2678.HK - Texhong Textile

[yadayada]

The inventory

turnover days and trade and bills receivable turnover

days were 100 days and 39 days respectively, compared

to 78 days and 36 days in 2012. Increase in inventory

turnover days was mainly due to the expansion of our

production facilities. In addition, customer orders had

been temporarily affected by the uncertainties on the

PRC government policy in cotton purchase and the

fluctuation of international cotton prices in the fourth

quarter of 2013.

I think what is happening is two things, increase in production near end of year, so this ratio looks higher. And company's buying textile in China expect lower prices in the future. It seems prices were unusually high because of the insane spread in 2013. Why would they buy more expensive textile right now if mills will be able to buy cotton cheaper later in 2014 due to policy changes? That is probably why they held off on buying.

 

But yea i wonder how big of an hit this will be to the company. They probably have to write a little bit off?

 

But why the hell did they halt trading? Trying to buy the company?

 

Mr Hong owns more then 50% and chairman owns like another 35%. So they own 85% through some holding company's. I dont see any other insiders owning a large stake? If 10% votes against some lowball offer were good. I thought if they do something like this, they would have done a takeover when it was trading at like 1.85. They could have done an offer for like 2.20 and still got the company for dirt cheap.

[paperwerks]

Hola Yadayada,

 

Yes, I am also guessing a writedown but who knows. Maybe the news will be positive and maybe the bad news is already priced into the stock and it is not so bad. The stock is down to 5 from 16 so a lot is already priced in.

 

I love the volatility of this stock and cyclicality of the industry. Reminds me of the oil refiners in a bear market and how they run up after it turns. There must be a good opportunity here at some point.........

 

 

 

 

[yadayada]

I dont think it is cyclical tho. 2011 was a v unique sitation because of the cotton bubble. This seems to be a unique situation in last 30 years. Profits have mostly been steady. They will last as long as innefficient cotton farmers in China need to be protected and Chinese government doesnt let free market do its job to weed them out.

[cameronfen]

I don't know if I buy what the company says on inventory.  It might be true but I have to check it out myself.  1.  The company has been growing every year at a similar rate and has more production at the end of the year than the beginning every single year, yet inventories have still never been this high.  Companies waiting to buy cotton is more believable, but I have to believe that most manufacturing firms that buy yarn will try and keep inventories low so it is not like they can or are even in the business of time arbitraging cotton. 

 

I wonder why they stopped trading.  Maybe you guys got bought out? 

[yadayada]

yeah but production went from 20k bales to 32k bales in last 2 months, that is huge. And this is mostly not reflected in revenue. I added all the numbers since 2006 in your excel file with multiples with revenue projection in 2014 with the new capacity, look for yourself.

 

 

Texhong_cotton_data.xlsx

[rykelsap]

The halt was due to protesters in Vietnam causing minor damage to Texhong's South Vietnam Facilities and the temporary halt of production at these facilities.

 

http://www.texhong.com/Public/Uploads/537377fd7de38.pdf

 

The protests appear to be indiscriminately targeting all businesses that are owned by Chinese corporations.

 

http://www.bbc.com/news/world-asia-27403851

[cameronfen]

@rykelsap Man I was reading about damage to Chinese factories in Vietnam I should have connected the dots...

 

@yadadada I'll put up my adjustments to your adustments to my excel :) Basically you are right, Texhong should have higher inventories because growth was higher, although the numbers still shouldn't be this high (projected finished goods should be at 8% of revenue). But I guess at this point Texhong and Texhong investors have other things to worry about.  But I already did the work so I guess I might as well share...

Texhong_cotton_data_1.xlsx

[yadayada]

yeah I wonder how this will work out. If it gets out of hand and they have to close or halt several plants this could get nasty. But then again, the stock could get much more cheaper then it is now :D. if they make like 4-600 million in China alone, and the stock drops another 30% or so, it would be cheap if they sold off most of their Vietnam assets and just operated in China.

[king888]

Is Texhong comparable to Thai Rayon ( BKK:TB)  ?  The profit from the last 5 years has been voltalile. It is trading at 0.3x book value

[yadayada]

they dont seem to make the same products, and seem to have much more volatile earnigs, but thanks for posting.

[yadayada]

made it a 10% holding now. Might buy some more if price goes around 5$. Interesting that a lot of comparable textile company's trade at around 12x earnings. They all pay huge dividends, and seem to basicly trade on that. So either two things happen, these guys will keep growing and pay about 30% in dividends on average, or they stop growing and pay most of their income in dividends. so between close to a billion and close to 2 billion of income. This thing should trade at 11-12 billion at least. There is a huge margin of safety here. Looking at the competition, it is likely that margins will expand as well. So like 800 million of net income in 2015 is like the absolute bear case. And that leaves like a 100% upside.

 

Also cant see their low cost advantage dissapearing anytime soon. They have half their operations in one of the cheapest countries in the world in terms of labor, energy and raw materials.

[yadayada]

http://quinzedix.blogspot.de/2014/06/texhong-texile-group-yarns.html

 

 

[yadayada]

Very informative report on bond issue. Break down of competitor, textile industry and where they think they have an edge. Added in attachment.

Debt_Registration_Document.pdf

[xxx1313]

Thanks, yadayada.

 

I wonder why they have to pay 7.625 % for a 1.5 year USD bond (!). It is rated “Ba2” by Moody’s and “BB” by S&P, not too bad. Is this an extra premium on everything related to China?

[yadayada]

I think it had to do with the cotton bubble. Bond issue was right around that time. That squeezed their margins. Naturally financial markets are unable to think one year ahead.

