20140918-光大证券-Riding_an_Export_Recovery_14页_296kb

Victory City (539 HK) Summary

Core Content

Victory City is a leading knitted fabric producer in China, with a vertically integrated business model that includes spinning yarn, dyeing yarn, knitting fabric, and garment manufacturing. The company is well-positioned to benefit from the recovery of both export and domestic markets, particularly in the fast fashion segment, which is characterized by rapid trend changes and shorter production cycles. Victory City's strategic diversification and automation efforts have helped it maintain a competitive edge amid structural challenges in the Chinese textile industry, such as rising labor costs, environmental regulations, and currency appreciation.

Main Points

• Company Overview:

  • Founded in 1991, Victory City is based in Xinhui, Guangdong, and has expanded its operations to include garment manufacturing in Indonesia, Cambodia, and Jordan.
  • It also ventured into resin manufacturing in 2013, leveraging existing licenses and infrastructure.
  • Major clients include Tommy Hilfiger, Zara, Walmart, and Columbia.

• Business Model:

  • Vertically integrated supplier for fast fashion, offering cost advantages, flexibility, and faster response to customer orders.
  • Diversified production base, with in-house facilities in China and overseas plants in Southeast Asia and Jordan, which offer lower labor costs and favorable trade conditions.

• Market Recovery:

  • The US economy is recovering, supporting Victory City's export business, which accounts for around 70% of sales.
  • The domestic market is also showing signs of recovery, especially in the sportswear sector.
  • The company has expanded its production capacity, particularly in its Xinhui plant, to meet growing demand.

• Valuation and Investment Highlights:

  • The company trades at 5.3x FY15E P/E, with a target price of HK$1.30 based on a 7x FY15E diluted earnings valuation, offering a 23% upside.
  • A forward dividend yield of 7.5% is considered attractive.
  • The company is expected to grow its earnings at a 19% CAGR from FY14 to FY16E.

• Competitive Advantages:

  • Early adoption of automation and environmental compliance, reducing reliance on labor-intensive processes.
  • Strategic location of overseas plants, allowing access to lower-cost labor and duty-free exports to key markets.
  • Strong cash flow generation and reduced net gearing to 35% by FY15E.

• Earnings and Financial Performance:

  • Revenue is projected to grow at a 16% CAGR from FY14 to FY16E.
  • Net profit is expected to rise steadily, with a CAGR of 20% from FY14 to FY16E.
  • The company has managed to maintain stable EBITDA margins and improve operating leverage.

• Investment Rating:

  • The report initiates coverage with a Buy rating, citing an attractive valuation and strong growth prospects.

Key Information

• Share Price: HK$1.06 (as of 17 September 2014)

• Target Price: HK$1.30

• Upside: 22.6%

• Dividend Yield: 6.6%

• 52-Week Price Range: HK$0.97–HK$1.29

• Free Float: 54.36%

• Major Shareholder: Chen Tien Tui (22.70% stake)

• Production Capacity (As of 31 Mar 2014):

  • Yarn spinning: 1,200 tons
  • Knitted fabric: 18 million lbs
  • Dyed yarn: 5 million lbs
  • Garments: 2.4 million pieces

• Key Financial Metrics (FY14–FY17E):

  • Sales: HK$5,372m (FY14), HK$6,063m (FY15E), HK$7,231m (FY16E), HK$8,275m (FY17E)
  • Net Profit: HK$277m (FY14), HK$349m (FY15E), HK$394m (FY16E), HK$473m (FY17E)
  • EPS: HK$16.5 (FY14), HK$19.9 (FY15E), HK$22.6 (FY16E), HK$27.1 (FY17E)
  • P/E: 6.4 (FY14), 5.3 (FY15E), 4.7 (FY16E), 3.9 (FY17E)
  • EV/EBITDA: 5.9 (FY14), 5.0 (FY15E), 4.7 (FY16E), 4.4 (FY17E)
  • DPS: HK$7.0 (FY14), HK$8.0 (FY15E), HK$9.0 (FY16E), HK$10.5 (FY17E)

• Industry Outlook:

  • China is expected to maintain its dominance in global textile and garment exports due to its cost advantages and developed supply chains.
  • The domestic clothing market is growing rapidly, with per capita spending increasing at a 16% CAGR from 2009 to 2013.
  • The fast fashion trend is expected to continue, favoring larger, vertically integrated suppliers like Victory City.

Risks

• Weaker-than-expected orders due to a deteriorating global economy.
• Political risks in the regions where the company operates.
• Potential for rapid increases in cotton prices that could affect gross margins.
• Over-reliance on the US market for a significant portion of its sales.

Conclusion

Victory City is well-equipped to capitalize on the recovery in both export and domestic markets, supported by its vertically integrated business model, strategic diversification, and automation efforts. Its current valuation is seen as attractive, with a target price of HK$1.30, offering a 23% upside. The company is expected to deliver strong earnings growth and maintain a competitive edge through industry consolidation and cost management.