Erdos Cashmere used to be one of the star shares on the Shanghai B market, enabling it to raise US$126 million and push its stock price to a high of $1.1 last year. But this year has been nothing but bad news. The stock has plunged, closing yesterday at $0.156 as the company prepares to issue its interim results in the coming days. After the share price fell by the maximum 10 per cent for three days in a row last month, the firm was forced to issue a statement, on July 31, to reassure investors that despite rumours to the contrary, it was making a profit and expected things to improve. 'We receive many calls from Chinese investors asking if we had gone bankrupt or sent our workers home,' said director Guo Enzhe. 'I tell them our net profit for full year 1998 will be similar to the 106 million yuan in 1997. We are operating normally. There are just too many rumours.' For Mr Guo and other Erdos officials, a drop of 86 per cent in its share price over the past year is a gross distortion of the company's performance. It has as much to do with the collapse of the overall B market and the Asian financial crisis as with the firm's declining profits and worsening business environment. 'The fact that every market in the region has been hammered indiscriminately means that a share falling to one tenth of the price is not unusual,' said Alexandra Conroy, senior investment analyst with ING Barings in Shanghai. 'Foreign-fund managers pulled out of the region wholesale, dumping all their Asian shares. It is hard to say if Erdos was picked on. Its share price could be undervalued.' It is easy to see why the managers used to be eager to buy Erdos. It is the world's largest cashmere-producer, with half of the mainland's capacity. The mainland produces half of the world's 10,000 tonnes of cashmere, which can grow on goats in only the mainland Mongolia, Turkey, Iran and Afghanistan because of the peculiar geographic and climatic conditions required. Exports account for half of its output, although only 10 per cent carry the Erdos brand name. With world production limited by a finite amount of raw material and demand expected to grow at home and abroad, how could you go wrong with an Erdos B share? It was the triple whammy of the Asian crisis, El Nino and the host of new companies entering the cashmere business. El Nino made last winter one of the warmest on record in the mainland, shortening the sales peak for cashmere by two months. Seeing the high profits from cashmere, hundreds of new firms have gone into it since 1995, increasing the number from less than 100 to 2,000, undercutting Erdos' prices at home and costing orders to firms which make cashmere garments under contract for foreign companies. The profit margin on exports has fallen from 30 to 5 per cent. At home, Erdos cut its prices by 15 per cent at the end of last year and has not been able to raise them again. Output this year will be lower than last, with demand at home weak for cashmere as for many other goods. Mr Guo sees the problems as temporary. 'We have made profits for 17 years in a row and will make a profit again this year. Of the 2,000 firms, about 10 per cent have already gone bankrupt and more will do so this year and next,' he said. 'These three years, 1997-1999, are a bad period in the business cycle and we will turn the corner in 2000.' This year it is opening 60 more retail outlets in the mainland and will have 200 by the end of the year. It takes individual orders from them, to minimise expensive inventory. It has nine factories nationwide outside its main plant in Dongsheng. It has sales firms in London, Los Angeles, Hong Kong and Tokyo and plans to promote its own brand name. 'People still look down on Chinese brands. The same garment sells for 10 times more with a foreign brand than with our brand, ' Mr Guo said. He said the firm was considering a bid for Gobi Cashmere, the top cashmere company in Mongolia, which the government is privatising. 'Our senior officials have been to its plant which uses the same Japanese equipment as we do,' he said. 'We have not decided whether to bid. Such an acquisition would be a complex business, involving approval from two governments.'