(Report producer/author: Guosheng Securities, Yang Ying, Hou Ziye, Wang Jiawei)

1. How to look forward to the development trend of China's clothing consumption?

1.1. Short-term situation and prediction: current fluctuations still exist, and subsequent recovery is imminent

Clothing consumption has a strong optional attribute, and the current retail performance is slightly weaker than that of the whole community. We believe that the subsequent repair is more flexible. 1) China's clothing consumption has experienced a slow recovery trend in Q3 after reaching the bottom in Q2 in 2022. From a monthly perspective, the retail sales of clothing knitwear clubs in July, August, September and October of 2022 were+0.8%/+5.1%/- 0.5%/- 7.5% year-on-year (the total retail sales of clothing knitwear clubs in the same period was+2.7%/5.4%/2.5%/- 0.5% year-on-year). We judged that the weak retail sales performance of the industry from September to October was mainly due to the fluctuation of passenger flow in some regions in China. 2) After that, if the consumption environment is significantly improved, we believe that clothing as an optional consumer goods has greater flexibility for subsequent improvement. This attribute has also been verified in the consumer repair in 2020: the decline of clothing retail sales in early 2020 is significantly greater than that of the total retail sales (in March 2020, clothing retail sales were - 34.8% vs total retail sales were - 14.8%), However, the subsequent recovery speed and elasticity are also more prominent (in October 2020, the clothing agency zero+12.2% vs the total amount of the agency zero+4.3%).

From the perspective of listed companies: the performance in 2022 is weak, and the valuation of the sector is at the bottom. We look forward to the subsequent recovery. Fundamentals: 1) Brand business performance is weak. The revenue/performance of key companies in the brand clothing sector in the first three quarters of 2022 were - 7%/- 31% year on year, of which the revenue of Q1, Q2 and Q2 were - 0.3%/- 15.2%/- 2.8% year on year, and the performance was - 12.5%/- 58.6%/- 10.5% year on year. In terms of segments: sports shoes and clothing have a good performance, and the performance of public clothing has been seriously damaged; 2) The fundamentals of the ready-to-wear manufacturing sector are stable, with growth in the first three quarters, but recent orders are weak and expected to weaken in the future. In terms of market performance: weak industry fundamentals and expectations led to the decline of all segments. Since the beginning of 2022, the ready-to-wear manufacturing, sports shoes and clothing, and mass clothing sectors have suffered relatively large losses. At present, the valuation of all segments of clothing is basically at a low level, and there is a large space for subsequent repair.

Looking forward to 2023, we believe that the recovery of clothing consumption is the general trend of the whole year: the environmental objective factors such as policy and passenger flow, the subjective will of consumers, and the performance of listed companies are expected to improve compared with 2022.

1. We believe that the passenger flow is expected to recover from fluctuations in 2023, and the consumption environment is expected to show a positive trend of change. The epidemic prevention and control will be more precise and scientific, and the frequent consumption policies will be boosted, which is expected to promote the improvement of the consumption environment. 1) The Comprehensive Group of the Joint Prevention and Control Mechanism of the State Council released the Notice on Further Optimizing the Prevention and Control Measures of the COVID-19 and Doing a Good Job in Prevention and Control Scientifically and Accurately on November 11, Adjust the management measures of "7 days of centralized isolation+3 days of home health monitoring" to "5 days of centralized isolation+3 days of home isolation"; ② 20 measures such as timely and accurate determination of close contacts and no longer determination of close contacts. Since then, many regions have taken specific actions to implement the 20 measures of the central government to further optimize the prevention and control work, and effectively implemented scientific and accurate prevention and control and normalized epidemic prevention and control. 2) At the same time, a series of policies and measures to expand consumption have been introduced in succession, which is expected to promote the release of consumption potential.

From the perspective of passenger flow: Q3 is improved on a month-on-month basis, and Q4 is still uncertain. We believe that it will recover from fluctuations in 2023. 1) The offline passenger flow in Q3 has significantly improved compared with Q2 on a month-on-month basis: from the perspective of the passenger flow in the shopping center, according to the big data of Win Mall, the performance of passenger flow hit the bottom in March and April, and the rapid month-on-month rebound in May and June, and the subsequent recovery in July and September. The passenger flow of sample shopping centers in the first three quarters of 2022 fell by 7.5% year on year (a significant decrease compared with the 23% decline in the first half of 2022). 2) Considering the current environment, we judge that Q4 offline operation will continue to face uncertainty, and the performance of passenger flow in 2023 is expected to recover from fluctuations.

2. Judging from the subjective changes of consumers, consumer confidence still fluctuates at present, and is expected to show a trend of slow recovery if environmental factors improve in the future. In recent years, China's consumer confidence index has maintained a strong trend in the past for a long time. It has only declined since the first half of 2020 and the second quarter of 2022 due to the national epidemic (from April to October 2022, it has been stable between 80 and 90). 1) Looking back at the SARS period in 2003, the consumer confidence index also decreased significantly from April to May 2003 due to the large-scale epidemiology, and subsequently recovered steadily with the effective control of the epidemic. 2) We believe that the current downturn in consumer willingness and confidence is expected to show a slow recovery trend as consumers' expectations of future income tend to stabilize.

3. From the perspective of changes in listed companies: 1) The terminal sales of the industry in 2022Q4 are still fluctuating: according to our tracking, the retail performance of the industry is stable during the National Day, and the subsequent fluctuations occur due to the weakening of passenger flow. We judge that the state of stable recovery in the general direction, monthly and regional fluctuations is expected to continue in Q4; At present, the peak season of clothing in winter is approaching, and the increase of consumption demand for autumn and winter clothing is expected to benefit the industry's flow and inventory reduction. 2) Looking forward to 2023: if the marginal improvement of consumption environment factors is relatively obvious, and the clothing category is regarded as consumer goods with strong optional attributes, we judge that the underlying growth elasticity of the follow-up industry is relatively large, which is expected to drive the valuation repair. In terms of performance, considering the low base of brand business performance in 2022, we believe that the quality of earnings is expected to recover and the performance is expected to grow rapidly under the low base in 2023. The specific sub-sectors are as follows:

Sports shoes and clothing: 1) 2022Q4: We tracked that the terminal flow performance of sports shoes and clothing brands slowed down in October compared with Q3. During the "Double 11" period, the sales performance was good, and the inventory reduction was steadily promoted. Based on the comprehensive judgment, we expected that the channel inventory was expected to return to normal in the next 1-2 quarters, laying a foundation for healthy growth. 2) 2023: On the premise of inventory reduction in place, considering the change of base, we judge that the pace of recovery in 2023 is reflected in the gradual improvement of Q1 flow, Q2 shows a rapid growth in the case of low base, and H2 shows a steady growth overall.

Brand clothing: 1) Since Q4, the flow performance of popular clothing and high-end clothing has been weaker than that of Q3. We track and judge that there are still fluctuations. Looking forward to 2023, the flow of fashion clothing terminals is expected to rebound and recover with the improvement of the consumption environment, and the quality of earnings is expected to gradually improve. From a quarterly perspective, it is expected that the growth rate of 2023Q1 performance is relatively weak, and Q2~Q4 performance is expected to grow rapidly. 2) Since Q4, the terminals of the home textile sector have also been in a fluctuating trend. In 2023, we are optimistic that the industry terminals will gradually recover, and the replenishment demand of the franchisees is expected to drive the company's performance to improve. In 2023Q1, driven by the festival sales, the flow is expected to grow significantly, and the subsequent growth will be stable at a low base.

Ready-to-wear manufacturing: The performance of the sector is relatively stable in 2022Q1~Q3. We track the performance pressure caused by insufficient order demand of manufacturers in Q4. We judge that this pressure will continue in 2023H1, and is expected to improve significantly in 2023H2. In summary, we expect that the revenue and performance of 2023H1 segment will increase under great pressure on a year-on-year basis, and 2023H2 is expected to grow healthily from a low base.

