BROS(SH:601339)2026-01-21 00:30Investment Rating - The investment rating for Bros Eastern is "Outperform" with an expected relative return exceeding the benchmark index by more than 10% over the next 12-18 months [4]. Core Insights - The report highlights a significant supply contraction in two major cotton exporting countries: the USA and Brazil, marking a turning point in global cotton supply with a "double reduction" pattern [5][6]. - The USA's cotton yield forecast has been cut by 8% to 856 pounds per acre, leading to a 2% reduction in final output, while Brazil's planting area is expected to decrease by 2.8% and production by 6.3% to 3.82 million tons, the first decline in five years [5][6]. - The report indicates that the US cotton price is showing bottoming characteristics, with current prices around 65 cents per pound, significantly below the average planting cost of 80 cents per pound, suggesting limited downside potential [6][8]. - Brazil's supply-demand changes are identified as a key variable affecting US cotton prices, with estimates indicating a 15.6% cost return rate loss for Brazilian cotton farmers, further supporting the supply contraction narrative [7][8]. Summary by Sections Supply Contraction - The USA's WASDE report indicates an increase in harvested area but a significant yield reduction, easing inventory pressure [5]. - Brazil's CONAB report predicts a decrease in both planting area and production, particularly in Mato Grosso, which accounts for 70% of Brazil's cotton output [5][6]. Price Dynamics - The ICE No. 2 cotton futures price is at a historical low, indicating a clear bottoming trend, with a significant cost inversion against planting costs [6][8]. - The basis analysis shows that the cotton basis is at historical lows, with signs of structural recovery, suggesting potential price increases in the medium term [6][8]. Investment Recommendations - The report recommends Bros Eastern due to its low-cost cotton inventory, which is expected to provide significant profit elasticity as cotton prices rise [8]. - The anticipated increase in raw material prices is expected to boost yarn sales prices and restore gross profit margins through inventory appreciation [8].