Thursday, Feb 14, 2002
The rating of CNLT (Far East) Bhd’s existing GRUNIF has been rationalized to MARC-2 (bg) following the completion of the merger of financial institutions within the consortium of bank guarantors. The notes are secured against unconditional and irrevocable bank guarantees in respect of the redemption of up to the face value of the notes issued. The rating reflects the strength of the bank guarantees, based on the weakest link approach.
CNLT is principally involved in the manufacturing and sale of yarn. CNLT’s own financial capacity to meet its obligation under the notes is supported by an average business position as a moderate-sized yarn producer in Malaysia, with manufacturing capability to meet customers’ demands for different types of yarn. Around 65% of CNLT’s products are exported while the remaining 35% are sold in the domestic market. CNLT’s international operations are supported by an extensive distribution network as well as assistance from the Thapar Group in India (through the Group’s flagship company, JCT Ltd.; a shareholder of CNLT). The export market comprises both quota and non-quota countries, with exports to the US (a quota country) accounting for 50% of CNLT’s total revenue. This significant geographical concentration left the company vulnerable to the slowdown in the US economy.
The implementation of the Asian Free Trade Area in year 2003 and the phasing out of the quota system in 2005 will heighten competition in the textile industry. The regional yarn manufacturers will become major competitors, with the benefit of cheaper cost structures compared to Malaysia. CNLT’s investment in automation and technology in its production line will enable it to remain competitive in the industry, besides reducing unit costs as well as boosting productivity. The company’s spinning capacity is being increased in stages from 35,000 spindles to 40,000 spindles a day, enabling it to reap the economies of scale associated with the increased capacity.
The near-to-medium term industry outlook is rather bleak, set against the backdrop of the global economic slowdown; depressed demand for textiles and garments by the US; overcapacity in the industry; rising global inventory levels; and slow recovery in the price of yarn. CNLT’s revenue, which posted a 10.9% growth in FY2000, is expected to come under downward pressure in the near term as the effects of the global economic slowdown are translated into reduced orders for the company’s products.
CNLT’s cost structure has remained rather unyieldy relative to changes in revenue. The rate of increase in operating cost surpassed that of revenue over the past three years, squeezing the company’s operating profit margin in the process. The price of the main raw material, cotton, which has fallen in the current year, is not expected to rebound in the near term, exerting downward pressure on the price of yarn.
CNLT’s cash flow protection measures weakened in FY2000 under the weight of the larger debt burden and reduced cash flow from operations. Much of the working capital funds were tied up in inventories and debtors. The company’s inventories of raw materials and finished goods as at end 2000 were 39% and 107.6% higher than that in the previous year, due to slower inventory turnover.
CNLT’s debt leverage is fairly high at around one time, with the debt maturity profile skewed towards long term debt. As at the end of 31 December 2001, the total amount of bank borrowings amounted to RM 85.21 million, of which RM 16.2 million were unsecured.
CNLT is principally involved in the manufacturing and sale of yarn. CNLT’s own financial capacity to meet its obligation under the notes is supported by an average business position as a moderate-sized yarn producer in Malaysia, with manufacturing capability to meet customers’ demands for different types of yarn. Around 65% of CNLT’s products are exported while the remaining 35% are sold in the domestic market. CNLT’s international operations are supported by an extensive distribution network as well as assistance from the Thapar Group in India (through the Group’s flagship company, JCT Ltd.; a shareholder of CNLT). The export market comprises both quota and non-quota countries, with exports to the US (a quota country) accounting for 50% of CNLT’s total revenue. This significant geographical concentration left the company vulnerable to the slowdown in the US economy.
The implementation of the Asian Free Trade Area in year 2003 and the phasing out of the quota system in 2005 will heighten competition in the textile industry. The regional yarn manufacturers will become major competitors, with the benefit of cheaper cost structures compared to Malaysia. CNLT’s investment in automation and technology in its production line will enable it to remain competitive in the industry, besides reducing unit costs as well as boosting productivity. The company’s spinning capacity is being increased in stages from 35,000 spindles to 40,000 spindles a day, enabling it to reap the economies of scale associated with the increased capacity.
The near-to-medium term industry outlook is rather bleak, set against the backdrop of the global economic slowdown; depressed demand for textiles and garments by the US; overcapacity in the industry; rising global inventory levels; and slow recovery in the price of yarn. CNLT’s revenue, which posted a 10.9% growth in FY2000, is expected to come under downward pressure in the near term as the effects of the global economic slowdown are translated into reduced orders for the company’s products.
CNLT’s cost structure has remained rather unyieldy relative to changes in revenue. The rate of increase in operating cost surpassed that of revenue over the past three years, squeezing the company’s operating profit margin in the process. The price of the main raw material, cotton, which has fallen in the current year, is not expected to rebound in the near term, exerting downward pressure on the price of yarn.
CNLT’s cash flow protection measures weakened in FY2000 under the weight of the larger debt burden and reduced cash flow from operations. Much of the working capital funds were tied up in inventories and debtors. The company’s inventories of raw materials and finished goods as at end 2000 were 39% and 107.6% higher than that in the previous year, due to slower inventory turnover.
CNLT’s debt leverage is fairly high at around one time, with the debt maturity profile skewed towards long term debt. As at the end of 31 December 2001, the total amount of bank borrowings amounted to RM 85.21 million, of which RM 16.2 million were unsecured.