Tack Fact posted a FY06 net income of HK$132.6 million on revenue of HK$1,655.2 million, compared with a profit of HK$155.5 million on revenue of HK$1,529 million last year. Both figures did not meet the forecasts of HK$230 million in net income or HK$1,700 million in revenue, according to Bloomberg estimates. One-time expenses were key reasons for dragging down the net income in FY06. Excluding special charges, the net income in FY06 jumped 17.8% to HK$183.3 million. Organic growth in ODM/OEM business was robust, with profit from operations surged 34.9% to HK$262.3 million in FY06. Operating profit margin was also improved to 15.8% in FY06 from 12.7% last year. We believe high utilization rate (97%) and strong order on hands have given Tack Fat more bargaining powers in negotiating contracts. Going forward, with total production capacity expanded by 13% in 2007, we expected the group’s turnover would jump by 13% to HK$1,870.3 million. We assume the net profit margin would remain 11%, which implies a net income of HK$205.7 or 0.12405 EPS in FY07. Based on a historical average P/E of 8.63, we set our target price at HK$1.07, implying 15% upside from its current trading price.

Concern on profitability of Mudd USA. Tack Fact has 36% attributable interest in Mudd USA. Mudd USA recorded a net loss of HK$72 in FY06, stemmed from magnified garment supply in the US market after termination of quota restrictions in early 2005. As the group did not provide its outlook for Mudd USA in next year, we expect Mudd USA would continuously weigh on the group’s bottom line in near future.

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