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Analyst:

Shaikh Malik Al - Razi


malik.razi@bracepl.com

An Anecdote of Textile & Apparel Sector of Bangladesh


Sector Report September 5, 2013
Figure 1: Apparel Export in million USD
12000 10000 100% 80%

8000
6000 4000 2000

60%
40% 20% 0%

Textile and Apparel is the largest manufacturing sector of Bangladesh in terms of GDP contribution as well as employment generation. The country has established itself as a reliable supplier globally and gradually moving into high end market. Moreover exporters are reaching beyond the traditional export destination like EU and North America region, and exploring other market opportunities in Japan and South America. This report is an effort to provide a baseline picture of the Textile and Apparel industry of Bangladesh. The report also entails the listed Textile and Apparel companies to the capital market.

0
1992-93 Woven 1997-98 Knit 2002-2003 2007-2008

-20%
2012-2013 Knit Growth

Woven Growth

Source: BGMEA, September 2013

Sector Overview
Figure 2: Export Shipment
13% 4%

1% 2%

Textile and Apparel is the major industry of Bangladesh, which generates around 79.6% of the total export receipt of the country. Bangladesh exported around USD 21.52 billion in the FY13, positioning itself as the second largest apparel exporter in the world. The country is the largest exporter of cotton t-shirt and second largest exporter of cotton pullover and jeans in the EU region; it is also the second largest exporter of cotton trousers to the US by volume.
80% Frozen food Leather Others

Raw jute & Jute goods

Readymade garments

Source: Export Promotion Bureau, September 2013

Figure 3: Textile Industry Value Chain

Back in the 1980s Bangladesh started to export apparel products by taking advantage of the Multi Fiber Agreement, where developing countries were given certain quota to export apparel products in developed countries. Initially Bangladeshi manufacturers only concentrated on stitching and finishing by importing finished fabrics and other accessories. Gradually several manufacturers developed backward linkages by investing in knitting, weaving, dying, accessories and spinning industries. Bangladesh has came a long way and currently the country only imports cotton and high-end woven fabrics for export processing. The industry value chain is provided below.

Source: BRAC EPL Research, September 2013

Although cost of Bangladeshi yarn is relatively expensive in comparison to international yarn price, local spinning manufactures have an edge due to lower power cost along with the fact that imported fabrics stretches the lead time for fabric and apparel manufactures. In terms of quality, Bangladeshi spinning mills is also superior in comparison to other neighboring countries. As a whole the Textile and Apparel industry is around 19.0% of the countrys GDP and the industry employs around 4.0 million people.

Figure 4: Top Apparel Exporters (in Million

Major Competitors
Bangladesh is currently exporting 5.0% of the total apparel market of the world worth USD 400.0 billion. The country seconds China in terms of volume. At the same time China is gradually producing more high end products or investing in other capital intensive industries and we are seeing low end orders shifting to Bangladesh. Over the years India, Pakistan, Vietnam and Turkey remain the core competitors for Bangladesh. However, many of these competitors produce cotton

Source: WTO, September 2013

An Anecdote of Textile & Apparel Sector of Bangladesh


September 5, 2013

in their backyard, whereas Bangladesh has to import the cotton. On the other hand in terms of labor cost, quality and scale of operation Bangladesh holds the advantage.
Figure 5: Top 5 Export Destinations

Major Export Destinations


Traditionally Bangladesh caters to the EU and North American region. However, the exporters are trying to expand the diversity of their cliental portfolio and recently Russia, Japan, Australia have emerged as new export destinations. Some of the Chinese manufactures are considering outsourcing the Garments from Bangladesh as well. India can also emerge as another export destination soon. Bangladesh has started exporting more to India as the country granted duty free access of 46 RMG export items.
Table 1: Major Export Destinations (Figures in Million USD)

Source: Bangladesh Bank, September 2013

2008-2009 U.S.A Germany U.K. France Netherlands Italy Canada Spain Turkey Belgium
Source: Bangladesh Bank, September 2013

