Leading enterprises in underwear material industry, short-term impact without damage to long-term logic
Chaoying International is the world's leading one-stop solution provider of lingerie materials, including elastic fabrics, elastic ribbons and lace. The company's sales and production capacity are in the leading position in the industry at the same time, and its customers cover many front-line brands of women's underwear. In recent years, the company's performance has maintained a trend of rapid growth, but recently it may be hit by the short-term profits brought about by the low sales of downstream underwear brands and their own production capacity expansion. We believe that these negative effects will not last for a long time, mainly because 1) the Victoria's Secret ratio of a single largest customer is less than 20%, and the customer base is broad. the ability to resist risks in the single market is strong; 2) the company leads the industry in terms of production capacity scale, operation mode and research and development, and is attractive to high-quality orders; 3) under the high pressure of environmental protection, China's fabric industry as a whole is faced with de facto backward production capacity clearance. Therefore, Chaoying's market share as a leading supplier in the industry will be guaranteed.
The rapid growth and large space of sports materials business is the main driving force of performance growth.
As the materials used in women's underwear are similar to those used in sportswear, Chaoying has entered the sportswear material market around 2012, which makes the company benefit from the magnificent demeanor of the sportswear industry. The main customers of the business are first-tier brands such as Under Armour, Lululemon and Adidas, as well as underwear customers who have developed sports product lines, such as Victoria's Secret. Since 2014, the sports materials business has shown a step-by-step growth, with revenue of HK $450 million in 2016, an increase of 51.3% over the same period last year, accounting for 18.4%.
The company's core competitiveness has been continuously consolidated, and short-term capacity expansion may put pressure on performance.
Super surplus one-stop service model can effectively improve customer procurement efficiency, and has obvious advantages in short delivery period. at the same time, it can also bring huge opportunities for cross-selling for the company. The growth of lace and sporting goods will expand this advantage. In terms of R & D, the company's investment has always been maintained at a high level in the industry, and the rate of R & D expenditure is stable at about 2.2%. In terms of capacity scale, the commissioning of Ma Chung Phase 6 and Vietnam plants in the first half of 2017 will increase the overall production capacity by 10-15% and 25-30% respectively, enough to ensure a leading position in the industry. In addition, 2017Q2's new automated inventory management system has also been completed and put into use. Intensive investment of fixed assets will bring pressure on capacity utilization and operating cash flow, and capacity will take time to digest. It is recommended to pay attention to the changes of the company's profit index and working capital.
First coverage: "overweight" rating with a target price of HK $5.27
We estimate that the company's EPS for 17-19 years will be HK $0.29, 0.39 and HK $0.48 respectively. Based on the DCF valuation method (WACC 9.97%, long-term growth rate 2%), the company is given a target price of HK $5.27, corresponding to 2017, 2018 18.2x and 13.5x PE, respectively. Coverage for the first time, giving a "overweight" rating.
Risk hint: downstream orders have fallen sharply; capacity release is not as expected; new business expansion is not as expected