In the first half of the 2023/24 fiscal year, Southern Xuan Holdings (01982.HK) achieved total revenue of HK$2.73 billion, a year-on-year decrease of 12.0%. Net profit decreased 15.7% from the same period last year to HK$290,000 million, while adjusted net profit declined to 10.6%.

Impossible Triangle: Southern Xuan Holdings (01982.HK) announced an interim dividend of HK$0.095 per share, which is equivalent to a dividend distribution ratio of 74.8%. We are surprised by the group's medium-term dividend amount and dividend distribution ratio, and believe that high dividends can be a short-term catalyst for the group's stock price. However, we believe there are great challenges for the Group to maintain a low leverage ratio, a high dividend distribution ratio, and active business expansion at the same time. As of the end of September 2023, the Group held approximately HK$1.12 billion in cash and was subject to approximately HK$670 million in current interest-bearing liabilities. Taking into account the Group's HK$300 million to HK$400 million capital opening agreement (to support Vietnam's factories, fabric and cashmere business, etc.) and the latest dividend distribution ratio, we expect the Group's leverage ratio to remain flat, while the dividend distribution ratio for the second half of the fiscal year will be lower than in the first half of the fiscal year.

The core knitting business is mixed: Knitting products are the core business of Southern Xuan Holdings (01982.HK). The annual sales volume for the first half of the fiscal year increased by about 1.6% year over year to about 19 million pieces. Among them, sales of fully molded products increased sharply by 17.6% over the same period last year. However, the increase in sales volume was offset by a decline in average prices of about 12.9% year-on-year, mainly due to the group's reduction in agreed prices for fully molded products and a decrease in sales volume of cashmere products. In the second half of the 2023/24 fiscal year, the number of orders from major customers recovered, and the group's sales of knitted products increased. The forecast for an increase in the number of units was clearly more optimistic than the previous forecast. However, the average sales price of knitted products (especially fully molded products) is still affected by the price of raw materials, so it is likely to remain at a lower level, limiting the growth of group revenue and profit. Furthermore, we believe that the group's gross profit level will not rise any further, and that it may return to a more reasonable level under the influence of the appreciation of the renminbi against the US dollar.

Preparing for the future: In response to weak market conditions, Southern Capital Holdings (01982.HK) tried to achieve an ideal balance between retaining cash and expanding operations. I) The intention is to increase the production capacity of about 5 million knitted products at the Vietnamese factory to meet the demand for products produced in the non-Chinese region; ii) continue to invest in the fabric business with greater potential; and iii) reduce capital expenditure to less than HK$400 million, even if multiple measures are insufficient to bring immediate results to the group, but to provide the group with basic market opportunities.

Myanmar is still the biggest uncertain factor: The Myanmar factory is still the biggest uncertainty facing Southern Xuan Holdings (01982.HK) at present. According to the group's financial report, based on political considerations, customers are currently not very interested in purchasing from factories in Myanmar, and it is currently not possible to completely rule out the possibility of further depreciation.