Cotton Prices Rise And Manufacturing Costs Increase

The macro-economy has been improving gradually, and the supply side reform policy has not been reduced.

In the first quarter, GDP grew by 6.7% over the same period last year, and CPI rose 2.3% in March, down 2.4% from market expectations, and PPI dropped 4.3% compared to the same period last year, which is higher than the market forecast of 0.3 PCT.

Export growth in March was 18.7% year-on-year, the first increase in 9 months. The growth of export data has stimulated the cotton textile industry.

Coupled with the policy of supply side reform, the phenomenon of rising prices in the upper and middle reaches of the textile and garment industry chain is particularly reflected.

And printing and dyeing two sub sectors.

We believe that the increase in cotton prices is mainly due to the delay of the national reserve cotton rotation policy beyond the market expectations, the decline of cotton supply at home and abroad and the rise in short-term demand.

1) policy: the round out policy is expected to start in May 3rd, and the time delay will exceed the market expectations, resulting in nearly 3 weeks of production cotton empty schedule.

2) supply side: the supply of cotton market in China is mainly divided into imported cotton and domestic cotton.

In 2015, the NDRC did not issue additional import quotas, and imports fell sharply by 39.8%.

The output of domestic cotton and Xinjiang cotton accounts for more than 6.

Due to climate impact, Xinjiang cotton fell 21.2% year-on-year.

The output of imported cotton and domestic cotton has dropped sharply, resulting in a tight supply side.

3) demand side: lack of domestic spot structure, low inventory of enterprises leads to short-term demand rise.

As a result of delayed policy and macroeconomic data, enterprises are being set up.

The demand is strong and the price is raised.

Spinning companies benefited from the increase in cotton prices, and benefited from Baron Oriental and Huafu color spinning, which is expected to have short-term performance elasticity.

We have preliminarily estimated the performance elasticity of the two companies.

1) Baron East: benefit from rising prices. If cotton prices rise by 5%, 10%, and 20%, net profit is expected to increase by 10.76%, 24.58% and 52.21% in the first quarter.

2) Huafu color spinning: benefiting from rising prices, if cotton prices rise by 5%, 10% and 20%, the net profit in the first quarter is expected to increase by 32.87%, 63.56% and 124.94%.

3) there is a positive correlation between the price rise of cotton and the stock price of the underlying company.

We choose the data from 3 years from 2010 to 2012, and find that the correlation between cotton price and the company's stock price is relatively high, and the stock price has a short-term lag.

The supply side policy of printing and dyeing industry continues to intensify, and the "sword" is real.

1) policy: under the pressure of environmental protection, the capacity to suspend production and stop operations is beyond market expectations.

Zhejiang, once again, will be able to cut down the printing and dyeing capacity of the province again.

2) supply and demand: changes in demand are relatively small, and a large reduction in supply has led to an increase in printing and dyeing prices.

3) voyage shares: as a leading company, it is fully benefited from the improvement of productivity concentration and product price increase. If the product price is increased by 5%, 10% and 15% respectively, the performance elasticity is 35.8%, 71.6% and 107.4% respectively.

Company as currently

The rate of occupation is only one digit. In the long run, the improvement of industrial concentration is expected to increase the company's strength.