Recently, we had a meeting with the management of DeYongjia Group (0321.HK/ HK $8.53, unrated) to learn about the latest situation of the company. De Yongjia is an excellent textile enterprise, also engaged in downstream retail business. Management told us that the company's textile business will further expand in fiscal year 16-17, and production capacity is expected to increase by 15%, mainly driven by stronger demand from US customers (accounting for 60% of total sales). At the same time, management is also optimistic that the prospect of retail business brand reshaping and network reconstruction has been basically completed, same-store sales revenue growth will reach 10.1% in the first half of fiscal year 16, and maintain 110 days of healthy inventory turnover days.

Minutes of the meeting

Textile business

High-quality knitting products manufacturer with vertical integration ability. The company's business focuses on high-margin emergency orders, usually with a production cycle of no more than three weeks, which accounts for 65% of the company's total sales. Management believes that the company's advantage lies in lean and flexible production, so it can negotiate orders two months in advance. 25% of the yarn of the company is produced independently, and the rest mainly comes from other domestic companies. Its clothing joint venture will further process 10% of its total fabric orders.

Diversified customer base. The company's customers include brand retailers and discount chains. Geographically, the company's more than 50 US customers (such as Gap and Nike) account for 60 per cent of the company's total revenue, Japanese customers (such as Uniqlo) account for 24 per cent, and European customers (such as Adidas, HM and Marks& Spencer) account for 10 per cent of revenue. In terms of customers, the top five customers account for less than 30% of total sales, and Uniqlo is the company's largest customer, accounting for about 10% of its revenue. Gap, Nike, Polo and Amif each account for 4-5 per cent of the company's revenue. Management believes that a diversified customer base minimizes its operational risk.

Production base. The company's yarn and fabric production plant is located in Dongguan. At the same time, the company has also set up a joint venture garment company with a 50% stake in Dongguan and Vietnam with a stake of 50%. Management indicated that it would not consider relocating the fabric factory to Vietnam until the TPP agreement was fully finalized, and the cost savings from the relocation were not significant because fabric production did not rely on intensive labour.

Foreground. Capacity utilization will increase to 90% in the first half of fiscal year 16, and sales will increase by 20.9% compared with the same period last year, but the average selling price will fall 4.5% from the same period last year, mainly due to the drop in the price of raw materials. Thanks to the improvement in the product mix, gross profit margin increased by 0.6 percentage points. Management expects gross profit margin to rise 0.5 percentage points to 23% in fiscal year 16 from the previous quarter to 24% in fiscal year 17. Production capacity is expected to grow by 15% a year in fiscal years 16 and 17. Retail business

De Yongjia operates the retail business through multiple brands, and 70% of its sales come from the Benny Road brand. The retail business has been losing money since fiscal year 13. The company has closed about 1300 stores in the past few years, and the number has now fallen to 2800. The company plans to open larger stores. Same-store sales grew positively in the first half of FY15 and further increased to 10.1% in the first half of FY16. At the same time, gross margin has been rising from about 45 per cent to about 49 per cent due to reduced retail discounts, and inventory turnover days have remained at a healthy level of 110 days.

Prospect: management is full of confidence in turning the business around, and most of the brand reshaping and network reconstruction have been completed. The company aims to achieve an EBIT margin of 7% over the next two years, in line with the peak of fiscal year 11.