Stella International Holdings:Athleisure growth and ongoing cost cutsoffset weak casual orders

Key highlights:

1) Volume: 4Q16OEM volume was weak at -13% yoy with customers of the casualfootwear business becoming more cautious on ordering and some late ordersshifted to 2017. By volume of product lines, Stella expects casual footwear tostabilize, women/dress shoes to recover, and athleisure footwear to grow in 2017.

2) ASP: Stella foresees ASP to decline in 2017on product mix change and clients’expansion into mass-market products.

3) Margins: Stella expects control of manpower and improvement of workingconditions to increase manufacturing margins in 2017. In the long term, managementexpects athleisure products to bring higher margins than casual footwear due tohigher volume.

4) Capacity: Management expects flattish capacity growth in 2017due todownsizing of workforce and remains cautious on capacity expansion in 2017. Waysto manage stabilized casual requirement are the focus for manufacturing.

5) Retail: 4Q16SSSG +c.20% yoy in Rmb terms. Management attributes the stronggrowth to well-received products launched last fall/winter.

6) Disposal of 60% China retail segment: Management maintains its timetable tofinish the transaction by mid-April in 2017. Contracts with related parties areunderway.

The company is scheduled to announce its 2016annual results on March 16. Wecurrently estimate OP/NI decline of 9%/12% yoy in 2H16, improving from 46%/44%yoy decline in 1H16due to aggressive cost control. Looking ahead, we still seeuncertainties in demand, especially for casual/non-sports categories. Besides, risksin changes in global trade policies in the US may impact US retailers/brands’sourcing strategies in the near term (see our report When the going gets tough: Buy