Hytex Integrated Bhd - 2007

MARC has removed the MARC-2ID /A-ID ratings of Hytex Integrated Berhad’s RM100.0 million Murabahah Underwritten Notes Issuance Facility/ Islamic Medium Term Notes (MUNIF/ IMTN) from MARCWatch Negative and reaffirmed the ratings. The reaffirmed ratings reflect MARC’s expectations of improvements in HIB’s operating performance with its newly commissioned integrated plant in China. The developing outlook reflects current pressure on its financial profile arising from its high gearing ratio of 1.49 times as at June 30, 2007, which is close to the covenanted cap of 1.50 times and tight liquidity position during its production ramp-up phase at its China plant. HIB is expected to reduce its borrowings by end-January 2008 with the expected proceeds from an insurance claim. Failure to reflect meaningful improvements in its debt leverage and liquidity position will result in downward pressure on HIB’s current rating(s). The ratings carry a developing outlook.

HIB is an integrated garment manufacturer that is involved in original equipment manufacturing (OEM), original design manufacturing (ODM), original brand manufacturing (OBM) and retailing. The group has established a niche in the OEM market having produced round-neck T-shirts for Nike and Puma for the past 14 and 4 years respectively. All OEM products are for export sales only. The garment industry is labour and capital intensive. HIB continues to invest in additional production capacity to achieve greater economies of scale, reengineer its production process to enhance efficiency and cost savings, and carry out research and development to remain competitive vis-a-vis low cost producing countries. Nike has classified HIB as one of only three Centres of Excellence (COE) while Puma recognises HIB as a strategic partner, as evident by its Strategic Partnership Agreement (SPA) with HIB. The company has diversified geographically through its manufacturing facilities in Cambodia and China. Its operations in these countries will enable it to lower production costs and to enjoy non-quota export entitlements in Cambodia, and to tap the huge domestic market in China.

HIB’s ODM licenses include six brands from Walt Disney (Mickey Mouse, Winnie the Pooh, etc) and four brands from Warner Brothers (Looney Tunes, Bugs Bunny, etc). The group has its own in-house brands, namely Tenderly, American Athletic and Issue. It’s ODM and OBM products are retailed domestically in its own concept stores like World of Cartoon Boutique and Hytex Studio, and consignment counters. HIB recently commenced retail operations in Shanghai, subsequent to the commissioning of its China plant in April 2007. HIB’s business mix of approximately 50:50 in OEM to ODM/OBM/retailing as well as its balanced mix of export and local sales have served the group well.

Its revenue growth slowed in the financial year ended 31 March 2007 (FY2007) as the group has reached high plant utilisation levels in the range of 80% to 90% for its Kepong and Cambodia plants. The China plant is expected to contribute to the group’s revenue starting FY2008 and will be contributing positively to the group in FY2009.

The developing outlook is premised upon HIB’s limited financial flexibility and its high gearing. As of June 2007, HIB’s cash balances stood at RM2.9 million. Nonetheless, the group has RM20.0 million of trade receivables and RM98.0 million of inventories with the bulk in raw materials and work in progress. HIB is expecting to receive proceeds from an insurance claim to ease its near-term liquidity requirements until Q4FY2008, by which time, the China plant is expected to contribute positively to the income of the group.

Major Rating Factors

Strengths

• Geographically diversified with manufacturing plants located in Malaysia, Cambodia and China; and
• Long term relationship with Nike and Puma.

Challenges / Risks

• High gearing ratio, close to covenanted cap of 1.50 times; and
• Strained cash flow attributable to higher working capital requirements for expansion in China.