China Lilang pressed ahead against all odds

Despite a significant decline in China’s apparel sector last year, the menswear maker recorded double-digit revenue and profit growth

Key Takeaways:

  • China Lilang’s revenue rose 14.8% last year to 3.54 billion yuan, while its profit jumped by 18.4% to 530 million yuan
  • The menswear maker is exploring opening overseas stores as it considers expanding beyond China

By Ken Lo

China’s apparel industry shrank last year as a result of multiple factors, led by weak demand both at home and abroad and rising costs. But that label doesn’t apply to clothing seller China Lilang Ltd. (1234.HK), whose latest results show healthy revenue and profit growth, especially in the second half of the year when it threw its weight into online retailing.

The company’s annual revenue rose 14.8% to 3.54 billion yuan ($490 million) last year from 2022, while its net profit grew 18.4% to 530 million yuan. While many companies struggled in the second half of the year amid growing consumer caution, Lilang’s revenue growth during that time accelerated.

The company’s revenue grew 21.6% during the final six months of the year, while its cost of sales rose by a far smaller 10.3%. That allowed it to post profit of 260 million yuan profit for the period, up 36.1% year-on-year, as its gross margin for the full year increased 2.2 percentage points to 48.2%. The stock ticked up by 4.7% the day after the announcement, showing such traditional product sellers can still generate some excitement among investors.

Last year began on a strong note for China’s apparel and other retail industries with the end of the country’s strict pandemic restrictions. But things quickly fizzled in the second half due to growing consumer caution with a slowing economy. Value-added output from apparel enterprises tracked by the National Bureau of Statistics (NBS) declined by 7.6% year-on-year for the full year, while production of finished apparel fell by 8.7%, accelerating from a smaller decline in 2022.

As the market softened, Lilang enhanced its retail network by shuttering underperforming stores. That, coupled with a limited supply of good locations for new outlets in shopping malls, caused the company to miss its target for a net 100 new store additions for the year. As of last December, Lilang’s network included 302 self-operated stores, and another 2,393 stores operated by third parties like agents and distributors. That gave it a total of 2,695 stores, up by just 51 outlets compared with the end of 2022.

Rising e-commerce 

Popularity of e-commerce in China helped Lilang’s online sales of textiles like apparel, footwear and hats, as well as its online sales of physical goods, grow 12.9% and 8.4% last year, respectively. The company has continued to promote its newer online sales presence by combining shopping with interactive elements and entertainment livestreaming to improve the experience for its customers. 

With its higher operational efficiency, the company expects its new retail business to grow by more than 20% this year, outpacing its overall sales growth of 15%.

China Lilang mainly sells men’s apparel under the Lilanz brand for its main product line, and Lilang Less Is More for its newer business casual line. Last year, it upgraded the brand strategy for Less Is More, boosting sales growth for the business casual line.

By series, the company’s main product line generated 2.84 billion yuan in sales last year, up 10.7% year-on-year, accounting for 80.1% of its total revenue, with eight new stores added. The business casual line grew by a much faster 35.2% to 703 million yuan, adding 43 net new stores, becoming an increasingly important part of the company’s business. 

While distributors grappled with inventory pressure after the pandemic, Lilang, facing the same issues, worked to improve its inventory management. That allowed it to reverse provisions on 26.7 million yuan more worth of inventory last year compared to 2022, as it also stopped providing rebates to distributors during the year.

The improved inventory management efforts helped Lilang reduce its inventory to 826 million yuan by the end of 2023, a decrease of 6.72% from 2022, as its inventory turnover days fell to 170 from 195 days over that period. The company’s accounts receivable of 733 million yuan at year-end was also down 13% from a year earlier, thanks to better collections of long outstanding bills and strong performance for the business casual line. Accounts receivable turnover days also fell to 42 days from 54 days a year earlier.

Overseas expansion

Lilang’s management pointed out that China’s challenging market could sideline many smaller brands, presenting an opportunity for the company to take over their market share. While aiming to open 100 to 200 new stores this year, Lilang acknowledged the goal was fluid due to China’s fondness for online shopping. In light of the uncertain situation at home, the company is also exploring opening stores overseas, conducting two exploratory visits to Southeast Asia.

CICC maintains an “outperform” rating for Lilang. In light of the company’s efforts at adding new brick-and-mortar stores and developing its e-commerce segment, it raised its 2024 and 2025 profit forecasts to 610 million yuan and 670 million yuan, respectively, and raised its target price to HK$5.16. Those profit figures would give the company forward price-to-earnings (P/E) ratios of 9 for 2024 and 7.8 for 2025.

The company’s trailing P/E of 10.5 times lags the 15 times for EEKA Fashion (3709.HK) and 21 times for Shenzhou International Group (2313.HK), making Lilang look attractive in light of its strong growth last year.

Its strong cash flow also gives the company greater leeway to pay dividends. It paid HK$0.36 in dividends for last year, including a final dividend of HK$0.13 and a special final dividend of HK$0.05, equaling a dividend payout ratio of more than 73%, and a yield of about 8%. 

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