Fountain Set faces pressure amid weak sales, low prices
Fountain Set (Holdings), a mainland fabric manufacturer, said its gross margin was under pressure on weaker sales and a fall in the average price following a plunge in cotton prices over the past year.
The company expected the volume of fabric exported from the mainland in aggregate to drop 15 per cent year on year in 2012 due to weak consumer confidence in the United States and Europe.
'The recent Christmas and Thanksgiving sales improved a lot, but retailers are still reluctant to place new orders,' said Gordon Yen, executive director of Fountain Set, which sells fabric to clothing manufacturers for markets in Europe and the US. 'The inventory levels of retailers are still higher than their expectations.'
Yen expects the market will only start to recover in the second half of this year when the presidential election in the US ends. The expanding domestic market would also help offset some of the declines in the export sector, Yen added. The company will increase the proportion of domestic sales gradually to 25 per cent from 20 per cent this year.
The average price of knitted fabric has declined by between 15 per cent and 20 per cent year on year on average over the past six months, following the plunge in cotton prices which dropped to about 90 US cents per pound at present from more than US$2 per pound in the same period last year.
The acute movement in the cotton price has been extremely rare over the past 15 years. The drop in Fountain's average price was less than the market due to product diversification.
Production costs, however, increased due to the higher inventory cost of cotton. Fabric manufacturers such as Fountain will keep 90 days of cotton inventory to guarantee production.
Fountain will repay debt and decrease its net debt level to 35 per cent from 42 per cent over the next three years, in light of the potential credit crunch and increase in interest rates. The low-interest-rate environment was expected to change in the near future because of the European sovereign debt crisis, said Yen.
The company will slow its expansion by freezing plans to open new plants. Fountain Set will invest up to HK$200 million in the 2012 fiscal year on new equipment to increase efficiency and cut emissions. At the end of August last year, the company had HK$800 million in cash on hand.
Today's average price of cotton per pound in US cents, representing a plunge of 45 per cent since 2011