1Q17 manufacturing revenue was up 7%yoy, butmanagement guides low-single-digit growth for 2Q17
Retail revenue momentum continued; disposal target to becompleted in 2Q17
　　Maintain Reduce with unchanged TP HKD10.0A satisfactory 1Q17: Total group revenue came in at USD307m, +10%yoy, ahead ofour full year growth expectation of +4%. By segment, manufacturing revenue was up7%yoy, returning to positive growth after four quarters of declines. Manufacturingvolume growth offset decline in average selling price （ASP）。 Strong volume （+9%） wasdriven by demand of in ath-leisure. Specifically, the top client in sports saw volumegrow 15% and the addition of another fast-growing sports client from 2H16 has helpedto boost volume too. Decline in fashion and casual narrowed to low-single-digits yoy butthe shift in more mass market products has driven to an overall lower ASP （-2%）despite higher raw materials costs. Into 2Q17, management expects a low-single-digitgrowth in manufacturing revenue, as mid-single-digit volume pick up should again beoffset by weaker ASP.
　　Retail still strong: China retail revenue came in at USD16m on the back of 9%same-store-sales growth （or 15% FX-neutral SSSG）。 Despite a slight dip in theJanuary to February period due to an early Chinese New Year with customersadvancing purchases into December-2016, growth picked up again in March. InEurope, the company saw 24% growth in sales with 8% SSSG （of 11% FX-neutral）。
　　Management attributed the improvement to new product series launches, better storeefficiency. The disposal of 60% interest in the retail business in China is targeted tocomplete in 2Q17 with a one-off gain unchanged at around USD2m.
　　Maintain Reduce. We continue to see margins facing further pressure, driven by:
　　1） lower ASP, and 2） margin dilution from the new factory. Manufacturing ASP shouldtrend lower given the casual brand’s shift to more mass products. Raw materialsprice stabilization could take six months to flow through. Separately, we see a risk ofmargin dilution in FY17e when new factory commences operations towards 2H of thisyear. We make no change to our forecasts in this report. Our unchanged target priceof HKD10.0 is based on 12.7x FY17e PE, 0.5sd below the average since 2007 andtranslated into HKD at our FX strategists’ end-2017 rate. With 23% downside, wereiterate our Reduce rating on Stella. Key upside risks include higher-than-expectedorders from brand customers, improving product mix and/or higher productionefficiency leading to higher gross margin, and higher-than expected sales growthand/or lower operating costs in the retail segment.