2678.HK - Texhong Textile

[Laxputs]

Thanks for this. Well I don't believe cheap cotton is a bad thing for Texhong. The idea is that they pass along the marginal costs of input to their customer, and have scale advantages to be the low cost provider. So cheap cotton only hurts them in the fact that they have some stockpiles of expensive cotton that they are selling through. Once those stockpiles are sold through, they are making yarn out of cotton purchased at these current cheap prices. So range of cotton prices doesn't really hurt them on the long run, just makes for erratic earnings.

[yadayada]

yea earnings took a hit basicly because they had a stockpile of cotton at elevated prices bought in 2013, because of all the cotton stockpiling of the Chinese government. And textile prices went down because cotton prices went down in 2014 so far. So there is some lag. But once they buy the lower priced cotton, earnings should turn up and this thing is very cheap.

[lathinker]

Texhong buys some land in Vietnam from an entity majority-owned by Mr. Hong Tianzhu.

http://www.texhong.com/upload/2015/01/21/2015012117581575824.pdf

 

This kind of transaction with the CEO/main shareholder raises a red flag in my view.. Why would Texhong not have bought the land in the first place? As a small mitigant, they at least disclose the details quite openly and I prefer this kind of disclosure to some hidden footnote in an annual report.

 

Anybody have a good reasoning why this should not make you suspicious? Alternatively, a FV estimate of the site in Vietnam?

[physdude]

Does anyone know the reason for the sudden ~20% increase today? Too bad it happened before I could make my position a full size one.  :(

[Laxputs]

Can't find any news. 12x average volume though...

[JM]

DBS Vickers came out with a Buy report last night. Sorry I can't post the whole thing but here's a clip:

 

A replay of 2012?

 

Margin normalization to play out as cotton price

stabilized

 

We see commonality in 2015 and 2012 and are

optimistic on a share price rebound

 

Fundamentals will take time to reflect, but we think it is

now time to accumulate

 

BUY reiterated with raised TP at HK$8.8ps

 

Significant shipment volume increase masked by an off year.

 

Texhong’s share price has been weak in the past year in view of a falling cotton price amidst China’s change in cotton policy. The margin compression has impacted FY14F, and this has masked the significant volume increase of over 50% during the year. With cotton prices now stabilized, FY15F margins should normalize and the impact of this higher volume should be more apparent. Compared to 2012, Texhong now has more than double its capacity, and a normalized margin will start to show this.

 

Margin recovery, just like 2012?

 

In the beginning of 2012, Texhong was recovering from a bad 2011 amidst falling cotton prices. We think 2015 will be similar as we

enter the year with a much more stabilized cotton situation. In addition, just like 2012, current stabilized cotton costs both in China and overseas have helped locked in some of the price difference between Chinese cotton and International cotton at Rmb2,000-3,000 per ton, giving better clarity to the margin outlook.

 

Share price to move earlier this time.

 

We have revised down our earnings on updated ASPs and input costs. The FY14F results to be announced in mid March should be a

non-event due to the earlier profit warning. We do think a more upbeat guidance during the announcement will be likely given the stabilized margin. We think as the market is now more familiar with the Texhong story, share price will likely move ahead of actual ASP recovery. Wildcards like the TransPacific Partnership, should it be completed, can be potential catalyst due to the company’s leading capacity share in Vietnam and the potential duty free access offered to manufacturers within the partnership. We have raised our

TP to HK$8.8ps based on 8x 1 year rolling P/E and reiterate our Buy on the stock.

 

 

[Laxputs]

Thanks for that. Would be nice to read the full report. Amazing how quickly the market reacts to one report.

[yadayada]

Anyone has a clue what effect the TPP would have? I keep hearing texhong will be a homerun if that happens. making north of 2b in profit. according to some political analysts there is a 50/50 chance that thing will be signed this year. But I also hear that the TPP will have a lot of negative side effects.

[60North Investments]

Annual results were published some hours ago. Revenue up 27% YoY with EBIT down 55%. EBIT margin just 5.7%. They decided to ditch the expansion into Turkey for now, but will invest 600mRMB in Vietnam in 2015. The decline in profit seems to be mainly due to low yarn sales prices in China. I'm not sure how much they work to move their profits to certain areas due to taxation, but Mainland China had the largest sales to external customers, yet showed no profits.

 

Revenue growth looks nice especially when considering that sales prices have come down quite a bit, meaning that the volume increases have been very significant unless I'm missing something. The question for me is, are they going back to 15-20% EBIT margins, and if so, when could that actually happen. Glad to hear if anyone has any thoughts!

[Golden Geezer]

This is pretty much where I hoped we would be (and apparently where the market thought we were as the share price did not move much today on lowish volume though let's see what happens tomorrow).

 

A 52% increase in capacity year on year from 284k ton to 432k ton of yarn (and an extra 15% coming in next year to circa 500k tons) means that the company is well positioned if the cotton price remains stable in 2015 (as I think it has so far). So the revenue is where I hoped it would be. 