1.2. Medium and long term: continue the multifaceted consumption upgrading trend, and there are opportunities for functional categories, low-line markets and high-quality national brands

In the medium and long term, what is the future trend of China's clothing consumption market? What are the structural changes and opportunities? 1. Compared with the past situation of the United States and Japan, we believe that China's future consumption trend is more inclined to the "structural upgrading" of the United States in the past. Some markets are characterized by "consumption differentiation", but do not have the conditions for overall consumption degradation. Referring to the past clothing consumption in the United States and Japan:

The United States: In the past process of structural consumption upgrading, the proportion of clothing consumption has declined, while the penetration of functional footwear in the clothing market has significantly increased. 1) In the past century, consumption has been the main driving force of American economic growth, and economic fluctuations will disrupt this pace in the short term. In this process, consumption shows the characteristics of structural upgrading: the proportion of service consumption and durable goods consumption has increased, and the proportion of non-durable goods consumption such as clothing has decreased. At present, China has a similar trend, which we believe is the normal performance in the upgrading of consumption structure. 2) In clothing consumption, the penetration rate of functional sports shoes and clothing in the United States continues to increase, reaching 38% in 2021 (compared with 21% in the world/13% in China). After the epidemic, the importance of residents' health was increased, and the recovery of sports categories was faster.

Japan: In the context of decades of basically no economic growth, the public's consumption power has generally declined, and the pursuit of practicality and cost-effectiveness. We believe that China does not have the conditions for overall consumption degradation compared with the previous situation. 1) In the 20th century, Japan's clothing consumption has experienced the process of early consumption upgrading, medium-term expansion, and later recession. At the end of the 20th century, Japan's economy and clothing consumption gradually declined, and the rise of simple pragmatism, MUJI and Uniqlo were developed. 2) We believe that its consumption degradation in the later period resulted from a long period of economic stagnation (GDP has basically not increased since 2000), which was catalysed by the expansion of the gap between the rich and the poor, and was further amplified under the impact of various major events. However, China's economy is still developing steadily (the current GDP CAGR has reached 9.7% since 2010), and we do not believe that it has the environmental conditions for overall consumption degradation.

2. From the perspective of trend, the change of domestic clothing consumption market demand shows diverse and complex characteristics, and clothing consumption shows diversified consumption ecology in the trend of different groups and categories. Trend 1: Low-line cities as a whole are still in the process of consumption upgrading, and the phenomenon of consumption stratification in higher-line cities is intensified under the epidemic. The middle class in low-tier cities has increased rapidly in recent years. The improvement of residents' income and lower house prices have promoted the improvement of low-tier consumption capacity, which is reflected in the pursuit of product quality and the formation of brand awareness. China's third-tier and lower-tier market population accounts for nearly 70%. According to McKinsey's data, in the third-tier and fourth-tier cities in 2010-2018, the number of households with an annual disposable income of 140000 to 300000 yuan CAGR reached 38% (23% in the first-tier and second-tier cities in the same period). These wealthier households currently account for more than 34% of the population in the third-tier and fourth-tier cities.

There is a large gap in the purchasing power of high-end cities, and the consumption of different groups is stratified. According to the data of the World Bank, in 2021, the wealth share of the top 1% of the population in China will exceed 30%, and the wealth share of the top 10% of the population will reach 68%. On the one hand, due to the wealth effect, the increase of the assets held by the head crowd has boosted the consumption will. Under the epidemic, the high-end consumption power is less affected and the local luxury market is hot. On the other hand, for the middle and low income groups in the high-tier cities, the environmental fluctuations make the income expectations fluctuate, while the house prices and prices remain high, which may lead to the extrusion of consumption.

Trend 2: The demand for functional categories will be upgraded, and there will be structural changes at the level of categories in the subdivided professional fields and market segments. The upgrading trend of sports shoes and clothing is more obvious. The quality upgrading of functional products is more explicit, and the improvement of the quantity and quality of consumer demand drives growth. It is mainly reflected in the following aspects: 1) The continuous upgrading of professional performance by brand owners and manufacturers has promoted the change of consumer demand; 2) Consumers themselves pay more attention to the subdivision and matching of professional performance of sports shoes and clothing; 3) Women's sports, children's sports and other sub-markets meet different gender and age groups. For detailed analysis, see "2.3 Long-term development of sports shoes and clothing: demand and policy driven, and continuous progress of domestic brands".

Trend 3: The rise of high-quality domestic brands is a long-term trend, and "content-based" products are loved by young people who are keen on personalization and self-expression. Clothing and accessories, as one of the carriers to highlight personality and express oneself, are rising under the background of improving national self-confidence. 1) Young consumers have a higher demand for personalization, and they also pay more attention to the content attributes behind the product. According to JD Big Data, the post-90s' preference for co-branded products has a TGI of 187, significantly higher than 99 of non-co-branded products. With the demand, various cross-border IP co branding and China-Chic styles are popular in the clothing market. For example, Anta brand launched a series of footwear and clothing products in cooperation with Suzhou Museum and won the favor of customers. 2) We believe that "China-Chic" is a long-term trend rather than a short-term trend, including the integration of Chinese traditional cultural elements, the launch of theme series products, and the strengthening of domestic brand attributes and image building. In this process, clothing brands that effectively realize self IP are expected to establish differentiation advantages in the environment of intensified competition, and enjoy the trend dividend of national brand rise in the medium and long term.

2. Investment main line 1: focus on the track of sports shoes and clothing with growth

As the most growing track in the textile and clothing sector, the sports shoes and clothing track is still one of the main investment lines in 2023. We believe that it is still one of the following: 1) In terms of fundamentals, although there are fluctuations in the short term, the medium term dimension is expected to improve gradually. In the long term, the industry is in the process of upward growth, with sufficient driving force for future growth; 2) At the valuation level, the impact on the fundamentals in the early stage is reflected in a sharp correction at the stock price level. The current market expectations are relatively consistent, and the valuation reflects a high cost performance ratio. For the investment strategy and timing of the sports shoes and clothing industry, we will elaborate from the following aspects: 1) Looking back over the past two years, what are the core drivers of the share price of the sports shoes and clothing industry? 2) How can we judge the fundamental trend of the industry in the next 1 year and the current level of inventory pressure in the industry? 3) How does the medium and long term industry change in market size, pattern evolution and core competitive elements of the company? 4) How to view the future valuation trend of the industry.

2.1. Resumption: terminal operation affects stock price trend

Looking back on the stock price trend of key companies in the sports shoes and clothing sector in the past two years, we conclude that the terminal flow performance, market expectations for channel inventory and important events all have an important impact on the stock price.

Flow: fluctuations will have a direct impact on the short-term performance of stock prices. In 2021, the outbreak of the "Xinjiang Cotton" event triggered the enthusiasm for domestic brand consumption, which led to the rapid growth of running water and the rapid rise of stock prices. At the beginning of 2022, with the steady improvement of the epidemic situation, the terminal flow of the sector companies increased steadily, which led to a higher share price. From March to the end of May 2022, the global economic situation was turbulent, the domestic terminal passenger flow declined, and the terminal consumption was depressed. At the same time, under the background of the Xinjiang cotton event in the same period, the base rose, and the decline of each brand significantly led to the weakening of the stock price. At the end of May to the end of August, the domestic epidemic situation gradually eased, and the flow performance of each brand company in May has improved compared with that in April, and the year-on-year growth rate of the end flow of each company in June turned positive. At the end of Q3, the brand flow slowed down in September, and we expect the performance of October to November to fluctuate significantly.

In terms of inventory: higher inventory means the mismatch between terminal sales and supply chain management, or brings discount pressure and asset impairment risk, which will affect the profit quality expectation. Since the end of Q3, the channel inventory has increased due to the blocking of Q2 sales in the early period and the stacking of Q4 stock. We expect the "Double 11" in November to help clean up the inventory, and the stock sales have improved compared with the end of Q3. Event impact: the Xinjiangmian event last year and the recent public opinion events related to Li Ning have had an impact on the sentiment of the capital market, and the impact is also obvious in terms of time and scope.

