Leading domestic knitted sweater manufacturers. The top five customers are Uniqlo, TommyHilfiger, Lands'End, Ann Taylor, and GAP. The company has become the world's largest supplier of the Uniqlo sweater category (about 40% sales). In December 2017, it acquired Polymax and entered the field of knitted uppers, serving international sports brands such as PUMA, UA, and Skechers using the ODM model, and developing local sports brands such as Anton and Li Ning.
Production capacity transfer+smart devices+R&D investment have led to an increase in the concentration of segment leaders. The CAGR of China's knitting industry in 2011-2016 was 5.5%. Currently, the knitting market is highly fragmented, with CR5 only about 2%. Leaders relied on financial strength to reduce cost pressure by increasing the level of equipment automation and enhancing overseas production capacity transfer. At the same time, they strengthened the vertical integration layout and placed emphasis on independent research and development to strengthen their core competitiveness. The entry threshold for the industry was raised, compounded by rising costs such as artificial environmental protection, etc., and the backward production capacity was gradually cleared out.
There is plenty of room to improve production capacity and efficiency in Vietnam to ensure continued customer penetration and expansion of new customers. Currently, Vietnam's production capacity utilization rate is only about 50%, and Vietnam's per capita production capacity is 2,540 pieces/year. Compared with the domestic level of 5,455 pieces/year, there is still room for improvement. Furthermore, the production equipment for sweaters is the same type as uppers, and the off-peak production seasons intersect. Every year from June to July is the low season for the production of knitted shoes, which is also the peak production season for fall and winter sweaters. Therefore, the flexible allocation of production capacity between the two parties promotes a further increase in capacity utilization. With the gradual release of production capacity, cross-sales space between sweater and shoe customers is worth looking forward to.
Fully molded clothing technology brings about changes, promotes product diversification, and caters to fast fashion trends. Launched in 2017, Whole Garment is currently the only manufacturer in the world that applies full-molded seamless knitting technology on a large scale. It can save half of production time, save sewing labor costs, reduce raw material loss, and increase the price of ordinary sweaters by 40% +.
The size of the domestic sneaker market has soared, and there is plenty of room for knitted shoes from various brands to penetrate.
The CAGR of domestic sneakers reached 15.3% in 2014-2017. Nike first launched Flyknit knitwear in 2012. Currently, sneakers produced by Nike account for only 6%-8% of total revenue.
In view of the low production cost, high fashion, and comfort of knitted shoes, domestic and foreign brands, including Nike, have increased the development and production of new knitted shoes products in recent years.
Investment advice: Considering the impact of Polygraph's January to March 31 (work stoppage during the Spring Festival holiday) and negative factors such as RMB appreciation and rising raw material prices, we lowered the company's profit forecast. We expect net profit for the 2018-2019 fiscal year to be HK$352 and HK$525 million respectively, up 7.4% and 48.9% year-on-year. The PE corresponding to fiscal year 2019 (ending March 31, 2019) is 10 times higher. However, given the company's leading advantage in the knitting field, there is plenty of room for Vietnam's production capacity to be released in the future, and cross-selling of sweaters and outerwear opens up room for growth. Currently, the margin of safety is high, and the “buy” rating is maintained.
Risk factors: Low overseas demand, lower than expected release of overseas production capacity, risk of exchange rate fluctuations, risk of fluctuations in raw material prices, etc.