Guosen Securities released a research report that Texhong Intl Gp (02678) is a global leader in cotton yarn production. In the first half of 2024, the company's revenue increased by 4.2% year-on-year to 11.24 billion yuan, mainly driven by the growth of its yarn business. Net income attributable to the parent company was 0.27 billion yuan, reversing the loss of 0.75 billion yuan in the same period last year. The gross margin increased significantly by 10.8 percentage points to 13.2% year-on-year, and by 3.1 percentage points quarter-on-quarter, mainly due to the recovery of production capacity utilization and the completion of digestion of high-cost inventory pressure at the end of last year.

The bank further pointed out that the company is focusing more on its yarn business: 1) Yarn business revenue in the first half of the year increased by 8.9% year-on-year to 8.81 billion yuan, accounting for 78.4% of total revenue, an increase of 3.4 percentage points. The volume and price increased by 6.6% and 2.2% respectively. By grasping the demand for functional sportswear and increasing the sales of related products, the company achieved growth. At the same time, the control of production capacity utilization and the clearance of high-cost inventory resulted in a significant improvement of 11.8 percentage points year-on-year and 2.5 percentage points quarter-on-quarter in yarn gross margin. 2) The midstream and downstream businesses mainly consist of woven fabrics sold to overseas markets. Due to the weak recovery of overseas markets, the revenue in the first half of the year decreased by 3.2% to 0.99 billion yuan, accounting for 8.8% of total revenue. Both volume and price decreased by 1.6%. By reducing expenses, the gross margin improved by 6.7 and 5.5 percentage points year-on-year and quarter-on-quarter respectively. 3) Due to the sale of the Vietnamese knitted fabric factory, the capacity decreased, and the revenue and sales volume decreased by 25.5% and 25.2% respectively year-on-year, accounting for 2.7% of total revenue. The sale of the Vietnamese factory improved profitability as it was previously unprofitable. The gross margin increased by 2.2 percentage points to 11.4% year-on-year. The company expects to sell 0.4 million tons of yarn, 48 million meters of woven fabrics, and 6,000 tons of knitted fabrics in the second half of 2024, with a total yarn sales target of 0.77 million tons for the year.

The bank stated that the company's yarn business achieved stable growth in the first half of the year. With the recovery of production capacity utilization and cost optimization, the gross margin of various businesses improved year-on-year and quarter-on-quarter. In the second half of the year, it is expected that the order volume and price will continue to recover. In the medium to long term, the local supply chain is the trend, and the company's early global layout gives it a competitive advantage in local supply chain and fast response, as well as a leading scale advantage, which is expected to continue to gain market share. The bank maintains its profit forecast, with projected net income attributable to the parent company for 2024-2026 of 0.59/0.76/0.92 billion yuan, with growth rates of 29.2% and 21.5% for 2025-2026. The target price is maintained at HKD 4.7-5.0, corresponding to a PE of 6.7-7.2x for 2024, and a rating of "outperform the market" is maintained.