CSCI-Textile OEM-Best Pacific (2111 HK)：Low visibility but improving backdrop - 20180116

Low visibility, but improving backdrop

• We have witnessed Best Pacific’s (BP) efforts in growing its revenue with the establishment of two JVs in recent months, which could prove vital for the company in terms of returning to profitability growth in 2018.
• The global lingerie market seems to have stabilised in 2H17, whereas the sportswear market has maintained its growth momentum. Accordingly, we estimate BP to post c.6.5% YoY growth in sales volume in 2H17E, improving slightly from the 8% YoY growth recorded in 1H17. Nevertheless, we reiterate our view that EBIT margin will come down further by 0.6ppt HoH to 13.6% in 2H17E, due to depreciation & amortisation expenses from the new Vietnam (VN) factory.
• We have revised down our earnings estimates for FY17/18E by 2.9%/4.3% respectively (see Figure 1). However, we have upped our PT to HKD4.6 (prev. HKD3.9), as we have rolled over to FY18E, still based on 1.0x PEG. We believe the market has fully factored in the operating de-leveraging effect from the VN expansion, though order visibility remains low. Upgrade to

Efforts in revenue expansion. One of the impending challenges that BP needs to overcome is to grow its revenue, which is through diversifying its revenue sources so as to minimise the impact from a weak lingerie market. It has thus established two JVs in Sri Lanka at the end of last year, with Phoenix Ventures Ltd. and MAS Holdings in November and December, respectively. The Phoenix JV will engage in the manufacture and sale of synthetic textiles and textile related products. Meanwhile, the MAS JV will engage in the manufacture of warp and weft knitted fabric, as well as the importation of yarn and greige fabric and complementary accessories for dyeing and finishing for export. We appreciate the management’s effort in diversifying its revenue sources.

An improving backdrop. We did not see any material negative emerging in the global lingerie market in 2H17, whilst the sportswear market has maintained its growth momentum. Hence, we expect BP’s sales volume will improve slightly by 1.7ppt. HoH to +6.5% in 2H17E from +4.8% in 1H17, Accordingly, we estimate BP to post c.6.5% YoY growth in sales volume in 2H17E versus a 4.8% YoY growth in 1H17, translating to +5.6% YoY growth for FY17E. Looking forward, we expect sales volume growth of 6.4%/8.4% for FY18/19E respectively. As a result of the recognition of additional dep & amort. expenses from the new VN factory, which started trial operation in Aug-17, and FX losses from RMB appreciation in 2H17E, we expect EBIT margin will erode further by 0.6ppt HoH to 13.6%, before recovering to around the 16.0%/18.2% level in FY18/19E respectively.

Upgrade to HOLD. We have revised down our earnings estimates for FY17/18E by 2.9%/4.3% respectively (see Figure 1). However, we have upped our PT to HKD4.6 (prev. HKD3.9), as we have rolled over to FY18E, still based on 1.0x PEG. We believe the market has fully factored in the operating de-leveraging effect from the VN expansion, though order visibility remains low. Upgrade to HOLD.