Spandex maker Texhong Textile hopes to buy another plant on the mainland by the end of June to lift its annual capacity by 15 per cent and help double sales to 4 billion yuan (US$500 million) by 2008, a senior executive said.
Texhong, which has grown rapidly by buying State-owned factories on the cheap and turning them into profitable operations, hopes to close the deal this month or next, pending Beijings approval, Chief Financial Officer Laurence Shu said in an interview late on Wednesday.
The landscape of the mainlands massive but fractured textiles industry virtually every city or county has its own mill is littered with derelict State-owned enterprises.
Texhong had long spotted opportunity in the debris and has been acquiring mills at a frantic pace to boost growth.
"Since Beijing tightened lending to State-owned enterprises, a lot of them have been willing to sell out," Shu said.
"This is going to be a good year," the softly spoken executive said.
Shares in Texhong, whose revenue climbed 35 per cent in 2005 to 1.92 billion yuan, have leapt nearly 50 per cent since the start of 2006, versus a 3.3 per cent slide of Hong Kong-listed rival Weiqiao Textile.
The firm, whose customers include knitted fabric makers Texwinca Holdings Ltd and Fountain Set (Holdings) Ltd, has a market capitalization of just HK$1.5 billion.
Texhong is one of several small-cap textile players listed in Hong Kong, but analysts said it comes with one of the lowest price earnings to growth, or PEG ratios, in the sector.
Its PEG ratio of 0.2 paled in comparison to 0.8 for larger, more downstream Weiqiao and Victory City International Holdings Ltds 0.3, suggesting room for its shares to rise.
Texhongs PEG ratio was calculated by combining its forward price earnings ratio with its forecast average growth rate for three years.
Now, despite volatile cotton prices and difficulties in controlling costs, Texhong expects to match last years gross profit margin of 17.9 per cent, Shu said.
Deutsche Bank has estimated that, if Texhong is unable to pass higher cotton prices on to the consumer, for every rise of 10 per cent in cotton prices, its gross margin drops by 8 per cent.
But Texhongs long-honed acquisition strategy is not without risk, said UBS analyst Erica Poon Werkun.
Most concerns centred around the difficulty of gleaning reliable financial data from enterprises more accustomed to answering to government cadres than to investors or analysts.
"One challenge is to evaluate the operations and financials properly due to the general lack of public information," she said.
"Another challenge is to have sufficient resources and experience to turn these businesses around, which were typically run at suboptimal level failure to do so could have a negative impact on margins and profitability."
Texhong, 90 per cent of whose sales were on the mainland in 2005, hopes to increase its exports to 20 per cent of sales in three years, Shu said.
But rapid growth of exports meant hiring people at possibly higher cost.
"We are expanding personnel and this takes time," he said.
"Europe has the latest fashion, so we can use what we learn in those markets to apply to the mainland too."
