GF Securities has released a research report maintaining a 'Buy' rating on Yue Yuen Industrial (Holdings) Ltd (SEHK: 551) with a target price of HK$18.34 per share. The firm's analysis is based on a sum-of-the-parts valuation, forecasting earnings per share of US$0.22, US$0.24, and US$0.26 for FY2026, FY2027, and FY2028, respectively.

First Quarter Performance Overview

For the first quarter of 2026, the company's overall revenue was US$1.985 billion, a decrease of 2.2% year-on-year. The manufacturing segment, which includes sports/outdoor footwear, casual footwear and sports sandals, soles, components, and other products, reported revenue of US$1.255 billion, down 5.5% year-on-year. Footwear shipment volume declined by 8.1% to 56.9 million pairs, while the average selling price increased by 2.4% to US$20.52 per pair. The retail business, contributed by Pou Sheng International, generated revenue of US$730 million, representing a 4.1% year-on-year increase. Net profit attributable to shareholders for Q1 2026 was US$352 million, a significant decrease of 53.6% year-on-year.

Profitability and Margin Analysis

The company's overall gross profit margin for Q1 2026 was 21.7%, down 1.2 percentage points from the previous year. The manufacturing segment's gross margin was 14.8%, a decline of 2.9 percentage points, primarily attributed to order volatility, production scheduling disruptions due to the overlap of the Lunar New Year and Ramadan in Indonesia, and rising labor costs. Conversely, the retail segment's gross margin improved to 33.6%, up 0.9 percentage points year-on-year, benefiting from inventory optimization and disciplined discounting.

Short-Term Outlook and Strategic Initiatives

The company has provided a cautious outlook for the second quarter of 2026. Based on monthly operational updates, manufacturing and retail revenues in April grew by 6.9% and 0.1% year-on-year, respectively, but declined by 6.6% and 2.7% in May. Looking ahead, the company plans to deepen its long-term partnerships with leading international brands. It will focus on ramping up production capacity in Central Java, Indonesia, and constructing a new factory in India, while flexibly adjusting production schedules to match order demand. The company also aims to strengthen its procurement diversification and localization strategies, pre-stocking materials to ensure supply chain stability. Furthermore, it intends to enhance manufacturing resilience through digital transformation, automation upgrades, and refined cost control. By leveraging the 'athleisure' trend and integrating R&D with automation capabilities, the company seeks to build a more niche-oriented product portfolio to achieve sustainable growth in volume, price, and profitability, thereby ensuring financial stability and healthy cash flow.

Key Investment Risks

The report highlights several potential risks, including a decline in sales from major customers, foreign exchange rate fluctuations, and an escalation in trade friction.