Thinking Behind The Performance Of International Brand Shoe Factories

After Yuyuan group and Shenzhou International, another Chinese sportswear OEM company announced its performance in 2021.

On the evening of April 7, Huali group (300979. SZ), a large number of international brand shoe manufacturers such as Nike, Puma and ugg, released its 2021 annual performance report. As of December 31, 2021, the annual revenue of Huali group was about 17.47 billion yuan, with a year-on-year increase of 25.4%; The net profit attributable to the shareholders of the listed company was about 2.768 billion yuan, an increase of 47.34% year-on-year, and the net interest rate reached 15.8%. Excluding the impact of exchange rate changes, the revenue and net profit increased by 34% and 58% respectively year-on-year.

Founded in 2004, Huali group was listed on the gem of Shenzhen Stock Exchange in April last year. It is mainly engaged in the development, design, production and sales of sports shoes. Its main OEM brands are Nike, converse, vans, puma, ugg, under armour, Hoka one one one and other world-famous sports brands. Its products include sports casual shoes, outdoor boots, sports sandals and slippers.

According to the financial report, in 2021, Huali group's sports shoes OEM business income reached 17.43 billion yuan, accounting for 99.78% of the total revenue, and the gross profit margin was 27.17%. The annual total output reached 209 million pairs, while the annual sales volume reached about 211 million pairs. Most of the products were sold to the United States, followed by Europe, accounting for 86.98% and 11.72% respectively.

In terms of product categories, sports and leisure shoes products are still the revenue pillar, which accounts for 81.35% of the total revenue; Outdoor footwear, sports sandals / slippers and others contributed 9.06% and 9.37% respectively; Other businesses accounted for 0.22%. Among them, the gross profit rate of sports and leisure shoes was the highest, reaching 28.88%. The gross profit rate of outdoor shoes, sports sandals / slippers and other products was 18.66% and 20.52% respectively.

As a matter of fact, with the continuous improvement of sportswear market demand, the performance of OEM enterprises as upstream has been steadily improved.

From 2017 to 2020, Huali group achieved operating revenue of 10.09 billion yuan, 12.388 billion yuan, 15.166 billion yuan and 13.931 billion yuan respectively, and the net profit attributable to parent company was 1.106 billion yuan, 1.532 billion yuan, 1.821 billion yuan and 1.879 billion yuan respectively. From 2017 to 2021, Huali group made a net profit of 9.106 billion yuan in five years.

And this growth trend may continue, for OEM enterprises, it will benefit from the continuous expansion of terminal market scale. According to Euromonitor, the global market for sports shoes will decline by 15.7% to US $118.4 billion due to the impact of the new crown epidemic in 2020, but the market size will reach US $189.9 billion by 2025, and the compound annual growth rate from 2020 to 2025 will still be as high as 9.9%.

This market size is directly reflected in the order demand of the OEM. Previously, Huali group disclosed that the company's order in 2022 has been basically finalized, and the order increment of the brand and how to increase the production capacity to ensure the order delivery have been basically determined. In the future, considering the demand of customers' orders, the company will maintain active capacity expansion, and three new factories put into operation in Vietnam in 2021 will reach the production capacity one after another. Meanwhile, the Indonesian factory is also under construction as planned. At present, Huali group's main production plant is located in Vietnam, and the company plans to build new factories in Vietnam and Indonesia in the next three years.

Thanks to the development of downstream market, sports shoes and clothing OEM industry has also attracted the attention of capital. Besides Huali group, Yuyuan group (0551. HK) and Shenzhou International (2313. HK) are engaged in sportswear OEM.

According to the financial report, in 2021, Yuyuan group realized an operating revenue of 8.533 billion US dollars (about 54.406 billion yuan), and the net profit attributable to its parent was 115 million US dollars (about 734 million yuan).

In 2021, Shenzhou International realized an operating income of 23.845 billion yuan, an increase of 3.5% compared with the same period of last year. However, the net profit attributable to the parent company was 3.372 billion yuan, which was about 33.7% lower than that of the same period of last year, and the net profit rate was also reduced from 22% in 2020 to 14.14%. As for the decline in profits, Shenzhou International explained that the reasons were the impact of the epidemic and the suspension of some production bases in Vietnam for part of the time.

As a representative factory of Nike, UNIQLO, Adidas and other international famous brands, Shenzhou International's main production base is located in Ningbo Economic and Technological Development Zone. In addition, it has a fabric base in Xining province of Vietnam, and has garment factories in Anqing city of Anhui Province, Ho Chi Minh City of Vietnam, Xining province and Cambodia Phnom Penh City. From 2017 to 2020, the net interest rate of Shenzhou International has been maintained above 20%, and the net interest rate level is higher than Adidas, Nike and other sports clothing brands, so it is known as the "strongest generation factory". Although the performance in 2021 is lower than expected, the new customer lululemon of Shenzhou International in 2022 is expected to make a sales contribution of US $30 million.

It is worth noting that the development trend of Xinguan epidemic and the prevention and control policies of the factory location are still the major risk factors faced by OEM enterprises.

Considering the cost of labor and other costs, the capacity of China's OEM enterprises has gradually transferred from inland to Southeast Asia in recent years, and 100% of the capacity of Huali group is distributed overseas. However, in the second half of 2021, the Vietnamese factory of Shenzhou International was shut down for 3-4 months, and the capacity utilization rate of Yuyuan group's Vietnam factory was only 63%. This also means that once the outbreak of the epidemic in Southeast Asia again, it will still have a direct impact on the production capacity of enterprises, thus affecting the profits of enterprises.

As of the midday closing on April 8, Huali group's shares rose 2.93% to close at 73.88 yuan, with a market value of 86.218 billion yuan; Shenzhou International fell by about 2 percentage points, with a share price of HK $102 and a market value of HK $153.48 billion, down by more than 30% since the beginning of the year.