Main points of investment
For the first time, the company was given a prudent overweight rating, with a target price of HK $6.22: we expect the company to achieve an annual revenue of RMB 100 million on 2018-19-20, an increase of 12.1%, 12.3%, 12.9%, and a net profit of 1.65%, 1.84%, and an increase of 11.1%, 11.8%, 12.1%, respectively. We are optimistic about the company's multi-category cross-regional production capacity and high-quality and stable key customer resource advantage barriers, the company continues to promote transnational production platforms, open up new categories and markets, the comprehensive advantage is constantly enhanced, and the market share is expected to continue to increase. The company's stock is given a target price of HK $6.22, corresponding to a 2018 PE of 11.5x, an increase of 13.7 per cent from the current price, with a "prudent overweight" rating.
The growth of the industry is good, and the degree of concentration increases gradually: due to the industrial transfer, Asia has become an important production base of the global clothing manufacturing industry. In terms of output value, the size of the global clothing manufacturing industry reached US $269.3 billion in 2012, with a CAGR of 5.8% in 2016-2016; the CAGR of 2016-2021E is expected to be 4.9%. Consumption upgrading and demand growth drive the scale growth of the industry. In addition, with the abolition of the trade quota system and the increase of industry barriers, leading enterprises benefit from industry integration and the degree of concentration increases gradually. CR2 increased from 0.66% to 0.85% in 2012-2016
Diversification strategy drives sustained growth of performance: first of all, multinational production platform is the main factor to effectively reduce the company's costs. The company has set up 20 production bases in five countries around the world, close to the origin of raw materials and cheap labor. In 2014-2017, the sales cost dropped from 2.47% to 1.82%, a decrease in 0.65ppt.
Secondly, diversified product categories are the core of performance growth. After the acquisition of Vista at the end of 2016, the company added new sports and outdoor clothing categories and began to make efforts in 2014, with revenue of 2% CAGR in 2017 and + 23.5% in 2017 compared with the same period last year. Third, multi-regional market layout, focusing on Europe, the United States and the Asia-Pacific region. In 2017, Europe, the Americas and the Asia-Pacific region accounted for 21% of revenue, 37% and 39% of revenue respectively. Revenue in the Asia-Pacific region is the main driver of performance growth. In addition, the diversification of large customers is a strong guarantee of the company's performance. The company has established more than 30 years of strategic cooperation with leading brands, such as Uniqlo and other global brands. After expanding the new sports category, the company's major sports customers are Under Armour, VF (The North Face) and PUMA, with a significant increase in revenue.
Risk tips: failure to maintain partnerships with core customers, labor shortages and rising costs, changes in raw material prices, risks of changes in global trade policies, foreign exchange controls and exchange rate fluctuations