Stella International’s 1H margin squeezed by investment-year costs; Goldman Sachs cuts earnings forecasts but reiterates Buy

Overview

The report assesses Stella International Holdings’ 1H26 results, margin pressure, sales performance by category, new capacity additions, and shareholder return arrangements. Goldman Sachs lowered its 2026–2028 earnings forecasts due to product mix, capacity ramp-up, and efficiency pressure, but believes these disruptions could gradually normalize in 2027 and therefore maintains its Buy rating and HK$15.00 target price.

Core views

1H26 revenue was broadly in line with the previously disclosed figures, but earnings were materially below expectations. Sales increased 1.5% year-on-year, below the 2.6% growth recorded in 2H25, with volume flat and average selling price up 1.8%. 1H26 net profit was US$64mn, 19% below Goldman Sachs’ forecast; net margin declined 2.0 percentage points year-on-year, indicating that modest revenue growth did not translate into corresponding profit growth. Margins were the central weakness in these results. 1H26 OEM gross margin was 20.3%, below Goldman Sachs’ 23.0% forecast by 2.7 percentage points and down 2.3 percentage points year-on-year. The main drags included higher material costs for World Cup-related products, operating deleverage at the China factory serving the largest sports customer, and upfront training and labor costs ahead of the commencement of operations at three new factories in Bangladesh, Indonesia, and Vietnam. Losses in the handbags and accessories business and one-off costs associated with the phased closure of the Philippines factory also added pressure, while a one-off gain from a land disposal provided only a partial offset. Although the selling and administrative expense ratio was 0.4 percentage points below Goldman Sachs’ forecast, core operating margin was still only 9.2%, down 2.1 percentage points year-on-year and 2.3 percentage points below Goldman Sachs’ forecast. By category, 1H26 revenue from the sports business increased 2.6% year-on-year. Weak shipments to the largest sports customer were offset by order expansion among the broader sports customer base; the category accounted for 48.9% of OEM sales, up from 48.5% in 1H25. Luxury and fashion revenue declined 4.8% year-on-year, mainly because footwear with simpler designs reduced the average selling price, while its share fell from 33.2% to 31.1%. Casual revenue increased 11.3% year-on-year, mainly due to shipments brought forward ahead of the Philippines factory closure, with its share rising from 18.3% to 20.0%; this growth therefore contained a significant timing effect. Management continues to define 2026 as an investment year and maintains its outlook for broadly flat full-year volume and average selling price. The company expects 2H26 gross margin to improve by approximately 200 basis points from 1H26 to around 22%, but forecasts FY26 operating margin of approximately 9.5%, below its previous target of 10%; 2H26 net profit is expected to be broadly in line with 1H26, implying a year-on-year decline in FY26 net profit. Three new factories in Bangladesh, Indonesia, and Vietnam are scheduled to commence operations in 2H26, while the footwear R&D center in Vietnam is targeted to open in November 2026. In July 2026, the company decided to close its Philippines factory in phases to concentrate resources in regions offering higher long-term returns. The company reiterated its three-year plan for 2026–2028, targeting high-single-digit compound annual growth in net profit, although growth will be more back-end loaded. Its shareholder return policy remains unchanged: in addition to a normal payout ratio of approximately 70%, the company still plans to return an additional US$60mn in cash in 2026; the 1H26 interim dividend was HK$0.42 per share, corresponding to a regular payout ratio of 70%. Goldman Sachs believes an approximately 11% shareholder return yield could support the near-term valuation. Based on a weaker product mix, capacity ramp-up, and efficiency performance, Goldman Sachs lowered its 2026–2028 net profit forecasts by approximately 10%–15%; the forecast revision table indicates cuts of 15.3%, 9.5%, and 10.0%, respectively. The new 2026–2028 revenue forecasts are US$1,567.6mn, US$1,638.7mn, and US$1,704.7mn, respectively; net profit forecasts are US$120.4mn, US$142.3mn, and US$151.1mn; and earnings per share forecasts are US$0.14, US$0.17, and US$0.18. Net margins over the same period are expected to be 7.7%, 8.7%, and 8.9%, respectively, below the previous forecasts of 9.1%, 9.5%, and 9.7%. Goldman Sachs rolled forward its target-price valuation basis from 11 times expected 2026 P/E to 11 times expected 2027 P/E, thereby maintaining its 12-month target price at HK$15.00. Its rationale is that near-term volatility caused by the investment year could normalize in 2027 as efficiency at the new factories improves, while higher shareholder returns could provide near-term support. Although industry sentiment remains affected by demand volatility, new capacity ramp-up, and weak outlooks from certain brands, Goldman Sachs maintains its Buy rating; based on the current price of HK$13.15, the target price implies 14.1% upside.

Analysis framework

Goldman Sachs first compares actual 1H26 revenue, gross margin, operating margin, and net profit with year-on-year figures and its own forecasts, and then explains the margin variance through material costs, customer orders, product mix, upfront costs for new factories, and one-off items. It subsequently breaks down revenue growth and sales mix across the sports, luxury and fashion, and casual categories, and revises its 2026–2028 financial forecasts by incorporating the commencement of operations at new factories, the closure of the Philippines factory, and management’s revised full-year guidance. Finally, the report rolls the valuation year forward to 2027, derives the target price using an 11 times expected P/E multiple, and cites potential efficiency recovery and shareholder returns as the basis for maintaining its Buy rating.

