Best Pacific International Holdings Ltd. (2111.HK): An Undervalued Company in Performance Textiles

Executive Summary

Best Pacific International Holdings Limited (“Best Pacific” or “the Company”), trading under the stock code 2111.HK, is a leading vertically integrated manufacturer of high-performance elastic fabrics, webbing, and lace. The Company operates a “one-stop solution” model, serving as a critical supply chain partner to premier global brands in the high-growth sportswear, athleisure, and lingerie markets. Its strategic international manufacturing footprint, with key facilities in the People’s Republic of China (PRC), Vietnam, and Sri Lanka, provides a significant competitive advantage in navigating complex global trade dynamics.

The Company delivered a record-breaking performance in Fiscal Year 2024 (FY2024), with revenue reaching HK$ 5,061.3 million, a 20.5% year-over-year (YoY) increase. This top-line growth, driven by post-pandemic inventory restocking from clients and robust demand in the sportswear segment, translated into exceptional bottom-line results. Net profit surged by 70.0% YoY to HK$ 594.1 million, showcasing significant operational leverage. However, performance in the first half of FY2025 (H1 2025) moderated, with revenue declining by 2.3% and net profit falling by 4.4%. This downturn is not indicative of a fundamental deterioration in the business but is a direct consequence of widespread customer caution following the announcement of potential U.S. tariffs in the second quarter of 2025, which created significant near-term uncertainty in the apparel supply chain.

This analysis reveals Best Pacific as an appealing opportunity for the income investor looking to invest in a value stock that pays an attractive dividend. The investment thesis is built upon three core pillars:

1. Structural Growth Alignment: The Company is strategically positioned to capitalize on the resilient, long-term consumer trend towards athleisure and performance wear, which demands the innovative, functional fabrics that are Best Pacific’s specialty.
2. Valuation Dislocation: The market appears to have overly penalized the stock for near-term, macro-driven headwinds. Best Pacific trades at a significant valuation discount to its high-quality, larger-scale peers, such as Shenzhou International and Eclat Textile, creating a valuation anomaly.
3. Financial Resilience and Shareholder Returns: The Company exhibits a rapidly deleveraging balance sheet, with its net gearing ratio falling to a very healthy 8.2% as of H1 2025. This financial fortitude, combined with a clear and consistent dividend policy (payout ratio of 20% or more), provides investors with a substantial margin of safety and an attractive income stream.

Key catalysts for a potential re-rating of the stock within the next 12-18 months include the successful ramp-up of its new manufacturing facility in Vietnam, any normalization or de-escalation of U.S. trade policy, continued market share gains in the lucrative sportswear segment, and margin expansion driven by operational efficiencies and stabilizing raw material costs.

Based conservative intrinsic value analysis incorporating Dividend Discount (GGM) model, this report identifies potential upside from the reference market price of HK$ 3.26 (closing price on 30th October 2025). The current valuation does not appear to reflect the company’s robust fundamentals, strategic positioning, and long-term growth potential. Therefore, the stock presents an attractive entry point for dividend investors seeking exposure to a high-quality industrial company at a discounted price.

Company Overview

Background

Best Pacific International Holdings Limited was founded in 2003 and has established itself as a formidable player in the global textile industry over the past two decades. The company achieved a significant milestone with its listing on the Main Board of the Hong Kong Stock Exchange (HKEX) in May 2014, under the stock code 2111. Over its decade as a publicly traded entity, Best Pacific has demonstrated a solid long-term growth trajectory. From its initial public offering year in 2014 to the end of FY2024, the company’s revenue grew from approximately HK$ 1,860.9 million to HK$ 5,061.3 million, representing a compound annual growth rate (CAGR) of approximately 10.5%. This consistent growth underscores management’s ability to navigate market cycles and strategically expand the business.

Business Nature

Best Pacific is a vertically integrated manufacturer specializing in high-performance elastic materials, a critical component in modern apparel. Its business is centered on a “one-stop solution” model, offering a comprehensive and integrated product portfolio to its brand customers. This model is a cornerstone of its value proposition. By providing a full suite of complementary materials – primarily elastic fabric, elastic webbing, and lace – the company simplifies the complex procurement processes for its clients. This integration ensures crucial benefits such as the synchronization of colors and material properties across different components of a single garment (e.g., the main body fabric and shoulder straps of a sports bra), which is a significant technical and logistical challenge for apparel brands. This streamlined approach shortens inventory cycles and production lead times for customers, fostering deep, sticky relationships and creating substantial barriers to entry for smaller, less integrated competitors.

