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CSCI-Textile OEM-Nameson Holdings (1982 HK)：Great synergies from the acquisition - 20170929

Great synergies from the acquisition

• Nameson announced last night to acquire the manufacturing business of knitted upper for footwear and knitted uppers shoes from its chairman under a profit-guarantee for FY18E.
• As the key customers of the footwear business includes global sportswear brands (i.e. PUMA, Sketchers and Under Armour), such acquisition represents a market (with higher NPM of 20% than its existing apparel manufacturing of 12%), hence product diversification from the manufacturing of knitwear apparel.
• The acquisition price of 8.3x PER FY18E is a bargain, as compared with the 17.5x for Taiwan Paiho (9938 TW, NR). We expect net EPS enhancement of 8.2% in FY18E and 9.3% in FY19E. We upped our PT to HKD2.4 (prev. HKD2.0), pegging on FY18E 10.8x PER (prev. 9.8x). Reiterate BUY.

Acquisition of 100% stake in V. Success from its chairman. V. Success engages in the manufacturing of knitted upper for footwear and knitted upper shoes business. It has manufacturing operations in Huizhou, PRC and Vietnam. The total consideration is HKD550mn (HKD344mn to be settled by issuing 200mn consideration shares at HKD1.72/shr, which represents 9.6% of the existing issued share capital of Nameson and the remaining HKD206mn in cash).

Profit-guarantee of HKD66mn for FY18E by the vendor. V. Success made a PAT of HKD32.9mn in FY17 and the vendor will provide a profit-guarantee of HKD66mn for FY18E. If V. Success fails to meet the above, the vendor shall pay Nameson a compensation equivalent to 8.33x of the shortfall amount no later than 30 Sept-18. The unaudited consolidated total assets and net asset value of V. Success Group as at 31 Jul-17 were HKD818mn and HKD55mn respectively.

A bargain acquisition. The consideration represents 8.3x PER for FY18E, though slightly lower than Nameson’s PER 8.6x, it is at substantially lower than 17.5x for Taiwan Paiho (9938 TW), which manufactures knitted shoe upper for Adidas. Moreover, the GPM and NPM for footwear is 50% and 20% respectively, much higher than knitwear apparel’s of around 25% and 12%.

Expansion of customer portfolio to include global sportswear brands. The key customers of the footwear business include PUMA, Sketchers and Under Armour. These brands grow at a much faster pace than Nike and Adidas in recent years, thanks to the proliferation of athleisure trend and a much lower base. This allows future cross-selling of Nameson’s knitwear and footwear products to its sportswear and knitwear clients.

Valuation and earnings revision. We adjusted our sales/EPS estimates upwards by 10.0%/8.2% for FY18E and 11.7%/9.3% for FY19E. Moreover, we raised our benchmark PER upwards to 10.8x (prev. 9.8x), taking into the account of a comparable PER for the footwear manufacturing business. As the footwear business will contribute c.13.5% of the group’s total PAT, our blended PER benchmark is calculated as: 13.5%*17.5x + 86.5%*9.8x (9.8x is our prior PER benchmark, which is c.10% discount to the average of its mid-stream peers). Hence, our PT is lifted by 20% to HKD2.4 (prev. HKD2.0). We reiterate our BUY rating. Nameson currently trades at only 7.8x PER for FY18E, still attractive. Reiterate Buy.