Status of the Industry Textile and apparel companies have slowed their performance in the 2012 interim report, but overall they are slightly lower than expected. Terminal demand and inventory are under pressure. Companies and dealers are more cautious in opening stores and placing orders. Recent stock price corrections are more. In the context of a rebound in the market and better expectations, there are valuation recovery opportunities. The outbreak of the industry still needs to wait for the terminal to pick up.

In the long run, we believe that there are three major factors that determine the sustainability of branded apparel companies' growth: pricing strategy, competitive landscape, and sales model. We thus divided the branded apparel companies into three categories: A (industry benchmark), B (developing), and C (structural failure).

Comments 1. The overall medium-quarter report was slightly lower than expected. Terminal pressure began to be reflected in the report. In the first half of the year, most of the company’s revenue growth was faster than that of terminal sales. The growth of terminal sales in August was better than that in July, but it was still significantly lower than that in the same period of last year. The growth of orders in the spring and summer 2013 trade fairs slowed down, and earnings forecasts face downward pressure.

2. The markup rate is an important measure of the price/performance ratio. Due to the internationalization of dress and fashion consumption, it is difficult for domestic fashion brands to produce such strong brands as Maotai. Looking at the situation now, China's mass consumer market has entered a phase of cost-effective competition. Raising prices and markup rates may bring about a competitive disadvantage.

3. International brands are the ceilings of domestic brand positioning and pricing, especially in sports, youth leisure (fast fashion), and luxury goods. Domestic brands are facing great competition pressure. We are more optimistic that international brands are not strong, or that strong international brands do not enter China's subdivided areas. For example, middle-end formal wear, mid-range business casual men's wear, middle-end women's wear, and outdoor wear. On the contrary, it is relatively difficult for strong international brands to enter the Chinese sports and youth leisure development.

4. E-commerce is very easy to impact on big brands in small industries such as home textiles. In the past, the display space provided by department store outlets to small industries was limited, which is beneficial to the monopoly channels of big brands. However, the development of e-commerce has reduced the restrictions on brand and product display in department store channels, small brands have been shown in high-traffic channels, and low prices are more attractive to online shopping at this stage. The challenge for e-commerce operators for brand managers is: if the rate of increase is unreasonable, then low-cost online shopping competitors will snatch market share; distributors will put water on the Internet and disrupt the original pricing system. Only companies with low markup rates and stringent channel product control can achieve a double harvest of online and offline businesses.

5. When the industry develops smoothly, the franchise model is expanding faster; but when the industry is difficult to develop, the franchise model will worsen the situation. Sports is a typical example. The affiliate model has a slow response to terminal demand, stocks are under pressure in the channel, dealer cash flow is under pressure, resulting in large-scale store closures or low-cost promotions, and brand image destruction. In the future, in order to reduce the price increase rate and the development of online shopping, it is imperative that the direct operation or joining mode be flattened.

Valuation and Recommendations Class A Company: Belle is a benchmark in the brand apparel industry, with low markup rates, no strong international competitors, and full direct channel management, maintaining a “recommended” rating.

Focus on Class B companies: If these companies can find a suitable brand positioning, maintain a higher cost performance, strengthen management capabilities and channel management capabilities, the successful operation of multiple brands can be upgraded to a larger A company with a more competitive competitive leader. The impact of loss of cost-effectiveness, competition from international brands, e-commerce, and pressure on goods may result in the conversion of Type B companies into Type C. We are optimistic about Seven Wolves, King Nine, and Pathfinder. There is also room for growth in the Lanzi and Canudi roads.

Type C companies recommend cautious treatment. If the rebound is relatively large, it is a good time to reduce their holdings: Under the pressure of strong international brands and online shopping, the competition in the industry is deteriorating, the competition between brands is unprecedentedly fierce, and the brand is facing reshuffling. Look in the short term. Unclear winner. Such as Li Ning and other sports companies in Hong Kong stocks, A shares of young casual wear company, Smith Barney apparel, Summa clothing. The growth of terminal sales in the home textile industry (Rolle, Fuanna, Mengjie) slowed down. In the department stores, it was a category with slower growth rate. The pressure on channel inventory was high, and the traditional channels were affected by online shopping.

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