Operations & Geography

The company’s manufacturing operations are strategically diversified across Asia, a key element of its competitive strength. Its primary production hubs are located in:

• People’s Republic of China (PRC): Facilities in Dongguan, Jiangxi, and Guizhou form the historical core of its manufacturing base.
• Vietnam: Existing operations in Hai Phong are being supplemented by a major new facility under development in Nghe An, which is central to the company’s future growth strategy.
• Sri Lanka: Joint-venture operations in Pannala and Thulhiriya provide further geographic diversification and access to another key apparel manufacturing region.

This international footprint is far more than a cost-arbitrage strategy; it represents a critical tool for geopolitical risk mitigation. In an era of escalating trade tensions and tariff uncertainty, particularly concerning the U.S. and China, this multi-location manufacturing capability provides Best Pacific and its clients with invaluable supply chain resilience. It allows for flexible sourcing solutions to navigate intricate trade policies, a feature highly prized by global brands that are actively seeking to de-risk their supply chains and reduce their historical over-reliance on any single country.

Major Products & Services

Best Pacific’s revenue is generated from three primary product categories. The breakdown based on FY2024 revenue contributions provides a clear picture of its business focus:

• Elastic Fabric (79.3% of Revenue): This is the company’s core business segment, producing high-performance knitted fabrics. It is further divided into two key end-markets:
  • Sportswear and Apparel (55.4%): This is the largest and fastest-growing sub-segment, manufacturing technical fabrics for performance wear, athleisure, yoga pants, and other active apparel.
  • Lingerie (23.9%): The company’s traditional stronghold, producing sophisticated and comfortable fabrics for intimate apparel.
• Elastic Webbing (19.5% of Revenue): This segment produces complementary materials such as waistbands, shoulder straps, and trims used in conjunction with its elastic fabrics.
• Lace (1.2% of Revenue): A smaller segment focused on decorative materials primarily for the lingerie market.

High Growth Areas

The primary engine of growth for Best Pacific is unequivocally the sportswear and apparel elastic fabric segment. In FY2024, this sub-segment’s revenue grew by a remarkable 28.7%, far outpacing the 7.8% growth in the more mature lingerie fabric segment. This performance reflects the company’s successful alignment with the powerful global trend of athleisure and wellness.

To capitalize on this momentum, management’s strategic focus is on international production expansion. The cornerstone of this strategy is the new, state-of-the-art production facility being developed in Nghe An, Vietnam. This significant capital project, acquired in late 2024 with production expected to commence in 2026, is designed to meet the projected medium-to-long-term demand from its global export customers. This expansion will not only increase overall capacity but will critically enhance its non-PRC production capabilities, further strengthening its strategic value to global brands.

Industry Landscape and Competitive Positioning

Global Industry Overview

Best Pacific operates within the vast and dynamic global textile market, a sector undergoing significant structural shifts. The overall market is substantial, with various market research firms estimating its size at over USD 1 trillion and projecting a compound annual growth rate (CAGR) of 4-5% through 2030. The textile fabrics sub-market, which is Best Pacific’s direct playground, is forecast to grow even faster, with some estimates projecting a CAGR of 6.7% to reach nearly USD 943 billion by 2031. Geographically, the Asia-Pacific region is the undisputed epicenter of the industry, accounting for approximately half of the global market revenue due to its extensive manufacturing base, cost advantages, and robust export infrastructure.

Several powerful, long-term trends are shaping the industry and creating opportunities for well-positioned players like Best Pacific:

• The Athleisure Megatrend: The blurring of lines between athletic and casual wear is a dominant, multi-decade consumer trend. This has fueled immense demand for fabrics that are not only stylish but also functional, comfortable, and durable. This directly benefits producers of high-performance synthetic materials like nylon and spandex, which are core to Best Pacific’s product offering.
• The Sustainability Imperative: A paradigm shift is occurring, driven by both consumer awareness and regulatory pressure. Particularly in Europe, new regulations like the EU Strategy for Sustainable and Circular Textiles are mandating greater durability, repairability, and the use of recycled materials, while cracking down on “fast fashion” and greenwashing. This evolution presents both a compliance challenge and a significant opportunity for manufacturers who can demonstrate a genuinely sustainable and transparent supply chain.
• Innovation in Synthetic Fibers: While traditional petroleum-based synthetic fibers like polyester and nylon remain dominant due to their superior performance characteristics and cost-effectiveness, the industry is heavily invested in mitigating their environmental impact. A key focus of innovation is the development of bio-based polymers and high-quality recycled fibers, which reduce dependence on fossil fuels and address end-of-life concerns.

Competitive Advantages

Best Pacific has cultivated a set of distinct competitive advantages that enable it to thrive in this demanding industry and serve the world’s most exacting apparel brands.

