Clothing OEM Stocks, Will Earnings Slow Down Significantly from Q2?

In Q1, Slightly Avoided COVID-19 Impact... Future Stock Direction Depends on Order Trends

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[Asia Economy Reporter Geum Bo-ryeong] As the novel coronavirus infection (COVID-19) spreads to the Americas and Europe, an analysis has emerged that the performance slowdown of clothing OEM stocks will become full-fledged from the second quarter.

On the 10th, KTB Investment & Securities lowered its annual operating profit forecast for the clothing industry by 22% from the previous estimate. This is because disappointing earnings are expected as the impact of COVID-19 is reflected. Due to COVID-19, sales of consumer goods companies in China in February mostly decreased by around 50% compared to the previous year, and first-quarter clothing retail sales are estimated to have dropped by more than 20%. In South Korea, cumulative clothing retail sales for January and February fell by 15%, and March is expected to be even weaker with an 18% decline.

The problem is that COVID-19 began to spread rapidly in the Americas and Europe from mid-last month. Clothing OEM stocks, which mainly produce in Southeast Asia for buyers in the Americas and Europe, slightly avoided the impact of COVID-19 in the first quarter. The first-quarter operating profits of Hwasung Enterprise and Youngone Trading are estimated at 14 billion KRW and 46 billion KRW, respectively, showing increases of 57% and 10% compared to the previous year, and are expected to meet consensus.

Na Eun-chae, a researcher at Korea Investment & Securities, explained, "The impact of COVID-19 on the first-quarter performance of clothing OEM stocks was minimal, but from the second quarter, they will be under the influence of a significant demand decline in the Americas and Europe," adding, "Order and shipment delays and order reductions are expected." He continued, "Annual sales of major companies such as Nike and Adidas are also expected to slightly decrease compared to the previous year, with the first half forecasted to see a decline of around 10%, followed by a recovery of about 5% in the second half, which will lead to a slowdown in OEM demand in the second and third quarters," and added, "Consensus for major Southeast Asian OEMs is also rapidly being revised downward."

The stock price direction of clothing OEM stocks is analyzed to depend on future order trends. KTB Investment & Securities lowered Youngone Trading's dollar order growth rate for this year from 7% to -2% due to the impact of COVID-19, and forecasted -6% and -4% for the second and third quarters, respectively. Korea Investment & Securities lowered the annual operating profit estimate for Hwasung Enterprise by 24%, expecting lower order growth in the second half. Park Hyun-jin, a researcher at DB Financial Investment, said, "As the spread of COVID-19 continues in the US and Europe, companies with business bases in those regions need to lower their second-quarter earnings expectations."