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Summary of China Textile Sector Analysis

Core Content

The China textile sector is undergoing structural consolidation and cyclical recovery, offering investors opportunities for stable earnings growth and high dividend returns at reasonable valuations. Key trends and stock recommendations are highlighted in the report.

Main Trends

Structural Trends

1. Global Consolidation: Rising labour costs, stricter environmental regulations, and supply chain streamlining are driving consolidation in the global textile and apparel market. This trend benefits market leaders who can leverage scale and efficiency.
2. Robust Synthetic Demand: Synthetic fabrics (mainly polyester) are increasingly replacing cotton in apparel and home textiles. The demand for functional sportswear and athleisure is a key driver for synthetic fabric growth.
3. Technology Innovation: Companies that invest in new technology and R&D can achieve better margins and create competitive barriers. Examples include improved production efficiency and exclusive product development.
4. Diversification to Low-Cost Countries: Textile companies are shifting production to ASEAN countries, particularly Vietnam, due to lower labour costs and favourable tax/tariff policies. The Trans-Pacific Partnership (TPP) could further enhance this trend.

Cyclical Trends

1. Improving Order Flow: After a period of volatility, cotton prices have stabilized, leading to a recovery in order flow from global brands.
2. Upstream Margin Recovery: Yarn spinners are expected to see a sharp rebound in margins as the industry recovers.

Key Information

• The sector has seen significant consolidation over the past decade, with market leaders gaining share due to scale and innovation.
• Synthetic fabrics are growing faster than cotton, driven by the demand for functional and sportswear products.
• Companies with strong R&D capabilities and efficient production processes are well-positioned for growth.
• Vietnam is emerging as a key low-cost production base for textile companies, offering both cost and tax advantages.

Stock Picks

Key Points

• Texwinca is expected to recover strongly in 2016 due to improved product mix and retail performance.
• Best Pacific benefits from strong demand for synthetic fabrics and functional sportswear, with a high dividend yield.
• Shenzhen is a structural BUY, with exposure to Nike and Adidas, and is expanding its production in Vietnam.
• Pacific Textiles and Texhong are recommended as HOLD due to lack of near-term catalysts.
• The sector offers stable earnings and high dividends, supported by structural and cyclical trends.

Analysts

• Ka Leong Lo: (852) 2268 0630 | kIlo@kimeng.com.hk
• Benjamin Ho: (852) 22680632 | benjaminho@kimeng.com.hk

Valuation Summary

Investment Thesis

The textile sector is recommended with an OVERWEIGHT rating due to structural and cyclical improvements. Companies with scale, innovation, and exposure to high-growth segments like synthetic fabrics and functional sportswear are positioned for long-term growth. The sector offers strong earnings potential and high dividend returns at attractive valuations.