2017 earnings expected to decline by around 30%
According to Best Pacific’s earnings alert, its net profit is expected todecline by around 30% YoY in 2017. The guidance was slightly lowerthan the market consensus. As of 2H17, the Company’s performanceimproved compared with 1H17 in terms of net profit; while 2H16’shigh base led to lower-than-expected results.
Lingerie material business （incl. the production of elastic fabric,elastic webbing & lace） still underperformed, due to thesluggish sales performance of its core customers. The SSSG ofVictoria’s Secret remained weak at -1% in December 2017.
Investment in PP&E led to higher manufacturing overheads. Itsplant in Vietnam did not go into operation until 2H17, while itsstart-up costs were incurred previously.
Higher expenditure related to human resources and foreignexchange losses caused by Renminbi appreciation furtherdragged the Company’s profitability.
We estimate that Best Pacific’s overall revenue could see low teensgrowth, while its operating margin should drop around 8ppt in 2017.
Trends to watch
The sportswear segment continues to perform in line with BestPacific’s expectations; besides, the outlook of its lingerie materialsegment seems positive, with more orders placed by customers. ItsVietnam operation has also started to record revenue since August2017, and its performance is expected to improve further.
Valuation and recommendation
We cut our 2017/18 EPS forecasts by 21.6%/14.2% to HK$0.30/0.39（-30.9%/+28.4% YoY） and introduce 2019e at HK$0.48 （+22.4% YoY）；the stock is trading at 15.6x/12.2x/9.9x 2017/18/19e P/E. Wemaintain our BUY rating and lift our target price by 5% to HK$5.74due to the shift in valuation （based on 12x 2019e P/E）。 The profitdecline in 2017 is already reflected in the current stock price, and weexpect a turnaround on its overseas capacity ramping up, given itsrich customer resources and R&D capability.
Risks
Recovery of orders key customers’ orders slow than expected.