资源描述
Europe Equity Research30 August 2019Global TestersWhy softlines testing will never go out of style (despite the US-China trade war)European Business Services and UK Small 10% for SGS and 9% for Bureau Veritas.Testing and quality assurance is critical to avoid reputational damage or breach of safety and environmental compliance.With an estimated 10% of group revenue generated in softlines, we believe Intertek has the greatest exposure to the sector. SGS and Bureau Veritas both have around 5% exposure.4Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorganFigure 3: Intertek: Softlines as % of group revenue, 2018 (estimated) in millionsSource: J.P. Morgan estimates. Intertek has not disclosed its revenue contribution from softlines since 2014, but we have estimated the 2018 exposure by applying the organic growth and FX variations reported for the Products division (Consumer Products in 2015) for the years in between.Figure 4: Intertek: Softlines as % of group profit, 2018 (estimated) in millionsSource: J.P. Morgan estimates. Assumes Softlines margin of 30%.Figure 5: SGS: Softlines as % of group revenue, 2018 (estimated)CHF in millionsSource: J.P. Morgan estimates. We have assumed softlines represents a third of overall Consumer & Retail revenue.Figure 6: SGS: Softlines as % of group profit, 2018 (estimated)CHF in millionsSource: J.P. Morgan estimates. Assumes Softlines margin of 30%.Figure 7: Bureau Veritas: Softlines as % of group revenue, 2018 (reported) in millionsSource: Company reports.Figure 8: Bureau Veritas:Softlines as % of group profit, 2018 (estimated) in millionsSource: J.P. Morgan estimates. Assumes Softlines margin of 30%.290, 10%Softlines87, 18%Softlines342, 5%Softlines103, 10%Softlines235, 5%Softlines70, 9%Softlines5Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorganThe impact of the trade war has so far been limitedThe US-China trade war and the prospect of tariffs on clothing appears not to have a significant impact on export-oriented testing activities in China. SGS reported in January that it had seen an impact on its China-based consumer business towards the end of 2018, but expected this to be back on track by the second half of 2019.The organic growth in SGSs Consumer and Retail division in H1 2019 was 5.5% (a positive surprise), with softlines reported to have been in growth. Bureau Veritas stated in July that its Northeast Asian consumer business was stable. Intertek has perhaps been the most positive, commenting earlier this month that we have not seen any impact of the trade discussions on the sustained good performance of our business in China across all business lines and our full year guidance of solid organic growth for softlines remains unchanged.The testers can follow manufacturing relocationsWe believe a shift in softlines manufacturing activity from China into South East Asia is unlikely to have a material impact on the global testing companies. All of them have an established base of operations in countries such as Vietnam, Cambodia, Bangladesh and India. Intertek, for example, operates from eight locations in Vietnam, one in Cambodia, two in Bangladesh, and 30 in India (Figure 9).Figure 9: Interteks locations in AsiaSource: J.P. Morgan, Company data.As Bureau Veritas put it: consumer products is a global business with multiple growth engines and we can easily follow manufacturing relocations and supply chain changes. The testers are already seeing the benefits: Bureau Veritas reported 15% growth in softlines revenue in South East Asia in Q1 2019, including 20% in Vietnam alone. SGS alluded to really strong growth in Turkey, India, Bangladesh Intertek said earlier this month that it hadnot seen any impact of the trade discussions onthe sustained good performance of our business in China.All of the global testers have operations throughout South East Asia and can respond to any move in sourcing to there from China.6Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorganand Vietnam during 2018. In H1 19, it confirmed that growth had continued to be solid in these countries and stable in China.The commercial relationship is with the brand, not the manufacturerIn softlines, the primary customer of the testers is usually the international apparel or footwear company, rather than the local manufacturer itself. This means that the testers can maintain continuity of customer relationship even if volumes shift between markets. It should allow them to maintain pricing. As Bureau Veritas recently put it: we are selling a service and we have no reason to decrease the price because the manufacturing sites are in a different location. Given the labour cost differential, however, it is possible that testers could see a margin benefit from a shift to South East Asia.The tariffs are simply accelerating an established trendIntertek recently commented that it has helped its customers