The fluctuation of RMB exchange rate will affect the textile manufacturing industry

The renminbi exchange rate has continued to decline recently. As of June 22, the central parity of the US dollar against the renminbi has fallen by 3.25% from the low point in early April. From January to May 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 trend in 2017. However, the net profit of the textile manufacturing segment 2018Q1 attributable to the decline of the parent company was 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.

RMB exchange rate fluctuations will affect export orders and corporate income of textile and garment companies

In the case of relatively stable currencies in Southeast Asia's other textile and apparel exporting countries, fluctuations in the renminbi will affect the competitiveness of China's textile and garment companies, and thus affect the ability of Chinese enterprises to obtain orders in global competition. For orders in hand that companies have already signed, because orders are often denominated in foreign currencies, if the foreign currency appreciates, when the order revenue is converted from foreign currency to renminbi after the order is completed, income will increase. In summary, the textile and apparel companies with a relatively high export share have greater flexibility in the performance of RMB exchange rate fluctuations. According to the 2017 annual report, companies with over 40% overseas income and relatively low valuations (PE(TTM) below 30) have: Jiansheng Group (82%) and Shenda (70%) , Jiaxin Silk (65%), Vosges shares (61%), Lianfa shares (59%), Luthai A (57%), Longtou (45%) and Blum East (42%). However, in reality, some textile and apparel companies import raw materials (for example, domestic cotton spinning companies import foreign cotton or cotton yarn), which will offset the impact of growth in order revenue in foreign currency settlement, and some textile and apparel companies will pass hedging or other methods. Lock the exchange rate in advance to reduce the impact of exchange rate fluctuations.

The fluctuation of RMB exchange rate will affect the performance of companies with overseas assets

In recent years, due to the transfer of textile and garment industries to areas such as Southeast Asia where labor costs are lower, textile and garment companies have also deployed overseas production capacity. For companies that have exposure to US dollar assets overseas, depreciation of the yuan results in exchange gains for these companies. For companies that have US dollar liabilities overseas, depreciation of the yuan results in exchange losses for these companies. Various listed companies in the textile and apparel industry are also actively deploying overseas production capacity, including: Blum Orient and Huafu Color Spinning yarn production capacity in Vietnam. By the end of 2017, Vietnam’s production capacity accounted for more than 40% and 15% of the total production capacity; Luthai A is Vietnam has an industrial chain of yarns, yarn-dyed fabrics and shirts, and shirts in Cambodia and Myanmar. As the exposure of overseas assets and liabilities can not be obtained directly from the statement, it can be pushed back from the company’s exchange gains and losses. Due to the appreciation of the RMB against the U.S. dollar in 2017, most of the textile and apparel companies received exchange losses, of which exchange gains and losses have a greater impact on the net profit of the company’s return to the mother (the absolute value exceeds 5%) and the valuation is relatively low (PE ( TTM) (less than 30 times): Blum Orient (-33%), Jiaxin Silk (-19%), Jensen Group (-11%), Vosges (-8%), Lianfa ( -6%), Shenda (-5%), Huafu Fashion (-5%) and Lutai A (-5%). In the case of depreciation of the renminbi, these companies also have a relatively large probability of gaining exchange gains.

risk warning

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