Yue Yuen Industries (00551) shows strong stock performance, downgraded to "hold" with a target price lowered to 16.8 Hong Kong dollars.

YUE YUEN IND (00551) released a research report stating that in the fourth quarter of last year, its contract manufacturing business revenue decreased by 4.6% year-on-year, dragged down by an 8.1% decline in shipments, partially offset by a 5.2% increase in average selling price. Management expressed a cautious view on the outlook for the contract manufacturing business, forecasting that average selling price and sales volume in 2026 will remain flat to slightly soft, with order visibility weakening to around 2 to 3 months. Given that YUE YUEN's stock price has outperformed its peers in the contract manufacturing industry since April last year, the bank currently believes that its relative valuation to its peers is reasonable. Therefore, the rating has been downgraded from "buy" to "hold", with the target price lowered from HKD 19.25 to HKD 16.8, reflecting the bank's more cautious outlook on shoe manufacturers relative to garment manufacturers in 2026. Management stressed that the order visibility for the first quarter of this year continues to be weak, and sales volume and gross profit margin may be under pressure year-on-year due to multiple long holidays in China, Vietnam, and Indonesia, continued tariff sharing arrangements, and cautious ordering pace from customers. Four brand customers, accounting for approximately 70% of YUE YUEN's contract manufacturing revenue, still need to share tariffs, which has a minor impact on the average selling price. In the second half of 2025, tariff sharing caused a decrease of 0.5 to 1 percentage point in the contract manufacturing gross margin. On a quarterly basis, the bank expects sales volume to be under pressure year-on-year in the first half of 2026, while the second half of 2026 will see pressure on average selling price year-on-year due to higher base comparison and an increase in orders with simpler designs.