About a year ago Merrill Lynch put a 'sell' recommendation on textile firm Texwinca Holdings, saying slower earnings growth was inevitable as its expansionary phase for value creation came to an end. Its valuation of Texwinca was HK$5.83 per share, about 9 per cent below its price then. At the time the counter was trading at $6.25. Merrill said that over the past three years Texwinca, one of the world's biggest manufacturers of knitted fabrics and operator of Baleno clothing shops, had been one of the strongest performers in terms of value creation. But deflationary pressures were likely to hurt sales growth and rising costs were expected to constrain margin expansion. Texwinca might not be able to fully pass on higher cotton prices. Earnings-per-share growth was forecast to slow to 7.3 per cent in 2004 and 9.3 per cent in 2005. Merrill believed tougher industry trading conditions and a slowing of earnings growth had not been fully factored into the share price. In July last year Texwinca posted an 11 per cent rise in net profit for the year to March 2003 with net income of $590.56 million against $530 million a year earlier. In December last year it posted a 40.6 per cent drop in interim profit due to higher cotton costs and Sars. It earned $180.14 million for the six months to September. The counter closed at $5.85 on Friday.
