INTRODUCTION
Background of the research
The textile industry is a vital sector within Vietnam's consumer goods market, serving as both a consumer need and an essential input for various other industries Over the years, Vietnam's textile and garment sector has experienced significant growth, becoming a key driver of the national economy According to the General Statistics Office (2021), this industry boasts a high export turnover, contributing 12-16% to the country's total export revenue (Phuong Anh, 2022) As reported by the General Department of Customs (2022), textile and garment exports reached $20.4 billion by July 2022, marking the highest turnover for that period and positioning textiles as the fourth largest export commodity group in Vietnam.
The Vietnamese textile and garment industry is a significant contributor to both the national economy and the global supply chain, ranking fourth in garment export value worldwide in 2019, behind only China, Germany, and Bangladesh With the industry’s vital role in economic growth, the conclusion of the EVFTA trade agreement with European nations in August 2020 is expected to boost garment exports to the EU market by an impressive 42% by 2026 compared to 2015, highlighting the sector's potential for expansion and increased international competitiveness.
The recent free trade agreement is anticipated to significantly enhance Vietnam's textile and apparel sector This research aims to analyze the current global and Vietnamese textile and garment industry landscape, identifying key trends and potential growth opportunities Specifically, the study will focus on the financial performance of four publicly traded textile and apparel manufacturers in Vietnam: Century Fiber Corp (STK), Song Hong Garment JSC (MSH), and Thanh Cong Textiles.
& Garments (TCM), and TNG Investment and Trading JSC (TNG) Furthermore, the fair
2 value of these four enterprises is determined using discounted cash flow (DCF) valuation methodologies, thereby making investment recommendations.
Objectives and Research questions
Understanding the value chain as well as the current situation of textile and garment in the world and Vietnam
Analyzing the financial performance of chosen four companies in the textile and garment industry, thereby producing valuable investment recommendations
This thesis also aims at following research questions
What is the current situation of the textile and garment industry globally?
What is the current situation of the textile and garment industry in Vietnam
What is the financial performance of the companies in this industry?
What is the fair value of TCM, STK, MSH, and TNG, and whether it is worth investing in these companies?
Organization of the study
In addition to the introduction, conclusion, references, and appendices, the content of the thesis is structured into four chapters
Chapter I: Introduction This chapter is a brief introduction to the area of the study along with the study objectives
Chapter II: Research Methodology This chapter shows how the author collects, selects, and analyzes the data This chapter also shows the author's tools and materials in the research Chapter III: Macroeconomic analysis This chapter analyzes the current macroeconomic factors, including policy, social, economic, and technology
Chapter IV: Analysis of the global and Vietnam textile industry The analysis includes the introduction to the global textile value chain and the current Vietnamese textile value chain Analyze the critical trend in the industry and the SWOT analysis of the Vietnam textile industry
Chapter V: Analysis of SYK, MSH, TCM, and TNG financial situation and SWOT analysis for each company
Chapter VI: Using the DCF valuation to find the intrinsic value for the stock price of STK, MSH, TCM, and TNG
RESEARCH METHODOLOGY
Research design
This thesis utilizes a mixed-methods approach, combining qualitative and quantitative techniques to fulfill its research objectives The qualitative analysis employs PESTLE and SWOT frameworks to explore macroeconomic conditions and assess the competitiveness of Vietnam's textile and garment sector, as well as to evaluate the competitive standing of individual companies within the industry.
The quantitative method is employed to analyze the financial statements of key players in Vietnam's textile and garment industry, specifically TCM, STK, MSH, and TNG To determine the fair value of each company, both the discounted cash flow (DCF) method and price multiple valuation techniques are utilized The DCF method focuses on the principle that a company's intrinsic value today is equivalent to the total of its future cash flows that will be distributed to shareholders.
The formula for business valuation according to the DCF method
➤ CF: Expected cash flow of the company in years 1, 2,…,n
➤ DCF (Discounted Cash Flows): Discounted cash flows represent the value of the business
Furthermore, the research paper used synthesis, and analysis methods to draw objective conclusions.
Data gathering procedure
Data for this research was obtained from secondary sources, including annual reports and financial statements of relevant companies Additionally, valuable insights were gathered from professional resources such as Master's and Ph.D theses, reputable magazines, trustworthy websites, and journal articles The sources utilized, including the Vietnam Textile & Apparel Association (VITAS) and the Vietnam Cotton and Spinning Association (VCOSA), are recognized for their high reliability and credibility.
American Apparel & Footwear Association (AAFA), General Statistics Office of Vietnam (GSO), Vietnam customs reports and documents from Ministries, Agencies, and Departments
The author will analyze the collected information and data using Excel, employing statistical methods, synthesis-calculus techniques, inference, and comparative reconciliation to draw insightful comments and assessments.
MACROECONOMICS ANALYSIS – PEST ANALYSIS
Political factors
Political stability serves as a significant advantage in Vietnam's economic development, fostering favorable conditions for growth, particularly in the textile industry This stability is a unique asset that not all countries possess, contributing to Vietnam's overall economic progress.
Over the past decade, the textile and garment industry has significantly boosted the national GDP, rising from 9.8% in 2011 to 12.98% in 2020 (GSO, 2021) As of the first quarter of 2022, it stands out as the leading contributor to the country's export growth.
The Government of Vietnam has prioritized the textile and garment industry for development, as outlined in Decree No 111/2015/ND-CP To bolster this sector, the government offers financial support covering up to 50% of research and development costs, and between 50% to 75% for application activities and production technology transfers (Ministry of Industry and Commerce Vietnam, 2022).
The Vietnamese government has issued Decision 3218/QD-BTC to guide the textile industry's development towards modernization by 2030, shifting from a Cut-Make-Trim (CMT) production model to a focus on purchasing raw materials and semi-finished products (FOB) Vietnamese garment companies are successfully navigating this transition, exemplified by Song Hong garment company's impressive FOB sales of 100.142 million USD in the second quarter of 2022, compared to just 13 million USD from the CMT segment, indicating that FOB revenue is approximately 7.7 times higher than that of CMT.
2022) Decision 3218/QD-BTC also promotes several solutions on resource development through human resource training programs for the textile industry in techniques, technology, and soft skills
The tax policy outlined in Decree 18/2021/ND-CP presents challenges for textile and garment enterprises, particularly regarding tax payments Notably, products that are exported on the spot do not qualify for tax exemptions, which could hinder the industry's growth despite existing supportive measures and policies.
The Vietnam Textile and Apparel Association (VITAS) mandates that domestic enterprises exporting products must pay export taxes on their production Concurrently, businesses importing products are required to pay import taxes However, goods imported for export production, known as FOB, are exempt from taxes as they are not consumed in the Vietnamese market, according to the Law on Import and Export Tax provisions This tax structure ultimately raises costs for textile businesses.
Economic factors
Vietnam's textile and garment industry has significantly increased its global market share, ranking second worldwide after China in 2021, thanks to its integration into the world economy and participation in numerous trade agreements (Xuan Quang, 2021) This achievement is a result of government promotion policies that prioritize the industry's development Currently, Vietnam benefits from 14 active Free Trade Agreements (FTAs), including key agreements like the EVFTA and those with Japan and China, which are vital export markets for Vietnamese textiles These trade agreements facilitate tariff reductions within the ASEAN Economic Community (AEC) and the EU, enhancing Vietnam's appeal as a manufacturing hub for exporting to both ASEAN and non-ASEAN partners.
