65143755

Asia Pacific Equity Research
26 November 2013
Initiation
Overweight
Texhong Textile
2678.HK, 2678 HK
Price: HK$10.94
Initiate with OW Spinning into a fast growth phase
Price Target: HK$16.00
We initiate coverage of Texhong Textile with an OW rating and a Dec-14

PT of HK$16.0, implying potential upside of 46% over the current share
price. Texhong is a leading yarn and fabric producer, with over 1,200
types of yarn products and 2,700 types of fabric products. It is a global
leader in Spandex yarns and is growing capacity aggressively.
China
SMID-Caps
Andrew Hsu
AC
(852) 2800-8572
andrew.tj.hsu@jpmorgan.com
Bloomberg JPMA AHSU <GO>
Cost advantage of Vietnam plant. Texhong currently benefits from

cheap cotton sourced from Vietnam. This cost advantage has allowed
Texhong to take market share from yarn makers located in China.
Unlike most of its domestic peers, the company has 40% of its
production capacity outside of China, i.e., in Vietnam. The company
also makes higher-end synthetic yarns in China and specialty yarns,
where proximity to customers is an important differentiator.
A volume play, in a nutshell. New capacity is the key driver of sales
and earnings growth for Texhong, in our view, as we expect gross and
EBIT margins to remain relatively stable. The company has added new
capacity in Vietnam (170k spindles started July 2013 with an additional
285k spindles by 2Q14) as well as in Shandong, China (~60k spindles,).
In total, we expect capacity to record a CAGR of 38% from FY12-14E.
Valuation, price target and risks. In our view, Texhong's 1H13 results
were strong, but we expect GM to be softer in 2H13, due to product mix
changes. The share price has fallen by 25% over the past month (vs the
Hang Seng Index: +4%), on fears of piling cotton inventory and
regulatory action that could cause cotton prices in China to drop.
Texhong currently trades at 5.8x CY14E P/E, 60% lower than its Asian
garment peers at 14.4%. Our DCF-based Dec-14 of HK$16.0 implies
CY15E P/E of 6.7x. Key risks include volatile movements in cotton
prices, given the companys high inventories, and narrower price
differentials between international and domestic cotton prices.
Texhong Textile (Reuters: 2678.HK, Bloomberg: 2678 HK)
Rmb in mn, year-end Dec
FY11A
FY12A
FY13E
Revenue (Rmb mn)
6,873
7,341
10,008
Net Profit (Rmb mn)
61
487
1,010
EPS (Rmb)
0.07
0.55
1.14
DPS (Rmb)
0.08
0.22
0.34
Revenue growth (%)
25.6%
6.8%
36.3%
EPS growth (%)
(92.7%)
694.3%
107.5%
ROCE
3.1%
14.2%
22.7%
ROE
2.8%
20.7%
35.5%
P/E (x)
124.2
15.6
7.5
P/BV (x)
3.7
3.0
2.4
EV/EBITDA (x)
33.7
12.5
7.3
Dividend Yield
1.0%
2.5%
4.0%
Source: Company data, Bloomberg, J.P. Morgan estimates.
FY14E
13,623
1,321
1.49
0.45
36.1%
30.8%
23.8%
36.8%
5.8
1.9
5.7
5.2%
FY15E
16,146
1,669
1.89
0.57
18.5%
26.4%
24.7%
36.0%
4.6
1.5
4.5
6.6%
Leon Chik, CFA

(852) 2800-8590
leon.hk.chik@jpmorgan.com
Ebru Sener Kurumlu

(852) 2800-8521
ebru.sener@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
Price Performance
14
HK$
10
6
2
Nov-12
Feb-13
May-13
Aug-13
Nov-13
2678.HK share price (HK$)

HSCEI (rebased)
Abs
Rel
YTD
122.6
%
126.9
%
1m
-25.5%
3m
-24.0%
-37.4%
-37.0%
Company Data
Shares O/S (mn)
Market Cap (Rmb mn)
Market Cap ($ mn)
Price (HK$)
Date Of Price
Free Float(%)
3M - Avg daily volume (mn)
3M - Avg daily value (HK$
mn)
3M - Avg daily value ($ mn)
HSCEI
Exchange Rate
Fiscal Year End
12m
182.5
%
174.8
%
885
7,607
1,248
10.94
26 Nov 13
1.01
12.68
1.6
1,1387.21
7.75
Dec
See page 18 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

26 November 2013
Andrew Hsu
(852) 2800-8572
Key catalysts for the stock price

Low-cost advantage in Vietnam plant
Volume play, riding on capacity expansion
plans
Key financial metrics

Revenues (Rmb)
Revenue growth (%)
EBITDA (Rmb)
EBITDA margin (%)
Tax rate (%)
Net profit (Rmb)
EPS (Rmb)
EPS growth (%)
DPS (Rmb)
BVPS (Rmb)
Operating cash flow (Rmb mn)
Free cash flow (Rmb mn)
Interest cover (X)
Net margin (%)
Sales/assets (X)
Debt/equity (%)
Net debt/equity (%)
ROE (%)
Key model assumptions
Sales volume ('000 tonnes) Yarn
ASP (Rmb per tonnes) Yarn
Year end capacity (MM spindles)
Upside risks to our view

Stronger-than-expected market share gains and
industry consolidation in the yarn sector
Higher-than-expected margins in new synthetic fiber
products
Improving margins for cotton sourced from China
FY12A
7,341
6.8%
877
11.9%
13%
487
0.550
694.3%
0.22
2.89
924
279
5
6.6%
1.31
119.9%
48%
21%
FY12A
243
25,308
1.100
FY13E
10,008
36.3%
1,539
15.4%
13%
1,010
1.141
107.5%
0.34
3.53
1,152
(48)
11
10.1%
1.36
136.3%
53%
36%
FY13E
337
25,814
1.840
FY14E
13,623
36.1%
2,050
15.0%
15%
1,321
1.493
30.8%
0.45
4.57
1,548
148
12
9.7%
1.44
133.8%
49%
37%
FY14E
458
26,589
2.158
FY15E
16,146
18.5%
2,580
16.0%
15%
1,669
1.886
26.4%
0.57
5.89
2,400
741
14
10.3%
1.38
124.9%
36%
36%
FY15E
532
27,386
2.482
Valuation and price target basis
Our PT (Dec-14, DCF-derived) of HK$16.0 implies a forward P/BV

