

0%

5%

10%

15%

20%

25%

30%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

(RMB/ton)

Domestic Cotton Price (328) Texhong GPM

0

5000

10000

15000

20000

25000

30000

35000

0

50

100

150

200

250

(RMB/ton)(USD cent/pound)

International cotton Domestic cotton

5

Vietnam capacity resulted in lower production cost. Associated capital invest-ment in building a manufacturing plant in Vietnam is relatively lower (20-40%) for the same capacity unit built in China [see figure 8]. Operating costs such as labour and utilities (electricity) in Vietnam are respectively 60% and 50% of those in China. Vietnam also enjoys beneficial trade policies such as the exemption of export duties to Japan and some other countries. Overall, the company estimates that operating cost in Vietnam is approximately 10% lower than its domestic production arm.

The story behind higher margins (3)…

Full utilization to lower operating cost. The company has a policy of running its factories at full utilization to save costs, keeping operating expenses constant as a % of sales [see figure 9]. Most domestic capacity adopts a make-to-order produc-tion strategy with order visibility of 2-3 weeks, while Vietnam carries out planned production owing to longer time to delivery (two weeks). Inventory accumulation under this production strategy is a logical concern, but as suggested by the annual figures, finished goods as a % of sales has remained steady over the past years [see figure 10], indicating the company has been able to deliver a high sales/production ratio.

Figure 8: Lower capex per 100K spindles in Vietnam

Source: CGIHK Research Estimate

270-300

220

0

50

100

150

200

250

300

China Vietnam

(million RMB)

Figure 9: Stable operating expenses owing to high efficiency Figure 10: Finished goods as % of sales remained stable in the past 5 years


6.6%

5.2%

8.4% 8.2%

7.0%


Finished goods % of sales

0%

1%

2%

3%

4%

5%

6%

7%


Selling & distribution expenses Adminstrative expenses

6

Most of Texhong’s competitors (i.e. core spun producers) are scaled players locat-ed in the Jiangsu area. The total capacity of the biggest of these competitors is estimated to be around 100,000-200,000 spindles, a small proportion of Texhong’s one-million spindle capacity. In the past five years the group has seen significant volume growth for its yarn products - CAGR of 20.7% [see figure 11], outpacing the industry growth of 12.3%. We attribute the company’s success in gaining market share from peers to the reasons listed below and expect the situation to prevail in the near future.

The scene behind strong volume growth…

Stable supply appeals to downstream customers. The yarn selling price is mainly determined by raw material cost and processing fee. Weak downstream demand has recently distorted the processing fee to an abnormally low level (RMB1,000-RMB2,000 lower per ton), where many domestic players can suffer losses. As a result of the difficult operating environment, supply from smaller-scale players has become uncertain, with utilization fluctuating according to selling prices. The stable supply from Texhong has become more attractive to many downstream customers, allowing the company to charge a slight premium at certain stages.

Stronger bargaining power over suppliers. Unlike its peers, Texhong has main-tained smooth and steady sourcing and production through different trough periods. Combined with its large production scale, its bargaining power over domestic sup-pliers is higher than its peers. For instance, the company is not required to pay de-posits when placing orders, and it also pays a lower handling fee for bulk purchas-es.

Lower funding cost. The textile industry is mature and capital-intensive, not exact-ly the ideal lending target for most domestic banks. We believe many players were eliminated during the 2011 crisis owing to liquidity problems when the cotton price collapsed – participants were tied down by expensive inventories and forced to sell products at a loss, vaporizing working capital. However, unlike its peers, Texhong can leverage on the financing platform enabled through its listing status to obtain loans at relatively low cost, either to finance its expansion or its daily operation.

Figure 11: Yarn sales volume grew at a 5-yr CAGR of 20.7%


123.4

171.8 179.7 189.8

242.9

30.0%

39.2%

4.6% 5.6%

28.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50

100

150

200

250

300


(tons)

Yarn volume (tons) YoY %

7

Significant capacity growth to drive sales volume. No capacity was added in 2012. Seeing stronger demand, the company has developed an aggressive expan-sion plan for the coming two years. Production capacity is estimated to increase by 77.5% and 22.5% at the end of FY13 and FY14 with details listed below [see figure 12]:

Geographical diversification to tackle trade duty barriers. Management regards

geographical diversification of its production base as a core strategy, to tackle the

trade duty barriers in different regions. For instance, if the TPPA (Trans-Pacific

Partnership Agreement) between Vietnam and the US passes, textile producers will

be able to enjoy import duty exemptions, while peers from China will be liable for

duties ranging from 16-30%.

