August 14, 2013 Vietnam Garment & Textile sector Update: Unprecedented developments but the industry is still tied up in a knot Executive Summary Following our first report on the textile and garment sector Vietnam Textile and Garment Sector Update_05 07 2013_SSIResearch, we continues to give our in-depth analysis report on this sector. Growing export value From 2000 to 2012, Vietnam s textile and garment export value increased 8 folds from $1.9bn in 2000 to $15.1bn in 2012, and global integration played a key role in the remarkable development: Currently, Vietnam is one of the top five textile and garment exporters in the world with a market share of 4% - 5%. Key export markets of Vietnam is the US, EU and Japan. The fourth position belongs to Korea. In 2012, export value to Korea was $1.1 bn, accounting for ~7.3% of total export. Vietnam establishes textile and garment export value of $19.5bn for 2013, implying a 29.2% YoY growth. It is likely that Vietnam will meet its target this year. Rising domestic market The size of Vietnam s apparel retail market reached VND 22.8 trillion (~$1.09 bn) in 2012. Because of the economic crisis, the market experienced a decline of 6%YoY in 2012 compared with 2011, after high value growth periods with CAGR of 13.4% from 2005-2010 and 20% in 2011. The domestic market is highly fragmented. It is led by VTEC, Blue Exchange and Vinatex with market shares of 3.6%, 3.1% and 3%, respectively, in 2012. Supply chain: The bottleneck in weaving & dyeing According to Vinatex, currently Vietnam has 5,982 textile and garment companies. The majority of which is located in the South (62%). The textile and garment sector of Vietnam mainly focuses on the last step in the supply chain cut and sew. Therefore, the number of apparel companies in Vietnam remains high, accounting WWW.SSI.COM.VN 1
for 70% of the total textile and garment companies. The paradox of Vietnam s textile and garment sector is that while it exports 2/3 of yarns produced, it has to import nearly 90% of dyed fabric. The key reason is the undevelopment of the middle step - weaving and dyeing - which is considered to be the bottleneck of Vietnam s textile and garment sector. - Raw materials: Because of high dependence upon imported raw materials, Vietnam s spinning industry s profitability is volatile to global price of cotton and foreign exchange rate. - Spinning: Currently, Vietnam has 5.1 million spindles, accounting for 2.04% of the world and ranks no. 6. With the current production capacity, Vietnam can produce ~700,000 tons of yarn a year. However, Vietnam exports ~2/3 yarns produced, mainly to Turkey. - Weaving & Dyeing: With 1/3 of the yarned weaved to be used domestically, current production capacity of Vietnam s weaving companies totals 1.3 billion meters of raw fabric. However, current production capacity of Vietnam s dyeing companies reaches 0.8 billion meters of dyed fabric (implying that Vietnam has to export 0.5 billion meters of raw fabric). The key reason is that the weaving and dyeing industries are capital intensive, and it requires high initial investment capital, especially for waste treatment system. It also requires expertise and intensive capital to treat the waste water during production. Due to environmental issues, only selected provinces allow dyeing companies to operate in their provinces. Although weaving and dyeing companies carry significant demand from garment companies in Vietnam, especially when textile and garment export value amplifies, as a discouraged industry and with old technologies and machines, the processes in Vietnam are underdeveloped. This is a subsequent result of the bottle neck facing Vietnam s textile sector. The production capacity of weaving and dyeing companies is too small and not enough for yarn produced locally. - Cut & Sew: Local weaving and dyeing companies can only meet 0.8 billion meters of dyed fabric or 11.8% of total dyed fabric and the remaining 6 billion meters are imported. Vietnam has an advantage over cut & sew in the supply chain because this step is labor intensive and requires lower investment capital with returns in the short-term. While Vietnam is in top 5 textile and garment exporters, it is mainly for processing. CMT (Cut Make Trim) and FOB (Free on Board) accounted for 96.5% of total export value of which CMT is 75.3% and FOB is 21.2%. Profit margin remains slim for the textile and garment sector, and this is because Vietnam is not capable of self-supplying raw materials for apparel production as mentioned above. Vietnam s garment industry is currently only participating into the third part in global apparel supply chain. Only 2%-3% of Vietnam s apparel export value is ODM (Original Design Manufacturing) which indicates that Vietnam garment enterprises almost do not carry out design process and are not capable of designing and branding. This is because of difficulties in human resource, lack of market information and being far from endusers in import markets. Vietnam garment enterprises are mainly sub-contractors for regional garment contractors. Although Vietnam is in top 5 textile and garment exporters, CMT (Cut Make Trim) and FOB (Free WWW.SSI.COM.VN 2