2.2. Medium and short term judgment of fundamentals: short-term fluctuation, medium-term improvement and flexibility

For the short and medium term judgment of the sports shoes and clothing sector, our conclusion is clear: Q4 - Q1 next year, due to the repeated changes in the consumption environment, the terminal passenger flow is unstable, and the flow will still fluctuate, but on the premise of gradual digestion and improvement of inventory, considering the relatively low base in 2023, the improvement of the whole year is certain, and in the process of improvement, due to the attributes of sports shoes and clothing products, Its elasticity will be obvious. 1. Flow level: Q4 fluctuates and is expected to improve in 2023. Compared with leisure and fashion categories, professional sports categories and domestic brands perform better than international brands. Due to the impact of the epidemic in 2022Q2, the terminal flow of brand companies has declined to varying degrees, and Q3 has improved. From July to August, the overall performance of sports shoes and clothing running water was significantly improved compared with Q2. From the point of view of Q2, the overall running water growth rate of Q3 still achieved good growth year on year, in line with market expectations. Due to the impact of the fluctuation of passenger flow around the country, we believe that there will be continuous fluctuations in the flow of water from Q4 to Q1 next year.

We believe that the structural characteristics of flowing water are also particularly important for the following basic judgment. The demand for sports shoes and clothing as a functional category is relatively rigid. We judge that the sales performance of professional sports is better than that of life category. In 2022, Li Ning's basketball/running flow increased by 30%/10% year on year, and fitness/sports life flow decreased by 9%/1% year on year. Shoes performed better than clothing. We think this trend will continue in H2 and next year.

The performance of niche sports, including ice and snow, yoga and outdoor high-end brands H2 is expected to continue the trend of H1, with a higher growth rate. In the process of the rise of minority sports, the number of participants increased, and under the professional sports scenario, the clear demand for related products is expected to bring higher growth performance. In 2022Q3, the high-end brands of Anta Group, such as DiSant and KOLONQ3, will grow by 40% - 45%. In terms of international brands, since this year, due to the interference of supply chain fluctuations in the early stage and the subsequent impact of channel inventory pressure, the revenue growth momentum has been weak, and the top dealers in the domestic market have performed better than the average level of the company in Greater China. We believe that international brands are still in the process of adjustment and recovery. According to our tracking, the performance of Nike Greater China in June and August is better than the company's expectation, and the terminal discount has gradually narrowed, and is expected to return to normal in 2023. The overall performance of Adidas is still weak. Affected by the Yeezy event, the company recently lowered its annual profit forecast again.

2. At the operational level, the current channel inventory is within a controllable range. If the Q4 depolarization in 2022 is relatively smooth, it will lay a good foundation for the overall growth of the industry next year. The channel inventory continues to be digested. In 2022, the Q3 brand will consider the "Double 11" and other major promotions to prepare goods. The industry channel inventory has increased compared with the end of June, and the domestic brand channel inventory has increased, which is still in a healthy range. After subsequent cleaning, it is expected to be improved by the end of the year. The international brand channel inventory has problems for a longer time, and it is still expected to take 1-2 quarters to clean up. With regard to the current inventory situation, the market is worried that the company will face certain channel inventory risk and subsequently generate inventory provision. Therefore, compared with the situation at the beginning of the epidemic in 2020 and in 2012, the increase of the channel inventory is a short-term change, which is still within the controllable range as a whole (similar to the situation at the beginning of the epidemic in 2020, but obviously different from the industrial structural problems in 2012). Referring to the historical experience, if the subsequent sales are smooth, we expect that the industry channel inventory is expected to recover to health after the first two quarters.

Anta Sports: According to our tracking, the ratio of Anta's stock to sales was slightly higher than 5 by the end of September. Benefiting from the product upgrading under the Winlink plan and the channel efficiency optimization after the transformation of DTC, we expect the Q3 terminal discount to be flat year-on-year/month-on-month; Fila's stock to sales ratio is expected to be between 7 and 8, and the Q3 terminal discount is expected to deepen slightly to about 75% year-on-year. Li Ning: As of the end of September, the inventory and sales ratio of Li Ning brand is expected to be slightly higher than 4, and the overall discount of Q3 offline terminals is expected to be between 65% and 70%. We judge that the proportion of new products within 6 months and 3 months in the company's channel inventory is still at a high level, and the stock age structure is healthy. Step International: Terminal sales were blocked in September. According to the announcement of the company's business situation in the third quarter, the turnover of retail inventory in the channel was 4.5-5 months by the end of Q3 (about 4.5 months at the end of H1), and the retail discount level was basically the same as that in 2022Q2, which was 70-75% off, deepening year-on-year in 2021Q3.

The market boom has receded, and the stores continue to expand. The lack of retail-oriented thinking is the core cause of the channel inventory crisis in 2012. The industry took 1-2 years to digest the inventory. With the end of the 2008 Beijing Olympic Games, the consumption enthusiasm of sports shoes and clothing gradually returned to normal. Although the sports shoes and clothing brands still maintain the momentum of rapid store expansion, since 2008, the brand company's revenue growth has slowed significantly, the channel inventory has accumulated, and the number of inventory turnover days has increased. Under the franchise model, the number of inventory turnover days of Li Ning has exceeded 100 days, and the channel inventory has accumulated to 8.8 months (the normal turnover days are about 60 days, and the inventory has accumulated to 4-5 months). By 2012, the revenue of all major sports brands has increased negatively, and the industry has entered the closing tide. In particular, small enterprises in the industry have limited capacity to bear losses and are faced with accelerated liquidation.

At the beginning of 2020, the COVID-19 broke out and the terminal consumption was affected, which was the reason for the higher inventory of sports shoes and clothing. With the recovery of consumption, it took 2-3 quarters to digest the inventory. By the end of Q3, the stock to sales ratio of special brands was about 5. However, with the gradual improvement of the epidemic situation and the company's efficient inventory reduction measures, according to the company's disclosure, by the end of Q1, the stock to sales ratio of special brands had returned to normal to about 4 months.

3. The direction of recovery is determined. Referring to past experience, the recovery of sports shoes and clothing is elastic. According to the judgment of Q4 in 2022, we believe that under the gradual recovery of consumption will, we expect the industry companies to continue to grow steadily throughout the year. At the same time, if the inventory of each brand is properly handled in Q4, the channel inventory will be healthier and the growth in 2023 will be more guaranteed. On the premise of inventory reduction in place, considering the base change in 2022, the pace of recovery in 2023 is reflected in the gradual improvement of Q1, the rapid growth of Q2 in the case of low base, and the steady growth of H2 as a whole.

In terms of share price, as we mentioned earlier, the performance of running water is one of the core drivers of the share price of sports shoes and clothing brand companies. We refer to the stock price trend in March 2020. At that time, the sharp fluctuations in domestic passenger flow led to the downturn in the terminal sales of brand companies and the decline in the stock price. However, with the subsequent recovery of domestic passenger flow, the terminal flow also gradually recovered, and the stock price began to recover after April. At present, we believe that the withdrawal of the stock prices of various sports shoes and clothing companies has basically reflected the market's expectations for Q4. With the recovery and improvement of the economic environment, the market performance is expected to rebound.

2.3 Long-term development: driven by demand and policy, domestic brands continue to make progress

1. Long-term prosperity: demand and policy drive industry growth. In the medium and long term, we believe that the domestic sports shoes and clothing market is still in the growth stage, and the scale maintains double-digit growth. The domestic sports shoes and clothing market is a fast-growing high-quality track. In recent years, the market size CAGR is about double digits, significantly higher than the average growth rate of the footwear industry. According to the data of Anta Sports Bulletin, the domestic sports shoes and clothing market size CAGR reached 13% in 2015-2020, and is expected to maintain double-digit growth in the future.