(CY15E) of 2.1x and implies a forward P/E of 6.7x (CY15E). Our DCF
assumptions include a WACC of 8.7% and a risk-free rate of 4.2%.
One year forward P/E Band
Source: Bloomberg, Company data and J.P. Morgan estimates.
Sensitivity analysis
Sensitivity to
1% increase in yarn ASP
1% increase in yarn volume
1% increase in cotton price
1ppt increase in GM
EBITDA
FY13E
FY14E
4.5%
4.7%
0.1%
0.6%
-4.4%
-4.4%
6.5%
2.7%
EPS
FY13E
6.0%
0.2%
-5.8%
8.6%
JPMe vs consensus
EPS
JPMe
Consensus
FY14E
6.3%
0.7%
-5.9%
3.6%
Comparative metrics
Company Name
ECLAT (OW)
GLORIOUS SUN (NC)
SHENZHOU (OW)*
TEXHONG TEXTILE (OW)*
MAKALOT (OW)
Average
Code
1476 TT
393 HK
2313 HK
2678 HK
1477 TT
Price (PT)
388 (350)
1.78
28.95 (32)
10.94 (16)
167.5 (206)
Downside risks to our view

Uncertainty in cotton policy in China
Risks that low costs in Vietnam plant are unsustainable
Volatile movement in cotton price given the companys high
inventories
Narrower price differential between international and domestic
cotton prices
FY13E
1.141
1.087
FY14E
1.493
1.352
Mkt Cap
$Mn
3,287
242
5,192
1,241
951
P/E
FY13E
34.80
14.8
16.3
7.5
19.23
18.5
FY14E
24.7
12.7
13.9
5.8
14.8
14.4
EV/EBITDA
FY13E
FY14E
na
na
na
1.6
13.8
11.8
28.9
6.4
na
na
21.3
6.6
P/BV
FY13E
na
0.8
2.6
2.4
na
2.0
Source: Bloomberg, Company data and J.P. Morgan estimates. Prices are as of 26 Nov 2013. Note: Bloomberg consensus estimates for Not Covered (NC) stocks
FY14E
na
0.8
2.4
0.0
na
1.1
YTD
Stock perf.
271.6
-21.2
66.7
126.5
85.3
Andrew Hsu
(852) 2800-8572

26 November 2013
Investment summary
Positive share price drivers
Cost advantage of Vietnam plant. Texhong currently benefits from lower priced
cotton sourced from Vietnam compared to its domestic peers that use cotton from
China. As a result of the Chinese cotton reserve policy introduced in 2011, the current
floor price of cotton (until March 2014) is Rmb20,400/tonne (or US1.4/lb), double the
international cotton price of ~US$0.8/lb. While the price policy initiative aims to
maintain levels of cotton acreage, some Chinese yarn spinners are disadvantaged by
high cotton prices. Unlike most of its domestic peers, 40% of Texhongs production
capacity is located outside of China, i.e., in Vietnam. As of 1H13, the company sells
80% of its product in China, thus it can profit from the price difference.
Texhong operates in the most upstream segment of the regional textile market. In our
view, there are not many sizable comparables that can afford to build plants in
Vietnam, due to their lack of scale and financial weakness. We note some indirect
competitors have entered the Vietnam markets in recent years, with the aim to source
low-cost cotton. However, we do not believe they will pose a considerable threat to
Texhong in the near term, given their different product mix. Companies operating in
Vietnam include dyed yarn spinners such as Bros Eastern (Not Covered [NC]) and
Huafu Top Dyed Melange Yarn [NC].
Figure 1: Cotton price
Rmb/ tonne
35000
30000
25000
20000
15000
10000
5000
0
01/01/2008
01/01/2009
01/01/2010
01/01/2011
International
01/01/2012
01/01/2013
China
Source: Bloomberg.
Shenzhou (covered by Leon Chik, CFA) has followed a different strategy of using
mainly domestic yarns (80% of total yarns purchased) for its production lines in
China, due to the requirements of its customers as well as its wish to maintain good
relationships with domestic yarn producers, according to management. We believe
that this put Shenzhou at a disadvantage (from mid-2011 to mid-2013) when pitching
for contracts against either domestic garment makers using imported yarns or other
Asian garment makers outside of China. The biggest challenge over the past two
years for Shenzhou, in our view, has been the much higher cost of cotton in China
compared to outside of China due to import quotas and government support for
prices to help domestic cotton farmers. The difference, adjusted for quality, freight
and taxes amounted to about 20% in 2012, we estimate.
Andrew Hsu
(852) 2800-8572

26 November 2013
A volume play, in a nutshell. The first phase of the northern Vietnam project of
170k spindles was successfully put into production in July 2013, pushing total
production to 1.84 mn spindles. In FY14, the Shandong plant expansion will be
about 60k spindles, while the second phase of the Northern Vietnam plant will be
about 258k spindles, as per management. The company expects to commence
commercial production by 1Q14 and 2Q14, respectively. Due to the slow application
and approval process by local authorities for the Uruguay project, its completion may
be delayed until 2015. In summary, Texhong will increase its average capacity by
40% and 36%, respectively, in FY13E and FY14E, and this should continue to power
revenue and profit growth, in our view.
Diversified customer base. The client base of Texhong is very diversified (~1,600
customers), with the top 10 customers accounting for 20% of FY12 sales. The top
five customers are Zhejiang Limayunshan Textile Co., Yixing Lucky G and L Denim
Co., Yixing Lucky G and L Dyeing and Finishing Co., Shaoguan Shunchang
Weaving Factory Co., and Guangdong Qianjin Jeans Co, all of which have over five
years of trade relationship with Texhong, as per the company.
Negative share price drivers and risks to our thesis