• Integrated “One-Stop Solution” Model: The ability to offer a comprehensive suite of materials – fabric, webbing, and lace – from a single source provides a powerful moat. It creates operational efficiencies for clients, ensures product consistency, and fosters deep, long-term partnerships that are difficult for more specialized competitors to disrupt.
• Strategic International Manufacturing Footprint: The company’s production facilities across China, Vietnam, and Sri Lanka are a crucial strategic asset. This diversification offers clients a “China+N” sourcing strategy, mitigating risks associated with geopolitical tensions, trade tariffs, and supply chain disruptions. This flexibility is a key decision factor for major global brands like Nike, Adidas, and Lululemon, which are actively diversifying their supplier bases.
• Robust R&D and Innovation Capabilities: With a dedicated R&D team of over 150 technicians and a consistent investment of 2-3% of revenue annually, Best Pacific has established a strong track record of developing proprietary, high-performance materials. This technological capability allows it to co-develop innovative solutions with its brand partners, moving it up the value chain from a simple manufacturer to a value-added innovation partner.
• Entrenched Relationships with Global Brand Leaders: Best Pacific has built long-standing relationships with a blue-chip customer base that includes industry leaders such as Nike, Adidas, Lululemon, and Under Armour. In FY2024, sales to the company’s five largest customers accounted for 46.4% of total revenue, indicating a deep level of integration and reliance. These partnerships provide a stable foundation of order flow and a high barrier to entry.
• Leadership in Sustainability: The company has been proactive in its commitment to environmental stewardship, obtaining key certifications such as ISO14001, Bluesign, and using the Higg Index to benchmark performance. Investments in green manufacturing technologies, including the use of biomass fuels and the installation of solar panels, position Best Pacific as a preferred supplier for global brands that have their own ambitious sustainability targets.

Major Competitors

The global performance textile industry is competitive, but the top tier is concentrated among a few large-scale, highly capable players. Best Pacific’s primary competitors include:

• Shenzhou International Group Holdings Ltd. (2313.HK): As the world’s largest vertically integrated knitwear manufacturer, Shenzhou is the industry behemoth, serving as a cornerstone supplier to giants like Nike, Adidas, and Uniqlo. With a market capitalization exceeding HK$100 billion, it operates on a massive scale. This scale and its deep integration with top brands command a significant valuation premium, with its stock typically trading at a P/E ratio in the mid-teens.
• Eclat Textile Co., Ltd. (1476.TW): A leading Taiwanese manufacturer renowned for its innovation in elastic knitted fabrics and performance garments. Eclat is also a key supplier to major international brands and is highly regarded for its technological prowess and strong financial performance. Reflecting its quality and growth prospects, Eclat also trades at a high premium, with a P/E ratio often exceeding 20x.

Best Pacific occupies a unique and advantageous position relative to these giants. It is large and sophisticated enough, with the requisite international footprint and R&D capabilities, to compete for and win business from the same top-tier global brands that work with Shenzhou and Eclat. However, with a market capitalization of under HK$4 billion, it is more nimble and trades at a valuation that is a mere fraction of its larger peers. This significant valuation gap suggests that the market is either pricing in a level of risk that is disproportionate to the company’s strengthening fundamentals or is overlooking its long-term growth potential and quality. This dislocation between its operational capabilities and its market valuation forms the core of the current investment opportunity.

Competitive Strategy & Future Growth

Management’s strategy is clear, consistent, and well-aligned with the prevailing industry trends. The plan for future growth is built on reinforcing its existing competitive advantages:

1. Deepen Multi-Location Manufacturing: The expansion in Vietnam is the most tangible evidence of this strategy. The goal is to continue increasing the proportion of production capacity outside of the PRC, providing customers with greater flexibility and security.
2. Drive Innovation-Led Growth: The company will continue to allocate significant resources to R&D to develop higher-margin, proprietary fabrics that solve problems for its brand partners and differentiate its offerings.
3. Aggressively Penetrate the Sportswear Segment: Leveraging its strong technical capabilities and existing brand relationships, the company will continue to focus on capturing a greater share of the high-growth sportswear and athleisure market.
4. Uphold Sustainability Leadership: Best Pacific will continue to use its strong environmental, social, and governance (ESG) credentials as a key selling point, positioning itself as the supplier of choice for the world’s most sustainability-focused brands.

Specific Market Exposure and Risks

A thorough analysis of Best Pacific requires a clear understanding of its specific exposures to global markets and the associated risks. While its manufacturing is concentrated in Asia, its financial performance is intrinsically linked to the economic health and trade policies of developed nations.

Geographic and End-Market Exposure

Best Pacific’s revenue is generated through sales to global apparel brands, whose primary end-markets are in North America, Europe, and Greater China. The company’s reported revenue by customer location in FY2024 showed significant sales to entities in Hong Kong, Mainland China, Sri Lanka, Taiwan, and Vietnam. This does not represent the final consumer location but rather the operational hubs of its global clients’ supply chains. The ultimate driver of demand remains the discretionary spending power of consumers in major developed and emerging economies. This exposes Best Pacific to global macroeconomic trends, including inflation, interest rates, and consumer confidence levels.

