\u3000\u3000 Zhejiang Xinao Textiles Inc(603889) (603889)
Key investment points
Wool fine spinning business: the effect of setting production according to sales is remarkable, and the wool business is growing at a high speed.
At the macro level, factors such as the Sino US trade war in 2018 and the epidemic situation in 2019-2021 accelerated the clearance of extensive production capacity, the trend of industry standardization and branding, and the trend of leading concentration accelerated.
1) price: wool price has strong support and upward momentum. Although the short-term rainfall has warmed up the supply of Australian wool, the overall output is still at a historical low in a decade. It has support and upward momentum at the current position (slightly lower than the historical center). The company has formed a mature wool price response mechanism, which is expected to benefit from the increase of wool price.
2) production volume: the effect of promoting production by sales is remarkable. Since 21 years ago, the company has implemented the strategic reform of promoting production by sales instead of setting production by sales, with remarkable results. The production capacity of 130000 ingots has been released, and the comparable sales volume is expected to increase by more than 40%. In the future, the company may respond to the increasingly vigorous downstream demand through strategic cooperation.
Cashmere business: product structure optimization + business system brings huge profit space.
2021 is the first year for the company to complete its cashmere business, with remarkable annual sales performance. It is expected that the company’s capacity utilization rate will exceed 50%, achieve a huge breakthrough in volume, and quickly obtain the recognition of downstream customers. We believe that with the following adjustments of the company, there is a huge room for improvement in the profits of the company’s cashmere business.
1) price: actively promote the adjustment of product structure. Some of the orders this year are processing orders, with a low profit margin; Among the remaining distribution orders, there are also some pure cashmere orders with low profit margin. In the next two years, on the one hand, the company will continue to increase its investment in product R & D and launch high value-added cashmere products; On the other hand, it will take advantage of the color card advantages of Duncan (the world’s top cashmere supplier, and downstream customers include Hermes, Chanel, etc.) to improve its cashmere order competitiveness.
2) volume: the sales team cooperates to enable cashmere business development. As the global leader in wool and fine spinning, the company covers more than 4000 medium and high-end high-quality customers in the downstream, and the proportion of single customers is less than 5%. At the same time, the company has a complete international sales network, a global R & D center and sales outlets, covering more than 20 countries and regions outside China. At present, due to a certain degree of overlap between wool and cashmere customers, the company is expected to empower its cashmere business with the help of wool business collaboration. At the same time, the company itself is also increasing the sales team of cashmere business.
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 13, 2022, the corresponding PE from 2021 to 2023 is 12 / 9 / 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.
Potential risk factors
Risk of excessive wool price fluctuation; Production expansion is less than expected; Repeated epidemic situation; Risk of poor destocking;
