(Report Producer/Author: Changjiang Securities, Yu Xuhui, Ma Rong)
1 Short-term – Conversion: from supply substitution to demand dominance
Review 2021Q1-Q3, under the repair of the dislocation of the global textile and apparel industry chain, "this trade-off" has become the main line of export growth performance between major export countries of textile and apparel. Looking forward to 2022, with the slowdown of the epidemic in 2021Q4, the loosening of control and control, the factors that suppress the operating rate of the global industrial chain are gradually fading, and the orderly recovery of overseas supply, the main line of domestic exports will be transformed from "supply substitution" to "demand-led".
2 Supply - Recovery: How much does order reflow affect?
Review 2021Q1-Q3, under the repair of the dislocation of the global textile and apparel industry chain, "this and the other" has become the main line of export performance between major textile and apparel export countries, and the specific impact path is "a country's prevention and control strict index rises→ the country's export growth rate falls→ the growth rate of alternative countries picks up (lagging behind)". If the daily new cases are used as a measure of the severity of the epidemic, for the major exporters of clothing and footwear, the correlation between the growth rate of exports of each category and the severity of the epidemic in the country is weak, and the correlation with the country's strict epidemic prevention index1 is stronger. That is, compared with the severity of the epidemic, the government's restrictions on travel restrictions, personnel gathering, and the opening of enterprises have a greater impact on exports.
Specific to the representative categories of clothing, footwear, and home textiles in the finished product, the growth rate of exports from various regions to the US & Japan market has changed since 2021:
Clothing: Under the strict prevention and control of Bangladesh in January-May, China and Vietnam formed a weak substitution. Under the Q3 epidemic in Vietnam, the substitution effect between China and Mengara is obvious, and the outflow of Vietnamese orders is inertia for 1 month. Since December, global supply has recovered, and demand has gradually become dominant.
January-May 2021: The government of Bangladesh, the third largest garment exporter, has stricter epidemic prevention controls and pressure on its garment exports; during this period, Vietnam and China formed export substitution, but not significantly.
June-October 2021: Under the aggravation of the epidemic in Vietnam, strict prevention and control was carried out in June and August, the growth rate of clothing fell, and there was an inertia of 1 month of outflow, and the outflow of orders from Vietnam lasted 4 months (7-10 months), exceeding the strict epidemic prevention for more than 3 months (6-8 months); during the period, with the weakening of prevention and control in Bangladesh, the substitution effect between China and Bangladesh was obvious.
November 2021: As orders return to Vietnam, supply is gradually balanced across countries.
Footwear: Vietnam's exports slowed significantly from July to November, during which China's substitution effect was obvious, and vietnam's order outflow was about 2 months of inertia. Vietnam's growth turned positive in December, and China's substitution weakened.
May-July 2021: Vietnam's strict composite index of epidemic prevention policies tends to rise, and in July the Vietnamese government required southern enterprises to "three localities" and closed the 19 southern provinces in the same month. In July, the growth rate of its footwear exports fell, but China's substitution effect is not obvious, which is expected to be related to a certain period of brand transfer orders and the offsetting of Vietnamese manufacturers' inventories;
August-October 2021: Although the strict composite index of Vietnam's epidemic prevention policy has declined, it is expected that Vietnam's exports will continue to decline sharply for 4 months due to the completion of the transfer of orders by some brands, the consideration of supply chain security, and the need to re-recruit workers and climb production capacity after the relaxation of control. Since August, the substitution effect of China's footwear industry chain has been obvious, and the growth rate has rebounded from negative growth to double-digit growth. Overall, the outflow of orders from Vietnam lasted for 5 months (7-11 months), exceeding the 3 months (6-8 months) of strict epidemic prevention and control, that is, the outflow inertia of order deposits for 2 months;
November-December 2021: Vietnam's export decline gradually narrowed, and China's substitution effect is expected to weaken.
Home Textiles: Under India's strict prevention and control, the export growth rate fell slightly in May and June, during which China's substitution effect was basically synchronized. With the decline of India's strict epidemic prevention index, the growth rate of India's exports has rebounded rapidly.
