ApparelApparel Production in Georgia

Transaction Services
Apparel Production in Georgia Greenfield Investment Opportunity

Strictly Private and Confidential
18January 2012
See important notice on the next page
Important Notice
PwC have prepared a report on the Apparel Production topic for JSC Partnership Fund (PF). The attention of recipients of this document is drawn to the comments in the letter to PF in the document. We emphasize that the information in the Report is, in general, as at December 2011 or earlier and thus is out of date. Provision of this document to recipients, other than PF, is intended only for information purposes and it does not represent any form of investment advice or recommendation by PwC to any such recipient or any other person. PwC accepts no duty of care (whether in contract, tort (including negligence) or otherwise) to any person other than PF. 03 October 2012
Apparel Production in Georgia Greenfield Investment Opportunity PwC
18 January 2012 JSC Partnership Fund 15, Tamar Mepe Avenue, Tbilisi 0112 , Georgia Dear Sirs, In accordance with our contract with you dated 22 October 2011 (the Contract), we provide you with the report on the Apparel industry (the Report). The Report has been prepared solely for you and the project purposes referred to on the next page. You may not make copies of this report available to other parties except as described in the Contract, and subject to the conditions described therein. We will not accept any duty of care (whether in contract, tort (including negligence) or otherwise) to any person other than you. We draw your attention to important comments regarding the scope and process of our work, set out immediately following this letter. Under certain circumstances, PwC may receive a success fee if it finds investors for the project. If you require additional clarification on any of the matters included in our report, please do not hesitate to contact Yuri Dolidze. Yours faithfully, Daneil Cappelletti Partner T: +420 251 151 250 F: +420 251 156 250 daniel.capelletti@cz.pwc.com Altaf Tapia Partner T: +995 32 2508 (061/561) F: +995 32 250 80 60 altaf.tapia@ge.pwc.com Yuri Dolidze Director T: +995 32 250 80 62 F: +995 32 250 80 60 yuri.dolidze@ge.pwc.com
PricewaterhouseCoopers Central Asia and Caucasus B.V. Georgia Branch; Address: #7 Bambis Rigi Street, Business Center Mantashevi, Tbilisi 0105, Georgia, T: +995 (32) 250 80 50, F:+995 (32) 250 80 60, www.pwc.com/ge
Scope and Process

Scope
Scope of our work
Process
The scope of our service is an independent conceptual study of the potential Greenfield projects in the Apparel industry having the following business model Contract manufacturing of clothes from fabric. A description of the scope is provided in Appendix 2, which has been extracted from the Contract. The Report is based on publicly available information, PwC search engines, other secondary data, industry specialists and knowledge of the industry gathered and/or used during its preparation as part of the analytical work. We have not carried out anything in the nature of an audit, due diligence, valuation, nor, except where otherwise stated, have we subjected the financial or other information contained in this report to checking or verification procedures. Accordingly, we assume no responsibility and make no representations with respect to the accuracy or completeness of the information in this report, except where otherwise stated. Our work did not involve special engineering, technical or legal qualification. As described in the Contract, this Report is intended to be used, among other supporting materials, by us and PF in discussions with various third parties such as, without limitations, fund providers or other third parties relevant for the purposes of the project (Potential recipient). Provision of Report to Potential recipients is intended only for information purposes and it does not represent an investment advice or recommendation to its employees or advisers. Therefore, items of possible interest to any Potential recipients may not have been specifically addressed for the purposes of the Report. Any Potential recipient shall comply with applicable copyright and other third party licensing requirements relating to his use of this Report. Any Potential recipient is also required to ensure that any notice or disclaimer and any copyright notice included in the Report are incorporated on any copy thereof. If any Potential recipient includes any part of the Report in his own reports or any other documents, he/she shall ensure that the relevant part of the Report is included accurately and not misrepresented in any way and any such report or document shall incorporate any notice or disclaimer and any copyright notice included in the Report.
Access to information
Basis of our work
Important notice
For the above reasons, this report may not have identified all maters that might be of concern to you.
JSC Partnership Fund ("Fund") is an investment fund established by the Government of Georgia. The Fund has over $1,5 billion worth of assets under management The Fund has two main products: Insurance and Investment. Insurance is mostly applied in energy sector through guaranteeing the off take agreement liabilities Investment is usually made in SPVs though preferred equity of sub-debt The Fund is aiming to be concentrated on four main sectors: Energy, Agriculture, Manufacturing and Real Estate. Current portfolio consists of Transport, Oil & Gas and Energy assets. Objective of the Fund is to maximize risk-adjusted return. Fund's ultimate shareholder is the Government of Georgia.
www.PartnershipFund.ge
PwC
Table of Contents
Overview Page
1 2 3 3.1 4 4.1 5 5.1 5.2 5.3 5.4 6
Project Idea Findings and recommendations Industry overview Apparel industry in Georgia Competitive edge of Georgia Market regulation Business development options Business case Sales and marketing strategy Organizational chart and staffing Financial projections Global apparel
7 9 11 18 20 26 28 29 31 33 35 38
Appendices 1 2 Glossary Terms of reference 44 46
Section 1 Project idea
Section 1 Project idea
Partnership Fund is inviting strategic investors to co-invest in a USD 9.5 mil. Greenfield project aiming at full service apparel manufacturing plant development
Business Case
The global USD 448 bn. apparel manufacturing industry undergoes significant changes. An increasing number of customers demanding quality products at reasonable prices with shorter lead times and value added services. The study encompasses the establishment of a Greenfield full service apparel manufacturing plant in western Georgia with an annual production capacity of six mil. pieces of wide variety of designed garments manufactured for global wholesalers and retailers under their private labels. The business is aiming to leverage Georgias unique position in terms of: 1. Availability of affordable and qualified workforce 2. Location - proximity to markets and sourcing destinations with developed infrastructure and transportation system 3. Liberal business environment and preferential terms of access to key regional markets 4. Government support 5. Availability of competitively priced inputs (energy, water, etc.) ... to enjoy shorter lead times, competitive quality and lower cost base advantage for western markets compared to major Asian sourcing destinations. Investment Return Indicators (USD mil.) Common Equity Holder NPV Project NPV Project IRR Payback Period Discounted Payback Period
Investment Case Analysed