Vietnam's textile and garment exports surged by 20.3% year-on-year, reaching 8.68 billion USD, marking the highest growth rate since 2012 and contributing nearly 14% to the nation's revenue (Diep Anh, 2022) As a developing country, Vietnam prioritizes the textile and garment sector due to its low labor requirements and the availability of a large, low-skilled workforce This industry plays a crucial role in driving GDP growth and serves as a cornerstone for the country's economic development.
Vietnam has effectively controlled Covid-19 and is poised to resume garment production using the "3-on-the-spot" measure, while China, the largest garment exporter, continues to face challenges with Covid-19 prevention and social distancing As a result, countries like Vietnam, which have a stable and robust textile industry, stand to gain significant advantages in the global market.
Despite challenges from supply chain disruptions and decreased demand due to the Covid-19 pandemic, Vietnam's textile and garment exports thrived in 2021, thanks to effective epidemic management According to Vietnam's Ministry of Industry and Trade (2022), the industry achieved remarkable export turnover, prioritizing large orders and efficient processing.
In 2021, the textile industry achieved significant growth, reaching USD 40.3 billion, a 15.2% increase from 2020, despite the challenges posed by Covid-19 and a stagnant global economy As of 2022, the sector continues to thrive, with export turnover hitting USD 22 billion in the first half of the year, marking a 23% rise compared to the same period last year (Bui Hang, 2022) Furthermore, spinning textile enterprises benefit from favorable government policies aimed at supporting businesses impacted by the pandemic, including tax and fee reductions totaling approximately VND 20,000 billion (Anh Minh, 2021).
The textile and garment industry in Vietnam faces significant challenges due to unfavorable economic factors stemming from the global context and necessary policy changes post-Covid pandemic The pandemic disrupted supply chains, leading to increased freight rates—up by 300% from March 2020 levels, according to Mark Yeager of Redwood Logistics—along with rising fuel and raw material costs Following a brief economic recovery, high inflation rates have prompted the US Federal Reserve to implement aggressive monetary tightening, raising interest rates by 1.5% by July 2022 This inflationary pressure has curtailed consumer spending, adversely affecting order volumes for textile companies Additionally, the declining EUR exchange rate, which fell below $1.02 amid recession fears on July 7, 2022, has further diminished revenues for enterprises exporting to the EU.
Social factors
Changes in social factors within key export markets significantly impact the business strategies of Vietnamese textile and garment companies Given that Vietnam primarily engages in outsourcing within the global value chain, it heavily relies on major clients like the US, EU, and Japan As of September 2021, 85% of Vietnamese textile and garment enterprises operated on a Cut-Make-Trim (CMT) basis, while only 15% utilized a Free on Board (FOB) model Consequently, these enterprises must adapt their production strategies, scale, and cultural approaches to align with the evolving demands of international customers.
Vietnamese textile and garment enterprises must enhance product quality and continuously improve worker skills to meet the rising consumption trends in export markets This commitment is essential for attracting major partners like UNIQLO, H&M, NIKE, and Levi Strauss, while staying aligned with modern fashion trends.
Despite the significant improvement in growth rate and receipt of orders for the whole year of
In 2022, the textile and garment industry faced challenges due to limited consumer purchasing power in export markets, primarily influenced by rising inflation As demand for procurement decreased in key markets, Vietnamese businesses sought to diversify their export destinations The United States remained Vietnam's largest export market, contributing $16.1 billion out of a total of $27.8 billion in 2021, which represented 57.9% of the nation's principal export turnover However, the unprecedented high inflation in the US, reaching a 40-year peak in early 2022, led to reduced consumer spending and a subsequent decline in order demand from American partners Consequently, Vietnamese enterprises are urged to scale up operations, enhance trade promotion, and explore new export opportunities in countries like France, the Netherlands, and Cambodia.
Technological factors
Vietnam, as a developing country, faces challenges with limited technological advancement in its textile and garment industry A survey conducted by VECEA in 2018-2019 revealed that a significant portion of enterprises rely on outdated technology, with 12.8% using equipment over 17 years old and 34% utilizing devices over 10 years old Only 36.2% of companies have machinery that is less than 7 years old While imported used machinery may be more affordable, it often results in lower productivity, highlighting the need for investment in modern technology to enhance efficiency in the sector.
9 environmental impact Therefore, Vietnam needs to improve and transfer technology and race against the 4.0 technology era
The integration of 4.0 technology in Vietnamese textile and garment enterprises has significantly enhanced productivity and quality, enabling them to meet the specific demands of the global market and compete effectively in foreign export markets As the industry is highly labor-intensive, adopting technology and automation is crucial for cost reduction For instance, the use of robots in production streamlines processes, resulting in shorter production cycles and decreased labor and management costs.
Duc Giang Corporation - Dugarco Joint Stock Company exemplifies technological advancement by prioritizing research and development (R&D) during the challenging economic landscape of the Covid-19 pandemic in 2021 This strategic focus led to a remarkable profit growth of 140% compared to 2020, with exports reaching $72.2 million.
The textile industry is energy-intensive and generates significant water pollution, posing a greater environmental risk compared to other sectors To address these challenges, a green transformation is essential, aligning with the global shift towards sustainable products and nanomaterials Businesses must adopt advanced technical solutions alongside technological improvements In response, the World Wide Fund for Nature (WWF) has partnered with the Vietnam Textile and Apparel Association to implement a project aimed at promoting sustainability in textile production.
"Greening Vietnam's textile and garment industry through improved sustainable energy and water management" Thereby, 20 seminars were organized for a total of 750 employees from
230 textile factories to participate in the intensive training program on technological and technical solutions to increase the efficiency of using water - energy - chemical resources and help reduce wastewater pollution
INDUSTRY ANALYSIS
The world textile and garment industry
4.1.1 The value chain of textile and garment industry
For over forty years, the concept of value chains has been explored both theoretically and practically, yet there remains no universal agreement on its definition Despite this lack of consensus, the term "value chains" serves various purposes across different contexts.
The value chain concept, introduced by Michael Porter in his 1985 book, outlines a sequence of interrelated activities within an organization that are essential for transforming a product or service from its initial conception to delivery and post-sale services, including disposal or recycling Essentially, a value chain encompasses the various stages of value creation during the development of a product or service, including research and development, design, manufacturing, marketing, and distribution to end users.
Globalization began in the early eighteenth century and has grown significantly in the modern economy as transportation, communications, and technology have advanced (Cairncross,
The primary driver of globalization is the reduction of trade barriers, particularly through trade policies such as tariffs and non-tariff obstacles Additionally, the rise of foreign direct investment (FDI) has facilitated the rapid exchange of technology, industrial production, and managerial expertise between the West and East As a result, value chains have become more vulnerable to globalization trends, with production processes increasingly fragmented and competitive factors dispersed across national borders, predominantly influenced by multinational enterprises (MNEs) and global players This integration of nations and regions through global production and commerce has led to the emergence of global value chains.
The term "global value chain" (GVC) describes the interconnected production and distribution processes shaped by unique interfirm governance relationships that span across borders Initially introduced in the mid-1990s, GVCs build upon Michael Porter's concepts, offering a fresh perspective on economic connections in a globalized market.
The concept of "fragmentation" highlights the international division of labor, where distinct stages of manufacturing processes are geographically dispersed (Arndt & Kierzkowski, 2001) This enables various roles within a value chain to be performed by different firms and institutions across countries, facilitating the establishment of transnational production networks (Readman and Kaplinsky, 2001).