Demand-driven: the national health awareness has been improved after the epidemic, driving sports-related consumption. The improvement of sports enthusiasm and participation will bring related needs. According to the Survey Bulletin of the National Fitness Activity in 2020 issued by the National Physical Fitness Monitoring Center, the number and proportion of people regularly participating in physical exercise in the country have increased year by year, and the proportion in 2020 is 37.2% (including children and adolescents, an increase of 3.3 PCTs over 2014 and 9.0 PCTs over 2007). There is still a gap between urban and rural areas, but the gap is significantly smaller than before. In 2020, the proportion of urban/rural residents who often participate in physical exercise is 40.1%/32.7% respectively. We judge that the number of rural residents in the past has increased more significantly.

In recent years, the rise of segmented sports fields, such as ice and snow sports, running, outdoor sports, etc., has brought new growth opportunities to the industry horizontally and accelerated the expansion of the industry scale. According to the data of Yuepao's "2021 China Running White Paper", the number of users of Yuepao APP increased by 16.7% year on year in 2021, and the number of daily active users increased by 21.4% year on year. Although the epidemic has affected the lives of residents, more and more consumers are beginning to develop running habits. At the same time, the average monthly running times of male and female users in 2021 and 2020 will be 5.6/5.9 and 5.3/5.1 respectively.

In 2021, more than 73% of the runners will consume more than 1000 yuan annually, of which the proportion of users who consume between 2000 and 5000 yuan annually will reach 32.3%, with a significant year-on-year increase. China's outdoor sports market is still in the stage of cultivation and growth, and the trend of "extensive outdoor" is rising. In recent years, outdoor sports have gradually popularized in China, driving the development of the outdoor market. However, with the continuous development of social economy in recent years, the popularity of outdoor sports in China has improved. Thanks to the large population base, China is also gradually growing into one of the major outdoor sports goods markets in the world. According to COCA data, the total retail sales/shipments of domestic outdoor products in 2019 reached about 25.02/14.16 billion yuan respectively.

Women's consumer demand rose and consumer groups expanded. Led by the trend of women's sports, the scale of women's sports market has a significant growth trend. The Lululemon brand has achieved rapid growth and maintained a leading position in the yoga track. Anta also mentioned the development of women's sports category and the development of women-specific products in its development plan for the next five years. Li Ning's women's fitness series launched "soft pants" and "smart pants", targeted at high-end female consumer groups, and promoted them on social platforms such as Xiaohongshu, with good market response.

Policy guidance: The introduction of relevant national supportive policies is expected to further boost the nationwide fitness boom. The government has issued policies for many times to encourage extensive nationwide fitness activities, promote the comprehensive development of mass sports and competitive sports, and is expected to further promote the sports shoes and clothing landscape. According to the National Fitness Plan (2021-2025) issued by the State Council, it is clear that by 2025, the public service system of national fitness will be improved, the people's physical fitness will be more convenient, and the number of participants in various sports will continue to increase. In November 2022, eight departments including the General Administration of Sport of the People's Republic of China jointly issued the Outdoor Sports Industry Development Plan (2022-2025), which proposed that by the end of 2021, the number of outdoor sports participants in the country had exceeded 400 million, and the total scale of the outdoor sports industry was expected to exceed 3 trillion yuan by 2025. Emphasis should be placed on strengthening youth sports work. According to the newly revised "Sports Law", it is encouraged to give priority to the development of youth and school sports, and schools must provide sufficient physical education classes to ensure that students participate in at least one hour of physical exercise every day during school.

2. Pattern change: The brands in the sub-sectors have risen rapidly, and the domestic brands have performed well. The specialization and differentiation of sports scenes is the inevitable trend of sports shoes and clothing consumption upgrading. Due to the strong professional attribute of the product, consumers have different preferences for the functional requirements of the product in different scenarios, and it is difficult to achieve compatibility, so differentiated products emerge as the times require. In recent years, the increase in the number of people participating in jogging in China has brought good development opportunities for professional products related to the running field. In addition, sports brands that cater to the needs of the segments in recent years have developed rapidly and gained market share by virtue of their differentiated characteristics. For example, Lululemon, which takes yoga and other indoor sports as the main clothing scene, and Di Sant, which takes skiing as the core brand gene, have performed well in the Chinese market in recent years.

The rising trend of domestic products is prominent, and we judge that the share of local brands is expected to continue to increase in the future. From the sales data of terminals, the growth trend of domestic leading brands has been better than that of international brands in Greater China since 2021. At the same time, we observed that with the increase of the attention and recognition of local brands, according to Baidu research data, consumers' attention to domestic brands has increased from 45% in 2016 to 75% in 2021. At the same time, the product strength of domestic brands has been strengthened, which resonates with consumer market sentiment. The accumulation of research and development of local brands in the past has laid a solid foundation for the improvement of product strength, such as the further promotion of Li Ning's professional sports technology, and the promotion and upgrading of fashion sports series, which together drive the improvement of ASP; Anta brand focuses on creating NBA star signature shoes, introducing the speed family into the professional racing shoe market; The tag of special step professional running has been certified by countless runners.

3. Core competitive elements: under the guidance of professional demand, product brand first, and channel optimization layout. The product is the first, the core technology is precipitated, the current consumption trend is adapted, and the pursuit of professional products is catered to. Consumers tend to be rational, and products have become the core focus of brand competition again. As a functional category with strong professional and technological attributes, the R&D of related technologies determines the barriers of products. International brands have first-mover advantages and scale advantages in research and development, and have formed strong technical achievements through long-term accumulation in the past. Since the 1970s, nike has introduced cushioning technology and developed the first air cushion running shoes. A series of international brands have started the development of cushioning technology, such as adidas' launch of boost technology. In 2017, nike launched Zoomx series and introduced carbon board running shoes Fengchao. The launch of these core technologies has helped international brands create popular series or evergreen classic models, and gradually accumulated the brand's product competitiveness.

The domestic brands started relatively late and are still catching up, but with the continuous investment in research and development, they gradually precipitated their own exclusive technology. Since 2017, the R&D investment of domestic sports brands has increased year by year, with the absolute value and growth rate of Anta R&D expenditure being particularly obvious. The R&D expenditure in 2021 will reach 1.1 billion yuan. Encouraged by R&D investment, domestic brands have created their own core technologies and products: Li Ning's two major technology brands "? Technology" and "弜 Technology" are the achievements of years of independent R&D investment in high-end products. The increase in product power has also brought about the increase in the price of sports shoes of domestic brands. Compared with international brands, the pricing gap is gradually narrowing.

Channel operation directly affects the report quality, optimizes the layout and amplifies the advantages of products and brands. Offline channels: the number is stable, the layout is optimized, and the area of single store is increased. Under the influence of the repeated fluctuations of the epidemic, most brands are more cautious about the expansion of their stores. In terms of channel layout, the store layout competition in the core cities is more intense, and we insist on "closing small stores and opening large ones". At the same time, the improvement of single store efficiency has become the key, the retail efficiency has been improved, and the operation of DTC has been strengthened. With the development of the retail market, high-quality large stores have become the focus of entering the shopping center. The rent of shops is higher and there are market share costs. Only large brands with sufficient financial strength have the strength to enter. DTC mode has become an important choice. Considering the level of store efficiency/floor efficiency, Anta and FILA have strong performance, and the brand of Li Ning has improved significantly.

Online channels: e-commerce business has become an important driving force for brands, opening up the online and offline retail system and improving retail efficiency. According to the data disclosed by various companies in H1, 2022, the e-commerce revenue of Anta main brand/Li Ning brand accounted for more than 30%, and the e-commerce revenue of FILA brand accounted for more than 20%. The e-commerce platforms are diversified, and the e-commerce channels assume diversified functions. In addition to the traditional channels such as Tmall and JD, the current e-commerce channels have also become important sales channels for emerging social live broadcasting platforms such as Tiktok, Kwai and Xiaohongshu. In addition, e-commerce has become an important promotional and marketing channel in addition to the function of depopulating inventory. The head brand will also pay more attention to the competition and profitability of e-commerce channels.

