Hongjing

On July 1st, the workshop in the Red River section of the China (Yunnan) Free Trade Zone, which is under construction in the small border town of Red River on the Sino-Vietnamese border, was bustling with activity.

The China (Yunnan) Free Trade Zone Red River section garment industrial park project uses relatively low labor costs and integrates Hekou's border resources to provide a good development platform for enterprise growth and expansion, promote industrial development, effectively drive employment for local residents in Hekou and Vietnamese workers, and is a high-quality project for undertaking industries from the eastern coastal areas and cross-border production capacity cooperation. It will also become a cross-border production capacity cooperation base integrating R&D design, weaving, garment processing, blankets, high-end fabric production, and sales.

A company's market capitalization refers to the total value of a listed company's issued shares calculated at market prices. The calculation method is the market price per share multiplied by the total number of issued shares. The rise and fall of market capitalization reflects the buying and selling atmosphere of the investment market and the latest valuation of the company concerned.

With the successful completion of the Shanghai and Shenzhen stock markets and Hong Kong stocks in the first half of 2021, as of June 30, the market capitalization of 201 companies in the textile and apparel sector exceeded 180 billion yuan, reaching 180.3532 billion yuan. Compared with 88.2183 billion yuan in the same period last year, this represents an increase of 92.1348 billion yuan.

In terms of corporate performance, Anta Sports' market capitalization increased significantly from 168.871 billion yuan on June 30, 2020 to 411.188 billion yuan on the same date in 2021, ranking first. Semir International also increased from 128.248 billion yuan on June 30, 2020 to 245.282 billion yuan on June 30, 2021, ranking second. Li Ning's market capitalization surged from 55.59 billion yuan on June 30, 2020 to 196.756 billion yuan on June 30, 2021, entering the top three.

Previously, Li Ning issued an announcement, expecting net profit of no less than 1.8 billion yuan in the first half of 2021, a year-on-year increase of more than 164%. The improvement in Achievements is mainly due to revenue growth exceeding 60% and continued improvement in operating profit margin. Shi Hongmei, an analyst at Oriental Securities, frankly stated that combined with Anta Sports' profit forecast for the first half of the year released last week, the achievements of the leading companies in the sportswear industry this year have exceeded expectations against the backdrop of continued improvement in terminal retail and the boost to domestic Brands from the "Xinjiang cotton" incident. From observation, the sportswear industry has a relatively good competitive landscape, and domestic Brands benefit more from the squeezing out of overseas Brand share. With the trend of revenue growth, the elasticity of profit growth is greater.

Shi Hongmei pointed out that although the overall improvement trend is clear this year from the perspective of apparel sub-categories, structural differentiation is still obvious during the recovery process: luxury goods and high-end Brands maintain high prosperity in domestic retail under the influence of consumption reflux; among apparel sub-categories, sportswear and sports leisure style sub-sectors perform relatively better. The "Xinjiang cotton" incident has boosted the terminal sales of domestic Brands in the short term. Leading companies such as Anta and Li Ning have maintained unexpectedly high retail growth rates this year. Mid-to-high-end men's and women's wear with distinctly differentiated Brand positioning and design styles are relatively more stable, with PB men's and women's wear under the太平鸟 Brand and TeenieWeenie under the锦泓 Group performing outstandingly. However, traditional mass casual wear, business men's wear, and footwear, which are mainly based on offline channels, show relatively weaker retail performance, and the situation of inventory competition is obvious.

Shi Hongmei further mentioned that since the concept was first established in 2017, the "Guochao" (national trend) has become one of the biggest tailwinds for the transformation and upgrading of China's fashion industry. From early original products by local designers to cross-border collaborations with elements of traditional Chinese culture, "Guochao" has evolved from a fashion trend into a change in a generation's consumption concept towards domestic Brands. Particularly under the catalysis of the "Xinjiang cotton" incident this year, many overseas Brands are facing negative impacts in various aspects such as channels, public opinion, consumer reputation, and Brand image, which further boosted the preference of Generation Z for domestic Brands. In the sportswear industry, leading domestic Brands such as Anta and Li Ning have clearly benefited from this localization trend since April, achieving unexpectedly high growth. In recent years, with the improvement of China's manufacturing level, domestic companies have become more flexible and down-to-earth in their marketing methods. Frequent external disputes have actually continuously enhanced the Chinese people's confidence in national Brands. In the long run, in track with better competitive landscapes (sportswear, children's wear, etc.), the replacement of overseas Brands by domestic Brands is more obvious, and the speed of market share increase will also be faster.

From the demand side, population iteration and Generation Z leading consumption are the main forces behind the rise and evolution of "Guochao." From the supply side, Brand companies led by domestic leading companies in various sub-sectors have been steadily improving their internal capabilities in recent years, continuously narrowing the gap with overseas competitors in various aspects such as Brand building, retail operations, supply chain capabilities, and digital system construction, and continuously fitting in with and leading the deepening of "Guochao."

