Why Nameson's Profits Fell Sharply

The apparel maker's revenue began to contract in the second half of its latest fiscal year, as business from its largest customer fell 11%

Key Takeaways:

• Nameson's profit tumbled 40% in the second half of its latest fiscal year, as business from its largest customer fell and it spent heavily on a new production base in Vietnam
• The company slashed its dividend for the second half of its fiscal year by more than half, citing its "ongoing commitment to prudent cash management"

The latest annual results from clothing maker Nameson Holdings Ltd. (1982.HK) are offering a complex patchwork of trends in the global apparel industry, from an economic slowdown dampening demand in China to the U.S.-China trade war that is pushing more manufacturing to Southeast Asia.

The bottom line for Nameson, both figuratively and literally, was an erosion of the company's business, resulting in tumbling profits in the second half of its fiscal year that runs through March 2025. The business declines were most notable in Japan and China, the company's top two markets, where sales during its latest fiscal year fell 19% and 7%, respectively, from the previous year.

Nameson's finances are also coming under pressure as it races to build up a production base in Vietnam, which it believes will be less affected than China by U.S. tariffs in Donald Trump's trade wars with the rest of the world. The company is also offering a lesson in some of the perils of geographic diversification, as it shifts production away from a facility in Myanmar due to customer requests and political instability in the Southeast Asian nation.

Investors haven't been too keen on apparel manufacturers for quite a while, and they weren't too excited about Nameson's latest report issued after the Hong Kong stock market closed last Friday. The stock fell 7.1% on Monday and is now down 8.2% so far this year. The shares trade at a price-to-earnings (P/E) ratio of just 5.3, roughly equal to Texhong's (2678.HK) 5.5, but well behind the 15 for Bosideng (3998.HK), a China-focused maker of winter apparel whose higher valuation derives from its well-known brand.

By comparison, names like Nameson and Texhong are largely anonymous, and instead they are making clothing for other big brand names. That difference is apparent in profit margins, with Nameson's gross margin of 18.0% for its latest fiscal year equal to less than half of Bosideng's 49.9% from its latest financial report for the six months through last September.

"The global economic landscape exhibited resilience despite facing challenges such as slower growth, persistent inflation, and policy uncertainties," Nameson said in its latest report. "Economic performance varied across countries, with spending behavior showing a complex recovery pattern."

While there was plenty of uncertainty around its business, one thing that was more certain was the company's decision to slash its dividend by more than half. Nameson actually raised its dividend slightly for the first half of its fiscal year to HK$0.098 per share from HK$0.095 the previous year. But in the latest report it slashed the dividend to just HK$0.015 for the second half of the year from HK$0.035 a year earlier.

It didn't directly address that decision but said in the report the company maintains an "ongoing commitment to prudent cash management, strong cash flow, and a healthy gearing ratio." The company's report shows that its cash tumbled 40% to HK$431 million ($55 million) by the end of March from HK$717 million a year earlier, and its gearing ratio more than doubled to 20.1% from 8.9% over that time.

While such trends certainly aren't cause for excitement, they also appear largely related to the company's aggressive expansion in Vietnam, which makes it look more proactive rather than fiscally irresponsible. At the end of the day, Nameson remains cash flow positive and profitable, even if its profits are coming under pressure.

Revenue contraction

While the diversification away from manufacturing in China looks prudent and like a good use of the company's financial resources, one thing that looks more worrisome is a sharp deterioration of Nameson's business in the second half of its latest fiscal year.

The latest report shows the company's revenue ticked down slightly, by less than 1%, to HK$4.35 billion for the 12 months through March from HK$4.38 billion in the previous year. But some calculations using data from the first half of the fiscal year show the company's revenue began to contract in the second of the year, falling by 5.3% after rising 2.2% in the first half.

The decline looks related to weakness in China and Japan, though the company didn't comment specifically on either market. But previous reports have indicated that Japanese fast fashion giant Uniqlo is Nameson's largest customer. Nameson's report says that revenue from its largest customer, which it didn't name, fell 11% in its latest fiscal year to HK$2.04 billion from HK$2.29 billion a year earlier, accounting for just over half of its revenue in the latest fiscal year.

The falling business from Uniqlo may represent weakness at the chain's China stores due to a slowing economy. But it's less clear why orders from its Japan operation fell so much, which may be one reason for investor concern. Whatever the reason, the drop may be partly responsible for a 33% rise in the company's inventory to HK$1.21 billion in the latest fiscal year from HK$911 million in the previous year.

The declines in China and Japan were partly offset by strength in Europe and North America, whose revenue for the year rose 21% to HK$833 million and 14% to HK$606 million, respectively. But as we've already noted, the North American business could come under pressure in the company's current fiscal year due to Donald Trump's tariffs on not only China, but also Vietnam.

Despite its declining revenue, Nameson did a good job controlling costs, and falling raw material costs helped it to improve its gross margin to 18.0% from 17.7% the previous year. On the bottom line, Nameson reported its full-year profit fell 5.4% to HK$342 million from HK$362 million the previous year. But calculations using data from the report for the first half of the fiscal year show the company's profit tumbled 40% in the second half of the year.

The bottom line is that Nameson is trying to diversify its production base to protect itself from the U.S.-China trade war, and is also learning about the dangers of relying too much on a single customer. We expect it will ultimately weather both storms, though its finances could get strained in that process, which will directly affect investors in the form of lower dividends.