Methodology notes

• Valuation MethodPE/PEG valuation

  Forward P/E valuation

  The report calculates its 12-month target price using 11 times expected 2027 P/E and rolls the valuation basis forward from 2026 to 2027 to reflect the possibility that investment-year disruptions may normalize following efficiency improvements.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of volume, average selling price, and category mix

  The report decomposes sales changes into volume and average selling price and further compares the growth rates and revenue shares of the sports, luxury and fashion, and casual categories to assess the sources and sustainability of revenue growth.

• Company Fundamentals and Financial Framework

  Margin bridge and earnings forecast revisions

  The report compares actual margins with year-on-year figures and Goldman Sachs’ original forecasts, then considers material costs, operating deleverage, new capacity ramp-up, business losses, and one-off items individually to revise its revenue, margin, and net profit forecasts for the next three years.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Stella International Holdings（1836.HK）

  The Hong Kong-listed footwear and handbag contract manufacturer covered by the report. Its recent earnings have been weighed down by investment-year costs and product mix, but Goldman Sachs expects efficiency improvements and shareholder returns to provide support.

  Strengths

  Expansion of the sports customer base, new capacity across three locations, a target of high-single-digit compound annual net profit growth from 2026 to 2028, and additional cash returns on top of the normal payout ratio of approximately 70%.

  Weaknesses

  1H26 gross margin and operating margin declined materially, while upfront costs for new factories, weak shipments to the largest sports customer, and losses in the handbags and accessories business weighed on earnings.

  Comparison

  Goldman Sachs’ Buy rating is based on the stock’s total return potential relative to other companies in its coverage universe; the report does not provide specific peer operating metric comparisons.

  Risks

  Slower growth in the sports business, lower-than-expected efficiency from new capacity and geographic or product adjustments, and exchange-rate volatility.

Key data

• 1H26 sales growth+1.5% year-on-year+2.6% in 2H25; 1H26 volume was flat and average selling price increased 1.8%
• 1H26 OEM gross margin20.3%Down 2.3 percentage points year-on-year and 2.7 percentage points below Goldman Sachs’ 23.0% forecast
• 1H26 core operating margin9.2%Down 2.1 percentage points year-on-year and 2.3 percentage points below Goldman Sachs’ forecast
• 1H26 net profitUS$64mn19% below Goldman Sachs’ forecast
• Sports business revenue+2.6% year-on-yearAccounted for 48.9% of 1H26 OEM sales, compared with 48.5% in 1H25
• Luxury and fashion business revenue-4.8% year-on-yearIts share declined from 33.2% in 1H25 to 31.1%
• Casual business revenue+11.3% year-on-yearIts share increased from 18.3% to 20.0%, mainly driven by shipments brought forward ahead of the Philippines factory closure
• 2H26 gross margin guidanceApproximately 22%Expected to improve by approximately 200 basis points from 1H26
• FY26 operating margin guidanceApproximately 9.5%Below the previous target of 10%
• Interim dividend per shareHK$0.42Corresponding to a regular payout ratio of 70%
• Additional cash return in 2026US$60mnOn top of the normal payout ratio of approximately 70%
• 2026–2028 net profit forecast revisions-15.3% / -9.5% / -10.0%Mainly reflecting weaker margins due to product mix, capacity ramp-up, and efficiency
• 2026–2028 net profit forecastsUS$120.4mn / US$142.3mn / US$151.1mnRevised Goldman Sachs forecasts
• 2026–2028 earnings per share forecastsUS$0.14 / US$0.17 / US$0.18Revised Goldman Sachs forecasts
• Three-year plan net profit targetHigh-single-digit compound annual growthCovers 2026–2028, with growth expected to be back-end loaded
• 12-month target priceHK$15.00Based on 11 times expected 2027 P/E; current price of HK$13.15, implying potential upside of 14.1%

Impact & implications

The report considers 2026 an investment year in which capacity construction and regional adjustments bring forward costs, resulting in lower margins, a year-on-year decline in full-year net profit, and downward earnings forecast revisions in the near term. If the three new factories ramp up smoothly and product and geographic adjustments improve efficiency, earnings volatility could gradually normalize in 2027. Until then, the normal payout ratio of approximately 70%, the additional US$60mn cash return, and an approximately 11% shareholder return yield constitute important support for Goldman Sachs’ Buy view.

Risks

• Growth in the sports business may slow.
• Efficiency improvements from new capacity and geographic or product adjustments may fall short of expectations.
• Exchange-rate volatility may affect operating and earnings performance.

What to watch

• Monitor whether 2H26 gross margin can improve by approximately 200 basis points from 1H26 to around 22%, and whether FY26 operating margin can reach approximately 9.5%.
• Monitor changes between shipments to the largest sports customer and expansion among the broader sports customer base, as well as the revenue mix of the luxury and fashion and casual categories.
• Monitor the commencement of operations and efficiency ramp-up at the three new factories in Bangladesh, Indonesia, and Vietnam in 2H26.
• Monitor whether the Vietnam footwear R&D center can open in November 2026 and the effectiveness of resource reallocation following the Philippines factory closure.
• Monitor the realization of back-end-loaded net profit growth from 2026 to 2028 and the additional US$60mn cash return arrangement in 2026.