CSCI-Textile OEM-Regina Miracle (2199 HK)：Drivers from customer and product diversification - 20171102

Drivers from customer and product diversification

• We expect Regina Miracle (RM) to post a strong recovery in its 1H18 results, which is slated to be announced by the end of Nov.
• While order recovery from L Brands (LB US, NR) will support its growth in FY18E, we see greater upside from a higher operating leverage on customer and hence market diversification from lingerie into the bigger functional apparel market in FY19E.
• We will maintain our NPM estimate for FY18E, but revised up our revenue and adj. EPS estimates for FY19/20E by 3%/12% and 3%/9%, respectively (see Figure 1). Accordingly, we have upped our DCF-based PT to HKD8.8 (prev. HKD8.0). RM currently trades at 17.5x/13.3x PER on a calendarised EPS basis for FY18/19E. Reiterate BUY.

A solid recovery for 1H18. Given LB’s order recovery is getting back on track, an exceptional low-base in 1H17 and contribution from new customers, we expect RM to post 25-28% YoY revenue growth for 1H18E, which could translate into a >5x YoY growth in net profit to c.HKD150mn level. We are expecting NPM to recover to a 5.3% level for 1H18E, versus 2.9% in 2H17. Meanwhile, on anticipation of increasing benefits on the back of higher operating leverage to be realised in 2H18E, we are maintaining our FY18E NPM estimate of 6.3% and thus also revising up our FY19/20E NPM estimates by 0.7/0.5ppts to 8.4%/9.4% respectively. 

Positive momentum from LB. RM is benefiting from LB’s product strategy of re-focusing on “constructed bras”, which is LB’s core strength, as opposed to “bralette”, which require less components (i.e. bra pads) in the production process. For example, on 26 Sept, Victoria’s Secret Sport (VS) launched the “Angel Max” collection of sport bras which provide twice the support and weigh 50% less than the normal sports bras, utilizing laser-cut and seamless technology in its production. At present, around one-third of LB’s orders are sports-bras, the rest are traditional bras.

Customer and market diversification into functional apparel, a market that is substantially larger than the lingerie market. One of the key parameters of RM’s pace of recovery that we are gauging is how fast it can expand and ramp up its apparel production, hence driving up its operating leverage which is crucial in driving profitability improvement. Revenue from apparel orders accounted for 1% of its total in FY17. Given the contribution from new customers, such as Uniqlo, we expect the percentage of contribution will rise to account for a LSD percentage of the total in FY18E. RM’s Factory C in Vietnam (for Uniqlo’s orders) will launch production in Apr-18 with a planned annual capacity of 30mn units. As such, revenue contribution from apparel will likely rise further in FY19E. At present, RM’s apparel customers include Uniqlo, Under Armour, Adidas and PUMA.

Maintain BUY, PT upped to HKD8.8. We will maintain our NPM estimate for FY18E, but revised up our revenue and adj. EPS estimates for FY19/20E by 3%/12% and 3%/9%, respectively (see Figure 1). Accordingly, we have upped our DCF-based PT to HKD8.8 (prev. HKD8.0), representing 20.4x/15.5x calendarised PER for FY18/19E. Reiterate BUY.