Greater China textile & apparel OEM sector

80 Pages·2016·2.79 MB·English

by  Timothy Ng

CHINA SECURITIES(INT’L)RESEARCH
Equity Research l China l Textile OEM 21 July 2016
Greater China textile & apparel OEM sector
Paradigm shift in global manufacturing

Global sportswear market, a supernova: We believe the global sportswear market is a supernova, with estimated
retail sales value growth of 7.0% CAGR from 2016-20E, almost double from the 3.4% recorded in 2010-15,
according to Euromonitor International. It will continue to outpace the general apparel and footwear market, as we
identified five mega trends in support of such development, namely : i) innovation in product design; ii) the
marathon mania; iii) athleisure trend; iv) boom in women’s training and v) emphasis on performance and
functional elements in apparel and footwear.
Paradigm shift in global manufacturing: The prevalence of the above mega trends are expected to drive a paradigm
shift in the global textile supply chain. We expect the growing use of synthetic fibre and green-fabrics, as opposed to
traditional cotton to be favourable to manufacturers’ margin. A less-define apparel market segmentation, such that
luxury and fast-fashion brands crossover into the sportswear market, creates new customers for manufacturers. The
localisation and automation of manufacturing, such as application of garment knitting technology in footwear
manufacturing, as well as 3D printing, implies that conventional manufacturing models are becoming obsolete. As
such, traditional footwear manufacturers are more vulnerable, as majority of the tasks can be automated, whereas
opportunities are still ample for apparel manufacturers.
Valuation and stock picks: We initiate coverage on China’s textile and apparel OEM sector, with a positive view on
sportswear apparel OEM. We believe those with facility exposure in Vietnam, strong balance sheet and technology
knowhow that is hard to replicate are in an increasingly more favourable position. At such, we initiate coverage on
Texhong Textile (2678 HK, BUY, PT HKD10.5), Pacific Textiles (1382 HK, BUY, PT HKD13.1) and Best Pacific (2111 HK,
BUY, PT HKD6.7) for the upstream segment, Texwinca (321 HK, HOLD, PT HKD5.5), Shenzhou International (2313 HK,
BUY, PT HKD48.2) and Nameson (1982 HK, BUY, PT HKD1.7) for the upper-mid stream segment. In stock picks, our
most preferred plays are Pacific Textiles in the upstream and Shenzhou in the upper-mid stream.
SO Lai Shan, Jennifer
(CE No.: AHA295)
[email protected]
[phone]
Greater China textile & apparel OEM sector

Table of Contents
Executive Summary .................................................................................................................... 3
Valuation ................................................................................................................................... 4
Sector valuation ............................................................................................................................................. 4
Valuation methodology ................................................................................................................................. 4
Industry Overview ...................................................................................................................... 9
Global sportswear market: A supernova ....................................................................................................... 9
Mega trends: ............................................................................................................................................... 10
General misconceptions of the impact of Olympic year on sportswear companies’ performance ............ 11
Implications on the supply chain: a paradigm shift in global manufacturing ............................................. 11
Industry Overview .................................................................................................................... 13
China textile industry ................................................................................................................................... 13
Trans-Pacific Partnership (TPP) – Opportunities and challenges ................................................................ 15
Global cotton market ................................................................................................................................... 15
China’s 2016 state cotton reserve sale ........................................................................................................ 17
Cotton prices: PRC Vs International ............................................................................................................ 17
Major highlights ........................................................................................................................................... 20
Valuation ...................................................................................................................................................... 20
Company
Pacific Textiles ...................................................................................................................................................... 19
Texhong Textile .................................................................................................................................................... 26
Weiqiao Textile .................................................................................................................................................... 33
Best Pacific ........................................................................................................................................................... 39
Shenzhou International ....................................................................................................................................... 45
Texwinca .............................................................................................................................................................. 52
Victory City .......................................................................................................................................................... 58
Nameson Holdings ............................................................................................................................................... 66
Win Hanverky ...................................................................................................................................................... 72

Please read the disclaimer on the last page. 2 21 July 2016
Greater China textile & apparel OEM sector