2009-2010 2,668.0 1,605.2 981.1 817.1 713.9 437.1 452.1 425.8 237.0 172.7

2010-2011 3,377.4 2,399.1 1,333.4 1,175.6 852.7 599.3 636.6 586.7 390.3 301.4

2011-2012 3,456.2 2,903.4 1,199.7 1,188.9 853.6 752.2 699.8 493.0 395.5 43.2

2,777.7 1,681.9 966.6 849.1 739.4 431.9 445.7 460.8 184.7 194.6

Figure 6: Import of Raw Material (Fig in mill


3500 3000 2500 2000 1500 1000 500 0 2007-08 2008-09 2009-10 2010-11 2011-12

Raw Material Sourcing


In the late 80s Bangladeshi exporters were focused on stitching and finishing by taking advantage of Multi-fiber Agreement by importing finished fabrics. Gradually investment came into backward linkage industries - spinning, dying, woven and knitting. Bangladesh imports cotton mostly from Central Asia Countries, Pakistan, India, USA, Australia and Brazil. Bangladesh imports cotton for the woven industry from India, Pakistan and China. The country also imports woven fabrics and some high end fabrics from China.

Rawcotton

Yarn

Textile and articles thereof

Source: Bangladesh Bank, September 2013

Core Strengths of the Industry


Affordable Labor Cost with Scale of Production Bangladesh Apparel industry enjoys a unique advantage due to the countrys abundant labor supply at affordable cost. Bangladesh labor cost is the lowest among the major apparel producers in the world. Regulatory Support

Figure 7: Minimum monthly wage in USD

Manufactures also have an advantage due to government subsidy in the energy sector; energy cost for Bangladeshs entrepreneurs is the lowest in the South Asian region. Exporters also enjoy a cash subsidy of around 5.0% if they use local yarn and fabric. Corporate tax for Apparel and Garments sector is only 15.0% whereas it is around 37.5% for other industries and while the highest corporate income tax slab is 45.0% in Bangladesh. Strong Backward Linkage

Source: Problems of Bangladesh Garments Sector and their Solution- Sarwar Md. Saifullah khaled, Thoughts on Economics, Vol. 20, No. 03

Bangladeshi spinning industry can meet 90.0% of the demand of knit fabric manufacturers and 40% demand of woven fabric manufacturers. Only a handful of high end fabrics are procured from international market.

An Anecdote of Textile & Apparel Sector of Bangladesh


September 5, 2013

Major Challenges to Overcome


Raw Material Import Dependence
Bangladesh solely depends on the imported cotton

Dependence for cotton on other countries is the basic disadvantage for the industry. Importers face challenges due to fluctuations in the international cotton price. Cotton import also raises the production cost of local yarn. The county is self sufficient in knit fabrics production, however local manufactures are yet to meet the international standard of woven fabrics. High Cost of Local Financing

Higher financing cost is one of the major impediment

High financing cost is another major impediment faced by local manufactures. Inflation as well as the interest rate is quite high in Bangladesh. Which makes long term investment costlier. Currently the corporate borrowing rate is around 16.0% to 17.0%. Infrastructure Bangladesh needs more investment infrastructural development in power and transport sector. The country urgently needs a deep sea port to cut the lead time and to increase the capacity of the port. This issue is vital since the country is expecting a massive growth in export as China becomes costlier for apparel importers and importers will gradually shift to low cost regions like Bangladesh.

More investment is required in power and transport sector

Generalized System of Preference (GSP)


The GSP scheme is aimed to increase reciprocal trade in goods and access to the EU market for products from LDCs by eliminating customs duties. Bangladesh enjoys Everything but Arms initiative in EU, under which the country enjoys duty-free and quota free access to the EU market and all Bangladeshi exports (except for arms and ammunitions) are eligible for duty-free treatment, subject to compliance with product-specific rules of origin (RoO). Previously Bangladesh had to go through a two stage conversion process (spinning to fabrics and fabrics to apparel) to be eligible for GSP facility. However, since the country does not have strong backward linkage in the woven manufacturing side, EU changed the rules of origin into one stage conversion process (fabrics to apparel). It means most apparel items from Bangladesh will get duty-free access, no matter where the raw materials originated. The standard import duty for apparel in the EU is 12.0%. However this change of rule might affect the domestic spinning mills, since they will face intense completion from foreign yarn manufactures.
Table 2: EU Rules of Origin Conversion Requirement
Early 1990s, Under EC GSP Woven Apparels One Stage Knit Apparels Three and then two stage
Source: European Union, September 2013

