Buy
Company update: Best buy in garment stocks FY03 results in line with expectation FY03 turnover surged 24.6% to $885M and net profit also jumped 26.7% to $104M. Turnover and net profit growth are in line with expectation. Growing Blue Cat business Blue Cat business has performed well during the year. We expect it to take a larger share in turnover and enhance overall gross profit margin. Outsourcing trend continues to be a beneficiary Heat wave in Europe and North America has stimulated swimwear orders growth. Outsourcing from the countries is also an important factor. Besides China, Cambodia also benefits from outsourcing. In addition, the group has advantages in production flexibility and labour costs. Valuation remains attractive Cash position and gearing have improved. The stock is trading at 8.5x FY04 PER and 7.1x FY05 PER. Valuation is attractive. Yield reaches 4.3% and 5.1% in FY04 and FY05, respectively. We revise our target price upward to $1.13, representing 10x FY05 PER.
Source: Tack
Fat, Tung Tai estimates FY03 results: In line with expectation FY03 results were slightly lower than, but pretty much in line with our expectations. FY03 turnover surged 24.6% to $885M. Net profit also jumped 26.7% to $104M. Increase in swimwear sales has major
contribution to turnover growth Sales orders for all products recorded satisfactory growth. Swimwear sales jumped 26.6% to $287.9M. Casual wear sales also gained 11.3% to $498.2M. Sports wear achieved milder increase, 6.8%, to $37.9M. Turnover growth was mainly driven by 26.6% increase in sales for swimwear. However, gross profit margin fell slightly from 33.9% to 32.9%. Profit margin of swimwear depends on design. It ranges from 33% to 35%. According to management, raw material prices were stable. If there is any increase in raw material prices, the group can transfer the cost to customers. Moreover, the group can source raw materials at lower prices by purchasing in bulk. We believe the group is possibly facing pricing pressure from customers. However, as Blue Cat business is expanding, overall profit margin can be maintained. In addition, increase in volume can compensate for the decline. Tack Fat continues to expand capacities As at 31 March 2003, capacities for swimwear, casual wear, sport wear were, 710,000, 845,000, 62,000 dozens, respectively. Utilization rate was over 97%, 3% higher than last year. The group continues to increase capacity according to orders they receive. On the whole, capacity and orders increased by 20% in 1H. The group has budgeted $60M capex for FY04, 60% is on swimwear, and 40% on casual wear. Blue Cat Blue Cat is expected to have larger share
in turnover Blue Cat business has performed well during the year. Turnover was close to $61M, which is slightly higher than our expectation. It accounts for 7% of turnover in its first year of operation. We expect it to reach $100M and accounts for 9% of total turnover in FY04. Blue Cat has the highest profit margin and as it increases its contribution, overall gross profit margin can also be increased. For retail stores, there are 88 stores in first-tier cities, in which the group manages 10 shops directly. The group’s target is to set up 150 stores through franchises by the end of 2004. With the expansion in retail network, demand for apparels will also increase. Continue to benefit from outsourcing trend to China Heat wave stimulated swimwear orders
growth. Outsourcing trend will continue due to low cost in China Heat wave in Europe and North America this summer stimulated sales of swimwear. The group’s orders on hand hence surged to 6 months. In the first half, swimwear orders grew 20-30%. Other than heat wave, outsourcing from the countries also helped orders growth. European and American firms will continue to take advantage of low labour costs in China and outsource its production. China remains to be one of the major garment producers. From January to August 2003, China’s exports of garments and clothing accessories climbed 25.5% to about US$3.2B. The robust growth reflects China garments are competitive. Having production base in Cambodia still
has advantages According to WTO agreement, textile quotas on China will end by the end of 2004. Currently, there are fewer quota restrictions in Cambodia, for example, no quotas are required for swimwear exports to US. Competitive advantage of setting up manufacturing base in Cambodia seems to diminish. However, the group can still benefit by having production bases in both countries. The major beneficiary is the group has the flexibility to adjust production in the two plants according to changes in policies. It provides the group a cushion against any sudden change. Another advantage is labour costs in Cambodia are even lower than in China. Pricing of the group remains competitive. Cambodia can also benefit from outsourcing trend. US clients tend to avoid Muslim countries and Cambodia is one of their alternatives. The group is highly experienced in garment manufacturing. It has developed close relationship with its customers. With its unrivalled reputation, Tack Fat is able to attract renowned brands to become its customers. The group added 4 new customers from the US in June. Orders received amounted to US$6M. Major shareholders, Mr. Kwok Wing and Mr. Kwok Chiu did a 164M-share placement at $0.70 each in August 2003. Their holdings decreased from 70% to 57.12%. Liquidity of the stock can be enhanced. We believe the group will continue to maintain high degree of transparency and bring in more investors. Conclusion The group’s inventory turnover was maintained at 103 days in FY03, dropped from 113 days in FY02. Accounts receivable turnover increased slightly to 49 days. The group’s cash position has been improving. Cash in hand is about $139M, much higher than $77M in FY02. Net cash generated from operation jumped from $66.8M to $114.7M. Gearing ratio (total liabilities over total assets) further dropped from 46.4% in 1H03 to 41.1%. Due to the surge in swimwear orders, we expect full-year swimwear turnover to jump 40% to about $400M. We also expect good performance of Blue Cat continues and the turnover to breach $100M. Therefore, we revise FY04 turnover estimate upwards from $1,065M to $1,097M. We expect net profit margin to maintain at approximately 12% level. The group is trading at 8.5x FY04 PER and 7.1x FY05 PER. Valuation is attractive. In addition, the group increases dividend payout from 20.2% in FY02 to 36.5% in FY03. Assuming the group maintains the payout ratio, yield in FY04 and FY05 reaches 4.3% and 5.1%, respectively. We maintain our buy recommendation and revise target price from $0.99 to $1.13, representing 10x of FY05 PER. Consolidated Income Statement
Source: Tack
Fat Group, Tung Tai estimates Consolidated Cash Flow Statement
Source: Tack
Fat Group, Tung Tai estimates Consolidated Balance Sheet
Source: Tack
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