Texwinca's textile segment poised for a comeback

But its retail division to face a slight blip.

According to Maybank Kim Eng, its recent chat with Texwinca pointed to a solid recovery in textile sales in 2HFY3/13, sustained by a high utilisation rate of over 90%, as the difference in China/global cotton prices narrowed further and industry consolidation gathered pace. 

Maybank noted, however, that the only snag was the weaker-than-expected recovery in retail SSSG. We raise our FYMar-13/14/15F earnings estimates by 2%/34%/42%. Reiterate BUY with a Street-high TP of HKD12.4, based on an FY3/14 PER of 12X, offering 46% upside potential.

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Textile profits to rebound. We reckon that the differential in cotton prices between China and the rest of the world has continued to narrow, which should benefit companies without access to cotton import quotas.

Based on official data, China’s 2M13 textile exports grew 32% YoY, which dovetails with Texwinca’s growing order book visibility and increasing customer demand. The rebound appears to be supported by the company’s target to raise its textile capacity by 15-20% in FY3/14F.

Gross margins, too, would have normalised to above 20% since 4QFY3/13 (1HFY3/13: 13%) and should be sustainable against our original mid-to-high teens estimate, in our view. 

Short-term pain at retail division. SSSG stayed in negative territory as opposed to management’s expectation of 5% growth in 2HFY3/13F. Weak apparel demand played a role, but the biggest blow was dealt by the aggressive discounting policies of local sportswear and casualwear brands.

Softening rentals, however, offered some cheer and inventory days stayed at a healthy level of 80 days. Short-term headwinds notwithstanding, management is still confident that it can bank on its ongoing product mix upgrades and brand rejuvenation efforts to achieve a double-digit retail EBIT margin in the next 1-2 years. 

Expect a multi-year bull market for textiles. We project a 23% YoY decline in Texwinca’s FY3/13F adjusted net profit. However, our latest forecasts point to 96%/27% profit growth in FYMar-14/15F, as continued industry consolidation and high entry costs allow the company to enjoy scale benefits.

The trend is also reflected by a surge in rush orders, as smaller rivals failed to meet customer requirements. We also expect Texwinca to benefit from the restocking activities and market share gains of its US blue-chip customers.