Executive Summary
Global sportswear market, a supernova: We believe the global sportswear market is a
supernova, with estimated retail sales value growth of 7.0% CAGR from 2016-20E,
almost double from the 3.4% CAGR recorded in 2010-15. It will continue to outpace the
general apparel and footwear market, as we identified five mega trends in support of
such development, namely : i) innovation in product design; ii) the marathon mania; iii)
athleisure trend; iv) boom in women’s training; and v) emphasis on performance and
functional elements in apparel and footwear.
Paradigm shift in global manufacturing: The prevalence of the above mega trends are
expected to drive a paradigm shift in the global textile supply chain, from raw materials
and fabric mills in the upstream to apparel plants in the mid-stream. We expect the
growing use of synthetic fibre and green-fabrics in the long-run, as opposed to
traditional cotton to be favourable to manufacturers’ margin. A less-define apparel
market segmentation, such that luxury and fast-fashion brands crossover into the
sportswear market, represents a new customer segment for manufacturers.
Acceleration in the localisation and automation of manufacturing, whereby garment
knitting technology is applied in the manufacturing of footwear and 3D printing,
implies that conventional manufacturing models are becoming obsolete. As such,
traditional footwear manufacturers are more vulnerable, as majority of the tasks can
be automated, whereas opportunities are still ample for apparel manufacturers.
New waves of investments in Vietnam’s textile industry: With the TPP coming into
effect in 2018, new waves of investments are likely to emerge in Vietnam’s textile
industry as export demand for Vietnam apparel grows leveraging on the advantage of
duty-free entry into the U.S.. Vietnam textile manufacturers are set to gain market
shares from the export markets currently served by U.S. producers in Mexico and
Central America. As such, the TPP will continue to drive geographical migration of
textile and garment plants from China to Vietnam, resulting in greater capex
investment, which has been stagnant for their plants in China. Given anticipation of a
relatively substantial market share gain by Vietnam textile producers, coupled with the
comparative advantage in operating costs, i.e. lower overhead and labour costs, such
new waves of investments would likely generate extra return that would otherwise
been stagnant in China. Nevertheless, the migration entails risks, such as uncertainty as
to how much time is required to train up workers to be adequately skilful and a
comparatively under-developed infrastructure, which suggests potentially longer than
expected lead time in ramping up facilities in Vietnam to an optimal level.
Valuation and stock picks. We initiate coverage on China’s textile sector with a positive
view on sportswear apparel OEM. We believe those with facility exposure in Vietnam,
strong balance sheet with technology knowhow that is hard to replicate to be at a
more favourable position. At such, we initiate coverage on Texhong Textile (2678 HK,
BUY, PT HKD10.5) and Pacific Textiles (1382 HK, BUY, PT HKD13.1) for the upstream
segment, Best Pacific (2111 HK, BUY, PT HKD6.7), Texwinca (321 HK, HOLD, PT HKD5.5),
Shenzhou International (2313 HK, BUY, PT HKD48.2) and Nameson (1982 HK, BUY, PT
HKD1.7) for the mid-upstream segment.

Please read the disclaimer on the last page. 3 21 July 2016
Greater China textile & apparel OEM sector

