Reduce profits of garment and textile enterprises

The sharp drop in yarn prices has dragged down the profits of yarn businesses. Photo: ST

Profits plummeted

In the third quarter of 2019, net revenue of Vietnam National Textile and Garment Group (Vinatex) was only VND4,152 billion, down 18 percent compared to the same period last year. After deducting its expenses, Vinatex's net profit was VND186 billion, down 13 percent compared to the third quarter of 2018. In the first nine months of 2019, Vinatex's after-tax profit decreased by 20 percent, reaching VND534 billion.

According to Le Tien Truong, General Director of Vinatex, the complicated development of the US-China trade war has affected the production and business activities of the whole textile industry, especially yarn manufacturing units. Accordingly, the group's production and business results in some yarn manufacturing units in the third quarter of 2019 decreased significantly compared to the same period in 2018, which affected the overall business of the group.

Talking about difficulties from the impact of the US-China trade war, the Board of Directors of Duc Quan Company said customers from its main market of China were paying very low prices. Therefore, the company has expanded into other markets such as South Korea, Taiwan (China), and Thailand, but its orders are small and limited. Meanwhile, the company has also faced fierce competition on orders from domestic FDI yarn enterprises and businesses from competing countries such as India, Thailand, Indonesia and Pakistan. Due to the competition, the selling price has been in a downward trend and has not shown any sign of recovery, and has even had signs of dumping to avoid inventory.

According to the Board of Directors of Duc Quan Company, while yarn prices were stable and maintained at 2.98 - 3.2 USD per kg in the third quarter of 2018, the unit price fluctuated and tended to keep going down in the third quarter of 2019. Meanwhile, the accumulation of price of cotton inventory as well as orders that have been ordered, which had high unit prices, on average from US$1.96 per kg from the previous quarters, made the company’s cost of goods sold unable to decrease sharply.

In the third quarter of 2019, Duc Quan Company's revenue recorded a growth of 54 percent, reaching VND361 billion, but the cost of goods sold reached more than VND361 billion, making the gross profit negative VND1.2 billion. After deducting its expenses, Duc Quan posted a net loss of VND12 billion in the third quarter of 2019 and a loss of VND43 billion in the first nine months of 2019, while in the same period last year, the company made profits of VND4 billion and VND29 billion respectively.

Ha Noi Textile and Garment Joint Stock Company posted an after-tax loss of VND7 billion in the first nine months of 2019, while in the same period of 2018, the company's profit reached more than VND75 billion. After-tax profit of Viet Thang Textile Corporation also decreased by 34 percent in the third quarter of 2019, reaching VND19 billion and down 13 percent in the first nine months of 2019, reaching nearly VND74 billion. At Thanh Cong Textile and Garment JSC, net profit also dropped by 39 percent in the third quarter of 2019 and by 28 percent in the first nine months of 2019, reaching VND58 billion and VND153 billion respectively.

However, there were still businesses that maintain growth such as TNG Company’s after-tax profit reached VND81 billion in the third quarter of 2019, up 29 percent; accumulated profit in the first nine months reached VND174 billion, up 34 percent. Similarly, Song Hong Garment Company also recorded net profit of nearly VND138 billion in the third quarter of 2019, an increase of seven percent;the accumulated result during the first nine months was VND357 billion, up by 31 percent. Garment 10 Company also achieved growth of six percent in the third quarter and 21 percent in nine months of 2019 with profit after tax of VND18 billion and VND52 billion respectively.

Market price also plummeted

At the beginning of 2019, the textile and garment industry had a lot of positive expectations from the new free trade agreements (FTAs) that Vietnam signed such as the Comprehensive and Progressive Trans-Pacific Partnership – CPTPP and the EU-Vietnam Free Trade Agreement (EVFTA). In particular, it was believed the textile and garment export turnover to the EU would increase sharply thanks to tax advantages, because this is Vietnam’s largest market. Vietnam’s textile and garment was also expected to attract many orders as well as investment projects shifting from other countries due to the US-China trade war. Facing such bright forecasts, many businesses planned to expand and improve their capacity to catch opportunities from the market. However, business results they achieved this year have not been as bright as expectations.

According to a report of BSC Securities Company, Vietnam's textile and garment export sector in the first nine months of 2019 was growing slowly due to the reduction of world demand because of the US-China trade war. According to BSC, the decline in revenue in yarn enterprises was because the US imposed tariffs on the Chinese textile and garment products, which reduced exports of yarn and fabric from China to the US. Thereby, supply and pressure on the market increased, dragging prices down. For garment enterprises, the decline in orders occurred locally in some enterprises only, while it was positive for some other businesses.

Along with the decline of business results, the textile stock price also decreased significantly. At the end of 2018 and early 2019, the textile stock price increased sharply thanks to a series of bright forecasts about its growth prospects. However, from the end of the second quarter and the beginning of the third quarter, when the situation was not as expected, the textile stock prices began to plummet. For example, FTM shares of Duc Quan Company fell from VND25,100 in the May 27th session to VND3,400 per unit only. TVT shares of Viet Thang Garment Company also dropped from VND40,200in the May 30thsession to VND 21,000 only. TCM of Thanh Cong Textile also decreased from VND33,800 (March 11th session) to VND21,700only, and Vinatex's VGT shares also decreased by 46 percent, reaching VND8,500 per unit. Falling stock prices have shown the attractiveness of textile and garment stocks has decreased significantly due to frustration of investors.

From now till the end of the year, BSC believed the growth of the textile and garment industry would stay over 10 percent thanks to the EVFTA and CPTPP trade agreements. This forecast was based on the data until the end of September 2019 when Vietnam's textile and garment exports had reached $24.61 billion, up nearly ten percent over the same period in 2018. In particular, the US continued to be Vietnam’s largest import market with a value of $11.21 billion, up nearly 8 percent and accounting for 45.5 percent of the country's total textile export turnover. Other major markets such as the EU, Japan, and South Korea also saw growth of 4 - 10 percent.However, there will still be differentiation among businesses. At the same time, the prospect of 2020 will be relatively slow with growth of 8-10 percent because world demand will decline because of the US-China conflict.