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Poised to take a leap forward

Initiate at Buy with a TP of W12,000

We initiate our coverage on Hwaseung Enterprise with a Buy rating and target price of W12,000. We believe the company is in the early stages of an earnings up-cycle, with operating profit expected to expand 432% YoY in 2024 and 56% YoY in 2025. Given the robust growth outlook, the stock looks undervalued at current levels (12-month forward P/E of 10x; vs. peer average of 15x). Amid a rapid rebound in Adidas’s earnings, peer ODMs are seeing both improved earnings and share price gains; as a key vendor for Adidas, Hwaseung Enterprise is likely to enjoy similar momentum going forward.

Adidas’s earnings growth and Originals lifestyle orders to drive earnings

For Hwaseung Enterprise, order volume is closely tied to Adidas’s earnings, and profitability largely depends on the share of popular, high-value products in overall orders. With both of these elements aligning favorably, we believe earnings and share price momentum will pick up, making now a good time to accumulate shares.

Adidas has successfully normalized inventory levels by clearing out excess stock (including Yeezy products, which now account for less than 1% of total inventory). Furthermore, the Adidas Originals lifestyle line has gained huge popularity since 2022 amid the “Y2K” fashion trend, driving strong demand and prompting Adidas to raise its revenue guidance three times this year. At the same time, Adidas is continuing to diversify vendors, leading to a higher vendor share for Hwaseung Enterprise. All in all, we expect higher order volume from Adidas to drive strong top-line growth going forward.

Furthermore, starting in 4Q24, Hwaseung Enterprise will begin producing more products in the Originals lifestyle line. Until now, the product mix has been evenly split between lower-priced core products and the Originals sports line, preventing the company from capitalizing on the growing popularity of the lifestyle line. However, orders for Adidas Originals lifestyle products are expected to gradually materialize; in 2025, we expect such orders to contribute around 10% of revenue.

2025 revenue and OP likely to expand 14% and 56% YoY, respectively

Factoring in increased orders for higher-ASP Adidas Originals lifestyle products, we estimate USD-denominated revenue will grow about 20% YoY in 2025 (+15% from volume growth and +4% from higher ASP), with OP margin reaching 6%. Most of the revenue increase will likely be driven by orders for Adidas Originals lifestyle products.