Change in EU rule of origin will positively effect export growth

2004-2010, under EBA Two Stage Two Stage

Present Requirement One Stage One Stage

Recent Developments
Bangladeshi Apparel manufacturers follow a low margin, low cost, mass production strategy. However, this low cost strategies sometimes fails to cover labor welfare. We have witnessed a few labor right violation issues and a couple of factory accidents. To improve the labor welfare and working condition, Walmart and other international buyers have agreed to provide funding. Government and other local NGOs are also working to address these issues. Bangladesh has also enacted a new labor law to protect the right of workers.

Change in EU rule of origin will positively effect export growth

An Anecdote of Textile & Apparel Sector of Bangladesh


September 5, 2013

Figure 8: Export Growth of Top 5 Exporters


30.0% 25.0% 20.0%

Sector Outlook
Bangladesh apparel sector saw a 26.0% YoY growth last year. Global orders are shifting more to Bangladesh as large retailers are following China plus one strategy Bangladesh became the obvious choice. Bangladeshi exporters are also exploring new markets and introducing lingerie and other high end products. Mckinsey forecasts a growth of 7.0% to 8.0% for the next decade, however the actual growth would be much higher as Chinese manufacturers are planning to outsource from Bangladesh. In a nutshell the story of Bangladesh has just begun.

15.0% 10.0% 5.0% 0.0%


-5.0% 2003 Bangladesh 2006 China India 2009 Turkey 2012 Viet Nam

Source: WTO and BRAC EPL Research, September 2013

Regulatory Structure
In Bangladesh Garments manufacturers, Spinners, Knit and Woven manufacturers have separate trade associations. This associations effectively work as self regulatory bodies and address any industry related issue at the same time they also engage in the bargain process of other stakeholders.
Table 3: Regulatory Bodies

Sector Yarn Manufacturers

Regulatory Organization Bangladesh Textile Mills Association (BTMA) Bangladesh Knitware Manufacturers and Exporters Association Knitware Manufacturers (BKMEA) Bangladesh Garments Manufacturers and Exporters Association Apparel Manufacturers (BGMEA)
Source: BRAC EPL Research, September 2013

Textile Sector in Bangladesh Capital Market


Table 4: Textile Sector in Capital Market Parameters Total No. of Listed Companies Listed Textile Companies Textile Sector Market Cap. 252 30 0.92 Billion

Total Equity Market Cap. of DSE 26.1 Billion


Source: Dhaka Stock Exchange, September 2013

There are around 5,000 apparel manufactures and several knit, woven, spinning manufactures in Bangladesh. However, only 30 companies are listed in the primary bourse (Dhaka Stock Exchange) of the country with a total market capitalization of USD 893.5 million. Most of the listed companies are cotton yarn manufactures, however several woven, knitting, dying companies are also listed in the exchange. The industry players are getting listed due to the increasing borrowing cost in the local market, which takes a major pie of the income. Listed Ready Made Garments (RMG) Manufacturers There are around 5,000 Ready Made Garments manufacturers among which only 4 is listed. RMG manufactures primarily deal with stitching and finishing of apparels. Value addition of the sector is around 20.0%. Back in 1980s RMG units used to import the fabrics and operate as small scale sweat shops. Bangladeshi RMG manufactures export knitwear, woven wear, denim and lingerie. Bangladesh is one of the most popular manufacturing hub for western buyers, due to the countries ability to produce large scale at a very competitive price. Huge population of Bangladesh contributes to this abundant labor supply at an affordable cost.
Table 5: Listed Apparel Manufacturers

In the capital market, a small number of RMG companies are listed

Company Name Desh Garmants Familytex (Bd) Limited Stylecraft Limited Zahintex Industries Limited
Source: Dhaka Stock Exchange, September 2013