Gereffi (1999), a pioneer in Global Value Chain (GVC) studies, introduced GVC analysis by categorizing chains into two main types: producer-driven and buyer-driven value chains This classification is based on the nature of relationships between suppliers and buyers, as well as the different governance structures involved.
The global textile and garment value chain is predominantly driven by buyers, including retailers and brand manufacturers, who dictate the rules and coordinate production across multiple countries These companies wield significant influence over the timing, location, and organization of production activities, thereby shaping how value is added throughout the chain Consequently, leading corporations are essential in forming production networks and driving mass consumption through strong branding and global outsourcing strategies.
Figure 4.1 The global textile and garment value chain
The global textile and garment value chain is structured into five key segments: the raw material network, which includes natural fibers like cotton, wool, and silk, as well as artificial fibers such as polyester; the component network, comprising textile industries that utilize these raw materials; the manufacturing network, which features garment factories and subcontractors primarily located in North America and Asia, responsible for product design, cutting, sewing, and finishing; the export network, operated by branded garment companies and trading firms that supply products to retailers globally; and finally, the global marketing network, established by merchants to deliver goods to the end consumer.
The global textile and apparel value chain is characterized by three key features: first, it presents significant barriers to entry, as international buyers prefer suppliers capable of meeting high-volume demands while adhering to stringent quality standards Second, global purchasers play a pivotal role in the governance of the value chain, effectively managing and controlling operations even without direct factory ownership Lastly, the trend of relocating garment manufacturing to countries with abundant labor and lower wage rates further defines this industry landscape.
Types of buyer in global textile and garment value chain
Lead businesses or global purchasers play a crucial role in organizing the textile and apparel global value chain (GVC), facilitating the entry of new enterprises and the distribution of operations These market leaders wield significant market power due to their scale, which is evident in their sales figures, and have diversified their activities beyond manufacturing to include high-value functions such as design, marketing, consumer services, and logistics In the textile and apparel GVC, there are three primary types of lead businesses: retailers, brand marketers, and brand manufacturers.
Retailers, often acting as trading houses, manage and organize products without owning production, falling into two categories: mass merchants, which provide a diverse range of items at department or discount stores, and specialty businesses that focus exclusively on proprietary label products Branded marketers maintain control over the brand while outsourcing production to overseas manufacturers, concentrating on essential functions like design and marketing, with their products sold through retail outlets In contrast, brand owners who possess both the brand name and production capabilities develop production networks that involve their direct participation.
13 in the manufacturing process, either by ownership or by giving production inputs Final goods were marketed through retail outlets
Figure 4.2 Types of lead firm in the textile and garment GVC
Types of upgrading and production modality in the global textile and garment value chain
Table 4.1 Upgrading in the global textile and garment value chain
Countries can adopt various strategies to enhance their position in the global textile and garment value chain, ultimately aiming for functional upgrading These strategies serve as essential steps in improving their competitiveness and value addition within the industry.
Function upgrading is essential for enhancing supplier capabilities in rapidly evolving emerging economies, facilitating a shift towards more knowledge and skill-intensive roles within the global value chain (GVC), which ultimately leads to increased value addition and heightened interaction risks (Goto, 2012; Nadvi & Thoburn, 2004) The trajectory of functional upgrading also illustrates key production modality groups, as depicted in Figure 4.3, which showcases the textile and garment value chain and highlights various manufacturing modalities, including CMT, OEM/FOB, ODM, and OBM.
Cutting, making, and trimming (CMT) represents the fundamental manufacturing mode within the global value chain (GVC) In this approach, global buyers supply all necessary materials to manufacturers, who then fulfill the production requirements However, manufacturers are not involved in more complex tasks such as product design, sourcing, distribution, and marketing, as highlighted by the OECD, WTO, and IDE-JETRO in 2013.
The production mode known as original equipment manufacture (OEM), full-package, or free-on-board (FOB) integrates sourcing and procurement with assembly, allowing garment makers to acquire or manufacture textile inputs while providing comprehensive manufacturing, finishing, and packing services for retail delivery In this model, the buyer supplies the design and often selects textile suppliers Companies have two sourcing options under the OEM/FOB/full-package approach: imported textiles or local sourcing The shift from CMT to OEM/FOB often coincides with the growth of a domestic textile sector, making the expansion of local textile mills crucial for value chain enhancement Notably, knitted textiles tend to develop more rapidly than woven fabrics due to the required financial investment.
Figure 4.3 The value chain of the textiles and garment
Source: OECD, WTO and IDE-JETRO, 2013
Overview about the textile and garment industry in Vietnam
4.2.1 The value chain of textile and garment in Vietnam
Vietnam's textile and apparel industries are incredibly diverse; some companies merely do
Many textile and apparel factories engage in "cutting and stitching," while others utilize in-house fabric supplies to create "composite woven and/or knit textiles." Some major manufacturers provide a comprehensive textile and apparel value chain, covering processes from "yarn and fabric production to weaving, dyeing, finishing, cutting, and sewing," though they typically do not supply raw cotton Despite the presence of significant enterprises with complete supply chains, only about 30% of the necessary accessories are produced in Vietnam, highlighting a gap in the country's backward linkages and support industries that cater to the export-oriented apparel sector (Nguyen Thi Hong Van et al, 2019).
Figure 4.5 Value chain of Vietnamese textile and garment export in 2021
Source: the author compiled from textiles and garment industry report of Le Hong Thuan,
In the retail sales of garments, approximately 60% of the total gross revenue is retained by the retailer, while 20% goes to the producer, and the remaining 20% covers freight, import duties, insurance, and transportation costs.
Vietnam's textiles and garment industry remains at the lower end of the value chain, heavily reliant on processing production methods like CMT and FOB, which constitute 95% of its export production This dependency is compounded by the fact that Vietnamese enterprises import 80% of the fabrics needed for garment production, significantly hindering their ability to add value Currently, CMT represents 65% of the operational capacity of these businesses, which lack initiative in sourcing raw materials Consequently, Vietnamese clothing manufacturers earn relatively low profits, focusing primarily on basic production techniques rather than value-added processes.
The production of components serves as a crucial intermediate stage in the garment industry, yielding higher profits than assembly alone Engaging in the production of raw materials provides a significant competitive advantage for a country’s garment sector, especially over nations reliant on imported inputs.
Cotton is the primary material in the textile industry, with VCOSA reporting a 22% increase in consumption over the past five years (Viettrade, 2021) Despite this rising demand, local cotton production remains minimal, with only 500 tons produced in 2021, meeting less than 1% of national market needs The area dedicated to cotton farming has decreased significantly, from 3,000 hectares to just 1,000 hectares over five years In stark contrast, cotton imports surged to 1.29 million tons in 2021, marking a 25% increase from the previous year and highlighting a dependency on foreign sources, as imports vastly exceed local output Consequently, Vietnam is rapidly becoming the world's second-largest cotton importer, following Bangladesh (Statista, 2021).
Table 4.2 Acreage, production and import of cotton in the period 2017-2021 Year Acreage (hectare) Production (tons) Import (tons)
Source: the author compiled from GSO and Vietnam customs data
Vietnam's cotton acreage continues to decline due to several factors The country's cotton production, primarily irrigated, is highly influenced by weather conditions, with high humidity and sunlight promoting bushy growth and reducing the risk of boll stinging However, cotton cultivation is often limited to the rainy season, making it unsuitable for many regions Furthermore, cotton farming receives little attention in Vietnam, as it has only been cultivated during wet and dry seasons, resulting in a small and scattered production area.