on Board) account for 96.5% of total export value of which CMT is 75.3% and FOB is 21.2%. Few large garment companies including Viet Tien, Nha Be, Phong Phu, etc. can do contractors and manufacture under FOB model. In addition to the fact that Vietnam is not capable of self-supplying raw materials for apparel production as mentioned above, profit margin of Vietnam textile and garment companies is thin and they benefit more from economy of scale. Our next report in the Garment & Textile sector will be the Initiating Coverage Report on TCM. WWW.SSI.COM.VN 3
Table of content Executive Summary... 1 I. Vietnam Garment & Textile Market: Remarkable development over the last decade which reflects in both growing export value and rising domestic market... 5 1. Growing export value... 5 2. Rising domestic market... 8 II. Vietnam Garment & Textile production... 9 1. Vietnam Garment & Textile supply chain: The bottleneck in weaving & dyeing... 10 2. Where is Vietnam s garment in global supply chain?... 12 RATING... 14 DISCLAIMER... 14 CONTACT INFORMATION... 14 WWW.SSI.COM.VN 4
I. Vietnam Garment & Textile Market: Remarkable development over the last decade which reflects in both growing export value and rising domestic market 1. Growing export value 2000 2012 period: Increase by 8 times in 12 years thanks to the global integration From 2000 to 2012, Vietnam s textile and garment export value had increased ~ 8 times from $1.9bn in 2000 to $15.1bn in 2012. Global integration is the key to the remarkable development: In 2000, Vietnam signed bilateral trade agreement with US. In 2007, Vietnam joined WTO. In 2008, Vietnam signed free trade agreement (FTA) with Japan. These agreements helped to boost textile and garment export. Furthermore, low production cost, especially low labor cost, attracts foreign textile and garment manufacturers coming to Vietnam and setting up factories. Japan is the typical sample of positive impact of free trade agreements on Vietnam s textile and garment export. After signing FTA with Japan in 2008, CAGR of Vietnam s textile and garment export value to this market hiked up to 23% in 2008-2012 while this figure for 2000-2007 period was only 2%. Chart 1: Vietnam s textile and garment export value (2000-2012) Source: GSO WWW.SSI.COM.VN 5
Source: Vinatex March 2013 Vietnam is one of top 5 textile and garment exporters in the world Currently, Vietnam is one of top five textile and garment exporters in the world with the market share of 4% - 5%. Key export market of Vietnam is US, EU and Japan. Export to US and EU has declined relatively while export to Japan has increased from 2007 to 2012. This change is mainly resulted from the increase of Japan market after the FTA with Vietnam and the decline of US and EU markets due to financial and debt crises leading to declining apparel demand. The fourth position belongs to Korea. In 2012, export value to Korea was $1.1 bn, accounting ~7.3% of the total export. In all three key export markets, Vietnam hold large market share: US: Vietnam is the 2 nd largest textile and garment exporter with 7.6% in 2012, behind China with 40.2% market share. EU: Vietnam is the 7 th largest textile and garment exporter with ~2.66% in 2012, behind China, Bangladesh, Turkey, India, Tunisia and Morocco. Japan: Vietnam holds the 3 rd position with market share of ~5%, behind China (78%) and EU (5.25%). WWW.SSI.COM.VN 6
Chart 2: Vietnam s textile&garment export markets (2012) Chart 3: Vietnam s textile&garment export markets (2007-2012) Source: Vitas Source: Vitas Textile and garment export is partially dependent upon the global economic growth: In 2007, when world GDP growth reached high figure of 5.4%, Vietnam s textile and garment export value increased significantly by 32.1%. In contrast, in 2009, the export turnover was down by 0.60% when the global economy was hit by crisis and grew at negative 0.59%. 6M13: Continue to enjoy high growth The textile and garment export value continued to enjoy high growth rate in 1H13. It reached $8.9bn, up by 14.5% YoY. Key markets are still US ($3.94bn or +12% YoY), EU ($1.29bn or +18% YoY), Japan ($1.1bn or 24.5% YoY) and Korea ($660mn or +32% YoY). Vietnam sets the textile and garment export value of $19.5bn for 2013 which means 29.2% YoY growth. It is likely that Vietnam will meet its target this year. WWW.SSI.COM.VN 7
2. Rising domestic market The size of Vietnam s apparel retail market was VND 22.8 trillion (~$1.09 bn) in 2012. Due to weak demand in the context of economic crisis, the market had been declined by 6%YoY in 2012 compared with 2011, after high value growth periods with CAGR of 13.4% in 2005-2010 and 20% in 2011. Recently, many consumers have switched from using products imported from China to Vietnamese products. The number of Made in Vietnam shops have been increasing significantly in the past few years. It is partially thanks to the government campaign Vietnamese use Vietnamese products. The domestic market is highly fragmented. It is led by VTEC, Blue Exchange and Vinatex with the market shares of 3.6%, 3.1% and 3%, respectively, in 2012. According to Euromonitor, small retailers held 86% share of total retail value in 2010. The products sold by these small retailers were quite diversified, from very cheap products either produced locally by domestic companies or imported from China to expensive boutique and designer shops. Many shops even specialized in hand-carried items from Europe, US and Thailand, which were popular amongst the teenagers and young population. Chart 4: Vietnam s Apparel Retail Market Share in 2012 Source: Euromonitor, March 2013 WWW.SSI.COM.VN 8
