FREE

CSCI-Textile OEM-Nameson Holdings (1982 HK)：Technological advancement drives growth - 20171218

Technological advancement drives growth

• We visited V. Success, the knitted shoe upper factory in Huizhou, shortly after its acquisition having been approved.
• We believe the market has yet to fully recognise the potential margin enhancement from the knitted shoe upper business, whole-garment production and growing cashmere sales. 
• We revised our PT upwards to HKD3.8 (prev. HKD3.0), based on a higher comparable PER of 14.0x (prev. 11.0x), c.22% discount to peers average. We expect Nameson to deliver 3-year FD EPS CAGR of 25% for FY17-20E. Given a strong OCF (i.e.>HKD400mn p.a.), low bank borrowing costs (i.e.1.7%) and disciplined capital investment, we believe it deserves a further re-rating. We just fine tune our EPS estimates by -2.2%/+1.0%/+3.9% for FY18/19/20E (see Figure 25). Reiterate BUY

Market potential of knitted shoe uppers Many investors question the sustainability of demand for the knitted shoe upper technology with the general belief that it will only be a short-lived trend. We believe the replacement of traditional shoe manufacturing by knitted shoe upper manufacturing, which involves molding and tooling, is a structural change, because the knitting manufacturing process would shorten the production cycle and such a highly automated production process would lower labour input and production waste. Moreover, such a technology would cater for product customisation and personalisation, with the ability to incorporate ergonomics. All these benefits match the future production trend. Knitted shoe upper manufacturing debuted in 2012, with Nike introducing its Flyknit sports shoe. Such technology is now applies in casual and fashion shoes (see Figure 5-6). Apart from the footwear industry, such knitting technology is used in apparel manufacturing (i.e. Nike’s Flyknit Apparel) (see Figure 3). It can also be applied in manufacturing handbags, car interiors and homewares.

Knitted shoe uppers will enhance Nameson’s overall margins. The total investment of c.2,000 units of knitted shoe upper machines is c.HKD624mn. We estimate the breakeven period would be c.3.5-4 years. The GPM of knitted shoe uppers is >40%, c.80% premium to Nameson’s traditional knitwear (see Figure 22). According to our sensitivity analysis, Nameson’s overall GPM will increase by 0.17ppts if shoe upper revenue increases by 1%.

Whole garment manufacturing for sportswear. At present, all whole garment orders are from Uniqlo. Nameson is the only supplier of Uniqlo’s “3D U-Knit” series. Nameson is currently expanding its clients to include sportswear brands, such as Under Armour which is one of its existing knitted shoe upper clients. The benefits from whole garment manufacturing include ASP and margin enhancement, as production lead time can be reduced by >50% with subsequent savings in labour costs and raw material waste.

Deserve a further re-rating. We have adjusted our EPS estimates by -2.2%/+1.0%/+3.9% for FY18/19/20E respectively. Our PT is raised to HKD3.8 (prev. HKD3.0), pegging to a higher comparable PER of 14x (prev. 11x) for 2018E. We expect Nameson to deliver 3-year FD EPS CAGR of 25% for 2017-20E.