The Loss Of The Advantage Of Chinese Spinning Enterprises And The Decline Of Cotton Quality

China's cotton prices have been staged in Daniel, big bear and low inflation for the third time. The reason behind this is that China's cotton supply and demand pattern has changed from "in short supply" to "over supply". Finally, the Chinese government adopted the policy of purchasing and storage to control the supply and demand. However, the planned economic regulation brought about an increase in the price difference between inside and outside cotton, the loss of the advantages of Chinese spinning enterprises, the waste of government's financial resources and the decline of cotton quality. At the same time, the purchase and storage was in the name of protecting the interests of cotton growers, but the actual benefits of cotton growers were limited.

The introduction of direct subsidy policy will be a big probability event; (2) at the time of launch, it will be more appropriate in 2014 and April, which will be more suitable in April and April. (3) in the form of policy, based on the research of foreign cotton subsidy policy and the domestic grain subsidy policy, we believe that the amount of cotton direct subsidy is also difficult to raise significantly (which will be less than grain), otherwise it will impact on Grain Direct Subsidy; (4) it is also difficult for the Chinese government to abandon the cotton purchase and storage policy completely. Although we have not seen the essence of the cotton subsidy policy, the abuse of the policy has become increasingly evident. We think: (1)

The national storage cotton in the warehouse, the release of large quantities of cotton, and the launch of direct subsidy have all become the driving factors; the bottom of the cotton price falls is whether the Chinese government will adopt the lowest price backing; (2) the probability of a big fall in international cotton prices in 2014 will not be great or will show a upward trend in the context of the continued recovery in Europe and the United States. (3) the price differentials will show a trend of shock narrowing based on the judgement of cotton prices inside and outside the country, but considering the limited amount of cotton direct subsidy in China and the cotton regulation volume of more than 10 million tons in the warehouse, the domestic cotton price is still higher than the international cotton price pattern. After the 1 quarter of 2014, the price difference between inside and outside may be narrowed to 2000-3000 yuan / ton. Based on the presupposition of the direct subsidy policy and its form, we think: (1) in 2014, domestic cotton prices will drop, because of more than 10 million tons.

Historical data show that cotton textile companies' gross margin and cotton price fluctuation are positively related. In the short term, after the direct subsidy was launched, domestic cotton prices fell, but because of the drop in cotton prices in 2011, the company's raw material procurement has learned from the accumulation of lessons in 2011, and a moderate amount can be used, so the short term domestic cotton prices have dropped to a bad margin. From the medium to long term trend, under the premise of economic recovery in Europe and America and stable export prices, domestic cotton prices fall from the "false high" of the storage and storage market to the "actual level" of supply and demand under the market, which will reduce the cost of raw materials and increase profit margins from the cost side, and constitute a real good. We take Lu Tai, Huafu and Bailong as the targets respectively. The elasticity of performance measurement shows that the decline in the actual cost of domestic cotton will increase the company's performance space. However, due to the long industrial chain and less cotton consumption, the decline in the actual cost of domestic cotton will bring better performance than Huafu and Bailong. In addition, in order to avoid the impact of internal and external spreads, the long industrial chain mode of Lu Tai and Shenzhou and the transfer mode of rainbow are worth learning from.

Risk factors: (1) the cotton issue involves multiple interests in China, and direct subsidy is also a very complex systemic problem, which leads to the direct subsidy policy has not been introduced or in the form of less than expected; (2) the recovery of overseas market demand is less than expected.