Nameson (1982 HK, not-rated): Apart from being a sweater supplier to
FastRetailing, Nameson could see exposure to Puma’s knitted shoe upper
businessupon potential acquisition of V. Success (announced on 28 Sep
Input costs unfavourable for Shenzhou (2313 HK, HKD53.45, Buy): We
expect 1H17top-line growth momentum to remain strong at 16% yoy, driven
by volume expansionthanks to efficiency enhancement and new capacity,
and a higher average selling priceon a better product mix and transfer
of costs. However, higher raw material costs couldimpact gross margin,
which we expect to fall by 20bps yoy. Offsetting this are
operatingleverage given continued ramp-up in Vietnam facilities, lower
convertible FX losses, andlower finance costs as the majority of the
convertible bonds were converted in 2Q17. Netnet, we see net profit
growing by 16% yoy in 1H17e.
Prefer Li & Fung in the space. We adjust down Pacific Textiles
(Hold) earnings by 6-8% for FY18-20e in this report to factor in the
impact from the Vietnam plantsuspension. Consequently, our new TP is
HKD8.70 (from HKD9.40) based on anunchanged 13x CY18e PE. We make no
other changes in this report. We like Li &Fung, as we find the
risk-reward attractive trading at c11x FY18e (ex-perpetuals) PE,c7%
dividend yield on the back of 11% FY16-19e core operating profit CAGR.
We rateStella Reduce as we are cautious on a margin recovery. We have a
Hold rating onShenzhou and Yue Yuen. Sector downside risks: unfavourable
trade policies; sharpadverse change in macro conditions.
Maintain Buy Shenzhou, Hold Li & Fung: We cut our Shenzhou
earningsestimates by 4-5% for FY17-19e to reflect lower margins with a
new TP of HKD59.60vs HKD56.80. We cut our Li & Fung COP forecasts by
3-8% for FY17-19e. We havea new DDM-based TP of HKD3.30 from HKD3.60.
Li & Fung (494 HK): We estimate Kohl’s is a key customer to Li &
Fung and itsteam-up with Amazon could boost store traffic.
Limited read-across from Best Pacific (2111 HK, HKD4.84, not rated):
The lingerieand sports fabric manufacturer expects 1H17 earnings to be
down up to 30% yoy as aresult of lower-than-expected lingerie sales,
increased overheads, higher human resourcecosts, and start-up costs in
Vietnam. We see limited read-across to our HK-listed textilescoverage.
As a direct peer to Best Pacific, Pacific Textiles (1382 HK, HKD9.40,
Hold) hasreiterated a positive view on order book growth from key
lingerie client L Brands as itsstrategy change starts to bear fruit. The
strong momentum is similar to downstream playerRegina Miracle’s (2199
HK, HKD6.75, not rated) expectation for FY March-18.
Yue Yuen (551 HK): Yue Yuen’s retail subsidiary Pou Sheng (3813 HK,
notrated)is a key partner to Puma in China, which we believe could be
the keydriver to Asia Pacific sales growth.
Macro still a headwind for Li & Fung (494 HK, HKD2.84, Hold): In
Right direction butmacro still unfavourable, 11 April, we expected US
store closures to continue. We remaincautious as 64% of Li & Fung’s
sales are generated there. Key US retailers, eg Walmart,Target, Kohl’s
and Macy, have all recorded sales declines y-t-d. We believe a soft
retailenvironment could weigh on the 1H17 results. Factoring in the
impact from the LF Asiadisposal in 1H16, we expect revenue to decline by
11% yoy as growth in logistics couldbe offset by a soft trading segment.
However, margin should stabilize thanks to a positivebusiness mix and
cost control measures. Overall, we expect group COP to fall 6% yoy.
What’s new? Starting in Asia, Fast Retailing (9983 JP, not-rated)
expects FY Aug-18 sales to be +10%, accelerating from a 4% growth in
FY17 driven by UniqloInternational. In Europe, Puma (PUM GR, Hold, CMP
EUR352.75, covered by Anne-Laure Bismuth) continues its strong momentum
with 3Q17 sales +13% on reportedterms (or +17% FX-neutral), 2% ahead of
Bloomberg consensus. Puma also raisedfull year FX-neutral sales guidance
to +14-16% (from 12-14%). In the US, Kohl’s(KSS US, not-rated) is now
selling Amazon devices and accepting Amazon returns(CNBC, 18 Oct). Key
implications to HK-listed supply chain:Shenzhou (2313 HK): The
vertically-integrated supplier has c20% and 10%revenue exposure to the
two brands respectively, based on our estimates.