Luen Thai faces price and quota pressure
The company will take a conservative approach to its expansion plans amid uncertainty over US measures
Falling prices and uncertainty over quotas will continue to put pressure on the revenue of Luen Thai Holdings, which posted a drop in net profit and turnover in the first half.
The increase in China's textile production capacity would put the product prices of Hong Kong's largest listed garment maker under pressure, a Kim Eng Securities research report said.
Luen Thai chief executive Henry Tan said he expected the average price of garments to decline next year.
He said falling prices were partly to blame for the firm's 8.9 per cent drop in turnover to US$270.36 million in the first half.
Given the possibility of safeguard quotas by the United States, Luen Thai would expand conservatively over the next year, Mr Tan said.
WTO members can impose one-year safeguard quotas on Chinese-made garments until the end of 2008, even though global textile quotas are scheduled to be lifted in January.
Concern was heightened earlier this month when US Undersecretary of Commerce for International Trade Grant Aldonas said the US might impose such quotas pre-emptively.
However, Mr Tan said Mr Aldonas had told him the US would probably restrict safeguard quotas to items also produced in the US, such as knitted tops and trousers.
Under this scenario, Luen Thai will not be severely affected by quotas. It does not make trousers and most of its knitted tops - which account for 47 per cent of its sales - are produced outside China.
Luen Thai is also mitigating the effects of quotas by reducing the US share of its turnover, which was down to 73.8 per cent in the first half from 78.8 per cent a year ago.
Despite the drop in turnover in the first half, Mr Tan said Luen Thai would post a rise in turnover for the full year by increasing production of items less susceptible to quotas.
He was also confident that Luen Thai would attain its target of US$30.5 million in net profit for the year, despite a 4 per cent drop in net profit to US$13.12 million in the first half.
The drop in turnover and net profit was partly due to the discontinuation of several loss-making businesses prior to the firm's IPO in July, namely its Mexican garment factories, air-cargo business and IT systems consultancy.
Excluding these discontinued businesses, Luen Thai's net profit in the first half rose 17.8 per cent to US$15.5 million while turnover fell 4 per cent to $266.78 million.
