Action
As of 2016, Best Pacific’s sales +20.6% to HK$2,469mn,and net profit +33.3% to HK$456mn; annualized dividendyield was 2.8%. The results beat our expectations; consideringthat its sector growth remained robust and margin improved,upgrade to BUY, but maintain TP at HK$7.95.
What’s changed
Lace and sportswear segments drove top line growth.
Sales of elastic fabrics/elastic webbings/lace products were up+21.1%/+16.7%/+49.1%. Revenue from sportswear materialalso grew 51.3%. Victoria’s Secret has expanded its business intosports products, creating cross-selling opportunities.
Capacity expansion still on the way. Best Pacific’sproduction capacity of elastic fabrics, elastic webbings and laceproducts now stands at 84.6mn meters, 1,190.6mn meters and22.8mn meters (+17.2%, +11% and +35.7% YoY). It has alsoestablished its first overseas production base in Vietnam; it isslated to commence production in 2H17.
GPM +0.3ppt to 33.5%, thanks to the higher margin of itselastic fabric sector; admin. expense ratio -0.5ppt to 6.6%.How do we differ from the market.With the R&D cost ratioremaining high (2.2%), cutting-edge product innovation couldstrengthen its cooperation with downside customers.Potential catalysts: its cost plus pricing model guaranteesstable GPM; the rebound in synthetic yarn prices could lead tohigher ASP; and, the start of production at its new Vietnam plantin 2H17 could drive growth.
Financials and valuation
We lift our 2017/18 EPS forecasts by 4.2%/2.1% toHK$0.52/0.60, (+17%/16% YoY). The stock is trading at11.6x/9.9x 17/18e P/E. Upgrade to BUY, maintain TP atHK$7.95 (13x 2018e P/E) implying 33% upside. Its growthtrend remains intact and its valuation is cheap.
Risks
Slower customer development and capacity expansion.