Virginia'S Focus On Productivity Transfer Is 8.3% Higher Than The Target Price.

　　 2020 in the first half of fiscal year, performance is lower than expected.

Virginia (02199) announced the first half of fiscal year 2020 (up to September 30, 2019): HK $3 billion 129 million, an increase of 2.1% over the same period last year; net profit of HK $141 million (corresponding to HK $0.12 per share), an increase of 5.8% over the previous year, less than expected, mainly due to the reduction of orders for a sporting goods customer. The company announced an interim dividend of HK $0.038 per share.

Sales of bra and underwear sales increased by 8.7% over the same period last year, and gross margins rose by 0.9 percentage points to 22.9%, thanks to the upgrading of the product mix and the success of the well received underwear products series. Sales of bra pads and other moulded products increased by 34% compared with the same period last year, and gross margins increased by 0.2 percentage points, mainly due to the increase in orders for bra pads by the largest customers. Sales of functional sports products decreased by 53% compared with the same period last year, and gross margin increased by 0.2 percentage points, mainly due to the termination of cooperation with an footwear brand partner.

Strategic capacity transfer orderly: in the first half of fiscal year 2020, the company's capacity in Vietnam and Shenzhen accounted for about 65% and 35% of total revenue respectively (53% and 47% in the first half of fiscal 2019). By the end of September, the company had 34 thousand employees in Vietnam and 9500 employees in Shenzhen. The production efficiency of Vietnam's first and second factories steadily increased (68% of the factory's workers were skilled workers), pushing forward the company's gross profit margin by 1 percentage points in the first half of fiscal year 2020.

Developing trend

Vietnam's fourth and fifth factories were put into operation in June 2019 and September respectively, and 4000 employees were needed by April 2020. The Santoni plant (the sixth factory in Vietnam) is expected to be operational in the second half of 2020. Virginia's capital expenditure budget guidance is HK $200 million, and the company is expected to achieve operational leverage on the basis of further climbing overseas capacity in the second half of fiscal 2020. In view of the uncertainties related to trade frictions, Virginia will continue to focus on capacity transfer and efficiency upgrading between Shenzhen and Vietnam over the next two years, rather than the increase in production facilities.

　　 Profit forecast and valuation

Due to the reduction of orders for sports products in the first half of fiscal 2020, the 14% and 13% to 0.24 Hong Kong dollars and 0.27 HK dollars respectively for the 2020 fiscal year and the 2021 fiscal year earnings per share were cut. At present, the company's stock price corresponds to 21.4 times 2020 fiscal year and 18.5 times 2021 fiscal year price earnings ratio. The "neutral" rating is maintained, but the target price is reduced by 13% to HK $5.47 (corresponding to 20 times earnings in 2021 fiscal year), which is 8.3% higher than the current stock price.