The recent depreciation in Japanese yen and continued appreciation of the renminbi is creating problems for Shandong-based Grand Concord International, causing the company to look into hedging instruments.
Grand Concord primarily deals with clients from Japan and the US, which tend to pay for its products in US dollars. Since the recent depreciation of the yen, Japanese clients have been demanding discounts to make up for the poor performance of their domestic currency, which has put the manufacturer in a challenging position.
Additionally, these US dollars have to then be converted into the Chinese currency, which has been on an appreciating trend. As a result, both the weakening of the yen and the strengthening of the renminbi has had a negative impact on the profitability of the company.
“In the old days, we negotiate currency rates via discussions with our customers on order basis,” said Eric Lee, chief financial officer (CFO) and company secretary at Grand Concord International to Asiamoney PLUS in an interview on April 16. “The renminbi has been appreciating and the Japanese yen has been relatively weak in the past few months, so now we are facing pressure on this. I am now discussing with some bankers on how to use some financial tools to lock-in the exchange rates.”
The yen has depreciated about 20% against the dollar in the past six months, extending the drop after the Bank of Japan (BoJ) expanded its stimulus earlier this month. The renminbi, on the other hand, strengthened 52 basis points (bp) to hit a record-high Rmb6.2454 against the US dollar on April 15.
Hedging instruments that the fabric and underwear manufacturer is keen to consider includes plain-vanilla forward contracts to mitigate foreign exchange (FX) risks, which it could start using sometime in 2013.
Since the renminbi has been allowed to directly trade with the yen since June 2012, the adoption of the Chinese currency by Japanese corporates still has been slow-moving. Lee feels that this is true for the company’s Japan clients as well.
“The clients will unlikely adopt the renminbi because most of our [Japanese] clients sell our products to the domestic market,” said Lee. “If they are really paying us in the renminbi, they will discuss and negotiate the price with us again to reflect the difference in exchange rates. So there is no big difference to us.”
In order to compensate for this decline in profitability arising from the rise and fall in the exchange rates of the renminbi and yen respectively, Grand Concord is looking to diversify away from producing low-margin products to those of higher quality and also to gradually expand into the Chinese market.
“For US customers, we are trying to find more quality customers so that we can bargain a higher price,” said Lee. “We are shifting our product mix and using higher quality products, including some functional fabrics to capture the market, especially if they are willing to pay these products to make up for the rise in costs.”
“Our other target is to find some China brands to help them to make innerwear and see if we can expand into the domestic market, which also helps us to mitigate the risk of currency fluctuations, because they will for sure pay us in renminbi,” he added.
For example, Grand Concord’s functional fabrics carry features such as smart thermal insulation, water resistance, moisture control, anti-microbial and anti-odour features.
The manufacturer plans to increase its production by 30% to 50% by the end of the year. As of December 31, 2012, the group’s annual fabric production capacity was approximately 4,500 tonnes while that of innerwear was 18.6milion pieces.
Grand Concord has a healthy and positive working capital cycle. Suppliers normally grant Grand Concord relatively long payable dates of around 90-120 days while for the company’s offers its customers a turnover of approximately 38 days.
However, the manufacturer has been paying its local suppliers within 45-50 days despite being offered long payment terms.
“The economy has not been as good and a lot of our suppliers are struggling with their cash flows. Given our healthy balance sheet, we have decided to help them with this issue despite them granting us long turnover days,” said Lee.
Grand Concord recorded an annual revenue of approximately Rmb475.8 million (US$77.1 million) for the year ending December 31, 2012, representing an increase of over 14.2% from the previous year. The growth in revenue was mainly due to the increase in production and sales in functional fabrics and various innerwear products, and the stable orders based on the company’s close business relationship with its existing customers.