Textile & Garment – Feeling the heat from inflation

• The total export T&G value increased by 21.6% yoy in 1H22, fulfilling only 44% of the government’s guidance for 2022.
• Inflationary pains and FX loss will weigh on the performance of T&G enterprises in the next couple of quarters, in our view.
• Thus, we rate NEUTRAL for T&G sector.

T&G export turnover maintained the growth momentum in 2Q22

T&G export value increased 17.8% yoy in 2Q22, taking 1H22 pace to 21.6% yoy thanks to strong demand from both US and EU markets. Riding on this trend, 2Q22 aggregate revenue of listed T&G companies grew 22.4% yoy, lower than that of 10.2% seen in 1Q22. Overall, GM edged down 1.1% pts yoy in 2Q22 due to increasing input material prices (cotton, polyester). Sector net profit rose 19.5% yoy in 2Q22 and 32.0% yoy for 6M22. Notably, a few T&G companies recognised a sizeable loss from FX due to the weakness of EUR.

Twin headwinds: subdued demand and FX fluctuation

Increasing inflation and tighter financial condition have cast shadow over the US and European economies which led to a contraction in global demand since 2Q22. We expect that garment companies’ NP growth momentum to slow down in 2H22F as some customers have canceled orders in 3Q22F due to high inventory. Whereas, 4Q22 orders have slowed down driven by the inflation concerns. Additionally, the EUR dropped below $1.02 on 07-Jul-22, continuing its slide to new 20-year lows and potential parity with the U.S. dollar. We think that net profit of MSH and TNG might be hurt by 5-10% in 2H22 vs. 1H22 due to exchange rate loss.

Raw material price will cool down in 4Q22F

We see that PET chip and cotton price have plummeted 15.9% and 40.3%, respectively, from their peaks in Mar-22 following the oil price downturn. We believe that both yarn and fabric prices will cool down in 4Q22F, trailing behind other input material prices. We forecast that the GM of cotton yarn companies edge down in 2H22 1.0% – 1.5% pts vs. 1H22 due to due to cotton prices falling gradually in 2H22 before moving sideways in 2023. We think that the GM of TCM, GIL, MSH will be improved in 2023F thanks to the decrease of input material price and recovery demand for premium products.

We rate NEUTRAL for the sector

T&G stock prices have dropped about 30.5% ytd following market correction and currently are traded at average TTM PE of 11x.  We believe valuation of T&G stocks are relatively fair as subdued global demand and margin pressure still persist at least by 2H22. Upside catalyst is better than- expected inflation control in the US market. Downside risk is stronger-than-expected input material price hike.

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