It is no secret that many luxury brands outsource their manufacturing in the Far East to save costs. One of such manufacturers is Sitoy Group Holdings Limited (1023:HK).
Sitoy Group Holdings is one of the leading manufacturers of luxury products, serving many brand owners in Europe and North America. The company has been able to grow its revenue from HK$1.7 billion in 2010 to more than HK$3.8 billion in 2014. Similarly, its net profit grew from HK$151.8 million in 2010 to over HK$504 million in 2014.
Yet the company still derived more than 55% of its revenue from North America’s customers. The company also started a retail brand, Tuscan, but its retail business is only 2.1% of its overall revenue. Sitoy enjoyed a gross margin of more than 25%. Although it is growing rapidly, it still has a strong balance sheet and is currently in a net cash position. The company boosted a return of equity of more than 20% for the past few years.
However, as the world worried about the demand for luxury goods, investors are not that optimistic about Sitoy Group. The company continues to trade at a price to earnings of only 12 times. It has a market capitalisation of slightly more than HK$6.1 billion and yet, the company has a net cash position of more than HK$1.3 billion as at 30th June 2014.
According to the company IPO details, the company produced goods for brands such as Coach Inc, Fossil Inc, Michael Kors, Lacoste, Prada SpA and Tumi. It seems that Coach Inc is one of its largest customers.
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There seems little to hate about Sitoy Group. However, with counting Coach Inc as one of its largest customer, the current crisis with Coach Inc might be a potential risk for the company if it does not diversify its revenue source away from the American brand.
If one is optimistic about the future of luxury goods, Sitoy Group might be a company you need to keep it in your watchlist.Join us on Facebook for more exciting updates and discussion about value investing. Submit your email address for important market updates and FREE case studies!We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded. The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim owns shares in Coach Inc