CSCI-Textile OEM-Pacific Textiles (1382 HK)：Attractive yield to support valuation - 20171124

Attractive yield to support valuation

• Despite the production interruption in its Vietnam (VN) factory, Pacific Textile (PT) was still able to deliver a solid set of 1H18 results with benign volume growth and cost absorption capability.
• We believe PT has seen its low in 1H18, as the VN blockage has been cleared and production is scheduled to resume in Dec 2017.
• Moreover, it is still cash rich and able to sustain its generous dividend payout policy. We adjusted our np estimates for FY18E/19E downwards by 2.4%/5.1%, after revising down our EBIT margin assumption for FY18E and lowered ASP forecasts for both FY18E and FY19E (see Figure 2). Our DCF-based price target is revised slightly down to HKD10.4 (prev. HKD6). Reiterate BUY.

Benign sales volume growth. Thanks to increased sales of sportswear and PRC domestic market, sales volume grew 4.3% YoY to 82.3mn pounds despite the VN factory interruption in 1H18. However, ASP fell 4.9% YoY to HKD36.5/pound due to the change in product mix, with a greater proportion of outwear sales, which commanded a comparatively lower ASP, versus innerwear. This might be caused by loss of orders from Uniqlo, given the VN factory disruption. Hence, PT has to reshuffle its capacity to cater for more PRC domestic clients to make up the loss. Nevertheless, such a situation will reverse in4Q18, as the blockage has been cleared and the VN factory is scheduled to resume production in Dec-17. Although it will still take several months to progressively raise production back to its normal level, we believe PT has seen its low in terms of revenue and margins in 1H18. According to the management, ASP in 2H18E is expected to improve HoH.

Good cost control. Despite rising raw material costs, i.e. cotton and synthetics in 1H18, we see PT’s average unit cost of raw materials and consumables used in its production have actually dropped 4.6% YoY to HKD26.3/pound (total cost of raw materials & consumables used/total volume sold); this compares with a 2.6% YoY decline in 1H17 and 1.6% YoY decrease in FY17. We believe this has partly offset the negative impact from the additional fixed cost (i.e. HKD6mn/month) that it needed to bear as a result of the VN factory interruption in 1H18.

Strong cash flow, attractive dividend yield. We believe the negative earnings impact from the production disruption to be one-off. PT’s cash on hand totalled HKD914mn in 1H18. We expect the company will be able to maintain its strong FCF generative power, with c.HKD900mn p.a. coupled with a limited capex outlay that would continue to support its strong dividend payout (>90%) going forward. Our estimated yield is 6.6%/6.9% for FY18/19E.

Valuation. We maintain our sales estimates for FY18E, but cut np estimates by 2.4% as we expect some outstanding customer claims from the VN factory disruption are yet to be booked in 2H18E. We have also adjusted downwards our sales and np estimates for FY19E by 2.8%/5.1% as we have factored in a lower ASP assumption. Accordingly, our DCF-based price target is adjusted slightly downwards by 1.9% to HKD10.4 (prev. HKD10.6). We believe PT has seen its low in 1H18. Hence, we reiterate BUY.