Guotai Haitong: Still optimistic about the leading yarn companies benefiting from the rising prices of American cotton and showing financial performance flexibility.

Guotai Haitong released a research report stating that U.S. cotton has been strengthening since early March, with a nearly 10% increase and breaking through 70 cents per pound. With the reduction in production in Brazil, and the cotton planting season in the U.S. and China, March to May is an important window for the price of U.S. cotton. It is still optimistic about the leading yarn manufacturers benefiting from the upward trend in U.S. cotton prices. Guotai Haitong's main points are as follows: Supply side: 1. Brazil, as the largest competitor to the U.S. cotton export market, has reduced production for the first time in 26 years. The planting area for cotton in Brazil is expected to decrease by 3.5%, with a 3.6% decrease in yield, resulting in a 6.9% reduction in production to 3.7951 million tons. 2. U.S. cotton planting intentions: In 2026, the intended planting area for U.S. cotton is expected to increase by 4% compared to the previous year, reaching 9.64 million acres. The slight increase in area is mainly due to the smaller price difference between cotton and other crops, and the cotton being more drought-resistant under extreme dry conditions. 3. Drought conditions in the U.S.: The DSCI drought index in the U.S. reached 172 (historically in the 85th percentile), with drought indices in major cotton-producing areas in Texas approaching the peak of the severe drought in 2022, which may lead to lower yields and higher abandonment rates. 4. Global cotton supply and demand tightening: The USDA's February Agricultural Outlook Forum predicts a reduction in the global cotton production-sales gap to -890,000 tons for the 26/27 year (the lowest in the past 5 years), with year-end stocks declining to 15.5 million tons, indicating a globally tight cotton balance. Demand side: 1. United States reached trade reciprocity agreements with India and Bangladesh in February: The U.S. and Bangladesh established a zero-tariff mechanism for using U.S. cotton, and reached a temporary cooperation agreement with India for textile preferential treatment, securing stable demand expectations for U.S. cotton. 2. China issued import cotton quotas earlier, and the focus of China-U.S. trade talks: Due to the high price difference between domestic and international cotton prices, the National Development and Reform Commission issued an additional 300,000 tons of import quotas on March 16th; in addition, during the China-U.S. bilateral talks in March, China expressed willingness to increase purchases from the U.S. Shenzhen Agricultural Power Group. It is worth noting that the expected recovery of Chinese purchases will be an important catalyst for U.S. cotton demand expectations. 3. U.S. cotton export situation: From January to the present, U.S. cotton exports for the old crop (season 25/26) totaled 665,500 tons (a 13.4% increase compared to the same period last year), while new crop (season 26/27) accumulated orders totaled 118,100 tons (a 1.2% increase compared to the same period last year), both reaching new highs in nearly 3 years. 4. Low inventory-to-sales ratios in U.S. apparel retail: In January, U.S. apparel store sales increased by 3% year-on-year, showing resilience. Additionally, the inventory-to-sales ratios of U.S. apparel stores and wholesalers are at their lowest levels in nearly four and five years, respectively. U.S. cotton price differences: 1. Historical price difference review: After the additional quotas were issued, the price difference between domestic and international cotton prices gradually narrowed, reaching 6,175 yuan/ton by March 31, but still at a historically high level of 84% in the past 20 years. 2. Comparison with core stock prices: High price differences benefit yarn companies with overseas production capacity advantages. Reviewing history, yarn companies have stronger price transmission and profit elasticity during periods of significant cotton price increases, and stock prices in the fourth quarter of 25 have already started to rise in response to cotton prices going up. 3. Comparison with oil prices: High crude oil prices (a 99.3% high in the past 10 years) have raised the costs of synthetic fibers, with the current price differences between U.S. cotton and domestic cotton for short fibers at extremely low levels of 14.2% and 33.6% in the past 10 years, respectively. Low price differentials indicate that the cost-effectiveness of using cotton is increasing continuously. Risk factors: Lower-than-expected consumer willingness, fluctuating raw material prices, and intensified industry competition.