Hong Kong-listed manufacturers and airlines are the immediate losers in the smouldering textile dispute between China and the United States, while energy, consumer plays and expressways are to escape the ruckus, according to a Merrill Lynch report on the impact of new textile import quotas announced by Washington last week.
Hardest hit are garment manufacturers in the mainland, with household names such as Texwinca (operators of the Baleno retail fashion chain) and Fountain Set, who both produce textiles for US retailers such as Wal-Mart and JC Penny, topping the list.
'Cost pressures and declining pricing power are the key reasons we maintain our negative stance on textile manufacturers in China,' says Merrill Lynch consumer analyst Jeanine Angell, noting that Texwinca makes most of its earnings from textile exports.
The 'safeguard' quotas cap China's textile export growth in bras, dressing gowns and robes and knitted fabrics to 7.5 per cent a year. These measures are expected to slow China's textile export growth to the US by 0.6 per cent year, but the impact on the share prices of the manufacturers could be much bigger because many are priced on expectations of huge market share gains in the US.
It is believed that since the US began rolling back quota restrictions, mainland manufacturers had made astounding market-share gains of the order of 60 to 70 per cent in several textile categories. China's textile exports to the US have increased 27 per cent this year.
'A lot of investors over the last three years have been buying Texwinca and Fountain Set on the back of a very favourable growth outlook,' Ms Angell says, while pointing out that the three categories account for only 3 per cent of China's textile exports to the US. 'But now the growth outlook for these companies is not as attractive as it was. There is more uncertainty involving their volume and earnings growth. They may not be able to attain the market share gains investors thought.'
Another sector expected to lose out is transport - airlines, shipping and port-related companies. The Merrill Lynch report says Cathay Pacific Airways, China Eastern Airlines and China Southern Airlines could suffer a drop in cargo, which accounts for an estimated 25 per cent of revenue.
'In a lot of cases airlines transport the textiles from China and Hong Kong into the US,' Ms Angell says. 'A lot of products need to get to market very quickly to get the fashion trends right and avoid discounting.'
Retail outlet Giordano is not expected to be affected by the import quotas because most of its retail umbrella is spread throughout Asia.
An unlikely beneficiary is Hong Kong-based Li & Fung, which specialises in logistics handling. 'For Li & Fung the more complex trade relationships are, the better, because that is how they earn their margins and commissions,' Ms Angell says.
'We have been worried that once the quota restriction is totally lifted, manufacturing activities will aggregate in China, thus reducing the need for such agents as Li & Fung.'
Ms Angell says it would be wrong to get too negative on the outlook for these manufacturers, but the spectre of future quotas throws some question marks over the sector.
'What it does is signal an added risk for the industry, because the big risk is that there is another 49 per cent of categories coming off quota in 2005, which the whole textile and garment industry is gearing towards,' she says. 'The growth outlook looks more risky than it did a year ago.'