The investment requirement stands at USD 9.5 mil. Financing structure considered is as follows: 1. The Investors contribution of USD 2.4 mil. in common equity 2. Partnership Funds matching contribution of USD 2.4 mil. in preferred equity 3. Debt of USD 4.7 mil. acquired with the assistance of Partnership Fund (if needed) 30% of investment is allocated to the production facility development. the remaining 70% covers initial working capital requirements .
3.1 7.2 25% 5 Yrs. 7 Yrs.
Section 2 Findings and recommendations
Section 2 Findings and recommendations
Business Viability
Market Viability
Findings
Global USD 448 bn. apparel manufacturing industry is expected to grow ca. 3% in 2011 and medium term forecasts are favourable too. The industry undergoes significant changes, such as: strengthening pressure on cost of production and lead times. Georgias location, availability and costs of quality workforce and energy creates opportunities for international players to gain competitive edge over Asian counterparts and supply western markets, namely Europe. In addition, most western markets impose smaller regulation and tariffs to apparel imports from Georgia compared to imports from most Asian countries. Organized apparel manufacturing in Georgia dates back to the beginning of 20th century. A number of international and local apparel companies with diversified customer portfolio are already operating in Georgia As all of key raw materials (fabric, buttons, threads, labels, zippers) can only be sourced from outside of Georgia, because there is no local production, the total cost of sourcing possesses some challenge to the business to be competitive on a global marketplace The manufacturing facility can be developed using used equipments (from closed factories in Europe for example) that could bring investment requirement down to 50%
Pg.
8-18, 3032, 34
Recommendations
Technical Viability
13, 15-16, 22, 24, 33
Business Model Viability
Full service apparel contract manufacturing that accesses markets through intermediaries is a well developed and established business model in the industry globally The project has a positive NPV of USD 10,4 mil. over 10 years span . The investment yields a 39% IRR (for the common equity investor). Investment payback period is 4 years. Financial viability is most sensitive to selling price and key raw material costs fluctuations Bringing in a strategic investor as considered by the Partnership Fund should enable unwinding establishment and developing needed industry contacts rapidly
10
Economic and Financial Model Viability
25-26
Management Model and Exit Strategy Viability
Recommendations
Key to attracting investors is development of a business environment that brings significant competitive advantages compared to competing destinations - E.g. Georgia should consider reaching preferential trading terms on apparel with US (largest apparel market) as enjoyed by Mexico and several central and south American countries, and with Japan (3rd largest importer of apparel) as enjoyed e.g. by Indonesia.
10
Section 3 Industry overview
11
Global apparel manufacturing is forecast to generate revenue of USD 448.5 bn. in 2011, a 3% increase over 2010. Global production is concentrated in Asia
Apparel Manufacturing Turnover, 2011
North America USD 22,4 bn.
Europe USD 132,3 bn. Africa & Middle East USD 9,0 bn.
Asia USD 260,1 bn.
South America USD 22,4 bn.
Oceania USD 2,2 bn.
Source: IBIS
12
China is the main exporter in apparel industry accounting for 40% of the global export, USA being the leading importer. International trade in apparel is growing steadily at 2.5% CAGR (2007-2011). The forecast is that during next 6 years average growth rate will be 3,8 % annually
Top Exporters (USD mil.) China Italy Turkey India France Indonesia Others
Source: Comtrade, PwC analysis
Top Importers (USD mil.) 121,072 18,505 12,382 10,604 9,221 6,501 125,115 40% 6% 4% 3% 3% 2% 41% USA Germany Japan United Kingdom France China, Hong Kong SAR Others 75,647 32,693 25,262 21,959 20,357 15,709 111,773 25% 11% 8% 7% 7% 5% 37%
Global apparel trade in USD bn., 2007-2011 350 300 250 200 150 100 50 0 CAGR 2.5%
USD bn.
268.8
278.7
282.3
296.1
303.4
2007
Source: IBIS, PwC analysis
2008
2009
2010
2011
13
The apparel industry consists of seven basic lines. Key segment at ca. 59% of the market is womens and girls wear
Primary apparel categories:
Product revenue split by customer group, 2011
Children's and baby clothes Work clothing and ethnic clothes