April-June 2021: Since April, india's strict comprehensive index of epidemic prevention policy has risen, and its home textile exports have declined slightly in May and June, and China's substitution effect has basically appeared simultaneously.
July-November 2021: India's strict composite index of epidemic prevention policy declined month by month, its home textile exports rebounded rapidly, and the outflow of orders did not have inertia. With the supply side returning to balance and demand-led, the export growth rate of China and India has increased month by month.
It can be seen that under the main line of "this and the other", due to differences in manufacturing difficulty, transfer cycle, recruitment difficulty, customer sentiment, etc., the inertia of order outflow is different; combined with the above, the outflow inertia: footwear (about 2 months) > clothing (about 1 month) > home textiles (about 0 months).
Looking forward to 2022, at the aggregate level, with the slowdown of the epidemic in 2021Q4, the loosening of control, and the gradual fading of the factors that suppress the operating rate of the global industrial chain, the orderly recovery of overseas supply, the main line of domestic exports will be transformed from "supply substitution" to "demand-led". At the epidemic level, as of December 26, the average daily new cases in major textile and apparel exporting countries in Q4 were the same as the Q3 growth rate of China 54 (+14.5%), Vietnam 9630 (+16.1%), India 12214 (-66.7%), Mengara 315 (-95.5%), Indonesia 549 (-97.5%), Cambodia 104 (-84.6%). In addition to China and Vietnam, the remaining major textile and apparel exporters have seen a significant slowdown since Q4. At the control level, except for China, the value of the Q4 epidemic prevention strict index in the remaining major export areas is mainly distributed in the range of [40,69], which is significantly lower than the [50,100] of Q1-Q3. Therefore, in the context of weakening the suppression factors, the resumption of work and production of overseas relevant export countries is expected to become the main factor affecting the short-term supply of the industry. For the domestic manufacturing industry, the substitution dividend of orders has decreased, and demand dominance will still become the main line of exports.
At the structural level, although the global supply is gradually restored and the repatriation dividend is decreasing, it is expected that some categories/enterprises with high complexity or added value, perfect supporting industrial chains, and verified competitive advantages will still have high order retention2. Due to the difference in competition pattern, product complexity and added value in different categories, brand owners have different degrees of consideration for production cost sensitivity, customer sentiment, product quality, stability, etc. Due to the comprehensive consideration of the above factors, the kinetic energy of brand owners to frequently transfer orders or change manufacturers for products with high complexity or added value is weak, and the stability of the Chinese supply chain with stable, safe and supporting service capabilities is stronger after substitution. Therefore, it is expected that the order retention: sports shoes > accessories> sportswear> textiles> other shoes and clothing, home textile categories, of which high-end products > low-end products. The specific analysis is as follows:
Fast fashion clothing: the profit margin of the industrial chain is relatively thin, and the proportion of labor costs is high, so the brand is more sensitive to costs; the overseas industrial chain is more complete and the customer stickiness is weak, and the order retention is expected to be the lowest.
Home textiles: similar to fast fashion, among which the retention of low-end orders is not high, and the retention of high-end orders is high.
Accessories: Labor costs account for a relatively high proportion, but benefiting from the perfection of supporting facilities and the optimization of the competition pattern in the high-end market, it is expected that the order retention is still high.
Sports shoes and clothing: although the proportion of labor costs is high, but the industrial chain profit margin is thick→ low cost sensitivity, competitive pattern, better → customer feelings, high manufacturing difficulties→ quality stability and research and development is more important, it is expected that the order retention is the highest; and because the sports shoe pattern is better, the profit margin is thicker, its order retention is higher than that of sportswear (simply refers to the manufacturing link). (Source: Future Think Tank)
