Meet the Makers Behind Uniqlo and Hoka: Fashion’s Hidden Powerhouses
China remains a major manufacturing hub for the world, especially in the fashion industry. Many Western fashion brands contract Chinese companies to produce their clothing lines. Even as production increasingly shifts to Vietnam, many of the factories there are set up and managed by Chinese manufacturers.
In today’s post, we’ll explore four publicly listed companies on the Hong Kong Stock Exchange (HKEX) that manufacture clothing for well-known global brands.
#1 Yue Yuen (SEHK:551)
Yue Yuen is the largest company on this list by revenue, generating HK$62 billion in FY23. As an OEM manufacturer, it produces footwear for major sports brands like Nike, Adidas, Asics, and New Balance, as well as outdoor brands such as Salomon and Timberland.
In addition to manufacturing, Yue Yuen has a retail segment through its Pou Sheng subsidiary. This retail business significantly boosts revenue, contributing about 35% through gross merchandise value (GMV), inflating its overall sales figures compared to other OEMs.
For the first six months of this year, Yue Yuen reported lower revenue but saw its profits double. This likely drove its share price up 107% year-to-date, outperforming even its key customers, Nike and Adidas.
However, its profitability metrics remain modest, with a net profit margin of 5.9% and a return on equity (ROE) of 11.2%. The company pays dividends, though not consistently. Based on its FY23 dividends and a current share price of HK$17.82, the dividend yield stands at around 5%.
While the stock appears fairly valued, we don’t see much upside from current levels, especially given Nike's recent struggles, which could lead to lower orders from its key customer.
#2 Shenzhou International (SEHK:2313)
Shenzhou International is a major player in the apparel manufacturing industry and the only company on this list included in the Hang Seng Index. Although its FY23 revenue of HK$27 billion is lower than Yue Yuen’s, its market cap is more than three times larger.
Several factors may explain why Shenzhou trades at higher valuation multiples:
Pure OEM Model:
Unlike Yue Yuen, which operates both as an OEM and a retailer, Shenzhou is a pure OEM manufacturer. Retail businesses typically trade at lower multiples due to inventory risk, high rental costs, and competition from online stores—challenges that OEMs avoid.
Superior Margins:
Shenzhou boasts a high net profit margin of 20.3% and a return on equity (ROE) of 16.2%, significantly outpacing Yue Yuen. Its higher profitability justifies a valuation premium.
Geopolitical Considerations:
Yue Yuen is owned by a Taiwanese company, which may expose it to geopolitical risks, prompting a valuation discount. In contrast, Shenzhou is a PRC-based company, possibly making investors more comfortable from a regional stability perspective.
For the first half of this year, Shenzhou reported a 12% increase in revenue and a 38% rise in earnings per share (EPS) year-over-year. However, its share price has declined by 26% year-to-date, tracking closely with one of its major customers, Nike. Other key clients include Uniqlo, Adidas, and Puma.
Although Shenzhou International’s dividend yield is modest at 3.5%, the stock appears undervalued based on our valuation metrics. We consider the stock attractively priced below HK$85, and with the current share price at HK$58, presenting a value opportunity.