Geopolitical and Trade Policy Risks

This category represents the most acute and immediate risk factor for the company.

• U.S. Tariffs: The announcement of potential U.S. tariffs in April 2025 had a direct and material impact on Best Pacific’s business. As detailed in the FY2025 Interim Report, the uncertainty created by this announcement led its brand customers to adopt a “cautious procurement approach,” shortening order cycles and delaying commitments. This directly caused the revenue decline in H1 2025. The risk has a dual nature: first, it creates demand volatility and reduces revenue visibility; second, it can lead to margin pressure as powerful brands may attempt to push a portion of the tariff costs onto their suppliers. This underscores why the company’s Vietnam expansion is not merely a growth initiative but a crucial strategic imperative to offer clients a tariff-mitigated sourcing alternative.
• U.S.-China Relations: The broader context of U.S.-China geopolitical competition creates a volatile and unpredictable operating environment. While Best Pacific’s strategic diversification into Vietnam and Sri Lanka is a direct response to this risk, its operations in the PRC remain a significant part of its business. Any further escalation in trade tensions could have negative consequences.

Economic Conditions in Manufacturing Hubs

The stability and competitiveness of its production locations are vital to Best Pacific’s success.

• Vietnam: The Vietnamese economy has been a standout performer in Southeast Asia, characterized by strong GDP growth and a government policy focused on attracting high-value manufacturing and foreign direct investment. This creates a favorable backdrop for Best Pacific’s expansion. However, rapid industrialization has placed strains on infrastructure, which can lead to logistical bottlenecks and inefficiencies.
• Sri Lanka: Following a severe economic crisis, the Sri Lankan economy has shown signs of stabilization, with the critical export sector, particularly apparel, on a recovery path. Best Pacific’s operations in the country have demonstrated resilience, achieving low single-digit sales growth in H1 2025. Nevertheless, the economic situation remains fragile and warrants ongoing monitoring for any signs of renewed instability.

Customer and End-Market Risks

The nature of Best Pacific’s business model entails specific concentration risks.

• Customer Concentration: A significant portion of the company’s revenue is derived from a small number of large, international brand customers. In FY2024, the top five customers accounted for 46.4% of total sales. While these long-term relationships are a source of strength and stability, they also represent a concentration risk. A strategic shift in sourcing by a single major client, or the loss of a key account, would have a material adverse effect on the company’s financial performance.
• Reliance on Consumer Spending: Ultimately, demand for Best Pacific’s products is a function of discretionary consumer spending on apparel and sportswear. A global recession, prolonged high inflation that erodes purchasing power, or a significant downturn in key markets like the U.S., Europe, or China could lead to reduced orders from its brand partners. The recent performance challenges faced by key partners like Nike, which has dealt with inventory issues and a slowdown in China, serve as a reminder of this dependency.

Management Discussion and Analysis (MD&A) Summary

A review of management’s commentary in the FY2024 Annual Report and the FY2025 Interim Report provides a clear narrative of the company’s recent performance, strategic priorities, and outlook.

Business Overview and Evolving Market Trends

Management’s perspective shifted markedly between the full-year 2024 and the first-half 2025 reports, reflecting the rapidly changing macroeconomic environment.

• FY2024 Perspective: Management portrayed 2024 as a year of robust recovery and record achievement. They attributed the strong performance to two primary factors: a wave of inventory restocking by clients in the first half of the year as supply chains normalized post-pandemic, and sustained momentum driven by the powerful global athleisure trend. The tone was one of confidence, highlighting the company’s ability to capitalize on favorable market conditions.
• H1 2025 Perspective: The narrative in the interim report is dominated by the impact of external shocks. Management explicitly identified the “proposals of reciprocal tariffs by the U.S.” in the second quarter of 2025 as the primary catalyst for a shift in market sentiment. They detailed how this policy uncertainty compelled their major apparel brand customers to adopt a “cautious procurement approach,” which manifested as delayed or reduced orders. This caution in the second quarter was significant enough to offset the growth experienced in the first quarter, leading to an overall decline for the first half.

Segment and Regional Performance Highlights

Management’s discussion provides valuable color on the performance drivers within its key business segments and geographic locations.

