CICC: Upgraded BEST PACIFIC to Outperform Industry rating, raised target price to HKD 4.45

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that considering the impact of U.S. tariff policies in the first half of the year, it has lowered the profit forecast for BEST PACIFIC (02111) in 2025 by 3.6% to HKD 617 million, and introduced a profit forecast for 2026 of HKD 661 million. The current stock price corresponds to a P/E ratio of 5.9x/5.5x for 2025/26, and the rating has been upgraded to outperform the industry. Due to the one-time impact of tariffs in 2025, the valuation has switched to 2026. Considering the upward shift in the valuation center of the Hong Kong textile manufacturing sector, the target price has been raised by 65% to HKD 4.45, corresponding to a P/E ratio of 7.5x/7.0x for 2025/26, indicating a 27.5% upside potential compared to the current stock price. CICC's main viewpoints are as follows: Investment Recommendation The company announced its 1H25 performance: revenue of HKD 2.33 billion, down 2.3% year-on-year; net profit attributable to the parent company of HKD 260 million, down 6.1% year-on-year. The 1H25 performance was below the bank's expectations, mainly due to the uncertainty of U.S. tariff policies in 2Q25, leading to cautious ordering by customers. The company declared an interim dividend of HKD 0.125 per share, corresponding to a payout ratio of approximately 50.0%. The company is deeply engaged in the underwear fabric and sportswear sectors, and the bank believes the company is expected to benefit from new product orders from sports customers, while the new factory in Vietnam will support long-term capacity growth. Benefiting from the recovery of downstream customer orders, the bank has upgraded the company's rating to outperform the industry. Revenue from elastic webbing grows against the trend, cautious ordering from sports fabric customers By product, in 1H25, revenue from fabrics/webbing/laces decreased by 4.4%/+6.9%/-20.6% to HKD 1.807 billion/HKD 501 million/HKD 22 million, accounting for 77.6%/21.5%/0.9% of revenue, respectively. The growth in webbing revenue is mainly due to the company's continuous investment in colored yarn webbing products this year, securing orders from several important customers. Among fabrics, revenue from sportswear and clothing/underwear fabrics decreased by 5.5%/-1.9% to HKD 1.231 billion/HKD 577 million, with the decline in sportswear and clothing fabric revenue mainly affected by cautious ordering from some U.S. apparel brand customers in 2Q25. Decline in capacity utilization drags down gross margin, good expense control The gross margin in 1H25 decreased by 0.4 percentage points year-on-year to 26.6%, mainly due to a decline in capacity utilization in 2Q25, with gross margins for fabrics/webbing/laces increasing by 0.2 percentage points/-2.0 percentage points/-10.7 percentage points year-on-year, respectively. In terms of expenses, the expense ratios for sales/management/finance in 1H25 increased by 0.3 percentage points/-0.1 percentage points/stayed flat at 4.5%/6.8%/1.8%, remaining basically stable. Overall, the net profit margin attributable to the parent company in 1H25 decreased by 0.4 percentage points year-on-year to 11.2%. Inventory operating efficiency under short-term pressure, continuous optimization of debt Due to the impact of U.S. tariff policies on orders in 2Q25, the inventory turnover days at the end of 1H25 increased from 112 days at the end of 2024 to 131 days; accounts receivable turnover days remained stable at 60 days. The net cash flow from operating activities in 1H25 increased by 14.2% year-on-year to HKD 348 million, mainly due to overall optimization of working capital management. In addition, the net debt in 1H25 decreased by 37.1% from the end of 2024 to HKD 300 million, and the net asset liability ratio dropped from 13.5% to 8.2% Potential Catalysts: Approximately 50% of the company's revenue comes from the United States. The bank expects that as U.S. tariff policies become clearer, customer orders are likely to gradually recover in the second half of the year, thereby driving the recovery of capacity utilization and profitability. Risk Warning: Downstream demand recovery may be less than expected, exchange rate fluctuations, and the risk of rising raw material prices