3 Demand - replenishment: can the export boom continue?
Since 2021Q4, the strict index of government prevention and control in many countries has declined, and the willingness of overseas consumers to travel has increased. Since Q3, the government's epidemic prevention and control efforts in overseas clothing consumer countries have generally weakened, the Q4 government strict index of epidemic prevention policies in the United States, Japan and the United Kingdom has been at a low level since 2021, and France and Germany are expected to be affected by the mutant strains in December. According to the Google Mobile Index, as of 2021/12/23, the number of people in retail and entertainment venues in the United States, Japan, France, the United Kingdom, and Germany was +3%, +0.4%, +7%, -1.4%, -3% year-on-year, and the flow of people in retail and entertainment venues in major clothing importing countries has recovered or is close to the pre-epidemic level; although the number of people in the workplace has declined significantly compared with before the epidemic, the decline has gradually narrowed.
With the stabilization of overseas economies and the weakening of travel restrictions, the growth rate of clothing retail sales in major clothing importing countries has picked up. At the macro level, the OECD expects major apparel consumers such as the United States and the euro area to have stable short-term economic growth in the future. At the meso level, the lack of consumption scenarios and travel restrictions have reduced the marginal suppression of clothing consumption, and the consumption of clothing has gradually transitioned from home clothing (home textiles, home clothes, etc.) to external clothing (leisure, sports, professional shoes and clothing, etc.) under the increase of travel. Judging from the changes in the retail sales of clothing in the United States, Japan and the United Kingdom in Q1, Q2, Q3, october and November compared with the same period in 2019, the sales of clothing and clothing accessories stores in the United States were +0.5%, +14.7%, +15.0%, +15.4%, respectively, and the growth rate increased; the retail sales of Japanese fabrics and accessories were -19.4%, -27.2%, -29.2%, -16.1%, respectively; the decline in British textiles was significantly narrowed since October. Sales of clothing and footwear stores were -47.3%, -6.4%, -7.8% and +3.8% respectively, and the growth rate has turned positive since October.
In terms of inventory, overseas brand customers are currently at a low level of inventory, and the demand for replenishment will support the resilience of the export side. Judging from the inventory data disclosed in the latest financial reports of overseas major brand companies, as of 2021Q3 (3 BURBERRY is FY22H1 data), 75% of the company's 2021Q3 library-to-sales ratio is below 40% of the single Q3 since 2015, 70% of the company's "revenue YOY-inventory YOY" is positive, and only Fast Retailing, H&M, SKX, adidas inventory levels are higher. Cautious business expectations, overseas supply chain crisis and clothing consumption pick-up, overseas clothing companies have relatively completely experienced the cycle of "passive replenishment→ active destocking→ passive destocking", and it is expected that with the recovery of clothing consumption under the liberalization of travel, the demand for replenishment of overseas brands will support the short-term and medium-term export boom.
Combined with the above-mentioned analysis of the structural level in the supply chapter, we will further analyze whether the mainland export boom can be continued under the background of the diversion of other supply countries but the upward trend of overseas garment demand.
Reviewing the fitting of the growth rate of garment consumption in garment importing countries represented by the United Kingdom, the United States and Japan in 2017-2020 with the export order index of China's textile and apparel industry, it can be seen that the correlation between the two is high, but the domestic export order index lags behind the growth rate of overseas garment consumption by 0 to 2 months (we believe that the lag is mainly due to trade risks and prudent business expectations). Therefore, in the context of the absence of a repair of the misalignment of supply countries in the past, the mainland's export prosperity index mainly depends on the clothing consumption of major overseas consumer countries. With the gradual balance of the supply side from 2021Q4 onwards, it is expected that the upward trend of overseas apparel demand will continue to support the continuation of China's export boom. Since Q4, the supply side of major exporting countries has basically been repaired to normal (Vietnamese footwear is expected to still be affected by order outflows in November), the growth rate of China's textile, clothing and home textile exports is still rising month by month, and the growth level in November is basically the best since 2021H2, which can be verified; among them, it is expected that price increases since Q3 will also have some support for growth. At the structural level, the category or enterprise with the verified competitive advantage has a high degree of order retention, and it is expected that its export boom is better than that of the industry.
