Glossary: ‘Yarn’ is a generic term for a continuous strand of textile fibres, filaments, or material in a form suitable for knitting, weaving or otherwise intertwining to form a textile fabric.
• Revenues of Chinese textile companies trending up. The 4Q09 performances of our sample of PRC-based textile-related companies, which include China Taisan (www.china-taisan.com) and China Gaoxian (www.chinagaoxian.com), suggest that the sector is on track for recovery.
Yarn and fabric manufacturers recorded a lower year-on-year decline in average turnover of 2% and 6%, respectively
(Exhibit 1), compared to the 34% and 31% recorded in 2Q09.
Since 2Q09, the year-on-year change in revenue growth has been trending upwards, reflecting revival in demand for mid- and upstream textile products.
• Gross profit margins have stabilised. The fabric manufacturers retained a similar level of average gross profit margin (Exhibit 2) of 19% in 4Q09, compared to 3Q09.
Although the average gross margin for yarn providers dipped from 18% in 3Q09 to 13% in 4Q09, the level was similar to the 14% achieved in 2Q09, suggesting the drop could be due to fluctuations in raw material prices, rather than an
aggressive markdown
Overall, the trend indicates that the gross profit margins for China textile companies are stabilising, and the prices of yarn and fabrics are subject to less pressure.
• Watch out for 1Q10 results. If the revenue trend persists, the yarn and fabric manufacturers are likely to record positive year-on-year growth in revenue for 1Q10.
The manufacturers could also register stronger profit margins with improved capacity utilisation to drive an exponential growth in earnings.
COMPANIES COVERED IN THIS ANALYSIS
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Guangzhou Asian Games may boost demand further. The games are scheduled for November 2010 with an estimated attendance of 14,700 athletes, compared to 11,028 athletes for the Beijing Olympic Games in August 2008.
With this upcoming large-scale sports event, demand for sport apparels in China could pick up, and translate into higher sales of fabrics and yarn throughout the year.
The article was recently published in Financial PR Journal, which is emailed to institutional investors, fund managers and analysts.
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