Mid-Summer Apparel OEM Stocks 'Cold, So Cold'

Yeongwon Trade, Hwasung Enterprise, and Others Face Earnings Slump... Combined with Stock Price Decline

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[Asia Economy Reporter Kum Boryeong] Domestic apparel original equipment manufacturer (OEM) stocks are showing a gloomy outlook as poor earnings performance coincides with stock price declines.

According to the Korea Exchange on the 17th, Youngone Corporation closed at 25,400 KRW the previous day. Compared to 34,650 KRW on the 2nd of last month, this represents a 26.7% drop in just a month and a half. During the same period, Hwasung Enterprise fell 27.52% from 14,900 KRW to 10,800 KRW, and Hansae Co., Ltd. dropped 17.22% from 13,650 KRW to 11,300 KRW. This is in stark contrast to the KOSPI index, which rose 4.63% from 2,087.19 to 2,183.76.

The earnings of apparel OEM stocks are expected to worsen further in the second quarter. Since March, the rapid spread of COVID-19 centered on the US and Europe, which are major clients, has caused contraction in upstream industries. Delays in shipments and sluggish orders for apparel OEM stocks peaked in the second quarter. According to Korea Investment & Securities, the combined operating profit of Youngone Corporation, Hwasung Enterprise, and Hansae Co., Ltd. in the second quarter is estimated to have decreased by 47% year-on-year. Operating profits by company are expected to decline by 39% and 21% year-on-year to 55 billion KRW and 14 billion KRW for Youngone Corporation and Hwasung Enterprise, respectively. Hansae Co., Ltd. is expected to post an operating loss of 1 billion KRW, significantly below the consensus operating profit of 6 billion KRW.

Apparel OEM stocks have introduced various measures under the influence of COVID-19, but these have not translated into visible results. In particular, Hansae Co., Ltd. entered the production of masks and protective clothing, creating new sales, but masks and protective clothing have low profitability, damaging margins. Son Hyoju, a researcher at Hanwha Investment & Securities, analyzed, "The expansion of low-margin mask and protective clothing production, price reductions and volume decreases in the apparel OEM business, and losses reflected from bankrupt buyers make a return to losses inevitable."

Stock prices are significantly lower compared to before COVID-19. Youngone Corporation’s stock price, which was 35,600 KRW on July 16 last year, has fallen 28.65% in one year. Hansae Co., Ltd. and Hwasung Enterprise also dropped 42.49% and 22.58%, respectively. To make matters worse, securities firms are lowering their target prices for these companies. Korea Investment & Securities lowered the target prices of Youngone Corporation and Hwasung Enterprise from 42,000 KRW and 19,000 KRW to 35,000 KRW and 16,000 KRW, respectively. Hanwha Investment & Securities also lowered Hansae Co., Ltd.’s target price from 15,000 KRW to 14,000 KRW, and Youngone Corporation’s from 48,000 KRW to 35,000 KRW.

Na Eunchae, a researcher at Korea Investment & Securities, said, "Although the stocks are excessively undervalued, a conservative approach is still necessary. Given the prolonged COVID-19 situation, it is difficult to expect meaningful order improvements in the second half, so we need to monitor the recovery trend of upstream industries."

This content was produced with the assistance of AI translation services.