Listing Year 1989 2013 1983 2011

Subsector Garments Garments Garments Garments

Product Woven/ Knitting Woven/ Knitting Woven/ Knitting Woven/ Knitting

Listed Denim Companies There are around 20 denim fabric manufactures in the country, among which only two are listed. Bangladesh produces around 350 million yards of denim annually. The industry is growing as Bangladeshi manufactures produce superior quality

An Anecdote of Textile & Apparel Sector of Bangladesh


September 5, 2013

fabric which costs close to the international price. However, the local fabric manufactures can supply only 40.0% of the total demand of the export oriented RMG manufactures. Value addition of Denim fabric manufacturers is around 35.0%.
Table 6: Listed Denim Manufacturers

Denim export is an emerging niche with substantial growth opportunities

Company Name Argon Denims Limited Envoy Textiles Limited

Listing Year 2013 2012

Subsector Denim Textile Denim Textile

Product Denim Fabric Denim Fabric

Source: Dhaka Stock Exchange, September 2013

Listed Composite Textile Companies There are several composite textile manufactures with a complete line of spinning, dying, knitting and garments facilities. Among them only five are listed. Most of the composite textile manufactures are knitwear producers. Some of these manufactures do not have the full line of operation, i.e., they have only knitting and garments.
Table 7: Listed Composite Textiles

Most of the composite textile companies are knit manufacturers

Company Name Listing Year Subsector Apex Spinning & Knitting Mills Limited 1994 Composite Textile The Dacca Dyeing & Manufacturing Co.Ltd. 2009 Composite Textile Generation Next Fashions Limited 2012 Composite Textile H.R.Textile 1997 Composite Textile Mithun Knitting 1994 Composite Textile
Source: Dhaka Stock Exchange, September 2013

Product Knitwear Woven/ Knitting Knitwear Knitwear Knitwear

Listed Spinning Companies To support the growing RMG export several spinning mills started their operation. Bangladeshi spinners can match the international standard, however their cost of production is slightly higher than the international market. The spinners have to rely on imported cotton. Bangladeshi yarn manufactures import cotton mostly from Central Asian countries; however they also import cotton from Brazil, USA, Australia, India and Pakistan. There are around 385 spinning mills in Bangladesh among which only 15 are listed in the capital market. Value addition of the spinning sector is around 25.0%.
Table 8: Listed Yarn Manufacturers

Highest number of listed company is in Spinning Manufacturing

Company Name Al-Haj Textile Cmc Kamal Delta Spinners Ltd. Dulamia Cotton Maksons Spinning Mills Limited Malek Spinning Mills Ltd. Metro Spinning Prime Textile R.N. Spinning Mills Limited Safko Spinnings Saiham Cotton Mills Limited Saiham Textile Sonargaon Textiles Square Textile Tallu Spinning
Source: Dhaka Stock Exchange, September 2013

Listing Year 1983 1997 1995 1989 2008 2010 2002 1995 2010 2000 2012 1988 1995 2002 1990

Subsector Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning Spinning

Product Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Acrylic yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn Cotton Yarn

An Anecdote of Textile & Apparel Sector of Bangladesh


September 5, 2013

Listed Dying Companies There are companies with specialized dying facilities. Four such companies are listed in the exchange. Such companies specialize from Home textile to Fabric printing.
Table 9: Listed Dying Companies

Company Name Alltex Industries Ltd. Anlimayarn Deying Ltd. Modern Dyeing & Screen Printing Ltd. Rahim Textile
Source: Dhaka Stock Exchange, September 2013

Listing Year 1996 1997 1988 1988

Subsector Dying Dying Dying Dying

Product Home Textile Swing Thread Dying Printed Fabrics Printed Fabrics

Capital Market Performance of Textile Sector


Table 10: Overview of the Listed Textile and Apparel Companies, as of 04 September, 2013

Ticker AL-HAJTEX ALLTEX ANLIMAYARN APEXSPINN ARGONDENIM CMCKAMAL DACCADYE DELTASPINN DSHGARME DULAMIACOT ENVOYTEX FAMILYTEX GENNEXT HRTEX MAKSONSPIN MALEKSPIN METROSPIN MITHUNKNIT MODERNDYE PRIMETEX RAHIMTEXT RNSPIN* SAFKOSPINN SAIHAMCOT SAIHAMTEX SONARGAON SQUARETEXT STYLECRAFT TALLUSPIN ZAHINTEX