Men's and boys' wear
Coats and winter clothes
37%
Other apparel
Manufacture of Suits for men and women Leisure clothes
59%
Women's and girls' wear

5%
Source: IBIS
Sportswear
Nightwear
14
Different market segments have different needs and success in marketplace dependent on businesses ability to adjust to changing needs effectively
Segmentation by Type Low
Haute Couture Dior, Chanel, Armani Ready to Wear/Designer Chanel, D&G, Prada, Gucci Diffusion D&G, CK, Emporio Armani, Versus, Hugo Boss Bridge Patricia Pepe,Lacoste,Ann Taylor,Max.&Co.,Brooks Brothers Mass Market Zara, H&M, GAP, Puma, Lotto, Marks & Spencer, Lebeck
Perform manufacturing within own facilities and employees
Degree of outsourcing
Contract some or all of the manufacturing functions to other firms. High
High Low Market & Typical Order Size by Volume High Order difficulty level Order Size: Large customers (like Zara, Gap, etc.) basically demand CMT services with large orders and little value added Smaller brands and retail chains are after FPP services with smaller orders and greater value added High
Source: PwC Analysis
Full package program (FPP): source materials and develop patterns as well as make garments. Greater financial responsibility.
Cut-make-trim (CMT) contactors: supply operators, machines, and thread and make garments.
Price Range Order Size (volume)
Low
Specialty contractors: provide services such as pattern grading, cutting, embroidering, belt making, fabric pleating, or screen printing. 15
The biggest share of value in apparel industry is captured by retailers (ca. 65% of retail value). Ca. 11% - is captured by apparel manufacturers
Apparel value chain
Materials supplier Apparel manufacturer Agent Transportation Wholesaler Retailer Total value
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Key drivers
65% 100% 1% 11% 7% Resources Prices Price Quality Low Raw Material Labour Energy Price Quality Low Marketing R&D Price Orders Scale Quality Low Fuel prices Operations Marketing Price Quality Service Medium Marketing 2% 13%
Keys areas for competiveness Concentration
Price Time Options Medium
Brand Price Low
16
Differentiation in apparel is limited. Apparel manufacturers have to compete based on costs. Cost of material accounts for majority of the total costs and comprises on average 56 % of the apparel manufacturings costs
Global apparel industry typical cost structure, 2011 70% 60% 50% 40% 30% 20% 10% 0%
Source: IBIS
58%
18%
14% 3% 3% Depretiation 2% Interest 2% Taxation
Purchases
Wages
General & Other
Rent
Purchases include materials such as fabrics, yarns, textiles, lace, buttons, zippers and so on. The industry is labour intensive; labour costs account for an estimated 18% of revenue. This is down from approximately 19.0% in 2006. General & Other costs include administrative and marketing costs.
17
Section 3.1 Apparel industry in Georgia
18
Section 3.1 Apparel industry in Georgia
Organized apparel manufacturing in Georgia dates back to the beginning of 20th century. Industry collapsed after the breakdown of Soviet Union in early 1990s. Qualified personnel of that time is still available. Number of local and international apparel companies with diversified customer portfolio are operating in Georgia
Local apparel manufacturers in Georgia
- Factory
Sokhumi
SAMEGRELOZEMO SVANETI RACHA-LECHKHUMI AND
Name BTM Textile
ABKHAZI A
Parent company ATK Textile / Turkey Milteks Tekstil / Turkey -
Established 2006 2009 2006 2010 2011
Number of employees 600 487 280 220 170
Revenue (USD mil.) 6.1 1.0 0.8 1.8
Larsi
SOUTH OSSETI A MTSKHETAMTIANETI
Georgia
Black Sea
Zugdidi Kulevi Senaki
KVEMO SVANETI
Ambrolauri
Adjara Textile
Telavi
KAKHETI
Poti Batu mi
Sarpi
GURIA
Kutais i
Samtredia
IMERETI
Zestapho Gori ni Khashuri

