China International Capital Corporation (CICC): Maintains YUE YUEN IND (00551) outperform rating, lowers target price to HKD 15.64.

CICC has released a research report stating that considering the continued pressure on manufacturing business orders and fluctuations in gross margins, it has lowered its profit forecasts for YUE YUEN IND (00551) for the 2026/27 fiscal year by 34% and 31% to $202 million and $236 million, respectively. The current stock prices correspond to a P/E ratio of 14x and 12x for 2026/27. The rating of outperforming the industry is maintained, and given the company's resilience in recovery, the target price is only revised downwards by 13% to HKD 15.64, which corresponds to P/E ratios of 16x and 14x for 2026/27, offering a 14% upside compared to the current price. CICC's main points are as follows: 1H26 performance below expectations The company reported its 1H26 performance: revenue of $3.972 billion, down 2% year-on-year; net profit attributable to shareholders of $72 million, down 58% year-on-year. Q2 2026 revenue was $1.987 billion, down 2% year-on-year; net profit attributable to shareholders was $37 million, down 61% year-on-year. The performance was below CICCs expectations, mainly due to gross margins being lower than anticipated. The company declared an interim dividend of HKD 0.40 per share, corresponding to an interim payout ratio of 114%. Manufacturing business: The decline in shipment volume narrowed, but gross margins were still affected by operational deleveraging and uneven capacity utilization In terms of revenue, brand orders remain cautious, with Q2 2026 revenue down 4% year-on-year to $1.411 billion. Footwear shipment volume decreased by 5% year-on-year to 61.7 million pairs, a narrower decline compared to Q1 2026's -8%; the average selling price (ASP) increased by 1% year-on-year to $21.35, with a continued rise in the proportion of high-end products. In terms of profit, Q2 2026 gross margin decreased by 4.0 percentage points year-on-year to 13.8%, a decline of 1.0 percentage points compared to Q1 2026, mainly due to uneven capacity utilization resulting from order fluctuations, as well as increased costs from shorter order delivery times and higher labor costs. Overall, Q2 2026 net profit margin attributable to shareholders decreased by approximately 4.0 percentage points year-on-year to 2.2%, and net profit attributable to shareholders decreased by 66% year-on-year to $31 million. Retail business: Significant cost control effects, maintaining double-digit profit growth Q2 2026 revenue was RMB 3.914 billion, down 3% year-on-year; the inventory age was continuously optimized within the quarter, and discounts were strictly controlled, resulting in a gross margin that was only down 0.1 percentage points year-on-year to 34.3%. In 1H26, the net closure of stores was 200, reducing the count to 3,110 stores. The effectiveness of cost control continued, with net profit margin attributable to shareholders increasing by 0.3 percentage points year-on-year to 1.6%, and net profit attributable to shareholders rising 22% year-on-year to RMB 61 million. Development trends Management indicates that the decline in manufacturing business shipment volume in 2H is expected to narrow, with the seasonal effect in Q3 likely to be more evident. ASP is expected to remain stable throughout the year, while gross margins in 2H will still face pressure year-on-year but may improve compared to 1H. In terms of the retail business, CICC expects continued pressure on the terminal retail environment in 2H, with some brands reclaiming channels, such as Nike reclaiming online channels from 2027, which may impact the revenue of Pou Chen by approximately 15%, but Pou Chen is actively compensating through other brands. Risk warnings: Orders below expectations, capacity expansion and ramp-up below expectations, fluctuations in raw material prices.