1H18 results miss expectations
Best Pacific International announced 1H18 results: Revenue rose 7%YoY to HK$1,351mn; net profit fell 26% YoY to HK$104mn（HK$0.10/sh）。 The results were lower than we expected mainly due toa weak lingerie business performance and overall margin squeeze.
Sales briefing: By product use, sportswear & apparel fabric materialsales grew 21.6% YoY and accounted for around 30% of total, whilelingerie sales grew modestly. By product type, elastic fabric sales grew7.1% YoY （boosted by sportswear）； elastic webbing revenue rose 5%YoY （ASP hikes）， and lace sales increased 25.6% YoY （volume growth）。
Major customer situations still mixed: L Brands was weak; VictoriaSecret same-store sales slipped 2% YoY in May and 6% YoY in June;while Pink brand growth missed expectations. Under Armour revenuerose 7.7% YoY in 2Q18 （Asia and Europe sales increased more than30% YoY）， beating market expectations.
Gross margin dipped 4.8ppt YoY to 23.9% amid unfavorable FXmovements, rising raw material costs and manufacturing overhead.Opex ratio was down 0.7ppt YoY.
Trends to watch
Best Pacific is targeting 2018 production capacity for elastic fabric andwebbing expanding 23.1% and 4.5% YoY to 135.8mn and 1,744.6mnmeters; and lace capacity largely unchanged at 24.6mn meters. JVacquisitions in Sri Lanka have been completed and are expected toaccelerate its overseas expansion, a significant move given theescalating trade frictions.
Earnings forecast
We cut 2018 and 2019 EPS forecasts 8.5% and 11.3% to HK$0.28（-5.2% YoY） and HK$0.33 （+19.2% YoY）。
Valuation and recommendation
Best Pacific trades at 9.4x 2018e and 7.9x 2019e P/E. Maintain HOLD,but cut TP 11% to HK$2.98 （9x 2019e P/E; 14% upside） on lower thanexpected results. While the stock looks oversold, materialimprovement in utilization and lingerie business remains to be seen.
Risks
Recovery of order growth from key clients could miss expectations.