Profit alert: Expect 1H22 earnings growth of 60%+, in line
- Issued positive alert expecting 1H22 earnings of no less than US$52m
- Strong demand from sports, fashion and luxury segment remained the key driver
- More headwinds in 2H given macro uncertainties but full year shipment target intact. BUY
Stella issued a positive profit alert, expecting a 1H22 net profit of no less than US$52m based on preliminary estimation, representing an earnings growth of at least 61% yoy.
- The profit alert, while encouraging, was not too surprising considering its strong revenue performance in the past few quarters, boosted by strong demand from the sports, fashion and luxury segment.
- 2Q22 revenue rose 13% yoy, slightly better than expected on stronger ASP growth (up 8% yoy), predominantly driven by higher raw material costs and product/customer mix. Shipment volume rose 3.4% yoy in 2Q22, translating into a 9.4% yoy growth for 1H22.
- We expect stronger headwind in 2H given higher base last year, as well as the macro uncertainties amid inflationary pressure, with its brand customers turning more cautious. Despite this, Stella should remain a core supplier, especially in the sports category, with a few new luxury customers providing added drivers. Capacity remains fully utilize and management is keeping its 5% full year shipment growth target unchanged.
- While the ASP growth would not necessarily translate fully into margin enhancement, as it was mostly raw material costs related and thus passed on to customers, the near-full capacity utilization should continue to provide some upside on margin given stronger operating leverage, as witnessed by the profit alert (1H net margin rose 2ppt yoy).
All-in, we expect Stella to remain a beneficiary of the rising athleisure demand, and its well-diversified capacity across ASEAN and China should provide it stronger cost advantage. Maintain BUY, with TP HK$13 (under review).