STK – Strong QoQ recovery reflected in orders for Q2 2024

We attended STK’s 2024 AGM in HCMC on March 28. Overall, preliminary Q1 2024 results weakened QoQ, in line with our expectations. However, 2024 guidance is more optimistic than our forecasts. We maintain our view that 2024 is a sharp reflection point of this cyclical business but see no potential changes to our forecasts, pending a fuller review. We currently have a MARKET PERFORM rating on STK. Our detailed takeaways are as follows.

Figure 1. 2024 guidance:

VND bn	2024G	2024G YoY	2024F	Vietcap comments
Sales volume (tonnes)	36,500	32%	40,894	2024G equivalent to 90% of 2022. Higher contribution from high-margin recycled yarn.
Revenue	2,703	90%	2,227	2024G equivalent to 129% of 2022. We are less bullish than management’s guidance.
- Existing factory	2,077	46%	NA
- New Unitex factory	626	NA	NA
GPM	17.8%	NA	16.1%	Recycled yarn higher than 20% Virgin yarn roughly 8%
Depreciation expenses	164	78%	125	We expect Unitex to come online in Q4 2024 while management expects Q3 2024.
NPAT	301	242%	219	2024G equivalent to 112% of 2022 (adjusted for abnormal FX losses). We are less bullish than management’s guidance.
- Existing factory	220	152%	NA
- New Unitex factory	80	NA	NA

Quarter	Sales volume (tonnes)	Management comments
Q1 2024 (prelim result)	5,400	- 20% QoQ; Little orders for the Fall-Winter 2024 retail season, which is a “lost season.” We expect minimal net profit.
Q2 2024	9,000	Order recovery begins for the Spring-Summer 2025 retail season. Q2 2024 orders from 1-2 brands set to double vs Q1 2024.
Q3 2024	10,500	Unitex to reach 70% utilization.
Q4 2024	12,500	Equivalent to the Q1 2019 level. Unitex to reach 80% utilization. The maximum rate is 92% due to maintenance.

Source: STK, Vietcap

2. Other management comments

- Brand customer inventory: All brands finished destocking and are at healthy levels. However, smaller brands are outperforming bigger brands. Uniqlo has been restocking strongly and the inventory of Puma and Lululemon has returned to 2021’s levels. Meanwhile, that of bigger brands such as Nike and Adidas have only returned to 2022’s levels.

- Brand customer FY2024 revenue growth guidance (from brands):

+ Nike: 1-5%

+ Adidas: 5-7%

+ Puma: 5-7%

+ Lululemon: 11%-12%

+ Uniqlo: 10%

- Unitex factory progress: 90% of construction and 60% of machinery installation is finished; to be launched in July 2024 to capture recovered orders. Employees and experts ready to install equipment. Unitex adds 36,000 tonnes p.a. to STK’s current capacity of 63,000 tonnes p.a. Unitex is more automated and can produce more diversified products vs existing factories.

- Recycled vs virgin: Recycled yarn's small underperformance in 2023 was due to both a more severe inventory glut and record weak demand that favored cheaper products. This should not affect the long-term trend. Large brands made commitments to end-consumers to triple recycled yarn usage during 2023-2025. Recycled yarn has become a normal product and STK is striving to sell more “recycled plus,” e.g., recycled and dope dyed, high-stretch, quick-dry yarn.