Chinese Firm to Bank on Cashmere With Initial Stock Offering : Textiles: The producer of 30% of the world supply of goats’ wool plans to raise $50 million through the sale of B shares on the Shanghai exchange next month.
Wang Lingxiang, the chairman of the world’s largest cashmere company, isn’t worried about the effect of bitter Inner Mongolian weather on his goats or the latest fads on Paris catwalks.
In the world of cashmere, he says, he calls the shots.
Erdos Cashmere Products Co., based in Dongsheng in China’s northeastern Inner Mongolia region, will be selling $50 million worth of shares to foreign investors next month. After a crash course in cashmere business, Hong Kong analysts are still losing sleep over the rare fabric’s price swings.
“For analysts who are worried about the price, I’ll tell you something,” Wang, 44, said. “Whether the price is high or low, to some extent, is decided by me, here. If I say it should be high it goes high, if I say its too high it drops.”
If Erdos, which processes cashmere and makes cashmere textiles, hoards raw materials by offering local farmers high prices, says Wang, pretty soon shortages will cause its competitors to pay higher prices. While South Africa’s De Beers profited from its grip on the world diamond business, Wang dubs cashmere his own “soft gold.”
Few countries have the right natural conditions to allow the mountain goat, originally from Kashmir and Tibet, to produce perfect cashmere wool.
“In the world, for one enterprise to control 30% of a particular product is very rare,” Wang said. “That’s why we aren’t worried about price movements.”
So what does the king of cashmere say prices will do this year? The fast-talking Wang says the recovery in cashmere prices last year should continue, but at a slower pace. This year, he says, cashmere product prices could rise up to 15%.
That will cause Erdos’s profit growth to slow. Wang forecast his company’s profits, which almost doubled last year, will rise 17% to 175 million yuan ($21.1 million) this year. Sales, which also doubled in 1994, will rise roughly 7.4% to about 800 million yuan.
By the year 2000, he says, the company should be selling 1.2-billion yuan worth of cashmere a year.
“I like the company,” said Maurien Yau, director of research at DBS Securities in Hong Kong. “The barriers for cashmere aren’t so high, they compete well on costs, and production isn’t easily increased.”
Her only worry is that, if something happens to northwest China’s mountain goats and their precious hair, “it could take two or three months for us to get to know.”
Elizabeth Cheng, director of research at James Capel Asia, says that, with 70% of production out of its control, she doubted Erdos could maintain its profit margins if the global economy slowed.
Wang responds that Erdos even turned a profit in 1988, when the price of a ton of cashmere had a stomach-wrenching fall from $185,000 a ton to $65,000 a ton. That fall was due to some cashmere raw materials being contaminated with dirt and cheaper fibers, which hurt quality at other Chinese manufacturers.
“As much as the price would fall so our raw material costs would fall,” he said. “We seek to maintain basic profitability; it doesn’t matter about raw material sellers, we must maintain our interests in the middle.”
The company wouldn’t reveal current figures for cashmere prices.
China came late to the cashmere business; Erdos was its first producer in 1972. The country now produces 60% of the world’s finished cashmere garments and de-haired cashmere goats’ wool. About half of that is produced by Erdos and half by its three main competitors.
“It’s impossible for foreign companies to compete with Chinese prices, and after years of importing advanced equipment, the quality is about the same,” as that made overseas, Wang said.
Wang said that, while in Europe a gram of de-haired cashmere wool would cost $30, in China it costs just $18. It’s no surprise then, that Erdos exports more than 60% of its products and estimates another 15% crosses the border after being sold in China.
China’s overall textile industry is going through troubled times thanks to rising raw material prices, shrinking export quotas in the United States and Europe, lower value-added tax rebates and delays in receiving those rebates.
Cashmere has escaped those problems. The high price of cashmere sweaters makes it a sought-after item for China’s trading companies to fill up sweater quotas, which are counted by the piece, says Wang.
So popular, in fact, that trading companies are ready to factor Erdos’s value added tax burden into the price they pay. When Erdos doesn’t need the trading companies’ quotas, it can export directly. Since 1994, such direct exports have been exempted from the value added taxes that Erdos otherwise pays.
The company wants to sell 110 million B shares on the Shanghai stock exchange. B shares can be owned by foreign investors. The shares are likely to be sold at a price-to-earnings ratio of between 6.5 times and 7 times.
