New Alert: Texhong (2678 HK) announced 2HFY2021 positive profit alert (+ve)
What’s new
- Expect net profit for 2HFY2021 at a similar level to 1HFY2021, within our expectation
- Higher than normal gross margin thanks to the high ASP amid rising raw material prices.
- Texhong will continue to be the beneficiary of an inflationary environment
- Recommend BUY with TP at HK$20.00
The positive profit alert announced that the net profit after tax for 2HFY2021 was at a similar level to that for 1HFY2021, indicating net profit to reach RMB1.29bn level. Given that the inflationary environment in 2HFY2021 was similar to that of 1HFY2021, the Board is of the view that the strong performance was mainly attributable to the continuous recovery of market demand for textile products and strong product gross margin. Due to the increase in raw material prices, the ASP has been raised accordingly. As a result, the overall products of the Group had a higher than normal gross margin for 2HFY2021.
Our view:
- The positive profit alert will be positive to the company’s share price.
- The strong expected results and higher than normal margin under the inflationary environment is anticipated and mentioned in our previous report on 7 Sep 2021: In-depth analysis Outrageously undervalued
- We continue to believe that Texhong is misunderstood by the market, trading at below 4x FY22F PE, (-1std of its 5 years mean). This contrasts with industry bellwether Shenzhou’s (2313 HK)’s c.30x FY22F PE.
- We continue to believe investors should take note that Texhong has consistently grown its volume and maintained good profitability over a long period of time.
- Moreover, the company’s upstream business will continue to be a beneficiary of an inflationary environment.
- We recommend BUY with TP at HK$20.00