Key takeaway

In 1H26, the company recorded revenue of RMB3.087bn, up 20.8% YoY, and net profit attributable to shareholders of the parent company of RMB325mn, up 20.2% YoY; in 2Q26, it recorded revenue of RMB1.801bn, up 24.1% YoY, and net profit attributable to shareholders of the parent company of RMB205mn, up 21.2% YoY. In 1H26, gross margin was 21.19%, down 0.41 pct YoY, and net margin was 11.10%, down 0.12 pct YoY; in 2Q26, gross margin was 21.76%, down 0.46 pct YoY but up 1.38 pcts QoQ, and net margin was 12.09%, down 0.38 pct YoY. In 1H26, both sales volume and average selling price increased for worsted wool yarn, cashmere sales volume rose 31.8% YoY, and the profitability of wool tops improved. Gross margin declined YoY in 1H26, mainly due to delayed price passthrough and the delivery of lower-priced orders, but improved QoQ in 2Q26; RMB appreciation also weighed on profitability in 1H26. Looking ahead to 2H26, price pass-through for worsted wool yarn is largely complete, while the profitability of the cashmere business is expected to improve as price pass-through advances and the customer mix is optimized. Regarding capacity, phase I facilities in Yinchuan and Vietnam continue to ramp up, while construction of phase II in Vietnam and the highend fancy yarn project is progressing steadily; together with expansion into sports, outdoor, and other applications, these initiatives are expected to support the company’s medium- to long-term growth.

Event

The company released its 2026 interim report. In 1H26, the company recorded revenue of RMB3.087bn, up 20.8% YoY, net profit attributable to shareholders of the parent company of RMB325mn, up 20.2% YoY, and net profit attributable to shareholders of the parent company excluding non-recurring gains and losses of RMB317mn, up 18.2% YoY. Net operating cash flow was negative RMB52mn, compared with negative RMB11mn in the year-ago period, mainly due to tax and fee payments; basic EPS was RMB0.34 per share, up 17.2% YoY, and weighted ROE was 8.53%, up 0.84 pct YoY.

On a quarterly basis, the company recorded revenue of RMB1.801bn in 2Q26, up 24.1% YoY, net profit attributable to shareholders of the parent company of RMB205mn, up 21.2% YoY, and net profit attributable to shareholders of the parent company excluding nonrecurring gains and losses of RMB201mn, up 19.9% YoY.

Quick Take

Both sales volume and average selling price increased for worsted wool yarn, the cashmere business maintained rapid growth, and the profitability of the wool tops business improved. By business segment: 1) Worsted wool yarn: In 1H26, revenue was RMB1.643bn, up 14.6% YoY, gross margin was 28.99%, up 0.16 pct YoY, and the segment accounted for 53.2% of total revenue; sales volume was 9,505.25 tonnes, up 7.7% YoY, and the average selling price was RMB172,800 per tonne, up 6.4% YoY, with increases in both volume and price driving revenue growth. On a quarterly basis, we estimate that the worsted wool yarn business generated revenue of approximately RMB960mn in 2Q26, up 18% YoY, with an average selling price of approximately RMB177,300 per tonne, up 4.9% YoY. 2) Cashmere: In 1H26, revenue was RMB1.043bn, up 32.7% YoY, gross margin was 12.30%, down 1.21 pcts YoY, and the segment accounted for 33.8% of total revenue; sales volume was 1,811.31 tonnes, up 31.8% YoY, and the average selling price was RMB575,600 per tonne, up 0.6% YoY, while capacity utilization remained high and sales volume growth drove business expansion. 3) Wool tops: Revenue reached RMB364mn in 1H26, up 20.2% YoY. Gross margin was 9.91%, up 3.68 pcts YoY. The business accounted for 11.8% of total revenue. External sales volume was 2,997.62 metric tons, with an average selling price of approximately RMB121,500 per metric ton. Higherwool prices drove improvements in the business's revenue and profitability. Quarterly, we estimate that wool tops revenue increased 42% YoY in 2Q26, with the average selling price reaching approximately RMB128,400 per metric ton, up 42% YoY. 4) Modification treatment, dyeing and finishing, and cashmere processing: Revenue was RMB19mn in 1H26, down 3.5% YoY. Gross margin was 35.50%, up 1.16 pcts YoY. The business accounted for 0.6% of total revenue.

