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CSCI-Textile OEM-Nameson Holdings (1982 HK)：Further market share gain - 20171128

Further market share gain

• Nameson’s 1H18 strong results came in line with our estimates, supported by a DD percentage sales growth from its major client, Uniqlo.
• We see Nameson was gaining more market share, with technological advancement into the production of whole knitted garment for Uniqlo. Such technology also allows Nameson to gain new sportswear clients, hence further market share gains from product diversification.
• The acquisition of knitted shoe uppers manufacturing business is expected to complete by the end of Dec-17. We adjusted our sales estimates upwards by 1.5%/4.3% for FY18/19E, EPS estimates by 8.5% for FY19E and kept FY18E EPS intact (see Figure 3). Hence, we upped our PT to HKD3.0 (prev. HKD2.4), pegging on FY18E 11x PER (prev. 9.8x), considering a higher percentage of revenue contribution from the knitted shoe-upper business. We believe its current price has not fully-reflected the contribution of the shoe-upper business. Reiterate BUY.

Strong sales order growth. Nameson’s revenue grew 19% YoY in 1H18, contributed by an increase of 13.7% in ASP (given the new cashmere orders which command a higher ASP) and 4.6% in sales volume, as Uniqlo’s sales grew sharply by 24.5% YoY. On the contrary, sales for its second-largest client, Tommy Hilfiger remained weak which fell 14.1% YoY, a slight narrowing from 15.9% YoY drop in FY17. Management expects 2H18E order growth to remain at similar level as 1H18. However, the percentage of quick response orders (QRO) has increased to 25-30% from 20% of total in the past. Hence, we might expect the percentage of contribution of 1H performance to Nameson’s full year earnings to drop from c.70% in the past to c.65%.

Manufacturing of whole garment. Given higher percentage of QRO, Nameson is making a right move into the investment of manufacturing of whole garment with 180 units of whole garment machines in place as at the end of Oct-17 and is expected to increase the total number of machines to 256 units by the end of Dec-17 with a total annualized production capacity of 1.5-1.8mn pieces. In 1H18, Nameson already produced c.870k units of knitted whole garments (cashmere orders are excluded) for Uniqlo. The ex-factory price of these whole garments averages c.USD15-25/piece, a large premium to its traditional garment of USD11-15/piece. Whole garment manufacturing can reduce production lead time by over 50% with savings in labour input and raw material wastage, versus traditional garment production. At the same time, Nameson was able to gain new sportswear clients with these machines and quality products. Hence, we believe it is an important strategic development and we expect continual market share gains in the future.

Valuation and earnings revision. We adjusted our sales estimates upwards by 1.5%/4.3% for FY18/19E, EPS estimates by 8.5% for FY19E and kept FY18E EPS intact (see Figure 3). Our PT is raised to HKD3.0 (prev. HKD2.4), pegging to 11x (prev 10x) comparable PER for 2018E, as the footwear business will contribute 15% of the group’s total revenue for FY19E. Our blended PER benchmark is calculated as: 15%*17.5x PER (Taiwan Paiho 1-yr fwd PER) + 85%*9.8x PER. Nameson trades at a calendarized PER of 9.2x for FY18E. Reiterate BUY.