Date: 19 September 2024
Broker: UOB Kay Hian
Company Overview
Best Pacific International Holdings (2111 HK) is a leading textile manufacturer specializing in lingerie materials, elastic fabrics, webbing, and lace. The company supplies major global brands such as Lululemon, Victoria’s Secret, and Uniqlo. Best Pacific has expanded its product offerings to cater to both lingerie and sportswear markets, becoming a significant player in the global textile industry.
Financial Performance
As of 19 September 2024, Best Pacific’s stock is priced at HK$2.11. The company is not currently rated, and no target price is provided. Best Pacific has shown strong performance, driven by rising demand from its key clients in the sportswear and lingerie segments.
Expansion in Sportswear and Apparel
Best Pacific has successfully extended its product offerings beyond lingerie materials to include elastic fabrics for sportswear and apparel. This strategic move has resulted in substantial growth, with revenue from sportswear and apparel customers growing at a compound annual growth rate (CAGR) of 12.5% from 2019 to 2023. In 1H24, revenue from sportswear and apparel accounted for 55% of the company’s total revenue, up from 38% in 2018.
Capacity Utilization and Gross Margin Improvement
The company’s gross margin improved by 6.0 percentage points year-on-year, reaching 27.0% in 1H24. This improvement is attributed to lower raw material costs and higher capacity utilization rates, which rose to 80% in 1H24 from 65% in 2023. Management expects to maintain the 80% utilization rate in 2H24, supported by favorable raw material prices and increased customer orders.
2024 Growth Outlook
Best Pacific targets 15% year-on-year revenue growth in 2024, aiming to achieve HK$4.2 billion in revenue. The sportswear and apparel segment is expected to drive this growth, with a projected 20% year-on-year increase. The company’s management is optimistic about maintaining high gross margins in 2H24, thanks to cost control measures and economies of scale.
Focus on Deleveraging
The company has been actively deleveraging since 2019, with a focus on reducing its bank borrowings in response to rising interest rates. As a result, Best Pacific’s net gearing ratio decreased from 30.0% in 2022 to 11.6% in 1H24. The company plans to continue its debt repayment efforts to lower finance costs further.
Enhancing Shareholder Returns
Best Pacific has committed to maintaining a 50% dividend payout ratio going forward, supported by healthy operating cash flow and reduced finance costs. The company’s trailing 12-month dividend yield stood at 11.7%, reflecting its strong cash flow management.
Valuation
Best Pacific is trading at 4.1x 2024F PE, which is approximately 0.5 standard deviations below its five-year historical mean of 5.5x. This suggests that the stock is currently undervalued relative to its historical performance.
Conclusion
Best Pacific International Holdings is well-positioned for continued growth, with a focus on expanding its presence in the sportswear and apparel markets. The company’s strong financial position, commitment to deleveraging, and high dividend payout make it an attractive investment opportunity. With a target of 15% revenue growth in 2024, Best Pacific is set to capitalize on its strong relationships with global brands and favorable market conditions.
