Textile industry: in a difficult period, the leftovers will be king this year

Textile industry: in a difficult period, the leftovers will be king this year

The textile sector performed outstandingly yesterday, with Huafang Textile hitting its daily limit, and individual stocks such as Golden Eagle and Shenzhen Textile rising sharply. As of yesterday’s close, the Great Wisdom Textile and Apparel Index had risen from a low of 1,043.30 points in November last year to 1,486.21 points, an increase of more than 40%. Orient Securities believes that brand retail companies that focus on domestic sales and industry leaders with relative monopoly advantages have broad room for growth in the future.

The industry is in a difficult period

Data show that in the first 11 months of 2008, the main revenue of textile enterprises above designated size increased by 13.80% year-on-year, while total profits fell by 1.77% year-on-year. This was the first profit decline in the industry in the past 10 years. Factors such as macroeconomic control, rising costs, the continued appreciation of the RMB, and the subsequent deepening of the financial crisis caused by U.S. subprime mortgages, which has led to a significant slowdown in export demand, have all become the triggers for this round of industry adjustments. The industry itself has inherent inherent problems with years of extensive growth. Contradictions have exacerbated this round of industry crisis.

The current decline in the industry’s export growth rate mainly comes from clothing in terms of variety. We believe this is closely related to the slowdown in foreign consumer demand and the loss of orders caused by rising domestic labor costs; from a regional perspective, it is mainly related to the United States Exports to Hong Kong dropped significantly, while exports to Europe were better. Affected by macro-control at the beginning of the year and the expected decline in industry prosperity, the growth rate of fixed asset investment in the industry has declined significantly since the end of 2007, and the downward trend has not stopped.

The decline in industry export growth has led to the return of a large number of export products, which has also had an impact on the domestic sales market. While a large number of small and medium-sized and export-oriented manufacturing companies have gone bankrupt, some companies with advantages in technological innovation, brand building and channel management have still maintained a certain growth. We expect that the domestic sales growth rate of the industry will decline to a certain extent year-on-year in 2009. However, considering the large domestic population base, low per capita textile consumption (especially the huge room for rural consumption growth) and the stimulation of domestic demand by national policies, the domestic sales of the industry will It can still maintain a growth of about 10%.

Key companies have a performance turning point

At present, there are 57 listed companies in the textile industry in Shenzhen and Shanghai. By analyzing the three quarterly reports of the entire industry sector in 2008, we can basically see the new situation of the listed companies in the industry:

The revenue of the textile and apparel industry is still growing, but profits have barely grown. Since Youngor accounts for more than 40% of profits in the industry sector, if the company is excluded, the industry’s operating income, total profits and net profits in the first three quarters increased by 12.16%, 6.94% and 0.42% respectively year-on-year.

The slight decline in the overall gross profit margin of the industry and the increase in period expenses (especially financial expenses) are obviously the main reasons why profit growth is lower than revenue growth. The third quarterly report shows that the overall gross profit margin of the industry in the first three quarters dropped from 16.39% in the same period last year. 15.62%, while the proportion of financial expenses in operating income increased from 2.57% in the same period last year to 3.17. The reduction in income tax rates starting in 2008 is one of the main reasons why the apparent net profit growth rate of the industry is higher than the total profit growth rate. The year-on-year growth of net cash from operating activities in the industry in the first three quarters exceeded the year-on-year growth rate of net profit, but the quality of industry asset operations continued the situation reported in the interim report and was declining year-on-year.

Some key companies that performed well in the early stage began to see a downward turning point in the third quarter. The operating conditions of most export manufacturing companies have further deteriorated based on the 2008 interim report. The specific manifestations are a sharp decline in gross profit margins, leading to a decline in profits or losses, some companies’ operating income has begun to decline.

Industry valuation is at historical bottom

At present, the overall price-to-book ratio of the textile industry is lower than the market average, and the price-to-book ratios of most key companies are close to or lower than the low levels of the market and industry indexes. The industry’s overall dynamic price-to-earnings ratio in 2008 has been lower than the low levels of the market and industry indexes. From the historical comparison of the valuation trends of various textile sub-industries with the broader market, we can find that the textile and clothing sub-industries are basically in sync with the broader market. We believe that the industry will continue to continue this trend in the future. It should be noted that due to pressure from within and outside the industry, many companies have begun to transform their profit models in recent years. The growth rate of fixed asset investment in the industry has shown a gradual decline, and corporate operations have also evolved from asset-heavy to asset-light. In addition, a large number of assets have appreciated without any revaluation, so it may not be reasonable to conduct a complete vertical comparison of price-to-book ratios.

We believe that the space for further decline in the textile sector is relatively limited in the future. The 2009 quarter may become a periodic low, and it may gradually stabilize or recover starting in the second half of 2009. After this round of industry survival of the fittest and upgrading, more and more companies in the industry and within the industry will gradually get rid of the attributes of primary processing and manufacturing, and more present the characteristics of consumer goods (brand retail, technology-based) companies, and the overall valuation of the industry The level will also be significantly improved.

Analysis of future investment strategies

We believe that the future trend of the RMB exchange rate may be warmer for the industry’s exports. The recent policy warm winds will have a positive promotion effect on the industry and will have a positive cumulative effect. The introduction of subsequent policies may provide short-term prospects for the industry. Create certain trading opportunities, but neither current policy benefits nor possible future benefits can fundamentally change the situation.The plight of the industry cannot change the process of survival of the fittest in this round of the industry.

At present, we have not yet seen the dawn that can reverse the overall decline of the industry. We maintain our “neutral” rating on the industry. In 2009, we are moderately optimistic about the winners amid industry adversity. We believe that companies that can survive the winter will usher in a brighter spring after the industry recovers. Brand retail enterprises focusing on domestic sales and growth leaders in niche industries with relative monopoly advantages (clothing accessories, fabrics, accessories), as well as leading companies with comprehensive advantages such as industrial chain, internal management, cost control and diversified investment The future growth space is even broader.

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