Downside from cotton price liberalization a risk, but not that significant. Apart
from the recent change in product mix (to low-margin, high count yarn), one of the
reasons for the recent share price decline, in our view, is the possibility of more
market based pricing of cotton in China, as per local media (cottonchina.org). One of
the items that is not market-based is the current policy to boost the domestic price
of cotton well above international levels. We note that this policy, which benefits
cotton farmers and hurts domestic cotton yarn producers, has been in place for many
years, thus it will not be easy to dismantle or change, in our view.
The current price of cotton in China is nearly double that of international markets.
Adjusting for freight, handling and quality differences, we estimate the price in
China is about 20% higher than international prices. The cost of cotton makes up
about half the cost of cotton yarn, and therefore yarn made with domestic cotton
would cost 10% more than yarn made with international cotton. This is the main
reason why plants with overseas production (mainly Vietnam) would have higher
profitability than a similar producer in China. However, the extra 10% cost
advantage does not fall to the bottom line for several reasons. First, some domestic
Chinese mills have quotas to import cotton (typically 20-50% of their needs) and
second, we believe some domestic mills sell at lower profits or even losses in order
to stay in business. The longer distance from Vietnam mills also prohibits them from
making higher-end niche products that require shorter turnaround times. In reality,
yarn mills in Vietnam may only have 3-4% superior margins to domestic mills,
according to our estimates.
For Texhong, its production base would be roughly split 50:50 between Vietnam and
China by the end of 2014. The Chinese mills will make synthetic yarns and
specialized cotton products. If the cotton arbitrage (higher cotton in China vs
Vietnam) was to disappear, margins for the Vietnam plants of Texhong and other
peers could come under pressure and some of the 3-4% superior margin may be lost,
in our view. However, the Chinese mills of Texhong and its peers could see margins
improve, although probably to a lesser extent than the decline in margins of the
Vietnam mills.
Andrew Hsu
(852) 2800-8572

26 November 2013
Taking everything into account, the elimination of the cotton arbitrage would be
slightly negative for Texhong and could lower margins at the group level 1-2%.
While we do not predict this to happen, this is already implied in both the current
share price and our price target. Our PT works out to a 14E P/E of just 6.7x, which is
well below the 10-15x fair value range that an industrial with similar earnings growth
would trade at, in our view. We, therefore, do not see this risk as the cause for much
downside. In fact, the longer-than-expected support for cotton prices in China could
actually result in upside for the rating and share price for Texhong.
Rising cotton prices could hurt margins. Raw material costs account for a large
proportion of COGS for most yarn spinners, including Texhong (~80%), whose
major raw material is cotton. Raw material costs are a more significant component of
cost for yarn spinners compared to fabric or garment manufacturers.
Table 1: Raw material cost/ COGS for textile companies
Texhong
Pacific Textile
Shenzhou
Specialty
Yarn
Fabric
Garment
Raw material cost / COGS (%)

80%
73%
40%
Remarks
~50% cotton
More labor intensive
Source: Company data
Thus, the profits of yarn spinners can be negatively affected when cotton prices rise
sharply. That said, Texhong has diversified its cost base in recent years and increased
its use of synthetic fibres.
Direct subsidies to farmers could hurt competitiveness. In an effort to lower
Chinas cotton price, central government may provide direct subsidies to cotton
farmers, according to local media (cottonchina.org). Should this happen, Texhong
would not be able to take advantage of the price gap between domestic and
international cotton prices. As such, any decision to change the existing reserve
policy would impact the cotton market, in our view.
Rising level of debt to fund expansion. The companys total debt increased by 9%
HoH to Rmb3.2 bn in 1H13 after the company issued US$200 mn of corporate bonds
(19s) in April this year. Its unrestricted cash balance almost doubled HoH to
Rmb958 mn despite having spent Rmb1 bn on capex in 1H13. Total debt/EBITDA
improved marginally to 2.5x from 2.7x a year ago on strong EBITDA growth. Net
debt/ EBITDA stayed a comfortable level at below 2.0x. However, net gearing ratio
reached an historical high of 69.3% in 1H13, up from 48.5% in 2012. With a
Rmb1.2 bn/Rmb1.4bn capex budget for FY13E/14E, respectively, Texhong is
stretching its cash flow. The company may need to raise more capital, we believe, if
its capacity expansion plan remains heavy.
Depreciation of the Rmb could result in losses. Texhongs loans are dominated in
USD, while its proceeds are primarily in Rmb. The company would be a beneficiary
of Rmb appreciation.

26 November 2013
Andrew Hsu
(852) 2800-8572
Valuation and share price analysis

DCF valuation
Our Dec-14 price target of HK$16.00 is based on a DCF based valuation (WACC of
8.7% and terminal growth of 3%) and equates to a forward P/E (FY15) of 6.7x. We
believe this P/E is justified given the company's robust medium-term (2013E-15E)
estimated net income CAGR of 29% and relatively stable operations (in terms of
sales growth and margin volatility) compared to other textile-related in Asia, using
J.P. Morgan and Bloomberg consensus estimates.
Over the past three years, Texhong has traded at a forward P/E range of as high as
74.2x (when the GM dropped significantly in 2H11due to the sharp increase in
cotton price) to as low as 2x.
Figure 3: P/B vs ROE
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Share price (HK$)
25.0
20.0
15.0
10.0
0.0
3/4/2008
7/4/2008
11/4/2008
3/4/2009
7/4/2009
11/4/2009
3/4/2010
7/4/2010
11/4/2010
3/4/2011
7/4/2011
11/4/2011
3/4/2012
7/4/2012
11/4/2012
3/4/2013
7/4/2013
11/4/2013
5.0
Price
3/4/2008
7/4/2008
11/4/2008
3/4/2009
7/4/2009
11/4/2009
3/4/2010
7/4/2010
11/4/2010
3/4/2011
7/4/2011
11/4/2011
3/4/2012
7/4/2012
11/4/2012
3/4/2013
7/4/2013
11/4/2013
Figure 2: P/E bands
P/B (LHS)
11
Figure 4: One-year forward P/E band
Figure 5: One-year forward P/BV band
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
PER(x)
Source: Bloomberg, company data.
-1 std dev
Avg
+1 std dev
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
ROE (RHS)
3/4/2008
7/4/2008
11/4/2008
3/4/2009
7/4/2009
11/4/2009
3/4/2010
7/4/2010
11/4/2010
3/4/2011
7/4/2011
11/4/2011
3/4/2012
7/4/2012
11/4/2012
3/4/2013
7/4/2013
11/4/2013
3/4/2008
7/4/2008
11/4/2008
3/4/2009
7/4/2009
11/4/2009
3/4/2010
7/4/2010
11/4/2010
3/4/2011
7/4/2011
11/4/2011
3/4/2012
7/4/2012
11/4/2012
3/4/2013
7/4/2013
11/4/2013
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
PBR(x)
-1 std dev
Avg
+1 std dev
We compare Texhongs current FY14E P/E with the following groups of peers:
1) Asian textile and apparel companies; and 2) leading industrial companies in
China.

