TEXTILE & GARMENT: PASSING THROUGH HEADWINDS

Analyst(s):

Hao Nguyen Duc

Hao.nguyenduc@vndirect.com.vn

TEXTILE & GARMENT: PASSING THROUGH HEADWINDS

Vietnam texttile & garment snapshot in 2021

Vietnam’s textiles and garments export value

In 3Q21, the garment and textile export turnover hit hard by Covid-19. As a result, fabrics and garments export value in 3Q21 decreased by 4.6% yoy to US$8.3bn. In which fabric exports reached US$618m, accounting for 7.4% of the total T&G export turnover (+30.3% yoy). Overall, the total export T&G value in 10M21 increased by 10.8% yoy to US$32.0bn, fulfilling 84.2% of the Vietnam government's guidance for 2021F (US$39bn).

Vietnam’s fiber and yarn export value

Yarn export value was not affected by Covid-19 as that does not require much labour. Furthermore, yarn prices in 3Q21 soared by 20.8% yoy thanks to the depletion of yarn inventories in China by the electric shortage in Aug-21 and Sep-21, causing increased demand for yarn outside China. As a result, yarn and fibres export turnover soared by 56.3% yoy to US$1,46bn. Notably, Vietnam's polyester yarn export value in 9M21 recorded at US$300m (+30.0% yoy).

T&G export destination in 9M21

According to (GDVC), regarding the export mix by geographic regions in 9M21, the US remained the largest importer of Vietnam T&G products with an import value of US$12.0bn (+13.2% yoy, accounting for 41.3% of Vietnam's textile and garment exporting value). 9M21 exporting to E.U. and China markets reached at US$2.9bn (+3.5% yoy) and US$3.4bn (+30.7% yoy), respectively. Whereas, exporting to Japan markets declined by 9.9% yoy to US$2.5bn in 9M21.

Vietnam’s yarn, textile and garment import value

According to MOIT, the total import value of T&G in 3Q21 recorded at US$3.8bn (+8.1% yoy) thanks to the low base in 3Q20 (most T&G companies affected by Coivd-19 in 2020). China is still the main import market of Vietnam, accounting for 52.0% of T&G import value. We expect Vietnam's T&G import turnover to maintain the growth momentum in 4Q21-22F as traditional orders will rebound in 2022F thanks to the rapid vaccination rollout in Vietnam's main export markets.

Sources: MOIT, VNDIRECT RESEARCH

Sources: MOIT, VNDIRECT RESEARCH

Sources: GDVC, VNDIRECT RESEARCH

Sources: MOIT, VNDIRECT RESEARCH Based on our estimate, 3Q21 aggregated revenue of listed T&G companies decreased by 4.8% yoy under the impact of Covid-19 stricter lockdown during

July-Sep. Due to the implementation of directive 16 of the government, most of Southern garment companies ran at 50%-60% capacity in 3Q21. Thus, sector net profit grew 1.8% yoy in 3Q21, lower than that of 141.1% yoy in 2Q21. For 9M21, aggregated revenue of listed T&G companies increased slightly 1.4% yoy. Yarn manufacturers such as STK, ADS posted strong revenue growth in 9M21 with 29.2% yoy and 17.4% yoy, respectively, thanks to the low base in 3Q20 and taking advantage of soaring in yarn price in 3Q21 (+20.8% yoy) by the depletion of yarn inventories in China. 9M21 net profit accelerated 63.2% yoy and even 12.1% higher than that of 9M19.

Figure 271: 9M21 earnings recap of T&G companies (VNDbn)

3Q20 revenue

3Q21 revenue Change (% yoy)

9M20 revenue

9M21 revenue Change (% yoy) NP in 3Q20 NP in 3Q21 Chg GPM (% pts) NP in 9M20

NP in 9M21 Chg GPM (% pts)

