Zhongwang Fabric Co.Ltd(605003) (605003)
Position the medium and high-end market and build a leading enterprise in the fabric industry. The company is mainly engaged in the R & D, design, production and sales of medium and high-grade sofa decorative fabrics and products. It has daily household sofa fabric brands “z-wovens” and “sunbelievable”, “neverfear” and other brands focusing on functional sofa fabrics. The products are artistic and functional. In recent years, the company’s performance has maintained stable growth. In 2020, the revenue / net profit attributable to the parent company was RMB 495 / 140 million, and the compound growth rate in 2018-20 was 8.37% / 28.82%. The growth rate of net profit was significantly higher than that of revenue, mainly because the company continued to optimize the product structure and continuously increased the business proportion of decorative fabrics with high gross profit.
The U.S. sofa market has a broad space, and the high-end trend is good for the industry leader. The continuous growth of U.S. home demand and the high outlook of the real estate market continue to promote the scale of the sofa Market. Under the assumption that the penetration rate of fabric sofa is 20% and the industry growth rate is 10%, the scale of U.S. fabric sofa will be $5.899 billion in 2023. From the perspective of the industry pattern, the pattern of China’s sofa fabric industry is scattered and the competition is fierce for the mature fabric market in the United States established by the benchmarking Bureau. As sofa fabric products change from application attributes to decoration and functional attributes, the high-end trend of the industry is clear. The company is positioned as a high-end company and has been deeply engaged in the U.S. market for a long time. It is expected to share the growth dividend of the U.S. sofa Market.
Strong product force and rapid response ability build a moat for the company. 1) The company has first-class R & D and design ability. By establishing an excellent design team and cooperating with 20 design companies around the world, it currently has more than 1600 patterns and nearly 20000 fabric styles. The number of fabric styles designed and proofed every year is about 3000. It can not only meet the needs of customers, but also lead the fashion and provide sofa fabric solutions; 2) The company has a complete industrial chain from design and R & D to production and sales, close cooperation between upstream and downstream, rigorous cooperation, and strong cost advantage and rapid response ability. The company has been deeply engaged in the U.S. market for many years. With industry-leading design ability and high-quality products and services, the company has established a deep cooperative relationship with leading customers in the United States, with strong cooperation viscosity.
Short term advantages: new capacity is released, and the company is expected to increase both volume and profit. 1) With excellent product power and rapid response ability, the company cooperates closely with downstream leading customers and has strong stickiness. The 21q3 epidemic in Vietnam forced downstream customers to stop production, put pressure on the company’s short-term performance, the 21q4 epidemic was controlled, the production of downstream customers resumed, and the company’s order demand is expected to resume growth. 2) The insufficient production capacity of existing decorative fabrics restricts the development of the company, and the proportion of outsourced production increases. The company urgently needs new production capacity to cope with the gradually increasing shipment demand. With the release of the production capacity of the raised investment project with an annual output of 15 million meters in 2022, the company will further expand customer orders and reduce the proportion of high-cost outsourcing production, which is expected to increase both volume and price.
Profit forecast and investment rating. We are optimistic about the bargaining power brought by the company’s product power and the cost advantage and rapid response ability brought by the integration of the industrial chain. After listing, the production capacity continues to expand and promote the performance growth. It is estimated that the revenue from 2021 to 2023 will be 537 / 680 / 829 million yuan, an increase of 8.5% / 26.5% / 21.9%, and the net profit attributable to the parent company will be 160 / 2.0 / 243 million yuan, an increase of 14.2% / 24.9% / 21.2%. At present, the valuation is at a low level. With the help of absolute valuation method and relative valuation method, we give the company a target price of 36.50 yuan. The company has obvious competitive advantages, rapid growth of short-term performance and large space for long-term development. We give a “buy” rating for the first time.
Risk factors: trade friction risk, market competition risk, substantial appreciation of RMB exchange rate, epidemic impact exceeding expectations, etc.