2.4 Investment suggestions: recommend high-quality leading enterprises with both growth and cost-effectiveness

From the perspective of valuation, the valuation level of companies in the current sector has been significantly reduced. Reviewing the trend of PE-TTM segment companies, it can be found that under the catalysis of multiple factors such as the increase in participation of residents in sports and the Xinjiang cotton incident, the valuation of segment companies continued to rise. Since 2022, the valuation of key companies has declined due to the repeated outbreaks in many places and the overall weak macro consumption. We believe that the current industry valuation is at a relatively low level and the investment space is considerable. From the basic point of view, as previously analyzed, we believe that the current track of sports shoes and clothing is still in a period of rapid growth, and the inventory problem that currently plagues the company's growth is expected to be solved from the end of this year to the beginning of next year with the gradual weakening of the impact of the epidemic situation and the company's efficient inventory reduction measures. From the perspective of valuation, the valuation of the current sports shoes and clothing sector has been significantly revised back, with considerable investment space.

3. Investment main line 2: recovery of clothing consumption environment, selection of stable stocks

How to view the opportunities brought by the subsequent consumption recovery to the brand clothing sector? 1. Brand clothing companies used to have relatively weak fundamentals and are currently at a low valuation. 2. If the consumption environment is significantly improved in the future, along with the recovery of clothing brands, we judge that the valuation is also expected to be restored. On the whole, the elasticity of the plate is relatively large. Among them: 1) Popular clothing depends on passenger flow, and its past performance has been seriously damaged, but its operation is relatively controllable. If the passenger flow recovers in 2023, it is expected to drive the flow rebound of popular clothing brands, and the valuation repair of superimposed sectors is expected to bring greater stock price elasticity, reminding attention to the target of month-on-month improvement. 2) The performance of medium and high-end clothing in the past was relatively stable, with a large difference in individual stocks. We believe that in 2023, the recovery of brands with effective member maintenance and excellent brand strength will be more sustainable. 3) With the recovery of the real estate chain and the release of consumer demand, we believe that the fundamentals are also expected to show marginal improvement.

3.1. Valuation: market performance is strongly related to fundamentals, and is currently awaiting recovery

In the past, the stock price of the plate has fallen in shock. We judge that there is a strong correlation with the expected performance of the whole year. Since 2022, the mass clothing and high-end clothing sectors have shown a trend of shock decline. Since October 2022Q1/Q2/Q3, the mass clothing sector (including the key companies Hailan Home, Senma Clothing and Taipingbird) has fallen 16.0%/3.4%/15.0%/10.1% respectively, The medium and high-end clothing sector (including the key companies Bienlufen, Sevenwolves, Gleis, Rejoice Bird, Deso Fashion and Bosden, the same below) fell 18.9%/19.9%/14.0%/0.5% respectively, while the home textile sector (including the key companies Lola Life, Fuanna and Mercury Home Textile) fell 9.4%/4.3%/16.4%/1.1% respectively. The performance of the medium and high-end segment was slightly stronger than that of the mass clothing and home textile brands.

From the perspective of PE (NTM, the same below), the PE of the mass clothing, medium and high-end clothing and home textile sectors basically remained at about 10X/12X/10X, with slight fluctuations but relatively stable overall. At present, it is at the bottom of the market. If the underlying improvement is expected to bring about a driving force in the future, we remind the potential opportunities of clothing as an alternative consumption in the subsequent environmental recovery, and remind and follow up the flow of brand merchants.

3.2. Medium and short term trend: expected to improve marginally, recover from fluctuations, and individual stocks vary greatly

The retail performance of fashion clothing terminals is closely linked with the general environment. Although the consumption environment in 2023 is uncertain, we believe that the recovery is the general direction. 1. If the subsequent environment maintains the current state, we judge that clothing consumption is expected to continue to recover in the fluctuation. 1) Affected by the environment since March 2022, the overall performance of clothing consumption Q2 is weak, and there are still fluctuations between Q3 and Q4 month by month, but the overall recovery trend is shown, among which the recovery speed of different brands is expected to show differences. 2) If the consumption environment in 2023 is similar to the current situation, we judge that the offline passenger flow is expected to recover gradually and slowly, driving the weak recovery of clothing consumption. 2. If the consumption environment is significantly improved in 2023, we judge that the passenger flow is expected to improve: 1) It is expected that the improvement will be more sustainable and will be a high-quality medium and high-end brand with excellent brand strength and stable operation; 2) The most obvious month-on-month improvement is expected to be the mass clothing which is greatly affected by passenger flow; 3) Home textiles will also show marginal improvement with the recovery of the real estate chain and the release of consumer demand; 4) At the same time, some personal care needs are expected to be released in the short term.

3.2.1 Medium and high-end clothing: relatively stable performance, focusing on high-quality individual stocks

In 2022, the performance of different companies in the high-end clothing sector will be differentiated, and the differences between brands will be magnified in the current environment. In 2022, the revenue of key companies in Q1, Q2 and Q3 sectors increased by 8.9%/14.1%/3.1% respectively year on year, and the performance decreased by 3.5%/29.6%/2.4% respectively year on year. Within the sector, due to the relatively small size of the corresponding customer groups of the high-end brands themselves, the brand stickiness and demand stability of the customer groups are tested under the weak environment, and the customer group characteristics and brand strength differences between different brands are highlighted.

The environment tests the operation ability of brand companies, and high-quality brands stand out by virtue of their robustness. In terms of operation, the inventory turnover of medium and high-end brands is slightly under pressure. We judge that it is mainly due to the weak consumption in Q2 and the reasonable stock preparation of the company at the end of Q3. The inventory is expected to be reduced after Q4 enters the peak season. In the first three quarters of 2022, the inventory turnover days of Bienlufen/Grice/Newspaper Bird/Disu Fashion were 325/314/298/221 days respectively, and - 14/+25/+15/+41 days respectively compared with the same period last year. The inventory turnover efficiency of Bienlufen was further optimized under efficient operation. 2) In terms of cash flow, the operating cash flow of medium and high-end brands in the first three quarters is relatively benign, and we judge that it is expected to continue to be healthy in the future.

Looking forward to 2023: the improvement of medium and high-end brands with excellent brand strength, stable operation and high-quality product base is more sustainable and deterministic. Under the weak environment, individual stocks have obvious differences, and brands with high brand stickiness and stable operation perform better. The customer base corresponding to high-end brands is relatively stable, and the contribution of members is relatively high. In the past, terminal consumption has strong uncertainty, making the difference between middle and high-end brands further expand. For example, compared with women's wear, men's wear brand consumption stickiness is stronger: 1) Beenlefen brand, which is positioned as a middle-aged sports business male customer group, has stable consumer demand and high brand loyalty. Q3 revenue has increased by 20% year-on-year/performance growth by 30%; Haggis, a member of the newspaper bird, also showed strong resilience. 2) Some women's wear brands have recovered relatively slowly.

We believe that in the recovery in 2023, the recovery of high-quality brands with effective maintenance by members and high operational stability is still more certain. Under the current environment, medium and high-end brands build private domain traffic pools and strengthen management efficiency with consumers as the center. We estimate that the sales contribution of small programs in the store of Bienlufen is relatively high, the maintenance of private domain traffic is effective, and the impact of the environment is relatively small. We track the industry situation and predict that the performance of Bienlufen in 2022 is expected to increase by 20%, and the revenue performance in 2023 is expected to increase by 20%+, significantly leading the industry. In the medium and long term, high-quality products are still the cornerstone of competitiveness, and the head brand continues to innovate iteratively while adhering to its style. According to the recent situation of the company's new products we track: the technological fabrics of Bienlufen products are updated iteratively, including POLARTEC warm knitting, slubby warm velvet and other products; Bosden: The innovative category "autumn down" has attracted market attention, including sweaters, down jackets, small fragrant down jackets, shirts, down jackets, etc. The design is rich and the category boundary is further extended. In 2022, the "comfortable outdoor" series products won many international awards.