KVEMO KARTLI
Tskhinvali
Georgian Textile LTD Apparel Manufacturing Factory Mileri
ADJARA
Akhaltsikhe
SAMTSKHE-
Tbilisi
Red Bridge Sadakhlo
Lagodekhi
Vale 0 25 50 75 Source: PwC Analysis 0 50 25 Kilometers 75 Miles
JAVAKHETI
Kartsakhi
163 small scale apparel manufacturers mainly servicing custom orders on local markets
Apparel manufacturing in Georgia, historic development

100 50 0 1980 2006 2007 2008 2009 2010 Apparel Manufacturing in Million Units
Source: Soviet Encyclopaedia, GeoStat, PwC analysis
Apparel Trade Data for Georgia (USD mil.), 2010

Country Turkey Import 21,6 12,7 3,4 3,0 1,8 0,5 7,5 50,5 Export 12,7 0 0,5 0,1 13,3
CAGR (for 2006-2010) 27,8%
China Italy France Germany United Kingdom Others Total

Source: GeoStat
19
Section 4 Competitive edge of Georgia
20
Fabric and other supplies constitute 56% of total costs. Proximity and access to major supply destinations (Turkey, Italy) gives the potential Georgian manufacturers competitive edge
Cotton price trend (USD cent per pound), 20062010
160 140 120 100 80 60 40 20 0 2006
Source: USDA, PwC analysis
Average CIF Price of Fabric in International Trade (USD/m), 2006-2010

16 14 12 10 8 6 4 2 2010 2006 2007 2008
CAGR 23,2%
CAGR 4%
2007
2008
2009
2009
2010
Currently local manufacturers in Georgia are sourced from Turkey As all of key raw materials (fabric, buttons, threads, labels, zippers) can only be sourced from outside of Georgia, because there is no local production, the total cost of sourcing possesses some challenge to the business to be competitive on a global marketplace
21
Labour cost represents 17% of total production costs. We see a trend of increasing wages in main producing countries. The low cost yet educated labour availability and high unemployment rate along with liberal labour legislation and low level of unionization makes Georgia an attractive destination for apparel manufacturing
Average monthly wages (USD)
USA United Kingdom Germany France Italy Greece Turkey India Azerbaijan Belarus Ukraine Bangladesh China Georgia Uzbekistan Armenia Morocco
Relative unemployment 2010

Armenia Georgia Turkey Iran Morocco Greece India USA France Ukraine Argentina Italy United Kingdom Germany Azerbaijan Bangladesh China Uzbekistan Belarus
% involved in Tertiary Education

USA UK France Italy Germany Ukraine Georgia Azerbaijan Armenia Turkey India China Bangladesh
Literacy rate 2010

Georgia Belarus Ukraine Armenia France Germany United Kingdom USA Azerbaijan Italy Greece Chile China Turkey India Morocco Bangladesh
1,000 2,000 3,000 4,000 5,000
0%
10%
20%
30%
40%
0% 0% 20% 40% 60% 80%
50%
100%
Source: Wordlbank; ICIA, PwC Analysis
The largest group of unemployed, ca. 50% is aged between 20-34 years Salary levels differ across Georgian regions. The highest average salary is in Tbilisi (ca. 25% above the national average), in regions we analysed as a potential location for the apparel factory an average salary level is 25-30% below country s average. Labour legislation is one of the most liberal in the region Level of unionization is low The average number of workers in one establishment worldwide is 60-70 employee. The average salary globally in this industry is USD 700. In Georgia this would be 450 less, USD 250.
22
Georgia has a stable and secured energy supply which is cost competitive
Cost of electricity USD/kwh, 2010

0.12 0.10 0.08 0.06 0.04 0.02 0.00 TK CN IN RU AZ AM KZ GE PK US EG
Cost of natural gas USD/m3, 2010

2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 TK IN GE
CN
AM
PK
RU
US
AZ
KZ
EG
Source: World bank; PwC analysis
1 2
Cost of electricity is USD 0.5 (per kwh) cheaper in Georgia compared to Turkey. Cost of natural gas is USD 2.52 (m3), while in Georgia it is only 1.13.
23
Transportation costs account <2% of total value added. Georgia possesses some transportation cost advantage compared to major sourcing destinations but it is a transportation time that gives Georgia a competitive edge for the European market
Transportation Cost Comparison to Selected Destinations
$12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 USA
Georgia China India Indonesia Turkey Germany United Kingdom France
International Airports International Airports - under construction MRN Port

