Tianhong Textile (02678.HK): Performance Is Affected By Trade Friction Disturbance.

Tianhong textile released its first half performance in 2019: revenue grew 15.7% to 10 billion 200 million yuan over the same period last year, but net profit fell 21.8% to 471 million yuan, and earnings per share were 0.51 yuan.

Sales breakdown: Sales of yarn, grey fabric, woven garment fabric, knitted fabric and denim clothing were +6%, -16%, +290%, +3% and +30% respectively, accounting for 76%, 3%, 12%, 4% and 5% of total sales respectively. The sales volume of yarn, grey fabric, woven garment fabric, knitted fabric and denim clothing were +6%, -15%, +197%, -0.4% and +8.3% respectively. The average selling price of clothing fabrics (woven apparel fabric +31%, knitted fabric 3%) and denim clothing (+20%) has risen, while the average selling price of yarns and grey fabrics has decreased by 0.2% and 0.8% compared with the same period last year.

Gross profit margin fell 3.2 percentage points to 13.5% year-on-year, mainly due to trade friction caused by product structure adjustment led to a decline of yarn gross margin 4.2 percentage points. Sales and management expenses increased by 0.7 percentage points over the same period. A total of 209 million yuan of proceeds from the acquisition of the subsidiary boosted net profit.

Developing trend

Tianhong textile maintains its target of 720 thousand tons of yarn shipment in March, which was put forward in 2019.

Nevertheless, uncertainties in international trade still exist, leading to lower visibility of orders in the second half of the year. After the acquisition of Winnitex (April 2019) and North America (the second half of 2018), we expect the vertical integration of the company (the yarn revenue contribution from 83% in the first half to 76%) is expected to reduce the fluctuation of the price of raw materials.

Profit forecast and valuation

Taking into account the narrowing of profit margins, we lowered the forecast of earnings per share in 2019 and 2020 by 8.8% and 10% to 1.17 yuan and 1.25 yuan respectively, representing a 7.7% decline in the same period and an increase of 6.7% over the same period last year.

At present, the stock price corresponds to 5 times and 4.7 times the 2019 and 2020 P / E ratios.

We maintained that we won the industry rating, but taking into account the downtrend of profit forecasts and the uncertainty of demand, we lowered the target price by 22.9% to HK $8.49, corresponding to 6 times the 2020 price earnings ratio. At present, the stock price has a 28.6% rise.