3.2.2. Popular clothing: the performance is seriously damaged, and the elasticity is large if the marginal improvement

Due to the strong correlation between mass clothing sales and passenger flow, the performance in 2022 has declined significantly and is at a low point. In 2022Q1, Q2 and Q3, the revenue of key companies in the mass clothing sector declined by 4.3%/17.9%/4.4% respectively year on year, and the performance fell by 19.7%/70.5%/19.3% respectively year on year. Profitability also declined due to the pressure of discount and rigid expenses. According to the company's announcement, the gross profit rate of Hailan Home/Taipingbird/Sema Clothing in the first three quarters was 0.6/- 2.7/- 3.7 PCTs respectively, and the sales expense rate was+2.6/1.9/4.6 PCTs respectively.

In 2023, the environment and passenger flow will improve significantly. We believe that in the short term, it is expected to drive the terminal flow of mass clothing brands to rebound rapidly, and the performance is expected to grow rapidly at a low base. Reviewing the pace of recovery in 2020: with the improvement of consumption environment and passenger flow, the terminal flow of mass clothing brands has improved significantly on a month-on-month basis, and the recovery flexibility is obvious. Under the low base, the revenue of key companies in the mass clothing sector in Q1 and Q2 in 2021 has increased by 44%/12% respectively, and the profit quality will be restored step by step.

Looking forward to 2023: The recovery of passenger flow is expected to drive the rapid and obvious marginal improvement of the mass clothing brands, including the restart of the store opening plan and the restoration of profit quality. 1) Although the current flow of the plate is still fluctuating, the overall operating state is relatively controllable. With the arrival of the peak season of 2022Q4, the inventory is expected to be smoothly reduced, laying a foundation for healthy growth in the future. 2) At the income level, the terminal flow of mass clothing is greatly affected by the passenger flow. If the passenger flow environment is significantly improved, the terminal flow of mass brand is expected to rebound rapidly at the early stage of improvement, the channel is expected to enter the opening stage after two years of optimization, and the subsequent profit quality is expected to gradually improve. 3) In terms of performance, the performance base of mass clothing brands this year is low, and the performance is expected to grow rapidly in 2023 (in 2022, the performance of clothing brands generally declined significantly due to the gross profit margin damage, stores and other rigid costs, which is more obvious in the mass clothing brands with lower markup). From a quarterly perspective, we expect that the performance growth rate of 2023Q1 is relatively weak, and the performance of Q2~Q4 is expected to grow rapidly.

In the long run, the core competitiveness of mass clothing brands under fluctuating normal conditions lies in the effective operation of channels and the flexible management of supply chain. Channel level: offline consumption is weak in the current environment, and the top mass brands develop diversified e-commerce platforms and reach consumers deeply while streamlining and optimizing the quality of offline channels and clearing out inefficient stores. We judge that in the current environment, traditional e-commerce platforms such as Tmall are still the main force, but emerging channels such as Tiktok are developing rapidly. We estimate that the Tiktok platform accounts for about 10%/20% of the current Sima/Peacebird online sales respectively. Supply chain level: the terminal sales environment fluctuates, and the requirements for efficient inventory management are improved. At the operational level, we believe that brands with effective digital operation and efficient supply chain management are expected to reduce the inventory risk caused by sales uncertainty. According to the brand attribute and the industry order meeting rhythm, we calculate that the proportion of Taipingbird women's clothing quick-return accounts for 30%+/Sima brand quick-return accounts for about 30%, and effectively manage the operational risk while obtaining full and effective sales.

3.2.3 Home textile: the current channel sentiment is weak, looking forward to the subsequent terminal recovery

The revenue performance of sector companies in the first three quarters was under pressure, and the performance was divided among individual stocks. 1) In 2022Q1, Q2 and Q3, the revenue of key companies in the home textile sector increased by 3.7%/decreased by 6.9%/decreased by 5.1%, and the performance decreased by 1.4%/36.6%/10.2% respectively. There are certain differences in the performance of different companies in the sector due to different development strategies and channel layout.

Looking forward to 2023: With the recovery of consumer sentiment and the demand for channel replenishment, the financial performance of the sector companies is expected to recover under the low base. At present, we believe that the industry is basically stable at the operational level. Although the company's inventory has increased by 2022Q3, it is still in a controllable range as a whole. As the macro environment fluctuates, terminal retail is expected to gradually recover, thus stimulating the replenishment demand of franchisees. At the same time, from the perspective of store opening, with the optimization of the industrial competition pattern, the sector companies are in the process of steadily expanding their stores, which is expected to bring incremental income in the future. Overall, we believe that the financial performance of the sector companies in 2023 is expected to gradually recover from this year's low base. In the medium and long term, the head company will still focus on product optimization and upgrading, and the expansion of offline channel stores will continue. The e-commerce strategy will be differentiated due to different brand positioning, and many measures will be taken to promote the market share.

Product level: bedding has certain mandatory attributes, and the fluctuation of short-term consumption environment may slow down the replacement frequency of residents. However, due to the consideration of durability and comfort, consumers pay more and more attention to the quality of home textile products in the purchase process. Take quilt core as an example, the sales proportion of chemical fiber quilts with good sales performance in the past has gradually decreased, and replaced by down quilts, silk quilts and other products.

Channel level: 1) Offline: compared with brand clothing brands, the number of offline home textile stores is still small. As of 2022H1, the number of Fuanna/Luolai Life stores, the leading companies in the industry, is 1516/2518, and the market coverage still has a lot of room to improve. At the same time, considering the current consumption environment, some small brand stores have been closed due to weak business ability, In the long run, the brand company has a broad space for offline store expansion. 2) E-commerce: brand companies may implement differentiation strategy due to their own positioning, while Luolai and Fuanna brand positioning high-end, pay attention to the stability of online channel profit margin. Mercury has long been the first position in Tmall Home Textile industry, and will continue to attract traffic through stable cost investment to maintain the steady growth of e-commerce channel revenue.

4. Investment main line 3: pay attention to the expected inflection point of clothing manufacturing orders

4.1. Valuation: currently at the bottom, focusing on order expectations and inventory inflection points

Valuation level: in the past, the expectation of industry orders was weak, which suppressed the valuation of the sector; At present, the valuation of the sector is in a position. We remind to track the inventory and order situation and pay attention to the inflection point. In the past, the stock price trend of the leading target has converged with that of the sector as a whole, and is currently at the bottom of the valuation. 1) Since 2022, the share price of the ready-to-wear manufacturing sector (taking the key companies Shenzhou International, Huali Group, Jiansheng Group, Kairun Group, Yuyuan Group, Virgin, Fengtai Enterprise, and Ruhong as samples, the same below) has dropped by about 40%, of which the share price has fallen by 22.9%/5.6%/24.6%/8.4% since October 2022Q1/Q2/Q3. PE (NTM) of the current plate is only 12 times higher or lower, and we believe that the current plate valuation is at a lower position. 2) The share price and valuation trend of leading companies such as Huali Group and Shenzhou International are similar to that of the sector. We believe that the pessimistic expectation of the market for industrial orders has restrained the overall valuation of the sector.

