Tack Fat (928) (November 26, 2003)

11 March 2003

Buy

Stock Code

928.HK

Price(25/11/03)

HK$0.81

Target Price

HK$1.13

 

 

Key Data

 

Shares Outstanding

1392.1M

Market Capitalisation

HK$1128M

52 week high/low

HK$0.98/HK$0.472

ROA

14.9%

ROE

31.6%

Current ratio

2.03x

Gearing

0.41x

Major shareholder:

 

Kwok's family

57.12%

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.

As at 31 March (HK$M)

2002A

2003A

2004F

2005F

Turnover

710.5

885.0

1,097.4

1,316.9

Gross Profit

240.9

291.4

362.2

434.6

Net Profit

82.3

104.1

132.4

157.9

Basic EPS (HK$cents)

8.04

8.0

9.51

11.34

Diluted EPS (HK$cents)

N/A

7.87

 

 

P/E (x)

10.2

10.4

8.5

7.1

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

For year ended 31 March (HK$'000)

2002A

2003A

2004F

2005F

Turnover

710,489

885,031

1,097,423

1,316,908

Cost of sales

(469,610)

(593,633)

(735,273)

(882,329)@

Gross profit

240,879

291,398

362,150

434,579

Other revenue

3,189

1,501

1,480

1,480@

Other net income/(expense)

(222)

48

48

48@

Selling expenses

(104,210)

(121,626)

(152,541)

(188,318)@

Administrative expenses

(25,669)

(37,877)

(48,953)

(59,260)@

Profit from operations

113,967

133,444

162,184

188,529@

Finance costs

(23,296)

(19,695)

(15,362)

(15,055)@

Profit from ordinary activities before taxation

90,671

113,749

146,822

173,474@

Taxation

(8,392)

(9,623)

(13,214)

(15,613)@

Profit attributable to shareholders

82,279

104,126

132,438

157,861@

@

 

 

 

@

Dividends attributable to the year

 

 

 

@

Interim dividend declared and paid during the year

24,000

10,624

-

-@

Final dividend proposed after the balance sheet date

8,300

27,393

-

-@

@

32,300

38,017

48,340

57,619@

Earnings per share (HK$cents)

 

 

 

@

Basic

8.04

8

9.51

11.34@

Diluted

N/A

7.87

@

@

Source: Tack Fat Group, Tung Tai estimates

Consolidated Cash Flow Statement

For the year ended 31 March (HK$'000)

2002

2003

Operating activities

 

@

Profit from ordinary activities before taxation

90,671

113,749

Adjustments for:

 

@

Interest income

(1,554)

(1,349)

Interest expense

17,064

12,755

Interest element of finance lease rentals paid

1,791

1,081

Depreciation of fixed assets

26,572

27,764

Amortisation of permanent textile quota entitlements

3,989

3,989

@

 

@

Operating profit before changes in working capital

138,533

157,989

Increase in inventories

(13,713)

(22,060)

Increase in trade receivables

(28,936)

(27,533)

Decrease/(Increase) in prepayments, deposits and other receivables

(5,328)

12,295

Decrease in trade payables and bills payable

(20,011)

(2,189)

Increase in accrued employee benefits

-

600

Increase in accrued expenses and other payables

1,564

2,844

@

 

@

Cash generated from operations

72,109

121,946

Tax paid - Hong Kong Profits Tax paid

(5,323)

(7,198)

@

 

@

Net cash from operating activities

66,786

114,748

@

 

@

Investing activities

 

@

(Placement)/withdrawal of pledged bank deposits

9,306

(2,582)

Capital expenditure

(14,765)

(32,712)

Payment for purchase of investment securities

-

(300)

Decrease in amount due from related company

189

63,797

Interest received

1,554

1,349

Net cash generated from/(used in) investing activities

(3,716)

29,552

@

 

@

Financing activities

 

@

Capital element of financing lease rentals paid

(17,981)

(12,351)

Net (decrease)/increase in trust receipt loans and export loans

41,071

(65,258)

Proceeds from new term loans

36,027

7,459

Repayment of term loans and mortgaged property loan

(1,348)

(30,650)

Decrease in long term payable

(7,770)

-

Decrease in amounts due to shareholders

(35,819)

(44,284)

Interest element of finance lease rentals paid

(1,791)

(1,081)

Interest paid

(17,064)

(12,755)

Issue of shares for cash consideration

-

98,280

Net proceeds from issue of convertible bonds

-

29,704

Dividends paid

(24,000)

(18,924)

@

 

@

Net cash used in financing activities

(28,675)

(49,860)

Net increase in cash and cash equivalents

34,395

94,440

Cash and cash equivalents at 1 April

(62,367)

(27,972)

Cash and cash equivalents at 31 March

(27,972)

66,468

Source: Tack Fat Group, Tung Tai estimates

Consolidated Balance Sheet

As at 31 March (HK$'000)

2002

2003

Non-current assets

 

@

Fixed assets

259,797

273,065

Intangible assets

5,285

1,296

Other financial assets

1,216

1,516

Deferred taxation

4,391

3,161

@

270,689

279,038

Current assets

 

@

Inventories

145,658

167,718

Trade receivables

94,220

121,753

Prepayments, deposits and other receivables

22,266

9,971

Amount due from related company

63,797

-

Pledged bank deposits

69,383

71,965

Cash and cash equivalents

7,850

66,911

@

403,174

438,318

Current liabilities

 

@

Bills payable

2,018

11,283

Trade payables

50,043

38,589

Accrued expenses and other payables

9,532

12,376

Bank loans and overdrafts

238,221

143,094

Obligations under finance leases

9,351

8,308

Taxation

4,398

2,374

@

313,563

216,024

@

 

@

Net current assets

89,611

222,294

Total assets less current liabilities

360,300

501,332

@

 

@

Non-current liabilities

 

@

Bank loans

33,709

5,008

Convertible bonds

-

27,300

Obligations under finance leases

41,561

38,573

Accrued employee benefits

1,200

1,800

Amounts due to shareholders

44,284

-

Deferred taxation

2,946

6,165

@

 

@

Net assets

236,600

422,486

@

123,700

78,846@

Capital and reserves

 

@

Share capital

6,600

133,557

Reserves

230,000

288,929

@

236,600

422,486

Source: Tack Fat Group




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