SAMEGRELOZEMO SVANETI RACHA-LECHKHUMI AND
ABKHAZIA
Larsi
MTSKHETASOUTH OSSETIA MTIANETI
Georgia
Kulevi
KVEMO SVANETI
Georgias time advantage is approximately one week depending on target market destination compared to key Asian sourcing countries. This is very important factor as lead time requirement is getting one of the key demand in the business. Georgias transportation infrastructure provides adequate connection to all neighbouring countries and international destinations. Georgia can transport its products to major European counties cheaper than Asian manufacturers.
Kutaisi
IMERETI GURIA
Telavi
KAKHETI
Black Sea
Poti
ADJARA
Batumi
Sarpi 0 0 25 50 25 75 50 Kilometres 75 Miles Vale
Akhaltsikhe
SAMTSKHEJAVAKHETI
KVEMO KARTLI
Tbilisi
Lagodekhi Red Bridge
Kartsakhi
Zhdanovi
Sadakhlo
24
Georgias location enables it to reach over 260 mil. people in medium income countries in two days period
Number of Customers Reached DE 82,3 FR 64,5 UK

350 300 250
500 450 400
60,8 TR 74,8 RO BG
7,6
200 150 100 50 -
IR
72,9
21,5
GE
4,5 -
AR
3,1 4h
AZ
8,8 8h
TM 5,1
13h
KZ 15,9
20h
UA 46,0
25h
30h
35h
35h
40h
24d
25d
28d
25
Section 4.1 Market regulation
26
Section 4.1 Market regulation
Industry regulations vary greatly among countries. Georgia possesses advantage of zero tariffs and duties to the European markets compared to most Asian counterparts
Assistance Quotas Subsidies Special Regulation and Quality Control Regulations Practices vary by countries. Mostly no quotas or safeguards since 2009 In most Asian countries governments subsidize the industry either by providing cheap financing or export support. Certificate of Origin ISO9001 GMP Company specific requirements
Average Import Duties and Tariffs Applicable to Apparel, 2011 Exporter Importer France Germany Japan UK USA
Source: ITC, PwC Analysis
Georgia 0,00% 0,00% 9,60% 0,00% 14,26%
Turkey 0,00% 0,00% 9,60% 0,00% 14,26%
China 11,79% 11,79% 9,60% 11,79% 14,26%
India 9,43% 9,43% 9,60% 9,43% 14,26%
Indonesia 9,43% 9,43% 0,00% 9,43% 14,26%
27
Section 5 Business development options
28
Section 5.1 Business case
29
Section 5.1 Business case
We specified the case for a greenfield full service apparel manufacturing plant offering wide variety of designed garments manufactured for global wholesalers and retailers under their private labels
Key characteristics 1250 pcs/h Installed capacity Land plot m2 4,000 Buildings Three story building with 2,000 m2 base Total area (m2) 6,000 Sampling & Pattern Making & Cutting 700 Area for sewing 3,700 Office Area 600 Packaging & Quality Control 400 Storage 300 Infrastructure Road Connection Local road with connection to arterials or freeways Railway Connection Optional Location Poti area has the following favourable characteristics:
MRN
Layout design
I floor Note: Layout is not to scale;
Availability of labour Developed infrastructure (roads, sea port, International airport [under construction], railway) Free industrial zone Proximity to Turkey
II/III floor
ABKHAZIA
SAMEGRELOZEMO SVANETI RACHA-LECHKHUMI AND KVEMO SVANETI
Georgia
Black Sea
Poti
GURIA IMERETI
SOUTH OSSETIA
MTSKHETAMTIANETI
KAKHETI
ADJARA SAMTSKHEJAVAKHETI
KVEMO KARTLI
Tbilisi
0 0
25
50 25
75 50
Kilometres 75 Miles
24
30
Section 5.2 Sales and marketing strategy
31
Section 5.2 Sales and marketing strategy
Full service quality offerings at competitive prices and results-oriented marketing efforts will build up critical mass of customer orders and develop portfolio of loyal customers and partners
Key demand drivers in the apparel industry are: Disposable income of inhabitants Population size Cultural factors As the industry is highly commoditized it is extremely important to be competitive on key success factors, namely: Ability to meet customers requirement on quality & price & time Good suppliers Access to low cost resources Effective quality control Economies of scale Economies of scope Service offering Capable of offering full range of services including design Best positioned to offer shorter lead times. This is increasingly demanded by customers ISO 9001, GMP certified Business needs to consider own brand development in the future. However it also increases the costs associated with advertising and maintaining brand equity Pricing In the industry it is highly important to offer competitive prices along with quality service to build up customer base At the initial phase of the project promotional pricing with discounts should be considered Promotion Apparel contract manufacturers are rarely engaged in promotion activities through trade fairs or fashion shows. Key to new customer acquisitions in this industry are contacts. Thus promotion activities focused on agents and making connections with apparel industry players are vital, especially during initial phases of the business development
Distribution Apparel contract manufacturers reach markets through intermediaries. Apparel buying Agents play significant role in the value chain. At the initial stage apparel agents residing in Turkey will be main targets for distribution arrangements.
32
Section 5.3 Organisational chart and staffing
33
Section 5.3 Organisational chart and staffing
The plant will offer employment opportunities to ca. 1,500 persons
General Director
Chief Financial Officer
Sales and Marketing Director
Chief Operation Officer
Administrative
Procurement Director
Designers & Developers
Production Line Chiefs
Personnel White Collar Blue Collar Total
75 1,411 1,486
Key Personnel Salesman Production line chiefs Fashion designers Technical designers Pattern Makers Seamstress QA Staff Others
Training Requirements Most of key personnel needs formal training or apprentice. Three weeks on-job training is sufficient for most of low-skilled workers (Seamstress, etc.) Training for maintenance staff is delivered by equipment suppliers and included in the price
34
Section 5.4 Financial projections
35
Investment requirement at USD 9,5 mil. produces common equity holders IRR of 32%. The project has positive NPV of USD 7,2 mil. The investment payback period is 5 years
Investment requirements (USD mil.) Equipment Land Buildings Other 1.0 0.1 1.5 0.4 6.5 9.5 Financials (USD mil.) Revenue Operating Costs Finance Costs Net Profit EBITDA Margin % Yr. 1 22.7 22.8 0.7 (0.8) 1% Yrs. 2 - 10 45.4 42.6 0.7 1.7 7% 11%
Working Capital Total
EBITDA Margin (Global industry benchmark)
Operating cost structure (USD mil.) Major Raw Material Auxiliary Materials Utilities Sales Commission Labour Fixed Costs Depreciation
Amount 26.4 5.3 0.3 3.6 4.1 2.6 0.3 42.6
% 62% 12% 1% 8% 10% 6% 1% 100%
Investment returns indicators (USD mil.) Common Equity Holder NPV Project NPV Common Equity Holder IRR Project IRR Payback Period Discounted Payback Period 3.1 7.2 32% 25% 5 Yrs. 7 Yrs.
Total
36
Analysis of the international apparel markets shows favourable trends