Valuation
Sector valuation
The market generally places a higher valuation on companies in the upper-mid stream
segment with a more integrated supply-chain which possesses both fabric and garment
manufacturing capabilities. The upper-mid stream segment trades at an average of 20x
PER 1-year forward, compared to 11x for upstream and 12x for midstream names. As
global sportswear companies compete on performance, being their outsourcing
partners, textile companies with greater R&D capabilities to develop new fabrics
should deserve to continue to trade at a premium valuation.
In terms of ROIC, upper-mid stream and mid-stream segment plays are higher at an
average of 14-15%, compared with up-stream plays of 12%, due to the heavy capital
investment required for facility setup in upstream production.
Valuation methodology
Comparable valuation and discounted cash flow. We based our stock valuation mainly
on comparable PER and DCF analysis. We classified the textile garment sector into:
i) upstream: yarn/ fabric/ component manufacturing;
ii) upper-midstream: fabric and garment manufacturing and
iii) mid-stream: garment manufacturing.
Up-stream plays are trading at an average PER of 10.7x 1-year forward, upper-mid
stream trades at 20.1x and mid-stream at 11.6x.
Figure 1: Sector Valuation Table
1-yr fwd 2-yr fwd Sales Op Profit Cap Ex/ Dvd EV/
Mkt Cap PER PER 1-yr fwd growth Margin Sales ROIC ROA Yield EBITDA
Name Rating PT Ticker (bn HK$)Currency Last Price FYE (x) (x) PBR (x) (%) (%) (%) (%) (%) (%) (X)
HK listed
Upstream: yarn/ fabric
Texhong Textile BUY 10.5 2678 HK 8 .0 HKD 9 .0 12/2015 8 .3 7 .9 1 .5 1.0 11.8 10.5 13.0 5.8 2.6 5.5
Weiqiao Textile NR N/A 2698 HK 6 .8 HKD 5 .7 12/2015 4 .4 2 .4 0 .3 (12.9) 18.3 3.8 5.0 3.4 5.2 1.0
Fountain Set NR N/A 420 HK 1 .1 HKD 0 .9 12/2015 N/A N/A N/A (3.5) 2.4 1.9 3.0 1.8 N/A 3.9
Pacific Textiles BUY 13.1 1382 HK 1 5.5 HKD 1 0.7 03/2016 1 4.5 1 4.8 4 .7 0.3 16.7 5.1 22.9 20.2 7.5 11.2
Best Pacific BUY 6.7 2111 HK 5 .5 HKD 5 .3 12/2015 1 4.0 1 2.0 2 .8 10.1 19.9 6.0 13.5 12.0 2.5 9.8
Sub-Average 7 .4 1 0.7 9 .5 2 .4 - 1 .0 1 3.8 5 .4 1 1.5 8 .6 4 .4 6 .3
Upper-mid stream: fabric & garment
*Texwinca HOLD 5.5 321 HK 8 .4 HKD 6 .1 03/2016 1 3.7 1 3.4 1 .2 0.2 12.8 2.2 14.0 10.9 7.2 4.5
Shenzhou International BUY 48.2 2313 HK 5 8.8 HKD 4 2.0 12/2015 2 0.3 2 0.3 3 .5 13.5 22.6 16.1 14.6 13.7 1.9 15.2
Victory City NR N/A 539 HK 1 .0 HKD 0 .4 03/2016 N/A N/A N/A (4.4) 8.3 15.7 3.7 2.3 13.5 5.1
Eclat NR N/A 1476 TT 2 3.7 TWD 8 8.3 12/2015 2 3.0 1 8.5 6 .7 22.4 19.0 2.4 25.4 22.9 N/A 16.4
Sub-Average 2 2.7 2 0.1 1 8.6 4 .0 8 .0 1 5.7 9 .1 1 4.4 1 2.5 7 .5 1 0.3
Mid-stream: garment
Regina Miracle NR N/A 2199 HK 1 0.7 HKD 8 .8 03/2016 1 7.7 1 3.4 3 .4 21.2 12.6 7.6 15.9 11.5 0.6 13.9
Nameson BUY 1.7 1982 HK 2 .6 HKD 1 .2 03/2016 5 .7 4 .6 2 .1 7.7 10.3 9.8 16.4 11.0 0.0 5.3
Win Hanverky NR N/A 3322 HK 1 .7 HKD 1 .3 12/2015 N/A N/A N/A 7.5 7.0 5.9 10.3 8.3 8.8 2.5
Eagle Nice NR N/A 2368 HK 1 .0 HKD 2 .0 03/2016 6 .6 5 .7 0 .9 1.2 10.9 1.6 10.2 8.0 11.8 4.2
Makalot NR N/A 1477 TT 8 .1 TWD 4 0.6 12/2015 1 6.4 1 4.5 3 .6 11.8 11.3 2.0 21.5 16.7 N/A 10.5
Sub-Average 4 .8 1 1.6 9 .6 2 .5 9 .9 1 0.4 5 .4 1 4.9 1 1.1 5 .3 7 .3
Average of all 1 0.9 13.6 12.0 2.9 5.4 13.1 6.5 13.5 10.6 5 .6 7.8
Source: Company data, CSCI Research Estimates, Bloomberg. *Remarks: Texwinca also engages in retail store operations.