Farmers often lack advanced skills and irrigation systems, relying heavily on natural conditions for crop growth As a result, cotton harvesting is performed manually, leading to significantly lower productivity compared to other countries worldwide (Nhung & Khai).
Cotton production in Vietnam faces significant challenges, resulting in lower economic returns compared to other crops like coffee and rubber Recent years have seen a decline in international cotton prices, which heavily impact domestic pricing due to minimal local production relative to demand Additionally, government support for cotton farmers is limited, and ginning factories do not provide assurances for profitability, further complicating the industry's viability.
As a result, Vietnam's cotton production does not now have a competitive advantage over other nations because cotton production is often scale-efficient In the meantime, Nguyen Thi
Ly from the Vietnam Cotton Corporation (VCC) highlights a significant shortage of large, undeveloped land suitable for cotton farming in Vietnam, with areas ranging from tens to 100 hectares To ensure quality cotton production in these regions, substantial investments are needed for land reclamation, automated irrigation systems, and mechanical equipment for intensive cultivation and harvesting.
Nevertheless, if the cotton sector has the investment mentioned above in the capital, the cost will also be relatively high, making the price uncompetitive with that of global cotton
Vietnam relies heavily on cotton imports to meet its yarn manufacturing needs, with 70% to 80% of its supply sourced from countries like the United States, India, Brazil, and Australia Notably, the United States has increased its market share of cotton exports to Vietnam from 38% to 49% over the past five years This growth is driven by the rising demand for US cotton yarn, which is favored for its quality and affordability in both local and international markets.
The recent increase in cotton imports from Vietnam can be attributed to the Chinese market, as noted by the USDA The Chinese government has ceased its price support program for local cotton producers, which previously inflated cotton prices through substantial national reserve purchases In response to rising domestic prices, Chinese producers are investing in Vietnam's spinning sector The ASEAN-China Free Trade Agreement allows tax-free export of cotton yarn from Vietnam to China, although imported cotton exceeding limits faces a 40% tariff Consequently, many Chinese factories have shifted operations to Vietnam, primarily utilizing American cotton to produce yarn for export back to China The USDA estimates that approximately 50-66% of cotton imported into Vietnam serves as raw material for Chinese-invested factories, most of which is then exported to China as yarn.
Source: Author's calculations from Vietnam customs data
According to the United States Department of Agriculture (USDA), the Chinese market was a significant factor in the recent surge in cotton imports from Vietnam Currently, the Chinese
Figure 4.6 Major Cotton suppliers for Vietnam by quantity in 2017-2021
US India Brazil Australia Others
The Chinese government has ceased its price support program for cotton producers, leading to increased cotton prices as the national reserve purchased large quantities In response to rising domestic prices, Chinese producers are investing in Vietnam's spinning sector Following the ASEAN-China Free Trade Agreement, cotton yarn produced in Vietnam can be exported to China without tariffs, while imported cotton exceeding quotas faces a 40% tariff Consequently, many Chinese factories have moved operations to Vietnam, particularly in the spinning industry, where they primarily utilize American cotton before exporting the yarn back to China According to USDA estimates, approximately 50% to 66% of cotton imported into Vietnam serves as raw material for Chinese-owned factories, with most of the output being exported to China as yarn.
Polyester, a petroleum derivative, is primarily imported in Vietnam, particularly from China, as local projects like Nghi Son and Vung Ro focus on crude oil extraction rather than the production of key materials like polyethylene terephthalate (PET) resin.
Vietnam's textile industry is limited by the presence of only one synthetic fiber factory, the Dinh Vu Synthetic Fiber Factory, which produces polyester fiber using pure terephthalic acid (PTA), monoethylene glycol (MEG), and titanium dioxide (TiO2) These materials are crucial to the country's refining sector, yet the factory has faced ongoing financial losses since it began operations.
Since 2012, the quality of local polyester products in Vietnam has not improved, with selling prices consistently exceeding those of comparable items (Cafef, 2021) Consequently, the domestic polyester market is heavily impacted by international manufacturers, many of which are backed by Chinese investors.
COMPANY ANALYSIS OF STK, MSH, TCM AND TNG
Century Synthetic Fiber Corporation (STK)
Century Synthetic Fiber Corporation is a prominent player among the seven producers of polyester filament yarn in Vietnam With a strong focus on leading the domestic market, Century Yarn aims to innovate within the textile industry and establish itself as a top global enterprise The company is committed to expanding its international presence by delivering high-quality products and services that meet and exceed customer expectations.
Founded on June 1, 2000, the company specializes in manufacturing Draw Textured Yarn (DTY) from imported Partially Oriented Yarn (POY), with an initial production capacity of 4,800 tons of DTY per year The factory features advanced production lines sourced from Barmag AG Group in Germany, enabling the production of synthetic microfilaments across a comprehensive range of specifications.
In response to market demand and the robust growth of the textile industry in 2003, CSF significantly expanded its investments, resulting in a doubled production capacity of 9,600 tons of DTY per year, as noted in the Annual Report of STK (2004).
On April 11, 2005, Century Synthetic Fiber Company Limited was officially transformed into Century Synthetic Fiber Joint Stock Company (CafeF, 2022)
In 2008, STK launched a POY yarn factory to enhance its value chain and profitability while reducing reliance on imported raw materials This strategic investment aimed to mitigate the impact of price fluctuations and supply issues associated with POY yarn As a result, Century Yarn became the first Vietnamese company to produce microfilament yarn from imported polyester chips, marking a significant milestone in its development and creating new opportunities for growth.
In 2014, STK implemented the investment project of an expansion factory in Trang Bang with a total expected investment capital of 34.2 million USD (Chi Tin, 2019)
In 2015, the company was officially listed on the Ho Chi Minh Stock Exchange under the code STK Additionally, it partnered with a leading industry enterprise to successfully create recycled yarn products from plastic beads, marking a significant step in diversifying its product offerings and enhancing value-added segments.
In 2021, the solar power project will come into operation, reducing CO2 emissions (Annual Report of the STK, 2021)
STK manufactures and trades polyester long fiber yarns, including
DTY (Drawn Textured Yarn) and FDY (Fully Drawn Yarn)
Fiber products are used to produce sports-outdoor clothing, sports shoes, polyester canvas bags, swimwear, curtains, car upholstery, and medical bandages
The company has 2 factories located in Cu Chi and Trang Bang with a total area of 68,000 m2
Source: Annual Report of the STK, 2021
Domestic market: including selling directly to customers in Vietnam and selling to foreign customers but delivering goods in Vietnam (on-site export)
Export markets: STK has been developing export markets such as the US, Japan, Thailand, and Korea
Since 2016, STK has been a pioneer in Vietnam's Recycled Yarn industry, expanding its offerings to include advanced features like high stretch, flame retardant, and anti-ultraviolet properties By producing recycled fibers, STK has successfully repurposed 3.04 billion plastic bottles, playing a crucial role in combating the global environmental crisis of plastic waste in oceans.
In 2021, Century Yarn advanced its Dope Dyed Yarn production in gray, black, and navy, offering a sustainable alternative to traditional fabric dyeing This innovation aligns with the global fashion industry's commitment, particularly among major brands like Nike, Adidas, Puma, H&M, and Inditex, to reduce harmful chemical emissions and promote environmental sustainability.
The company enhances economic production efficiency by recycling waste and secondary fibers into plastic beads, creating a closed production loop This innovative approach not only boosts profits and lowers production costs but also minimizes environmental emissions.
