20160831-DBS_Group-联泰控股-00311.HK-Making_Progress_11页_333kb

Luen Thai Holdings Limited Summary (30 August 2016)

Core Content

Luen Thai Holdings Limited (Luen Thai) is a company engaged in the manufacturing of apparel on an OEM basis, primarily knit wear and woven wear, along with freight forwarding, logistic services, and system consultancy. The report outlines the company's performance in the first half of 2016 and its outlook for the future, highlighting key financial metrics, operational improvements, and strategic developments.

Main Points

• Stock Recommendation: BUY
• Price Target: HK$1.55 (25% upside from the last traded price of HK$1.24)
• Dividend Payout: Increased to 60% in 1H16, up from the usual 30%, indicating strong cash flow and a positive surprise for investors.
• Profitability: Improved in 1H16 due to reduced non-profitable orders and lower air freight costs, leading to better gross margins (from 15.1% to 17.3%).
• Valuation: The company's FY17F P/E of 5.4x is considered undemanding, with a reasonable valuation and an improved dividend yield (>8%).

Key Business Segments

• Casual and Fashion Apparel: Revenue decreased in 1H16 due to the drop in non-profitable GAP orders and weak Uniqlo business, but profitability improved.
• Life-style Apparel: Continued to perform poorly, with segmental losses in 1H16.
• Sweaters: Maintained stable performance, with a slight increase in profitability.
• Accessories: Benefited from duty-free access in Cambodia and the Philippines, with potential for growth due to trade agreements.
• Logistics / Real Estate: Minor contribution to revenue, with a slight loss in the Qingyuan Real Estate project.

Strategic Developments

• Vietnam and Cambodia: Luen Thai is expanding its manufacturing presence in Vietnam and Cambodia to leverage duty-free trade agreements, especially the Transpacific Partnership, which could provide duty-free access to US markets.
• Philippines: The company's operations in the Philippines offer duty-free access for travel goods and handbags, providing a competitive edge.
• China Retail Expansion: The company is launching a retail venture in China, distributing the "Chaps" brand, leveraging its private group's experience in the retail segment.

Outlook

• The outlook remains challenging, but improvements are expected in 2H16 and FY17F, driven by better utilisation of Cambodia facilities and potential market share gains.
• The company is expected to see a 26% bottom-line growth in FY17F due to improved operations and sourcing strategies.
• Despite challenges, the company's ability to offer multiple supply bases and its vertical integration strategy are seen as long-term positives.

Risks

• Cambodia Operations: The factory acquired in 2013 may still require time to improve efficiency and profitability.
• Order Headwinds: Weakness in the US retail market and inventory issues could impact near-term reordering.
• Utilisation: Lower utilisation in China factories could negatively affect margins.

Financial Highlights

Key Assumptions and Drivers

• Sales Growth: Expected to increase in 2017F, driven by improved operations and new orders.
• Gross Margins: Projected to improve to close to 17% in FY16F due to elimination of non-profitable orders and lower freight costs.
• Investment in Vertical Integration: Increased stake in TNS (a fabric production facility in Vietnam) to 50%, enhancing long-term capabilities.
• Share Price Drivers: Improved client strength, strategic expansion, and the ability to provide multiple supply bases.

Balance Sheet Overview

• Net Cash Position: Luen Thai has maintained a net cash position, with an increase in cash and short-term investments.
• Current Ratio: Improved to 1.8 in 2016F, indicating better liquidity.
• Quick Ratio: Also improved to 1.5 in 2016F.
• Shareholder's Equity: Increased from 376 in 2013A to 416 in 2017F, reflecting improved financial health.

Conclusion

Luen Thai is in a recovery phase, with improved profitability and a higher dividend payout in 1H16. The company is leveraging its manufacturing capabilities and strategic positioning in duty-free markets to enhance its competitive advantage. Despite ongoing challenges, the long-term outlook is positive, supported by its vertical integration strategy, expansion into the retail segment, and potential for improved operations in Cambodia. The current valuation is considered attractive, and the company is recommended as a BUY.