US Stock IPO Preview | Hong Kong's 707IL, a clothing retailer: Performance becoming increasingly challenging, at risk due to concentration of major customers and suppliers "dependency syndrome"

Another Hong Kong clothing supplier joins the ranks of those heading to the U.S. for an IPO.

On September 5th, Hong Kong clothing supplier 707 Cayman Holdings Ltd. (hereinafter referred to as "707IL") submitted an IPO application to the U.S. Securities and Exchange Commission (SEC), planning to list on the Nasdaq Stock Exchange. The company had originally submitted a confidential application to the SEC on April 9, 2024, and now it has officially sounded the "horn" for its U.S. IPO.

It is understood that the company plans to raise approximately $11 million by issuing 2.5 million shares of stock at a price range of $4 to $5 per share. At the midpoint of the proposed price range, 707 Cayman Holdings' market value will reach approximately $99 million.

In recent years, there has been a gradual increase in the number of Hong Kong clothing companies listing in the U.S. For example, Sihong International completed its listing on the Nasdaq on April 23rd this year. The company submitted a confidential filing to the U.S. Securities and Exchange Commission on August 30, 2022, and publicly disclosed its prospectus on November 1, 2023. However, after the listing, due to poor fundamentals and declining performance, it also did not escape the fate of a stock price plunge.

Now, with 707IL's U.S. listing, can the company attract investors' favor with its true strength and drive the stock price to show an upward trend?

Revenue and net profit both decline, performance is "small but not beautiful"

According to the prospectus, 707IL was established in 2021 and is a Hong Kong-based clothing supplier that provides a range of services to numerous clothing brands, including market trend analysis, design and product development strategies, procurement, production management, quality control, and logistics, focusing on customers in Western Europe, North America, and the Middle East.

It is important to note that the company does not produce its own branded products but chooses to collaborate with third-party manufacturers, mainly located in China and Vietnam.

It is well known that the development characteristics of clothing consumption in mainland China and Hong Kong have been quite different. Mainland China, due to its large market size, is one of the world's largest clothing consumption markets, with a diverse and personalized demand for clothing covering various styles, grades, and functions. On the other hand, the Hong Kong market is relatively small but as an international city, it is an important fashion and trade center with a strong fashion-leading and international characteristics, having a certain demand for high-end, fashionable, and personalized clothing.

This has led to the Hong Kong clothing market being overly dependent on overseas markets and having a competitive edge in high-end clothing and fashion design.

In recent years, the size of the Hong Kong clothing market has fluctuated due to factors such as the global economic situation, trade frictions, and the pandemic. For example, in 2022, Hong Kong's textile exports fell by 40% to HK$25 billion, a 49% decrease from the 2019 level. However, Hong Kong's strong competitiveness in high-end clothing, fashion design, and other areas makes its market value still significant.

This development characteristic can also be seen from the fundamentals of 707IL - its performance is easily affected by the global economic situation, with customers mainly from Western Europe, North America, and the Middle East According to the prospectus, the total number of customers of Hong Kong 707IL increased from the six months ended March 31, 2023 to the six months ended March 31, 2024. Among them, 707IL's customers are mainly from Western Europe, North America, and the Middle East. The company has developed a series of customers based on geographical location, design, and technical requirements.

In addition to relying on the international market, the company also seems to have concerns about "major customer dependence": as of the six months ended March 31, 2023 and March 31, 2024, two major clients of 707IL contributed approximately 81.1% and 70.90% of the revenue, posing a significant risk of high customer concentration.

Due to the delayed delivery of customer sales orders, in the six months ended March 31, 2024, the company recorded revenue of HKD 37.43 million, a decrease of 6.27% year-on-year; and a net profit of HKD 1.22 million, a decrease of 51.58% year-on-year. Due to the impact of declining profits, as of March 31, 2024, 707IL's cash and bank balances further decreased to HKD 9.78 million, indicating a tight cash flow situation.

Based on the above, it is not difficult to see that although 707IL has grown rapidly and extended its reach to the secondary market within just 3 years of establishment, the company's fundamentals overall still exhibit the characteristics of being "small but not beautiful".

Industry Diversification and Intense Competition, "Breaking the Game" is the Top Priority

How intense is the competition in the clothing supplier industry in Hong Kong?

In the prospectus, 707IL provided data that as of the date of this prospectus, there are over 10,000 clothing supply chain management service providers in Hong Kong, with the industry highly diversified and fiercely competitive. These clothing supply chain management service providers typically compete in various aspects such as reputation and certification, service coverage across the entire supply chain process, scope and economies of scale, financial risk management, etc.

Moreover, clothing suppliers in Hong Kong also face competition from international brands and suppliers from around the world, including Europe, America, Japan, Korea, as well as neighboring regions such as Singapore and Korea. Coupled with the limited local market capacity in Hong Kong, the competitive pressure on the entire industry is significant.

It is worth noting that in such a competitive environment, 707IL still has obvious development shortcomings, exposing the urgent need to enhance its competitiveness.

According to observations from the Zhitong Finance and Economics App, 707IL not only suffers from "major customer dependence", but also has a clear "dependence" issue on the supply chain end. As of March 31, 2024, all of the company's suppliers are third-party manufacturers, with a total of 39 third-party manufacturers, some of which have manufacturing factories in China, Vietnam, Bangladesh, and Cambodia.

As of the six months ended March 31, 2023 and March 31, 2024, the total purchase volume from the top five suppliers accounted for approximately 80.2% and 87.1% of the total purchase volume, with 5 and 2 suppliers accounting for 10% or more of the total purchase volume for the six months ended March 31, 2023 and March 31, 2024, respectively In such a development state, once there is a manifestation of supply chain disruption, the company's business and operational conditions may face risks. For example, the outbreak of the epidemic in March 2020 disrupted the global supply chain, mainly manifested in delivery delays or material shortages, extended delivery times from suppliers, and extended logistics/transportation times to customers. The appearance of these factors undoubtedly also had a certain impact on 707IL's performance that year.

However, it is worth noting that, due to the geographical advantages of the Hong Kong region, the future development of 707IL still presents "opportunities and challenges coexisting".

In terms of opportunities, looking at the overall environment of the Hong Kong garment industry, Hong Kong has certain advantages in clothing design, trade channels, etc., and is one of the important fashion and trade centers, providing clothing suppliers with development opportunities and platforms. If "707IL" can fully utilize these advantages of Hong Kong, such as focusing on design innovation, expanding international market channels, etc., it may achieve certain growth.

On the challenge side, Hong Kong garment suppliers also face many challenges, such as high costs (including labor, land costs, etc.), intense market competition (competition from local and other regional suppliers), and unstable international market demand. Of course, if 707IL wants to stand out in the market and achieve growth, it needs to overcome these challenges, such as improving production efficiency, optimizing the supply chain to reduce costs, accurately positioning market demand to provide unique products or services, and enhancing its competitiveness.

In summary, whether from the current industry capacity or from the company's own fundamentals, the "hard strength" of Hong Kong garment supplier 707IL is not strong enough. This also means that the company's attractiveness to investors will be greatly discounted, and whether it can show an upward trend after listing is probably a big unknown