Since 2020, the company has implemented rooftop solar power systems at its Cu Chi and Trang Bang factories, fulfilling approximately 10% of its electricity requirements This initiative not only leads to a 10% reduction in electricity costs but also decreases the annual carbon footprint by 10.7%, resulting in a total reduction of 530,000 tons of CO2 emissions over the project's lifespan, as highlighted in the STK Sustainability Report (2021).
Senior and middle-level human resources lack experience managing and training lower-level human resources
Besides, input materials are entirely dependent on imports As a result, enterprises are exposed to the risk of material price fluctuations in the world market
As an exporter, STK relies heavily on importing raw materials, purchasing them only one month in advance for its monthly order plans The company's dependence on Unifi for 100% of its recycled chip supply limits its negotiating power on prices, hindering STK's ability to effectively manage profit margins in the recycled yarn segment.
STK has announced the issuance of 13.6 million additional shares to support the Unitex synthetic fiber factory project, as reported by Nguyen Thi Thao Vy in 2021 This move will increase the total number of outstanding shares, potentially resulting in price dilution for existing shareholders.
European regulators are taking a strong stance against "fast fashion," aiming for significant changes by 2030 New regulations will ensure that textile products entering the EU market are designed for longevity, made primarily from recycled polyester fibers, and free from harmful substances Additionally, these products must adhere to human rights standards, promoting a more sustainable and ethical fashion industry.
The recycled yarn market is projected to reach $5.9 billion by 2025, representing 45% of global yarn demand (Textile Exchange, 2022) This trend will significantly benefit raw materials that are key sources of recycled fibers, such as STK.
Besides, the yarn industry benefits from the decision to apply the Anti-Dumping Tax (CBPG)
In the past year, the Ministry of Industry and Trade implemented official anti-dumping measures on various polyester-long fiber products imported from China, India, Indonesia, and Malaysia These measures aim to foster a fair and competitive environment for domestic producers.
39 manufacturing enterprises, improving the competitiveness of products and enterprises from Vietnam
STK is poised to gain from China's zero COVID policy, as many orders are being redirected to Vietnam The ongoing social distancing measures in various Chinese cities are likely to drive up inflation and freight costs, impacting the importation of textile materials However, this situation presents an opportunity for Vietnamese businesses to secure increased orders as companies seek alternatives to China.
Song Hong Garment Joint Stock Company ( MSH)
In 1988, established under the name of Garment Factory 1/7, directly under the State with 100 workers
In 1993, renamed as Song Hong Garment Company
In 2004, the company expanded to six garment factories, increasing its workforce to 3,600 employees Additionally, it underwent equitization and rebranded as Song Hong Garment Joint Stock Company, as noted in the Annual Report of MSH, 2022.
In 2006, company established branch in Hong Kong
In 2007, the company further developed Song Hong 4 area in Nam Dinh province with the scale of 4 garment factories
In 2012, the company advanced the construction of the Song Hong 7 area in Hai Hau district, Nam Dinh province, which includes four garment factories Additionally, the development of the Song Hong 8 area in My Trung Industrial Park was initiated to relocate the export bedding production facilities from the city center.
In 2015, the company started the factory project in Nghia Hung
In 2016, the Nghia Hung production area began operations, leading the company to establish four additional garment factories in Nghia Hung district This expansion increased the total workforce to nearly 11,000 employees across 18 factories To celebrate the 15th anniversary of the Song Hong bedding brand, the company introduced its second generation of pure cotton mattress products.
In 2018, the company listed shares on HOSE on November 28, 2018 with a total charter capital of up to VND 476,280,000,000.(Annual report of the MSH, 2022)
In early 2021, the company commenced the construction of the Song Hong 10 factory located in Nam Dinh province, with plans for completion by December 2021, as noted in the MSH annual report of 2022.
In 2022, SH10 - Nghia Hung factory will come into operation from March 2022, with about
2000 workers, expected to reach 100% capacity in Q3/2022, increasing FOB capacity to 35% (Ngo Le Nhat Ha, 2022)
MSH primarily engages in garment processing, with exports constituting over 90% of its revenue, primarily through FOB orders for prominent fashion retailers and wholesalers like Columbia and Walmart In 2021, the company focused on manufacturing and trading garments, materials, and equipment for the textile industry, as well as industrial products aimed at enhancing people's lives, while emphasizing both export and domestic garment markets.
Song Hong Garment is a prominent player in the garment export sector, supplying major global brands through its primary export methods of CMT and FOB, with the latter contributing significantly to its revenue and profit With over 30 years of experience, the company specializes in a diverse range of products, including knitted and woven items, sporting goods, and fashion apparel for men, women, and children, featuring categories such as skirts, pants, jackets, T-shirts, blue suits, sportswear, and felt goods Notably, Song Hong Garment partners with renowned brands and retailers, including Columbia Sportswear, Haddad Brands (Nike, Converse, Levi's), GIII (Calvin Klein), Tommy Hilfiger, DKNY, Walmart, Bugatti, Sae-A Trading, Target, and Express.
The domestic sector's main products are blankets - sheets - pillows, masks, and cushions, which are researched and developed by the company and are mainly distributed in the domestic market
The company's garment products market includes both domestic and international markets The company mainly exports to America, Europe, Japan, Korea, Taiwan, Hong Kong,
Canada, Mexico, and the Middle East countries Up to now, Song Hong has become a prestigious manufacturer of famous fashion brands thanks to its tremendous production capacity
The company's bedding products are currently distributed nationwide through a distribution system of showrooms and agents
The company operates 177 showrooms and has an extensive network of agents across 49 out of 63 provinces and cities in Vietnam Since 2016, its bedding products have not only catered to the domestic market but have also met the high standards required for export to the demanding markets of Japan and Korea.
In 2021, MSH's factories and workshops maintained stable production activities, anticipating a recovery in garment demand from export markets The company's strong production capacity is crucial for attracting large-scale customers and expanding order sizes as consumer demand in the garment industry increases MSH has demonstrated its leading production capabilities by meeting the stringent standards of renowned global brands, including Columbia, G-III, Haddad, and Walmart.
Moreover, MSH is one of the reputable enterprises, capable of producing products with severe difficulty, a skilled workforce, and proper cost management
Furthermore, MSH is one of the few enterprises with a high proportion of FOB products, with FOB level 1 and FOB level 2 having a higher gross profit margin than CMT
The production of yarn in China is heavily influenced by cotton management policies, which directly affects the input material and the final output Consequently, businesses in this sector face significant risks associated with profit volatility.
MSH faces challenges in internal competitiveness, primarily due to a shortage of highly qualified workers, outdated technology, and inefficient production organization This situation is particularly concerning as the export garment market demands constant design innovation.
The company has neglected to research and invest in domestic market demand, leaving several market segments unoccupied and allowing foreign products to easily enter the local market.
The European-Vietnam Free Trade Agreement (EVFTA) will lead to reduced export taxes for textile and garment products in the EU market in 2023 Specifically, garments classified under B3, B5, and B7 will see a decrease of 2% to 4% in export taxes (Vietnam Ministry of Industry and Trade, 2022)
MSH is poised to gain from ongoing US-China trade tensions, particularly as demand for textiles and garments surges in the post-pandemic market, leading to a significant increase in orders for the company.
MSH heavily relies on imported raw materials from China, making its supply chain vulnerable to disruptions caused by China's zero COVID strategy This reliance means that fluctuations in raw material prices, which constitute a significant portion of garment companies' cost structures, can greatly affect gross profit margins and overall business performance.