26 November 2013
Andrew Hsu
(852) 2800-8572
Comparison to Asian textile/apparel peers

Texhong is trading at a 62% discount to the average FY14 P/E for garment peers in
Asia and a 73% discount to the major Taiwanese peers, based on J.P. Morgan and
Bloomberg consensus estimates. The discount is not justified, in our view. We
believe the recent share price weakness is largely due to the companys proposed
change in product mix and speculation of narrower domestic and international cotton
price gap, which could hurt near-term margins. The reaction is overdone, in our
view, and represents an attractive entry point.
Figure 6: Regional textile/garment companies sales growth
Figure 7: Regional textile/garment companies GPM trends
60%
45.0%
50%
40.0%
35.0%
40%
30.0%
30%
25.0%
20%
20.0%
10%
15.0%
0%
10.0%
-10%
5.0%
2009
-20%
2009
Makalot
2010
Shenzhou
2011
Eclat
2012
2013E
Pacific Textile
2014E
Texhong Textile
Source: Company data; J.P. Morgan estimates, Bloomberg consensus estimates for NC
companies
Makalot
2010
Eclat
2011
Pacific Textile
2012
2013E
Shenzhou
2014E
Texhong Textile
Source: Company data ; J.P. Morgan estimates, Bloomberg consensus estimates for NC
companies
We believe Texhongs current valuation is inexpensive and does not take into
account its structural advantages (high usage of low cost cotton and yarn overseas
and robust capacity expansion in FY13E/14E).
Peer group valuation
Company Name
Fabric
TEXWINCA (NC)
PACIFIC TEXTILES (NC)
RAYMOND (NC)
HUNTSMAN CORP (NC)
ARVIND (NC)
Average
Garment OEM
ECLAT (OW)
GLORIOUS SUN (NC)
SHENZHOU (OW)*
TEXHONG TEXTILE (OW)*
MAKALOT (OW)
Average
Brand
VF CORP (NC)
KOHLS (NC)
TARGET CORP (NC)
Average
Code
Price (PT)
Mkt Cap
$Mn
FY13E
P/E
FY14E
EV/EBITDA
FY13E
FY14E
FY13E
321 HK
1382 HK
RW IN
HUN US
ARVND
IN
7.73
11.96
267.90
22.49
1,353
2,217
264
5,430
12.1
15.1
14.3
14.9
10.3
13.3
9.6
9.8
Na
8.2
2.9
6.4
5.7
7.2
120.40
498
9.4
13.2
8.3
10.3
1476 TT
393 HK
2313 HK
2678 HK
1477 TT
388 (350)
1.78
28.95 (32)
10.94 (16)
167.5 (206)
3,287
242
5,192
1,241
951
34.80
14.8
16.3
7.5
19.23
18.5
VFC US
KSS US
TGT US
233.40
55.85
63.76
25,692
12,130
40,241
21.3
13.4
13.8
16.8
P/BV
FY14E
YTD
Stock perf.
5.5
1.8
4.4
1.2
3.0
1.8
4.4
1.2
3.0
6.0
71.8
-41.6
41.4
na
5.8
Na
6.1
1.4
2.3
1.4
2.3
20.4
24.7
12.7
13.9
5.8
14.8
14.4
na
Na
13.8
28.9
Na
21.3
na
1.6
11.8
6.4
na
6.6
an
0.8
2.6
2.4
na
2.0
Na
0.8
2.4
0.0
na
1.1
271.6
-21.2
66.7
126.5
85.3
18.9
12.3
13.5
14.8
11.8
5.3
7.6
11.5
10.6
5.2
6.9
7.3
4.6
2.0
2.5
2.8
4.6
2.0
2.5
2.5
54.6
29.9
7.8
Source: Bloomberg, J.P. Morgan estimates. Note: Bloomberg consensus estimates for NC companies. Prices are as of 26 Nov 2013.
Andrew Hsu
(852) 2800-8572

26 November 2013
We also analyze the DCF price sensitivity to WACC, and the terminal multiple.
Table 2: Base-case DCF analysis
HK$ MM
Cash flow estimates
Sales
EBIT
NOPAT
Capex, net
Depreciation
Change in working capital
Free CF (excl. non-core))
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
3,254
279
252
(470)
73
(287)
(433)
3,738
265
239
(238)
95
(244)
(149)
4,088
363
315
(179)
110
56
302
5,472
985
1,710
(485)
128
(611)
743
6,873
158
142
(425)
172
(257)
(368)
7,341
677
499
(536)
201
69
233
10,008
1,276
1,114
(1,200)
263
(316)
(140)
13,623
1,691
1,475
(1,400)
359
(354)
80
16,146
2,112
1,801
(1,659)
467
49
658
DCF Parameters
Liabilities as a % of EV
WACC
Assumptions
Terminal growth
Risk-free rate
Market risk
Beta
Cost of debt
Net debt/ Equity
Implied exit P/E multiple (x)
30%
8.7%
Enterprise NPV (10E-16E)

+ Net cash (debt), current
- Minorities (Market value)
+/- Other items
= Equity value
/ Number of shares
= Equity value per share (HK$)
12,783
(1,658)
0
0
11,124
885
16.00
3.0%
4.2%
6.0%
1.0
6.0%
53.1%
7.5x
Source Company data, J.P. Morgan estimates.
WACC
Table 3: Sensitivity analysis based on WACC and perpetual terminal growth rate
16.0
7.2%
7.7%
8.2%
8.7%
9.2%
9.7%
10.2%
1.5%
16.4
14.8
13.5
12.3
11.3
10.4
9.7
2%
18.1
16.3
14.7
13.4
12.2
11.2
10.3
Terminal growth rate

2.5%
3.0%
3.5%
20.2
22.8
26.1
18.0
20.1
22.6
16.1
17.8
19.9
14.6
16.0
17.7
13.2
14.4
15.9
12.1
13.1
14.3
11.1
12.0
13.0
4.0%
30.5
25.9
22.5
19.7
17.5
15.7
14.2
Source: Company data, J.P. Morgan estimates.
4.5%
36.4
30.2
25.7
22.3
19.6
17.4
15.6
Andrew Hsu
(852) 2800-8572