[SpecOps]

I like Texhong and recently bought some shares. Didnt make it a large position as I want room to top up if it falls further, always a wild ride with stocks as volatile as this.

[jch548]

I didn't see any comments on Moody's latest action. Should be able to work off of their debt figure to get at projected ebitda numbers. But what is Moody's definition of debt?

 

Liked the part where they should be able to liquidate their high cost inventory in short order.

 

I only have a small starter position here. Haven't had time to give it a hard look.

 

 

Announcement:

Moody's: Texhong's 1H 2014 profit warning is credit negative

  The document has been translated in other languages

 

Global Credit Research - 13 Jun 2014

 

Hong Kong, June 13, 2014 -- Moody's Investors Service says Texhong Textile Group Limited's profit warning for its 1H 2014 consolidated net profit is credit negative, but has no immediate impact on the company's Ba3 corporate family and senior unsecured bond ratings.

 

 

 

The ratings outlook remains stable.

 

 

 

On 10 June 2014 Texhong announced that its 1H 2014 consolidated net profit is expected to decline substantially from the RMB447 million achieved in 1H 2013.

 

The likely weak profit is due to: (1) lower yarn selling prices in China, owing to the lower cotton auction price set by the government on 1 April 2014; and (2) the depreciation of the RMB.

 

"We believe that the profit decline is short term in nature because the company's China facilities will take in lower priced cotton in 2H 2014. Moreover, the yarn selling price has stabilized," says Chenyi Lu, a Moody's Vice President and Senior Analyst.

 

Texhong has less than two months of cotton inventory in China to support its operations and Moody's estimates that the company will use its entire higher cotton cost inventory in 1H 2014.

 

Moreover, while international cotton prices increased in the first four months of 2014, prices fell in May and early June to levels similar to those seen at the start of 2014. The lower prices should help lower Texhong's cost of purchasing cotton overseas after 1H 2014.

 

Moody's expects Texhong to recover some of its profit margin in 2H 2014. If, however, the recovery takes much longer, Texhong's ratings could be under pressure.

 

"With the reduced margin, Texhong's debt/EBITDA in 2014 will deteriorate to 4x. Nonetheless, this ratio is within the parameters of its Ba3 ratings," says Lu, who is also Moody's Lead Analyst for Texhong.

 

The company has indicated that its sales volume for yarns totaled 37,000 tons in May 2014, which is well above the average monthly sales volume of 23,667 tons in 2013. The improved result in May was driven by higher manufacturing capacity and strong demand for Texhong's products.

 

Moody's estimates that Texhong's revenue will increase by about 30% to around RMB10.7 billion in 2014, driven by the higher capacity. Its debt/EBITDA is expected to deteriorate from 3.4x in 2013 to around 3.5x-4.0x over the next 12-18 months.

 

The principal methodology used in this rating was the Global Manufacturing Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

 

Established in 1997 and listed on the Hong Kong Stock Exchange in 2004, Texhong Textile Group Limited specializes in producing core-spun yarn and textile products.

 

The company currently operates 15 yarn production bases; 12 in the Yangtze River Delta and Shandong Province in China, and three in Vietnam. Its chairman, Tianzhu Hong, holds a 54% stake, and is the majority shareholder of the company.

 

Lu, Chenyi

Vice President - Senior Analyst

Corporate Finance Group

Moody's Investors Service Hong Kong Ltd.

24/F One Pacific Place

88 Queensway

Hong Kong

China (Hong Kong S.A.R.)

JOURNALISTS: (852) 3758 -1350

SUBSCRIBERS: (852) 3551-3077

 

[yadayada]

if you do, check out the debt registration document i posted a few posts back, that one is very informative.

[Patmo]

Wait, what are the legal differences between NA investors buying into HK-traded companies vs. buying into NA-traded reverse mergers? Say the company goes belly up, do you actually have a claim on the assets?

[yadayada]

yeah there is a difference, you do have a claim on assets. I think because it is actually in China, and you invest along with chinese people that you are more protected. They don't give a rat's ass about mostly american investors.

[Laxputs]

Assuming that long-term gross margins are constant at 15% (or better) even if a convergence of domestic and foreign cotton prices happens, what could cause production to be reduced?

 

1. An abnormal spike in cotton prices (and domestic/international price convergence)?

2. Unlikely government involvement by restricting total amount of foreign yarn/cotton imported?

3. Chinese crash/recession?

 

How can Texhong produce 15% gross margins when cotton prices converge in an industry that doesn't appear to have barriers to entry?

 

[yadayada]

all very unlikley to happen if you look into it youll see. as for 3, the TPP happening is a hedge against that.

[Laxputs]

I'm having trouble deriving the 15% gross operating margins/ the base case. I've read through this thread and the VIC and all of blogger Red Corner and the financial statements from the company. It's clear to see, on average cotton prices multiplied by their greatly increased capacity, this company is selling very cheaply, but I would like to get to the minimum, normalized, 15% gross operating margins.

 

The variables of international cotton prices, domestic cotton prices, domestic production, Vietnam production, and what their product can be sold for in the short term and long term given that the end product (the textiles) are going to be sold for less as cotton prices have been reduced, are keeping things a bit murky for me.

 

If anyone can clearly, mathematically lay out the base margin case when the spread of domestic vs international cotton prices converge, I'd appreciate it.

 

TIA.

[Laxputs]

Interim results out.

 

http://www.texhong.com/home/listednotice.htm?catalogid=58&childcatalogid=72

 

 

[physdude]

Another profit warning out - http://www.aastocks.com/en/stocks/news/aafn-news/NOW.632178/1. There is not much price reaction so the current depressed price has probably already taken this into account.

 

Does anybody have any idea how long the cotton prices can remain depressed going forward?