Intelligent Finance and Economics APP learned that Zheshang Securities released a research report stating that the year-on-year data for individual months showed that clothing, hats, needles, and textiles in July/August/September 24 were -5.2%/-1.6%/-0.4% respectively, with a cumulative increase of +0.2% from January to September. In Q3, retail still faces some pressure, partly due to cautious consumers and partly due to the impact of high temperatures and typhoons on offline traffic. In terms of quarterly revenue disclosure, although sportswear saw a slowdown in revenue growth compared to Q2, the majority of brands maintained positive growth, demonstrating resilience.

The bank pointed out that over the past 3 years, textile manufacturing has been facing overseas brand destocking pressure starting in mid-2022, gradually ending destocking by Q4 2023, and returning to a normal procurement structure. Apart from Nike, which has shown slightly weak growth due to internal reasons, other leading European and American sports brands have overall positive growth targets. For example, Adidas aims for a 10% revenue increase by 2024. High-frequency data shows that Yue Yuen, the world's largest sport shoe manufacturer, and leading sports clothing manufacturer Jinhong have seen order recovery since Q4 2023, and the high level of prosperity has continued from July to September 2024.

Zheshang Securities' main points of view are as follows:

1. Clothing Brands: Q3 deleveraging is evident, highlighting the resilience of functional clothing. Continue to monitor the progress of consumption promotion policies.

Retail is under pressure, and the leading functional clothing sector demonstrates growth resilience:

The year-on-year data for individual months shows that clothing, hats, needles, and textiles in July/August/September 24 were -5.2%/-1.6%/-0.4% respectively, with a cumulative increase of +0.2% from January to September. In Q3, retail still faces some pressure, partly due to cautious consumers and partly due to the impact of high temperatures and typhoons on offline traffic.

From the perspective of quarterly revenue disclosure, although there is a slowdown in revenue growth in Q2 for sportswear, the vast majority of brands maintained positive growth, demonstrating resilience.

Looking at the Q3 performance of A-share brand clothing, all sub-sectors experienced a decline in revenue, coupled with rigid expenses, leading to significant profit pressure in the quarter, with sports fashion and home textiles showing smaller profit declines than other sectors.

Examining the financial indicators, the pressure mainly comes from declining revenue and rigid expenses:

In Q3, overall gross margin performance of key individual stocks remains robust, with net margin decline mainly attributed to: 1) a decrease in absolute gross margin due to declining revenue; 2) pressure on the sales expense ratio brought by increased channel investment, as well as narrowing revenue scale and rigid management expenses leading to an increase in cost ratio.

In terms of individual stocks, Zhejiang Semir Garment stands out as one of the very few companies with positive revenue growth in a single quarter due to its high price-performance product positioning and active channel investment. However, profit fluctuated in the quarter due to increased sales and R&D investment; other companies that managed profit decline well are mainly represented by Biem.l.fdlkk garment, Shanghai Shuixing Home Textile, and Luolai Lifestyle as leading companies in the home textile sector.

Advocate for the leading functional clothing companies and keep an eye on the progress of consumption promotion policies:

Although the overall Q3 A-share brand clothing sector is under profit pressure due to declining revenue and rigid expenses, with the need for most companies to revise down annual profit forecasts, resulting in short-term market fluctuations, there are:

Functional clothing leaders such as Bosideng (24-year PE 12.6X), anta sports (24-year PE16.0X), xtep int'l (24-year PE 11.5X), 361 degrees (24-year PE 6.9X), and Li Ning (24-year PE12.3X) are recommended based on their resilient Q3 revenue performance and valuation levels in Hong Kong stocks such as sports and down-filled functional clothing.

If consumer promotion policies continue to be introduced (such as the leading home textile companies being included in the list of subsidies in shanghai), the improvement in subsequent sector turnover is worth looking forward to. It is recommended to closely monitor zhejiang semir garment (24 PE 13.4X), hla group corp., (24 PE 11.6X), shanghai shuixing home textile (24 PE 11X), shenzhen fuanna bedding and furnishing (24 PE 14X), luolai lifestyle technology (24 PE 15X), and in the pro-cyclical sector, pay attention to baoxiniao holding (24 PE 10X), biem.l.fdlkk garment (24 PE 12X), jinhong fashion group (24 PE 9X).

2. Textile manufacturing: Steady growth as expected, focusing on leading companies with clear mid-term growth logic in specific sub-sectors.

Overseas leading brand demand remains generally stable, with Q3 export chain showing good performance.

Looking back over the past three years, textile manufacturing began to face destocking pressure from overseas leading brand retailers in mid-2022, gradually ending destocking by Q4 2023, returning to normal purchasing structure. Apart from Nike, which has shown slightly weak growth due to internal reasons, the overall growth targets of other European and American sportswear leaders are positive. Taking Adidas as an example, the target income for 2024 is +10%.

From high-frequency data, looking at the monthly data of the world's largest sports shoe manufacturer, yue yuen ind, and the leading sportswear manufacturer, ronghong, we see that order recovery started in Q4 2023, and high prosperity is expected to continue from July to September 2024.

Overseas demand has been gradually recovering since Q4 2023, so although the base in Q3 2024 may show a month-on-month increase, the year-on-year comparison is still in a recovery period. Therefore, most leading companies in this sector are still showing a good growth trend, including huali group, yue yuen ind (profit forecast for the first three quarters +140%-145%), zhejiang weixing industrial development, zhejiang jasan holding group, and anhui korrun leading in quarterly growth.

Two types of leading companies saw an increase in gross margin in Q3 due to order growth and capacity utilization recovery, driving profit elasticity and demonstrating continuous growth potential:

1) Leading companies in the sports and outdoor sectors, deepening cooperation with the world's leading brands: including sports shoe manufacturers huali group, yue yuen ind; sports and leisure apparel suppliers shenzhou international group holdings limited unsponsored adr (clothing), anhui korrun (bags, clothing), zhejiang jasan holding group (socks, seamless), zhe jiang taihua new material (outdoor, women's sports, underwear).

By continuously seizing market share through differentiated product development, fast response, and cost control: Zhejiang Weixing Industrial Development (zippers, buttons), Zhejiang Xinao Textiles Inc. (wool, cashmere yarn).

Considering factors such as the high base effect in Q4 and the US presidential election, the short-term sector market may fluctuate. It is recommended to adhere to the mid-term growth logic of clear sub-segment leaders.

Benefiting from the continued deepening of cooperation with major customers, full and continuous expansion of overseas production capacity: Huali Group (300979.SZ) (PE ratio of 20 times in 2024), Yue Yuen Ind. (00551) (PE ratio of 9 times in 2024), Shenzhou International Group Holdings Limited unsponsored ADR (02313) (PE ratio of 14 times in 2024), Anhui Korrun (300577.SZ) (PE ratio of 13 times in 2024), Zhejiang Jasan Holding Group (603558.SH) (PE ratio of 11 times in 2024).

By continuously seizing market share through differentiated product development, fast response, and cost control, demonstrating steady growth: Zhejiang Weixing Industrial Development (002003.SZ) (PE ratio of 22 times in 2024), Zhejiang Xinao Textiles Inc. (603889.SH) (PE ratio of 12 times in 2024).

3. Risk Warning

1) Risk warnings for clothing brand companies: Insufficient consumer recovery, weather impacting consumer motivation;

2) Risk warnings for textile manufacturing companies: Decline in export demand due to trade friction, fluctuations in raw material costs due to fluctuations in commodity prices, unexpected exchange rate fluctuations.