20180122-信达国际控股-南旋控股-01982.HK-Recent_setback_provides_good_entry_point_9页_1mb

Nameson Holdings (1982.HK) Summary

Core Content

Nameson Holdings is a leading knitwear manufacturer in China, listed on the Hong Kong Stock Exchange in April 2016. The company provides a one-stop service that includes raw material development, product design, sample manufacturing, production, quality control, and timely delivery to its clients. It has a diverse client base, including major international brands like UNIQLO (61% of sales), Tommy Hilfiger (21%), and Lands' End.

Key Highlights

• Recent Performance: In 1H18, Nameson delivered a strong result with revenue and adjusted net profit up by 19% and 28.8% YoY, respectively, to HK$2,114 million and HK$292 million. This exceeded estimates, with the latter being 76% of the forecast.
• Earnings Drivers: Strong sales from Uniqlo, including cashmere orders, and stringent cost control contributed to the results. The company's gross margin was 22.9%, down slightly due to higher ASP for cashmere orders and strong RMB.
• New Business Contribution: The acquisition of V. Success Group (knitted upper for footwear and shoes business) was approved by shareholders in December 2017. This acquisition is expected to contribute to FY18E net profit by ~5.4% and will be fully realized in FY19E with a contribution of ~21.4%.
• Valuation: The current share price is HK$3.13, with a target price of HK$3.60, implying an upside of 15%. The company is trading at a FY19E 11.6x PE ratio, which is ~40% below the average of peers, indicating an undemanding valuation.
• Future Outlook: Nameson's EPS is expected to grow at a 27.2% CAGR from FY17 to FY19, driven by the new business, increased market share, and order ramp-up from new clients. The company also plans to expand its client base in North America and Japan.

Main Points

• Client Expansion: The company has expanded its client base, including Brooks Brothers, and expects continued growth from new clients.
• Valuation Discount: The current valuation is considered undemanding, with potential for re-rating due to diversifying client mix and new business growth.
• Upside Catalysts: The following factors could drive future growth:
  1. Earnings upgrade from the higher margin shoe-upper business.
  2. Successful ramp-up of Vietnam Phase 2 plant.
  3. Potential inclusion in the Hang Seng Small Cap Index.

Financial Performance

• Revenue Growth: Expected to grow from HK$3,268 million in FY18 (old) to HK$3,386 million in FY18 (new), a 3.6% increase. For FY19, the forecast is HK$4,368 million, up 17.8% from the previous forecast.
• Net Profit: Projected to increase from HK$383 million (FY18 old) to HK$415 million (FY18 new), an 8.3% rise. For FY19, the net profit is expected to reach HK$586 million, a 20.5% increase.
• Diluted EPS: Expected to rise from HK$0.181 (FY18 old) to HK$0.196 (FY18 new), and further to HK$0.260 in FY19, reflecting a 20.5% increase.

Valuation Metrics

• Forward P/E: FY19E at 11.6x, which is ~40% below the average of peers.
• Dividend Yield: 3.0%.
• Target Price: Raised from HK$2.82 to HK$3.60 based on a 13.8x weighted average FY19E PE ratio.

Operational and Strategic Aspects

• Technology: Nameson utilizes whole garment knitting technology, which allows for seamless garments and more efficient production.
• Capacity Utilization: The company's capacity utilization is expected to increase from 38.4% in FY18E to 65.0% and further to 80.0% in FY20E.
• Plant Expansion: The Vietnam Phase 2 plant is expected to significantly increase production capacity and efficiency, contributing to revenue growth.

Risk Factors

• Slow Ramp-Up: Potential slower-than-expected ramp-up in the newly acquired shoe-upper manufacturing business.
• Plant Delays: Delays in the ramp-up of the Vietnam Plant Phase 2 could impact performance.
• Client Dependency: Reduced orders from Uniqlo could affect revenue.
• Cost Increases: Sharp rise in raw material costs may impact margins.

Financial Ratios

• Growth Rates: Revenue growth is projected to be 21.1% in FY18E, 29.0% in FY19E, and 15.1% in FY20E.
• Margins: Gross margin is expected to increase from 23.4% to 24.4% in FY19E, with net margin increasing from 12.2% to 13.4%.
• ROE and ROA: ROE is projected to be 24.0% in FY18E and 27.3% in FY19E, while ROA is expected to rise from 14.0% to 17.0%.
• Net Gearing: Net gearing is projected to decrease from 13.5% in FY18E to -4.3% in FY19E and -17.3% in FY20E, indicating improved financial leverage.

Analysts and Rating

• Rating: Maintain (Trading Buy).
• Analysts: Hayman Chiu, Kenneth Li, Lewis Pang, Wilfred Yuen, Chloe Chan, Edith Li, Johnny Yum.
• Rating Policy:
  • Stock Rating: Buy (outperform HSI by 15%).
  • Sector Rating: Accumulate (outperform HSI by 10%).

Conclusion

Nameson Holdings is well-positioned for growth with a strong performance in 1H18, the addition of a new business through the acquisition of V. Success Group, and an undemanding valuation. The company is expected to benefit from diversifying its client base, increasing production capacity, and leveraging its advanced knitting technology. The recent price setback presents a good entry point for investors.