Goldman Sachs: YUE YUEN IND and its subsidiary POU SHENG INT'L exceeded expectations in net profit for the second quarter, with a focus on OEM and retail business

According to the Zhitong Finance APP, Goldman Sachs released a research report stating that YUE YUEN IND (00551) and its subsidiary POU SHENG INT'L (03813) are expected to exceed market expectations for net profit in the second quarter of 2025 by 16% and 49%, respectively, mainly due to non-operating income and tax benefits exceeding expectations. The OEM business generally met expectations, but gross margins were under pressure. The bank believes that investors should focus on the original equipment manufacturing (OEM) business and the retail (POU SHENG INT'L) business, paying attention to changes in tariff policies and the latest developments regarding its Chief Financial Officer.

Goldman Sachs' main points are as follows:

YUE YUEN IND and its subsidiary POU SHENG INT'L announced their performance for the second quarter of 2025

In the second quarter of 2025, the group's net profit increased by 13% year-on-year, exceeding the market consensus expectation (GSe) by 16%, although this was mainly driven by non-operating income and lower-than-expected tax expenses. Specifically, the sales of the original equipment manufacturing (OEM) business steadily grew by 6.5% in the second quarter (previously announced), with a slight decline in gross margin, but the operating profit margin generally met market consensus expectations, reflecting the impact of uneven production levels, delayed capacity ramp-up, and rising labor costs on margins. POU SHENG INT'L's sales in the second quarter of 2025 (down 12% year-on-year, in line with expectations) / net profit (down 69% year-on-year; exceeding market consensus expectations by 49%) had been previously announced. The net profit of POU SHENG exceeded expectations due to better-than-expected gross margins and tax benefits. However, there is still room for improvement in inventory conditions (inventory amount increased by 4.6% year-on-year), with inventory turnover days at 146 days (compared to 138 days in the first quarter of 2025 and 130 days in the first half of 2024). Additionally, YUE YUEN IND announced today the replacement of its Chief Financial Officer (CFO), with Mr. Chau Chi Ming taking over the position.

Goldman Sachs believes that investors should focus on the — original equipment manufacturing (OEM) business: 1) Update the order outlook for the second half of 2025 and order visibility by customer classification, especially the incremental changes in orders after tariff resolutions; 2) The direct and indirect impacts of the U.S. tariff increases, including pricing and production efficiency; 3) The comparison of short-term labor prospects with capacity expansion plans, considering demand fluctuations and tariff differences; 4) The latest developments regarding the CFO change. Retail (POU SHENG INT'L) business: 1) Recent sales trends and outlook for the second half of 2025; 2) Update on discount trends/inventory conditions, especially the progress of Nike inventory clearance; 3) Performance and outlook segmented by brand and product category, with attention to any new brand/product highlights; 4) Online and offline channel strategies.

YUE YUEN IND: Key indicators for the second quarter of 2025

Total sales (previously announced): Revenue for the second quarter of 2025 was previously announced at USD 2.03 billion, a year-on-year increase of 1%, with sales of the original equipment manufacturing business increasing by 6.5% year-on-year: footwear shipments (up 5% year-on-year) continued to grow steadily; average selling price (ASP, up 2% year-on-year) benefited from a high-end order mix. The equipment utilization rate (UTrate) for the second quarter of 2025 was 95% (compared to 91% in the first quarter of 2025 and 92% in the second quarter of 2024) Gross Profit Margin (GPM): The overall gross profit margin is 22.4% (market consensus expectation is 22.3%), of which the gross profit margin for original equipment manufacturing is 17.8% (slightly lower than the market consensus expectation of 18.1%), and the gross profit margin for retail business is approximately 34.5% (exceeding the market consensus expectation of 33.5%). Although equipment utilization has improved year-on-year and quarter-on-quarter, the company pointed out that the following factors continue to affect the profit margin of the original equipment manufacturing business in the second quarter: 1) The order completion rate and equipment utilization of some factories significantly deviated from the average level, leading to uneven production levels; 2) The production efficiency of some production lines did not meet established targets; 3) With the expansion of labor scale and rising wages in various regions, total labor costs have increased.

Operating Profit Margin (OPM): The overall operating profit margin is in line with market consensus expectations, thanks to the operating profit margins of the retail and original equipment manufacturing businesses generally meeting expectations.

Net Profit (NI): YUE YUEN IND's net profit for the second quarter of 2025 is USD 95 million (exceeding the market consensus expectation of USD 82 million), a year-on-year increase of 13%, mainly due to higher-than-expected non-operating income and lower tax expenses.

The group's interim dividend remains the same as the same period last year, at HKD 0.40 per share. This means that the dividend payout ratio for the first half of 2025 is approximately 48% (45% for the first half of 2024).

POU SHENG INT'L: Key Indicators for 2025

Sales (Pre-announced): Revenue for the second quarter of 2025 is RMB 4.1 billion, a year-on-year decrease of 12%. Same-store sales (SSSG) for the first half of 2025 decreased in the mid-teens percentage, indicating that the decline in the second quarter reached the high-teens percentage on the basis of a 13.9% decline in same-store sales (all channels) in the first quarter. All channels achieved a 16% offline growth in the first half of 2025, despite weakness online. Discounts in offline direct channels deepened in low single digits (LSD%) year-on-year for the first half of 2025, while discounts improved in low single digits (LSD%) in the second quarter of 2025 compared to the first quarter of 2025.

Number of Stores (PoS): 3,408 directly operated stores, a year-on-year decrease of 2%, as the company is actively closing underperforming stores. This means a net closure of 29 stores in 2025 (market consensus expectation is to close 10 stores).

Gross Profit Margin (GPM): The gross profit margin for 2025 is 34.5%, exceeding the market consensus expectation of 33.5% (down 1 percentage point from the first quarter of 2025, or up 2 percentage points from the first quarter of 2024).

Operating Profit Margin (OPM): The operating profit margin for 2025 is 1.3%, generally in line with market consensus expectations. The operating profit margin decreased by 3.2 percentage points year-on-year, mainly due to reduced operating leverage.

Net Profit (NI): The net profit is RMB 49 million, exceeding market consensus expectations by 49%, benefiting from better-than-expected gross profit margins and tax benefits (from deferred credit expenses).

Inventory: Inventory amount increased by 4.6% year-on-year in the first half of 2025, with inventory turnover days at 146 days (138 days in the first quarter of 2025, 130 days in the first half of 2024) The proportion of expired inventory to total inventory is <9% (less than 8% in Q1 2025 and the first half of 2024). The accounts receivable turnover days in the first half of 2025 are 18 days (19 days in the first half of 2024), and the accounts payable turnover days have shortened to 25 days (32 days in the first half of 2024).

POU SHENG INT'L will distribute an interim dividend and a special dividend, both at HKD 0.0115 per share. This means the dividend payout ratio for the first half of 2025 is approximately 64% (62% in the first half of 2024)