Sheltered from falling Chinese exports

If you happened to catch the news on BBC or CNN in the past couple of months about the jobs situation in China, you are likely to get the impression that there had been massive lay-offs at factories throughout the country, especially with 20 million migrant workers reported to have lost their jobs.

But it appears that that's not the case in Shishi city in Fujian province where China Fibretech is located.

As its founder, chairman and CEO, Wu Xin Hua noted in Mandarin, "Unlike in Guangdong province where most of the manufacturing output are export-oriented, most of the products in Fujian are destined for domestic markets. So we have not seen any signs of widespread retrenchments here."

In fact, he also pointed out that consumption of food, clothing, household appliances and even cars have not slackened conspicuously despite the prospects of slower growth in the Chinese economy.

This is good news for China Fibretech, which is in the downstream segment of the textile industry.

"Most of our customers are domestic and we expect demand to continue to grow within China, perhaps at a slower pace. Domestic demand is likely to be more resilient compared to companies manufacturing for exports," said Mr Wu.

Pure Service Provider

Unlike the bulk of its customers and other SGX-listed companies in this sector, China Fibretech is a pure play service provider in that it’s not involved in any upstream activities such as the weaving or knitting of the fabrics it handles for its more than 200 local customers, who are mainly Fujian-based fabric traders and garment producers, of which none accounts for more than 5% of its total sales.

Instead, China Fibretech specialises in both dyeing and post-processing treatments of cotton, polyester (including Spandex) and mixed fabrics, which is to impart functional properties to fabrics such as water-resistance, fire-resistance or provide ultraviolet or anti-static protection qualities.

As a pure play service provider, it receives products on a consigned basis and hence carries lower inventory risk and enjoys a faster cash conversion cycle. As the company serves the domestic market, it also has zero exposure to foreign exchange risks for its receivables.

Another competitive advantage that China Fibretech enjoys is the high barriers of entry due to strict regulatory controls imposed on the fabric-processing sector by the authorities.

As Mr Wu noted, "While it's easier for us to diversify our business upstream, it is more difficult for upstream players to muscle into our niche segment due to the tight environmental restrictions placed on the issue of new operating licences in the dyeing and post-processing sector."

Founded in 1995 and listed on the SGX in June 2008, China Fibretech has enjoyed a compounded annual growth of 23.3% in revenue, 27.1% in gross profit and 38.2% in net profit between FY2004 and FY2008.

For FY2008, it chalked up a net profit of nearly RMB120 million or an increase of 26.8% over the previous period. It also registered a 24% rise in revenues to RMB470 million over the same period. Earnings per share (EPS) rose from 26.4 to 30.2 RMB cents.

Spandex Lift

Mr Wu attributed the improvement in its revenue base not only to an increase in processing volumes from 54,600 tonnes to 61,800 tonnes in 2008, but also more importantly, to an increase in average selling price (ASP) from RMB 6,940 per tonne to RMB 7,615/tonne. This was due mainly to the addition of Spandex material to its processing capacity.

Besides yielding higher ASP, he explained that Spandex also requires less time for processing – about three hours compared to eight hours for cotton fabrics. Unlike cotton, it can also be processed at lower temperatures, hence leading to savings on energy requirements.

"We were able to achieved better topline and gross margin performances in FY 2008 by improving the sales mix towards higher value products such as Spandex and tapping on the more resilient local demand," said Mr Wu.

"For example, while Spandex products now make up some 15% of our processing capacity, we are likely to increase that proportion. With disposable income improving among consumers and more time for leisure and sports, we expect demand for Spandex products used in swimwear and sportswear to increase over time in China," he added.

China Fibretech's improved performance was also helped by the rationalisation of its business and manufacturing activities.

For instance, it was able to consolidate its manufacturing operations by moving its cotton processing facility from Xiamen to Shishi, where overhead costs as well as prices of water and electricity are lower.

Said Mr Wu, "Looking ahead, we have also been putting emphasis on higher processing efficiencies such as the purchase of newer and more efficient machinery."

Meanwhile, despite spending approximately RMB 20 million on a new land parcel aimed at doubling its processing capacity by 2011 to 120,000 tonnes, China Fibretech is currently sitting pretty on a net cash position of RMB252.2 million.

Mr Wu said that the company's management is currently taking a prudent and conservative approach to deal with current challenges by slowing its expansion plans and conserving cash to adequately deal with the market conditions, which may include capitalizing on any opportunities should they arise.

China currently accounts for 70% to 80% of the world's fabric dyeing business, with India and Bangladesh accounting for the rest of the global market share.