4 Enterprises - Repair: Profit elastic differentiation
At the level of listed companies, under the judgment of stable domestic demand for clothing and rising external demand, the export chain target is preferred. Follow two main lines: 1) select strong fundamental support targets (enterprises with high order retention and fully verified competitiveness under the epidemic): stable volume price increase and stable profitability; 2) focus on the repair opportunities of damaged targets (the lack of downstream consumption scenarios causes the industry prosperity to be weaker than before the epidemic): volume increase and elastic release.
Below we will start from different main lines to discuss the performance at the enterprise level:
Long-term optimism about strong fundamental support targets: in 2021, the downstream consumer demand will be repaired better and benefit from the supply-side substitution effect, and the order saturation is high. In the context of the upward movement of raw materials and shipping, the price increase is relatively smooth, and it benefits from the transfer of high-quality orders and low-priced inventory cotton4, and the gross profit margin has reached the best level in recent years. Looking forward to the future market, some enterprises take this opportunity to fully verify their competitiveness with efficient and safe & cost-effective production capacity, good R & D and service advantages, etc., it is expected that the order retention degree in the future market is high, and its long-term growth is worth looking forward to driven by the increase in new customers & the penetration rate of old customers. At the price level, considering the easing of scarcity on the supply side, the pressure on the cost side is decreasing, and the price is expected to be more stable.
In 2022, focus on the repair flexibility of damaged targets: In 2021, the downstream consumption scene is missing and the prosperity of some industries (such as bags, business clothes, etc.) that are significantly affected by the epidemic is still significantly weaker than in normal years, and the order saturation is low. In this context, the operating rate is insufficient, the raw material rise and the FOB settlement model, the price increase has not been smoothly transmitted to the brand merchants, and the profitability of the enterprise is weak. With the normalization of the epidemic since Q4, the demand repair has been superimposed, the capacity utilization rate has rebounded, the price increase is expected, and the performance repair elasticity is greater. (Source: Future Think Tank)
5 Long-term – Restructuring: Supply Chain Resilience and Globalization
Textiles and garments are an important export and trade surplus industry in China. In 2020, China's textile and garment exports were US$280.7 billion, accounting for 10.84% of China's total exports, and the trade surplus was US$251.5 billion, accounting for 47% of China's total trade surplus. Reviewing the changes in China's textile industry chain in recent years, it can be roughly divided into three stages:
Before 2015: the proportion of textile trade continued to increase, and the comprehensive competitive strength was in an absolutely dominant position. In 2006, it surpassed India to become the world's largest textile and apparel exporter, and in 2015, China's exports of textiles/clothing/home textiles accounted for 31.7%/37.2%/38.7% of the world's total.
2015-2019: With the weakening of the cost advantage of China's production factors, the relocation of China's textile and clothing industry chain showed structural differentiation. That is, the proportion of downstream (finished products) moving out is high, and the midstream (intermediate products) are differentiated by the upstream (equipment/raw materials). Specifically, upstream: chemical fiber and textile are capital-intensive industries, with strong equipment advantages, low migration ratio, high proportion of exports of more than 60% of categories and high ranking in the integrity of the industrial chain. The competitive advantage of natural fibers is not obvious, and continues to move out; midstream: differentiated by the influence of upstream materials, chemical fiber intermediates have greater competitive advantages than natural fiber intermediates, and the proportion of migration is relatively low; downstream: labor-intensive garment manufacturing has a high proportion of migration. According to the HS classification, the proportion of textile/clothing/home textile export trade in 2015-2019 changed by +2.3/- 7.9/-0.6pct respectively, and the textile and garment trade path gradually changed from "textile (China)-apparel (China)--brand merchants (THE United States, Japan, Europe, etc.)" to "textiles (China)-apparel (China/Southeast Asia, etc.) - brand owners (the United States, Japan, Europe, etc.)", and Southeast Asian countries represented by Vietnam attracted garment production capacity transfer based on labor cost advantages and policy dividends.
Since 2020: Short-term orders are returning, and long-term supply chains are accelerating restructuring.
