Performance review

The 2022 results fell short of our expectations

The company announced full-year results for 2022: revenue of HK$4,493 million, -6.3% year on year; net profit of HK$299 million, -25.5% year on year. Of these, 2H22 received revenue of HK$2,214 million, or -18.5% year on year; net profit attributable to the mother was HK$131 million, or -42% year-on-year. The company's performance fell short of our expectations, mainly because overseas brand customers were more conservative in placing orders in the context of inventory removal. The company paid a dividend of HK11.50 cents per share for the full year of 2022, corresponding to a payout rate of 40% and a dividend rate of 10%.

Overall overseas sales are under pressure, and the penetration rate of underwear customers continues to increase. By product, fabric, ribbon, and lace revenue in 2022 was -5.1%, -9.5%, and -15.1%, respectively, to HK$34.4, 98, and 760 million, accounting for 76.6%, 21.7%, and 1.7% of revenue, respectively. Among fabrics, underwear fabric revenue in 2022 was +9.2% yoy to HK$1.29 billion, mainly due to increased penetration among existing underwear customers; sportswear and apparel fabric revenue was -12.0% yoy to HK$2.15 billion, mainly affected by the decline in orders from individual overseas customers, while sales revenue to domestic customers was +11.2% year-on-year.

Due to high raw material costs, gross margin declined, and exchange gains and losses increased profits. The company's gross margin in 2022 was -4.28ppt to 18.9% year-on-year, mainly because raw material prices remained high for most of the year. The company strictly controls expenses. The sales and management expenses rates in 2022 were -0.16ppt and -0.63ppt to 4.1% and 6.4%, respectively. Furthermore, due to depreciation of the yuan and the Vietnamese dong, etc., the company's exchange earnings in 2022 were +56.17 million HK$56.17 million year-on-year to approximately HK$57.9 million. Overall, the company's net interest rate to the mother in 2022 was -1.72ppt to 6.7% year-on-year.

Steady operations and healthy cash flow. The company's accounts receivable in 2022 were -22.9% year-on-year to HK$650 million, the number of accounts receivable turnover days was -2.0 days to 61.1 days compared to the same period last year; inventories were -22.0% to HK$1.14 billion, and the number of inventory turnover days was +11.9 days to 129.9 days year on year. The increase in inventory turnover days was mainly due to the increase in overall inventory balance due to high raw material prices. The company's operating cash flow in 2022 was +48% year-on-year to HK$770 million, mainly due to well-controlled accounts receivable payments and inventory levels.

Development trends

Since the beginning of the year, the capacity utilization rate of the company's core production base has been lower than normal by about 20%. The company expects that 1H23 overseas customers will still be in the inventory removal period, which will have a negative impact on the company's order volume. At the same time, the company believes that the inventory level of US core clothing brand customers has improved recently, and 2H23 may show positive inventory replenishment.

Profit forecasting and valuation

Considering that there is still pressure on current orders, we lowered our profit forecast for 2023 by 37.7% to HK$314 million, and introduced the 2024 profit forecast of HK$432 million. The current stock prices correspond to 3.8x and 2.7xP/E in 2023 and 2024 respectively, maintaining a neutral industry rating. The target price was lowered by 38.3% to HK$1.24, corresponding to 4.1x and 3.0Xp/E in 2023 and 2024, with an upward margin of 8.8% compared to the current stock price.

risks

The recovery in demand from overseas customers fell short of expectations, the risk of rising raw material prices, and the risk of exchange rate fluctuations.