Song Hong Garment is significantly impacted by exchange rate fluctuations between USD and VND due to its primary transactions being conducted in US Dollars and its focus on international markets The company also holds foreign currency loans, predominantly in USD If its financial assets in USD exceed its financial liabilities in the same currency, it faces heightened risk when the USD/VND exchange rate weakens, meaning a decline in the value of USD against VND, and conversely, it benefits if the USD strengthens.
Source: Income statement of MSH
Thanh Cong Textile Garment Investment Trading Joint Stock Company (TCM) 51
Between 1967 and 1975, a small-scale private textile enterprise known as "Reinventing the Textile Industry" was founded, employing 500 workers and focusing on weaving and dyeing Its products primarily served the southern domestic market and the Cambodian market, as noted in the TCM's 2020 annual report From 1986 to 1996, the company invested over 55 million USD, resulting in increased labor productivity and enhanced product quality.
52 products began to be exported to many major countries around the world, including the European market (Annual report of the TCM, 2020)
Between 2006 and 2009, the company restructured and rebranded as Thanh Cong Textile – Investment – Trading Joint Stock Company, subsequently listing its shares on the Ho Chi Minh City Stock Exchange (HOSE) under the ticker TCM During this period, it issued shares to foreign strategic partner E-land Asia Holdings Pte., Ltd from Singapore, a subsidiary of Korea's E-Land Group, which then became involved in the company's management activities.
In 2010, enterprises began adopting advanced management tools to enhance production and management activities, including the implementation of Lean systems in production processes and the use of ERP and BSC systems for effective business management.
In 2011, the company invested more equipment for yarn factory 4, knitting factory to increase production capacity, expand export market to Korea and increase FOB order rate
In 2018, the company boosted its charter capital to VND 542,300,550,000 and acquired the Trang Bang Garment Factory project in Trang Bang Industrial Park from E.Land Vietnam Co., Ltd This strategic move aimed to enhance production efficiency and family management while increasing garment product capacity Additionally, the company transformed a yarn factory to specialize in producing new yarns tested by the R&D Department, thereby diversifying its product offerings and enhancing product value.
In 2019, the company launched Textile Factory No 2, increasing its annual fabric production capacity to 15 million meters Additionally, a Memorandum of Understanding was signed with Singapore Juki Group to implement the Smart Factory project.
In 2020, Thanh Cong, a pioneering company in Vietnam alongside Bitis and Trung Nguyen, launched a new retail strategy by introducing its self-developed ONLEE brand on the Amazon e-commerce platform.
TCommerce Co., Ltd was founded in April 2021 with an initial charter capital of 12 billion VND, focusing on e-commerce services in the fashion sector By June 2021, the company significantly boosted its charter capital to over 713 billion VND, reflecting its rapid growth and commitment to the industry.
In December 2021, the Company cooperated with Ree Solar Joint Stock Company to install a solar power system at Garment Factory 2 in Hoa Phu Industrial Park.The solar power system
53 at Garment Factory 1 has been put into operation with an operating capacity of 825,517 kw in
2021 (Annual report of the TCM, 2021)
Producing, trading, importing and exporting all kinds of cotton, fiber, yarn, fabric, garment, footwear and machinery, equipment, spare parts, raw materials, supplies, chemicals (except toxic chemicals) harmful), dyes, packaging
The company specializes in the manufacturing, importing, and exporting of a wide range of cotton products, including fiber, yarn, fabric, garments, dyestuffs, and packaging solutions Key clients include prominent brands such as Eland, Ping, Eddie Bauer, and Kiwa Additionally, the company's production methods encompass both FOB (Free on Board) and CMT (Cut, Make, Trim) processes.
Thanks to its closed production cycle, TCM has implemented an in-house yarn strategy for years, achieving partial self-sufficiency in fabric material supply This reduces reliance on imported raw materials, particularly from China, allowing TCM's products to comply with origin requirements for foreign partners and gain competitive advantages from the CPTPP and EVFTA Agreements Furthermore, the company is enhancing its yarn-weaving-dyeing-sewing production chain by integrating an intelligent factory line model with Juki's Jantes management support system, ensuring efficient sourcing of materials.
As the pioneering company in Vietnam to establish a complete textile and garment value chain encompassing yarn, fabric, and garments, TCM is well-positioned to leverage opportunities from Free Trade Agreements (FTAs) with the EU and CPTPP, which stipulate an origin requirement of "from fabric onwards."
Under the EVFTA, TCM's products primarily fall within groups B3 and B5 of the tax reduction schedule, leading to a complete elimination of import taxes after five years.
TCM offers a wide range of textile products, including yarn, fabric, and garments, while benefiting from the management expertise of Eland Korea, which enhances employee welfare and the working environment The company is committed to innovation, with its R&BD department actively researching new products that feature sustainable materials In 2021, TCM plans to introduce products made from bio-based and recycled materials, such as those derived from sugarcane, corn, ocean-collected plastic bottles, and second-hand clothing.
54 development of environmentally friendly products helps TCM make a good impression on domestic and international clients
TCM's yarn production lacks efficiency, and despite the economy reopening and business activities resuming, the collaboration among departments and external outsourcing units remains inadequate This disconnection negatively affects overall productivity.
The newly signed Free Trade Agreements (FTAs) have positively impacted the fabric revenue segment, with accumulated figures for the first four months of 2022 reaching $9 million, reflecting a 39.2% increase compared to the same period last year (Vndirect research, 2022) Domestic sales now represent nearly 50% of total revenue and are projected to continue growing in the future (Vndirect research, 2022).
Besides, the company also has the opportunity to develop new customers to increase revenue through the free trade agreements that Vietnam has signed
TCM stands out as one of the few companies with a comprehensive Yarn-Knitting/Weaving-Dyeing-Garment value chain, enabling it to swiftly comply with the origin requirements of FTA agreements Notably, TCM self-produces nearly 80% of the cotton yarn used in its production, with the remaining 20% sourced from imported synthetic fibers (Vndirect research, 2022).
TNG Investment and Trading Joint Stock Company (TNG)
TNG is a unit operating in industrial sewing, import, and export, producing garments with paper packaging, plastic for making plastic bags, nylon raincoats, and garment materials and accessories
Besides, TNG is one of Vietnam's largest textile and garment exporters Annually, the company produces about 12 million products of jackets and 9 million products of Chino
Figure 5.12 Profitability index of TCM in 2020 -2021
The company's products, primarily pants, are exported to key markets including the United States, the EU, Canada, France, and Mexico, which together constitute approximately 83% of total exports, according to the TNG annual report of 2021.
The company operates ten garment branches with 178 production lines and four facilities dedicated to garment accessories Each year, it produces approximately 12 million jackets and 9 million Chino pants The majority of the company's exports, around 83%, are directed towards the United States, EU, Canada, and Mexico.
On November 22, 1979, TNG Investment and Trading Joint Stock Company, formerly known as Bac Thai Garment Factory, was established
In 2006, the Commencement of construction of Song Cong TNG Factory
In 2007, it changed its name to TNG Investment and Trading Joint Stock Company TNG shares are listed on Hanoi Stock Exchange, and the stock code is TNG
In 2010, the construction of the TNG Phu Binh factory started
In 2013, the construction of the TNG Dai Tu Factory started
In 2016, TNG inaugurated and implemented the TNG Fashion Design Center and the company's office
In 2021, TNG introduced a range of fire protection clothing, antibacterial cotton, and antibacterial cloth masks As a leader in innovation, TNG was among the first to produce antibacterial cloth masks designed to combat Covid-19, adhering to the standards set by Decision 870/QD-BYT.
