Time for Cherry-picking
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
Valuation upgrade with changes in market conditions and strategies
The keywords of the textile/apparel industry during the 2021-1H22 period were pent-up demand, digital channel strategies, and overseas growth momentum. Pent-up demand remains strong for longer than expected as face-to-face activities are increasing along with the reopening from the pandemic. Many Korean companies have seen a steep growth in sales and operating profit.
Looking toward 2H22, the prolonged Russia-Ukraine war, lockdowns in China, and other macro uncertainties have raised the need to pick out companies that have greater growth potential vs. peers through improvements in fundamentals. Some apparel companies are expected to improve their margin structure with diversification of retail channels, and some will enjoy earnings growth backed by overseas expansion or launch of new businesses (cosmetics). It is now time for cherry-picking as the burden of high base effect in apparel consumption weighs down heavier on the sector in the second half.
Brand companies: Attention on F&F, Handsome, Shinsegae International
We recommend keeping an eye on domestic-oriented companies like Handsome and Shinsegae International until the removal of China-related uncertainties. Given that China has recently begun to lift pandemic restrictions, companies likely to benefit from an upturn in Chinese demand, such as F&F and The Nature Holdings, should look attractive once again in 2H22. In particular, F&F stands unrivalled in terms of sales volume growth.
OEM companies: Our top pick is Hwaseung Enterprise
Hansae and Youngone have received much attention in the market since 2021. Amid global supply disruptions, apparel consumption has been strong both at home and abroad. OEM companies have enjoyed greater growth potential in a seller’s market vs. the past. With growing macro uncertainties pushing up raw material prices, the companies have been able to pass on cost increases to customers with relative ease so far due to brisk demand. But if consumption slows down in the US, cost increases may lead to higher COGS ratios.
Despite sluggish growth of the past two years, Hwaseung Enterprise is expected to raise capacity utilization rates in 2H22 with momentum from new Adidas products. Youngone saw a sharp growth in earnings in 1H22 thanks to the inventory build-up by buyers. Manufacturing for high-end brands or categories should help OEM companies to defend earnings in times of rising COGS ratios.