When I first wrote about Texhong I suggested that the low-end run rate gross margin would approximate 15.7%. The full year 2014 results seem to bear this out.
Remember that the company holds 30 days of inventory so that as prices fall last month's more expensive cotton is sold on at today's lower prices. It is the direction -- and not the level -- of cotton prices that matter.
This is what happened:
and this is the impact that it had on Texhong's gross margin:
One can also see its imprint in the balance sheet:
Now that cotton prices appear to have stopped falling, adding that back get us to this:
The next issue is that of the appropriate multiple to apply to these estimated forward earnings (or dividends).
First, Texhong will de-lever despite continued substantial growth capital expenditure:
Its bonds are publicly traded and rated by, inter alia, Moody's. An upgrade of the bonds ought also to improve the market ratings of the equity.
Second, this is a company with a history of domination, ambition, and profitable growth, and whose long-term outlook is no worse now than it has been in the past.
Third, I have excluded a number of free options: cyclical recovery in the PRC end markets, the Trans Pacific Partnership, lower operating costs (labor, utilities, taxes, distribution) in Vietnam, etc.
If 10x earnings is conservative then $15 is at the low end of fair value.
Disclosure: I own some of these shares