• Sportswear vs. Lingerie Segments: Management consistently emphasizes the sportswear segment as the company’s principal growth engine. The H1 2025 report offered a crucial detail: the sportswear segment’s revenue was more significantly impacted by the tariff-related uncertainty, declining by 5.5%, whereas the lingerie segment proved more resilient with a decline of only 1.9%. This divergence is likely because the major global sportswear brands have a proportionally higher sales exposure to the U.S. market, making them more sensitive to U.S. trade policy shifts.
• Elastic Webbing Segment: Management highlighted the performance of the elastic webbing segment as a notable success in a challenging period. The segment achieved 6.9% revenue growth in H1 2025, which was attributed to prior strategic investments in higher-value, yarn-dyed webbing products. These innovative offerings enabled the company to secure “core programmes from various key customers,” demonstrating that product innovation can drive growth even when the broader market is soft.
• Regional Operations:
  • Vietnam: In H1 2025, operations in Vietnam experienced a low single-digit sales decline, mirroring the group’s overall performance. Management directly linked this to reduced orders from U.S.-exposed brands. In response to the heightened uncertainty, management confirmed they have adopted a “more prudent approach” to capital investment, deliberately slowing down the expansion plan for the new facility in Nghe An.
  • Sri Lanka: Management reported continued operational improvements in Sri Lanka, resulting in a low single-digit sales increase in H1 2025. This performance highlights the resilience of these operations and their successful navigation of the post-crisis economic environment in the country.

Management Strategy

Across both reports, management reiterates a consistent and focused four-pronged strategy designed to drive long-term value creation:

1. Leveraging Multi-Location Production: Continuing to enhance and utilize the international manufacturing footprint to provide clients with flexible and de-risked supply chain solutions.
2. Focusing on Innovation and R&D: Sustaining investment in research and development to create proprietary, higher-margin products.
3. Deepening Sportswear Market Penetration: Aggressively pursuing growth opportunities within the structurally attractive sportswear and athleisure market.
4. Maintaining Disciplined Cost Control: Implementing measures to enhance production efficiencies and protect profitability, especially during periods of market volatility.

Future Prospects

Management’s forward-looking statements reflect a blend of caution and underlying confidence. The official outlook remains “cautiously optimistic” for the medium term. For the second half of 2025, management anticipates an improvement in business momentum. They expect an uptake in sales orders from key customers, which should lead to higher production capacity utilization. This, in turn, is expected to generate economies of scale and support an enhancement of overall profit margins. While acknowledging the persistent risks from geopolitical tensions, management expresses confidence that Best Pacific is “well-positioned to capitalize on emerging opportunities”.

Financial Performance Analysis

A detailed examination of Best Pacific’s financial statements reveals a company that achieved record profitability in FY2024 before facing a macro-driven moderation in H1 2025. Underlying this, the data shows a significant strengthening of the balance sheet and robust cash generation, painting a picture of fundamental health.

Table 1: Key Financial Summary (HK$ millions)

Sources: FY2024 Annual Report , FY2025 Interim Report , FY2025 Interim Results Presentation

Income Statement Review

Best Pacific’s income statement tells a story of strong operational leverage in a growth environment, followed by margin pressure when top-line growth stalled.

Revenue: The company’s revenue surged by 20.5% YoY in FY2024 to a record HK$ 5,061.3 million, driven by strong client restocking and robust demand, particularly from the sportswear segment. This momentum reversed in H1 2025, with revenue declining by 2.3% YoY to HK$ 2,329.8 million. Management explicitly attributed this dip to customer caution in Q2 2025 following US tariff announcements, which offset a stronger Q1.

Table 2: Revenue & Gross Profit by Segment (HK$ millions)

Note: Gross Profit Margins are in parentheses.

Sources: FY2024 Annual Report , FY2025 Interim Report , FY2025 Interim Results Presentation

Gross Profit and Margin: Gross profit grew by an impressive 35.2% in FY2024, with the gross margin expanding by 290 basis points to 26.8%. This was a direct result of higher capacity utilization from the surge in revenue, economies of scale, and relatively stable raw material costs. In H1 2025, gross profit fell by 3.8%, and the margin contracted by 40 basis points to 26.6%, reflecting the negative impact of lower production utilization in the second quarter.

Operating Expenses: The company demonstrated effective cost management. In FY2024, G&A expenses as a percentage of revenue decreased from 7.2% to 6.7%, showcasing positive operating leverage. S&D expenses remained stable at around 4.3-4.5% of revenue across the periods. Notably, R&D investment as a percentage of revenue increased from 2.1% in H1 2024 to 2.4% in H1 2025, indicating that management continued to invest in innovation despite the top-line pressure.

Net Profit and EPS: The combination of strong revenue growth, margin expansion, and cost control led to a 70.0% surge in net profit to HK$ 594.1 million in FY2024, with the net margin expanding to 11.7%. In H1 2025, net profit declined by 4.4% to HK$ 270.7 million, with the net margin remaining relatively stable at 11.6%. Basic EPS followed a similar trajectory, growing 75.3% to HK$ 0.5848 in FY2024 before declining 6.1% to HK$ 0.2505 in H1 2025.

