- Despite softer outlook for sportswear, OEM companies should fare better in 2024 and post volume recovery amidst a gradual restocking cycle
- Stay defensive on quality names that offer steady growth and stable yield – Prefer OEMs such as Shenzhou and Stella on their recovery paths
- Be selective on brand apparels – we like Anta Sports that rides on a multi-brand strategy and fast-growing sports categories, and Adidas on its sustained earnings rebound into 2024-25E
A restocking time. 2024 should be a year of recovery for textile OEMs as the restocking cycle for brand apparels & footwear kicks off. We expect volume recovery to range between a mid-single-digit to low-teens’ growth. Global sportswear operators including Nike and Adidas have seen firm reduction in their inventory turnover by 3 days and 22 days, respectively, indicating a normalising level. Industry data such as Vietnam footwear export value (Source: General Statistics Office) have turned positive on a y-o-y basis by Dec-23. Taiwanese OEMs, such as Eclat Textiles, have also reported signs of improvement from Oct-23 onwards. As such, we expect midstream OEMs, Shenzhou and Stella, to post an earnings recovery of 23%/17%, and 13.5%/13% in FY24E/FY25E, respectively.
Latest trends in 2024. Amidst softer outlook for sportswear, we believe the following trends will follow in 2024: (1) rapid orders will increase, which will benefit quality OEMs as they hold the expertise and market share to handle shorter lead time orders that also support higher margins; (2) selective brand apparels & footwears could continue to drive outperformance through adaptive pricing strategies and fast-growing categories such as running, outdoor wear, and winterwears; (3) we also expect margin expansion to materialise across the supply chains via rising utilisation rates amongst the OEMs, and cost-saving initiatives across brand apparel & footwear operators such as Nike and Adidas.
Stable yield, resilient financial positions. We expect stable yield and resilient financial positions of OEMs to be further supported by their volume recovery, becoming safe havens for investors. Stella provides a sound yield of 12%, while Shenzhou has come down to a more attractive valuation of 18x FY24 PE during recent weeks. We prefer Anta Sports on its successive multi-brand strategy that drives global expansion, and Adidas as a sound recovery play with earnings to breakeven in 2024E.