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Greater China textile & apparel OEM sector

Figure 2: PER Versus ROIC

30.0
25.0 Pacific Textiles Eclat
Makalot
20.0
% Nameson
C 15.0 Regina Miracle
IO
R Best Pacific Shenzhou
Texhong
10.0
Eagle Nice
Texwinca
5.0 Weiqiao
-
- 5.0 10.0 15.0 20.0 25.0
PER x - 1 yr fwd

Source: CSCI Research estimates, Bloomberg
Stock picks
Pacific Textiles – For yield lovers
(1382 HK, Buy, PT: HKD13.1)
 As a leading knitted fabric manufacturer with an established track record, we believe
Pacific Textiles (PT) will continue to benefit from industry consolidation.
 While we do not expect any exciting earnings growth, we believe PT is able to
maintain a 100% dividend payout going forward, given its cash-generation power,
strong balance sheet and minimal capex for its Vietnam expansion.
 We initiate coverage with BUY and DCF-based PT of HKD13.1, equivalent to 17.2x
ex-cash PER for FY17E. It currently trades at 14.0x ex-cash PER for FY17E and a
dividend yield of 6.9%.
Texhong Textile – A re-rating story
(2678 HK, BUY, PT: HKD10.50)
 We expect Texhong’s net FX losses to come down significantly in FY16E on reduction
in its net USD liability exposure.
 Capacity expansion provides buffer for a weak cotton price trend.
 Texhong is favourably positioned as a potential beneficiary of the TPP agreement on
the back of its established factory base in Vietnam. Moreover, it is building itself into
an integrated textile and clothing supplier by expanding downstream into fabric,
dyeing and garment manufacturing. We initiate coverage with BUY and PT of
HKD10.6, based on 9.5x FY16 PER, its 5-year historical 1-yr forward average PER.
Best Pacific – A niche player in a premium market
(2111 HK, Buy, PT: HKD6.7)
 Best Pacific (BP) is a major beneficiary of the sportswear boom, as it expects
revenue contribution from sportswear to overtake lingerie in five years’ time.
 Expansion in lace segment provides it with upside on margin growth.
 Best Pacific (BP) is a potential beneficiary of the TPP agreement with the
commencement of production from its first factory in Vietnam in 2017. We initiate
coverage with a BUY rating and PT of HKD6.7, based on 1.0x PEG, as we estimate
core net profit 3-year CAGR of 17.6%. Our PT equivalents to 17.6x PER for FY16E.

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Greater China textile & apparel OEM sector

Shenzhou International – Beneficiary from a paradigm shift in global manufacturing
(2313 HK, Buy, PT: HKD48.2)
 We believe the strong momentum of the sportswear segment will continue to
support Shenzhou (SZ)’s growth, despite tepid growth in casual wear sales.
 Margin expansion to sustain, supported by a rising demand for functional fabrics
with growing appeal of performance apparel, higher contributions from sportswear
and Nike’s Flyknit footwear.
 Shenzhou is a vertically integrated textile play, which allows it to benefit most from a
paradigm shift in footwear manufacturing with the application of garment knitting
technology. We initiate coverage with BUY and PT of HKD48.2, based on 1.0x PEG as
we estimate core net profit 3-year CAGR to be 23.4%. Our PT equivalents to 23.4x
PER FY16E.
Texwinca – Retail operation remains an overhang
(321 HK, HOLD, PT: HKD5.5)
 Substantial one-off gains, i.e. sales of trademarks, will be hard to repeat going
forward.
 Outlook for the retail operations is becoming more uncertain.
 While we expect the performance of Texwinca’s (TW) textile segment to be stable,
loss incurred from its retail operations will continue to drag on its bottom-line. We
initiate coverage with a HOLD rating and PT of HKD5.5 based on 12.4x PER, its 3-year
historical 1-year forward average PER. TW currently trades at 13.7x PER and a
dividend yield of 4.4% for FY17E.

