[ad_1]
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. — Ed.
Dollar-based new order growth in the domestic OEM industry should come in above 30% y-y for 2Q22, exceeding market forecasts. However, the recent share performances of domestic OEM plays suggest that the market is paying more attention to a likely slowing in new orders in 2023. That said, with Youngone trading at a 2023F P/E of 6x (based on worst-case scenario earnings), we recommend a trading buy approach to the stock.
US inventory buildup cycle close to an end
Following large-scale order issuing over end-2021~early-2022, US apparel/ accessory inventory levels have recovered to the levels observed in 2019. That said, with robust order momentum likely to sustain for the 2022 fall/winter season, short-term earnings at domestic fashion OEM plays should remain solid. Youngone and Hansae are forecast to book dollar-based new order growth of 32% y-y and 27% y-y, respectively, for 2Q22. In addition, the depreciation of local currencies in major producing countries (vs the dollar) and forex rate spreads should contribute to their margin improvement.
At end-April, the US wholesale inventory/retail sales ratio rose to 2.5x. Given that apparel wholesale inventories tend to precede retail inventories by 1~2 months, it is possible that new order momentum will slow in 2023, assuming a drop in consumption from 2H22. Accordingly, investors should pay keen attention to new order trends over September~October, when negotiations for spring/summer 2023 orders should start in earnest.
Youngone trading at 2023F P/E of 6x even based on worst-case scenario earnings
[Base] Based on the assumption that order growth will remain flat y-y next year, considering average real inventory growth of -6% y-y and inflation of 6% during previous downcycles in 2008 and 2020, we see ample upside for Youngone and Hansae’s shares, which are trading at 2023F P/Es of 6x.
[Worst] Assuming order growth of -9% y-y for next year and real inventory growth of -15% y-y, Youngone still boasts valuation merit. In line, we maintain Youngone as our sector top pick. We advise investors to look for low-buying opportunities.
Domestic OEMs suffer excessive share price decline despite solid fundamentals
Domestic OEMs suffer from valuation discounts compared to their Taiwanese counterparts due largely to a gap in margins. In response, they have vertically integrated their value chains, expanding the sales portion of their fabric/dyeing businesses from less than 5% in the 2010s to over 10% in 2021. If margin gap reduction trends sustain, valuation discounts seem likely to fade.
With the Uyghur Forced Labor Prevention Act (UFLPA) becoming effective on Jun 21, global brands are expected to make more efforts to comply with rules on raw materials tracking and production processes. Also, as the majority of Youngone and Hansae’s manufacturing facilities are in Southeast Asia and Latin America, they stand to benefit from global brands’ moves to diversify production bases following the US-China trade conflicts.
[ad_2]
Source link