Ma Li, a research analyst at Zheshang Securities, believes that after decades of development, Chinese Brands are beginning to rapidly approach overseas Brands in terms of product strength, supply chain management, and retail operations. From the analysis:

In terms of product strength, we see that domestic Brands are comprehensively catching up with overseas Brands. Xtep's 160XPro, Li Ning's technology, and Bosideng's peak/extreme cold series down jackets have achieved comparable capabilities to overseas top Brands in terms of technology, functionality, and appearance. These product lines have also received unanimous recognition from consumers.

In terms of the supply chain, companies represented by SHEIN are creating a new supply chain organization model. SHEIN has cultivated hundreds of loyal suppliers and a complex supply chain management system, and has carried out a comprehensive digital transformation. It is this group of suppliers, which were cultivated by SHEIN from a small scale and are almost equivalent to self-operated, that has allowed SHEIN to achieve the goal of completely sharing data systems with upstream supply chains, enabling real-time visual tracking of each stage of orders, and allowing upstream and downstream material preparation and order scheduling to be completed in advance.

At the same time, SHEIN's independently developed supply chain data system (with 1,000 IT R&D personnel) that has undergone several iterations, can accurately allocate orders to these suppliers who can respond quickly. This group of suppliers, which have broken away from assembly line production and produce only in small teams, also have the ability to handle order volumes of only 200 per order and an annual volume of hundreds of thousands of SKUs. SHEIN's model truly minimizes inventory risk while continuously attracting consumers with constantly updated styles.

In retail operations, Chinese Brands are gradually overtaking competitors through online-driven methods. Chinese companies headed by太平鸟 are starting to adjust their organizational structures, breaking down barriers between online and offline departments to achieve data sharing. The advantages of real-time feedback and rapid insight from online data are rapidly becoming apparent. 太平鸟 relies on feedback from online updates to quickly identify best-selling products and place follow-up orders or add new designs, comprehensively improving the timeliness and accuracy of product design. At the same time, the method of departments receiving instructions sequentially and acting accordingly has been changed to a roundtable discussion system centered on best-selling products. All departments learn about the emergence of best-selling products in the first instance, and begin to interact and start relevant processes in advance within their respective responsibilities. Based on the new organizational structure, the company improves its incentive methods, implements an excess sharing system, and further stimulates employee enthusiasm through benefits. The dividend from product strength improvement is making the company gradually become a leading Brand representing the fashion of young people in China. The company has maintained a high-speed growth trend for five consecutive quarters since the second quarter of 2020.

From the perspective of industry structure, the market share of the three major overseas groups Nike, Adidas, and Uniqlo has increased significantly from 2.6% in 2011 to 7% in 2020. The market share increase of overseas sports leaders is particularly rapid. In 2020, the retail sales of Nike, Adidas, and Skechers in China reached the 150 billion yuan level, while the main brand turnover of Anta, Li Ning, and Xtep reached the 650 billion yuan level. Therefore, Ma Li predicts that if overseas brands experience a 10% to 20% decline in turnover in the long term, the marginal improvement in the pattern brought to Chinese brands will be very significant.

Guoxin Securities analyst Ding Shijie emphasized that the Chinese textile and apparel industry's consumer market and supply chain both have a globally leading appeal. The competition is fierce, but the space is also vast. However, overall, the leading players in the sports, OEM, and children's wear industries have a long lifespan, because:

Firstly, in the sports sector, the size of China's sportswear market in 2020 reached 315 billion yuan, with a CAGR of 513.5%, and still has considerable potential for improvement. After competition and reshuffling, industry leaders have demonstrated comprehensive competitiveness, and Chinese companies are rapidly rising through brand upgrades, channel efficiency improvements, and supply chain rapid response.

Secondly, in the OEM sector, China's textile and apparel industry chain has a far-leading global competitiveness. The leading OEM companies behind the leading sports apparel brands have deep barriers to entry, a clear trend of concentration, and prominent pricing power, exhibiting characteristics of rapid growth, strong certainty, high ROE, and strong resilience in the face of the epidemic.

Furthermore, in the children's wear sector, demand is driven by the two-child policy and consumption upgrades, and industry growth is strong, with a CAGR of 13.5% in the past five years. The concentration of China's children's wear industry is low and improving rapidly, and leading brands have multiple competitive advantages in terms of scale, efficiency, positioning, and Brand, with vast room for growth.

Shi Hongmei, the aforementioned analyst from Oriental Securities, pointed out that the rise of domestic Brands is underpinned by the strength of the nation, changes in population structure, and cultural confidence, as well as the proactive efforts of domestic brands to seek premium pricing as China's manufacturing capabilities gradually improve. In the past, when channels were king, domestic Brands struggled to challenge the market position and influence of overseas Brands in the minds of consumers. In the age of personalization and social media, the outstanding designs and products of domestic Brands are more easily accessible to young consumers, and Brand stories and content are more easily able to resonate with the target audience. Under this trend, the Brand competition landscape in the domestic consumer market is subtly undergoing a turning point. By seizing this wave of upgrades in consumption concepts, consumption habits, aesthetics, and purchasing channels, domestic Brands have the opportunity to achieve a comeback in domestic market competition.