- We attended STK’s online analyst meeting, in which management discussed 6M 2021 business results and its outlook as well as disruptions from the current COVID-19 outbreaks in Vietnam to the company’s production and supply chain.
- The industry backdrop looks positive for STK as the global apparel demand recovery is maintaining momentum. At the same time, blue-chip customers’ commitment to increase their usage of recycled materials indicates booming demand for recycled yarn going forward. Textile Exchange — an organization supporting a sustainable textile industry — forecasts that global recycled polyester consumption will nearly quadruple from 2020-2025.
- STK maintains its 2021 revenue and NPAT targets that imply 34% and 72% YoY growth, respectively, assuming that the current supply chain disruptions due to COVID-19 in Vietnam will ease in the short term. Per management, July 2021 earnings will slightly exceed those of June 2021.
- STK has arranged for 70% of its workers to stay at its factories during non-working hours as per the Government’s requirements to contain the spread of COVID-19. As 30% of workers are currently absent from work, STK’s production is trailing its original schedule. In addition, COVID-19 containment efforts are also deterring logistics activities, per STK. 

STK guides for 2021-2026 revenue/NPAT/EPS CAGRs of 17%/16%/13%, respectively, which are premised on capacity expansions and a product mix shift toward high-margin recycled yarn. STK’s expected slower CAGR for EPS vs NPAT is due to its plan to raise equity capital to fund its capacity expansion. We note that STK typically sets conservative business guidance relative to its actual results.

STK’s guidance for 2021 vs VCSC’s forecast

Source: STK, VCSC compilation

STK expects to raise another USD20mn-30mn in equity capital in addition to a planned rights issuance of USD6mn that was previously announced. Further details regarding the potential USD20mn-30mn transaction were not disclosed.

Recycled yarn consumption to accelerate as fashion brands increase their usage of recycled materials. In April 2021, Textile Exchange and the Fashion Industry Charter for Climate Action — convened by United Nations Climate Change — launched a joint initiative that includes the 2025 Recycled Polyester Challenge. 85 brands and suppliers — including leading fashion players such as Adidas, Inditex and H&M — participated in this challenge and made commitments on recycled polyester usage. Textile Exchange expects global annual recycled polyester consumption to soar from 4.5 million tonnes in 2020 to 17.1 million tonnes in 2025. This target implies that the global recycled polyester consumption volume share will balloon from 14% to 45% during the same period.

Given this upbeat industry backdrop, management was confident that STK’s recycled yarn price gap (i.e., yarn selling price – PET chip price) will be able to remain at the current attractive levels.

The arrangement for workers to stay at factories will cause additional but insignificant expenses, per management. If the current situation lasts for another several weeks, management estimates that the additional expenses for meals, accommodation and COVID-19 testing for employees will amount to ~VND3bn (USD130,000), which is equivalent to 1% of our 2021F NPAT. 

Logistics activities are encountering some disruptions. Although STK and its suppliers are still allowed to ship their goods, third-party logistics services are either getting suspended, delayed or more expensive as drivers are required to undertake regular COVID-19 tests and other verifications. That said, STK believes it can pass the elevated shipping costs onto its customers.