II. Vietnam Garment & Textile production Thanks to significant development in the last 12 years, currently the textile and garment is a key industry for socio-economic development and poverty reduction in Vietnam, contributing 8% of GDP. There were ~2.5 million employees working in this sector in 2011, accounting for 10% of Vietnam industrial workforce. This sector is labor intensive. It is estimated that every $1bn increase in export turnover may create ~150,000-200,000 jobs. The textile and garment industry contributes the largest to the total export turnover of Vietnam. In 2012, its export value was $15.09 bn, accounting for 13.18%. It increased by 7.5% compared with that of 2011. The textile and garment export value is $2.37 bn higher than the second position (mobile phones and spare parts). According to Vinatex, currently Vietnam has 5,982 textile and garment companies. The majority of these companies are located in the South (62%). 30% and 8% of these companies are in the North and the Central & Highland provinces, respectively. The textile and garment sector of Vietnam mainly focuses on the last step in the supply chain cut and sew. Therefore, the number of apparel companies in Vietnam is the highest, accounting for 70% of the total textile and garment companies. However, the industry is facing many paradoxes and a lot of difficulties still exit. To find out the reasons for these paradoxes, we will analyze the Vietnam s textile and garment supply chain to see its advantage and disadvantages. High dependence upon imported raw materials: In total, Vietnam has to import ~65% raw materials for spinning of which are ~99% of cotton and 30% of synthetic fiber. It also has to import ~88% of dyed fabric for cut & sew. High and increasing contribution of FDI companies in export value: Although the number of FDI companies only accounts for 15%, its export value represents as much as 59.8% in 2012. Furthermore, its contribution to total textile and garment export is increasing. In 2005, export value of FDI enterprises was $2.14bn, accounting for 44% in total. However, in 2012, these FDI companies exported textile and garment products worth $9.02bn or 59.8% of total export value. Chart 5: Export value of FDI and domestic enterprises Source: Vietnam Customs WWW.SSI.COM.VN 9
1. Vietnam Garment & Textile supply chain: The bottleneck in weaving & dyeing Raw materials (cotton, synthetic fiber, wool, silk, etc.) Spinning Yarn Weaving & Fabric Garment Dyeing Cut & Sew Raw materials: It is estimated that currently Vietnam needs around 820,000 tons of raw materials a year, including 420,000 tons of cotton and 400,000 tons of synthetic fibers. Cotton: Vietnam can only meet 5,000 tons of cotton needed or 1.2%. The remaining of 98.8% is imported, mainly from US (45.6% in 6M13) and India (23.1% in 6M13). This fact is attributable to unfavorable weather condition and limited land bank for agriculture. Synthetic fiber: Vietnam has to import 120,000 tons or 30% of synthetic fiber needed. Because of high dependence upon imported raw materials, Vietnam s spinning industry s profitability is volatile to global price of cotton and foreign exchange rate. Spinning: Currently, Vietnam has 5.1 million spindles, accounting for 2.04% of the world and rank no. 6. With current production capacity, Vietnam can produce ~700,000 tons of yarn a year. This process is machine intensive and Vietnam seems to have advantage with low production capacity. However, Vietnam exports ~2/3 yarns produced, mainly to Turkey. The key reason why Vietnam has to export the majority of yarn produced is the un-development of the next step weaving and dyeing. Weaving & Dyeing: With 1/3 yarns to be used domestically, current production capacity of Vietnam s weaving companies can produce 1.3 billion meters of raw fabric. And after that, current production capacity of Vietnam dyeing companies can produce 0.8 billion meters of dyed fabric (It means Vietnam has to export 0.5 billion meters of raw fabric). The key reason is that weaving and dyeing industries are capital intensive. It requires high initial investment capital, especially for waste treatment system. It also requires expertise and much money to treat waste water during production process. Due to environmental issues, only a few authorities allow dyeing companies to build dyeing plants in their provinces. Although weaving and dyeing companies have huge demand from garment companies in Vietnam, especially when textile and garment export value is still increasing, as a discouraged industry and with old technology and machines, these steps in Vietnam are so un-developed. It leads to the fact that weaving and dyeing become the bottle neck of Vietnam s textile and garment sector. The production capacity of weaving and dyeing companies is too small and not enough for yarn produced locally. WWW.SSI.COM.VN 10