Diversified production base enables more responsive supply chain. A strate-

gic geographical production network would also enable the group to improve its

response time to domestic and overseas customers, which now require more flexi-

bility from suppliers owing to the shift towards the fast-retailing business model. The

Uruguay and Turkey plants are good examples of this strategy.

Future growth…

Figure 2: Capacity Expansion Plan

FY12 FY13E FY14E

China 600 1,140 1,260

Vietnam 400 635 865

Turkey - - 70

Uruguay - - 100

Yarn capacity ('000 spindles) 1,000 1,775 2,295

Planned production ('000 tons) 240 440 560

YoY % 77.5% 29.3%

Realizable capacity ('000 spindles) 1,000 1,278 2,010

Realizable production ('000 tons) 240 317 490

YoY % 31.9% 54.9%

Year Estimated Capacity Estimated time Estimated Capex

(spindles) for commencement (million RMB)

2013 300K Q4

240K Q4

170K 2H

65K 2H

2014 120K 1H

230K 2H

70K 2015

100K 2015

Note*: 30 sets of open-end spinning machines was added.

Note#: 54 sets of votex & open-end spinning machines will also be added.

Source: CGIHK Research Estimates

Locations

China existing

Shandong

Quang Ninh*

Dong Nai

Shandong

Turkey

Uruguay #

1,350

Vietnam1,350

8

Product mix skewing towards synthetic products. The company will continue focusing on its speciality – yarn production – and will keep its fabric production scale stable. Currently accounting for 19.5% of total raw materials mix, synthetic products will be the next growth engine [see figure 13]. The company has devel-oped a plan to further grow this type of product through the acquisition of the Shan-dong factory and the buildup of its Turkey and Uruguay plants. On the demand side, orders will be supported by existing customers, such as Toray (a Uniqlo sup-plier) which will gradually grow cooperation with Texhong over time.

Benefits of this development include: 1) increased overall profitability with a re-duced proportion from lower-margin fabric production [see figure 14]; 2) diversifica-tion of product offering (i.e. demand) to lower product concentration risk; 3) reduc-tion in reliance of cotton in cost procurement, securing more stable margins [see figure 15a & 15b].

Future growth (2)…

Figure 14: Yarn to fabric sales mix

FY10 FY11 FY12 FY13E FY14E FY15E

Yarn sales % 80.6% 84.2% 83.7% 86.5% 89.3% 91.2%

Fabric sales % 19.4% 15.8% 16.3% 13.5% 10.7% 8.8%

Yarn GPM 27.0% 8.3% 16.5% 18.4% 17.4% 17.1%

Fabric GPM 10.5% 5.6% 8.3% 9.0% 9.0% 9.0%


Figure 13: Total cost of raw materials breakdown


16.7%

58.5%

19.5%

5.3%

Yarn

Cotton

Spandex, rayon andpolyester

Other raw materials

Figure 15a: GPM for synthetic core-spun is less volatile than for cotton Figure 15b: GPM for other synthetic yarns is less volatile than for cotton


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1H10 2H10 1H11 2H11 1H12 2H12

Core-spun (cotton) Core-spun (synthetics)

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1H10 2H10 1H11 2H11 1H12 2H12

Other yarns (cotton) Other yarns (Synthetic)

9

Potential change in China’s cotton policy. Our Beijing industry analysts believe

the switch to a direct subsidy programme is highly probable in 2014, possibly after

March/April when the reserve accumulation programme ends. The domestic cotton

price is likely to normalize at RMB18,000-19,000 per ton (< 10% below the current

level), while the international cotton price should stabilize, if not improve given the

global demand and supply outlook. Overall, the change in policy is likely to trigger a

narrowing in the cotton price gap to RMB2,000-3,000 per ton. We estimate the

group’s overall GPM to moderate to 18.3% in FY14, assuming the domestic cotton

price drops by 10% and yarn selling prices decline by mid-single digit percentage

rate.

Growth to be supported by sales volume in 2014. We believe the negative im-

pact on declining ASP is likely to be offset by better sales volume due to: 1) mild

recovery of demand from downstream textile exporters under the new cotton policy

owing to a more competitive cost base compared to overseas players; 2) continued

capacity expansion in Shandong (120,000 spindles) and Vietnam (230,000 spin-

dles) which will add 29.3% in planned capacity and 54.9% (our estimate) increase in

realizable capacity as new facilities built in 2013 slowly ramp up.

