According to the Zhixun Finance and Economics APP, Guosen Securities released a research report stating that textile manufacturing companies have a relatively low share in the full value chain of textile and clothing, with generally weak industry profitability and growth prospects. There are many differentiated characteristics in the financial attributes of companies in different links of the textile manufacturing industry, and understanding the main operating logic behind makes it easier to grasp the turning point. In the future, there is a certain level of uncertainty in the global trade environment. Companies with a sound production layout can better mitigate risks. At the same time, as the industry grows in scale, the growth rate of orders may slow down, and in the background of weak recovery in end demand, the positive price transmission trend of the industry chain has not yet formed. Companies with the ability to increase market share will highlight the sustainability of growth.

Guosen Securities' main points are as follows:

Textile manufacturing industry chain review: Manufacturers account for only 30% in the clothing value chain. Besides cost advantages, if they can help brands improve product turnover efficiency, they will contribute greater value.

Characteristics of upstream and downstream of textile manufacturing companies:

1) Profits of upstream raw material suppliers are greatly affected by price fluctuations of raw materials and products, with a higher proportion of working capital tied up in raw material inventory. They have a strong cyclical nature, with large-scale leading companies.

2) Midstream material suppliers have a high degree of product diversification, a high level of automation in production, and custom development capabilities are key to bargaining power, leading to high profit margins for high-quality segmented companies.

Downstream finished product suppliers are mainly based on the OEM model, with high barriers to entry for suppliers deeply tied to top brands, and companies with strong management and integrated research and development capabilities have high ROE.

From the perspective of production capacity and revenue distribution, downstream OEM manufacturing enterprises reduced their proportion of production capacity in China relatively early, with most of it already deployed in Southeast Asia. The share of domestic market revenue accounts for 20-30%; for midstream accessory companies, most of the production capacity remains in China. The proportion of direct revenue from the domestic market is generally lower than the proportion of domestic production capacity as downstream companies relocate abroad, typically ranging from 3-8%; for upstream yarn enterprises, the overseas production capacity of cotton spinning is relatively high, while chemical fiber and wool spinning are still mainly located in China. The proportion of revenue in the Chinese market is higher, reaching 30-80%.

Research reports and tracking data for the industry:

Industry trend one: China's textile industry dominates globally, becoming an indispensable part of the global supply chain, while low value-added processing industries are shifting to Southeast Asia;

Industry trend two: Microscopically, talents, technologies, and capital are being exported, and leading textile companies are expanding overseas to build new growth curves;

Industry trend three: The overall trend of the upgrading of China's textile industry points to a broad prospect of value-added enhancement.

Examining market dominance based on export share, China has a significant advantage in both finished and intermediate products, Southeast Asia has improved its advantage in finished products, and the USA has a clear advantage in raw materials. Recent industry developments: In October, textile and footwear exports from Vietnam increased by 19.0% and 50.5% respectively year-on-year, with a significant increase in growth rate compared to previous months; China's textile exports increased by 15.6% year-on-year; clothing and footwear exports increased by 6.8% and decreased by 1.6% respectively year-on-year. The US clothing consumption shows strong resilience, with cumulative retail sales of clothing in the US increasing by 2.1% year-on-year from January to October 2024; clothing wholesaler inventory-to-sales ratio has continued to decline, while retail inventory levels remain relatively stable.

Investment logic for sector segmentation:

1) Raw materials, intermediate materials suppliers: The highlights of high-quality enterprises lie in rapid performance growth, high profit margin levels, overlaying a strong cyclical downturn to find buying points, and having good profit elasticity. The highlights are due to product differentiation, technological and service barriers, the ability to expand market share, and earn excess profits. As the industry has a high degree of production automation, a generally high requirement for capital expenditure, the sustainability of cash flow sources is crucial, while at the same time, the industry concentration ceiling is high. Enterprises with significant profitability advantages will effectively increase their market share through capacity expansion.

2) Finished goods suppliers: Investable enterprises have the following characteristics, including strong performance certainty, high ROE, good growth potential, and good long-term cash flow returns. This is because finished goods suppliers, as labor-intensive enterprises, generally have low entry barriers, low product added value, rising labor costs, but corresponding advantages include low capital expenditure and relatively light assets. Excellent suppliers can play to their strengths, deeply bind with leading global brands, and only a few giant enterprises have formed an oligopoly structure.

And they themselves have competitive advantages such as cost scale advantages, management efficiency advantages, strong delivery capabilities, and integrated R&D barriers, providing significant value to brand customers.

Investment recommendation: Choose the right track and seize the turning point

Key recommendations include leading sportswear OEM Shenzhou International (02313), Huali Group (300979.SZ), as well as top players in the manufacturing sector, Weixing Industrial Development (002003.SZ), Zhejiang Jasan Holding Group (603558.SH), Zhejiang Taihua New Material (603055.SH), Anhui Korrun (300577.SZ), focusing on leading players in woolen and cotton spinning sectors Zhejiang Xinao Textiles Inc. (603889.SH), Bros Eastern Co.,Ltd (601339.SH).

Risk warning: Macroeconomic growth below expectations; Capacity expansion below expectations; Deterioration of downstream customer inventories for suppliers; International political and economic risks.