Disclosure: I do not hold position in mentioned stock. Also, the price has increased slightly since I initially wrote it up (from HK$5.11 to HK$5.30), however all points in this write up are still valid with a price level of HK$5.30.
Company Overview and Recent History
Texwinca is a Hong Kong-listed textile & apparel company, with two main business segments: 1) Textile business, which produces, dyes & sells knitted fabric and yarn, & 2) Retail and distribution business, which sells casual apparel and accessories. Each segment contributes about the half of the revenue to the firm. The vertically integrated cost-efficient model used to work well, however both segments have been hit hard by some adversity recently.
Texwinca’s textile business is one of the largest fabric producers in the world, serving many global fashion brands like A&F, Ralph Loren and Gap. However, it is facing cyclical headwind driven by the soft global (especially US, which is the main textile revenue source) economy and the increasing production cost in mainland China.
The retail business sells its apparel majorly through brand Baleno. However, Baleno (along with many other local mainstreet fashion brands like Esprit, Giordano & Meters/bonwe) has been squeezed very hard in its mainland China market (its main retail revenue source) by new-entering international fast fashion brands like Zara, H&M and Uniqlo. Baleno, once a high end fashion brand, lost its value significantly in the past few years, and is now considered merely as an “immigration worker (lowest income city worker from rural area) brand”. To cope with the competition, the business tried to streamline by disposing all the non-core brands and focus solely on Baleno.
Driven by weak performance on both sides, the stock has lost more than 40% of its value since the recent peak at HKD 9.38 in July 2015. At the current stock price (5.11), the stock looks attractive from first glance with following traits: