Textiles & Garment sector – Turning point for yarn makers

• We expect that discretionary demand of Vietnam‘s top export markets such as the U.S. and E.U and even China, will soften further into 2023F.
• We expect yarn manufacturers to recover from 3Q23F thanks to demand recovery from the U.S. market.
• Our stock pick is STK, while TNG, ADS are on our the watchlist.

Tough time but there are signs of recovery

After decreased 6.8% yoy in 4Q22 due to weak orders, Vietnam export value extended the downward trend, fell 17% yoy in 2M23. However, we see positive signals from both domestic and global markets. The Manufacturing Purchasing Managers’ Index (PMI) of Vietnam, the U.S. and China increased by 3.8 pts, 0.9 pts, 2.6 pts mom, respectively. While the inflation in the U.S. and E.U are cooling down in 2M23. With the indicators recovering, we expect the export sector to face less difficulties in 2Q23F and recover gradually in 3Q23F.

China re-opening is a double-edge sword

We expect China to fully reopen its economy soon in 2Q23F. We believe that this event will support export goods to China such as fiber and yarn to recover from 2H23F. Accordingly, China is the main yarn importer of Vietnam, accounting for 48% of the total export value. In addition, the reopening of some of China’s net exports can help reduce input costs of garment enterprises as 70% of fabric materials from Vietnam are imported from China. On the other hand, China is the largest supplier of T&G to the U.S with 22.4% share, followed by Vietnam with 14.87% in FY22. We expect that garment companies with high share of export to U.S such as MSH, GIL, TCM, VGT will face challenges in 2H23.

We expect yarn manufacturers to recover from 3Q23F

As upstream producers, yarn makers will be affected earlier than downstream firms as large customers reduce inventories amid expected weaker end-customer demand. As a result, we believe that yarn companies such as STK, HTG, PPH, and ADS will show signs of recovery from 3Q23, earlier than the garment manufacturers. STK’s management disclosed sale volume in Feb-22 to improve compared to 4Q22. While, HTG expect 1Q23 net profit to reach VND65bn (+20.3% qoq).

Our stock pick is STK while TNG, ADS are on our the watchlist

We like stocks that are upstream in the industry, which have the potential to recover earlier in 2023F.Thus, we prefer STK for our stock pick. We expect STK’s net profit growth will likely to bottom out from 3Q23F thanks to demand recovery and customers refilling inventories to produce for 1Q24F season. We expect FY23-24F sales volume to grow 15%/22% respectively, bringing the FY23-24 earnings growth back to 2-digit positive territory. In addition, investors should keep focus on ADS and TNG thanks to taking advantage from China reopening economy and remaining stable orders from long-time partners.

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