26 November 2013
Company background
Founded in 1997, Texhong is a leading yarn and fabric producer. It is the largest
maker of fabrics containing Spandex in the world, with a market share of close to
30%, according to management. The company has over 1,200 types of yarn products
and 2,700 types of fabric products. It currently has about 1.84 mn spindles (China:
1.11mn and Vietnam: 730k) to produce yarn. By the end of 2014, we expect the
capacity split between China and Vietnam to be roughly 50/50. Texhong has 11
production bases in China and two in Vietnam and plans to add new capacity in
Turkey and Uruguay (mainly in synthetics). The plants located in China focus on
more synthetic blends as well as more specialty products, where proximity to the
client is an advantage. The plants in Vietnam specialize in yarns with higher cotton
content and more commoditized products where there is a cost advantage over
Chinese mills.
Texhong was founded by Chairman Mr Hong in 1997 and was listed on the Hong
Kong Stock Exchange in 2004. Mr Hong and co-Chief Executive Officer Mr Zhu
currently hold ~53% and 15% stakes, respectively. Mr Hong has over 20 years of
experience in the textile industry. Prior to establishing Texhong, he was a Vice
General Manager of Jinjiang Yifeng Garment Weaving Company Ltd. He is also
Vice Chairman of the Hong Kong General Chamber of Textiles Limited. Mr Zhu was
Assistant to the General Manager of Nantong No. 2 Cotton Textile Factory prior to
joining Texhong in 1997.
Customers and sale trends

The client base of Texhong is diversified (~1,600 customers), with the top ten
customers making up ~20% of FY12 sales. The top five customers are Zhejiang
Limayunshan Textile Co., Yixing Lucky G and L Denim Co., Yixing Lucky G and L
Dyeing and Finishing Co., Shaoguan Shunchang Weaving Factory Co., and
Guangdong Qianjin Jeans Co. They are all have over five years of trade relationships
with Texhong.
For the first 10 months of FY13, Texhong sold about 216k tonnes of yarns and is in
the process of adjusting the product mix in order to achieve more than 100% sales to
production ratio. Based on the adjusted product mix, yarn production volume is
currently about 32k tonnes per month. Management expects the annual yarn
production volume target of about 440k tonnes will be achieved from 2Q14.
We have assumed sales would grow by 36% in both 13E and 14E based on a 39%
and 36% increase in yarn sales volume and a 2% and 3% increase in yarn ASP in
13E and 14E, respectively. We expect other segments to register only modest
growth. We expect the utilization rate to come in at ~100% in FY13E/14E. 1H13
sales increased by 8.5% YoY to Rmb3.6 bn mainly on a moderate increase in sales
volume of yarns, the companys major products that accounted for 86% of sales.
New capacity is set to come online gradually in 2H13 and FY14. The first phase of
the northern Vietnam project of 170k spindles was successfully put into production
in July 2013, pushing total production to 1.84 mn spindles. In FY14, the Shandong
plant expansion will be ~60k spindles, while the second phase of the Northern
Vietnam plant will be ~258k spindles. They are expected to commence commercial
production by 1Q14 and 2Q14, respectively, according to management. Due to the
slow application and approval process by local authorities for the Uruguay project,
its completion may be delayed to 2015, according to management.
9

26 November 2013
Andrew Hsu
(852) 2800-8572
Figure 8: 1H13 Sales breakdown by region

Macau
16%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Vietnam
3%
China
81%
Source: Company data.
Figure 9: Sales and GPM
2009
2010
2011
2012
Gross margin
2013E
2014E
2015E
Sales growth
Source: Company data. J.P. Morgan estimates.
Figure 10: 1H13 sales breakdown by product (Both stretchable and

non-stretchable yarns can be sub-divided into cotton, denim and
synthetic fibre)
Fabrics
13%
Stretchable corespun yarns
64%
Other yarns
23%
Cost structure
Cotton, which represents ~45-50% of the companys cost of sales, is the largest raw
material component for Texhong. Allenburg is the largest supplier of cotton to
Texhong, followed by Glencore.
Cotton prices have fallen to the lowest level YTD in November, as the markets
fretted that China is gearing up to release cotton from its stockpile, a move that
would quickly ripple through the global cotton market. According to Texhong
management, the company can typically pass on the cotton cost to consumers swiftly
with only a two- to three-week time lag. Cotton price movements in FY14 will likely
be dependent on China government policy on cotton reserve pricing, in our view. We
project the per-unit cotton cost to be lower in 2H13 vs 1H13 largely due to falling
cotton prices since 2Q13. We expect every 1% increase in cotton price to lower 13E/
14E EPS by 5.8%/ 5.9%.
10
Andrew Hsu
(852) 2800-8572

26 November 2013
Figure 11: Cotton price

Rmb/ tonne
35000
30000
25000
20000
15000
10000
5000
0
01/01/2008
01/01/2009
01/01/2010
01/01/2011
International
01/01/2012
01/01/2013
China
Source: Bloomberg.
Synthetic fiber (spandex, rayon, viscose and polyester) is the second-largest raw
material cost, representing ~30-35% of Texhongs cost of sales. Its major suppliers
include Invista and Hyosung.
Figure 12: FY13E cost breakdown
Utilities, 6.2%
Consumables,
1.3%
Others, 1.1%
Depreciation,
3.3%
Direct labour,
8.2%
Noncotton,
34.9%
Cotton ,
45.0%
Source: J.P. Morgan estimates. Non-cotton mainly consists of synthetic fiber
Margins
Due to the change in product mix (producing more high-count yarn, which commands
lower margins, in order to meet market demand), 2H13 GM is likely to be softer.
Texhong prefers to produce low-count yarn because of its higher margins, as more
cotton needs to be used and thus it can take advantage of the China vs international
cotton price difference, according to management. The SG&A ratio and staff cost
expense ratio should remain roughly flat in 2H13 and FY14, on our estimates.
11
Andrew Hsu
(852) 2800-8572

26 November 2013
Figure 13: GM by product (1H13)

30.0%
25.7%
26.9%
22.8%
17.0%
20.0%
20.4%
15.7%
14.5%
8.0%
10.0%
5.3%
0.0%
1
Stretchable core-spun cotton yarn
Stretchable core-spun denim yarn
Stretchable core-spun synthetic fiber yarn Other cotton yarn