Price 74.60 9.00 34.30 76.50 39.80 25.20 26.90 34.60 33.00 8.30 51.00 36.50 22.10 34.80 14.30 26.50 15.20 117.40 87.40 24.80 259.70 29.40 24.70 27.60 31.00 14.60 91.50 820.00 43.70 30.80

YTD 112.5% 15.9% 45.6% -1.0% N/A -9.0% -10.2% 2.0% 12.7% -6.6% 2.3% N/A -21.5% 8.4% -12.1% 10.4% -9.4% 73.4% 3.0% 22.0% 95.4% -15.1% 0.8% -1.4% 7.7% -22.8% -1.0% -6.4% 67.7% 1.9%

Avg. Turnover Market Cap TTM Earnings 2013 2.9 0.6 3.2 0.3 55.7 21.2 17.6 21.5 0.2 0.0 47.8 66.4 47.6 3.9 11.0 28.8 2.3 10.9 0.0 2.6 0.7 75.3 3.4 35.5 18.4 1.5 9.4 0.0 37.9 7.4 757.4 432.0 612.9 642.6 2,865.6 1,927.6 1,761.4 1,586.9 111.2 62.7 6,961.5 5,075.8 3,728.7 880.4 2,942.9 5,130.4 796.0 1,951.8 119.6 947.4 571.9 7,285.9 554.7 3,732.9 2,325.0 386.4 12,299.5 451.0 2,057.4 1,524.6 35.7 (19.5) 23.1 18.5 201.9 121.1 60.3 99.0 2.6 (11.2) 480.9 705.0 342.1 63.1 104.6 527.6 13.3 55.5 1.3 55.8 15.7 953.0 22.4 259.7 201.1 (9.4) 834.3 11.0 97.8 70.8

Annualized Earnings 34.3 (20.1) 21.9 18.5 221.3 126.0 156.8 52.9 1.3 (13.3) 461.9 907.2 346.8 51.5 113.5 383.8 15.2 57.6 1.3 37.6 12.5 1,407.6 22.6 259.7 206.6 (20.6) 916.6 11.0 103.3 84.3

TTM P/E 21.2 x N/A 26.5 x 34.8 x 14.2 x 15.9 x 29.2 x 16.0 x 42.1 x N/A 14.5 x 7.2 x 10.9 x 13.9 x 28.1 x 9.7 x 59.9 x 35.2 x 95.7 x 17.0 x 36.4 x 7.6 x 24.8 x 14.4 x 11.6 x N/A 14.7 x 41.0 x 21.0 x 21.5 x

Annualized P/E 22.1 x N/A 28.0 x 34.8 x 13.0 x 15.3 x 11.2 x 30.0 x 84.3 x N/A 15.1 x 5.6 x 10.8 x 17.1 x 25.9 x 13.4 x 52.4 x 33.9 x 95.7 x 25.2 x 45.8 x 5.2 x 24.6 x 14.4 x 11.3 x N/A 13.4 x 41.0 x 19.9 x 18.1 x

Source: Dhaka Stock Exchange and BRAC EPL Research (Avg. Turnover, Market Cap, Earnings figures in million) *For RN Spinning Limited, LTM earnings is based on approximation; the company is yet to reveal Q4 2012 numbers.

An Anecdote of Textile & Apparel Sector of Bangladesh


September 5, 2013

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Khandakar Safwan Saad Mehedee Hasan Qazi Musaddeq Ahmed Shaikh Malik Al - Razi Nafees Mohammed Badruddin Farah Tasnim Huque Head of Research (Acting) Research Analyst Research Associate Research Associate Research Associate Research Associate safwan@bracepl.com mehedee.hasan@bracepl.com musaddeq.ahmed@bracepl.com malik.razi@bracepl.com nafees.badruddin@bracepl.com farah.tasnim@bracepl.com 01730 357 779 01730 727 941 01730 727 943 01755 658 980 01730 727 931 01730 727 913

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