\u3000\u3000 Zhejiang Xinao Textiles Inc(603889) (603889)
Key investment points
Industry focus – pattern and marginal change
1) wool imitation yarn industry: the market share of high-quality leading enterprises has accelerated. The wool imitation yarn industry can be simply understood as obtaining a certain stable processing fee through the finishing of wool. Therefore, this naturally determines the full, decentralized and hierarchical pattern of competition in the wool textile industry. With the transformation of high quality and functionality of terminal demand, industrial scale and branding have become an inevitable trend. Factors such as the 2018 Sino US trade war and the epidemic situation in 2019-2021 accelerated the clearance of extensive production capacity, and the high-quality leading market share increased rapidly.
2) cashmere industry: monopolized by China, competing for the best. Cashmere is an expensive natural animal fiber and an indispensable raw material for luxury goods and high-end ready-made clothes. China has an absolute monopoly on cashmere resources. More than 70% of the world’s cashmere is produced in China, and more than 90% of the cashmere is processed in China. At present, China’s competition pattern has changed from dominance to competition.
Cycle focus — how to view the impact of wool and cashmere price cycle
1) based on the data of Australian wool over the past 30 years, we believe that although the short-term rainfall has warmed up the supply of Australian wool, the overall output is still at a historical low, and the wool price is supported at the current position (slightly lower than the historical center) and has upward momentum; The company has formed a mature wool price response mechanism, which is expected to benefit from the increase of wool price.
2) cashmere price also has upward potential energy in the medium and long term. According to the market quotation of Qinghe County, the largest cashmere producing area in China, the cashmere price has warmed up to slightly lower than the historical center. Cashmere’s unique physical properties and natural characteristics of environmental protection make it an indispensable raw material for luxury goods and high-end clothing. Because the supply of cashmere is basically stable, we believe that cashmere has upward potential energy in the medium and long term.
Growth driven — how to view the future development of wool and cashmere in the company
1) wool business: the price and quantity rise together and continue to improve. Price: benefiting from the continuous rise of wool price. Volume: ① the effect of promoting production by sales is remarkable, and the production capacity of 130000 ingots is fully released. We are coping with the increasingly vigorous downstream demand through strategic cooperation.
2) cashmere business: order structure optimization + leveraging the group’s collaborative advantages, the profit margin is expected to continue to improve. ① Order structure optimization: self functional product R & D + Duncan color R & D advantages = high value-added products; ② Customer base expansion: with the strong customer base of new Australia, the production capacity is expected to continue the high-speed release trend.
Profit forecast and valuation
We expect the company’s revenue to increase by 52% / 26% / 20% year-on-year to RMB 34.5/43.4/5.22 billion in 21 / 22 / 23, and the net profit attributable to the parent company to increase by 97% / 35% / 27% year-on-year to RMB 299 / 404 / 513 million. According to the closing price on January 9, 2022, the corresponding PE from 2021 to 2023 is 11 / 8 / 7X respectively. Considering the revenue growth of the company in the next few years, the profit is expected to be released at a high speed and has great potential to maintain the “buy” rating.
Risk tips:
Risk of excessive wool price fluctuation; Production expansion is less than expected; Repeated epidemic situation; Risk of poor destocking;
