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CSCI-Textile OEM-China Textile Monthly：Taking advantage of the RMB rally fable - 20171006

China Textile Monthly

Taking advantage of the fabling RMB rally

• The 7% YTD rally of the RMB against the USD has plagued China’s textile OEM sector, on fears of forex translation loss and rising cost pressure that will weigh on their margins.
• We believe such negative impact might have been overplayed by the market, as the RMB rally against the greenback is widely expected to be unsustainable. Moreover, RMB is more stable versus the currency basket, as the CFETS RMB Index is still down by 4% YTD YoY due to the euro strength. This has supported China’s strong 4% YoY growth in export value in Jan-Aug 2017. Thus, we believe the demand growth in the textile sector would more than offset the negative impact of translation loss this year.
• Previous concerns such as rising raw material costs and Trump’s punitive tariffs on China exports to the U.S. are faltering, as the cotton price growth pace has continued to decelerate, whereas the rebound in synthetic yarn prices has been primarily driven by higher crude oil prices. Moreover, athleisure continues to evolve rather than subside, thus sportswear is expected to continue to drive growth of the global apparel and footwear industry at a 5-yr CAGR of 6.7% over 2016-21E, versus 4.9% for apparel & footwear industry. Sectoral valuation remains attractive as dividend yield is high at an average of 4.7%, only second to the REITS sector.

Demand growth more than offset the potential negative FX impact. We believe the RMB rally against the greenback is primarily driven by the China government’s capital controls and the dollar weakness, where both are unsustainable. Moreover, RMB is more stable versus the currency basket, as the CFETS RMB Index is still down by 4% YTD YoY due to the euro strength (see Figure 2). This has supported China’s strong 7.4% YoY growth in export value in Jan-Aug 2017, compared with a 7.6% YoY decline in 2016 when the RMB depreciated (see Figure 3). Thus, we believe the growth in demand of the textile sector would more than offset the negative impact of translation loss this year and such losses will not expected to continue through 2018.

Assessment of potential impact on individual companies. Our analysis (see Figure 4) showed that the negative earnings impact would be greatest on Shenzhou International (2313 HK, BUY), followed by Pacific Textiles (1382 HK, BUY) and Nameson (1982 HK, BUY). As we expect RMB appreciation against the USD to be short-lived, we recommend investors to accumulate quality names on consolidation leveraging on the fabling RMB rally.