2021 results in line; businesses saw rapid growth
　　Texhong Textile announced its 2021 results: Revenue rose 35.5% YoY to Rmb26.52bn, and attributable net profit grew 419.3% YoY to Rmb2.69bn, in line with our forecasts. In 2H21, revenue and attributable net profit increased 23.2% and 175.8% YoY to Rmb14bn and Rmb1.4bn.
　　Trends to watch
　　Yarn business reported rapid growth on recovering demand and higher cotton prices; fabrics and garment business growth accelerated. In 2021, revenue was Rmb20.4bn （up 34.2% YoY） for the yarn business, Rmb3.61bn （up 51.7% YoY） for fabric production, and Rmb1.92bn （up 28.4% YoY） for other businesses in downstream sectors. Revenue contribution of the fabrics and garment business rose while remaining stable. We think the firm further strengthened its vertically integrated production capability.
　　Steady GM for various business segments; knitted fabrics waiting for new capacity expansion; garment business completed reorganization and optimization. Thanks to increased demand and price hikes for cotton yarn, gross margin for the yarn business rose 9.9ppt YoY to 23.3%. The GM for grey fabrics, woven fabrics, and jeans wear stood at 29.7%, 23.1%, and 13.3%. The firm adjusted its garment business in late 2021 to improve efficiency and profitability. The knitted fabrics business only had a GM of around 16% due to short-term production halt and higher yarn prices. The firm expects new capacity to help improve the profitability of its knitted fabrics business.
　　Company plans to expand main business capacity by 16%, keeping pace with the fabrics and garment businesses’ rapid capacity expansion. The firm plans to raise its yarn capacity to 4.50mn spindles from 3.87mn in 2022 via asset reorganization and production equipment acquisition to bring it in line with fabrics and garment production lines’ demand for capacity expansion.
　　Yarn sales are expected to increase steadily; we see substantial room for growth in fabrics business’ sales volume and earnings. The firm expects the sales volume of yarn, woven fabrics, and knitted fabrics to reach 880,000 tonnes, 180mn meters, and 28,000 tonnes in 2022, up 7.6%, 31.4%, and 55.6%. Given the firm’s business performance, we expect its main business to maintain mid-to-high single-digit growth and develop steadily via capacity expansion and product optimization. The firm has accumulated rich experience in woven fabrics R&D and production. Its existing clients have strong demand for orders and capacity expansion. The knitted fabrics business is experiencing efficiency improvements and maturing production process. The rise in price of outsourced yarns had put pressure on the GM of the knitted fabrics business for a short period but we see substantial upside to the profitability of fabrics in the medium and long term. Given peers’ profitability, we expect the firm to raise the GM of woven and knitted fabrics to around 25% and 20% in the short and medium term.
　　Financials and valuation
　　As the firm has planned higher capacity expansion and fabric sales growth than we had forecast, we lift our 2022 and 2023 attributable net profit forecasts 17% and 42% to Rmb2.05bn and Rmb2.15bn. The stock is trading at 3.7x 2022e and 3.6x 2023e P/E. Maintain OUTPERFORM and TP of HK$14.39 （5.5x 2022e and 5.2x 2023e P/E）， offering 48.4% upside.
　　Risks
　　Weaker-than-expected capacity expansion at overseas facilities; volatile raw material prices; surge in labor costs.