VGT 3,307 4,076 23.3% 10,335 11,112 7.5% 68 187 4.3% 202 569 4.5% TNG 1,690 1,710 1.2% 3,529 4,080 15.6% 65 85 1.0% 129 169 -1.3% MSH 1,068 1,296 21.4% 2,970 3,448 16.1% 43 119 -3.9% 164 334 1.4% VGG 1,934 834 -56.9% 5,170 4,390 -15.1% 40 -30 -1.8% 68 38 -0.2% TCM 980 783 -20.1% 2,717 2,707 -0.4% 85 -3 -8.2% 200 118 -3.0% MNB 1,363 766 -43.8% 3,126 2,109 -32.5% 39 3 -5.6% 28 -19 -3.0% GIL 907 629 -30.7% 2,546 2,752 8.1% 87 18 -3.4% 189 204 1.8% STK 328 469 43.0% 1,197 1,546 29.2% 20 62 6.6% 75 203 6.4% PPH 490 350 -28.6% 1,570 1,172 -25.4% 79 15 3.5% 249 298 5.2% ADS 192 333 73.4% 878 1,031 17.4% 15 21 -2.4% 2 64 6.7% Source: Fiinpro, VNDIRECT RESEARCH We see gross margin improvement across sector in 9M21. To be specified, STK's gross margin inched up 6.4% pts yoy to 19.4% in 9M21 thanks to 1) larger contribution with higher-margin recycled yarn (56% in 9M21 revenue vs 38% in 9M20). VGT's GPM in 9M21 widened by 4.5% pts yoy on the back of the larger contribution from yarn which delivered a higher margin. Whereas MSH's GPM in 9M21 increased by 1.4% pts yoy as FOB orders to be shifted from Myanmar and Southern companies. On the other hand, the GPM of TCM and MNB softened 3.0% pts yoy in 9M21 due to 1) increasing "3-on-site" and Covid-19 test cost for labour and 2) lack of gauze mask and anti-virus fabric order.

We expect a full recovery since 2Q22F 4Q21-1Q22F earnings growth might be weakened due to labour shortage

Vitas forecasts that the T&G industry will face a serious shortage of labour as workers tend to return to their hometowns to avoid the pandemic and have not returned to work immediately. Furthermore, according to the survey results in Sep-21 of Vitas and the Vietnam Leather, Footwear and Handbag Association, 70% of textile and footwear enterprises participating in the survey have been fined by their brands for late delivery in 2021. We think that labor shortage may affect to revenue growth in 4Q21-1Q22F of Southern companies such as TCM, GMC, and VGG.

Riding on the demand surge in U.S and E.U. market

The U.S. and E.U. consumers have shown a strong pent-up demand after lockdown. According to the Bureau of Labor Statistics (BLS), CPI for apparel advanced by 3.4% yoy and 4.3% yoy in Sep-21 and Oct-21, respectively. Nearly half of the U.S. population has been vaccinated against COVID-19, allowing Americans to buy personal goods directly in the shop, travel and attend sporting events. As a result, the U.S.'s T&G import turnover in 9M21 increased by 26.9% yoy to US$82.2bn, in which import turnover for apparel reached at US$58.5bn (+24.5% yoy). Whereas, E.U.'s CPI for clothing and accessories also rose 3.6% and 1.7% yoy in Aug-21 and Sep-21. We expect that the outlook of the Vietnam T&G industry

in 2022, followed by the recovery of the U.S. and. E.U. T&G industry. The International Monetary Fund (IMF) and the World Bank (W.B.) forecast global GDP growth to achieve 4.9% in 2022F, and world textile demand in 2022F will return to 2019 levels, reaching about US$740bn. Moreover, VITAS forecast Vietnam T&G export turnover to achieve US$38bn (+8.5% yoy) and US$43bn (+13.1% yoy).

Figure 272: The U.S.’s CPI for apparel posted 120.7 pts in Oct-21 (+4.3% yoy) Figure 273: The E.U.’s CPI for clothing and clothing accessories increased by 1.7% yoy to 105.2 pts in Sep-21

Sources: BLS, VNDIRECT RESEARCH Sources: BLS, VNDIRECT RESEARCH

Local yarn manufacturers will benefit from the anti-dumpling tax

In 3Q21, local yarn manufacturers cooperated with a consulting company and worked with the Vietnam Trade Remedies Administration about the antidumping case for polyester filament yarn products made from Vietnam, China, India, Indonesia and Malaysia. Initially, the Ministry of Industry and Trade of Vietnam (MOIT) has applied the preliminary anti-dumping tax that has been applied since Sep-21, then official tax rate was announced on 13 Oct 21. According to the decision of the MOIT, most Chinese manufacturers will face an anti-dumping duty of 17.45%. While India, Indonesia and Malaysia yarn manufacturers will be subjected to 54.9%, 21.9% and 21.3%, respectively. We think that main target of the anti-dumping tax was China, Vietnam’s main recycled yarn import country. In 1H21, the amount of polyester yarn imported from China reached at 156,500 tons, accounting for 60% of the total imported polyester yarn, of which 20,000 tons are recycled yarn.

