Tianfeng: Maintain "buy" rating on STELLA HOLDINGS (01836) to expand overseas base and optimize customer portfolio

Tianfeng released a research report stating that it maintains a "Buy" rating on STELLA HOLDINGS (01836). Based on the performance in the first half of 2025, taking into account the high base effect from last year and the operational efficiency after the addition of new production capacity, profit forecasts have been adjusted. It is expected that the net profits for 2025-2027 will be $160 million, $180 million, and $190 million respectively (originally $180 million, $200 million, $220 million); and EPS will be $0.20, $0.21, and $0.23 respectively (originally $0.22, $0.24, $0.26). The company is currently in a stable position, which is a direct result of the three-year plan (2023-2025). Under this plan, the company has improved its product category mix, diversified and expanded its customer base, and optimized its manufacturing base layout. According to this plan, the company has set two profit targets: achieving a 10% operating profit margin throughout the three-year period and a low double-digit annual growth rate in after-tax profits. Given that the company has exceeded these targets in 2023 and 2024, the company is confident that it will achieve these goals by the end of 2025. However, the company is facing short-term challenges in terms of profitability in the first half of the year, mainly due to two factors. First, due to customers rushing to fulfill the surge in demand in the European summer tourism peak season last year before the Paris Olympics, about a million pairs of orders were shipped ahead of schedule in the first half of 2024, resulting in a high base effect. Secondly, there are short-term operational efficiency issues related to increasing production capacity in Indonesia and the Philippines, where local labor productivity has not yet reached optimal levels. In order to meet demand and ensure the achievement of important customer goals, the company has shifted some production to a shoe factory in Vietnam, leading to increased costs including overtime expenses. Although the current initial situation is not ideal, the company expects the situation to gradually improve in the second half of the year. Importantly, as the company is about to finalize its next three-year plan (2026-2028), it is still on a path of continuous growth. Part of this plan includes the company's plan to further expand total production capacity by 20 million pairs starting this year. This will be achieved by further increasing the capacity of the company's new factory in Soloro, Indonesia, starting operations at the second factory in Bangladesh, and accelerating the construction of a dedicated factory for the company's largest sports client in Indonesia. Another focus of the company's next three-year plan is to develop the handbag and accessory manufacturing business, with the aim of making it a significant long-term growth driver. The company has recently completed the acquisition of a small but experienced handbag factory in Vietnam. The company will leverage its expertise to improve the product quality and production efficiency of the overall handbag business. Once finalized, the company's next three-year plan will enable the company to meet the cross-category demands of brand customers. As more companies reassess their supply chains and integrate suppliers, the company's goal is to become the ideal partner to meet their needs - combining high quality standards with added value.