Short-term: Order reflow. The global supply chain crisis under the epidemic has catalyzed the return of textile orders to China, and the proportion of textile/clothing/home textile export trade increased by 0.02/0.44/18.05pct in 2020. Among them, the decline in clothing exports has been significantly reversed, and the small increase in textile exports is mainly due to the return of clothing orders to the country after the supporting of the middle and upper reaches of the industrial chain also occurs in China, and the significant increase in the proportion of home textile trade is mainly due to the exemption of the United States from the tariff list of medical protective products including masks and other medical protection products (from March 6, 2020, 1 year is exempt from the tariff of 7.5%, including home textile products 6307 textile materials manufactured products).
Long-term: Rebalancing costs and risks to accelerate the restructuring of a more resilient global supply chain. Under the supply chain crisis caused by the epidemic, brand owners are expected to reconstruct a decentralized & nearby supply chain system out of consideration for relatively controllable freight rates, instant supply capacity, and stable supply chain. However, different categories are expected to be affected differently due to differences in production barriers, brand stickiness, factory construction & recruitment difficulties, delivery times, etc.
Specifically:
Fast fashion shoes and clothing: Fast fashion brands pursue the richness, fashion, new speed, cost control and high turnover rate of SKUs, but pay less attention to product quality and production scale. Therefore, the manufacturer's production, factory construction and recruitment barriers are low, and under the supply chain crisis, the brand owners' preference for localized/nearby supply chains is expected to form a substitution effect on some footwear and apparel supply chains in China and even Southeast Asia. Considering the high cost sensitivity of fast fashion brands, it is expected that their order transfer to low-cost countries has been relatively sufficient, so the impact of the epidemic on their supply chains is mainly reflected in the proximity of production.
Home textiles: Compared with apparel, the fashion attributes of home textile products and the requirements for fast reaction are weaker, and the proportion of home textile labor costs is significantly lower than that of garments (such as Vosges shares - bedding business labor accounted for 14.1%, slightly higher than Blum Oriental - yarn business 11.4%, but far lower than Lutai A- garment business 36.3%), so it is expected that in the post-epidemic era, brands will have a weak trend of proximity and decentralization of suppliers.
Sports shoes and clothing: with a long life cycle, weak fashion, relative to the characteristics of the standard, brand owners pay more attention to the quality and functionality of products. Manufacturers have higher production barriers and deeper participation in research and development, so the up and down tourists are better. From the perspective of the supplier development of head sports brands, in history, its capacity transfer was mostly landed after consultation between brand owners and manufacturers, so the changes in the sports supply chain are mainly reflected in the capacity transfer and decentralization of the original suppliers, rather than the order transfer brought by ordinary shoe and apparel brand owners to choose new off-site suppliers. The 2021Q3 vietnam epidemic caused by the shortage of sneakers is expected to significantly increase the brand's emphasis on the decentralization of manufacturers. At present, the production distribution of head sports shoes and apparel manufacturing enterprises has been relatively dispersed, in addition, in the context of the high certainty of the growth of the core supplier strategy and the industry, the head supplier is also willing to adopt the strategy of continuing to decentralize the layout, and the deep binding can still be achieved in the future.
In summary, in the long run, the supply chain crisis caused by the epidemic since 2020 has accelerated the globalization of the textile and clothing supply chain. By category, fast fashion footwear brands will pay more attention to the localization / proximity of the industrial chain, sports footwear brands will be the supply chain of the nearby kinetic energy is weaker, is expected to emphasize the original supplier distribution of globalization to avoid potential risks, home textile suppliers are relatively less affected. In this context, on the one hand, overseas production capacity layout is earlier and more dispersed production capacity enterprises are becoming more scarce; on the other hand, from the perspective of industry growth, industrial value chain distribution, supply-side concentration & capacity distribution, sports foundry leader is still the best subdivision track in textile manufacturing.
(This article is for informational purposes only and does not represent any of our investment advice.) For usage information, see the original report. ）
Featured report source: [Future Think Tank]. Future Think Tank - Official website