Figure 274: China will be subjected to 17.4% anti-dumping duty on polyester yarn (Unit: tons)

China India Indonesia Malaysia

Total Anti-dumping tax 2020 sales volume 1H21 sales volume

3.36%-17.45% 237,939 156,600

54.90% 14,664 4,100

21.94% 21.23% 10,649 9,321 9,300 5,700

272,573

175,700

Source: MOIT, VNDIRECT RESEARCH

Investors should keep eyes on yarn polyester manufacturers such as STK. According to STK’s management, imported yarns ASP from China in 1H21 was 10-12% lower than ASP of STK, respectively. We expect anti-dumping tax support STK to increase market share in the domestic market and improve the GPM in FY22-23F.

Investment risks

Variant Covid-19 (Omicron) has spread to 19 countries and territories around the world. According to World Health Organization (WHO), people who have been infected with COVID-19 are likely to be re-infected with the Omicron variant. The worsening of the new variant outbreak in Vietnam’s main export markets may hit T&G companies’ performance directly. We expect that countries need to accelerate vaccination programs for people to limit the spread of disease. Furthermore, the increase of yarn price in 4Q21-22F could affect to GPM of garment companies.

Figure 275: Peer comparisons Our top pick is STK while MSH is on the watchlist We like Century Synthetic Fiber Corp (STK VN, ADD, TP: VND72,500) for:

• We expect that the recycle yarns segment in 4Q21-22F will particularly benefit from demand recovery of the domestic market and electric shortage situations in China. • We expect Unitex factory phase 1 to operate commercially in 1Q23F. The total sale volume in FY23F is expected to reach 76,800 tons/year to capture the growing demand for recycled and virgin yarn. • We expect STK to expand its market share in the domestic market thanks to the preliminary anti-dumping tax on imported yarns from China, India, Malaysia and Indonesia. • STK’s earnings are expected to grow robustly by 90.3% yoy in FY21F and 37.0% CAGR over FY21-23F. Song Hong Garment JSC (MSH VN, ADD, TP: VND100,100). We expect MSH to remain the positive outlook in FY22-23F. MSH has sold receivables from New York & Company with the recovered value of VND80bn. Currently, MSH has full orders until Jun-22 due to the rebound of orders from U.S. customers. Moreover, we expect the SH10 factory to help FOB revenue grow 15%/20% yoy in FY22/23F.

Market Cap P/E 3 year CAGR growth

P/BV (x) EV/EBITDA ROE (%) ROA (%) Company Ticker US$m TTM 2021 CAGR TTM 2021 TTM 2021 TTM 2021 TTM 2021

Vietnam National Textile & Garment Group VGT VN 827.1 44.9 na -4.3 na na 19.3 na 3.9 na 1.5 na Thanh Cong Textile Garment Investment Trading JSC TCM VN 250 34.9 26.3 13.8 2.8 2.6 17.4 13.9 10.2 14.225 6.2 8.0 TNG Investment & Trading JSC TNG VN 219.9 14.3 14.6 17.6 2.0 na na na 15.6 14.0 4.8 4.4 Song Hong Garment JSC MSH VN 195.7 11.8 11.9 -13.8 3.0 2.5 9.4 6.3 24.4 32.4 11.5 15.8 Century Synthetic Fiber Corp STK VN 182.1 15.9 18.6 21.1 3.6 2.8 10.0 8.8 24.8 21.9 14.9 14.3 NHA BE Garment Corp-JSC MNB VN 72.3 12.3 na 5.1 na na 8.2 na 11.5 na 1.5 na Viet Tien Garment Corp VGG VN 47.8 20.6 10.9 -18.7 1.1 na 5.2 na 5.4 9.8 2.9 3.8 Mirae JSC KMR VN 30.4 55.9 na -39.9 na na 9.2 na 1.6 na 0.8 na

Avergae 26.3 16.5 -2.4 2.5 2.6 11.2 9.7 12.2 18.5 5.5 9.3 Median 18.3 14.6 0.4 2.8 2.6 9.4 8.8 10.8 14.2 3.9 8.0

Source: VNDIRECT RESEARCH, BLOOMBERG (Data as in 26 November 2021)