to move low added-value activities from China to other parts of the world for the past ten years. In our opinion, the US-China trade war has added impetus to a trend that was happening anyway. As Bureau Veritas commented recently: its not new. In our opinion, China will continue to be an enormously important market for the global testing companies. It is likely to remain a critical link in the global softlines supply chain. As Intertek has stated: we should not underestimate the high quality of manufacturing in China. China is not just a low-cost manufacturing hub or house for the world. Its much more than that. There is a lot of investment in leading technology, the quality of processes and the discipline of the workforce. The diversification of manufacturing away from China is likely to be gradual regardless of the imposition of tariffs. Relocating manufacturing can be a complex decision. Intertek commented that it can be costly and not risk free, because theyve got to re-think all production standards training of the factories. Theyve got to rethink the Tier 1, Tier 2 and Tier 3 supply base.Overthe longer-term, complexity may lead to opportunityIn our opinion, diversification of softlines manufacturing can be an opportunity for global testing companies, as it increases the complexity of the supply chain. The development of new manufacturing relationships may also lead to an increased emphasis on a risk-based approach to quality assurance. The testers have not beenslow to pick up on this opportunity. In Q1 this year, Bureau Veritas opened a new softlines testing laboratory in Hanoi, Vietnam to cope with the rising demand in the country. A move from China to South East Asia should not affect the pricing of testing services, but may help margins.Anything that increases the complexity of global supply chains, or causes increased need for quality assurance, is positive for the testers.7Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorganThe trade war may accelerate the shift away from ChinaIt all began with a trade deficitThe desire by the US to curb its rapidly expanding trade deficit with China (Figure 10) has been a key factor driving the escalation of protectionist activity in 2018 and2019. Figure 10: The burgeoning US-China balance of trade, 1985-2017$ in billionsSource: US Census Bureau.According to the Office of the US Trade Representative (USTR), US imports from China accounted for 21.2% of overall US imports in 2018. The US is Chinas largest single destination for its exports, making up 18% of the total in 2017 (Figure 11). The US accounts for around 9% of Chinas imports, ranking it fifth behind the EU and Asian neighbours South Korea, Japan and Taiwan.Figure 11: Chinese exports by destination, 2017Source: World Trade Organization.The focus of US tariffs is shiftingto consumer goodsOn 1 August, the US announced plans to impose 10% tariffs on $300 billion of Chinese imports effective 1 September 2019, although it subsequently delayed a portion of these tariffs until December. In response to Chinese retaliatory tariffs announced on 23 August, the US tariffs were increased to 15% instead of 10%. The -600-500-400-300-200-10001002001985 1990 1995 2000 2005 2010 2015Imports Exports Trade balance18%16%14%6%5%41%US EU Hong Kong Japan South Korea OtherMore than 20% of all imports into the US come from China. The burgeoning balance of trade between the two countries has led them into an increasingly vitriolic exchange of tariffs and other protectionist measures in 2018 and 2019.Consumer goods, particularly softlines, are the focus of the next round of US tariffs on Chinese imports, effective 1 September.8Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorgan15% tariffs planned for 1 September 2019 will apply to $112 billion of Chinese imports, focusing on consumer goods, notably softlines, which until this point have not been significantly affected. According to the Peterson Institute for International Economics, more than a third of the value of the new targets are footwear, clothing and textiles. The second tranche of 15% tariffs will now be effective on 15 December 2019 and will cover a further $160 billion of Chinese imports, including a number of consumer electronics and toys that will be affected for the first time.Figure 12: US imports from China subject to tariffs by 15 December 2019%Source: Peterson Institute for International Economics.The delay to 15 December 2019 of tariffs on toys and consumer electronics may indicate the USs desire to avoid disruption to the Christmas shopping season, for which imports peak in October. Similarly, the timing of the September tariffs on clothing may be aimed at avoiding the back to school peak shopping period. 