The rating of CNLT (Far East) Berhad’s (CNLT) RM60 million Bank Guaranteed CP/MTN has been upgraded to A(bg)/ MARC-1(bg). This reflects the weakest link rating within the unconditional and irrevocable bank guarantees provided by a consortium of financial institutions. The bank guarantors consist of Aseambankers, Malayan Banking Berhad, Bumiputra Commerce Bank Berhad and EON Bank Berhad.

CNLT, a medium sized manufacturer of yarn faced a challenging year in 2003. Demand in the international textile market, particularly from the USA was sharply lower. Around 65% of CNLT’s products are exported while the remaining 35% are sold in the domestic market. The heavy reliance on USA as its major export market affected CNLT’s sales. The USA’s textile market was overwhelmed by cheap imports from China due to imminent phasing out of the quota system. Domestically, CNLT operates in a highly fragmented and competitive domestic market set against heightened regional competition arising from the implementation of the Asean Free Trade Area (AFTA), where tariffs on textile products will effectively be reduced. While it is difficult to compete on pricing and cost, manufacturers would have to compete on other non-price factors such as quality and customer relationship.

To remain competitive, CNLT concentrates on higher value added products and personalized services offered to its customers. CNLT strives to control costs through optimization of processes. In the near term, CNLT plans to concentrate on local sales, until the global market recovers. Faced with heightened competition within the industry, CNLT plans to shift product mix and marketing strategies; moving downstream and manufacture textiles and apparels in Senegal to benefit from the preferential duty and quota treatment when imported into the United States and the European Union. This move would be synergistic to its yarn production in Malaysia.

Rising cotton prices resulted in a reduction of gross margin by 15.7% in FY2003. Cotton comprises 60% of CNLT’s raw materials. However, the group has the flexibility to switch to synthetic cotton during periods of rising cotton prices, somewhat mitigating the risk of an upsurge in raw material prices.

Set against the different operating environment affecting the textile industry, CNLT registered a drop in revenue of 11.7% to RM74.87 million in FY2003, and a pre-tax loss of RM12.70 million (FY2002: 1.72 million profit). CNLT’s cash flow protection measures consequently deteriorated due to the losses suffered coupled with higher financing cost. As a result of eroded shareholders’ funds, CNLT’s debt leverage rose to 1.34x. The group expects its shift in product mix and change of marketing strategies to improve its financial performance for FY2004.