Ready to wear?

Out of fashion: Zhou Chengjian

Usually, the announcement of a round of positive financial results would be greeted by a rise in a company’s share price. But not for Metersbonwe, whose stock dropped to its lowest level in two years, despite revealing that sales were up 21% in the first half of the year, and that net profits had increased by 15%.

Why the drop? After the company’s results had been released, Moneyweek published a hugely controversial report alleging that Metersbonwe had deliberately understated inventory levels by dumping unsold stock on its distributors.

“The company asked me to purchase Rmb130,000 ($20,800) of goods for the spring season this year, but I sold less than Rmb90,000 last year,” Zhang Song, manager of a franchise store, was also quoted by China Economic Net as complaining.

Needless to say, Metersbonwe quickly denied the report, saying that it has never forced its distributors to order more stock than requested. Acknowledging that there had been a sizable decrease in the inventory on its balance sheet (it dropped 32%, from Rmb2.6 billion to Rmb1.8 billion) the company claimed strong sales growth coupled with a cut in the production of new merchandise had helped to shift unsold stock.

Investors seemed unconvinced by the explanation. The company’s shares were suspended from trading on the Shenzhen stock exchange on October 15 and when they resumed the day after, the price dropped another 6%, wiping out Rmb1.3 billion in market value.

The brand’s reversal of fortune – at its height it appeared in the blockbuster Hollywood movie Transformers – has been sudden.

Founded 17 years ago, Metersbonwe is the third-largest apparel brand in China by sales behind Nike and Anta, a local sportswear firm, and as recently as May this year it was being lauded by the Financial Times for succeeding where so many other Chinese brands have failed: outpacing foreign rivals in the competitive Chinese fashion market.

Critics say cracks started to show late last year, however. The company shocked investors when it announced that inventories had almost tripled in 2011 from their 2009 levels. Sales were also slowing in tougher trading conditions and it didn’t help that the company had expanded too quickly, mainly by franchising its shops.

As a result, Moneyweek says that Metersbonwe has been offering steep discounts to clear the backlog, with even some of this season’s merchandise already selling at 50% off.

But business shows little sign of picking up. “Sales have been bad. Everything looks old and people feel like they have seen the merchandise last year. We can’t get rid of the inventory even with big discounts,” a salesperson at a Metersbonwe store in Guizhou province complained.

Private Economy News agrees, suggesting that the reason why so much of Metersbonwe’s current range looks familiar is that the company is stuck with unsold goods from last year.

So why the apparently robust revenues reported in the most recent financial results? Another warning flag being waved by Moneyweek is that the largest single buyer of Metersbonwe products in the first half of this year seems to have been a company controlled by its founder Zhou Chengjian, which bought over Rmb320 million worth of goods.

Zhou’s relatives – who also own stakes in some of the distributors – purchased a further Rmb68 million of goods during the same period, Moneyweek alleges.

Metersbonwe isn’t the only garment maker struggling to manage its stock levels. According to industry data, at the end of the first half of this year, China’s top 80 listed garment manufacturers were saddled with inventories of Rmb67.2 billion. Out of the group, 66 had stock levels chewing up more than Rmb100 million in capital. But for 10 firms (including Metersbonwe) inventory exceeded Rmb1 billion.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.