 

The beauty of this stock is that short term movements in cotton prices hide the gross profit story as the company has to burn 90 or so days of cotton inventories at lower prices. But everyone is hurting and as the lowest cost producers it means they should hopefully gain some market share...

 

If there is positive news on the TPP, or an increase in cotton price then the price could take off. If there are further issues in Vietnam between Chinese and Vietnamese (as there was earlier last year) or if the cotton price goes down again then we could go back to 5hkd. I guess a change in cotton pricing policy in China would impact them (but not sure how).

 

I think Turkey and South America is a distraction. I'd rather the company focuses on China and Vietnam.

 

All in all, I am impressed how the chairman has steadfastly executed the capacity expansion plan. Here's hoping for a positive profit announcement in a couple of months, they seemed to have done this a couple of times in the past...

[Laxputs]

Things are looking good. 52% yarn tonnage sales increase 2014 vs 2013. 432 yarn tonnage 2014 with guidance to 500 tonnes 2015. More capacity coming to Vietnam with 250k spindles and that production going online in 1q16.

 

The GM pain is mainly from the falling cotton prices. Texhong is producing yarn with older more expensive cotton given their 90 day inventory. The inventory will not get burnt through until the cotton prices stop falling.

 

http://www.cottoninc.com/corporate/Market-Data/MonthlyEconomicLetter/pdfs/English-pdf-charts-and-tables/One-Year-of-Daily-CC-Index-Prices.pdf

 

Here we see 3 months of almost constant prices. If the stability continues (or if cotton prices increase) GM should return to 17-20%.

 

There is some yarn ASP pricing pressure as well due to slower Chinese textile demand (but thus far, less of an impact).

 

Hopefully we see a positive profit alert in the coming months.

 

I should say that my understanding of the company and the investment case has been heavily influenced by the Red Corner Blog, some of this is just regurgitation.

 

 

[yadayada]

Funny that sritex trades at around 20x earnings. A lot of these companeis trade on high multiples in anticipation of a TPP deal.  If Texhong would trade there it would probably trade at around 25 billion hkd? That would be more then 200% upside from todays price. If they suprise on the upside with their vietnam factories, that could even be 30-35bn. Id be out long before that though.

[yadayada]

In h1 2014 production was 182k tonnes. And this year it was 216k tonnes. A 18.6% increase.

 

Raw material costs were at about 3.1 billion both periods. But they dropped about 30% over that period... So something is not right here.

 

If we assume 30% lower inventory costs, then we should first  increase 3.1 billion (the costs of 2014) by 18.6% (the increase in volume), but then decrease it by about 30% to get normalized cost of raw materials. Then you would get 2.6 billion RMB. Vs 3.15b RMB.

 

So that means raw material costs should drop another ~600m? assuming cotton prices stay stable. And only half of the price drop is reflected here. So Scratch that, thesis still stands!

 

Another way to verify this is to check cotton prices (both US and Chinese). if you multiply 13k times 216k you get 2.8 billion. Not 3.15 billion. And they do get half their cotton from the US? US cotton is trading at 70 cents per pound, or 8800 yuan per tonne. So there you should get a much lower raw material cost.

 

Thoughts?

[Laxputs]

H1 2015

 

Texhong's thesis is the most challenging of the companies I own. There are so many variables and those variables have fluctuating prices. There are 2 commodity prices and several countries that influence the equation. There is government regulation that works both for and against them.

 

The company did 17% GM H1. Judging by the falling price of CC Grade 328 up until Dec.14 it seems to me that that at least 30% of the period they were still using expensive cotton to produce their yarn. Also, the ASP of yarn fell during that period. The ASP of yarn is directly correlated to cotton, but is still a unique variable in calculating their short term margins, as I see it. So margins in H2 will benefit from stabilized cotton prices (though still fell a bit) and more stable yarn ASP (company also states this in regard to H2 2015).

 

In the long-term, in theory, given Texhong is the low-cost producer and that their China 'ex-Vietnam arbitrage' GM seems to be around 15% which translates to 6-7% NM, then at that yarn ASP, the high-cost producer whose output is needed to satisfy total demand is likely breakeven or losing money. The changes in cotton prices and yarn ASP is just noise to Texhong in the long term. Texhong essentially grosses up their fixed costs, adds in the variable cotton costs, and makes at least 15% GM over a reasonable time frame.

 

In H1 2014, mgmt guided to 500m tonnes of yarn from 2'220'000 spindles. Given they have only 2'160'000 for 2015, volume needs to be adjusted accordingly, to 486.5t, I believe. Mgmt also mentioned moving some facilities around (not expanding) so I assume that cut into H1 volume somewhat.

 

I think it will be interesting to see what they do H2 2015. Revising the guidance for 2015 to 486.5t from cotton alone, we should see more volume H2. This does coincide with previous years doing more volume in the second half of the year but I'm not positive it's from seasonality rather than increased production facilities (tricky to separate). Their margins are likely going to be materially above 17%--but I'm not sure if that's 18% or 20%. The market should rerate them on runrate margins that will be better than H1, and on the 12% increase in production capacity that will be operational 2016, plus the Xingiang JV project (numbers yet to be released).

