China’s textile-sector shares are set to remain volatile amid the specter of a trade war with the U.S., but it isn’t clear there will be much impact even if potential tariffs on U.S. cotton are executed, Maybank KimEng said in a note on Tuesday.
“Given U.S. cotton accounts for only 7 percent of China’s total consumption, the direct impact to upstream yarn producers is limited,” it said. “We believe Chinese companies will source more cotton from other regions to offset the impact. As a result, we do not expect any shortage of cotton supply.”
Among the textile plays, it noted that nearly 40 percent of Texhong’s production capacity is in Vietnam, which won’t be hit by the tariff, and its China production mainly uses domestic cotton.
“Also, Texhong may benefit if the cotton price continues to move up, because it holds at least five months of cotton inventory and
sells yarn at the market price,” the brokerage said.
It added that its preferred sector pick was Shenzhou; “it has only 12 percent direct sales exposure to the U.S. and nearly 30 percent of its production is outside of China.” Shenzhou has also already locked in its yarn-procurement price for the first nine months of the year, it said.
Among other China textile players, Pacific Textiles and Best Pacific mostly use synthetic yarns for their key raw material and that was mainly sourced from Japan, Taiwan and South Korea.
Cotton price volatility
But while Maybank KimEng didn’t expect material direct impact on China’s cotton supply, it said that cotton prices could become more volatile.
“Amid the uncertainty of trade policy, brands and retailers may turn more cautious on placing new orders. This may have a negative impact on the sector,” it said.
Maybank KimEng said it expected Vietnamese production would become more important for China’s textile industry.
Any U.S. tariffs applied to textile and apparel imports from China would be borne by U.S. brands, which they are likely to try to pass on to customers and suppliers, it noted.
Importance of Vietnam
“To work around the tariff hike, brands will seek to find quality apparel makers outside of China to minimize the impact,” it said.
Among downstream textile plays, the brokerage said it expected Shenzhou, Crystal and Nameson would be more resilient with less exposure to U.S. sales and more production outside of China.
Pacific Textiles was likely to see a greater hit, with the U.S. market at 40 percent of total sales, as would Regina Miracle, with its exposure to the U.S. market at 60 percent of sales, the note said.