20170110-Maybank_KERPL-超盈国际控股-02111.HK-Don_t_get_distracted_by_noises_EPS,TP_slightly_raised_14页_334kb

Best Pacific International (2111 HK) Summary

Core Content

Best Pacific International is a leading global producer of lingerie materials, with a strong focus on expanding into the sportswear segment to drive long-term growth. The company's recent performance and strategic initiatives have prompted a reaffirmation of the "BUY" rating, with an updated price target of HKD8.70, representing a 37% increase from the previous target of HKD6.35. The analysis suggests that the recent share price correction presents a buying opportunity, as the company is well-positioned for growth in the sportswear market.

Main Points

• Strategic Expansion: Best Pacific is expanding its capacity in China and Vietnam to meet the rising demand in the sportswear segment. This expansion is expected to ease capacity constraints and support growth.
• Key Clients: The company is a major supplier to Victoria's Secret, the largest lingerie retailer in the US, and is also expanding its client base in sportswear, including Puma, 2XU, Champion, and Sweaty Betty.
• Investment Noises: While the company has made a passive investment in a life insurance joint venture, this is considered a minor factor and not a significant financial burden. The investment is small relative to the company's overall assets and is expected to have limited impact on its financials.
• Trade War Impact: The potential impact of a US-China trade war is deemed manageable. Even with a 45% tariff, the retail price increase is expected to be only around 4%, and production relocation to the US is not cost-effective due to significantly higher labor costs.
• Order Flow and Demand: The company is experiencing strong demand, with orders in December exceeding capacity. This is attributed to both existing clients and new customers, particularly in the sportswear segment.
• Financial Performance: Best Pacific has shown consistent revenue growth, with EBITDA and core net profit increasing over the past few years. The company is expected to maintain strong cash flow and continue its expansion plans.

Key Financial Metrics

Growth and Profitability

• Growth Ratios: Revenue growth is expected to remain strong, with a projected 27.4% in FY18E.
• Profitability: EBITDA margins are stable at around 26.6%, and the company is showing improving profitability with a rising ROAE and ROAA.
• Capacity Expansion: The company is investing in a new production facility in Vietnam, which is expected to enhance its capacity and reduce reliance on China.

Key Catalysts

• New Customer Acquisition: Best Pacific has secured new clients in the sportswear and lingerie sectors, including Puma and Victoria's Secret.
• Capacity Expansion: The expansion of production capacity in Vietnam is expected to significantly enhance the company's ability to meet rising demand.
• Growth Potential: The sportswear segment has significant growth potential, with the company's penetration into major brands still low.

Risks and Volatility

• Operating Expenses: The expansion may lead to increased operating expenses.
• Raw Material Prices: There is potential volatility in raw material prices, which could affect margins.
• Market Conditions: The company's performance is somewhat dependent on the broader market conditions, particularly in the US and China.

Investment Recommendation

• BUY Rating: The company is reaffirmed as a "BUY" with a price target of HKD8.70.
• Valuation: The SOTP valuation suggests a fair value of HKD8.1 per share, which is 7% below the current price target and represents over 20% upside from the current share price.

Summary

Best Pacific International is well-positioned for growth, particularly in the sportswear segment, with a strong focus on capacity expansion and new client acquisition. Despite some investment noises, the company's core business remains robust, and its financial metrics indicate strong performance and potential for future growth. The recent share price correction is seen as an opportunity to invest, and the company's strategic moves in the sportswear market are expected to drive multi-year growth.