Main assumptions Selling price and variable cost estimates are based on the apparel manufacturing industrys typical figures in Georgia All revenue and cost estimates are based on constant dollar approach Capital investment estimates are for indicative purposes and might fluctuate as much as 20% or more depending on peculiarities of detailed technical design and characteristics of area considered for the facility development Operating period of the project is 10 years. Salvage value discount factor from last year operating income is 25% Business is assumed to achieve an optimal capacity utilization of 80% in the second year of operations, during the first year 40% of capacity utilization is considered Labour salaries are USD 250 and above. Discount rate of 14% considered by Partnership Fund was incorporated in the analysis. Sensitivity analysis to discount rate is provided Sensitivities Analysis shows that ability to ensure cost effective sourcing of major raw materials (fabric, etc.) is vital for financial sustainability of the business.
12000 7000 2000
IRR 25% Raw Material Cost Change -20% -10% 10% 20%
IRR 25% $ -20% Fixed Cost Change 9.5 $ 30% 27% 25% 23% 21%
Selling Price Change -20% -3% #NUM! #NUM! #NUM! #NUM! -10% 38% 14% #NUM! #NUM! #NUM! 67% 46% 25% -1% #NUM! 10% 94% 73% 53% 34% 13%
11.0 $ 72% 70% 68% 66% 64%
20% 120% 98% 78% 59% 41%

11.5 85% 83% 81% 79% 77%
37
NPV USD 000
Selling Price 10.0 $ 10.5 $ 44% 58% 42% 40% 38% 36% 56% 54% 52% 50%
-3000
0%
10%
20% Disc. Rate
30%
40%
-10% 10% 20%
Base case @ 14% Disc.Rate
Section 6 Global apparel
38
Global Apparel Manufacturing industry has a low level of market concentration. None of the large global companies account for more than 1.0% of the industry revenue. However the level of industry concentration is expected to increase in the future
Selected potential customers Name

Adidas Chicos FAS
Symbol
FWB: ADS; OTC Markets Group: ADDYY NYSE:CHS
Origin
Principal Markets
Turnover USD Bn. Key Sourcing Destinations

