CICC: Raise Chaoying International Holdings (02111) to outperform the industry rating and increase the target price to HK$4.45
The Zhitong Finance App learned that, considering the impact of the US tariff policy in the first half of the year, CICC lowered Chaoying International Holdings (02111)'s profit forecast for 2025 by 3.6% to HK$617 million and introduced a profit forecast of HK$661 million for 2025/26. The current stock prices correspond to 2025/26 5.9x/5.5x P/E, respectively, and raised to outperform the industry rating. Due to the one-time impact of tariffs in 2025, the valuation switched to 2026. Considering the upward shift in the valuation center of the Hong Kong stock textile manufacturing sector, the bank raised the target price by 65% to HK$4.45, corresponding to 7.5x/7.0xp/E in 2025/26, with 27.5% upside compared to the current stock price.
CICC's main views are as follows:
Investment advice
The company announced 1H25 results: revenue of HK$2.33 billion, -2.3% YoY; net profit to mother of HK$260 million, -6.1% YoY. 1H25's performance was lower than expected, mainly due to the uncertainty of the US tariff policy in 2Q25, which led to customers being cautious in placing orders. The company declared an interim dividend of HK$12.5 per share, corresponding to a payout ratio of approximately 50.0%. The company is deeply involved in the field of underwear fabrics and sportswear. The bank believes that the company is expected to benefit from new product orders from sports customers, while the new factory in Vietnam will help increase long-term production capacity. Benefiting from the recovery of orders from downstream customers, the bank upgraded the company's rating to outperform the industry.
Elastic ribbon revenue bucked the trend, and sports fabric customers are cautious about placing orders
By product, 1H25 fabric/webbing/lace revenue was -4.4%/+6.9%/-20.6%, respectively, to 1,807 million/501/HK$0.22 million, accounting for 77.6%/21.5%/0.9% of revenue, respectively. The increase in ribbon revenue was mainly due to the company's continued investment in colored yarn ribbon products this year and received orders from many important customers. Among fabrics, revenue from sportswear and garment/underwear fabrics was -5.5%/-1.9% year-on-year to HK$12.31/577 million, respectively. The decline in sportswear and apparel fabric revenue was mainly affected by prudent orders placed by some US clothing brand customers in 2Q25.
Declining capacity utilization is dragging down gross profit margins, and cost control is good
The gross margin of 1h25 was -0.4 ppt to 26.6% year on year, mainly due to the decline in 2Q25 capacity utilization. Among them, the gross margin of fabric/webbing/lace was +0.2pp/ -2.0pp/ -10.7ppt, respectively. In terms of expenses, the 1H25 sales/management/finance expense ratio remained flat at 4.5%/6.8%/1.8% year-on-year, respectively, at +0.3ppt/-0.1pT/, respectively, and remained stable. Overall, the 1h25 net profit margin was -0.4ppt to 11.2% year over year.
Inventory operation efficiency is under pressure in the short term, and debt continues to be optimized
Due to the impact of the 2Q25 US tariff policy on orders, the number of inventory turnover days at the end of 1H25 increased from 112 days at the end of 2024 to 131 days; the number of accounts receivable turnover days remained stable at 60 days. Net cash flow from 1H25 operating activities was +14.2% YoY to HK$348 million, mainly due to overall optimization of working capital management. Furthermore, 1H25 net debt decreased by 37.1% to HK$300 million from the end of 2024, and the net balance to debt ratio fell from 13.5% to 8.2%.
Potential catalyst: About 50% of the company's revenue comes from the US. The bank expects that with the clear US tariff policy, customer orders will gradually resume in the second half of the year, which in turn will drive a recovery in capacity utilization and profitability.
Risk warning: Downstream demand recovery falls short of expectations, exchange rate fluctuations, and the risk of rising raw material prices.