Preview of new stocks in US stocks | Hong Kong 707IL selling clothes: Performance becomes more difficult, fears of big customers and suppliers relying too heavily

There is a growing number of Hong Kong clothing suppliers heading towards listing in the United States. On September 5th, Hong Kong clothing supplier 707 Cayman Holdings Ltd. (hereinafter referred to as "707IL") submitted an IPO application to the U.S. Securities and Exchange Commission (SEC) with plans to list on the NASDAQ stock exchange. The company had submitted a secret application to the SEC as early as April 9, 2024, and now it has officially sounded the horn for its listing in the United States. It is understood that the company plans to raise approximately $11 million by issuing 2.5 million shares of stock priced in the range of $4 to $5 per share. At the midpoint of the proposed price range, 707 Cayman Holdings would have a market value of approximately $99 million. In recent years, compared to the past, there has been a gradual increase in the number of Hong Kong clothing companies listing in the United States. For example, Sihong International, which completed its listing on NASDAQ on April 23rd this year, had submitted a secret application to the SEC on August 30, 2022, and publicly disclosed its prospectus on November 1, 2023. Despite the high-profile listing, the company saw its stock price plummet due to poor fundamentals and declining performance. Now, with 707IL's listing in the United States, can the company attract investors with its real strength and promote a trend of upward stock prices? Declining revenue and net profit, "small but not beautiful" performance According to the prospectus, 707IL was established in 2021 and is a Hong Kong-based clothing supplier that provides a range of services to numerous clothing brands, including market trend analysis, design and product development strategies, procurement, production management, quality control, and logistics, focusing on customers in Western Europe, North America, and the Middle East. It is important to note that the company does not produce its own branded products but chooses to collaborate with third-party manufacturers, primarily located in China and Vietnam. It is well known that the characteristics of clothing consumption in mainland China and Hong Kong have been quite different. For example, the mainland China market, due to its large market size, is one of the largest clothing consumption markets globally, with diverse and personalized demands for various styles, grades, and functions of clothing. On the other hand, the market in Hong Kong is relatively smaller but as an international city, it is an important fashion and trade center with a strong fashion-leading and international character, with demand for high-end, fashionable, personalized clothing. This has led to Hong Kong's clothing market being overly reliant on overseas markets and shows competitive characteristics in areas such as high-end clothing and fashion design. In recent years, influenced by global economic conditions, trade disputes, and the pandemic, the size of the Hong Kong clothing market has fluctuated. For example, in 2022, Hong Kong's textile exports declined by 40%, amounting to $25 billion, a 49% decrease from the 2019 level. However, Hong Kong's competitiveness in high-end clothing, fashion design, and other areas remain significant. This development characteristic can be seen from the basic aspects of 707IL performance affected by global economic conditions, with most customers located in Western Europe, North America, and the Middle East. According to the prospectus, the total number of customers of Hong Kong's 707IL increased from 50 in the six months ending March 31, 2023, to 50 in the six months ending March 31, 2024. Among them, 707IL's customers are mainly located in Western Europe, North America, and the Middle East, and the company has developed a range of customers based on geographical location, design, and technological requirements. Besides being dependent on the international market, the company also seems to have a "major customer dependence" concern: as of the six months ending on March 31, 2023, and March 31, 2024, two major customers accounted for approximately 81.1% and 70.90% of the company's revenue, posing a high risk of concentration on major customers. Due to delays in customer sales orders, in the six months ending on March 31, 2024, the company recorded revenue of HK$37.43 million, a 6.27% decrease year-on-year, and net profit of HK$1.22 million, a 51.58% decrease year-on-year. Due to the impact of declining profitability, the company's cash and bank balances as of March 31, 2024, also further decreased to HK$9.78 million, indicating a tight cash flow situation. Based on the above, it is clear that although 707IL has grown rapidly, expanding its reach to the secondary market within just three years of its establishment, its overall fundamentals still exhibit a "small but not beautiful" feature. Industry fragmentation and fierce competition, "breaking the game" is urgent Just how fierce is the competition in the clothing supply industry in Hong Kong? In the prospectus, 707IL provides data indicating that there are more than 10,000 clothing supply chain management service providers in Hong Kong, with the industry highly fragmented and fiercely competitive. These clothing supply chain management service providers typically compete in reputation and certification, service scope covering the entire supply chain process, economies of scale, financial risk management, and other aspects. Not only that, clothing suppliers in Hong Kong also face competition from around the world, including international brands and suppliers from Europe, the United States, Japan, South Korea, as well as competing regions like Singapore and South Korea. Add to that the limited capacity of the local market in Hong Kong, and the competitive pressure across the entire industry is significant. It should be noted that in such a competitive environment, 707IL has clear development drawbacks that need to be addressed, highlighting the need for its competitiveness to be improved. Observing from the outside, 707IL not only suffers from "customer dependence" but also from a clear "dependency" on the supply chain. As of March 31, 2024, all of the company's suppliers were third-party manufacturers, with 39 third-party manufacturers all located in China, Vietnam, Bangladesh, and Cambodia. As of the six months ending on March 31, 2023, and March 31, 2024, the total amount of purchases from the top five suppliers accounted for approximately 80.2% and 87.1% of the total purchases, among which five andTwo suppliers account for 10% or more of the total purchase amount for the six months ending on March 31, 2023 and March 31, 2024.In such a development state, once the supply chain disruption occurs, the company's business and operation conditions may face risks. For example, the outbreak of the epidemic in March 2020 disrupted the global supply chain, mainly manifested in delivery delays or material shortages, extended delivery times from suppliers, and extended logistics/transportation times to customers. The appearance of these factors undoubtedly also had a certain impact on the performance of 707IL that year. However, it is worth noting that, due to the geographical advantage of Hong Kong, the future development of 707IL still presents both "opportunities and challenges". In terms of opportunities, looking at the overall environment of the Hong Kong garment industry, Hong Kong has certain advantages in garment design, trade channels, and is one of the important fashion and trade centers, providing garment suppliers with development opportunities and platforms. If "707IL" can fully utilize these advantages of Hong Kong, such as focusing on design innovation, expanding international market channels, they may achieve certain growth. As for challenges, Hong Kong garment suppliers also face many challenges, such as high costs (including labor, land costs), fierce market competition (competition from local and other regional suppliers), and unstable international market demand. Of course, if 707IL wants to stand out in the market and achieve growth, they need to overcome these challenges, such as improving production efficiency, optimizing the supply chain to reduce costs, accurately targeting market demand to provide unique products or services, and enhancing their competitiveness. In conclusion, whether from the current industry capacity or the company's own fundamentals, the "hard power" of Hong Kong garment supplier 707IL is not strong enough, which also means that the company's attractiveness to investors will be greatly discounted, and whether it can show an upward trend after listing is also a big unknown.