Textile & Garment – Selectively picking up

• 4Q21 aggregated earnings of listed T&G companies soared 53.0% yoy, bringing FY21 earning to grow 57.4% yoy.
• We expect Vietnam yarn producers are the biggest beneficiaries of US-China trade tension.
• Our top picks are STK and MSH.

Earnings growth to recover in 4Q21
Vietnam’s T&G export turnover grew 7.9% yoy and 14.4% qoq in 4Q21 thanks to the resumption of factories in the Southern after 3-month lockdown in 3Q21. Based on our estimates, 4Q21 aggregated revenue of listed T&G companies increased 24.1% yoy, while sector net profit soared 57.4% yoy in 4Q21, higher than that of 82.0% vs. 3Q21. Top companies to record strongest FY21 earnings growth include: ADS (+303.2% yoy), VGT (+161.4% yoy), and STK (+92.9% yoy).

Yarn producers are the biggest beneficiaries of US-China trade tension
According to Reuters, on 23-Dec-2021, US President Joe Biden signed a new law banning the import of cotton material made in Xinjiang (China), which accounts for 11% of US imported textile and garment. We expect Vietnam cotton yarn producers such as VGT, ADS might fill the gap left by Xinjiang producers. We also believe STK is one of biggest beneficiaries amid the growing demand of prefer eco-friendly materials.

We expect earnings growth of garment companies to slow down in 2022F
According to World Bank, cotton prices are expected to rise by 15% in 2022 due to poor harvest in the US and India. The US Department of Agriculture forecast US cotton production to reach 17.6m bales (-3.2% yoy) in 2022F, while the India’s cotton volume in FY21-22F is forecasted to decline 4% yoy as crops in the producing states are damaged by rain during the harvest season. We think that high cotton price will hurt gross margin of garment companies which use cotton yarns for production process such as MSH, TNG, TCM. As a result, we forecast garment companies’ earnings growth to decelerate to 20-25% in FY22F from 40% in FY21.

Selectively picking up
Most of T&G’s stocks had an impressive performance with about 48% – 291% rally in market prices. Despite the solid outlook of textile sector in 2022, we believe investors should pick up selectively as most of T&G stocks are close to fair value. We prefer T&G companies that have ability to expand capacity in order to capture longer-term growth of the sector. Our stock picks are STK (ADD, TP VND72,600) and MSH (ADD, TP VND100,100). We believe STK will become Vietnam’s second-largest yarn production while SH10 factory is the key revenue driver of MSH in FY22-23F.

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