18.83 1.713 India, Thailand, Turkey, China, Germany, Hong Kong, Indonesia, Mexico, Brazil, Pakistan, Taiwan China, Vietnam, USA, Indonesia, India, Sri Lanka, Philippines, Bangladesh
Germany Global USA USA
Christian Dior
CDI:FPEN Paris, CDIF:PZPLUS Mkt Grp CHDRY:USOTC US, CDI:BQEquiduct CHDRF:USOTC US, France DIO:GRFrankfurt CDI:TQTurquoise, CDI:EBBATS Europe CDI:ROBucharest
N/A N/A NYSE:GPS France Italy USA
Global
29.56
France, United States, Canada, and Japan
Coco Chanel Dolce & Gabbana GAP Guess? H&M
Global Global Global
2.398 0.987 14.664
Hong Kong, China Italy , China United Kingdom, France, Ireland, Korea, Japan and China
NYSE: GES HMb.ST
USA Sweden
Global Global
1.19 127
USA, Mexico, Italy, Hong Kong China, Bangladesh, India, Indonesia, South Korea, Pakistan and Sri Lanka , Turkey, Italy, Portugal, Greece, Bulgaria, Poland, England
39
Selected potential customers
Name
Levi Strauss & Co Nike Polo Ralph Lauren
Symbol
JSE:LVISF NYSE: NKE NYSE: BKE
Origin
USA USA USA
Principal Turnover USD Bn. Key Sourcing Destinations Markets

Global Global Global 4.303 19.014 4.979 Argentina, Canada, China, Hong Kong, India, Indonesia, Italy, Turkey, United States, Vietnam; China, Vietnam, USA, THAILAND. Australia/New Zealand, Central America, Korea, Hong Kong
Puma SE
FWB: PUM
Germany Global
3.79
Canada, the United States, Mexico, Brazil, the Czech Republic, Poland, Italy, Greece, Syria, Spain, Jordan, Morocco, Tunisia, Turkey, Egypt, India, Bangladesh, Vietnam, Thailand, Taiwan, Malaysia, Indonesia, Philippines, Singapore, USA, Mexico, Asia, Italy
Hong Kong, Poland and Turkey, China, Bangladesh, Vietnam, Indonesia, Thailand, Cambodia, the Philippines, Pakistan and India.
True Religion Brand Jeans VF Corporation Volcom
NASDAQ: TRLG
NYSE: VFC
USA
USA
Global
Global
0,36
7.703
NASDAQ:VLCM
USA
Global
0,3
China, Mexico
Zara
IDEXY:US - USA; ITX:SM Spain; IDEXF:US - USA; ITX:EB - UK; ITX:IX - UK; ITX:LI - UK; ITX:NR -UK; Spain ITX:S1 -UK; ITX:TQ -UK; ITXS:PZ -UK; IXD:GR Germany; IXD:TH -Germany
Global
8,1
Spain, Portugal, India, Turkey
Source: Publicly available sources, PwC Analysis
40
Apparel industry players are increasingly trying to do business in countries with cheap labour. The key for success will be to leverage Georgias production competitive advantage to eat share from main competitors
We have studied the competition level in this industry. The fact is that the number of apparel manufacturers is increasing. However it is not easy to find contractor with good combination of price, quality and time delivery options. The last is becoming more and more important every year and Georgia has a good opportunity to use its location as one of the main competitive advantages. As of 3rd quarter of 2011 the number of apparel manufacturing establishments worldwide is estimated around 148,726 owned by ca. 132,791 enterprises. Our analysis indicate that average employment per establishment is ca. 60-70 person.
Selected sizable apparel producers

Name Symbol Business Origin Key Customers Wrangler, Lee Jeans Riders, Rustler Chic, 20X, Maverick Rock & Republic at Kohl's Nautica Bosideng, Snow Flying, Kangbo, Bengen Shuangyu and Shangyu Body Glove, People's market Innos, Corte Ingles, Loeb Turnover USD No. of Employees EBIT Margin bn. ROE ROA
VF NYSE: VFC Corporation
Apparel
USA
7,7
47,000
13.3%
14.8%
8.8%
Bosideng BGT Corporation Devernois SA
3998:HK
Apparel
China
5,7
30,000
18.1%
16.4%
13.4%
BGT-R:TB
Apparel
Thailand
0,026
10.5%
19.3%
10.5%
DEVR:FP
Apparel
France
0,056
3,6%
3,4%
2,5%
Source: Publicly available sources, PwC Analysis
41
Technological advancement in the Global Apparel Manufacturing industry is deemed to be low. Much of production is very labour intensive as it comprises sewing and cutting machines that need to be operated by man
Sampling
Pattern Making
Fabric Cutting
Input
Output
Final Quality Check
Packaging
Quality Control
Equipment Needed Plotters Stitch Machines Cutters Embroidery Sewing Machines Digitizers Flat Lock Machines Bar Tracking Machines
Potential Suppliers Gerber Juki Janome Jinan
Origin of Supplier USA Japan USA China
Contact Information www.gerbertechnology.com www.juki.co.jp www.janome.com www.jqlaser.com
The use of technology is increasing. For high productivity of the manufacturing process it is essential to use modern technologies. However, some functions are different to automate and therefore will remain labour intensive in the near future.
42
The top three traders (the United States, Germany and China) represent 28% of world merchandise trade. Asia accounts for almost 30% of world merchandise trade
USD 0-250 bn. USD 250-500 bn.

