Rainbow Hong Kong textile stocks turned over 5 times

In the past few years, the textile industry has been left untouched, but since September 2012, Hong Kong's textile stocks have embarked on a magnificent unilateral rally, and Rainbow Textile (02678.HK) is more than five times The gains were disdain for Hong Kong's capital markets, with Shenzhou International (02313.HK) and Pacific Textile (01382.HK) doubling their share prices within a year.

Market worries about the textile industry

Rainbow Textiles "curves save the country"

The market has always been concerned that the low-cost advantages of labor in Southeast Asia will have a fatal impact on China's textile and clothing companies. For example, China's processing fee, on the average, is US$10 per piece of clothing, Bangladesh is probably US$5, and Britain’s import of goods from Bangladesh can be free of tariffs. The main advantage of China is that the textile industry chain is fully equipped. Once the industrial chain of Southeast Asian countries is formed, domestic companies will be more affected.

Tianhong Textile was listed on the Hong Kong Main Board in December 2004 and is focused on the production of cotton core yarns. It is the largest manufacturer of cotton core yarns in China. Rainbow Textiles decided to invest in textile mills in Vietnam as early as in 2006. Now it has begun to take shape - the company currently has 1 million spindles: 600,000 spindles in Xuzhou and Nantong, and 400,000 spindles in Vietnam. In addition to the advantages of building factories in Vietnam, which can freely import cotton from the international market, the local wage level is only about half that of China. In addition, in order to attract foreign investment, Vietnam stipulates that from the first profit-making year, the first three years will be exempted from income tax, and the subsequent seven-year income tax will be halved, far more than China’s “two exemptions, three reductions, and a half”. Since 2011, China’s cotton prices have been up to about 6,000 yuan more per tonne than the international market, which has given Tianhong Textile in Vietnam an enviable cost advantage. This advantage is directly reflected in the 2012 annual report. Coupled with the low base effect in 2011, Thong Textile’s net profit in 2012 increased by 7 times to RMB 486.63 million. The overall gross profit margin increased from 8.1% in 2011 to last year’s 15.3%.

Shenzhou and Pacific Textiles

Increased valuation

Rainbow's overseas expansion has been successful. Its share price has also increased from 2.5 Hong Kong dollars in early September last year to 13.6 Hong Kong dollars, the highest once rushed to 16.3 Hong Kong dollars. Almost at the same time, other textile stocks in the Hong Kong market also ushered in the spring. Shenzhou International is famous for OEM UNIQLO, Adi, and Nike. Its stock price has risen 110% since the end of August 2012. The price of Pacific Textiles also began a double-rounded market at the end of November last year.

Through observations, it is found that the stock price of Rainbow Textiles is boosted by the stimulation of profit growth. The rising share prices of Shenzhou International and Pacific Textiles are purely due to valuation expansion rather than profit-driven net profits disclosed in the latest annual reports of the two companies. They are -4.0% and +3.6% respectively. In other words, the stock price is entirely based on an increase in valuation. For example, the price-earnings ratio of Shenzhou International has increased from 8.3 times at the end of August last year to 15.6 times, and the price-to-earnings ratio of Pacific Textiles has increased from 8.4 times at the end of November last year to the current 14.1 times.

Big report outperforming stock prices

On August 14, 2012, Credit Suisse commented on Tianhong Textile's mid-term report, saying that its profitability was better than market expectation. The upcoming Vietnam project will increase its annual profit and raise its target price and rating. . On January 14, this year, the international rating agency Moody's raised the rating of Tianhong Textile from "negative" to "stable."

On November 27, 2012, Citi pointed out in a report that the mid-term gross profit margin of Pacific Textiles was far better than expected, demonstrating the strong cost control capability of Pacific Textile and giving it a “buy” rating. Afterwards, the share price of Pacific Textiles began to increase.

On December 13, 2012, Credit Suisse issued a report that Shenzhou International's business has grown steadily, its production capacity has been expanded in an orderly manner and it has maintained a healthy cash flow, and its target price has been directly raised from HK$14.6 to HK$20.8. On the day of the report, the share price rose 8.6%, and then ushered in the main rise.

Analyze the reasons for the rise of Hong Kong textile stocks in the past year. First of all, the pre-market over-emphasis on the impact of Southeast Asia, given the lower valuation, valuation repair space is larger. For example, Shenzhou International and Pacific Textile. Second, overseas expansion of production capacity to reduce costs and improve profitability. For example, the expansion of Texhong Textile in Vietnam. Third, the industrial downturn has brought opportunities for mergers and acquisitions to increase concentration. In the end, the reports of Daxing and rating agencies increased the market's attention to textile stocks.