Balance Sheet Review

The balance sheet reveals a story of rapidly improving financial health and resilience.

Liquidity: The company maintains a healthy liquidity position. The current ratio improved significantly from 1.4 times at year-end 2023 to 1.8 times at year-end 2024, before settling at a solid 1.7 times as of H1 2025. The cash and bank balances stood at a strong HK$ 1,149.7 million at the end of H1 2025.

Working Capital Management: Working capital management was efficient in FY2024, with inventory turnover days improving from 122.4 to 111.8. However, a key indicator of the Q2 2025 disruption was the increase in inventory turnover days to 131.1 in H1 2025. Management explicitly attributed this to higher-than-expected average inventories maintained during the period due to the sudden slowdown in orders, which supports the narrative of an external shock rather than an internal operational issue.

Financial Strength: The most compelling aspect of Best Pacific’s financial evolution is its rapid deleveraging. The Net Gearing Ratio has demonstrated a consistent and impressive downward trend, falling from 15.0% at the end of FY2023, to 13.5% at the end of FY2024, and reaching a very low 8.2% as of H1 2025. This dramatic reduction in leverage in just 18 months showcases the company’s powerful underlying cash generation, which is being prudently allocated to strengthen the balance sheet. This significantly de-risks the investment case. The Net Debt Position has correspondingly fallen from HK$ 498.8 million at the end of FY2023 to just HK$ 300.4 million at the end of H1 2025. On a per-share basis, this equates to a net debt of only HK$ 0.29 per share, an exceptionally low level of financial burden.

Cash Flow Review

The cash flow statement confirms the company’s strong operational execution and disciplined capital allocation.

Operating Cash Flow (OCF): Best Pacific is a strong cash generator. It generated HK$ 760.6 million in OCF in FY2024 and a robust HK$ 348.2 million in H1 2025. The fact that OCF increased YoY in H1 2025 despite lower net profit highlights effective working capital management during the period.

Investing Cash Flow: The company continues to invest for future growth. Net cash used in investing activities was primarily driven by capital expenditures (CapEx) for property, plant, and equipment, which amounted to HK$ 323.1 million in FY2024 and HK$ 118.0 million in H1 2025. These investments are largely directed towards the strategic expansion in Vietnam.

Financing Cash Flow: The use of financing cash flow clearly reflects management’s priorities: deleveraging and shareholder returns. In FY2024, the company used HK$ 356.4 million for financing activities, which was mainly for the repayment of bank borrowings and the payment of dividends. This disciplined approach continued into H1 2025.

Table 3: Key Financial & Operational Ratios

Sources: FY2024 Annual Report , FY2025 Interim Report , Analyst Calculations

Valuation Assessment

The current market valuation of Best Pacific appears to reflect a significant disconnect from its fundamental quality, long-term growth prospects, and rapidly improving financial health. The analysis suggests that the stock is undervalued on both an intrinsic and a relative basis.

Fundamental Assessment

Best Pacific exhibits the hallmarks of a high-quality industrial company. It has a proven long-term growth trajectory, temporarily interrupted by macroeconomic factors rather than company-specific failures. Profitability is robust, with a Return on Equity (ROE) of 16.97% in FY2024. Most importantly, its financial resilience has improved dramatically, evidenced by the net gearing ratio plummeting to a very conservative 8.2%. This strong balance sheet provides a significant margin of safety and the financial flexibility to fund growth and continue rewarding shareholders.

Relative Valuation

A comparison with Best Pacific’s closest and most relevant high-quality peers, Shenzhou International and Eclat Textile, starkly illustrates the current valuation anomaly.

Table 4: Peer Valuation Comparison

The data reveals a massive valuation gap. Best Pacific trades at a Trailing Twelve Month (TTM) P/E multiple of approximately 5.7x, a steep discount of over 60% to Shenzhou’s multiple of ~14.6x and a discount of over 70% to Eclat’s multiple of ~21.2x. A similar chasm exists on a Price-to-Book (P/B) basis, where Best Pacific trades below its book value (~0.98x), while its peers command significant premiums.

While a certain discount is justifiable given Best Pacific’s smaller scale and higher customer concentration, the current magnitude appears excessive. It suggests the market is pricing Best Pacific as a low-quality, no-growth commodity textile producer, rather than as a key innovation partner to the world’s leading sportswear brands. This mispricing seems to overly penalize the company for the temporary, macro-driven slowdown in H1 2025, while largely ignoring its superior financial health (lower gearing than peers) and strong recovery potential.

Intrinsic Value Estimation

Dividend Discount Model (Gordon Growth Model)

The DDM is a relevant valuation tool given Best Pacific’s established dividend policy (payout ratio of at least 20%) and attractive yield.