Nameson Holdings – Quality knitwear play, re-rating is imminent
(1982 HK, Buy, PT: HKD1.7)
 Nameson (NS) is a fully-automated knitwear manufacturer, having established
relationship with Uniqlo where orders are committed for its Vietnam facility
expansion.
 Capacity expansion in Vietnam is expected to drive NS’s above average growth in
FY17-18E.
 We initiate coverage with BUY and PT of HKD1.7, based on 8x PER, 30% discount to
the peers’ average of mid-stream plays, given its short listing record. We estimate
NS’s core net profit 3-year CAGR to be 17.2%. It currently trades at 5.7x PER for
FY17E and a PEG of only 0.3x, the low-end of industry peers.

Figure 3: Pacific Textiles (1382 HK) - PER band Figure 4: Pacific Textiles (1382 HK) - PBR band
20.0 14.00
18.0
12.00
16.0
14.0 10.00
12.0 8.00
10.0
8.0 6.00
6.0 4.00
4.0
2.00
2.0
0.0 -
21-peS 21-voN 31-naJ 31-raM 31-yaM 31-luJ 31-peS 31-voN 41-naJ 41-raM 41-yaM 41-luJ 41-peS 41-voN 51-naJ 51-raM 51-yaM 51-luJ 51-peS 51-voN 61-naJ 61-raM 61-yaM 61-luJ 21-peS 21-voN 31-naJ 31-raM 31-yaM 31-luJ 31-peS 31-voN 41-naJ 41-raM 41-yaM 41-luJ 41-peS 41-voN 51-naJ 51-raM 51-yaM 51-luJ 51-peS 51-voN 61-naJ 61-raM 61-yaM 61-luJ
Price 8x 11.5x 15x 18.5x 22x Price 1x 1.5x 2x 2.5x 3x

Source: Bloomberg, CSCI Research Source: Bloomberg, CSCI Research

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Greater China textile & apparel OEM sector

Figure 5: Texhong Textile (2678 HK) - PER band Figure 6: Texhong Textile (2678 HK) – PBR band
30.0 25.00
25.0
20.00
20.0
15.00
15.0
10.00
10.0
5.00
5.0
0.0 -
21-peS 21-voN 31-naJ 31-raM 31-yaM 31-luJ 31-peS 31-voN 41-naJ 41-raM 41-yaM 41-luJ 41-peS 41-voN 51-naJ 51-raM 51-yaM 51-luJ 51-peS 51-voN 61-naJ 61-raM 61-yaM 61-luJ 21-peS 21-voN 31-naJ 31-raM 31-yaM 31-luJ 31-peS 31-voN 41-naJ 41-raM 41-yaM 41-luJ 41-peS 41-voN 51-naJ 51-raM 51-yaM 51-luJ 51-peS 51-voN 61-naJ 61-raM 61-yaM 61-luJ
Price 8x 11.5x 15x 18.5x 22x Price 1x 1.5x 2x 2.5x 3x

Source: Bloomberg, CSCI Research Source: Bloomberg, CSCI Research
Figure 7: Best Pacific (2111 HK) - PER band Figure 8: Best Pacific (2111 HK) PBR band
12.0 7.00
10.0 6.00
5.00
8.0
4.00
6.0
3.00
4.0
2.00
2.0 1.00
0.0 -
41-nuJ41-luJ 41-guA 41-peS41-tcO 41-voN41-ceD 51-naJ 51-beF51-raM 51-rpA51-yaM 51-nuJ51-luJ 51-guA 51-peS51-tcO 51-voN51-ceD 61-naJ 61-beF61-raM 61-rpA61-yaM 61-nuJ 41-nuJ41-luJ 41-guA 41-peS41-tcO 41-voN41-ceD 51-naJ 51-beF51-raM 51-rpA51-yaM 51-nuJ51-luJ 51-guA 51-peS51-tcO 51-voN51-ceD 61-naJ 61-beF61-raM 61-rpA61-yaM 61-nuJ
Price 8x 11.5x 15x 18.5x 22x Price 1x 1.5x 2x 2.5x 3x