Assumptions for 2014

Valuation & Risks

Valuation looks undemanding at 7.8x PER FY14. We estimate the company’s

earnings to increase by 130% and 11% in FY13 and FY14, respectively, implying a

PER of 8.7x and 7.8x, below its textile peers at 10.4x and 9.6x, which should record

earnings growth in the low teens. We initiate coverage with a BUY rating on the

stock with a price target of HK$16.70, equivalent to a PER of 9.5x FY14, as we

believe the street has underestimated the company’s earnings in 2H13.

Downside risk factors to our forecast: 1) Collapse of domestic cotton prices on

the removal of the government’s support policy. This will suppress the domestic

selling price of yarns and will damage profitability. Texhong’s cost advantage from

offshore sourcing will also vanish in these circumstances if price gap narrows signif-

icantly. 2) The sudden narrowing of the cotton price gap would undermine the

group’s strategy to leverage on its offshore production. This would present a down-

side risk to our margin assumption. 3) The failure of the company to achieve high

sales/production ratio after its aggressive expansion plan, presenting downside risk

to our sales assumption.

Figure 16: Peer comparison table

Ticker Company Price Market cap PBR (x)

(local currency) (US$m) 2012A 2013E 2014E 2012A 2013E 2014E

2678 HK Equity TEXHONG TEXTILE 13.66 1,558 20.2 8.7 7.8 3.8 2.9 2.3

2698 HK Equity WEIQIAO TEXTI-H 4.45 685 6.1 7.0 8.8 0.3 0.3 0.3

1382 HK Equity PACIFIC TEXTILE * 9.35 1,743 14.6 12.7 11.2 3.4 3.1 3.0

321 HK Equity TEXWINCA HLDG * 7.03 1,236 13.0 9.8 8.3 1.6 1.6 1.6

2313 HK Equity SHENZHOU INTL GP 24.50 4,420 15.5 14.0 11.9 2.9 2.6 2.2

Average 13.9 10.4 9.6 2.4 2.1 1.9* Note: March year end

Source: Bloomberg & CGIHK Research

PER (x)

10

Key Assumptions

Sales (RMB millions) FY12 FY13E FY14E FY15E

Yarn 6,146.9 8,526.6 11,595.0 14,501.0

Stretchable core-spun yarns 4,390.6 6,165.6 8,125.2 9,984.1

Other yarns 1,756.2 2,361.0 3,469.8 4,516.9

Grey Fabric 1,027.9 944.7 916.3 907.2

Stretchable grey fabrics 825.9 807.5 783.3 775.5

Other grey fabrics 202.0 137.1 133.0 131.7

Garment Fabric 166.7 148.4 143.9 142.5

Total Sales 7,341.5 9,619.6 12,655.2 15,550.6

Sales YoY % FY12 FY13E FY14E FY15E

Yarn 6.2% 38.7% 36.0% 25.1%

Stretchable core-spun yarns 18.9% 40.4% 31.8% 22.9%

Other yarns -16.2% 34.4% 47.0% 30.2%

Grey Fabric 6.4% -8.1% -3.0% -1.0%

Stretchable grey fabrics 17.9% -2.2% -3.0% -1.0%

Other grey fabrics -23.9% -32.1% -3.0% -1.0%

Garment Fabric 42.3% -11.0% -3.0% -1.0%

Total Sales 6.8% 31.0% 31.6% 22.9%

Volume YoY % FY12 FY13E FY14E FY15E

Yarn 28.0% 34.2% 40.3% 23.3%

Stretchable core-spun yarns 44.8% 38.0% 37.2% 21.6%

Other yarns 2.3% 25.9% 47.8% 27.0%

Grey Fabric 13.3% 1.2% 0.0% 0.0%

Stretchable grey fabrics 26.0% 7.8% 0.0% 0.0%

Other grey fabrics -17.7% -23.2% 0.0% 0.0%

Garment Fabric 63.8% -19.1% 0.0% 0.0%

ASP YoY % FY12 FY13E FY14E FY15E

Yarn -17.0% 3.4% -3.1% 1.4%

Stretchable core-spun yarns -17.9% 1.7% -3.9% 1.0%

Other yarns -18.1% 6.8% -0.6% 2.5%

Grey Fabric -6.0% -9.2% -3.0% -1.0%

Stretchable grey fabrics -6.5% -9.3% -3.0% -1.0%

Other grey fabrics -7.6% -11.6% -3.0% -1.0%

Garment Fabric -13.1% 10.0% -3.0% -1.0%

11

Key Financials

Profit & loss (RMB m) Cash flow (RMB m)

2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E

Revenue 5,472 6,873 7,341 9,620 12,655 Profit before tax 950 83 557 1,263 1,408

Cost of sales (4,163) (6,317) (6,217) (7,670) (10,334) Depreciation and amortisation 144 176 205 226 302

