Long-term investors will love Nike.
In the past decade, Nike's stock price has risen more than six times. For investors, this is quite a considerable return.
But if they choose a Nike foundry, the result will be more enjoyable. Shenzhou International started as a garment OEM for UNIQLO, and now it is also one of Nike's largest manufacturing companies. In a ten-year period, Shenzhou International shares have risen more than 18 times, and the current market value is about HK$230 billion.
Contrary to traditional perceptions, the net profit margins of foundry companies such as Shenzhou International and Huali Group are much higher than those of globally renowned sportswear brands such as Nike and Adidas. These foundries chase cheap labor between different countries, but that's not the only factor in their success.
Outperformed Nike
Perhaps, it is time to change the stereotype of foundries.
In the sports shoes and apparel foundry industry, it is inseparable from two head companies - Shenzhou International, a vertically integrated knitting manufacturer, and Huali Group, a sports shoe foundry. The respective net profit margins of the two are not only leading in the foundry industry, but even surpass those of common customers Nike and another sportswear giant, Adidas.
Shenzhou International was established in 1988 and has a market value of HK$230 billion. In 2020, Shenzhou International achieved revenue of 23 billion yuan and a net profit of 5.1 billion yuan. In the early years, Shenzhou International cooperated with Japanese casual clothing brands such as Uniqlo, and gradually established its own industry position. To this day, the company remains an important foundry for UNIQLO. However, more than a decade ago, Shenzhou International's business began to shift to sportswear OEM, and became a collaborator of Nike and Adidas, two major international sports equipment brand owners.
Since 2019, the average annual net profit of Shenzhou International has reached 5 billion yuan. Moreover, the company's net profit margin has remained around 20% in recent years. In the first half of 2020, shenzhou international net profit margin reached 24.32%. In the first half of 2021, it fell slightly to 19.58%.
Huali Group currently has a market value of nearly 100 billion yuan, a revenue of 13.9 billion yuan in 2020, and the number of employees in the company is close to 150,000. The main customers of Huali Group are Nike, Puma, VF, Columbia and other world-renowned enterprises. At present, the company's top five customers account for about 93%, and the remaining customers such as ASICS, New Balance and other brands are also cooperating.
Huali Group achieved a net profit of 1.879 billion yuan in 2020 and a net profit of 1.821 billion yuan in 2019. In recent years, the net profit margin on sales has been between 11% and 16%.
In contrast, Nike's net profit margin for the full year of 2021 was 12.86%, 6.79% in 2020 and 10.3% in 2019. Adidas' net interest rate has also remained in the single digits for nearly a decade. For the six months ended June 30, 2021, Adidas had a net profit margin on sales of 9.3%, a net margin on sales as low as 2.23% for the full year 2020, 8.37% for the full year 2019 and 7.78% for the full year of 2018.
This is different from the traditional perception, people usually think that the profit margin of the foundry company is more meager than the brand enterprise.
Wu Daiqi, CEO of Siqisheng, believes that although brands such as Nike occupy the two ends of the industrial value chain with higher profits, as a sports fashion apparel brand, it also needs to invest a lot of marketing expenses to maintain the brand's voice, so marketing expenses account for a large proportion, which affects its net profit level.
From the financial report, Nike's marketing expenses are not a small expense, and "marketing, sales and management expenses" usually account for half of its operating costs. According to the 2022 interim report, Nike's "marketing, sales and management expenses" were 46.7 billion yuan and operating costs were 80.8 billion yuan; the 2021 annual report showed that Nike's "marketing, sales and management expenses" were 82.9 billion yuan and operating costs were 156.4 billion yuan.
At the same time, not all foundry companies can achieve high net profit margins. The Baocheng Group in Taiwan, which also produces sneakers for Nike, Adi and other companies, is also the Yue Yuen Group (00551. HK) net interest rate has only hit a 6% high in recent years and a low of –3%.
For investors in the sportswear industry chain, investing in Nike in the past decade can certainly have a good rate of return, but investing in its foundry companies is a better choice.
Judging from the performance of the capital market, the growth rate of Shenzhou International's stock price in the past decade is much higher than that of Nike and Adidas. From January 31, 2012 to January 21, 2022, Nike's share price increased (after the reversion) by 6.16 times; during the same period, the share price of Shenzhou International increased by 18.22 times (after the restoration). That is to say, in the past decade, the share price of foundry company Shenzhou International has risen three times that of Nike.
Where does competitiveness come from?
Head foundries maintain competitiveness by not just chasing cheap labor.
Zhou Yaling, chairman of Shamena Group, who was interviewed by the first financial reporter, believes that for Shenzhou International and other enterprises, the internationalization of the team, the informatization of the system, the adherence to lean production, and the investment in research and development, hardware and talents are very important.
Samena is a garment foundry company, some of its manufacturing links are also in Vietnam, and the brand customers it serves include Nike and other companies.
According to Zhou Yaling, Shenzhou International's supply chain has achieved a "one-stop" supply chain, from fabrics to ready-to-wear can be completed by themselves. On the one hand, this reduces the transportation cost, on the other hand, the delivery time of the product to the brand side is greatly shortened, and the funds can be quickly recovered. Moreover, automated production has also helped Shenzhou International save a lot of labor costs.
