Korea’s fashion OEM firms eye record sales 

South Korea’s clothing original equipment manufacturers (OEM) are set to see a supercycle or a sustained period of expansion driven by robust demand, analysts said. 

Clothing OEM shares rose unanimously on Tuesday.

Hansae Co. closed the day’s trade 10.2% higher at 23,700 won ($19.10). Youngone Trading finished 2.9% higher at 45,100 won. Hwaseung Enterprise rose 1.8% to close at 14,500 won. 

‘BEST YEAR YET’

Meritz Securities Co. has released a report titled “A supercycle is coming to the OEM industry,” forecasting the best year yet for the sector. 

South Korea’s original manufacturers generally receive orders from global brands based in the West and manufacture them out of factories based in Southeast Asia.

There are three main reasons behind the bullish outlook, according to industry insiders.

The clothing industries in North America and Western Europe have risen at a rapid speed amid a push for stockpiling. The growth estimate for the West’s clothing market stands at 10% compared to Asia’s 4%. 

In the United States, the turnover rate in the retail clothing sector reached a record high with the lowest-ever in-stock rate. 

The fashion labels’ rush to secure enough stock pushed clothing prices higher. Average unit prices in the US continued to slide in the first half of last year but rebounded in the latter half. In particular, the Q4 figure surged 10% on-year. 

“The fashion houses are offering higher prices to fill their warehouses,” Ha Nuri, a research analyst at Meritz said.

Adding to the positive news, factories in Southeast Asia have resumed their operations, which will cut production costs.

There are signs of relief to the global shipment congestion, which will ease the supply chain bottleneck. 

“The external environment is working in favor of domestic companies; including the strengthening US dollar, the trickle-down effect from market recovery in the West, and the tendency to choose Southeast Asia over China,” Ha said.

ATTRACTIVE VALUATIONS

Hansae Co., Youngone Trading, and Hwaseung Enterprise are South Korea’s main clothing OEM companies. Analysts are bullish on all three. 

Hanse has shown rapid growth and its corporate value is widely considered undervalued.

As 85% of its revenue comes from the United States, Hanse is expected to benefit the most out of the three main players. 

Its 2022 revenue and operating profit are expected to increase 18% and 33% on-year, respectively. The price to earnings (P/E) ratio is expected to be eight times higher. 

Youngone Trading is benefiting from strong demand for outdoor and athleisure clothing. 

“In general, Q1 and Q4 are considered off-seasons,” Hyundai Motor Securities analyst Jung Hye-jin explained. “Given that last year’s Q4 recorded an earnings surprise, this year’s Q1 will also likely show good sales flow.”

The company’s operating profit hovered 64% above the market consensus in Q4 2021.

Out of the three main players, Hwaseung Enterprise is the biggest beneficiary of the resumption of operations at factories in Vietnam. The sportswear maker has 60% of its production facilities in the Southeast Asian country.

“The company suffered from production disruption in Vietnam and the lackluster performance of one of its main clients, Adidas, last year,” Ha of Meritz said. 

The analyst expects better results for Hwaseung this year on the back of Adidas' product diversification and more. 

Write to Ji-Yeon Sul at sjy@hankyung.com
Jee Abbey Lee edited this article.