Fluctuations in the RMB exchange rate will affect the textile manufacturing industry

Recently, the RMB exchange rate continued to fall. As of June 22, the central parity of the US dollar against the RMB fell by 3.25% from the early April low. In the first five months of this year, the export value of textile yarns, fabrics and products denominated in US dollars increased by 10.70% year-on-year, continuing the rapid growth in 2017. However, the net profit of the textile manufacturing sector 2018Q1 fell year-on-year, mainly due to the appreciation of the RMB exchange rate. The depreciation of the RMB exchange rate may have a positive impact on the profits of these enterprises.

Fluctuations in the exchange rate of the RMB will affect the export orders and corporate income of textile and garment enterprises

In the case that the currencies of other textile and garment exporting countries in Southeast Asia are relatively stable, the volatility of the renminbi will affect the competitiveness of China's textile and garment enterprises, thus affecting the ability of Chinese enterprises to obtain orders in global competition. For the on-hand orders that the company has already signed, since the orders are often denominated in foreign currencies, if the foreign currency appreciates, the income will increase when the order income is converted from foreign currency to RMB after the order is completed. To sum up, textile and garment enterprises with relatively high exports have greater performance elasticity when the RMB exchange rate fluctuates. According to the 2017 annual report, companies with overseas revenues exceeding 40% and relatively low valuations (PE(TTM) less than 30 times) are: Jiansheng Group (82%) and Shenda (70%). Jiaxin Silk (65%), Vosges (61%), Lianfa (59%), Lutai A (57%), leading shares (45%) and Blum Oriental (42%). However, in practice, some textile and apparel companies will import raw materials (such as domestic cotton spinning companies to import foreign cotton or cotton yarn), which will offset the impact of foreign currency settlement on the growth of orders, and some textile and apparel companies will adopt hedging methods. Lock in the exchange rate ahead of time to reduce the impact of exchange rate fluctuations.

Fluctuations in the RMB exchange rate will affect the performance of companies with overseas assets

In recent years, as textile and garment industries have shifted to Southeast Asia and other regions where labor costs are lower, textile and apparel companies have also deployed overseas production capacity. For companies that have exposure to US dollar assets overseas, the depreciation of the renminbi means that these companies receive exchange gains, while for companies that have a dollar debt exposure overseas, the devaluation of the renminbi will result in exchange losses. The listed companies in the textile and apparel industry are also actively deploying overseas production capacity, including: Blum Oriental and Huafu Color Spinning distribute yarn production capacity in Vietnam. At the end of 2017, Vietnam's production capacity accounted for more than 40% of the total capacity and more than 15%; Lu Tai A Vietnam has an integrated industrial chain of yarns, yarn-dyed fabrics and shirts, and has shirt production capacity in Cambodia and Myanmar. Since overseas assets and liabilities are not directly available from the statement, they can be reversed from the company's exchange gains and losses. Due to the appreciation of the RMB against the US dollar in 2017, most textile and garment enterprises have received exchange losses, in which exchange gains and losses have a greater impact on the company's net profit (in absolute terms over 5%) and the valuation is relatively low (PE ( TTM) is less than 30 times): Blum Oriental (-33%), Jiaxin Silk (-19%), Jiansheng Group (-11%), Vosges (-8%), and Lianfa ( -6%), Shenda (-5%), Huafu Fashion (-5%) and Lutai A (-5%). In the case of RMB depreciation, these companies also have a relatively high probability of obtaining exchange gains.

risk warning

The sharp appreciation of the RMB exchange rate will weaken the competitiveness of exporting enterprises in the textile and garment industry, affecting income and orders; textile and apparel companies face overseas policy risks in overseas production capacity.