1H24 performance exceeded our expectations

The company announced 1H24 results: revenue of HK$2.385 billion, +25.1% YoY; net profit to mother of HK$0.277 billion, +100.1% YoY. The company's performance was higher than our expectations, mainly due to the recovery in gross margin exceeding expectations. Furthermore, 1H24 dividends HK13.33 HK cents per share, corresponding payout ratio of 50%.

Orders are recovering well, and sports fabric revenue is showing strong performance. By product, 1H24 fabric/webbing/lace revenue was +27.1%/+21.0%/-14.7% to 1.89 billion/0.47 billion/0.03 billion HK$0.03 billion, respectively, accounting for 78.0%/20.3%/1.7% of revenue, respectively. Among fabrics, 1H24 underwear fabric revenue was +11.2% to HK$0.59 billion; sportswear fabric revenue was +35.8% to HK$1.3 billion year-on-year, mainly due to strong growth in orders from downstream customers, and the company's share in the supply chain increased.

1H24's gross margin increased rapidly, leading to a marked improvement in profitability. Thanks to increased capacity utilization under economies of scale, 1H24 gross margin was +6.0ppt to 27.0% year over year, with fabric/webbing/lace gross margin +6.3pp/ +5.8pp/ -8.7ppt, respectively. In terms of expenses, the 1H24 sales expense ratio was -0.04ppt to 4.3% year over year; the management expense ratio was +0.4ppt to 6.9% year over year, mainly due to the increase in employee benefit expenses due to the expansion of business scale; and the financial expenses ratio was -1.3ppt to 1.8% year over year, mainly due to the decline in the company's overall debt level and reduction in financing costs. Overall, 1H24 net profit margin was +4.4ppt to 11.6% year over year.

Steady operation and optimized debt structure. 1H24 inventory +11.6% YoY to HK$1.05 billion, inventory turnover days -14.7 days to 107.7 days; accounts receivable +33.2% YoY to HK$0.79 billion, receivables turnover days -2.4 days to 58.1 billion days YoY. 1H24 Net cash flow from operating activities was -21% year over year to HK$0.3 billion, mainly due to increased production and sales, which increased the company's inventory and accounts receivable. Furthermore, 1H24's net debt was -21% YoY to HK$0.39 billion, and the net balance ratio was -3.4ppt to 11.6% YoY.

Development trends

The second half of the year is usually the peak season for company orders. We expect 2H24 revenue to maintain a good growth trend. Among them, the sports sector is expected to lead the growth rate, and profit margins are expected to maintain a high level due to scale effects.

Profit forecasting and valuation

Considering the upward trend in the company's profit margin, we raised our 2024/25 profit forecast by 26%/26% to HK$0.56/0.64 billion. The current stock prices correspond to 2024/2025 4.6x/4.0x P/E, respectively, and maintain a neutral rating. Considering the upward shift in the valuation center of the textile manufacturing industry, we raised our target price by 58% to HK$2.70, corresponding to 5.0x/4.4x P/E in 2024/25, with 9% upside compared to the current stock price.

risks

Downstream demand recovery falls short of expectations, exchange rate fluctuations, and the risk of rising raw material prices.