Profit down 40% in H1, unlikely to improve in Q3。
Tayho's H116net profit was Rmb34m and EPS was Rmb0.06, down 40% YoY. Profitremained low in Q216, with EPS at Rmb0.02. The company guided for profit to comein at not more than Rmb16m in Q316. Aramid contributed 54% of the company's totalprofit. As its sluggish earnings were mainly due to the downturn in the spandexindustry, the company's differentiation strategy is unlikely to help reverse the profittrend. Aramid is likely to break through in the field of defence in terms of obtainingorders through increasing marketing efforts.
Spandex cycle may have bottomed。
With spandex prices continuing to decline in H116as we expected, including a fasterdecline in Q216, industry profits dropped to a record low: 1) Most industry participantsonly managed to cover cash costs; 2) amid a slowdown in new capacity coming onstream, no new capacity will be put into operation in H2, and 2017may not see asharp increase in new capacity commissioned; 3) spandex demand growth remainedstrong at about 4-5%. Therefore, we believe industry fundamentals have alreadybottomed out. Coupled with the market influence of its differentiated products, thecompany is likely to maintain QoQ profit growth in Q316.
Defence aramid demand to see breakthrough; fewer low-end products lift GPM。In H116, the company's aramid revenue slightly missed our expectation. Gross marginwas higher than our full-year estimate of 21%, rising to 25% in H116, mainly becauseof the company's exit from the low-end filtration market. The company has receivedMilitary Secret Level-2clearance for production and is actively developing the defencemarket. We look for a breakthrough in this market in terms of obtaining orders.
Valuation: Maintain Sell rating。
We maintain our price target of Rmb9.84(based on 3x 2016E P/B). In our view,currently trading at 4.6x 2016E P/B, the share price has factored in the breakthrough inthe defence field and high expectations for order-driven profit growth. Therefore, wemaintain our Sell rating.
