Textile & Garment – Challenges to blur the outlook – Update

• 2Q21 aggregated net profit (NP) of listed T&G companies returned to pre-pandemic level, surging 141.7% yoy and 46% vs. 2Q19.
• We see challenges to blur the industry outlook, including manufacturing disruption and rising administration cost due to the current outbreak.
• Our top pick is STK while MSH is on the watchlist

Earnings to grow robustly in 2Q21
Vietnam’s T&G export turnover climbed 24.6% yoy in 2Q21, even 7.4% higher than pre-pandemic level (2Q19), thanks to increasing demand of Vietnam’s primary export markets, include the U.S. (+42% yoy) and E.U (+18% yoy). Based on our estimates, 2Q21 aggregated revenue of listed T&G companies jumped 22.1% yoy, while 2Q21 aggregated NP soared 141.7% yoy driven by: 1) low base 2Q20 as production disrupted for a few weeks during the first wave outbreak, 2) better product mix (recycled yarns, bed mats), and 3) increasing in FOB orders (shifting orders from epidemic-affected countries to Vietnam).

Riding on the demand surge in U.S and E.U. market
The U.S. and E.U. consumers have shown a solid pent-up demand after lockdown. The U.S.’s T&G import turnover in 1H21 increased by 31.16% yoy to US$50.6bn, of which import turnover for apparel grew 26.9% (Source: OTEXA). In addition, according to the General Department of Vietnam Customs (GDVC), E.U.’s T&G import turnover from Vietnam in May-21 and Jun-21 soared 11.9% yoy and 21% yoy, respectively thanks to reopening economy.

2H21 outlook will be dictated by the current Covid-19 wave
The COVID-19 outbreak in the South region could disrupt supply chains again as companies cannot deliver raw materials and ensure timely deliveries due to a lack of human resources. We see that T&G companies with factories in the South area are hardest hit, like VGT, TCM, and GMC. If the current situation lasts for several weeks, we forecast that additional expenses for meals, accommodation and Covid-19 vaccination for employees account for 10% of T&G companies’ s G&A expense in FY21F. VITAS forecast in the optimistic scenario, if the Covid-19 is under control by the end of Aug-21, T&G export turnover in 2021 may only reach US$33bn (-6% yoy).

STK is our stock pick
We like STK regarding: 1) strong revenue growth from recycled yarn in FY21-23F; 2) capacity expansion plan – doubling capacity in 2025F and 3) gain more market share from the U.S. market thanks to the low preliminary anti-dumping duty.

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