1H22 performance is lower than we expected.
The company announced 1H22 results: revenue of HK $2.278 billion, + 9.7% year-on-year, and net profit of 168 million yuan,-3.9% year-on-year. The performance was lower than we had expected, mainly due to the decline in gross profit margin due to the higher-than-expected increase in raw material prices. The interim dividend per share is HK7.28 cents, with a dividend payment rate of 45%.
With the high growth of underwear fabrics, the domestic market is developing rapidly. During the period, the company's fabric, ribbon and lace sales accounted for 75.5%, 22.8% and 1.7% respectively, and revenue was + 11.4%, 6.3% and-12% to 17.21,5.19 and 39 million Hong Kong dollars, respectively. Among the fabrics, the underwear fabric was + 20.2% to HK $674 million compared with the same period last year, mainly due to the increase in the penetration rate of existing underwear customers. Sports fabric year-on-year + 6.4% to HK $1.047 billion, on the one hand, the company has entered into a number of new core plans with sports brands, but on the other hand, the short-term destocking of overseas brands has dragged down some demand growth. While the domestic market performance is eye-catching, 1H22 sportswear fabrics in the domestic sales revenue to achieve a year-on-year high growth of + 38.1%.
As the cost of raw materials rises, foreign exchange benefits thicken profits. 1H22's gross profit margin was-4.4ppt to 20% compared with the same period last year, mainly due to the rise in the cost of raw materials. With the growth of revenue and good control of expenses, the rate of sales and distribution expenses and the rate of administrative expenses are-0.6%,-1.0ppt to 4.1% and 6.3% respectively compared with the same period last year. In terms of research and development, due to the need for continuous innovation to meet the love of the market, the expense rate is the same as the same period last year, at 2.4%. In addition, thanks to the devaluation of the renminbi, the Vietnamese dong and the Sri Lankan rupee, the exchange rate was HK $270 million. Overall, the company's net interest rate was-1.0ppt to 7.4% year-on-year.
The overall operation is healthy and the cash flow is abundant. The company's inventory turnover days during the period were from + 22 days to 140days compared with the same period last year, mainly due to the increase in inventory balance caused by the increase in the unit price of raw materials since 2H21. The turnover days of accounts receivable are 5 to 85 days compared with the same period last year, and the efficiency of capital turnover is improved. In addition, the company's net operating cash flow was + 7.4% year-on-year to HK $275 million, with a good cash position.
Trend of development
Considering that overseas demand still faces the impact of inflation in the second half of the year, we expect the revenue side to maintain the growth trend in the first half of the year. At the same time, with the recent fall in raw material prices, the level of gross profit margin is expected to recover. In the medium and long term, we believe that the company will maintain close cooperation with core customers, keep the long-term growth trend unchanged, and will invest more resources in the domestic market, which is expected to bring new increments.
Profit forecast and valuation
In view of the current low market climate, we have lowered our earnings forecasts for 2022 and 2023 by 8.4%, 5.1% to 4.18 Hong Kong dollars and 504 million Hong Kong dollars, and the current price-to-earnings ratio is 4 times / 3 times respectively, maintaining a neutral industry rating. At the same time, considering that it will take time for the company's valuation to be repaired, we have lowered our target price by 23.6% to HK $2.01, corresponding to 5 times 2022 and 4 times 2023 earnings, which is 24.8% upside from the current share price.
Risk
The risk of rising prices of raw materials, weak downstream demand, capacity expansion is not as expected.