There emerged rising competition on the textile market in the Asia-Pacific after wage growth occurred in the textile industries of China and Bangladesh. This situation should be positive for Indonesian textile and garment manufacturer Sri Rejeki Isman (Sritex) because rising production costs of foreign competitors improve the competitiveness of Sritex products.
Most of Sri Rejeki Isman's exports - some 53 percent of the company's total exports - are shipped to nations on the Asian continent. The majority of the remainder of its exports goes to Europe (19 percent) and the United States (18 percent).
Besides the issue of minimum wages that affects its foreign counterparts, another factor that could significantly improve corporate earnings of Sritex would be the signing of the Comprehensive Economic Partnership Agreement (CEPA) with the European Free Trade Association (EFTA). This trade deal is on the agenda of the Indonesian government and would open access for Indonesian companies to European markets. If a CEPA with the EFTA is indeed signed it could boost Sritex' shipments to the European Union (EU) by nearly 20 percent. Currently, Indonesian textile exports to the EU are burdened by import duties that range between 11-30 percent.
Also Donald Trump's decision to pull the USA out of the Trans Pacific Partnership (TPP) should be a positive development for Sritex in terms of competitiveness. When the USA was a member of this trade deal, TPP member nations - such as Vietnam - could export their textiles to the USA at a much more competitive rate compared to Indonesian textile exporters (Indonesia not being a TPP member). However, Sritex's regional competitors have now lost this competitive advantage since the USA exited the TPP earlier this year.
Sritex has developed into Southeast Asia's largest vertically-integrated textile and garment manufacturer, equipped with four business segments: spinning, weaving, dyeing, and garment. Sritex recently completed expansion programs in each segment.
The spinning segment contributes most - around 39 percent - to the company's total sales. Meanwhile, spinning accounts for 55 percent of the company's total exports. Unlike finished clothes, spinning (which is the process of converting fibers into thread or yarn) is much less affected by current trends and therefore a stable source for earnings.
Its garments segment is also lucrative as Sritex managed to obtain deals for the production of army clothing from the United Arab Emirates, several countries within the EU and North Atlantic Treaty Organization (NATO). These orders show that foreign confidence in the quality of Sritex' products is high.
A (potential) weakness of Sritex, especially in times of a weak rupiah, is that the company needs to import about 60 percent of its raw materials from abroad (primarily from Australia, the Middle East and the USA). These materials include cotton, rayon fiber material and polyester.
Therefore the company has recently invested USD $250 million in the construction of a rayon fiber factory that is designed to produce up to 100,000 tons of rayon per year. This factory, scheduled to be fully operational in 2018, is estimated to curb the company's rayon fiber imports by 30 percent.
Citigroup Securities Indonesia advises investors to buy Sritex shares, having set its share price target for the company at IDR 350 a piece. In the first trading session on Friday (25/08) shares of Sritex jumped 1.74 percent to IDR 350 a piece. So far this year its shares have surged 52.17 percent.
Stock Quote Sri Rejeki Isman (Sritex) - SRIL: