Acquired Chairman's knitted upper for footwear and knitted uppershoes business with profit guarantee
Nameson announced on Sept 28 to acquire V. Success Group, which is theChairman's knitted upper for footwear and knitted upper shoes business, forHK$550mn with a profit guarantee of at least HK$66mn in FY18E, this translateinto FY18E 8.3x PE, which would be earnings accretive to Nameson （wouldincrease FY18E net profit by ~4.5%, expect 3-month contribution given the profitguarantee is fulfilled）， should the acquisition being approved by shareholders.Management expects deal to be closed by end 2017. The deal would be settledby issuing new shares （62% of total consideration） and cash （remaining 38%）。Current clients include renowned sports brands such as Puma （~50% of sales），Under Armour （~10%） and Sketchers （~10%） etc.
FY17 result slight beats on GM and operating leverage; US marketimproved in 2H17, new US & Japan clients to drive growth in FY18E
Nameson's net profit was up 20.6% Yoy to HK$329.5mn （~7.0% higher than ourestimates）， thanks to better than expected GM expansion which came in at23.7% （up 190bps Yoy, vs our FY17E at 23.4%） and market consensus at22.8%）， while stringent cost control and lower interest expenses also contributedto the bottom line. Management mentioned in our recent update the businesskicks off well in 1H18E, with sales growth across all regions. We expect saleswould pick up in North America in FY18E （vs. 17.1% in FY17 and -27.6% Yoy in1H17）， while sales to Japan would see a moderate growth driven by ramping upof Adastria Co.' （2685 JT, owning brands like Lowrys Farm and Global Work）which has also become Nameson's new client in 1H17, we expect these newclients' order would continue to ramp up in FY18E. Take note that Nameson alsogain Brooks Brothers.
Nameson's top two largest customers （Uniqlo and Tommy Hilfiger） continue toaccount for ~80% of revenue in FY17. Nameson received ~2mn pieces of newcashmere wear order for FY18E from Uniqlo. Though the volume would be ~6%of total capacity in FY17, the ASP >50% higher than company average（USD11-12/piece）， which we believe would help drive revenue growth in FY18E.
Vietnam Plant Phase 2 still ramping up but still benefit in the long run
Nameson has expanded to Vietnam （Tay Ninh Province） in 1Q15, with designedcapacity at 4.4mn pieces/year for Phase 1 factory, and currently fully utilized.Phase 2 factory gradually commenced operation in 2H17, and managementexpressed that it is still ramping up, thus the current utilization rate stillmaintained at ~50-60% （vs. PRC plant at ~90%）， we believe the GM from theVietnam would gradually improve. Upon fully ramped up, both Vietnam plantswould constitute ~36% of total capacity （~45mn pieces/ year）。
Trading at FY18E/19E 13.2x/11.0 PE, re-rating continues on diversifyingclient mix, with new business driving earnings growth ahead
We expect Nameson's EPS to grow at 16.2% CAGR in FY17-FY19E, driven bymarket share gains and order ramp up from new clients, while GM expansion onlower production cost as well as contribution from new business. Nameson istrading at FY18E 13.2x PE valuation （incl. ~4.5% incremental EPS contributionfrom new business , ~24% discount to peers' avg.）， and with 3.2% dividend yield,current valuation still looks attractive and continue to deserve a re-rating. Weraise Nameson's TP from HK$2.18 to HK$2.82 based on 15.6x weightedaverage FY18E PE （~10% discount to peers' avg, vs. 12.3x FY18E PE in our lastupdate）。 We identify the following upside catalysts for Nameson: i）Acquisition approved by shareholders, ii） Earnings upgrade driven byfactoring in newly acquired business, iii） Successful ramp up of VietnamPhase 2 plant and iv） increasing market awareness favours re-rating.