The lag in passing through cost increases delayed the realization of profitability, while gross margin improved QoQ in 2Q26. 1) Margins: In 1H26, the company's gross margin was 21.19%, down 0.41 pct YoY. Net margin was 11.10%, down 0.12 pct YoY, and the income tax rate was 14.85%, down 1.38 pcts YoY. Quarterly, the company's gross margin was 21.76% in 2Q26, down 0.46 pct YoY and up 1.38 pcts QoQ. Net margin was 12.09%, down 0.38 pct YoY and up 2.37 pcts QoQ. The income tax rate was 15.48%, up 0.15 pct YoY a nd 1.73 pcts QoQ. Gross margin declined YoY in 1H26 due to the lag in passing through cost increases, RMB appreciation, and the concentrated delivery of previously secured low-priced orders. It improved QoQ in 2Q26. 2) Period expenses: In 1H26, the company's selling expense, administrative expense, R&D expense, and finance expense ratios were 1.71%, down 0.21 pct YoY; 2.60%, down 0.48 pct YoY; 2.01%, down 0.26 pct YoY; and 1.23%, up 1.08 pcts YoY, respectively. Quarterly, the respective ratios in 2Q26 were 1.58%, down 0.28 pct YoY; 2.24%, down 0.62 pct YoY; 2.03%, down 0.36 pct YoY; and 1.10%, up 1.33 pcts YoY. The higher finance expense ratio was mainly due to increased foreign exchange losses. The company recorded a foreign exchange loss of RMB20.7009mn in 1H26, compared with a foreign exchange gain of RMB16.3235mn in the same period last year.

Proposed private placement to steadily advance global capacity expansion and develop new product categories such as high-end fancy yarn. The company plans to raise no more than RMB1.019bn through a private placement. The proceeds will fund Xinao Vietnam's high-end worsted eco-yarn spinning, dyeing, and finishing project (Phase II), the smart workshop project with annual capacity of 2,000 metric tons of combed high-end cashmere and wool fancy yarn, and other projects. The application was accepted by the stock exchange on August 28. The company's recent construction projects are summarized as follows: ① Xinao Vietnam's “50,000-spindle high-end worsted eco-yarn spinning, dyeing, and finishing project”: Phase I, comprising 20,000 spindles, was completed between late 2024 and 2025 and gradually commenced production. Capacity continued to ramp up in 1H26. Construction of Phase II, comprising 30,000 spindles, has begun. Trial runs are expected to start progressively from late 2026, followed by phased capacity additions. ② Installation and commissioning have been completed for all 20,000 spindles under Xinao Yinchuan's 20,000-spindle highquality worsted wool and cashmere yarn project. Capacity was gradually commissioned in 2H25 and continued to ramp up in 1H26. The company is expected to begin advancing Phase II of its Ningxia project by the end of 2027. ③ Zhejiang Tongxiang “Smart workshop construction project for annual production of 2,000 metric tons of combed premium cashmere and wool fancy yarn”: The project has a budget of RMB269mn. Upon completion, it is expected to diversify the supply of premium yarn products and expand the fancy yarn business.

Outlook: 1) Price increases for worsted wool yarn are gradually taking effect in 3Q, and earnings upside is expected to materialize in 2H. As of August 27, the Australian Wool Exchange Eastern Market Indicator stood at AUD18.53/kg, up 53% from end-June 2025. As price increases for worsted wool yarn gradually take effect, the cashmere business continues to pass through price increases and optimize its customer mix. Profitability is expected to improve in 2H. 2) In the long term, downstream applications of wool yarn on the demand side have expanded beyond traditional thermal knitwear into diverse and emerging scenarios, systematically broadening into sports and outdoor products, woven fabrics, home textiles, fancy yarns, industrial applications, and other fields. On the supply side, the company is pursuing a sustainable, broad-based development strategy to diversify and expand its product portfolio. The worsted wool yarn industry remains fragmented. Xinao’s market share is estimated at 16%-17%. Xinao has comprehensive competitive advantages in brand, customers, R&D, and capacity. As the company advances the development of its global production bases, there is considerable room for further market share gains.

Earnings forecast: We expect the company’s revenue to reach RMB5.92bn, RMB6.77bn, and RMB7.62bn in 2026-2028, up 17.2%, 14.3%, and 12.5% YoY, respectively. Net profit attributable to shareholders of the parent company is expected to reach RMB586mn, RMB661mn, and RMB726mn, up 22.0%, 12.9%, and 9.9% YoY, respectively. This corresponds to P/E ratios of 10.1x, 8.9x, and 8.1x. We maintain our “Buy” rating.

Risks: 1) Raw material price volatility: The company’s primary raw materials include wool and cashmere, and material costs account for a relatively high proportion of its core business costs. If raw material prices fluctuate significantly in the future and the company is unable to promptly pass the impact on to downstream customers, it may face the risk of lower gross margin and weaker earnings due to raw material price volatility. 2) Risk of slower-than-expected capacity expansion: Projects under construction include the premium worsted ecoyarn spinning, weaving, dyeing, and finishing project with 50,000 spindles at the company’s Xinao Vietnam subsidiary. These projects are gradually entering production. Slower-than-expected commissioning would affect the company’s revenue growth. 3) Risk of weaker-than-expected downstream demand: The sales volume and prices of the company's products depend on downstream market demand. If downstream demand falls short of expectations, the company's order volume and product prices will be affected, which in turn will affect its revenue and gross margin.