Na[mTaebsloen_’Ss u1mHmFYar1y7] recurring net profit was up 24% YoY, whichbeats our and market expectations. Strong results were driven byenhanced gross margin coupled with mild volume growth. VietnamPhase II capacity expansion plan is on track and will drive volumegrowth in 2HFY17 and FY18. Improved operating efficiency andRmb deprecation will support its GPM. Maintain BUY with a higherTP of HKD1.90 (15% upside).
Margin expansion on improved operating efficiency. Nameson’s1HFY17 gross margin expanded substantially by 3.3ppt to 23.8%despite a 3% decline in ASP. It was attributed to a) improved operatingefficiency from increased automation of the production process; and b)Nameson’s sales are dominated in USD while costs mainly in Rmb.Depreciation of Rmb against USD is beneficial to its margins. We expectits GPM to sustain in FY17.
Volume to grow on Vietnam expansion. Vietnam phase II expansionis on track, which is expected to gradually commence production in early2017. The production facility accounts for 34% of the current capacity,which is a major volume growth driver in years ahead. Moreover, taxbenefits and lower operating costs in Vietnam support Nameson’searnings growth.
Sales from Uniqlo remain strong. Sales from Uniqlo, the largest clientof Nameson, was up 19% YoY, in spite of market’s concerns on theUniqlo’s sales. Revenue from this client jumped from 50% in 1HFY16 to59% in 1HFY17, more than offsetting the sales decline from the USclients. Nameson remains the largest wool knitwear supplier of Uniqlo,and their long standing business relationship is a valuable asset to theGroup.
Maintain BUY with a higher HK$1.90 TP. Nameson is currently tradingat FY17F 10.5x P/E. We derive our TP using 12x FY17F P/E, which isclose to the valuation of its closest listed peer, Pacific Textile (1382 HK).Key Risks: Weaker-than-expected volume growth and lower-thanexpectedGPM.