"Due to Exchange Rates"... Apparel OEM Stocks Concerned About Performance Amid Weak Dollar

Despite the KOSPI rally, stock prices are not gaining much attention

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[Asia Economy Reporter Geum Bo-ryeong] Despite the recovery in the clothing industry, the continued weak dollar trend is raising concerns about the performance of domestic clothing original equipment manufacturer (OEM) stocks.

According to the Seoul foreign exchange market on the 7th, the won-dollar exchange rate closed at 1,085.6 won, down 2 won from the previous trading day. The won-dollar exchange rate, which was 1,187 won as of August 31 last year, began to decline gradually due to the impact of the U.S. presidential election, breaking below the 1,100 won level on December 3.

The weak dollar trend is likely to negatively impact the performance of clothing OEM stocks. Since clothing OEM companies supply products to overseas brands such as Nike, Adidas, and Gap, their export ratio is high, making their performance sensitive to the won-dollar exchange rate. This is bad news for clothing OEM stocks that were hit hard by the COVID-19 pandemic but showed signs of recovery in the second half of last year. Wholesale sales have been heavily discounted, improving inventory direction since the second half of the year.

Researcher Baesong from KTB Investment & Securities explained, "Arithmetically, a 1% drop in the won-dollar exchange rate is estimated to reduce operating profit by 1.6% for Youngone Holdings and 4.8% for Hansae Co., Ltd." He added, "The average exchange rate in the fourth quarter of last year was 1,119 won, down 5% from the previous year, making it inevitable for Youngone Holdings and Hansae Co., Ltd. to suffer operating profit hits of around 10% and 20%, respectively." Furthermore, due to the off-season and timing differences in raw material purchases, the actual profit decline could be even greater. With forecasts indicating continued dollar weakness throughout this year, it is expected to significantly affect the performance of clothing OEM stocks.

Despite the KOSPI rally, the stock prices have not stood out significantly. While the KOSPI rose 14.05% from 2,602.59 on November 23 last year to 2,968.21 recently, Youngone Holdings increased only 0.32%, from 31,500 won to 31,600 won. During the same period, Hansae Co., Ltd. actually fell 6.36%, from 17,300 won to 16,200 won.