The estimated intrinsic value of the company based on the Gordon Growth Model is 18% higher than the reference price of HK$ 3.26 (Closing price on 30th October 2025). This provides a reasonable margin of safety for the interested investor.

Investment Outlook: Catalysts and Returns

The investment case for Best Pacific is supported by a series of potential near-term catalysts that could unlock the value identified in the analysis, as well as a compelling long-term total return profile for patient investors.

Potential Catalysts (12-18 months)

Several key events and developments could serve as powerful catalysts to drive a re-rating of the stock and close the valuation gap:

• Successful Ramp-up of Vietnam Facility: Positive news flow regarding the construction progress, budget adherence, and, most importantly, the securing of initial orders for the new Nghe An facility will be a major de-risking event. It will provide tangible proof of future capacity growth and enhanced geographic diversification, which are central to the investment thesis.
• Normalization or Reduction of U.S. Tariffs: As the primary headwind that triggered the H1 2025 slowdown and subsequent stock price weakness, any de-escalation of U.S. trade protectionism would provide immediate relief. A clarification or reduction of tariff threats would likely lead to a rapid normalization of ordering patterns from key customers, boosting revenue visibility and sentiment.
• Rebound in Orders from Key Brand Partners: Stronger financial results or more optimistic forward guidance from Best Pacific’s major customers, such as Nike, Lululemon, or Adidas, would signal a recovery in end-market demand. This would directly improve revenue forecasts and investor confidence in Best Pacific’s near-term growth trajectory.
• Margin Improvement and Operational Efficiency: The delivery of strong H2 2025 financial results, particularly a recovery in gross margin back towards the 27% level, would provide concrete evidence that the H1 2025 margin compression was a temporary issue caused by low utilization. This would affirm the company’s operational resilience and pricing power.
• New Customer or Program Wins: The announcement of a new major brand partnership or securing significant, multi-year programs with existing customers, especially within the high-growth sportswear segment, would validate the company’s competitive positioning and growth strategy.

Long-Term Return Expectation

For investors with a 5- to 10-year horizon, Best Pacific offers an attractive potential for total annualized returns, composed of both capital appreciation and a significant dividend yield.

Capital Appreciation: The long-term earnings growth is expected to be driven by the overall growth of the global textile market (projected at 4-7% annually) plus incremental market share gains enabled by the new Vietnam capacity. Assuming the company’s valuation multiple gradually re-rates from its current depressed level of ~6x P/E towards a more reasonable 9-10x P/E over the next 3-5 years, in line with industry averages for quality manufacturers, this implies significant capital appreciation potential. A conservative estimate suggests that a combination of earnings growth and multiple re-rating could generate annualized capital appreciation in the range of 10-15%.

Dividend Yield: The company has a stated dividend policy of paying out at least 20% of distributable profits and has recently maintained a payout ratio closer to 50%. The current trailing dividend yield is over 8%, providing a substantial and well-supported income stream. Assuming dividends grow in line with earnings, the yield-on-cost for a long-term investor is highly attractive.

Total Return Calculation: Combining a conservative estimate of 10% annualized capital appreciation with the current dividend yield of approximately 8% suggests a potential annualized total return in the high teens (15-20%) over a medium-term horizon. This projection is based on the assumptions of a stable macroeconomic environment, successful execution of the Vietnam expansion, and a gradual normalization of the company’s valuation multiple.

Risk Assessment

While the investment thesis is compelling, it is subject to a number of significant risks that must be carefully considered. These risks are primarily external and macroeconomic in nature, rather than being rooted in operational deficiencies.

Key Risks

• Geopolitical Tensions and Trade Protectionism: This is the most significant and immediate risk. The H1 2025 results demonstrated the company’s sensitivity to U.S. trade policy. An escalation of the U.S.-China trade war, or the specific imposition of punitive tariffs on textile and apparel goods sourced from Vietnam, would severely impact customer demand and profitability.
• Dependency on Large Customers and Consumer Spending: With nearly half of its sales coming from its top five clients, Best Pacific faces customer concentration risk. The loss of a major brand partner or a significant, sustained reduction in orders would materially impact revenue. Furthermore, demand is ultimately tied to discretionary consumer spending in key markets (U.S., Europe, China), which is vulnerable to economic downturns, high inflation, or shifts in consumer sentiment.
• Fluctuations in Raw Material Costs: The primary raw materials for Best Pacific’s products are synthetic fibers like nylon and spandex, which are petroleum derivatives. Their prices are therefore linked to the volatile global price of crude oil. A sharp and sustained increase in oil prices could compress gross margins if the company is unable to pass these higher costs on to its customers in a timely manner.
• Execution Risk on Vietnam Expansion: Large-scale capital projects carry inherent execution risks. Any significant delays, cost overruns, or difficulties in ramping up the new Vietnam facility to its expected levels of efficiency and quality could negatively impact projected growth and returns on invested capital.
• Intense Industry Competition: The textile manufacturing industry is highly competitive. While Best Pacific has carved out a strong position, it faces constant pressure from both large-scale giants like Shenzhou International and a fragmented landscape of smaller, regional players, which can limit pricing power.
• Currency Fluctuations: As a company with manufacturing in China, Vietnam, and Sri Lanka, and sales denominated primarily in USD and HKD, Best Pacific is exposed to fluctuations in the exchange rates of the HKD, USD, RMB, VND, and LKR. Adverse movements can impact both reported revenues and costs.
• Sustainability and Regulatory Compliance: The increasing focus on sustainability, particularly in Europe, brings rising compliance costs and the risk of reputational damage if standards are not met. While currently a strength, maintaining this leadership position requires ongoing investment and vigilance.

