The fabric producer may find it difficult to budget for sales as US and European retailers change sourcing strategies The United States and European Union safeguard quotas about to be imposed on nine Chinese textile products, as well as continuing high oil prices and labour shortages in the Pearl River Delta, are having an adverse effect on fabric producer Fountain Set (Holdings), the company said yesterday. After posting a drop in net profit in the first half which ended on February 28, Fountain Set executive director Gordon Yen said the quotas would further hurt profit and revenues. 'We may experience delay or last-minute changes in orders from garment manufacturers. Our customers face uncertainty as a lot of US and EU retailers continue to change their sourcing strategy. It will be difficult for us to budget and schedule our production and sales,' he said. For the full year ending August, the Hong Kong-listed firm's top line would grow only 5.3 per cent due to slowing orders, said a Kim Eng Securities report, adding that news of the quotas would 'put pressure on the share prices of Hong Kong's textile and garment manufacturers in the short term'. Fountain Set's net profit for the first half fell 60.21 per cent to $53.86 million compared with a year earlier. The results were worse than expected by Kim Eng and Nomura International. Although the firm's $3.12 billion turnover was 6.3 per cent higher than the first half a year ago, it was 18.79 per cent down from the previous second half. The firm attributed its poor performance to high cotton, oil and coal prices, and a reduction in export tax refund due to changes in mainland tax rules. Cotton prices are likely to remain high, as demand for cotton worldwide is expected to exceed production by 4.5 million bales this year, according to the US Department of Agriculture. Kim Eng expects Fountain Set's operating profit margin to increase three percentage points to 7.7 per cent in the second half, as it has cleaned up its high-cost inventory. Mr Yen said the prospect of quotas had brought the capacity expansion of the fabric producer to a crawl, even though it would spend $350 million this fiscal year enhancing its factory in the Jiangyin in Jiangsu province. The firm will expand its annual fabric dyeing capacity by one million pounds to 25 million pounds this year and to 29 million pounds next year, less than 31 million pounds as previously planned. The Kim Eng report cited some short-term concerns about Fountain Set - 'the low utilisation rate of the Jiangyin plant' being one, while its Guangdong plant 'has not met local environmental standards'. Fountain Set is also vulnerable to rising interest rates, warns Kim Eng. The firm's net bank borrowings rose 6.8 per cent to $2.12 billion in the first half from the second half last year, but its net bank borrowing ratio fell to 0.6 from 0.75. The share price closed down 2.5 per cent at $3.90 yesterday.