Pacific Textiles (01382.HK): Interim Results Review

1HFY20 performance is not as good as we expected.

Mutual textile (01382) announced 1HFY20 performance: income HK $3 billion 25 million, down 11.1% compared to the same period last year; net profit of HK $412 million (corresponding to HK $0.29 per share), down 17.9% over the same period. The performance in the first half was not as good as expected, mainly due to the lower order value of thermal underwear fabrics. The company announced an interim dividend of HK $0.26 per share, a dividend yield of 91% and an annualized dividend yield of more than 9%.

Sales situation: 1) volume and price double down, among which the sales of cold resistant fabrics (sales average price and sales contribution) were higher than 20%, mainly due to overstock of UNIQLO Heattech products; 2) sportswear fabric sales increased by more than 30% over the same period last year, accounting for 11% of the group's total sales (8% last year); and 3) the sales volume in mainland China, Southeast Asia and Hongkong in China decreased by 11.6%, 7.2% and 26.1% respectively.

Profitability: due to the decline in the average selling price, gross profit margin dropped by 0.7 percentage points to 17.9%, but partly offset by favorable foreign exchange environment (the RMB depreciated at the beginning of this year). The operating expenses rate increased by 0.2 percentage points to 4.1%.

Developing trend

Affected by warm winter, we expect 2HFY20 thermal underwear orders to remain weak. However, the group is optimistic about the upward trend of sports products. Mutual textiles also plans to build up new factories and increase its capacity in Vietnam by purchasing land use rights. UNIQLO's monthly same store sales and total retail sales fell by 1.9% and 2.6% respectively in October 2019, mainly due to warmer temperatures, typhoon Haibei and weekend rainstorms.

Profit forecast and valuation

As the company's customer orders are still under pressure, we lowered the forecast of FY2020 and FY2021 earnings per share by 8.3% and 4.8% to HK $0.57 and HK $0.62 respectively. The current stock price corresponds to 10.2 times and 9.5 times the FY2020 and FY2021 P / E ratio. In view of the attractiveness of the company's dividend, maintaining the neutral rating and the target price of HK $6.87 remain unchanged (corresponding to 12 times FY2020 P / E and 11.1 times FY2021 P / E), which is 17.8% higher than the current stock price.

risk

There is uncertainty in customer orders and international trade.