Gross profit 1,309 556 1,124 1,949 2,321 Tax paid (109) (22) (71) (147) (164)

Operating expenses (334) (361) (430) (591) (758) Change in working capital (435) (332) (12) (492) (528)

Other income (expenses) 10 (37) (17) 27 35 Other operating cash flow (81) 59 245 127 196

Finance income (cost), net (44) (78) (123) (127) (196) Operating cash flow 470 (36) 924 977 1,213

Share of asso/JCEs 9 3 4 4 5 Capex (494) (428) (541) (1,354) (1,355)

Profit before tax 950 83 557 1,263 1,408 Other investing cash flow 154 (13) (104) 16 46

Income tax expenses (109) (22) (71) (147) (164) Investing cash flow (340) (441) (645) (1,338) (1,309)

Profit after tax 841 61 486 1,116 1,244 Change in debt 255 616 (86) 1,250 200

Minority interest 0 (0) 0 0 0 Net share issues/(repurchases) 0 0 0 0 0

Net profit 841 61 487 1,116 1,244 Dividends paid (143) (199) 0 (335) (373)

Other financing cash flow (65) (47) (127) (134) (220)

EPS (HKD) 1.09 0.08 0.68 1.58 1.76 Financing cash flow 47 371 (212) 781 (393)

DPS (HKD) 0.28 0.10 0.27 0.47 0.53 Other adjustment (0) 0 0 0 0

Net change in cash 177 (106) 67 419 (489)

Balance sheet (RMB m) Key ratios

2010 2011 2012 2013E 2014E 2010 2011 2012 2013E 2014E

Cash & cash equivalent 569 463 530 950 461 Sales growth (%) 33.8% 25.6% 6.8% 31.0% 31.6%

Inventory 1,387 1,289 1,422 1,972 2,594 Gross profit growth (%) 117.6% -57.5% 102.3% 73.4% 19.1%

Accounts receivable 404 640 812 1,065 1,400 Net profit growth (%) 194.6% -92.7% 693.6% 129.5% 11.4%

Other current assets 531 265 259 332 430 EPS growth (%) 198.0% -92.4% 710.9% 133.0% 11.4%

Total current assets 2,891 2,657 3,023 4,318 4,886 Gross profit margin (%) 23.9% 8.1% 15.3% 20.3% 18.3%

Fixed assets 1,950 2,177 2,494 3,602 4,627 Net profit margin (%) 15.4% 0.9% 6.6% 11.6% 9.8%

Goodwill & intangibles 0 0 0 0 0 ROA 20.5% 1.2% 9.2% 16.3% 14.0%

Other non-current assets 68 96 108 183 203 ROE 45.5% 2.9% 21.0% 37.8% 32.9%

Total assets 4,909 4,930 5,625 8,104 9,716 Net-debt-to-equity (%) 28.7% 65.7% 47.6% 61.3% 65.0%

Short-term debt 610 144 206 206 406 Inventory turnover (days) 92 77 80 81 81

Accounts payable 859 502 865 1,151 1,550 Receivable turnover (days) 28 28 36 36 36

Other current liabilities 552 448 373 471 600 Payable turnover (days) 60 39 40 48 48

Total current liabilities 2,021 1,094 1,444 1,828 2,556 Quick ratio (x) 0.5 0.7 1.0 1.0 0.9

Long-term debt 630 1,712 1,564 2,814 2,814 Current ratio (x) 1.3 1.8 2.2 2.2 2.1

Other non-current liabilities 49 52 59 122 136 Interest-coverage ratio (x) 22.8 2.1 5.5 11.0 8.2

Total liabilities 2,700 2,858 3,067 4,764 5,506

Share capital 94 94 94 94 94 P/E(x) 12.5 163.8 20.2 8.7 7.8

Reserve 2,115 1,978 2,464 3,245 4,116 P/B (x) 4.8 4.8 3.8 2.9 2.3

Shareholders' equity 2,209 2,072 2,558 3,340 4,210 Yield (%) 2.0 0.7 2.0 3.5 3.9

Minority interests 0 0 (0) (0) 0

Total equity & liabilities 4,909 4,930 5,625 8,104 9,716

Source: CGIHK Research Estimate

12

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Explanation on Equity Ratings

BUY – share price will increase by >20% within 12 months in absolute terms

SELL – share price will decrease by >20% within 12 months in absolute terms

HOLD – no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL

texhong [2678.hk] textile sector...margin expansion based on widened cotton price gap. raw materials...

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