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Best Pacific International (2111 HK) Summary

Core Content

Best Pacific International is a leading global manufacturer of lingerie materials, specialising in elastic fabrics, elastic webbing, and lace. The company has established strong relationships with top global lingerie brands such as Victoria's Secret, Calvin Klein, Triumph, and Wacoal, which positions it well for growth. The report initiates coverage with a Buy rating, highlighting the company's potential for long-term value creation.

Main Points

• Revenue Growth Outlook:
  The company is forecasted to achieve a 21% CAGR in revenue from 2013 to 2016, driven by the expansion of its lace business, market share gains, and the growth of the global lingerie industry. Net profit is expected to grow at a 32% CAGR during the same period.

• Gross Margin Expansion:
  Gross margins are projected to increase from 31.4% (2013E) to 32.6% (2016E), as the high-margin lace business ramps up and becomes a larger portion of revenue.

• Valuation:
  A 6-month target price of HKD4.60 is set, based on a 13x PER for 2015E, which is in line with its closest peer, Pacific Textiles. The upside from the current price (HKD3.80) is 21.1%.

• Key Catalysts:

  • Strong global demand for lingerie, which is growing at more than twice the pace of general apparel.
  • Untapped potential in the sportswear market, where the company's elastic fabric expertise could drive future growth.
  • Expansion of its one-stop-shop business model, which allows it to provide a comprehensive range of materials for lingerie production.

Financial Summary (HKD million)

Growth Drivers

• Lingerie Industry Growth:
  The global lingerie industry is growing rapidly, and Best Pacific is well-positioned to benefit from this trend due to its focus on high-quality, niche products.

• Lace Business Expansion:
  The company's entry into the high-margin lace business is expected to significantly improve gross margins and overall profitability.

• Sportswear Market Potential:
  The company has a strong position in elastic fabrics, which are in demand for sportswear. It is expected to win more orders in this segment, especially as global sports brands expand into women's sportswear.

• One-Stop-Shop Model:
  Best Pacific offers a comprehensive range of materials (elastic fabric, elastic webbing, and lace) for lingerie production, which is a key competitive advantage. This model helps it maintain close relationships with brands and streamline production processes.

• R&D Investment:
  The company has a dedicated R&D team of around 100 members, split into two units: one for fabric development and one for lingerie product design. It has been granted 34 patents and is known for its high-quality, innovative materials.

Key Risks

• Slow Ramp-Up of Lace Business:
  Delays in scaling the lace business could negatively impact revenue and margin growth.

• Gross Margin Pressure:
  Increased competition or rising input costs could put downward pressure on gross margins, especially if the company's elastic fabric and webbing segments face challenges.

Competitive Positioning

• Mid-Stream Player:
  Best Pacific operates as a mid-stream manufacturer, producing fabrics for lingerie but not engaging in garment assembly or raw material production. This allows it to focus on quality and innovation.

• High-Quality Fabric Provider:
  Its fabrics are known for quality but often higher prices, which is acceptable to its premium brand clients.

• Diversified Client Base:
  The company's relationships with multiple global brands provide stability and a strong cushion against the failure of any single client.

Market Differentiation

• Less Cyclical Demand:
  Lingerie is considered a necessity by many consumers, leading to more stable demand compared to other apparel sectors.

• Brand Loyalty:
  Both end-users and brands tend to be loyal to products that fit well and are comfortable, which is where Best Pacific excels.

Investor Appeal

• Niche Exposure:
  Best Pacific offers a unique niche in the China textile space, with a strong potential for multi-bagger returns.

• Undervaluation:
  The company's valuation is seen as attractive compared to its peers, especially given its higher gross margins and growth prospects.

Conclusion

Best Pacific International is positioned as a high-growth, high-margin player in the lingerie materials sector. With a Buy rating and a strong track record in R&D and customer relationships, it is seen as a compelling investment opportunity for those seeking exposure to the growing global lingerie market. However, the company's success will depend on the successful ramp-up of its lace business and the ability to maintain its competitive edge in the face of rising competition.