1H17 result beats on GPM and operating leverage; Stabilizing USmarket; New US and Japan clients to ramp up in 2H17Though Nameson's sales growth stayed flat Yoy in 1H17, their adjusted netprofit was up 24.1% Yoy to HK$226.8mn and accounted for 75.6% of ourFY17E estimates. The upbeat was driven by better than expected GPMexpansion which came in at 23.5% （up 330bps Yoy, vs our FY17E at 22.3%and market consensus at 22.8%）， while stringent cost control and lowerinterest expenses also contribute to the bottom line.
　　Nameson's top two largest customers （Uniqio and Tommy Hilfiger） continueto account for ——80% of revenue in 1H17. As apparel retailers' underwentdestocking, sales in North America fell ——27.6% Yoy in 1H17, andmanagement mentioned that sales began to stabilize in 2H17, we expectsales drop in North America would narrow in FY17E （vs. 1H17） and sales toJapan would accelerate in 2H17, given the recent cold weather wouldincrease quick order response from Uniqlo as well as new client orders.
　　In 1H17, Nameson received orders from Gap Inc （GPS US） and accountedfor ——3% of revenue, while Adastria Co. （2685 JT, owning brands like LowrysFarm and Global Work） has also become Nameson's new client, we expectthese new clients' order would ramp up in 2H17 and FY18E. Nameson'smanagement continues to explore new clients including a renownedJapanese client.
　　Production in Vietnam plant Phase 2 to commence production in 2H17Vietnam has signed Free Trade Agreements （‘FTAs’） with Japan, Korea,Russia-led Eurasian Economic Union （EEU） and European Union （‘EU’） toenjoy ——0% tariff. Nameson has expanded to Vietnam （Tay Ninh Province） in1Q15, with designed capacity at 4.4mn pieces/year for Phase 1 factory, andcurrently fully utilized. Phase 2 factory would gradually commence operationin 2H17. Upon fully ramped up, the annual capacity would reach 12.6mnpieces/year, and Vietnam plants would constitute ——36% of total capacity（——47mn pieces/ year）。
　　Target to diversify product mix in medium term through introducingnew products and seeking for M&A opportunitiesNameson's management target to diversify current product mix through, i）introducing new products to clients, such as active knitwear/ activefunctional knitwear （with water repellent, UV protection feature） for clientsand ii） looking at M&A opportunities in shoes and apparel knitting universe.
　　UNIQLO's strong quarterly sales and 2Q17 outlook （due in mid Jan 17）Diversifying clientele
　　M&A news flow
　　Trading at FY18E 9.8x PE, re-rating continues on diversifying clientmix and potential M&As
　　We expect Nameson's EPS growth to accelerate to 15.4% CAGR inFY16-FY18E （vs. 11.1% in our previous estimates）， driven by market sharegains and order ramp up from new clients, while GPM expansion on lowerproduction cost. Nameson's is trading at FY18E 9.8x PE valuation （——32%discount to avg. PE of Shenzhou （2313 HK） & Pacific Textile （1382 HK） at14.5x）， and with 3.6% dividend yield, current valuation still looks attractiveand continue to deserve a re-rating. We raise Nameson's TP from HK$1.85to HK$2.18 based on 12.3x FY18E PE （15% discount to peers' avg）