Source: Bloomberg, CSCI Research Source: Bloomberg, CSCI Research
Figure 9: Shenzhou (2313 HK) - PER band Figure 10: Shenzhou (2313 HK) – PBR band
4.0 50.00
3.5 45.00
40.00
3.0
35.00
2.5 30.00
2.0 25.00
1.5 20.00
15.00
1.0
10.00
0.5 5.00
0.0 -
61-rpA 61-rpA 61-yaM 61-yaM 61-yaM 61-yaM 61-yaM 61-nuJ 61-nuJ 61-nuJ 61-nuJ 61-luJ 61-luJ 61-luJ 21-peS 21-voN 31-naJ 31-raM 31-yaM 31-luJ 31-peS 31-voN 41-naJ 41-raM 41-yaM 41-luJ 41-peS 41-voN 51-naJ 51-raM 51-yaM 51-luJ 51-peS 51-voN 61-naJ 61-raM 61-yaM 61-luJ
Price 8x 11.5x 15x 18.5x 22x Price 1x 1.5x 2x 2.5x 3x
Source: Bloomberg, CSCI Research Source: Bloomberg, CSCI Research
Figure 11: Texwinca (321 HK) - PER band Figure 12: Texwinca (321 HK) – PBR band
4.0 16.00
3.5 14.00
3.0 12.00
2.5 10.00
2.0 8.00
1.5 6.00
1.0 4.00
0.5 2.00
0.0 -
61-rpA 61-rpA 61-yaM 61-yaM 61-yaM 61-yaM 61-yaM 61-nuJ 61-nuJ 61-nuJ 61-nuJ 61-luJ 61-luJ 61-luJ 11-luJ 11-tcO 21-naJ 21-rpA 21-luJ 21-tcO 31-naJ 31-rpA 31-luJ 31-tcO 41-naJ 41-rpA 41-luJ 41-tcO 51-naJ 51-rpA 51-luJ 51-tcO 61-naJ 61-rpA 61-luJ
Price 8x 11.5x 15x 18.5x 22x Price 1x 1.5x 2x 2.5x 3x

Source: Bloomberg, CSCI Research Source: Bloomberg, CSCI Research

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Greater China textile & apparel OEM sector

Figure 13: Nameson (1982 HK) – PER band Figure 14: Nameson (1982 HK) – PBR
4.0 2.50
3.5
2.00
3.0
2.5 1.50
2.0
1.5 1.00
1.0
0.50
0.5
0.0 -
Price 8x 11.5x 15x 18.5x 22x Price 1x 1.5x 2x 2.5x 3x

Source: Bloomberg, CSCI Research Source: Bloomberg, CSCI Research

Please read the disclaimer on the last page. 8 21 July 2016
Greater China textile & apparel OEM sector

Industry Overview
Global sportswear market: A supernova
The retail sales value of the global sportswear industry grew at a 3.4% CAGR from
2010-15 to USD265.3bn, compared with 1.5% for the global apparel market and 2.0%
for the footwear market during the same period. According to the forecast by
Euromonitor International, the retail sales value growth from global sportswear is
expected to accelerate to 7.0% CAGR from 2016-20E to USD372.2bn, which means it
will continue to outgrow the estimated 5.3% and 6.1% growth rate for the apparel
segment and footwear segment respectively.
We identified five major mega trends below, supporting our view that the global
sportswear market will remain a supernova in the next five-year period (2016 to 2020).
Figure 15: Global apparel, footwear & sportswear retail value growth
Growth for the global
12% Sportswear 5-yr CAGR:
sportswear market to
10% +7.0% (2015-20E)
accelerate in the next

five-year period (2015-20E) 8%
6%
4%
%
Y 2%
o
Y 0%
-2%
-4%
Sportswear 5-yr CAGR:
-6%
+3.4% (2010-15)
-8%
2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Apparel Footwear Sportswear

