Next item on the wish list
The domestic expenditure pattern has seen a shift from telecom to
clothing, while new macro developments are changing the garment
export market. We see Win Hanverky (Buy) and China Ting (Buy) as
the rising stars, benefitting in both markets.

Expenditure shifting from telecom to clothing
Spending on telecom services has grown impressively in the past four years, as
reflected by a rapid rise in mobile penetration during this period. However, the data
for 9M06 indicates a shift in the consumption pattern: for the first time, spending on
clothing has grown faster than communication services, making clothing the fastestgrowing
segment. Also, the Chinese seem willing to pay more for branded and betterquality
clothing.
Macro developments bring export opportunities to a few
We see macro developments that should increase competition in the low-end garment
segment. At the same time, we find very few Chinese players (such as Win Hanverky
and China Ting) with a strong capability to shift focus to higher-end products and
thus earn high margins from global brand names. We are initiating coverage on Win
Hanverky with a Buy rating and target price of HK$4.80 and on China Ting with a Buy
rating and target price of HK$3.30.
Safeguard is not a bad thing after all
We expect the elimination of the quota system in 2008 to be positive for the Chinese
textile and garment industry, but we believe the industry will still be partially
controlled, perhaps via more stringent regulations for environmental and social
compliance. Contrary to conventional belief, we see some level of regulation as
beneficial to the industry players, as it would prevent a rush of capacity increases
that could drive down profitability for all.

Contents
T E X T I L E S A P P A R E L & L U X U R Y G O O D S 5 J A N U A R Y 2 0 0 7 2
I N D U S T R Y D Y N A M I C S
Buy what the Chinese are buying 3
We note a change in China’s consumption expenditure pattern favouring
the garment sector. We believe clothing will be the next item after mobile phones
on the Chinese consumer’s shopping list.
How would the Chinese spend an extra Rmb700? 3
Macro trends that should restructure the export industry 7
We believe competition in China’s low-end garment segment will likely intensify,
and expect some low-quality production to shift to south-east Asian countries.
China losing its low-cost advantage 7
Vendor base consolidation 8
Quota 101 – developments and implications 10
We summarise the recent developments of the quota systems and their
implications for the industry. We also review a number of ways to work around
the system.
Modest impact on the export market 10
Ways to get around the system 10
The world after 2008 11
R I S K A N A L Y S I S
Sector risks 12
In this section of our report, we review the issues that may have a negative
impact on the garment and textile sector.
RMB appreciation 12
New roadblocks to exports 12
Cotton price to be stable in the near term 12
A P P E N D I X
Industry structure and valuations 14
C O M P A N Y P R O F I L E S
Company profiles 15
Win Hanverky 16
China Ting Group 34