Cut & Sew: It is estimated that currently Vietnam needs 6.8 billion meters of dyed fabric for garment production. Local weaving and dyeing companies can only meet 0.8 billion meters of dyed fabric or 11.8% of total dyed fabric and the remaining 6 billion meters is imported. 50% of imported dyed fabric is from China and the rest is from some countries including Taiwan, Japan, Korea, Thailand, India, etc. Vietnam has advantage over cut & sew step in the supply chain because this step is labor intensive and requires lower investment capital with returns in short-term. Therefore, Vietnam has obtained remarkable achievements as mentioned above. The paradox of Vietnam s textile and garment sector is that while it exports 2/3 yarns produced, it has to import nearly 90% of dyed fabric. The key reason is the un-development of the middle step - weaving and dyeing industries - which are considered to be the bottleneck of Vietnam s textile and garment sector. Chart 6: Textile & Apparel Companies by categories in Vietnam Chart 7: Textile & Apparel Companies by categories in Vietnam Source: Vitas, March 2013 Source: Vitas, March 2013 WWW.SSI.COM.VN 11
2. Where is Vietnam s garment in global supply chain? The garment (apparel) value chain is organized around five main parts: (1) Raw material supply, including: natural and synthetic fibers; (2) Provision of components, such as the yarns and fabrics manufactured by textile companies; (3) Production networks made up of garment factories, including their domestic and overseas subcontractors; (4) Export channels established by trade intermediaries; and (5) Marketing networks at the retail level. The apparel value chain Source: Appellbaum and Gereffi (1994) Garment industry s value chain is buyer-driven in which large retailers, marketers and branded manufacturers play the crucial role in setting up decentralized production networks in a variety of exporting countries, typically located in developing countries. In buyer-driven model, retailers generally design and/or market but do not make the branded products they ordered. Buyer-driven chains profits are mostly allocated to retailers for their high-value research, design, sales, marketing and financial services that allow the retailers, designers and marketers as strategic brokers in linking overseas factories and traders with products niches in their main consumer markets. Apparel manufacturers receive small part of profits. WWW.SSI.COM.VN 12
Vietnam s garment industry is currently only participating into the third part in global apparel supply chain. Only 2%-3% of Vietnam s apparel export value is ODM (Original Design Manufacturing) which indicates that Vietnam garment enterprises almost do not carry out design process and are not capable of designing and branding. This is because of difficulties in human resource, lack of market information and being far from endusers in import markets. Vietnam garment enterprises are mainly sub-contractors for regional garment contractors. Although Vietnam is in top 5 textile and garment exporters, CMT (Cut Make Trim) and FOB (Free on Board) account for 96.5% of total export value of which CMT is 75.3% and FOB is 21.2%. Few large garment companies including Viet Tien, Nha Be, Phong Phu, etc. can do contractors and manufacture under FOB model. In addition to the fact that Vietnam is not capable of self-supplying raw materials for apparel production as mentioned above, profit margin of Vietnam textile and garment companies is thin and they benefit more from economy of scale. WWW.SSI.COM.VN 13
RATING Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock s expected return relative to the market required rate of return, which is 16% (*). A BUY rating is given when the security is expected to deliver absolute returns of 16% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to negative 8%, while a HOLD rating implies returns between negative 8% and 16%. Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating. Industry Rating: We provide the analyst industry rating as follows: Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market. *The market required rate of return is calculated based on 1-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. DISCLAIMER The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy, completeness or correctness is not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time; Expressions of opinion contained herein are subject to change without notice; This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities; SSI and its affiliates and/or its officers, directors and employees may have positions and may effect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. This document is for private circulation only and is not for publication in the press or elsewhere; SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content; The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user. CONTACT INFORMATION Phuong Hoang Director, Institutional Research & Investment Advisory phuonghv@ssi.com.vn Giang Nguyen Research Manager, Consumer Goods giangntt@ssi.com.vn WWW.SSI.COM.VN SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) 3824 2897 Fax: (848) 3824 2997 Email: info@ssi.com.vn HA NOI 1c Ngo Quyen Street Ha Noi City Tel: (848) 3936 6321 Fax: (848) 3936 6311