Other denim yarn
Other synthetic fiber yarn
Stretchable grey fabrics
Other grey fabrics
Garment fabrics
Balance sheet
Leverage manageable. Total debt increased by 9% to Rmb3.2 bn as at Jun-13
compared to Dec 12, after the company issued US$200 million of corporate bonds
(19s) in April this year. Its unrestricted cash balance increased to Rmb958 mn from
Rmb530 mn in Dec-12, even after heavy capital expenditure of Rmb1 bn in 1H13.
Total debt/EBITDA improved marginally to 2.5x from 2.7x a year ago on strong
EBITDA growth. Net debt/EBITDA stayed a comfortable level at below 2.0x.
1H13 trade and bills receivable higher on advance purchases of overseas cotton.
Inventories increased by 51% HoH to Rmb2.1 bn due to an increase in advance
purchases of overseas cotton. The companys cotton inventory was around 100k
tonnes, amounting to Rmb1.3 bn, as per company data. Trade and bills payable as a
result increased to Rmb2.6 bn. Trade and bills receivables decreased to Rmb520 mn
from Rmb812 mn. We expect trade and bills receivables to return to a more normal
level in 2H13.
Stable dividend payout ratio. Texhong has maintained a dividend payout ratio of
~30% over the past five years. We forecast a stable dividend payout of 30% p.a. for
the next three years, which translates into a 2014E forward dividend yield of 4.5%.
Capex plans. Capital expenditure in 1H13 was Rmb ~1bn, which was mainly related
to the newly added capacity in China and Vietnam. We estimate capex of Rmb 1.2bn
for 2013E. For 2014E, we expect Rmb 1.4bn.
12
Andrew Hsu
(852) 2800-8572

26 November 2013
SWOT analysis
Strengths
Weaknesses
Texhong is a leading yarn and fabric producer. It is the

Raw material costs, mainly cotton, account for ~80%
largest maker of fabrics containing Spandex in the world,
of Texhongs COGS. Rising cotton prices could hurt
with a market share of close to 30%, according to
margins
management
In an effort to lower China cotton prices, there has been
The company has a diversified portfolio of products, with
proposals to Chinese government to offer direct subsidies
over 1,200 types of yarn products and 2,700 types of
to cotton farmers. Should this happen, Texhong would not
fabric products
be able to take advantage of the pricing gap between
domestic and international cotton prices. As such, any
The company enjoys low cost advantages in Vietnam. It
decision to change the existing reserve policy would
has about 1.84 mn spindles (China: 1.11mn and Vietnam:
impact the cotton market
730k) to produce yarn
Texhong is stretching its cash flow, with its net gearing
Texhong will increase its average capacity by 40% and
ratio reaching an historical high of 69.3% in 1H13. The
37%, respectively, in FY13E and FY14E, which should
company may need to raise more capital if the capacity
continue to power revenue and profit growth
expansion plans remain heavy
Texhongs client base is diversified (~1,600 customers),
with the top 10 customers accounting for ~20% of FY12
sales
Opportunities
New production facilities in Uruguay and Turkey can
bypass import tariffs and shorten transportation duration
Rebound in demand in China from a low base to boost
domestic growth
Benefit from the ongoing industry consolidation and
gain market share
Development in new synthetic fibre products
Threats
Texhong is adding new plants in Uruguay (120k spindles)
and Turkey (60k spindles), which are free trade
production zones to Brazil (3% of Texhong sales) and the
EU (3% also), respectively. These new plants can have
execution risks
Uncertainty in terms of cotton policy in China
Risks that the low costs in Vietnam plant are
unsustainable over the longer term
Volatile movements in cotton price given the companys
high inventories
Narrower price differential between international and
domestic cotton prices
13
Andrew Hsu
(852) 2800-8572

26 November 2013
Financials
Table 4: Key assumptions
Year-end Dec
Sales volume ('000 tonnes)
Yarn
ASP (Rmb per tonnes) Yarn
Year end capacity ('000 spindles)
2011
2012
2013E
2014E
2015E
190
30,500
1.000
243
25,308
1.100
337
25,814
1.840
458
26,589
2.158
532
27,386
2.482
Table 5: Revenue mix

Rmb MM, year-end Dec
Yarn
YoY
% of total
Grey fabrics
YoY
% of total
Garment fabrics
YoY
% of total
Total
YoY
2011
5,789
32.0%
84.2%
966
5.1%
14.1%
117
-18.2%
1.7%
6,873
25.6%
2012
6,147
6.2%
83.7%
1,028
6.4%
14.0%
167
42.3%
2.3%
7,341
6.8%
2013E
8,694
41.4%
86.9%
1,131
10.0%
11.3%
183
10.0%
1.8%
10,008
36.3%
2014E
12,178
40.1%
89.4%
1,244
10.0%
9.1%
202
10.0%
1.5%
13,623
36.1%
2015E
14,556
19.5%
90.2%
1,368
10.0%
8.5%
222
10.0%
1.4%
16,146
18.5%
Table 6: P&L statement

Total Revenues
YoY change (%)
Cost of sales
YoY change (%)
Gross Profit
YoY change (%)
Gross Margin
Selling expenses
Administrative expenses
Other Income/(Expenses)
EBIT
EBIT margin
Net Interest Expense
Net Income Before Taxes
YoY change (%)
Tax
Effective Tax rate
Minority Interests
Net Income
YoY change (%)
Net margin
Number of shares (FD)
Diluted EPS (CNY)
DPS (CNY)
2011
6,873
25.6%
(6,317)
51.7%
556
-57.5%
8.1%
(152)
(209)
22
158
2.3%
(78)
83
-91.2%
(22)
26.6%
(0)
61
-92.7%
0.8%
885
0.069
0.082
2012
7,341
6.8%
(6,217)
-1.6%
1,124
102.3%
15.3%
(203)
(227)
6
677
9.2%
(123)
557
567.9%
(71)
12.8%
0
487
694.3%
6.6%
885
0.550
0.219
2013E
10,008
36.3%
(8,122)
30.6%
1,887
67.8%
18.9%
(277)
(310)
8
1,276
12.8%
(119)
1,157
107.6%
(148)
12.8%
0
1,010
107.5%
10.1%
885
1.141
0.342
2014E
13,623
36.1%
(11,101)
36.7%
2,522
33.7%
18.5%
(841)
(422)
10
1,691
12.4%
(142)
1,549
33.9%
(229)
14.8%
0
1,321
30.8%
9.7%
885
1.493
0.448
2015E
16,146
18.5%
(13,049)
17.5%
3,097
22.8%
19.2%
(997)
(500)
12
2,112
13.1%
(155)
1,958
26.4%
(289)
14.8%
0
1,669
26.4%
10.3%
885
1.886
0.566
Source: J.P. Morgan estimates, Company data.
14
Andrew Hsu
(852) 2800-8572

