Textile & Garment – After rain comes the sun – Update

• 1Q21 aggregate net profit listed T&G companies soared 38.2% yoy thanks to their better product mix and overseas marketing cost-cutting.
• We expect a sharp increase in orders amid the strong demand recovery in clothing and footwear of the U.S. and the E.U.
• Our top picks are STK and MSH, while TCM is on the watchlist.

Positive signal in 1Q21

In 1Q21, total export T&G value increased by 6% yoy, to US$8.85bn thanks to the recovery of sales volume from Vietnam’s main export market such as the U.S and Korea. Based on our estimates, 1Q21 aggregate revenue of listed T&G companies slid 7.6% yoy on subdued average selling prices. However, we saw gross margin (GM) improved by 1.6% pts yoy while selling expenses declined by 12 % yoy across the board thanks to 1) better product mix with higher GM (recycled yarns, gloves, backpack) 2) enjoying from low prices inventories since 4Q20, and 3) overseas marketing cost-cutting. As a result, 1Q21 aggregate net profit soared 38.2% yoy.

Riding on the demand surge of U.S and EU market

U.S. and E.U. consumers have shown a strong pent-up demand after the lockdowns. U.S.’s GDP growth in 1Q21 increased by 6.4% – the best increase since 1984. Whereas personal consumption surged an annualized rate of 10.7% – the second-fastest since 1960. The Office of Textile and Apparel (OTEXA) showed that the T&G import value of the U.S. reached US$24bn (+4.3% yoy). In addition, European Commission (E.C.) has sharply revised the regional GDP growth forecasts for 2021 and 2022 due to the significant recovery of E.U. economies.

We believe T&G companies are entering a new CAPEX expansion cycle

STK aims to develop a Unitex synthetic fiber factory with an investment cost of US$120m which will turn the company to be the second-largest yarn production manufacturer in Vietnam with a total capacity of 120,000 tons/year. In addition, large T&G companies aim to build new factories or upgrade capacity in order to capture opportunities emerging from EVFTA and RCEP. MSH and TCM target to expand 20.0% and 25.0% their manufacturing capacity, TNG plans to increase their capacity by 50.0% cotton factory.

Our top picks are STK and MSH, while TCM is on the watchlist

Our sector picks are STK and MSH because of the promising outlook of recycled yarns and (Free On Board) FOB businesses, respectively. We also like TCM with its new cooperation with Adidas, but the current surge in stock price has fully reflected its prospect.

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