Interim results summary: Nanxuan Holdings, a leading knitwear manufacturer in China, announced its interim results for fiscal year 2017. The company's first-half revenue increased 0.9% year over year to HK$1,772 million, and revenue from major major customers increased 20% year over year, offsetting the decline in sales in the US market.
Benefiting from increased production efficiency, increased automation, and increased plant efficiency in Vietnam, gross margin increased 3.3 percentage points over the same period last year. Adjusted net profit increased 24% year over year to HK$230 million. The company declared an interim dividend of 3.8 HK cents per share, with a payout ratio of around 34%.
Accelerate Vietnam's layout. The efficiency of the first phase of the Vietnam plant continues to improve. Currently, the plant utilization rate has reached 80%. The second phase will be put into production in the second half of fiscal year 2017, continuing to drive sales growth. Although US President-designate Trump intends to cancel the Trans-Pacific Partnership, textile and garment vendors expanding their business in Vietnam can still benefit in the long run because Vietnam's production costs are low and it still has favorable trade arrangements with major export markets. Nanxuan Holdings' current production capacity in Vietnam has been used to meet the needs of Japanese customer Uniqlo (58% of total revenue in fiscal year 2016), so the impact of the dissolution of the Trans-Pacific Partnership on the company should be minimal. Overall, Vietnam's production capacity will be used to meet orders with long production times, while China's production capacity will be used to meet orders with short production times to increase company flexibility.
Valuation/Stock Price Catalyst: According to Bloomberg, the company's forecast price-earnings ratio for the 2017/18 fiscal year is 10.8/8.8 times. Compared with the industry average price-earnings ratio of 14.6/12.6 times, the valuation is not high. Given the company's expansion of production capacity, contributions from new customers, and cost savings from new production capacity in Vietnam, the company's profit growth is strong, and the stock price is expected to be revalued.
The main risk. Sales fell short of expectations. The pace of developing new customers has been slower than anticipated. The implementation of the capacity expansion plan fell short of expectations.