Brand inventory removal in the first half of the fiscal year affected year-on-year performance, and the month-on-month improvement trend improved. The company is the world's leading underwear manufacturer. In the six months ending September 30, 2023 (first half of fiscal year 2024), the company's revenue fell 23% year on year to HK$3.55 billion, net profit fell 66% to HK$110 million, and the interim dividend rate was 40%. Performance was in line with expectations, with significant year-on-year declines, mainly due to a sharp decline in orders from overseas brands starting in the second half of FY2023. However, revenue in the first half of FY2024 had increased 8.5% month-on-month, capacity utilization, production efficiency and product added value increased, and gross margin increased 1.3 percentage points to 23.8% month-on-month.
In the face of adversity, the Group strengthened cost control, but the financial expense ratio increased 1.2 percentage points year over year due to overseas interest rate hikes. Furthermore, 1) the Shenzhen factory has been relocated to Zhaoqing one after another, generating labor compensation of HK$86 million in the first half of the fiscal year, accounting for 2.4% of revenue; 2) it should account for HK$520,000 in profits from associated companies (mainly Vimi China's share profit), with a loss of 50 million yuan in the same period last year. Combined with the above influencing factors, the net profit margin increased 0.9 percentage points month-on-month to 3.0%.
There is a clear month-on-month upward trend in orders, and attention is being paid to repairing the elasticity of profits. 1) Order outlook: The company expects that in the second half of fiscal year 2024, orders for underwear will rise steadily from month to month, and the sports sector will develop further; the sports sector is expected to fully recover in the 2025 fiscal year. It is expected that the capacity utilization rate of the Vietnam base (85% of sales) in the 2025 fiscal year will rise to a high level in the first half of fiscal year 2023. At the same time, the new Zhaoqing park will be put into operation one after another, and the design production capacity is twice that of the original Shenzhen park. 2) Labor compensation expectations: The relocation of the Shenzhen park is expected to generate more than HK$160 million in labor compensation in the 2024 fiscal year, accounting for about 25% of the total labor compensation, and the remaining 75% will be completed in the 2025-2026 fiscal year. 3) Medium- to long-term perspective: First, process optimization and automation promotion help improve human efficiency, product innovation drives unit price increases, capacity utilization increases, reduces depreciation ratio, and drives continuous increase in profit margins. Second, after establishing a joint venture with Vimi China, marketing, innovation, and new retail efforts began. On the one hand, the increase in explosive development in the Chinese market fed back the US market, and cooperation between the company and customers deepened; on the other hand, Vimi China's rapid growth contribution should account for the profits of the joint venture company.
Risk warning: Overseas brands continue to remove inventory; overseas economic recession; trade war; systemic risk.
Investment advice: The upward trend in orders is clear, and medium- to long-term profit margins are expected to continue to improve. The performance of the first half of the fiscal year was relatively good. At present, the order low point has passed, and the improvement trend is clear. It is expected that the 2025 fiscal year will return to normal.
In the medium to long term, benefiting from the popularity of women's sports and the development of the yoga category, the company has good potential for growth. As manpower efficiency and capacity utilization increase, profit margins are expected to continue to improve. Due to the large labor compensation expenses incurred by the relocation of the Shenzhen Park, the profit forecast was lowered. The company's FY2024-FY2026 net profit is expected to be HK$3.0/4.3/540 million (previously HK$4.0/5.5/660 million), with year-on-year changes of -21%/+42%/+26%. Due to lower profit forecasts, the reasonable valuation was lowered to HK$2.8-3.0 (previously HK$3.8-4.0), corresponding to FY2025 PE 8.8.8.5x, maintaining the “buy” rating.