The market performance of manufacturing companies precedes the fundamentals and reflects future performance expectations. 1) In the business operation of clothing manufacturers, most of them adopt the futures mode (brand merchants place orders first, manufacturers then produce and sell), and a small part of them are replenishment orders and express orders for rapid production based on demand, so there is a time lag of about 3 to 6 months between the actual performance of the manufacturing company and the current order. 2) We reviewed the fundamentals and market performance of the manufacturing sector in the past, and the stock price trend performance often led the fundamentals by about two quarters. For example, the business in the early stage of 2020 was affected by environmental factors, and the revenue growth of the sector companies showed a turning point in 2022Q4, but the market had an obvious response in 2022Q2. We judge that this feature is determined by the business model: the stock price performance of the manufacturing sector mainly reflects the market's expectations for the fundamentals of the next 2-3 quarters, rather than the current recent performance. 3) At present, the downstream demand is weak, and we judge that the manufacturer's order visibility and market expectations are relatively low, while the market performance in the past has reflected this expectation and is currently at the bottom waiting for the inflection point.

We remind us to pay attention to the expected inflection point of future orders and track the de-stocking of brands. Take Shenzhou International as an example: Shenzhou International is a leading garment manufacturer. Its main customers include Nike, Adidas, Uniqlo and Puma. The sales revenue of the company's two largest customers in 2021 will account for more than 50% of the company's revenue. Our company's market performance since 2019 is basically similar to the trend of core customers' stock prices, and has a significant correlation with customers' inventory turnover. We judge that the main reason is that customers' inventory affects their willingness to place orders, and to a certain extent reflects the changes in downstream demand, thus affecting the market's judgment on the expected performance of Shenzhou International. To sum up, we should pay attention to the inflection point of customer inventory and company orders of brand companies, which may bring upward momentum to manufacturing companies.

4.2. Fundamentals: order-driven, current demand is weak, and 2023H2 is expected to improve

The current order of clothing manufacturers is weak and is expected to improve in the future. 1) Since 2022Q3, due to the weak downstream demand, the order demand of the global clothing manufacturing supply chain has been generally weak, and the growth rate of the export of relevant products of China, Bangladesh and Vietnam, the important clothing exporting countries, has been weakened on a month-on-month basis: the export value of China's clothing and clothing accessories in October was - 16.9% year-on-year (+18.5%/+5.0%/- 4.4% respectively from July to September), and the export value of Vietnam's textiles in October was+14.3% year-on-year (+9.1%/+40.7%/+21.3% respectively from July to September), From July to September, the export value of Bangladesh's clothing was+71.4%/+49.7%/+34.6% year on year. 2) While the order demand is weak, the supply stability of the global clothing supply chain has been strengthened. The clothing manufacturing industry has gradually changed from "supply driven" last year to "demand driven" in the second half of this year.

4.2.1 Demand: domestic steady recovery, overseas pressure still exists

We analyze that the current demand for orders in the industry is weak, mainly due to the superposition of two factors: 1) Weak terminal consumption: weak expectations of future consumption make the orders of brand merchants relatively conservative, which is more obvious in overseas brand merchants. 2) Inventory rhythm problem: current clothing brands have high inventory, and there is a demand for de-stocking. Taking into account the downstream consumption and the de-stocking of brands, we expect that the demand for orders in the industry will be weak in 2022Q4~2023Q1, and the demand for orders in 2023Q2~Q3 is expected to improve on a month-on-month basis, among which domestic orders are expected to recover before overseas orders.

1. Terminal demand level: what is the expected trend of overseas and domestic apparel terminal consumption in the future? What is the impact on the order? At present, consumption in Europe and the United States still faces great pressure. China has experienced fluctuations in the past, but the overall recovery is gradual. Considering that the head manufacturing listed companies mainly face the export market, we believe that the overall inflection point of the company's orders is still mainly determined by the overseas situation, and the recovery of domestic consumption can make up for some orders to some extent.

The demand for clothing consumption in Europe and the United States is weak, which we believe is mainly caused by inflation pressure and economic downturn. 1) Under the influence of high inflation, energy crisis, international environmental fluctuations and other factors, the purchasing power of overseas European and American consumers has declined, and the growth rate of clothing consumption has slowed down since the middle of 2022. According to the data of the United States Department of Commerce, the retail sales of American clothing and clothing accessories stores in 2022Q3 increased by 3% year-on-year, significantly slower than that in H1. According to the data of the US Department of Labor, the US CPI/clothing CPI increased by 8%/4% year-on-year in October. 2) The weakness of downstream consumer demand directly led to the reduction of imports of related products. According to the data of the General Administration of Customs of China and Wind, the amount of textile raw materials and textile products imported by the United States and the European Union from China in October 2022 was 3.42/2.93 billion US dollars, - 33.4%/- 32.6% respectively year-on-year (the amount of exports in September was - 29.1%/- 14.5% respectively), showing a weaker performance on a month-on-month basis.

Domestic clothing consumption demand was relatively affected in 2022Q2, and is currently recovering from fluctuations, and is expected to further improve in the future. China's clothing consumption was affected by passenger flow changes in the first half of 2022, and gradually showed a recovery trend in the subsequent fluctuations. In October, the zero value of clothing knitwear and textile cooperatives fell by 7.5% year-on-year (from January to October, the cumulative year-on-year decline was 4.4%). The performance of key companies in the Q3 brand clothing sector has recovered significantly from that of Q2. In 2022, the revenue of Q1, Q2 and Q2 will be -0.3%/- 15.2%/- 2.8% year on year, and the performance will be - 12.5%/- 58.6%/- 10.5% respectively.

2. Inventory: What is the pressure on the current inventory of clothing brands? How was it formed? When is it expected to be deionized? The inventory of European and American clothing industry comes from: ① the pace of logistics is accelerated, and the backlog of goods is formed due to the rapid arrival of goods; ② The terminal consumption is under pressure, and the subsequent inventory reduction is less than expected; In general, we judge that the future still needs to be digested in 1-3 quarters; The domestic inventory comes from the low sell-out rate caused by the 2022Q2 epidemic. We judge that it has recovered and is expected to remain healthy in 2023. The inventory of the European and American clothing industry is at a high level, and it is still in the period of de-organization, and the pace of placing orders by brands tends to be conservative. We track that the current channel inventory of overseas downstream apparel industries in Europe and the United States is at a high level. According to the data of the Census Bureau of the United States Department of Commerce, the U.S. clothing wholesalers and retail inventory bottomed out in Q3 2021 and continued to rise. In September 2022, the wholesale inventory/retail inventory increased by 68.3%/24.1%, which has significantly exceeded the level of the same period before the epidemic.

Embodied in the specific brand level: the inventory turnover of most international brands slowed down in the recent quarter, and sports shoes and clothing were more obvious. The inventory turnover days of international head sports brands Nike, Adidas, Lululemon, Skechers and PUMA in the latest reporting period were 116.0/161.0/133.5/144.3/159.5 days respectively, with a year-on-year increase of 19.2/13.9/19.8/6.0/21.6 days respectively. Generally speaking, brands with high inventory tend to increase the discount clearance to promote the terminal inventory reduction, while the upstream supply chain orders are relatively conservative to accelerate the improvement of inventory turnover.

We analyze the main reasons for the inventory formation of overseas brands, including: 1) optimistic advance orders in the early stage, the improvement of the subsequent supply chain, and the rapid arrival of inventory in transit. 2) Downstream consumption is under pressure, and terminal inventory is less than expected. Take Nike as an example. By the end of FY2023Q1 (2022/8/31), Nike's inventory had increased by+44% year-on-year to $9.7 billion, of which the problem of inventory backlog in North America was relatively serious (the inventory in North America increased by 65% year-on-year), and the inventory in Greater China was slightly reduced (the inventory in Greater China decreased by 3% year-on-year). According to the company's announcement, the company's supply chain was in a tense state due to global fluctuations in the first three quarters of FY2022 (May 31, 2021~February 28, 2022), so the company advanced its procurement plan: 1) According to our tracking, Vietnam and other important product production areas were affected by the local epidemic disturbance at that time; 2) Port congestion, shortage of logistics resources, extension of goods transportation time and impact on arrival. According to the company's announcement, as of August 31, 2022, Nike's inventory in the United States accounted for 65% of the inventory in transit.