 

This is the only company I don't have more precise forecasts pinned down. But I think there is a long term MOS in cash flows close to today's price and upside is looking like 50-100% with a time frame of 2015 results released mid March 2016.

 

Looking forward to input from others.

[yadayada]

Yeah so this is price chart (from red's blog):

http://2.bp.blogspot.com/-NteF-rc255E/VRwROyejv6I/AAAAAAAACSc/mHUa7nIxsW8/s1600/CC%2B328%2B2014.png

 

In 2013 they produced 283k t. And they spent 5.8b on raw materials. So that is 20500 RMB per ton. Which seems about right. They barely had any ops in Vietnam then.

 

Then in 2014 they produced 431k t, and spent 7.2b, and that is about 16600 rmb per ton. Which seems about right looking at the graph.

 

And then in h1 2015 they spent 3.1b on 216k t of material produced. Which is 14300 rmb per ton.

 

But about 1 million spindles are in Vietnam, and 1.17m are in China.

 

And average price per ton of material from the US was about 9k RMB in 2015 (with steady prices) and 13.5k rmb in China. So average raw material cost going forward should be closer to 11-12k RMB per ton. That should all be pure profit since yarn prices have adjusted already.

 

Since yarn prices have stabilized now, I get 1.5-2b in normalized profit if all commodity prices stay stable. If cotton moves up, that is in texhong's advantage (unelss they move up too much).

 

Since inventory turns over in 80 days. Going into 2015, they still had 80 days of bought inventory from 2014 that was bought at a higher price. So if you adjust for that, you would get about 200m RMB of extra profit. Or about 250m HKD. Since now going forward they have their lower cost raw materials, witht he same yarn prices.

 

So going forward on 10.5b of revenue, you have 5.8b in raw material costs (assuming 12k per ton), and about 2.4b of other costs to get a gross margin of 22%.

 

Subtract 750m of SG&A and selling costs, and about 220m of interest, and another 200m of taxes, and I get 1.15b RMB in net income. or about 1.43b HKD in net income. So earnings yield of 20%.

 

But they are installing 250k new spindles in vietnam, and will expand their China operations. Then bonus upside comes from yarn prices recovering a bit and TPP signing so they can export to Europe.

 

And at full capacity in 2015 they will produce over 500k ton, and that will net them close to 1.7-1.8b HKD profit? Even if Im wrong they will do 800m-1b HKD in profit. So then the stock is still on the cheap side. You wait till next earnings release in april 2016, see if the thesis is right, and then you either get 50-100% price appreciation as the market recognizes it, or if we are wrong, price will stay at about 7-9$ and you don't lose.  Since they are one of largest low cost provider there is little risk. Seems like a good deal.

[Golden Geezer]

Texhong should be well positioned to benefit from TPP:

 

http://www.barrons.com/articles/4-stocks-to-win-from-trans-pacific-trade-deal-1444202959

 

[Golden Geezer]

Texhong is motoring along nicely. A good set of results and a very smart founder which has positioned them well:

 

http://www.just-style.com/analysis/is-vietnam-ready-to-reap-the-benefits-of-tpp_id127463.aspx?utm_source=insights-feed&utm_medium=rss-feed&utm_campaign=rss-feed

[Laxputs]

Anyone selling Texhong after the runup? I noticed Red Corner is parting with some of his shares.

[Golden Geezer]

I also sold down at around HK$9.30, this is quite a volatile stock with a support around HK$5 which it seems to test every year or so. I wanted to take some profits, as I was up approx. 75%. If TPP gets signed then I will lose out a lot but it seems unlikely. I would buy again if it went back down to HK$6-6.5. It's still a great business.

[Laxputs]

1H2016 results out. Still holding on to all of my shares after the 95% run-up. I'd reconsider selling if they approached a high teen price range within a year.  In the prospectus, mgmt mentioned that they expect cotton prices to rise 2H2016 and that companies with cotton stockpiles should benefit (i.e Texhong).  So we will see what the market does to the share price when stronger margins meet larger capacity.  The quality of management, the profitable expansions that will keep happening, the 30% dividend, the small chance of TPP, are keeping me in. Thanks to the Red Corner for a nice win on this one.

[KJP]

I'm also still holding.  (We seem to be invested in the same things.)  Red posted an update this morning about a recent company roadshow presentation that I don't have access to.  The numbers look good, as you would expect.

 

[ccplz]

Who is Red?

[KJP]

Who is Red?

 

The author of this blog:  http://quinzedix.blogspot.com/

 

[Laxputs]

Anyone still own Texhong and want to hash out some numbers over skype or email? Would be nice to collaborate. PM please.

[Laxputs]

Anyone following Texhong? Rising after a long time. I've owned this for years without much analysis, one of a few legacy stocks from following The Red Corner Blog. Anyone with thoughts on it? Thanks.