Similarly, Huali Group is also one of the few ODM manufacturers in the industry with a complete footwear manufacturing industry chain (original design manufacturers that complete their own work from design to production), which can independently complete product development and design, mold, upper, sole and finished product manufacturing.
Cheng Weixiong, general manager of Shanghai Liangqi Brand Management Co., Ltd., told reporters: "Shenzhou International has done a very solid job in the vertical integration of knitting, from yarn, weaving, dyeing and finishing, printing, garments and other supply chain integration, not to be disconnected and single-handed, the resulting gross profit is higher than that of a single-generation enterprise, and the competitiveness is stronger." “
He believes that the gross profit of simple OEM enterprises must not exceed the brand premium, but after the vertical integration of the supply chain is opened, it is not a simple OEM, but a supply chain company with a category of monopoly.
In 2012, for example, Nike launched flyknit Racer, the originator of knitted running shoes. This required a foundry to produce high-tech Flyknit uppers for it, and many suppliers chose to abandon it, but Shenzhou International spent a lot of money to buy a number of new special production equipment for Nike. From 2012 to 2016, the share of Flyknit upper orders in Shenzhou International's revenue rose from 2% to 6%.
In 2012, With years of experience in the vulcanization process, Huali Group solved Nike's thorny problems in the manufacture of vulcanized shoes. With Nike's suppliers already plentiful, the company was able to break into Nike's industrial chain.
After years of development, Shenzhou International and other enterprises have accumulated world-renowned sports shoes customer resources, and the binding with the brand side is very close. They even set up dedicated factories for major customers: in September 2006, the company's Nike-specific plant was established; in 2008, Adidas's dedicated plant was established.
Wu Daiqi believes: "Shenzhou International was established earlier, and in the early years, foreign brands such as Nike would first look for such a large-scale company when entering the Chinese market. Due to the advantage of scale, enterprises have a great bargaining advantage in purchasing raw materials, etc., and if the order is sufficient, it can also improve production efficiency. In addition, cooperation with a number of well-known foreign brands needs to adapt to their work requirements and concepts, and the level of enterprise management must be improved. ”
In recent years, some brand owners have begun to implement the core supplier strategy, and the Matthew effect in the sports shoes and apparel OEM industry has become more and more significant, and orders have accelerated to the head suppliers. The long-term competitiveness of foundry enterprises is production efficiency and R&D ability to keep pace with the times.
"Over the years, (I've) seen some very old factories that have worked with Nike and Adi and were later eliminated. If there is no progress, it will not keep up with the needs of the times, and it will also be eliminated. Zhou Yaling told reporters.
Vietnam is not the end
The pursuit of cheap production factors is the survival instinct of these foundry enterprises.
For more than a decade, sportswear foundries have moved between Asian countries, looking for sufficient labor and tax incentives.
China was once the largest producer of brands such as Nike and Adidas, but the manufacturing sector is gradually moving to Places like Vietnam, where labor is cheaper and tax policies are more favorable. Today, Vietnam is already the largest producer of Nike footwear products.
Vietnam's population is close to 100 million, and the cultural background of its northern region is similar to that of China, and after years of training, the gap between the quality of the labor force and China has gradually narrowed. Shenzhou International and Huali Group have a strong relationship with Vietnam, and both companies use Vietnam as their main production base.
In 2013, Shenzhou International Vietnam Fabric Factory started construction; in 2015, Vietnam Garment Factory started construction. In addition, Shenzhou International has a garment factory in Phnom Penh, Cambodia. According to Shenzhou International, the company began construction of a garment production facility in Vietnam at the end of 2019. It is estimated that approximately US$100 million will be invested in the new garment production facility, which will be used to lease land, construct plant and ancillary facilities and purchase machinery and equipment.
Huali Group's finished shoe manufacturing plants are located outside of China and are currently mainly located in the northern and central regions of Vietnam. "Vietnam's local labor resources are abundant, and the port and logistics facilities are also relatively good." Huali Group said in an announcement.
But in recent years, Land and Labor costs in Vietnam have also risen, eroding the competitiveness of its processing industry.
According to Zhou Yaling' observation, as textile manufacturing industries have poured into Vietnam in a honeycomb, the wages of Vietnamese workers have risen, rising at a rate of 8% to 10% per year. Taken together, the total cost of Vietnam's manufacturing industry has increased by about 50% in the past seven years.
In this case, some new manufacturing companies in Southeast Asia are more willing to place factories in Places like Cambodia, where labor costs are cheaper. Those manufacturing companies that already have factories in Vietnam have also set the location of new factories in countries outside Vietnam.
While Warley Continues to Expand and Build New Plants in Vietnam, new plants in Indonesia and Myanmar are under construction. According to the announcement of Huali Group, the Indonesian factory is larger and will be built in phases. The first phase of the plant in Indonesia is expected to start production at the end of 2022 and will have a capacity contribution from 2023. In addition, Huali Group revealed that its Myanmar plant will accelerate construction after the local situation stabilizes.
Among some Southeast Asian countries, some close upstream and downstream cooperation in the industry is forming.
Zhou Yaling said: "The supply chain of Vietnam's textile industry is very perfect, the water quality is good, and the land transportation is also very convenient. Therefore, the best solution is to make fabrics in Vietnam and process them into finished products in Cambodia, because the process of making fabrics requires less manpower. ”