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Texhong Textile Group

Texhong (‘company’) is engaged in cotton textile manufacturing and is the second largest operator in China by revenues. Its primary products are yarn (78% of revenues), and knitted garment fabrics (20%). It also sells grey fabrics and non-woven fabrics.

Its profits are primarily generated in China (49%) and South East Asia (48%), along with the US and others. Tangible assets are primarily located in China (90%) and the rest in South East Asia (mostly Vietnam). Its primary raw material is cotton and is exposed to escalations in prices, which hit decade highs in 2021. Trade payables are denominated mostly in US$.

Sales and profits rose in 2021 compared to 2020 to 26.5b rmb and 2.7b rmb respectively (PY: 19.6b and 530m) – primarily due to finished goods pricing increases. Though revenues in the primary yarn segment were up 34%, volumes were up only 9%.

The results appear to be a result of abnormally good operating conditions. Taking normal revenues of 22-23b rmb (achieved in 2019) and applying average margins over the recent past - results in normal demonstrated net profits of about 1.6b rmb.

The company does operate with net borrowings of 4.7b rmb. Though this is only just over 1x 2021 ebitda (4.4b rmb) and finances less than 1/3rd of total assets, 71% of it is comprised of floating rate debt that is vulnerable to the current climate of interest rate increases. This is made up of RMB (32% of borrowings), HK$ (42%), and US$ (26%) borrowings – bearing interest rates between 1.3 and 4%. These are partially hedged via interest and currency swaps. There are undrawn banking facilities, however, of 2.5b rmb - which would be valuable should operating conditions turn sour.

The equity sells for 6.5b rmb at market, which is about 4x earnings. It’s backed by tangible assets of about 10b rmb.

Management is also embarking on a plan of expansion – committing to 2.5b in capex. They’ve demonstrated returns on tangible assets of at least 14%. If they can maintain similar returns on newly deployed capital, shareholders can look forward to fruitful growth.

Dividends are fairly steady with recent annual dividends of 377m rmb yielding nearly 6% at market - and management have committed to payouts of ~30% of net profits.

Considering the prominent position of the company in a reasonably stable industry, the equity appears undervalued on quantitative and qualitative standards.

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