From FY2022Q4 to FY2023Q1 (2022/3/31~2022/8/31), the overseas goods transportation improved faster than expected, while the terminal sales were less than expected under the environmental fluctuations such as the passenger flow in Greater China, resulting in a sharp increase in the company's inventory. In order to speed up inventory turnover, Nike Company tightened its procurement plan while deepening its promotional activities. We judged that this directly affected the orders of upstream manufacturers in the short term.

We judge that the inventory problem caused by the logistics rhythm is expected to improve gradually in the future, but considering the current inventory volume and overseas consumption may continue to be weak, in a comprehensive view, we expect that the inventory de-stocking cycle of this round is relatively longer than the historical situation. From the past experience, there are differences in the time of de-stocking of different brands: we track that the time of de-stocking of Nike Group in 2020 is about four quarters, and the company's inventory is again at a high level by the end of FY2023Q1. According to the company's announcement, it is expected that the inventory of FY2023Q2~FY2023Q4 (2022/9/1~2023/5/31) will continue to improve on a month-on-month basis. Adidas' inventory at the end of 2022Q3 increased by 72% year on year, and the company expects that it will gradually improve in the future: it is expected that it will decrease significantly at the end of 2023Q1 and return to the normal level at the end of 2023Q2. We believe that when the inventory inflection point of brand manufacturers appears, it is expected to boost the order situation of upstream manufacturers to improve. In summary, we estimate that the corresponding orders of manufacturers in 2023Q3 are expected to improve significantly.

The inventory of domestic clothing industry is under pressure in 2022Q2, and has improved significantly. It is expected to be in a healthy state in 2023. 1) In 2022Q2, terminal sales were impacted, and the industry was temporarily under inventory pressure, which gradually improved with terminal repair. According to the data of the National Bureau of Statistics, the inventory of finished products in China's textile and apparel industry increased by 6% year-on-year in September 2022 (13% year-on-year in June). We judge that with the steady recovery of consumption in the future, the terminal inventory is expected to be further optimized, thus driving upstream orders. 2) Compared with the overseas situation, we believe that the domestic clothing industry has entered a state of prudent supply chain management since 2020, and the current inventory situation is relatively controllable and better than the current level of the overseas clothing industry.

From the company level: due to the targeted reduction of channel shipments, we judge that the current industry report inventory pressure is increasing and the channel inventory is relatively controllable. In the first three quarters of 2022, the average inventory turnover days of the brand clothing sector were about 19 days longer than that of the same period last year. We judged that the decline in inventory turnover efficiency was due to: 1) the terminal of the brand clothing direct stores was blocked in the early stage, and there was a backlog of goods; 2) Due to the targeted reduction of orders from franchisees, we judge that the inventory of franchisees in the current industry is relatively good and controllable, and the subsequent operation status is expected to be healthy, and the cash flow performance is also expected to improve.

4.2.2 Supply: the global clothing manufacturing end tends to be stable, and overseas is better than domestic

At present, the production and operation of the global clothing manufacturing supply chain tend to be stable and highly deterministic. 1) Vietnam, Bangladesh, Cambodia and other countries have experienced the impact of the epidemic in 2021 and the environmental fluctuations after the subsequent policy liberalization, and the current factory operation has gradually returned to normal. We judge that overseas factories are gradually desensitized to the fluctuations of the epidemic and the subsequent stability is good. 2) After experiencing the environmental fragility of 2022Q2 in some regions of the domestic supply chain, with the domestic environment becoming more stable, the certainty of production and operation of domestic factories is also further strengthened.

From the perspective of regions, the overseas supply chain in the weak market is relatively benign due to its advantages in cost and trade environment. Southeast Asian countries, represented by Vietnam, have lower resource costs and labor costs than domestic countries, and have the advantages of tariffs, income taxes and other advantages. The supply chain cost advantage is obvious. At present, most of China's head manufacturers have also formed a domestic+overseas diversified capacity layout. For example, Shenzhou International, the leading garment manufacturer, has built an independent integrated production capacity of covering fabrics+garments in China, Vietnam and Cambodia. Among footwear manufacturers, Yuwon International's Vietnam/Indonesia/domestic production accounted for 35%/48%/12% (2021) respectively. Currently, Huali Group's main production capacity is distributed in Vietnam. We believe that in the current industrial environment, orders are inclined to overseas supply chains with cost advantages, and the official entry into force of the Xinjiang Bill intensifies this trend. Suppliers with international capacity have obvious cost advantages and relatively good order stability.

The pattern is optimized and the concentration is increased. If the balance of supply is improved, the leading manufacturers will benefit significantly. The competition pattern of China's clothing manufacturing industry is scattered, and there has been an obvious trend of centralization since the epidemic. From the direct impact of the epidemic on production and operation in the early stage to the weakening of the industrial order demand in the later stage, the tail capacity was forced to be cleared due to the vulnerability of operation in the process of environmental turbulence. According to the data of the National Bureau of Statistics, the number of textile and clothing, shoes and hats manufacturing enterprises in China will be 12706 in 2021, down significantly from 14827 in 2018. The uncertainty of the environment drives brand companies to seek a more stable, faster and stronger supply chain. At the same time, the differentiation advantages and barriers of the head manufacturers are gradually highlighted, driving the order resources to be concentrated in the head. According to the company's announcement, in 2022H1 Shenzhou International/2022Q1~Q3, the sales growth of orders from Huali Group to the first largest customer reached more than 30%, while the revenue growth of Nike Group in the last three quarters was 2.4%. We judge that the share of Shenzhou International and Huali Group in this core customer has increased since 2022.

23 annual strategy summary

To sum up, the investment strategy of the clothing industry in 2023 revolves around the main logic of recovery. There are three main lines of investment: the first is to focus on the sports shoes and clothing track with growth, corresponding to 25/23/16 times of PE in 2023. 1) Basic level: ① The flow of 2022Q4 plate fluctuates, but the inventory is relatively controllable. ② Looking forward to 2023, participation in outdoor sports is expected to increase under the improved environment. Referring to the past recovery, we believe that the demand for sports shoes and clothing is elastic. ③ In the medium and long term, demand and policy will boost the growth of sports shoes and clothing track, and the market share of national brands is expected to rise further with the improvement of product strength. 2) Valuation level: The impact of the fundamentals in the early stage has been reflected in the stock price. At present, the valuation of the plate has a high performance-price ratio, and the market performance is expected to rebound with the improvement of the fundamentals in the future.

Line 2: The clothing consumption environment recovers, corresponding to 16 times of PE in FY2023; Pay attention to Hailan Home, which may have marginal improvement, corresponding to 9 times of PE in 2023; Considering the short-term release of personal care needs, it is recommended to focus on robust medical care, which corresponds to 17 times of PE in 2023. The fundamentals and market performance of brand clothing companies are greatly affected, and are expected to recover from fluctuations in 2023: ① The prediction that the improvement sustainability is strong is the high-quality medium and high-end stocks with excellent brand power, good product foundation and stable operation; ② In the early stage of recovery, the marginal improvement of mass clothing is expected to be the most obvious and more flexible, mainly due to its strong correlation with passenger flow and low performance base; ③ Home textiles are expected to improve marginally with the release of consumption demand in the real estate chain. ④ Personal protective care needs are expected to be released for a short time.

Main line 3: pay attention to the expected inflection point of clothing manufacturing orders. 1) The current order demand in the global clothing manufacturing supply chain is generally weak. We judge that the weak order is mainly due to the weak expectation of the downstream end consumption in Europe and the United States+the inventory needs to be de-stocked by the brands, which is expected to show a significant month-on-month improvement in Q2~Q3 of 2023. 2) The valuation of the sector is currently at a low level. We remind us to pay attention to the inflection point of inventory depletion, which is expected to bring about the upward momentum of the sector.

(This article is for reference only and does not represent any investment suggestions. Please refer to the original report for relevant information.)

Selected report source: [Future Think Tank]