466234100927587497368645756515041107211221112627172023411330177745182962211313142033620411347824196641232120% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%TotalMiscellaneousMineral productsHide and skinsTransportation equipmentAnimal productsPrepared foodstuffsChemicalsFuelMetalsWood productsPlastics and rubberVegetable productsMachineryStone and glassElectronics and electrical machineryTextiles and clothingFootwearToys and sports equipmentAs of 24 September, 2018 Effective 1 September, 2019 Effective 15 December, 2019 Not covered9Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorganAllChinese softlines exports to the US will beaffectedIf all of the announced tariffs are implemented by 15 December 2019 as planned, the US will have applied punitive tariffs to 96% of the products it imports from China by that date, including 100% of softlines. Table 2: The US tariffs on China, as they stand nowStage Effective date Tariff rate Exports coveredList 1 6 July 2018 25% $34 billion including water boilers, X-ray machines, airplane tyres and various other industrial partsList 2 23 August 2018 25% $16 billion including electronic parts, plastics, chemicals, batteries, and railway carsList 3 * 24 September 2018 25% $200 billion including car parts, appliances, televisions, batteries, fabrics, food and semiconductor assembliesList 4A 1 September 2019 15% $112 billion including food items, electronics, steel and iron pipes and clothingList 4B * 15 December 2019 15% $160 billion including cellphones, laptops, textiles, toys and video game consolesSource: J.P. Morgan. * Tariff originally 10% and raised to 25% on 10 May 2019. * Tariffs originally slated for 1 September, but delayed to 15 December on 13 August. Tariff rate to be increased from 25% to 30% on 1 October 2019.Chinese retaliation does not impact softlinesChina has responded to the imposition of tariffs on its exports to the US with tariffs of its own on almost all of the products it imports from the US. Chinese tariffs now cover around $110 billion of US products, nearly all of its total imports from the country ($120 billion in 2018). Softlines are a small part of overall US exports to China. The largest exports are civil aviation, soybeans, cars and capital goods (Figure 13). Figure 13: US exports to China$ in billionsSource: Office of the US Trade Representative (2017).Tariffs may acceleratea shift that was happening anywayIn our opinion, it is clear that the shift of softlines manufacturing away from China is a trend that has been underway for a number of years. It is perhaps inevitable that the current US-China trade war, with its very real implications for the overall cost of supply, will accelerate the trend. The imposition of 15% tariffs on many Chinese softlines on 1 September, will clearly have a material effect on the overall cost of production of products made in China.Most US apparel companies expect to reduce their sourcing from ChinaA recent survey for the US Fashion Industry Association (USFIA) found that 83% of respondents in 2019 expected to reduce their sourcing from China in the next two years, up from 67% in 2018. Only 13% expected to maintain their current level of sourcing from China, the lowest since the survey began in 2014 (Figure 14).16.312.410.56.15.479.2Civil aviation Soybeans Cars Semiconductors Machinery OtherUS companies have been reducing their exposure to China for several years. The trade war looks likely to cause an acceleration in the shift, but it is certainly not a new development. 10Europe Equity Research30 August 2019Alexander Mees(44-20) 7742-3681alexander.c.meesjpmorganFigure 14: In 2019, US fashion companies expect to reduce their sourcing from China more than they did in earlier yearsSource: US Fashion Industry Association, 2019 Fashion Industry Benchmarking Study. How do you think your sourcing value or volume from China will change in the next two years?By contrast, 80% of respondents to the USFIA survey said they expected to increase sourcing from Vietnam over the next two years, up from 74% in 2018 and 37% in 2017. 60% expected to increase sourcing from Bangladesh, up from 56% in 2018 and 32% in 2017. The Gap has commented that it intends to continue to reduce its exposure to China, sustaining a trend that has seen the proportion of its product manufactured there fall from 25% to 21% in recent years. Most major apparel companies have sourced from countries such as Vietnam and Bangladesh for several years already. Between 2012 and 2017, the value of Vietnams clothing export trade increased at a CAGR of 14.0%, closely followed by Cambodia on 12.3% (Table 3).Table 3: Value of clothing exports, 2012-2017$ in millions2012 2013 2014 2015 2016 2017 CAGRWorld 415,785 452,983 483,908 456,005 448,611 471,594 2.6%China 159,754 177,530 187,276 174,694 159,341 158,463 -0.2%European Union 109,852 118,646 127,533 112,661 117,703 129,733 3.4%Bangladesh 19,380 23,501 24,584 26,603 28,668 29,213 8.6%Vietnam 14,443 17,148 20,174 21,948 23,005 27,782 14.0%India 13,928 15,542 17,
展开阅读全文