Shenwan Hongyuan has issued a research report stating that Yue Yuen Industrial (00551) is an international sports footwear manufacturer and operates a major domestic sports goods retailer, with a deep presence in the global sports industry chain. Considering the low visibility of manufacturing orders, the firm has revised down its profit forecasts, now projecting net profit attributable to shareholders for 2026-2028 at $330 million, $380 million, and $410 million (previously $370 million, $390 million, and $420 million for 2026-2028), corresponding to P/E ratios of 9x, 8x, and 7x. Based on the average P/E of footwear and apparel manufacturing companies, a 12x P/E for 2026 is applied to Yue Yuen. The firm is optimistic about the recovery of manufacturing orders and the company's potential for profit elasticity once end-market demand rebounds, maintaining a Buy rating. The key points from Shenwan Hongyuan are as follows:

Yue Yuen Industrial reported its Q1 2026 results, which met expectations. Q1 revenue was $1.99 billion, down 2.2% year-on-year, with net profit attributable to shareholders at $35 million, a decrease of 53.6% year-on-year, in line with prior guidance. The performance decline was attributed to pressure on the manufacturing segment.

Manufacturing Business: Shipments faced pressure, but gross margin is expected to recover as holiday disruptions subside and higher-priced orders are fulfilled. Q1 manufacturing revenue was $1.26 billion, down 5.5% year-on-year, with a gross margin of 14.8%, a decrease of 2.9 percentage points year-on-year. This was due to lower shipment volumes and production scheduling disruptions caused by the overlap of the Lunar New Year and Ramadan holidays in Indonesia, leading to uneven capacity utilization and a significant increase in unit costs. The final net margin was 1.5%, down 3.2 percentage points year-on-year. 1) Volume and Price: Q1 shipment volume was 56.9 million pairs, down 8.1% year-on-year, with an average selling price of $20.52 per pair, up 2.4% year-on-year. 2) Category Breakdown: Q1 sports and outdoor footwear revenue was $970 million, down 6% year-on-year, accounting for 48.9% of total revenue and contributing the majority of income. Casual footwear and sports sandals/soles and accessories revenue were $200 million and $90 million, down 4.7% and 1.5% year-on-year respectively, accounting for 9.9% and 4.4% of revenue. 3) Regional Breakdown: Q1 revenue from the U.S./Europe/Mainland China/other regions decreased by 4.8%, 4.9%, 17.2%, and 0.8% year-on-year respectively, with revenue shares of 29.1%, 27.1%, 13.0%, and 30.8%.

Retail Business: Significant improvements in quality and efficiency led to a year-on-year increase in net profit attributable to shareholders despite headwinds. Q1 retail revenue was RMB 5.05 billion, down 1.1% year-on-year, while net profit attributable to shareholders was RMB 180 million, up 32.5% year-on-year. Gross margin was 33.6%, an increase of 0.9 percentage points year-on-year. The company enhanced cross-channel synergy, implemented dynamic inventory management, and strictly controlled end-market discounts, effectively improving sales quality and gross profit margins. As of Q1 2026, the number of directly operated stores decreased by 105 from the beginning of the year to 3,205, reflecting ongoing optimization of the store network.

Expense control continued to improve, enhancing retail business profitability. The company's overall selling and distribution expense ratio was 10.2% in Q1, with an administrative expense ratio of 6.9%, both largely flat year-on-year, indicating overall stability in expenses. By segment, the Q1 operating margin for the manufacturing business was 2.0%, down 3.7 percentage points year-on-year, while the selling, distribution, and administrative expense ratio was 10.7%, down 0.1 percentage point year-on-year, reflecting rigorous cost control and improved efficiency. For the retail business, the Q1 operating margin was 5.8%, with a selling, distribution, and administrative expense ratio of 28.5%, down 1.0 percentage point year-on-year. The optimization in expense ratio was primarily due to store network optimization, rental cost control, and improved labor efficiency, resulting in a final net margin of 3.8%, up 0.9 percentage points year-on-year.

Risks include fluctuations in order demand, rising labor costs, manufacturing margins below expectations, and domestic retail performance below expectations.