The apparel sector performed well in general in 2H23 as we see China Lilang and JNBY reporting strong numbers (so will Bosideng, in our view). Going into FY24E, we tend to be more picky, but China Lilang should still outperform, thanks to its own initiatives (improvements in operational efficiency as well as upgrades in product and brand quality, etc.). More importantly, we think the downside is protected given its 8x FY24E P/E and 10% yield.

FY23 results were a slight beat and dividend was decent. China Lilang's sales/ net profit increased YoY by 15%/ 18%, better than CMBI est. by 3%/ 5%, thanks to: 1) better-than-expected new products and demand (after a series of reforms), 2) higher interest income and 3) write-back of inventory provisions (with the new logistic centre and improved re-order capability). In terms of segment, sales growth rates for core brand/ smart casual/ e- commerce were at 10%/ 35%/ 18%. A DPS of HK$0.36 for FY23 was declared, implying a 74% payout ratio and an 8% yield based on current market cap. Working capital has also improved significantly, and inventory/ receivable days dropped to 170/ 42 days, from 195/ 54 days in FY22.

FY24E guidance is fairly robust and far ahead of our expectation. Due to the high base, macro uncertainty and intense competition, we tend to stay conservative on the apparel sector (even cautious for sportswear). However, China Lilang has announced a rather impressive retail sales growth target of 15% (including 20% growth for e-commerce). We think such growth will be driven by: 1) more successful new and star products, where sell-through rate was at 78% to 83% in FY23, compared to 75% to 82% in FY22, and the down apparel sales growth was as fast as 30% during the 2023 winter; 2) improvement in inventory management, esp. after the implementation of the new logistic centre and the greater use of re-orders; 3) ramp-up of smart causal segment, where sales growth was rapid at 35% in FY23 and sales per store had already exceeded that of core brand, 4) a larger scale of store revamps (target to renovate 400 stores in FY24E, vs 400/300 in FY23/22); 5) acceleration in store expansion (target to net open 100 new stores, vs around 50 in FY23E and net closures of about 90 in FY22). The retail sales growth YTD in 2024 may have slowed down vs 4Q23 (still positive), but the trend is improving in Mar 2024.

Maintain BUY and raise TP to HK$5.75. We revise up FY24E/25E net profit by 8%/ 13%, to factor in: 1) robust trade fair sales growth and 2) strong smart casual sales growth. Our new TP is based on 10x FY24E P/E (rolled over), supported by a 11%/14% sales/net profit CAGR during FY23-26E. We think it is still rather attractive, given an 8x FY24E P/E and 10% yield.