TNG is expected to maintain profitability for years to come, primarily through its core business of garment production for export Additionally, the company is actively exploring and developing new production and business sectors While garments remain the focal point of TNG's operations, the company is also involved in laundry, packaging, printing, embroidery, and real estate ventures.
TNG partners with major retailers like Decathlon, Columbia Sportswear, and The Children's Place, ensuring long-term, stable orders and a demand for increased annual output In response, TNG is enhancing its supply of raw materials and accessories while focusing on developing innovative models to boost product profitability.
TNG boasts extensive experience in garment manufacturing for export, providing it with a competitive edge in the market The brand is highly regarded by large clients and the media in the international arena, which serves as a solid foundation for TNG to attract and develop relationships with even larger customers.
Although foreign importers highly appreciate the brand "TNG Fashion," it is not familiar to domestic consumers, which proves that the promotion and development of domestic brands are not good
Despite low labor costs, the average cost per product unit remains high, causing textile companies, including TNG, to have prices that exceed those of competitors in India, China, and Indonesia Additionally, the lack of a standardized quality system across the industry results in varying standards among companies, leading to inconsistencies in product quality.
TNG is poised for significant growth in the textile and garment industry, leveraging a robust domestic market and enhanced export potential With supportive government policies and mechanisms in place, the company is well-positioned to achieve positive advancements in both production and export activities in the upcoming years.
The openness of Vietnam's economy has attracted foreign investment, particularly in the textile and garment sector, creating a favorable environment for companies like TNG to expand their business through the FOB model.
In 2021, the company significantly expanded its operations by investing in the TNG Vo Nhai 2 Garment Branch, as well as the Phu Binh and Song Cong Branches, increasing its total design capacity to 324 advanced sewing lines This modernization not only enhances production capabilities but also positions the company to attract new orders and improve overall efficiency in the future.
In recent years, the company has achieved improved business results, attracting significant capital from banks and foreign institutional investors through bond offerings This influx of funding supports the company's objectives of expanding production and business operations to better serve its customers.
The increasing number of large-scale manufacturing enterprises with many factories in Thai Nguyen province poses significant challenges for the Company in recruiting and retaining
62 employees Accordingly, the Company needs to constantly improve the working environment and labor policy to attract high-quality labor for future development
In addition, Vietnam's textile and supporting industries have not developed accordingly, so the production activities of enterprises are highly dependent on imported raw materials
Moreover, product requirements are increasingly strict in major export markets such as the
EU, the United States, and Japan Therefore, textile enterprises in general and TNG, in particular, will have production strategies to increase product quality in the subsequent business periods
In 2021, TNG achieved a revenue of VND 5.444 billion, reflecting a 21.5% increase from the previous year The company's profit after tax soared to nearly VND 233 billion, marking a 51.6% rise compared to approximately VND 154 billion in 2020 However, the gross profit margin experienced a decline due to rising depreciation expenses.
Source: Income statement of TNG
In the first quarter of 2022, the textile company reported revenue of 1,260 billion VND, and profit after tax was 38 billion VND
In the first quarter of 2022, TNG enhanced labor productivity and product quantity by integrating automatic sewing equipment and implementing hourly production controls for each employee (Finhay, 2022) This strategic move was driven by the rising demand for their products.
Figure 5.13 Business results of TNG in 2021-2022
63 goods, the shortage of containers improved and export goods were no longer congested at the port, helping to increase revenue
The integration of advanced software in production planning has enhanced the efficiency of machinery and equipment, leading to improved customer debt collection As a result, both interest and selling expenses have significantly decreased.
Source: Income statement of TNG
In 2020, TNG's operating profit margin (ROS) was 3.43%, which increased to 4.27% in 2021, reflecting positive changes in the company's production activities This growth indicates that for every dong of net turnover, TNG generated 0.0427 dongs of after-tax profit in 2021, a notable improvement from 0.0343 dongs in 2020 The rising profitability suggests effective cost management policies that contributed to TNG's financial success However, TNG's ROS remains lower compared to competitors in the textile industry, such as STK and TCN To enhance its business scale and operating profitability, TNG should capitalize on the flourishing opportunities within the textile sector.
VALUATION OF STK, MSH, TCM AND TNG
The valuation of STK
Figure 6.1 DCF Valuation of STK
Source: The author's calculations from the financial statements of the STK
The Discounted Cash Flow Valuation method was employed to assess the value of STK stock, predicting a significant 25% increase in cash flow for 2022 as a result of post-COVID recovery This growth is anticipated to continue with a 20% increase from 2023 to 2025, driven by the expansion of production facilities, followed by a more moderate 10% growth in subsequent years.
First, we calculate the free cash flow for the firm After using these inputs, we projected the free cash flows for the next 5 years
Free Cash Flow for the Firm (FCFF) represents the cash available after a business has financed its essential projects, serving as a key metric for assessing financial health and stock valuation This indicator reflects a company's financial strength by showing the cash remaining after all short-term expenses are accounted for, ensuring the company can maintain operations in the short term.
The formula below is used to determine the free cash flow for the business
FCFF = Free Cashflow for the firm
EBIT = Earnings before Interest and Tax
CIT rate = Corporate income tax rates
Based on the formula, FCFF from 2021 to 2025 is calculated with the result of 130.4 respectively; 163;195.6; 232.72; 281.664 (Figure 6.1)
Next, calculating the WACC (Weighted Average Cost of Capital (WACC = r) is approximately 16% (Figure 6.1)
WACC, or Weighted Average Cost of Capital, reflects the overall cost of capital from various sources, such as common stock, preferred stock, and debt Each component's cost is determined using a discount rate, which is essential for calculating the net present value of a business.
The primary objective of the Weighted Average Cost of Capital (WACC) is to assess the cost associated with a company's capital structure, taking into account the proportions of equity, debt, and preferred stock Each component incurs a specific cost for the company, which includes a fixed interest rate on debt and a predetermined interest rate on preferred stock.
In summary, WACC represents the future risk of cash flows The higher the WACC, the greater the risk, resulting in a smaller discount factor and the smaller the firm's valuation
Finally, perform DCF valuation according to the following formula and get the result of VND
➤ CF: Expected cash flow of the company in years 1, 2,…,n
➤ DCF (Discounted Cash Flows): Discounted cash flows represent the value of the business
After adjusting for present value, we determined an Enterprise Value of VND 2,808 billion By adding cash and marketable securities to this Enterprise Value and subtracting the debt, we calculated an Equity Value of VND 3,173,925,873,720.
Then, dividing by shares outstanding and got an intrinsic value of 46,549VND per share In comparison to the current price of 42.7VND the stock rated as a buy
In summary, investing in STK stock is advisable due to several key factors The textile and garment industry is experiencing a favorable outlook, bolstered by advantageous trade agreements and anti-dumping measures on imported fiber products Additionally, the recycled yarn segment presents significant long-term revenue potential Furthermore, plans to expand production capabilities will contribute to future growth.
Unitex factory is set to double its capacity by 2025, indicating significant growth potential Additionally, utilizing the discounted cash flow method highlights the promising future of recycled yarn, making STK stock a highly recommended investment opportunity.
