The downturn will continue in 2009 as the Chinese New Year (CNY) approaches. Since CNY will come slightly earlier than usual this year and business is expected to be poor, many companies have decided to shut down ahead of the Spring Festival holiday. The shutdown of many production facilities and the market's preference for cash over inventory during holidays have dragged down demand even more.
The post-holiday outlook does not look good either because many small textile and garment producers may not resume production so soon. Some have hardly received any orders for February onwards. Therefore, the outlook for chemical fibre producers in 1Q09 remains gloomy.
China Sky has shut down half of its production lines. It has also adopted strict credit policies that are likely to help lower default risks but will also hamper its efforts to secure orders and retain customers. Li Heng seems to be the least affected player, enjoying a high utilisation rate and maintaining its output at a level comparable to that seen in good times.
Fibrechem and Sino Techfibre are also badly hit, plagued by low utilisation rates. The short-term outlook will be worse than that in 3Q-4Q08. We are OVERWEIGHT on the chemical fibre sector despite the gloomy outlook mainly because of its low valuations. We believe current share prices have already factored in bearish market sentiment and any future downside will be limited.
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