Guosen: "Reciprocal tariffs" have limited impact on high-quality textile manufacturing enterprises. Pay attention to opportunities in bottom layout.

Guosen released a research report stating that clothing and footwear are non-standard, low-value goods. The production side belongs to the labor-intensive industry, and due to the non-standard nature of the goods, the circulation process accounts for the majority of the costs, with a common markup factor of 5 times. Faced with additional tariffs, the supply chain has extremely limited capacity to bear the burden, and the likelihood of goods flowing back to the United States is low. It is expected that consumers will bear the majority of the costs. The policy is still subject to change, and there may be measures taken to reduce or exempt tariffs on these types of goods and their related production areas. If high tariffs are ultimately implemented, the impact on high-quality contract manufacturing enterprises is relatively low. Since the incident, the decline has already exceeded 20%, showing value for bottom layout. Guosen's main points are as follows: Analysis of Trump's equivalent tariff policy On April 3rd, Trump announced comprehensive tariffs. Starting from April 5th, a 10% base tariff will be imposed on all countries, and starting from April 9th, countries with large trade deficits with the United States will face higher differentiated "equivalent tariffs". For China, a 34% tariff will be imposed (China's original tariff was 20%, so the cumulative tariff will reach 54%). Vietnam, Indonesia, and India will face tariffs of 46%, 32%, and 26% respectively. South Korea and Japan will face tariffs of 25% and 24%, while the European Union will face a 20% tariff. Before the policy officially takes effect, there is still a negotiation window. Vietnam is urgently negotiating: Prime Minister Pham Minh Chinh called a cabinet meeting, proposed reducing American product tariffs to 0%, and sought a 3-month buffer period. Assumptions and deductions on the trade impact of equivalent tariffs policy 1) Contract textile enterprises' overseas production capacity is concentrated in Southeast Asia and all are covered by high "equivalent tariffs": Footwear manufacturers like Feng Tai and Yue Yuan have the majority of their production capacity in Southeast Asia, with a production capacity of about 10% in China. Huali's production capacity is mainly in Vietnam and Indonesia. Clothing manufacturer CRYSTAL INTL is mainly in Southeast Asia, with less than 20% of its production capacity in China. Handbag and clothing contract manufacturing enterprises like Kai Run have production capacity of up to 70% in Indonesia. Upstream integrated fabric production enterprises like Shenzhou and Lu Thai still have about 40% of their production capacity in China, with the rest mostly in Southeast Asia. While midstream and upstream yarn and fabric production enterprises still mainly have production capacity in China, they are gradually expanding into Southeast Asia. 2) Assuming impacts, if additional tariffs are fully implemented, the majority of the costs will be borne by American consumers: Currently, manufacturers and brands calculate their prices based on ex-factory prices, with the brand bearing the tariff costs. In multiple rounds of trade frictions, suppliers have never shared the burden of tariff costs. The core reason is that footwear and clothing products have high markup factors, low supply chain profit margins, limited capacity to bear the costs, and the high quality product control and reliable delivery times provided by high-quality suppliers are more meaningful for improving the efficiency of the product circulation process for brands. In an extreme assumption under the current "equivalent tariff" impact, brands will shift the cost burden to suppliers. Based on the assumption that the supply chain can bear up to the cost of the industry's profit and loss equilibrium, with a 45% tariff, suppliers will bear 5% and the remaining 40% will be passed on downstream by brands, leading to a final increase in end prices of about 10%, borne by consumers. Considering that the wage cost gap is much higher than the portion of additional tariffs, and the United States lacks the conditions to support industrial chains, the possibility of the textile and clothing industry returning to the US is low. "Wrongly killed" stock selection logic 1) Screening from top to bottom, companies with low contributions of revenue from the United States and high net profit margins are less sensitive to the impact of tariffs. Screening from bottom to top, companies with production capacity in short supply have stronger bargaining power. Currently, companies with less than 20% of revenue from the United States include SHENZHOU INTL, Zhejiang Jasan Holding Group, Anhui Korrun, and Lu Thai, which are mainly suppliers with production capacity in China and high domestic market shares. Companies specializing in footwear and clothing contract manufacturing with revenue from the United States accounting for over 40% have production capacity mainly concentrated in Southeast Asia. High net profit margin companies still able to maintain good profit margins if facing industry sharing of tariffs and price reductions close to the break-even line include SHENZHOU INTL, Ru Hong, Huali Industrial Group, and Zhejiang Jasan Holding Group. Looking at the compound growth rates over the past few years, Huali Industrial Group's growth leads the pack, reflecting trends of production capacity in short supply, rapidly increasing market share among high-quality customers, and expecting to have good bargaining power. 2) Market review after the announcement of "equivalent tariffs," European and American international brands and contract factories both experienced significant declines, with many companies seeing cumulative declines of over 20%: Following Trump's tariff policy announcement on April 3rd, markets around the world experienced significant declines. European and American international sports brands and footwear and clothing contract manufacturers, due to their large production capacities in Southeast Asia, saw significant drops in their stock prices, while upstream yarn and fabric manufacturers saw relatively smaller declines. On April 4th, A-shares, Hong Kong stocks, and Taiwan stocks were closed. European and American international sports brands experienced a minor recovery. On April 7th, A-shares, Hong Kong stocks, and Taiwan stocks reopened, experiencing significant declines once again, with a pessimistic market sentiment and opportunities for mistaken kills. Selective recommendations on individual stocks 1) SHENZHOU INTL (02313): Low exposure to the United States, leading in net profit margin. According to our calculations, the company's revenue from the United States accounts for approximately 16.1%, with a net profit margin of about 20.5%. In an extreme situation assuming a 5% sharing of tariffs, the impact on net profit would only be 4%. Furthermore, there may be potential for market share expansion due to large-scale industry reshuffling. 2) Huali Industrial Group (300797.SZ): Leading net profit margin, production capacity in short supply. The company has shown a significant trend of increasing market share in the years following the epidemic, with large orders from new customers Adidas and New Balance this year, indicating a shortage of production capacity and strong ability to coordinate with customers and orders. If assuming a 5% sharing of tariffs, profits may decrease by 13%, but due to strong bargaining power, the extent of price reduction may be smaller. 3) Additionally, it is recommended to pay attention to other high-quality textile and manufacturing companies in the sector, with declines of 15% to 25% since April 3rd. With limited exposure to the United States, strong competitive strength, and potential for further benefits.The companies that are witnessing an upward trend are Zhejiang Weixing Industrial Development (002003.SZ), Zhejiang Taihua New Material Group (603055.SH), Anhui Korrun (300577.SZ), Zhejiang Xinao Textiles Inc. (603889.SH), and Zhejiang Jasan Holding Group (603558.SH).Risk Warning Macroeconomic performance falls short of expectations; capacity expansion falls short of expectations; downstream customer inventory deteriorates; uncertainty in tariff policies; international political and economic risks; systemic risks.