CSCI-Footwear OEM-Stella International (1836 HK)：New Nike factory is gaining traction - 20171018

New Nike factory is gaining traction

• Stella just reported its 3Q17 operational data, which suggests it is on track to meeting its sales volume target for FY17E.
• Its new Nike factory in Vietnam is gaining more traction after commencement of operation in 2H17. We expect more cost benefits to be realised on the Group level starting from FY18E.
• Management reiterates its EBIT margin target of 6% in FY17E. We have trimmed our EPS estimates for FY17/18E slightly by 0.1%/1.4% after factoring in a lower ASP assumption, but upped that for FY19E by 1.8% as we expect greater EBIT margin enhancement from the new VN factory. Hence, we reiterate our BUY rating with the PT revised to 2 (prev. HKD15.5) still based on 1.0x PEG and a core np 3-year CAGR estimate of 17.9% for FY16-19E.

Management expects ASP decline to stabilise in 4Q17E. Total footwear sales rose 1.8% YoY to 42.2mn pairs in the first nine months of 2017, a deceleration from the 6.3% YoY increase in 1H17 due to a 6.4% drop in ASP in 3Q17 (1H17: ASP -1.9%), which was affected by the one-off impact from Under Armour’s orders, as Stella began to manufacture a full range of UA’s shoes in 3Q17. The ex-factory ASP for UA’s orders was lower on average to USD25-40/pair in 3Q17, versus USD40/pair in 1H17. Nevertheless, the ASP of its fashion athletic footwear clients had improved by c.1% YoY on the whole in 3Q17. Stella is seeing positive order momentum in 4Q17, with faster volume growth and a narrower ASP drop of c.4% YoY. Management expects ASP to come down by 4% in FY17E and c.1% in FY18E.

Stella is on track to meet its full-year sales volume target for FY17E.  For the manufacturing business, total pairs of shoes sold rose 4.1% YoY in 3Q17 and rose 5.5% YoY to 42.2mn in the first nine months of 2017, versus a 7.8% YoY decline in the first nine months of 2016. This reinforces our prior view that FY17E is a year of recovery for Stella. The total number of shoes sold in the first nine months already accounted for 75.4% of its full-year target of 56mn pairs, hence, we believe Stella is on track to meet its sales target for FY17. For FY18E, management targets to sell a total of 60mn pairs of shoes, representing c.7.1% YoY growth.

Valuation. We have trimmed our EPS estimates for FY17/18E by 0.1%/1.4% after factoring in a lower ASP assumption, but upped that for FY19E by 1.8% as we expect greater EBIT margin enhancement from the new VN factory. Hence, we reiterate our BUY rating with the PT revised to HKD15.2 (prev. HKD15.5) still based on 1.0x PEG and a core np 3-year CAGR estimate of 17.9% for FY16-19E. Stella currently trades at 13.7x PER and a dividend yield of 4.5% for FY17E.