Downside Catalysts

Specific events that could trigger a negative re-rating of the stock include:

• A significant escalation of the U.S.-China trade war, leading to new, broad-based tariffs that impact goods from both China and Vietnam.
• The public announcement by a major brand customer of a strategic shift in its supplier base away from Best Pacific.
• Official company updates revealing major delays, significant cost overruns, or major technical challenges with the Vietnam expansion project.
• A sharp and sustained spike in raw material prices that leads to a severe contraction in gross margins for multiple quarters.
• The onset of a severe global recession that leads to a sharp contraction in global apparel demand.

Downside Scenario Estimate

In a severe downside scenario—for instance, a combination of a global recession and the imposition of punitive tariffs on Vietnamese exports—the stock’s valuation would likely come under significant pressure. A reasonable “rock bottom” support level can be estimated by considering its tangible book value. As an asset-heavy manufacturer, tangible book value provides a proxy for the liquidation value of its physical assets. As of H1 2025, the company’s Price-to-Book ratio was already low at approximately 0.98x, meaning it was trading below its accounting book value. In a distressed scenario, the stock could trade at a discount to its tangible book value per share. Given a book value per share of approximately HK$3.42, a downside support level in the range of HK$ 2.40 to HK$ 2.75 (representing a 0.7x to 0.8x multiple on book value) would be a plausible floor, barring a fundamental impairment of the company’s assets.

Conclusion

Based on a comprehensive analysis of Best Pacific’s strategic positioning, financial health, growth prospects, and current valuation, the company is considered to be a compelling opportunity for investors looking for a value stock with an appealing dividend yield.

Best Pacific offers an attractive combination of structural growth, a discounted valuation, and improving financial quality.

• Growth: The company is strategically aligned with the powerful and enduring consumer shift towards athleisure and performance apparel. While near-term growth has been temporarily impacted by macroeconomic and geopolitical factors, the medium- to long-term outlook remains positive. This growth is underpinned by the company’s capacity expansion in Vietnam and its potential for continued market share gains within its blue-chip customer base. Analyst consensus forecasts a return to double-digit EPS growth, supporting the growth component of the thesis.
• Reasonable Valuation: This is the most compelling aspect of the investment case. The stock currently trades at a P/E multiple of approximately 6x, a stark and, in our view, excessive discount to its direct, high-quality peers, which trade at multiples of 15x to 20x or higher. This valuation gap provides a substantial margin of safety and significant room for multiple expansion as near-term uncertainties abate. The stock is priced for stagnation, not for the resilient growth it has historically delivered and is positioned to resume.
• Financial Strength and Quality: The company demonstrates high-quality business characteristics, including a strong Return on Equity (approximately 17% in FY2024) and a rapidly strengthening balance sheet. The dramatic reduction of the net gearing ratio to a very healthy 8.2% mitigates financial risk and provides management with the flexibility to invest in growth while continuing to reward shareholders.
• Dividend Support: The attractive dividend yield, currently exceeding 8%, provides a strong floor for the stock price and a significant component of the total return proposition. This dividend is well-supported by a clear payout policy and the company’s robust operating cash flow, making it a reliable source of income for investors.

At the reference price of HK$ 3.26 per share, the market appears to be overly fixated on the temporary headwinds from U.S. tariff uncertainty that impacted H1 2025 results. In doing so, it is undervaluing the company’s resilient business model, strategic international footprint, strong financial health, and positive long-term growth prospects. The current valuation offers an attractive entry point for investors with a medium to long-term investment horizon. This provides an opportunity to accumulate a position in a high-quality, globally relevant manufacturer ahead of key potential catalysts, including the operational launch of its new Vietnam facility and a potential normalization of the global trade environment.

Disclaimer

This article is a record of the thinking behind a personal investment decision. It does not represent any recommendation to purchase any stock mentioned in the article. As always, readers are strongly advised to do their own due diligence before making any investment decisions.