Source: WTO
USD 500-1000 bn. >USD 1000 bn.
43
Appendix 1 Glossary
44
Appendix 1 Glossary
Glossary of terms and abbreviations
Term
CAGR CNF EBIT EBITDA FOB GMP IRR ISO xxxxx NPV
Definition
Compound annual growth rate Cost and Freight included Earnings before interest and tax Earnings before interest, tax, depreciation and amortisation Free on Board Good Manufacturing Practice quality management system in manufacturing Internal Rate of Return Global quality management standards Net Present Value
45
Appendix 2 Terms of reference
46
Appendix 2 Terms of reference
Terms of reference
Objective of the assignment is to reveal business opportunities in manufacturing and agriculture fields identified by PF and to find investors for projects with high business potential. The conceptual study, covers evaluation of the business opportunities identified by PF.
For each business field identified by PF conceptual study will include at least the following: 1. Executive Summary 2. Description of Products or Services 3. Evaluation of value chain of the product/service including intermediate and final products. 4. Evaluation of local, regional and international markets for output, intermediate and final products including a. Market size and historical growth b. Regulation and legal environment c. Potential customers/contracts and customer concentration d. Competition at local, regional and international level 5. Technology Considerations and investments, including evaluation of possible locations 6. Marketing Strategy including a. Pricing and b. Distribution 7. Organization and Staffing 8. Evaluation of supplies for the product or service including a. Raw materials and suppliers of raw materials b. Energy c. Other inputs 9. Initial planning of the plant/asset (when applicable) including: a. Manufacturing basic design layout plan/asset b. An initial plan of the production's array and the RFI definitions for the plant/process. c. Initial planning of the transportation's system and the distribution chain. d. Defining critical raw materials and recommended purchasing costs against destination prices. e. Defining necessary training programs for the operators. f. Produce the following documents: i) Civil engineering RFI ii) Equipment RFI iii) Erection RFI iv) Other required RFI 10. Financial Projections for short, medium and long term including local, regional and international markets 11. Findings and Final Recommendations
47

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Apparel Production in Georgia Greenfield Investment Opportunity

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Apparel Production in Georgia Greenfield Investment Opportunity PwC

Scope and Process

Basis of our work

1 2 3 3.1 4 4.1 5 5.1 5.2 5.3 5.4 6

Appendices 1 2 Glossary Terms of reference 44 46

Section 1 Project idea

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 1 Project idea

Investment Case Analysed

3.1 7.2 25% 5 Yrs. 7 Yrs.

Section 2 Findings and recommendations

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 2 Findings and recommendations

13, 15-16, 22, 24, 33

Business Model Viability

Economic and Financial Model Viability

Management Model and Exit Strategy Viability

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

North America USD 22,4 bn.

Asia USD 260,1 bn.

South America USD 22,4 bn.

Oceania USD 2,2 bn.

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

Product revenue split by customer group, 2011

Children's and baby clothes Work clothing and ethnic clothes

Coats and winter clothes

Manufacture of Suits for men and women Leisure clothes

Women's and girls' wear

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

Perform manufacturing within own facilities and employees

Contract some or all of the manufacturing functions to other firms. High

Price Range Order Size (volume)

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

Keys areas for competiveness Concentration

Price Time Options Medium

Brand Price Low

Source: PwC Analysis

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3 Industry overview

14% 3% 3% Depretiation 2% Interest 2% Taxation

General & Other

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3.1 Apparel industry in Georgia

Apparel Production in Georgia Greenfield Investment Opportunity PwC

Section 3.1 Apparel industry in Georgia

Name BTM Textile

Parent company ATK Textile / Turkey Milteks Tekstil / Turkey -

Established 2006 2009 2006 2010 2011

Number of employees 600 487 280 220 170

Revenue (USD mil.) 6.1 1.0 0.8 1.8

Zugdidi Kulevi Senaki

Zestapho Gori ni Khashuri