26 November 2013
Table 7: Interim estimates

Year to Dec (Rmb MM)
Total Revenues
Gross Profit
EBIT
Net Income Before Taxes
Net Income
Diluted EPS (HK$)
Ratios
Revenue split
GPM
EBIT margin
NPM
YoY
Revenue
GP
EBIT
NP
1H12
3,325
446
237
165
145
0.164
2H12
4,016
678
439
393
341
0.386
1H13
3,609
771
543
502
447
0.505
2H13E
6,400
1,116
733
655
563
0.64
1H14E
7,463
1,455
933
855
729
0.823
2H14E
6,160
1,066
758
695
592
0.67
45.3%
13.4%
7.1%
4.4%
54.7%
16.9%
10.9%
8.5%
36.1%
21.4%
15.1%
12.4%
63.9%
17.4%
11.5%
8.8%
54.8%
19.5%
12.5%
9.8%
45.2%
17.3%
12.3%
9.6%
11.8%
-20.1%
-31.6%
-43.3%
3.0%
Na
Na
Na
8.5%
72.8%
129.1%
207.8%
59.3%
64.5%
66.9%
64.9%
106.8%
88.8%
71.7%
63.1%
-3.7%
-4.4%
3.4%
5.2%
Source: J.P. Morgan estimates, Company data.
Table 8: Balance sheet

Cash and Cash Equivalents
Inventories
Trade & bills receivables
Due from customers for contract
work
Deposits, prepayments &
receivables
Total Current Assets
Property and Equipment, Net
Lease prepayments
Deferred tax
Total Assets
2011
463
1,289
640
2012
530
1,422
812
2013E
712
1,938
1,108
2014E
569
2,638
1,508
2015E
897
3,126
1,787
(273)
(234)
(296)
(483)
(689)
538
2,657
1,992
0
50
4,930
493
3,023
2,229
0
57
5,625
672
4,134
3,166
0
77
7,378
432
5,146
4,208
4,313
0
9,459
395
6,205
5,399
5,524
0
11,729
Trade & bills payables

Due to customers for contract
work
Borrowings
Income taxes Payable
Total Current Liabilities
502
865
1,179
1,605
1,902
417
144
(14)
1,094
309
206
3
1,444
548
276
79
2,082
969
299
160
3,033
1,493
323
221
3,938
Bank loans
Other Noncurrent Liability
Noncurrent liabilities
Total Liabilities
1,712
52
1,765
2,858
1,564
59
1,623
3,067
2,094
80
2,175
4,256
2,271
109
2,380
5,413
2,448
130
2,577
6,515
Share capital
Reserves
Total Shareholders' Equity
Minority Interest
Total Shareholders' Equity
Total Liabilities and Equity
94
424
2,072
0
2,072
4,930
94
444
2,558
(0)
2,558
5,625
94
1,007
3,122
(0)
3,122
7,378
94
1,931
4,046
(0)
4,046
9,459
94
3,100
5,215
(1)
5,214
11,729
15
Andrew Hsu
(852) 2800-8572

26 November 2013
Table 9: Cash flow statement

EBIT
Depreciation and Amortization
Working Capital Changes
Tax Paid
Cash Flow From Operations
2011
158
172
(257)
(109)
(36)
2012
677
201
69
(22)
924
2013E
1,276
263
(316)
(71)
1,152
2014E
1,691
359
(354)
2015E
2,112
467
49
1,548
2,400
Capital expenditures
Investments and others
Cash Flow from Investing
(425)
(16)
(441)
(536)
2
(645)
(1,200)
0
(1,200)
(1,400)
0
(1,400)
(1,659)
0
(1,659)
Free Cash Flow
(477)
279
(48)
148
741
Debt
Other Financing
Cash Flow from financing
619
(249)
371
(79)
(281)
(212)
621
(391)
230
229
(170)
(291)
220
(185)
(414)
Change in cash
Cash beginning
Foreign exchange changes
Cash at end
(106)
569
0
463
67
463
0
530
182
530
0
712
(143)
712
0
569
327
569
0
897
16

26 November 2013
Andrew Hsu
(852) 2800-8572
Texhong Textile: Summary of Financials

Income Statement
Rmb in millions, year end Dec
Revenues
% change Y/Y
EBITDA
% change Y/Y
EBIT
% change Y/Y
EBIT Margin
Net Interest
Earnings before tax
% change Y/Y
Tax
as % of EBT
Net income (reported)
% change Y/Y
Shares outstanding
EPS (reported)
% change Y/Y
FY11
6,873
25.6%
327
(70.5%)
155
(84.2%)
2.3%
(78)
82
(91.3%)
(22)
27.2%
61
(92.7%)
885
0.07
(92.7%)
FY12
7,341
6.8%
873
166.9%
673
333.5%
9.2%
(123)
549
572.2%
(71)
13.0%
487
694.3%
885
0.55
694.3%
FY13E
10,008
36.3%
1,539
76.2%
1,276
89.8%
12.8%
(119)
1,157
110.7%
(148)
12.8%
1,010
107.5%
885
1.14
107.5%
FY14E
13,623
36.1%
2,050
33.2%
1,691
32.5%
12.4%
(142)
1,549
33.9%
(229)
14.8%
1,321
30.8%
885
1.49
30.8%
FY15E
16,146
18.5%
2,580
25.9%
2,112
24.9%
13.1%
(155)
1,958
26.4%
(289)
14.8%
1,669
26.4%
885
1.89
26.4%
Cash flow statement

EBIT
Depr. & amortization
Change in working capital
Taxes
Cash flow from operations
FY11
155
172
(257)
(109)
(36)
FY12 FY13E
673
1,276
201
263
69
(316)
(22)
(71)
924
1,152
Capex
Disposal/(purchase)
Net Interest
Other
Free cash flow
(442)
(78)
1
(422)
(536) (1,200) (1,400) (1,659)

