Value in textile industry? No way!

Below is a recent recommendation by one of the brokerage companies on the SGX comapnies involved in the textile industry:

Risk-reward ratio getting attractive. In fact, these textile companies are generally financially sound. They are in net cash position and are still garnering lucrative net margin of 26%-30%, rewarding investors with adecent ROE of >20%. As high-end textile manufacturers are relatively asset-heavy given their high capex investment, current low historic P/NTA of 1x also indicates opportunities to pick up shares in these companies at bargain prices.


But from the info i gathered, it seems like the picture is not so rosy.

A 2% increase in a value-added tax rebate for garment and textile exports – from 11% to 13% – was good news for exporters, but a sign of hard times for the export sector. Rebates had been cut or removed for many industries last year in an attempt to deflate China’s ballooning trade surplus, but struggling exporters prompted Beijing to reverse its earlier moves. The slowdown was most evident in relatively low tech sectors like textiles and apparel. In the first seven months of 2008, growth of garment and textile exports rose 7.67%, down from 24.4% growth over the same period last year. The General Administration of Customs said an appreciating renminbi, weak US demand, trade barriers and the earlier rebate reductions all contributed to the slowdown. While lower-end exports were more visibly affected, broader numbers were hit as well. In the January-July period, growth in overall exports was down 5.7 percentage points to 21.9% year-on-year, and the trade surplus fell 9.6%.

In the first quarter of 2008 alone, US apparel imports from China declined by nearly 10% compared with the corresponding period of 2007, reaching US$4.43bn. In terms of China's currency, the renminbi, the fall was an even greater 17%. China's drop in competitiveness stems from mounting costs on several fronts. Apart from higher costs of energy and raw materials - which manufacturers face all over the world - Chinese textile mills face greater costs in having to comply with growing environmental legislation. At the same time, Chinese apparel factories are having to cope with new regulations on working conditions. Furthermore, firms wishing to invest are finding it harder to obtain finance as the Chinese authorities have tightened credit in a bid to limit inflation. On top, Chinese exporters have been hit by lower export tax rebates. Labour costs have become a particularly serious issue for Chinese firms. At least seven major exporting countries in Asia can now offer lower labour costs than China. During the first quarter of 2008, US consumer expenditures on clothing and footwear (on an annualised basis) were 0.2% lower than in the first quarter of 2007 - after growing by 3.7% in 2007, 4.5% in 2006 and 5.1% in 2005.

Statistics of WebTextiles.Com showed that China's large enterprises produced 9.72 billion pieces of garments in the first half of this year, up 7.64% year-on-year, 6.7 percentage points lower than the growth of last year. The commodity retail price index was 107.5 in the first half of this year, up 7.5%, while the index of clothing declined by 1.62%; the CPI stood at 107.9, up 7.9% year-on-year, while the index of clothing fell 1.48%. On the contrary, the PPI rose 2.40% in June 2008, the same as that in previous month, but the PPI of clothing was at the record high level since 2006. Sales of clothing have entered slack season since July and the price will go downward. It is predicted that the market supply of clothing will be in great surplus, which will dampen the operation and development of textile industry.


Calling investors to pick up shares of companies in the textile industry is, in my point of view, premature. Generally, there are excess capacity and the prices are going down. Export markets are soft and manufacturing costs are rising. Textile, being a commodity, has got no power in terms of pricing.