Source: Euromonitor International 2016, CSCI Research
Nike and Adidas dominate the market, but new comers such as Under Armour
expanded rapidly in recent years. Data from Euromonitor report showed that the
top-ten sportswear companies captured an aggregate 41.7% global market share in
2015, with Nike Inc. being the world’s leading sportswear player commanding the
largest market share of 17.2%. This was followed by Adidas Group with 10.7%. Under
Armour Inc and Skechers USA Inc have expanded rapidly in recent years, benefiting
from the activewear casual fashion trend that is taking the US by storm with a market
share of 1.6% each.
Figure 16: Global top ten sportswear companies, 2015 Figure 17: Global sportswear market by region, 2015
Ranking Sportswear company Market share
300 265.3
1 Nike Inc 17.20%
250
2 adidas Group 10.70% 200
3 VF Corp 3.50% nb 150 102.2
4 Kering SA 1.70% DS 100 59.1 53.6
5 Under Armour Inc 1.60% U 50 3.2 11.6 20.1 15.5
6 Skechers USA Inc 1.60% 0
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Source: Euromonitor International, CSCI Research Source: Euromonitor International, CSCI Research

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Greater China textile & apparel OEM sector

Mega trends:
I) Innovation in product design
Innovation keeps Major sportswear brands have continued to launch innovative products and design,
demand rolling through the application of technology in the development of fabrics, which focuses on
enhancing the functional performance, as well as in the manufacturing technique/
process, which focuses on efficiency improvement in supply chain management.
High-tech fabrics are developed by major sportswear brands, such as Nike’s “DRI-FIT”,
Adidas’s “Climachill”, Armour’s “Coldblack” and Lululemon’s “LUON®”, which caters for
different sports activities by addressing the different requirement in terms of their
“functions” and “performance”. Manufacturing can be streamlined with new
technology such as Nike’s “Flyknit” and Adidas’s “Primeknit”, where the upper part is
knitted from strands of polyester yarn (single material and one machine). Adidas’
Futurecraft 3D-printed personalised running shoe, which combines material and
process where the midsole of the shoes are produced from 3D printing. The continual
rollout of innovative designs has kept customer demand rolling.
II) Marathon mania
Shortened replacement As long-distance running becomes increasingly popular, driven by the running boom in
cycle the key markets, including the U.S. and U.K., as the marathon mania sweeps across
Asia, it will not only create additional global demand for running gear, but it will also
shorten their replacement cycle, leading to a higher replacement rate. We believe this
will create another wave of demand for sports apparel, footwear and related
accessories.
III) “Athleisure (运动休闲)” trend prevails
Luxury brands, i.e. According to Euromonitor International, the growth in global athleisure apparel
Chanel, Karl Lagerfeld (sports-inspired apparel, which combines athletic with leisure) reached 6% in 2015, in
start to tap the comparison to 4% growth in the overall apparel market. Athleisure is one of
athleisure market. sportswear’s main growth drivers, as opposed to a passing trend, as luxury brands
crowded into this segment, given slowing growth in their traditional market, such as
couture sneakers from Chanel and sweatshirt from Karl Lagerfeld. Comfort dressing is
expected to lead sales across major categories of menswear and womenswear.
IV) Boom in women’s training
Fast-fashion brands Women’s training activities are booming, driven by fitness and running trends, as well
starts to encroach the as the above athleisure trend, where women buy sportswear for non-sports use. There
women’s training is increased blurring between sportswear and “activewear”. As the demand for
market. functional and fashionable products grows, major sportswear brands, such as Adidas
and Nike are keen to exploit this trend. Besides, the fast-fashion brands have started to
encroach on this market.
V) Performance apparel and footwear are the spotlight
“Performance” is the Given the trends aforementioned, performance apparel is set to be the an
pursuit of global outperformer of the global sportswear market in the foreseeable future, contributing
sportswear brands. 26% of total absolute value growth in 2015-20E and performance footwear is set to
contribute 25% of total absolute value growth over the same period, according to
Euromonitor International. Performance products usually command higher prices, and
hence better margins, underpinned by higher tech specifications and improved
performance. This will induce and support sportswear companies’ continual
investment in R&D to innovate their products and design, leading to long-term
sustainable growth of the global sportswear market.

Please read the disclaimer on the last page. 10 21 July 2016