(123)
(119)
(142)
(155)
2
0
0
0
495
56
269
873
Equity raised/(repaid)
Debt raised/(repaid)
Other
Dividends paid
Beginning cash
Ending cash
DPS
Ratio Analysis
EBITDA margin
Operating margin
Net margin
0
619
(106)
(142)
569
463
0.08
0
(79)
(148)
(133)
463
494
0.22
Balance sheet
FY11
FY12 FY13E FY14E FY15E
Cash and cash equivalents
463
530
712
569
897
Accounts receivable
640
812
1,108 1,508 1,787
Inventories
1,289
1,422 1,938 2,638 3,126
Others
265
259
377
432
395
Current assets
2,657
3,023 4,134 5,146 6,205
.
Sales per share growth
LT investments
0
0
0
0
0 Sales growth
Net fixed assets
1,992
2,229 3,166 4,208 5,399 Net profit growth
Total Assets
4,698
5,625 7,378 9,459 11,729 EPS growth
.
Liabilities
Interest coverage (x)
Short-term loans
144
206
276
299
323
Payables
502
865
1,179 1,605 1,902 Net debt to equity
Others
448
373
627 1,129 1,713 Sales/assets
Total current liabilities
1,094
1,444 2,082 3,033 3,938 Assets/equity
.
ROE
Long-term debt
1,712
1,564 2,094 2,271 2,448 ROCE
Other liabilities
Total Liabilities
2,858
3,126 4,315 5,472 6,574
Shareholder's equity
2,072
2,558 3,122 4,046 5,214
BVPS (Rmb)
2.34
2.89
3.53
4.57
5.89
Source: Company reports and J.P. Morgan estimates.
FY11
4.8%
2.3%
0.9%
0
621
(143)
(248)
530
712
0.34
FY12 FY13E
11.9% 15.4%
9.2% 12.8%
6.5% 10.1%
25.6%
6.8% 36.3%
25.6%
6.8% 36.3%
(92.7%) 694.3% 107.5%
(92.7%) 694.3% 107.5%
4.2
7.1
FY14E FY15E
1,691 2,112
359
467
(354)
49
(148)
(229)
1,548 2,400
0
229
(170)
(350)
712
569
0.45
0
220
(185)
(448)
569
897
0.57
FY14E FY15E
15.0% 16.0%
12.4% 13.1%
9.7% 10.3%
36.1%
36.1%
30.8%
30.8%
18.5%
18.5%
26.4%
26.4%
14.4
16.7
12.9
67.2% 48.5% 53.1% 49.5% 35.9%

1.5
1.4
1.5
1.6
1.5
219.9% 222.9% 228.9% 234.9% 228.8%
2.8% 20.7% 35.5% 36.8% 36.0%
3.1% 14.2% 22.7% 23.8% 24.7%
17

26 November 2013
Andrew Hsu
(852) 2800-8572
Other Companies Discussed in This Report (all prices in this report as of market close on 26 November 2013)
Shenzhou International (2313.HK/HK$28.95/Overweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Texhong
Textile within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Texhong Textile.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: Texhong Textile.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Texhong
Textile.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Texhong Textile.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan
covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing
research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may
screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail
research.disclosure.inquiries@jpmorgan.com.
Texhong Textile (2678.HK, 2678 HK) Price Chart
32
24
Price(HK$) 16
0
Nov
10
Feb
11
May
11
Aug
11
Nov
11
Feb
12
May
12
Aug
12
Nov
12
Feb
13
May
13
Aug
13
Nov
13
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
18

26 November 2013
Andrew Hsu
(852) 2800-8572
Shenzhou International (2313.HK, 2313 HK) Price Chart
48
36
OW HK$32
Price(HK$)
24
Date
Rating Share Price

(HK$)
Price Target
(HK$)
23-Sep-13
OW
32.00
25.00
12
0
Oct
06
Apr
08
Oct
09
Apr
11
Oct
12
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Sep 23, 2013.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Hsu, Andrew Tak Jun: China Lesso (2128.HK), Greatview Aseptic Packaging (0468.HK), TCL Communication
Technology (2618.HK), TCL Multimedia (1070.HK)
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2013
J.P. Morgan Global Equity Research Coverage

IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
43%
57%
42%
76%
Neutral
(hold)
44%
49%
50%
65%
Underweight
(sell)
12%
39%
8%
57%
*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
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19
Andrew Hsu
(852) 2800-8572

26 November 2013
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Asia Pacific Equity Research

Initiate with OW Spinning into a fast growth phase

Price Target: HK$16.00

We initiate coverage of Texhong Textile with an OW rating and a Dec-14

Cost advantage of Vietnam plant. Texhong currently benefits from

Leon Chik, CFA

Ebru Sener Kurumlu

2678.HK share price (HK$)

Asia Pacific Equity Research

Key catalysts for the stock price

Key financial metrics

Upside risks to our view

Valuation and price target basis

Our PT (Dec-14, DCF-derived) of HK$16.0 implies a forward P/BV

One year forward P/E Band

Source: Bloomberg, Company data and J.P. Morgan estimates.

Source: Bloomberg, Company data and J.P. Morgan estimates.

Source: Bloomberg, Company data and J.P. Morgan estimates.

Downside risks to our view

Source: Bloomberg, Company data and J.P. Morgan estimates.

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Negative share price drivers and risks to our thesis

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Raw material cost / COGS (%)

Source: Company data

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Valuation and share price analysis

Share price (HK$)

Figure 2: P/E bands

Figure 4: One-year forward P/E band

Figure 5: One-year forward P/BV band

Source: Bloomberg, company data.

Source: Bloomberg, company data.

Source: Bloomberg, company data.

Source: Bloomberg, company data.

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Comparison to Asian textile/apparel peers

Figure 7: Regional textile/garment companies GPM trends

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Enterprise NPV (10E-16E)

Source Company data, J.P. Morgan estimates.

Terminal growth rate

Source: Company data, J.P. Morgan estimates.

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Customers and sale trends

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Figure 8: 1H13 Sales breakdown by region

Source: Company data.

Figure 9: Sales and GPM

Source: Company data. J.P. Morgan estimates.

Figure 10: 1H13 sales breakdown by product (Both stretchable and

Source: Company data.

lp@ennismorefunds.com Leo Perry 08/15/15 02:26:03 AM Ennismore Fund Management

Asia Pacific Equity Research

Figure 11: Cotton price