The valuation of MSH
Figure 6.2 DCF Valuation of MSH
Source: The author's calculations from the financial statements of the MSH
Suppose cash flow thrives by 20% in 2022 due to post-covid recovery, with 10% growth in the following years
First, we calculate the free cash flow for the firm in 2021, 2022, and 2023 to be 171,3264 billion VND, 205,59168 billion VND, and 226,150848 billion VND (Figure 6.2)
Next, calculating the WACC (Weighted Average Cost of Capital (WACC = r) is 0.148149138 (Figure 6.2)
After adjusting for discounts and present value, the Enterprise Value is calculated at VND 3,454 billion By adding Cash and Marketable Securities to this Enterprise Value and subtracting Debt, we arrive at an Equity Value of VND 33,654,187,934,845.
Then, dividing by shares outstanding and got an intrinsic value of 48,713 VND per share The MSH stock is rated as a buy compared to the current price of 38 VND
In conclusion, the discounted cash flow analysis suggests that MSH stock is a buy, with a target price of VND 48,713 based on a conservative estimate that includes a WACC of approximately 14.81% and a long-term growth rate of 10% This valuation accounts for market risks, epidemic risks, and unforeseen factors Nonetheless, we believe MSH warrants a higher valuation due to its favorable growth potential, recovering demand, and superior production capacity and efficiency.
The valuation of TCM
Figure 6.3 DCF Valuation of TCM
Source: The author's calculations from the financial statements of the TCM
Assume that cash flow thrives by 25% in 2022 due to recovery from mining and operation of more production plants, with 10% growth in the following years
First, we calculate the free cash flow for the firm in 2021, 2022, and The following years to be 93.26 billion VND, 116.575 billion VND, and 5800.758192 billion VND (Figure 6.3)
Next, calculating the WACC (Weighted Average Cost of Capital (WACC = r) is 12% (Figure 6.3)
After discounting all factors to present value, the enterprise value was determined to be VND 4,728 billion By adding cash and marketable securities and subtracting debt, the equity value reached VND 4,858,031,078,985 Dividing this equity value by the number of outstanding shares resulted in an intrinsic value of VND 59,283 per share Given the current stock price of VND 42.5, MSH stock is recommended as a buy.
TCM is highly recommended for investment due to several key factors Firstly, the ongoing rise in raw cotton prices is a significant advantage Additionally, the expansion of the Vinh Long factory phase 2 will increase capacity by 18% Lastly, TCM's closed supply chain positions the company to reap substantial benefits.
The valuation of TNG
In 2022, cash flow is projected to rise by 10% as a result of post-COVID recovery, followed by a 15% increase from 2023 to 2025 driven by anticipated expansion of production facilities Subsequently, cash flow growth is expected to stabilize at 10% in the years thereafter.
First, we calculate the free cash flow for the firm in 2021, 2022, 2023, and 2024 to be 193.64 billion VND, 213.004 billion VND, 255.6048 billion VND, and 306.72576 billion VND (Figure 6.4)
Next, calculating the WACC (Weighted Average Cost of Capital (WACC = r) is 15% (Figure 6.4)
After adjusting for all factors and bringing the figures to the present, we determined an enterprise value of VND 4,277 billion By adding cash and marketable securities to this enterprise value and subtracting the total debt, we arrived at an equity value of VND 3,832,385,463,354.
Figure 6.4 DCF Valuation of TNG
Source: The author's calculations from the financial statements of the TNG
Then, divided by outstanding shares, an intrinsic value of 36,458 VND per share The MSH stock is rated as a buy compared to the current price of 24.9VND
According to the Discounted Cash Flow (DCF) analysis, TNG stock is a strong buy recommendation The company aims to expand its production capacity to 327 lines in 2022, with a projected increase to 372 lines by 2025, creating over 20,000 jobs Additionally, TNG anticipates a 5% annual growth in revenue per sewing line.
2022 and 2025, thanks to measures to improve labor productivity Besides, TNG still maintains stable operations with signed orders mainly from long-time customers such as Decathlon, ANF, The Children's Place
CONCLUSION
Following the 20th Century, the textile industry transformed into a large-scale manufacturing sector, experiencing significant breakthroughs Production has progressively shifted to lower-cost regions, transitioning from North America and Western Europe to countries such as Japan, Hong Kong, Taiwan, Korea, China, South Asian nations, and Latin America.
The textile and garment industry in Vietnam ranks second in export turnover, employing over 20% of industrial workers and nearly 5% of the national labor force However, the majority of this export turnover comes from foreign direct investment (FDI) enterprises, which, despite representing only 25% of production volume, account for over 60% of exports In contrast, Vietnamese enterprises earn a mere 3% of the industry's export profits To enhance their competitiveness and establish a stronger presence in the market, domestic companies must innovate their production methods and business management, alongside receiving state support for growth.
Vietnam's garment manufacturing sector engages in the global value chain primarily through Cut-Make-Trim (CMT) at 65% and Free on Board (FOB) at 30%, with FOB level 1 accounting for 20% and FOB level 2 for 10% However, the industry struggles to offer comprehensive package solutions, resulting in low added value.
Vietnam's textile and garment industry faces challenges in distribution and marketing due to its reliance on CMT and FOB processing orders, resulting in a lack of branded products for global retailers Without control over upstream production links and the ability to develop unique designs and brands, Vietnam struggles to secure a significant position in the global textile value chain However, the EVFTA Free Trade Agreement, effective since early 2020, presents a promising opportunity for Vietnamese exports to the European market, as it reduces tax rates to 0%.
The textile and garment industry is experiencing a positive trend, with uninterrupted production activities and a continuous increase in order value Most textile enterprises have secured orders through Q3 2022, and fashion brands are optimistic about sales prospects due to growing post-pandemic shopping demand and a shift of orders to Vietnam This shift is expected to contribute to positive growth in order value throughout 2022.
73 garment industry grew in export turnover thanks to the benefits of EVFTA, CPTPP, and the US-China trade war
Stocks of companies that are expected to grow and are recommended to buy are STK, MSH, TCM, and TNG
STK is experiencing strong demand for recycled yarn due to brand commitments, which will enhance revenue growth and improve gross profit margins The upcoming operation of Phase I of the Unitex factory in Q1/2023 will increase total capacity to 50% Additionally, anti-dumping duties on yarn imports from China, India, Indonesia, and Malaysia are expected to bolster STK's domestic output growth in the medium term Consequently, investors should consider purchasing STK stock, as it presents promising business prospects for both the medium and long term, particularly when evaluated using the DCF method.
MSH is experiencing significant growth, driven by a high volume of international orders, particularly from Walmart and Columbia, which positively impacts the company's stock performance Additionally, MSH is enhancing its production capabilities with the launch of the Song Hong 10 factory.
At the end of 2022, Song Hong Garment demonstrated a favorable business outlook, prompting a recommendation to purchase MSH shares based on stock valuation methods and the company's positive performance.
TCM stands out in the textile industry due to its comprehensive yarn-to-sewing production chain, which includes yarn manufacturing, weaving, dyeing, and sewing This vertical integration allows TCM to reduce input and transportation costs significantly, as it produces its own fabric Additionally, by relying on self-supplied fabric, TCM can manage export orders more effectively and is less vulnerable to external supply disruptions Given TCM's advantageous business position and favorable stock valuation, it is advisable to consider purchasing TCM shares.
TNG is actively expanding its production capabilities with the Dong Hy 2 project, set to add 20 sewing lines in 2023, and the Dai Tu 2 project, which will introduce 22 sewing lines in 2024 To capitalize on preferential tariffs amid strict fabric origin requirements, TNG is increasing its use of locally sourced materials, aiming to reduce imports from China to below 60% Given these developments and the positive outlook reflected in the DCF valuation method, TNG stock is highly recommended for investors.
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