We expect 2021 earnings to grow 388.2% YoY, beating expectations
　　Texhong Textile preannounced 2021 results, estimating its 2H21 net profit after tax to be similar to that of 1H21 （Rmb1.29bn）。 We expect the firm’s 2021 net profit to soar about 388.2% YoY to Rmb2.52bn, beating expectations, mainly due to higher raw material prices, recovery of end-market and the return of overseas textile orders to China.
　　Trends to watch
　　The firm’s earnings grew rapidly in 2021, thanks to the rising orders and prices along the global industrial chain of the cotton textile sector, the deepening of integration and increased orders due to production capacity expansion. Specifically:
　　1） Prices: Cotton sector saw a new round of rising prices in 2021, with the ASP increasing over 30%. Prices of the firm’s products in the end-market continued to rise, as the ASP of midstream products such as cotton yarn grew more than 30%. The firm actively utilized derivative instruments to lock in low purchase prices of cotton and maintained healthy inventory in response to fluctuating raw material prices. We expect the firm’s low raw material cost to improve its 2021 gross margin, and full-year gross margin of the main business to be higher than normal.
　　2） Number of orders: We note that the global industrial chain of the apparel sector was in an uptrend with rapidly growing demand in 2021. Apparel brands in the end-market had higher requirements for the production scale, delivery and environmental assessment of suppliers. The firm took an increasing number of orders, as a portion of small and medium-sized cotton textile companies exited the market, and some countries and regions overseas limited product exports amid the pandemic. We attribute these factors to the firm’s increased orders and earnings. We expect the firm’s orders to grow rapidly in 2021.
　　3） Capacity expansion: The firm has continuously expanded overseas production capacity for yarn such as in Vietnam in the past 3 years. The firm’s 1H21 yarn capacity reached 4.14mn, with the scale steadily increasing and capacity utilization rate significantly improving. The firm’s capacity for midstream and downstream fabrics and garments （jeans） has started operating. The firm’s self-use ratio of fabrics steadily grew, and garment output saw double-digit steady growth in 1H21. We expect the new knitted fabric business to help the firm expand to the industrial chain of sportswear, and assist the firm to take incremental orders.
　　In recent years, the firm has successfully expanded its capacity to midstream and downstream sectors such as grey fabrics, fabrics and garment. We believe the firm continuously improved its vertically integrated production capacity and leveraged synergies between businesses. Meanwhile, it has enhanced cost control efficiency and bargaining power. We believe all these advantages may become the potential drivers for the firm’s long-term growth.
　　Valuation and recommendation
　　As the firm’s 2021 earnings from the main business significantly beat expectations, and prices of cotton and yarn may fluctuate, we raise 2021 and 2022 net profit forecasts 27.4% and 20.6% to Rmb2.52bn and Rmb1.76bn （previous forecast for 2021/2022 net profit is Rmb1.98/1.46bn respectively）， and set 2023 net profit forecast to be Rmb1.51bn. The stock is trading at 4.8x 2022e and 5.6x 2023e P/E. We maintain an OUTPERFORM rating and TP of HK$14.39 for 2022, implying 6.4x 2022e and 7.4x 2023e P/E with 34.2% upside.
　　Risks
　　Cotton prices fluctuate at elevated levels; slower-than-expected overseas capacity expansion; weaker-than-expected orders.